CH 1 - NATURE, OBJECTIVE AND SCOPE OF AUDIT (1)

CA Inter | AUDIT AND ASSURANCE Nature, Objective and Scope of Audit
Chapter I
NATURE, OBJECTIVE AND SCOPE OF AUDIT
MEANING AND DEFINITION OF AUDITING
“An audit is an independent examination of financial information of any entity, whether

profit oriented or not, and irrespective of its size or legal form, when such an
examination is conducted with a view to expressing an opinion thereon.”
T/F Audit is independent examination of operations conducted by management

FALSE As per SA 200 read with Sec 143, Audit is independent examination of financial
HHint statements of an entity to express opinion thereon. It is thus examining financial
information, not operations of entity
The person conducting this task should take care to ensure that financial statements
would not mislead anybody.
This he can do by satisfying himself that:
(i) the accounts have been drawn up with reference to entries in the books of
account;
(ii) the financial statement amounts are properly classified, described and disclosed
in conformity with accounting standards; and
(iii) the entries in the books of account are adequately supported by sufficient and
appropriate evidence;
(iv) the statement of accounts and information in it present a true and fair picture
of the operational results and of the assets and liabilities.
(v) none of the entries in the books of account has been omitted in the process of
compilation and nothing which is not in the books of account has found place in
the statements;
(vi) the information conveyed by the statements is clear and unambiguous;
Explain stating clearly how the person conducting this task should take care to ensure
that financial statements would not mislead anybody. [MTP-Oct. 19]
Or
The person, conducting audit should take care to ensure that financial statements would
not mislead anybody. Explain stating clearly the meaning of Auditing. [RTP-May 20]
Kunal Mandhania 1|Page

3. SCOPE OF AUDIT
The following points merit consideration in regard to scope of audit:

1. The audit should be organized to cover adequately all aspects of the enterprise relevant
to the financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be reasonably
satisfied as to whether the information contained in the underlying accounting records
and other source data is reliable and sufficient as the basis for the preparation of the
financial statements.
3. In forming his opinion, the auditor should also decide whether the relevant information
is properly disclosed in the financial statements subject to statutory requirements,
where applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
a) making a study and evaluation of accounting systems and internal controls and
b)carrying out such other tests, enquiries and other verification procedures of
accounting transactions and account balances as he considers appropriate in the
particular circumstances.
5. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
a. comparing the financial statements with the underlying accounting records and other
source data to see whether they properly summarize the transactions and events
recorded therein; and
b. considering the judgments that management has made in preparing the financial
statements accordingly, the auditor assesses the selection and consistent
application of accounting policies, the manner in which the information has been
classified, and the adequacy of disclosure.
6. The auditor is not expected to perform duties which fall outside the scope of his
competence. For example, the professional skill required of an auditor does not include
that of a technical expert for determining physical condition of certain assets.
7. Constraints on the scope of the audit of financial statements that impair the auditor’s
ability to express an unqualified opinion on such financial statement should be set
out in his report, and a qualified opinion or disclaimer of opinion should be expressed
as appropriate.

The Auditor compares the entries in the books of account with vouchers and if two agrees,
T/F his work is done. [May 10 (2 Marks)]
Statement is False
Auditor’s responsibility is not restricted to comparing the books of account with
Hint
vouchers only but he can also perform other method and techniques such as physical
H
verification, ARP, inquiry &confirmation, BRS, Check ICS, etc.
Principal/basic Aspects to be covered in Audit/Overall Audit approach
The principal aspects to be covered in an audit of the financial statements are the
following:
1. Examination of Accounting System & Internal Control System
 To ascertain whether it is appropriate for the business and helps in proper
recording of all the transactions.
 To determine the Nature, Timing and Extent (NTE) of Audit Procedures to be
performed.
 To find out whether they are adequate and comprehensive.
2. Vouching of the transactions
 To ensure authenticity and validity of transactions.
 To check the arithmetical accuracy of the books of account.
 To ascertain proper distinction into capital and revenue items.
3. Verification of Assets & Liabilities
 To ensure existence and valuation of the assets and liabilities appearing in the
balance sheet.
4. Statutory Compliances
 In case of entities governed by some law, rules or regulations, for example in case
of audit of a company incorporated under Companies Act, 2013.
5. Expression of Opinion
 On true and fair view of state of Affairs as reflected by Balance Sheet.
 On true and fair view of Financial Results as reflected by Statement of Profit and
Loss.
 On true and fair view of Cash Flows as reflected by Cash Flow Statement.
6. Reporting on Other matters
 As required by the law governing the entity.

What are the aspects to be covered in an audit. (M 94 - 8M, N15 – 5M)

State the matters which statutory auditor should look before framing opinion on
accounts on finalisation of accounts. (M 96 - 8M)
GST & Co., a firm of Chartered Accountants has been appointed to audit the
accounts of XYZ Ltd. The partner wanted to cover principal aspects while
conducting its audit of financial statements.Advise those principal aspects
[RTP-May 18]
Discuss: Principal aspects to be considered by an auditor while conducting an
Let’s  audit of final statements of accounts. [May 18 (5 Marks)]
Practice
SWM is proprietorship firm engaged in the manufacturing of different kind
of yarns. It sells its finished products both in the domestic as well as in the
international market. The company is making total turnover of 30 crores. It
has also availed cash credit limit of 3 crores from Dena Bank. In the year
2020-21. Proprietor of the firm is worried about the financial position of the
company and is under the impression that since he is out of India, therefore
firm might not run well. He approaches an Internal Auditor about as to what
would be covered, in Audit. Advise regarding principal aspects[MTP-March
19]
TYPES OF AUDIT (A) (N 11 – 5M)
Audit is not legally obligatory for all types of business organisations or

institutions. On this basis audits may be of two broad categories i.e., audits
required under law and voluntary audits.
1. Statutory audit/ Audit Required under law.

Meaning: An audit which is made compulsory under any statute is called statutory
audit. Various aspects concerning the audit such as scope of audit, qualifications of
an auditor and his rights, duties are mentioned in that statute itself.
(i) Audit required under GST by various State Government.
(ii) Banking companies governed by the Banking Regulation Act, 1949.
(iii) Companies governed by the Companies Act, 2013.
(iv) Co-operative societies registered under the Co-operative Societies Act, 1912.
(v) Public and charitable trusts registered under various Religious and Endowment
Act,

(vi) Corporations set up under an Act of Parliament or State legislature such as

the Life Insurance Corporation of India.
(vii) Specified entities under various sections of the Income-tax Act, 1961.(Direct
tax Audit)
(viii) Electricity supply companies governed by the Electricity Supply Act, 1948.
2. Non-statutory audit (or) Voluntary audit:

In the voluntary category are the audits of the accounts of proprietary entities,
partnership firms, Hindu undivided families, etc. In respect of such accounts, there is
no basic legal requirement of audit. Many of such enterprises as a matter of internal
rules require audit. Some may be required to get their accounts audited on the
directives of Government for various purposes like sanction of grants, loans, etc. But
the important motive for getting accounts audited lies in the advantages that follow
from an independent professional audit. This is perhaps the reason why large numbers
of proprietary and partnership business firms get their accounts audited.
T/F Auditing is legally obligatory for all types of business organisations.

Statement is False
 Auditing is not legally obligatory for all types of business organization.
Hint
 Examples of such organisations are proprietorship entities, Partnership Firms, HUF
 However if audit conducted by them it is beneficial for them
Audit is not legally obligatory for all types of business organisations or institutions”
Let’s 
Discuss.(N15 RTP)
Practice
Discuss the types of audits required under law. [Nov. 11 (5 Marks)]
Advantages of voluntary audit:
"Audit of the accounts of the sole-proprietor is not compulsory. However, he may

get his books audited for various reasons”. Comment. (B) (N
91, M 06 - 8M, PM)
How the audit is advantageous to Sole Trader?
Let’s  (PM)
Practice State six important advantages of audit of accounts of a partnership firm (Nov
2018)
RAG is proprietorship firm engaged in the manufacturing of textile and handloom
products. It sells its finished products both in the domestic as well as in the
international market. The company is making total turnover of Rs. 30 crores. It has

also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year 2020-
21, proprietor of the firm is worried about the financial position of the company and
is under the impression that since he is out of India, therefore firm might run into
losses. He approaches a CA about advantages of getting his accounts audited
throughout the year so that he may not suffer due to accounting weaknesses. Advise
regarding advantages of getting accounts audited. [MTP-March 18, Oct. 18]Or
The chief utility of audit lies in reliable financial statements on the basis of which
the state of affairs may be easy to understand. Apart from this obvious utility,
there are other advantages of audit. Some or all of these are of considerable value
even to those enterprises and organisations where audit is not compulsory. Explain.
[RTP-Nov. 18]
a) The sole proprietor will be very much benefited by the suggestions given by the
auditor, with regard to the system of accounts, internal controls and checks over
employees etc,
b) Books are upto date
c) Easy to take loans and financial assistance from banks.
d) The visit by auditor acts as a moral check on the employees.
e) Helps in decision making
f) Helps in solving disputes in case of arbitration
g) The audit helps in detecting frauds and errors.
h) Government may require audited and certified statements before it gives assistance
or issues the license for a particular trade.
i) Insurance companies also rely on audited accounts, in case of any insurance claims.
j) It safeguards the financial interests of persons who are not associated with the
management of the organisation e.g. partners or shareholders.

SA 200 (REVISED) Overall objectives of Independent audit and conduct of

Audit in Accordance with S.A. (Effective date- April 1, 2010).
Main objective:
(a) To Perform Audit Procedures , to obtain Audit Evidence and To obtain reasonable
assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable financial reporting
framework; and
(b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings
State the objectives of Audit according to SA 200 [RTP-May 20]
Explain the Overall Objectives of Independent auditor. [RTP-May 19]
2. Secondary/Incidental objectives:
a) Detection and prevention of frauds, and
b) Detection and prevention of errors.
SA 200
Objectives of Audit Responsibilities / Pre-requisites /

See Primary objective above requirements of Auditor.
1. Ethical Requirements
2. Professional skepticism
3. Professional Judgment
4. Sufficient and Appropriate Audit
evidence
Requirements / prerequisites / Responsibilities of auditor (B)
1. Ethical He shall comply with ethical requirements including independence. He

Requirement:- is required to comply with code of ethics issued by ICAI.
a. Integrity & Objectivity: He should be straight-forward and
sincere in his approach to the professional work. He should be fair
without any bias or prejudice.

b. Independence: The term independence means that the judgment

of a person is not subordinate to the wishes and directions of
other person who have engaged him i.e. The audit decisions should
be taken without giving importance to his personal wishes.
c. Confidentiality: The auditor should not leak the information
collected by him, during the course of his professional work, to
any third party without specific authority from the client.
d. Professional competence & due care: The auditor requires
specialised skill and competence which are acquired through a
combination of general education, technical knowledge obtained
through study and practical experience.
Note: it is mandatory that auditor complies relevant ethical
requirement relating to financial statements audit engagements.
These ethical requirement are established by ICAI code conduct.
2. Professional (i) An attitude of questioning mind or being alert to situations that
Skepticism shows suspicion
(ii) Includes being alert to
 Contradictory evidences
 Conditions indicating Possible frauds
 Conditions indicating questioning reliability.
 Circumstances requiring audit procedures in addition to those
required in SA
(iii) Helps to reduce Overall Risk.
(iv) Requires critical assessment of audit evidences gathered.
(v) It also includes consideration of the sufficiency and
appropriateness of audit evidence obtained in the light of the
circumstances
3. Professional Application of knowledge, training & Experience in making
Judgment: appropriate decisions audit engagement.
Proper decisions includes
 Regarding materiality
 Audit Risk
 NTE of audit procedures
 Sufficiency & appropriateness of evidences, etc.
4. Sufficient and  Auditor should always obtain sufficient and appropriate audit
Appropriate evidence Sufficient means Required Quantity
Audit Evidence Appropriate means Required Quality.

and Audit  Reduce audit Risk to acceptable low level, however audit risk
Risk: cannot be zeroed due to inherent limitations of audit.
5. Use of SA Auditor should always comply with SA except where:
(a) SA does not apply
(b) SA is conditional and condition does not apply
Other IMP considerations of S.A. 200 (revised) (A)
Auditor’s opinion does not assure

i) Future viability of entity
ii) Efficiency and Effectiveness with which Mgt. has conducted affairs of the company.
The same was also upheld in the LONDON AND GENERAL BANK LTD. CASE.
The London It is no part of Auditor’s duty to give advice either to Directors or

and General Shareholders as to what they ought to do. An auditor has nothing to do
Bank Ltd with the profitability or unprofitability, provided he discharges his own
[1895] duty to the shareholders. His business is to ascertain and state the
true financial position of the company at the time of the audit and his
duty is confined to that.
An auditor has nothing to do with prudence or profitability of a company.

T/F
[May 16 (2 Marks)]
Statement is True As per SA 200 and Sec 143(2) “Overall Objectives of the
Independent auditor and Conduct of Audit in accordance with SAs” the
H Hint auditor’s opinion does not assure, the future viability of the entity nor the
efficiency or effectiveness with which management has conducted the affairs
of the entity.
The purpose of an audit is to enhance the degree of confidence of intended users

T/F
in the financial statements.(module)
Statement is correct.
 As per SA 200 "Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing", the purpose
Hint
of an audit is to enhance the degree of confidence of intended users in the
H
 This is achieved by the expression of an opinion by the auditor on whether

the financial statements are prepared, in all material respects, in

accordance with an applicable financial reporting framework.
Auditor's Opinion is an assurance as to the future viability of the enterprise or the

T/F efficiency or effectiveness with which management has conducted the affairs of
the enterprise.
Statement is False.
 SA 200 "Overall Objectives of an Independent Auditor and Conduct of an
Audit in accordance with Standards on Auditing" specifically provides that
the auditors opinion cannot be assumed as an assurance as to the future
viability of the enterprise or the efficiency or effectiveness with which
Hint
management has conducted the affairs of the enterprise.
H
 The objective of an audit of financial statements, prepared within a

framework of recognised accounting policies and practices and relevant
statutory requirements, if any, is to enable an auditor to express an opinion
on such financial statements.
The primary objective of an audit is to detect fraud and error in the financial statements.
T/F [Nov.14 (2 Marks)]
Statement is False
(a) Prevention & detection of fraud and error is not primary objective
H Hint (b) Primary objective of an audit is to express an opinion on true and fair view of
(c) The secondary objective is prevention & detection of fraud & error.
The basic objective of audit does not change with reference to nature, size or form of
T/F the entity. [May 15 (2 Marks)]
Nov. 17 (2 Marks) module
Statement in True
(a) As per SA 200 & sec 143(2) Basic objective of auditing is to express an opinion on
H Hint true and fair view of financial statements.
(b) Any change in the nature, size or form of an entity does not change that basic
objective of the audit.
Kunal Mandhania 10 | P a g e
T/F Auditor’s opinion is on True & Fair view of financial statements

TRUE : As per SA 200 & sec 143(2) For reporting on true & fair view, it is seen whether
H Hint acceptable policies are consistently applied, regulations have been observed &
appropriate disclosures have been made in financial statements
The objective of audit is to obtain absolute assurance and to report on the financial
T/F
statements. [RTP-May 18, MTP-April 19]
Statement is incorrect.
Objective of audit is to express an opinion on true and fair view of the financial
statements. In this reference. SA-200 "Overall Objectives ofthe Independent
Auditor and conduct of audit in accordance with Standards on Auditing" provides
that in conducting an audit of financial statements, the overall objectives of the
Hint
auditor are:
H
a) To obtain reasonable assurance about whether the financial statements as

a whole are free from material misstatement; and
b) To report on the financial statements, and communicate as required by the
SAs, in accordance with the auditor's findings.
Comment on the following: "The Auditor shall comply with relevant ethical requirements
including independence". [MTP-April 19]
Or
Discuss prerequisites and fundamental principles to be possessed by an auditor.[May 11
(8 Marks)]
Or
Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional
Accountants related to an audit of financial statements. Discuss with reference to those
fundamental principles of professional ethics. [RTP-May 19]
The auditor shall comply with relevant ethical requirements, including those pertaining
to independence, relating to financial statement audit engagements. Relevant ethical
requirements ordinarily comprise the Code of Ethics for Professional Accountants (IESBA
Code) related to an audit of financial statements. The Code establishes the fundamental
principles of professional ethics relevant to the auditor when conducting an audit of
financial statements. Explain. [MTP-May 20]
Or
Explain the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements in accordance with Code of Ethics issued by

ICAI. [Jan. 21 (4 Marks)]
"Professional judgment is essential to the proper conduct of an audit." Discuss. [Nov. 18
(5 Marks)]
Inherent limitations of audit:- (A) [N 96, M 00, N 01, M 03, M05]
As per SA 200 The auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent limitations
of an audit. The inherent limitations of an audit arise from:
1. The Nature of Financial Reporting: The preparation of financial statements involves
judgment by management in applying the requirements of the entity’s applicable
financial reporting framework to the facts and circumstances of the entity. In
addition, many financial statement items involve subjective decisions or assessments or
a degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made.
2. The Nature of Audit Procedures: There are practical and legal limitations on the
auditor’s ability to obtain audit evidence. For example:
i. There is the possibility that management or others may not provide, intentionally
or unintentionally, the complete information that is relevant to the preparation
and presentation of the financial statements or that has been requested by the
auditor.
ii. Fraud may involve sophisticated and carefully organised schemes designed to
conceal it. Therefore, audit procedures used to gather audit evidence may be
ineffective for detecting an intentional misstatement that involves, for example,
collusion to falsify documentation which may cause the auditor to believe that audit
evidence is valid when it is not. The auditor is neither trained as nor expected to
be an expert in the authentication of documents.
iii. An audit is not an official investigation into alleged wrongdoing. Accordingly, the
auditor is not given specific legal powers, such as the power of search, which may
be necessary for such an investigation.
3. Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter
of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit
an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the
conduct of the audit. Notwithstanding this, the relevance of information, and thereby
its value, tends to diminish over time, and there is a balance to be struck between
the reliability of information and its cost.
4. Other Matters that Affect the Limitations of an Audit: In the case of certain subject
matters, limitations on the auditor’s ability to detect material misstatements are
particularly significant. Such assertions or subject matters include:
— Fraud, particularly fraud involving senior management or collusion.
— The existence and completeness of related party relationships and transactions.
— The occurrence of non-compliance with laws and regulations.
— Future events or conditions that may cause an entity to cease to continue as a going
concern.
The preparation of financial statements does not involve judgment by management

T/F in applying the requirements of the entity's applicable financial reporting
framework to the facts and circumstances of the entity. [RTP-Nov. 18, May 19]
 The preparation of financial statements involves judgment by management
in applying the requirements of the entity's applicable financial reporting
H Hint framework to the facts and circumstances of the entity.
 In addition, many financial statement items involve subjective decisions or
assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made.
Audit procedures used to gather audit evidence may be effective for detecting an
T/F
intentional mis-statement. [RTP-Nov. 18, May 19]
 Fraud may involve sophisticated and carefully organised schemes designed
to conceal it. Therefore, audit procedures used to gather audit evidence
may be ineffective for detecting an intentional misstatement that involves,
Hint
for example, collusion to falsify documentation which may cause the
H
auditor to believe that audit evidence is valid when it is not.

 The auditor is neither trained as nor expected to be an expert in the
authentication of documents.
T/F An audit is an official investigation into alleged wrongdoing. [RTP-Nov. 18, May 19]
 An audit is not an official investigation into alleged wrongdoing.
Hint
Accordingly, the auditor is not given specific legal powers, such as the power of
H
search, which may be necessary for such an investigation.
The matter of difficulty, time, or cost involved is in itself a valid basis for the
auditor to omit an audit procedure for which there is no alternative.
T/F
[RTP-Nov. 18, May 19]
 The matter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no alternative.
 Appropriate planning assists in making sufficient time and resources
Hint
available for the conduct of the audit. Notwithstanding this, the relevance
H
of information, and thereby its value, tends to diminish over time, and there
is a balance to be struck between the reliability of information and its
cost.
Judgmental matters are transactions that are unusual due to either its size or
T/F
nature and that therefore occur infrequently. [Nov. 18 (2 Marks)]
 Judgment in the context of audit is the application of relevanttraining,
knowledge and experience, within the context provided by auditing,
accounting and ethical standards, in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit
engagement.
H Hint  Significant risks often relate to significant non-routine transactions or
judgmental matters. Non-routine transactions are transactions that are
unusual, due to either size or nature, and that therefore occur
infrequently. Judgmental matters may include the development of
accounting estimates for which there is significant measurement
uncertainty. Thus judgmental matters are not always unusual due to their
size or nature.
The Auditor is expected to, reduce audit risk to zero and can therefore obtain
T/F absolute assurance that the financial statements are free from material
misstatement due to fraud or error. [Jan. 21 (2 Marks)] Module
Hint
 As per SA 200 "Overall Objectives of the Independent Auditor and the
H
Conduct of an Audit in Accordance with Standards on Auditing", the auditor

is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free
from material misstatement due to fraud or error.
 This is because there are inherent limitations of an audit.
There are inherent limitations of an audit, which result in most of the audit
T/F evidence on which the auditor draws conclusions and bases the auditor's opinion
being conclusive rather than persuasive. [MTP - April 21]
 As per SA 200, the auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or
Hint
error.
H
 This is because there are inherent limitations of an audit, which result in

most of the audit evidence on which the auditor draws conclusions and
bases the auditor's opinion being persuasive rather than conclusive.
Auditing implies systematic, critical and special examination of the records of a

T/F
business for a specific purpose.
Statement is False.
 Auditing involves examination of financial information contained in financial
H Hint statements to express an opinion on their true and fair view.
 Systematic, Critical and Special examination of the records of a business
for a specific purpose is termed as investigation.
Auditor is able to obtain only reasonable assurance due to inherent limitation of

T/F
audit.
Statement is True, auditor is able to obtain reasonable assurance only due to
following limitations of audit:
 Use of Judgment.
Hint
 Use of Test Checking.
H
 Inherent Limitations of internal control.

 Persuasive nature of audit evidence.
Discuss Limitations of audit. [May 11 (8 Marks)]

 Or
"The process of auditing is such that it suffers from certain limitations". Discuss.
Or
ABC'Ltd. Requested the auditor to provide for absolute assurance in respect of its
ten branches scattered in Mumbai and confirm;that financial statements are free
from material misstatements due to fraud or error. Advise.
Or
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are.inherent
limitations of audit. Explain.[RTP-Nov. 18]
There are practical and legal limitations on the auditor's ability to obtain audit
evidence. Explain with examples. [RTP-May 20, MTP-Oct. 20]
In case of certain subject matters, limitations °lithe auditor's ability to detect
material misstatements are particularly significant. Explain such assertions or
subject matters. [RTP-May 20]
The matter of difficulty, time, or cost involved is not in itself a valid basis for the
 auditor to omit an audit procedure for which there is no alternative or to he

satisfied with audit evidence that is less than persuasive. Explain. [RTP-May 18]
Omission of Audit procedure due to difficulty, time or cost constraint:
 The matter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no alternative
or to be satisfied with audit evidence that is less than persuasive.
 Appropriate planning assists in making sufficient time and resources available
for the conduct of the audit. Notwithstanding this, the relevance of
Ans
information, and thereby its value, tends to diminish over time, and there is a
:
balance to be struck between the reliability of information and its cost.
There is an expectation by users of financial statements that the auditor will
form an opinion on the financial statements within a reasonable period of time
and at a reasonable cost, recognising that it is impracticable to address all
information that may exist or to pursue every matter exhaustively on the
assumption that information is in error or fraudulent until proved otherwise
SA-210 Agreeing The Terms of Audit Engagements:-
Effective Date:-  1st April 2010.
Scope:-  Deals with auditor’s responsibility in agreeing upon terms of audit

engagement with management and TCWG.
Objective:-  To accept or continuous audit engagement only when basis upon
which it has been performed is agreed through:
a). Establish whether preconditions are present.
b). There is common understanding between auditor and
management of terms of audit engagements
Preconditions 1. Management’s Financial Reporting Framework should be
for Audit:- acceptable to auditor
T/Q (B) 2. Management should accept his responsibility :-
(a) Preparation and presentation of Financial statement(F.S)
(b) Preparation of internal control system(I.C.S) that prevents,
detects and corrects misstatements
(c) Provide auditor with :-
(i) All information(Record, documentation ) related to audit
(ii) All additional information asked by auditor
(iii) Unrestricted access to all the personnel within the entity.
Let’s  Discuss preconditions for an audit as per SA 210. Explain how would an
Practice auditor proceed to establish the presence of pre conditions for an audit.
[RTP-May 21]
T/F Maintenance of internal Control system is responsibility of Auditor. [May 14 (2 Marks)]

Statement is Incorrect.
(a) As per SA 210 states that designing and maintenance of Internal control system is
H Hint the responsibility of the Management.
(b) Auditor evaluates the internal control system for the purpose of determining Nature,
Timing & Extent of Audit procedures.
To maintain an adequate accounting system incorporating various controls is the

T/F
responsibility of Management.
Statement is True.
 SA 200 "Overall Objectives of an Independent Auditor and Conduct of an
Audit in accordance with Standards on Auditing" specifically provides that
Hint
the management and, where appropriate, TCWG have responsibility for the
H
preparation and presentation of the F.S. in accordance with the applicable

FRF;
 This responsibility includes the design, implementation and maintenance of

internal control relevant to the preparation and presentation of F.S. that
are free from material misstatement, whether due to fraud or error.
Decision- If management or those charged with governance impose a limitation

Limitation on on the scope of the auditor's work in the, terms of a proposed audit
Scope! Prior to engagement such that the auditor believes the limitation will result in
Audit the auditor disclaiming an opinion on the financial statements, the
Engagement auditor shall not accept such a limited engagement as an audit
Acceptance engagement.
Recurring Audit  In case of a recurring audit, the auditor may decide not to send a
(B) new engagement letter each period.
 However, the following factors may make it appropriate to send a
new letter T/Q
1. Any indication that the client misunderstands the objective and
scope of the audit.
2. Any revised or special terms of the engagement.
3. A recent change in senior management, board of directors or
ownership.
4. A significant change in nature or size of the client's business.
5. Legal requirements or pronouncements of the Institute of
Chartered Accountants of India, or changes in the existing ones.
Comment on the following: "It is not mandatory to send a new engagement

letter in recurring audit, but sometimes it becomes mandatory to send new
letter?' Explain those situations where new engagement letter is to be sent.
[Nov. 11 (5 Marks)]
Or
Let’s 
Practice
Indicate the factors which make it appropriate for an auditor to send a new
engagement letter for a recurring audit. [Nov. 14 (5 Marks)]
Or
‘P’ an auditor decides not to send a new engagement letter to G Ltd. every
year. Whether he is right in his approach. State the circumstances where
sending new engagement letter, would be appropriate.[Nov. 15 (5 Marks)]
Or
On recurring audits, the auditor shall assess whether circumstances require

the terms of the audit engagement to be revised and whether there is a
need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other
written agreement each period. Explain the factors an auditor considers to
be appropriate to revise the terms of the audit engagement or to remind the
entity of existing terms.[RTP-May 21]
Acceptance of 1. The auditor shall not agree to a change in the terms of the audit
a change in engagement where there is no reasonable justification for doing so.
engagement 2. If, prior to completing the audit engagement, the auditor is
requested to change the audit engagement to an engagement that
P/Q
conveys a lower level of assurance, the auditor shall determine
whether there is reasonable justification for doing so.
3. If the terms of the audit engagement are changed, the auditor and
management shall agree on and record the new terms of the
engagement in an engagement letter or other suitable form of
written agreement.
4. If the auditor is unable to agree to a change of the terms of the
audit engagement and is not permitted by management to continue
the original audit engagement, the auditor shall:
(a) Withdraw from the audit engagement where possible under
applicable law or regulation; and
(b) Determine whether there is any obligation, either
contractual or otherwise, to report the circumstances to
other parties, such as those charged with governance, owners
or regulators
5. If auditor concludes that there is reasonable justification to change
the engagement & if audit work performed in compliance with SA’s
applicable to the changed engagement then,
(a) The report issued would be appropriate for the revised terms
of engagement
(b) In order to avoid confusion the report would not include the
original engagement.
Let’s  X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their
Practice accounts. He sent his letter of engagement to the Board of Directors, which
was accepted by the Company. In the course of audit of the company, the
auditor was unable to obtain appropriate sufficient audit evidence regarding

receivables. The client requested for a change in the terms of engagement.
Offer your comments in this regard. [Nov. 09 (5 Marks)]
An auditor who, before the completion of the engagement, is requested to

change the engagement to one which provides a lower level of assurance,
should consider the appropriateness of doing so. Explain stating the factors
based on which client can request the auditor to change the engagement.
[RTP-Nov. 19]
Letter of Engagement. (B) (N 91, 92, M 03, 08, 09 - 4M,

N15 – 5M)
1. Letter of (a) Letter of engagement refers to the letter written by the Auditor
Engagement: to the Client, documenting and confirming his acceptance to the
appointment, the objective, scope and extent of his responsibilities
to his Client.
(b) The Auditor and the Client should agree on the terms of
engagement. The agreed terms should be recorded in an audit
engagement letter or other suitable form of contract.
(c) In the interest of both Client and Auditor, the Auditor should send
an Engagement Letter, preferably before the commencement of
engagement, to avoid any misunderstanding with respect to
engagement.
2. Purpose: (a) Define the duties and responsibilities.
(b) Set out the basis of audit fees.
(c) Indicate the time within which the audit is expected to be
completed.
(d) This will help in avoiding misunderstanding between client and
auditor in future.
3. Mandatory (a) Objective and scope of audit
clause of (b) Management’s responsibility
engagement (c) Auditor’s responsibility
letter (d) Identification of financial reporting framework
(e) Reference to Expected form and content of audit reports and
statement that there may be circumstances in which a report may
differ from its expected form and content.
Note:  Engagement letter reduce the possibility of mis-understanding to a
greater extent.
 Normally terms of audit engagement is recorded in written
agreement. However if law or regulation prescribed in sufficient
details, the terms of audit engagement need not be recorded in
written agreement
 Engagement letter is mandatory at the time of acceptance of audit
 Use of an engagement letter is the best method of assuring the

auditor will have access to all book, accounts and vouchers required
for audit purpose
Let’s 
Practice What is the purpose of a Letter of Engagement? What are the important
contents of a Letter of Engagement? [May 17 (6 Marks)]
T/F The audit engagement letter is sent by the client to auditor. [MTP-Oct 20] (module)
Statement is False
H Hint As per SA 210 “Agreeing the terms of Engagement” Audit Engagement letter is sent by
auditor to client.
T/F Term of engagement must not be decided in advance

Statement is False
Client and auditor should agree on terms of engagement by way of an audit engagement
Hint
letter, to avoid any misunderstanding. Thus, auditor should send an engagement letter,
H
preferably before commencement of engagement.
SA 210 does not require the auditor to agree management's responsibilities in an

T/F
engagement letter or other suitable form of written agreement. [RTP-May 20]
SA 210 requires the auditor to agree management's responsibilities in an
Hint
engagement letter or other suitable form of written agreement.
H
Ans :
It is important for the auditor that each party should be clear about the nature
T/F
of the engagement.[MTP-May 20]
 It is important, both for the auditor and client, that each party should be
H Hint clear about the nature of the engagement.
 It must be reduced to writing and should exactly specify the scope of the
work.
T/F Even if law or regulation prescribes sufficient details of the terms of the audit
engagement the auditor should record them in a written agreement. [Nov. 20 (2

Marks)]
If law or regulation prescribes in sufficient detail the terms of the audit
H Hint engagement referred above, the auditor need not record them in a written
agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities.
Ans :
The terms of audit engagement can restrict the scope of an audit. [MTP - April
T/F
21]
 The scope of an audit of financial statements will be determined by the
auditor for having regard to the terms of the engagement, the requirement
H Hint of relevant legislation and the pronouncements of the Institute.
 The terms of engagement cannot, however, restrict the scope of an audit
in relation to matters which are prescribed by legislation or by the
pronouncements of the Institute.
Describe set of instructions which an auditor has to give to his client before the start of
 actual audit. [Nov. 09 (4 Marks)]
Instructions to be given to client before start of Audit:
(i) To prepare the financial statements is accordance with the FRF and on going
concern basis is responsibility of management.
(ii) To select and consistently apply the appropriate accounting policies is
management responsibility.
(iii) Maintenance of adequate accounting records and internal controls for
Hint
safeguarding assets of the company is the management responsibility.
(iv) Management is required to provide unrestricted access to whatever records,
documentation and other information required in connection with the audit.
(v) Management is responsible for making judgements of estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs
of the entity.
SA-220 QUALITY CONTROL FOR AUDIT OF F.S (Revised)
Effective Date:-  1st April 2010.

Objective:-  The objective of the auditor is to implement quality control
procedures at the engagement level that provide the auditor
with reasonable assurance
Definitions:-  Engagement partner:-Partners and other person in firm (C.A
full time in practice) responsible for engagement and report
thereon.
 Engagement quality control review:- Process to evaluate
judgment and conclusion of engagement team before issue of
report
 Engagement Q.C. reviewer:-person or team to conduct review.
 Engagement team:-all persons performing an engagement
including expert.
Responsibility of  Maintaining Overall quality of each audit assigned to him.
Engagement  Shall follow acceptance and client continuance relationship
Partner (C)  Maintaining Professional skepticism throughout the audit for
evidence of non-compliance with relevant ethical requirements
by members of the engagement team
 Seeing competency and capabilities of engagement team.
 Direction, supervision and performance of audit engagement in
accordance with professional standards, legal standards and
regulatory and legal requirement.
 Take action if Team doesn’t comply with audit engagement
 Review being performed in accordance with firms review
policies and procedures.
 Consultation of difficult matters and implementation of results
drawn from such consultation.
 Maintaining independence during engagement.
Responsibility of  Determine that engagement Q.C. Review has been appointed.
Partners regarding  Discuss significant matters with engagement quality control
engagement Q.C. reviewer.
Review:-  Not date the audit report until review is done.
Responsibility of  Discuss significant matters with engagement partner.

Q.C. Reviewer:-  Review of F.S and proposed auditor’s report
 Review of selected audit documentation.
 Reviewing conclusion drawn from auditor’s report.
In an engagement quality control review, the reviewer writes in
the end- “he did not come across any instance that shows any
issue was not resolved”
Difference of  Engagement team should follow firm’s policies and procedures
Opinion within team for  dealing and resolving  difference of opinion.
or between partner
and review:-
Elements of a The firm’s system of quality control should include policies and
system of quality procedures addressing
control each of the following elements:

(a) Leadership responsibilities for quality within the fi rm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific
engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
Human Resources The firm should establish policies and procedures designed to provide it
with reasonable assurance that it has sufficient personnel with the
capabilities, competence, and commitment to ethical principles
necessary to perform its engagements in accordance with professional
standards and regulatory and legal requirements, and to enable the
firm or engagement partners to issue reports that are appropriate in
the circumstances.
Such policies and procedures address the following personnel issues:
(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence;
(e) Career development;
(f) Promotion;
(g) Compensation; and
(h) Estimation of personnel needs.
Addressing these issues enables the firm to ascertain the number and
characteristics of the individuals required for the firm’s engagements.
The firm’s recruitment processes include procedures that help the
firm select individuals of integrity as well as the capacity to develop
the capabilities and competence necessary to perform the firm’s work.
Monitoring The firm should establish policies and procedures designed to provide it
with reasonable assurance that the policies and procedures relating to
the system of quality control are relevant, adequate, operating
effectively and complied with in practice.
Such policies and procedures should include an ongoing consideration
and evaluation of the firm’s system of quality control, including a
periodic inspection of a selection of completed engagements.
The purpose of monitoring compliance with quality control policies and
procedures is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal
requirements
(b) Whether the quality control system has been appropriately
designed and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures have
been appropriately applied, so that reports that are issued by the
firm or engagement partners are appropriate in the circumstances.
Leadership As per SA 220 "Quality Control for an Audit of Financial
Responsibilities for Statements" the engagement partner shall take responsibility for
Quality on Audits the overall quality on each audit engagement to which that
partner is assigned.
As a part of this responsibility Engagement Partner should
emphasizes the following to the Engagement Team (ET):
 Compliance with professional Standards and legal
requirements.
 Compliance with firm's Quality Control Policies and
procedures as applicable.
 Issuance of appropriate audit report.
 Ability to raise concerns without fear.
 Quality is essential & indispensable in engagement
performance.
Meaning of Engagement Partner:
The partner or other person in the firm who is a member of the
Institute of Chartered Accountants of India and is in full time

practice and is responsible for the engagement and its
performance, and for the report that is issued on behalf of the
firm, and who, where required, has the appropriate authority from
a professional, legal or regulatory body.
engagement Through its policies and procedures, the firm seeks to establish
performance consistency in the quality of engagement performance. This is
often accomplished through written or electronic manuals,
software tools or other forms of standardized documentation, and
industry or subject matter-specific guidance materials. Matters
addressed include the following:
(i) How engagement teams are briefed on the engagement to
obtain an understanding of the objectives of their work.
(ii) Processes for complying with applicable engagement
standards.
(iii) Processes of engagement supervision, staff training and
coaching.
(iv) Methods of reviewing the work performed, the significant
judgments made and the form of report being issued.
(v) Appropriate documentation of the work performed and of the
timing and extent of the review.
(vi) Processes to keep all policies and procedures current.
Engagement partner refers to the partner or other person in the firm who is responsible
for the audit engagement.
[MTP-April 19]
Ans.: Statement is correct.
 As per SA 220 "Quality control for an Audit of Financial Statements", Engagement
partner refers to the partner or other person in the firm who is responsible for
the audit engagement and its performance, and for the auditor's report that is
issued on behalf of the firm, and who, where required, has the appropriate
authority from a professional, legal or regulatory body.
26. There is no need to put the nature of engagement to writing.
[MTP-April 19]
Ans.: Statement is incorrect.

 As required by SA 210, terms of audit engagement need to be recorded in writing.
 It is important, both for the auditor and client, that each party should be clear
about the nature of the engagement. It must be reduced to writing and should
exactly specify the scope of the work.
The firm's system of quality control should include policies and procedures
addressing each element. Explain. [RT1P-Nov. 18, MTP - Oct. 19]
As per SA 220, the engagement partner shall take responsibility for the
overall quality on each audit engagement to which that partner is assigned.
While taking responsibility for the overall quality on each audit engagement,
analyse and explain the emphasis of the actions of the engagement partner
and appropriate messages to the other members of the engagement team.
Also define engagement partner. [MTP-Aug. 18]
Or
The engagement partner shall take the responsibility for the overall quality
on each audit engagement to which that partner is assigned. Discuss with
reference to SA 220 "Quality Control for an audit of financial statement".
[Nov. 19 (3 Marks)]
Let’s 
Or
Practice
As per SA 220 "Quality Control for an Audit of Financial Statements", the
engagement partner shall take responsibility for the overall quality on each
audit engagement to which that partner is assigned. Explain dearly stating
the meaning of engagement partner and also the actions of the engagement
partner and appropriate messages to the other members of the engagement
team, in taking responsibility for the overall quality on each audit
engagement. [RTP-Nov. 20]
The firm should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the system
of quality control are relevant, adequate, operating effectively and complied
with in practice. Such policies and procedures should include an ongoing
consideration and evaluation of the firm's system of quality control, including
a periodic inspection of a selection of completed engagements. Explain in the
above context the purpose of monitoring compliance with quality control
policies and procedures. [RTP-Nov. 19, Nov. 20]
Comment as an auditor on the following situations: Mr. X, a partner in X & Co., a firm of
a Chartered Accountants, died on 31-3-2015 after completing routine audit work of XYZ
 Company Ltd. Mr. Y another partner of the firm of Chartered Accountants signed the
financial statements of XYZ Company Ltd., without reviewing the finalization work done
by the assistants. [Nov. 10 (5 Marks)]
Review of Work performed by others:
(a) As per SA 220, "Quality Control for an Audit of Financial Statements". The
engagement partner shall take responsibility for reviews being performed in
accordance with the firm's review policies and procedures. Review procedures
consists of the considerations, whether,
1) the work has been performed in accordance with professional standards and
regulatory and legal requirements;
2) Significant matters have been raised for further consideration;
3) appropriate consultations have taken place and the resulting conclusions have
been documented and implemented;
4) the work performed supports the conclusions reached and is appropriately
documented;
5) the evidence obtained is sufficient and appropriate to support the auditor's
report; &
Hint
6) the objectives of the engagement procedures have been achieved.
(b) When the auditor delegates work to assistants or uses work performed by other
auditors/experts he will continue to be responsible for forming and expressing his
opinion on the financial statements. However, he will be entitled to rely on the work
performed by others, provided he exercises adequate skill and care and is not aware
of any reason to believe that he should not have so relied.
(c) The auditor should carefully direct, supervise and review work delegated to
assistants. He should obtain reasonable assurance that work performed by other
auditors/experts and assistants is adequate for his purpose.
(d) In the instant case, Mr. X, a partner of the firm had completed routine audit work
and died on 31 March, 2015. Mr. Y another partner of the firm has signed the
financial statement of XYZ Company Ltd. without reviewing the finalization work
done by the assistants. Mr. Y will be fully responsible for negligence, he cannot
take the shelter that Mr. X had done the work.
Information which assists the auditor in accepting and continuing of

relationship with the client (C)
1) The integrity of the principal owners, key management and those charged with
governance of the entity;
2) Whether the engagement team is competent to perform the audit engagement and
has the necessary capabilities, including time and resources;
3) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
4) Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.
Mention any four information which assists the auditor in accepting and
continuing of relationship with the client as per SA 220. [May 15 (5 Marks)]
Or
As per SA 220, "Quality Control for an Audit of Financial Statements" the
auditor should obtain information considered necessary in the circumstances
before accepting an engagement with a new client, when deciding whether
Let’s 
Practice to continue an existing engagement and when considering
acceptance of a new engagement with an existing client. Explain [RTP-May
18]
Or
CA Raj, an engagement partner wants to take decision, regarding acceptance
and continuance of an audit engagement. Which information, he should obtain
before accepting an engagement?[May 19 (3 Marks)]
Through its policies and procedures, the firm seeks to establish consistency
Let’s  in the quality of engagement performance. This is often accomplished through
Practice
written or electronic manuals, software tools or other forms of standardized
documentation, and industry or subject matter-specific guidance materials.
Explain the matters to be addressed in this context. [RTP - May 21]
Matters to be addressed in Policies and Procedures to establish consistency
in quality of engagement performance:
Ans.:
The firm should establish policies and procedures designed to provide it with
reasonable assurance that engagements are performed in accordance with
professional standards and regulatory and legal requirements, and that the
firm or the engagement partner issues reports that are appropriate in the
circumstances.
Through its policies and procedures, the firm seeks to establish consistency
in the quality of engagement performance. This is often accomplished
through written or electronic manuals, software tools or other forms of
standardized documentation, and industry or subject matter-specific
guidance materials. Matters addressed include the following:
(vii) How engagement teams are briefed on the engagement to obtain an
understanding of the objectives of their work.
(viii) Processes for complying with applicable engagement standards.
(ix) Processes of engagement supervision, staff training and coaching.
(x) Methods of reviewing the work performed, the significant judgments
made and the form of report being issued.
(xi) Appropriate documentation of the work performed and of the timing and
extent of the review.
(xii) Processes to keep all policies and procedures current.
INDEPENDENT AUDIT
What is the importance of having the accounts audited by independent professional

auditors? [May 01 (8 Marks)]
Or
What are the advantages of Independent audit. [May 12 (8 Marks)]
Or
Discuss the following: Advantages of Independent Auditor. [May 15 (5 Marks)]
Or
 RAG is proprietorship firm engaged in the manufacturing of textile and handloom
products. It sells its finished products both in the domestic as well as in the
international market. The company is making total turnover of Rs. 30 crores. It
has also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year
2020-21, proprietor of the firm is worried about the financial position of the
company and is under the impression that since he is out of India, therefore firm
might run into losses. He approaches a CA about advantages of getting his accounts
audited throughout the year so that he may not suffer due to accounting
weaknesses. Advise regarding advantages of getting
accounts audited. [MTP-March 18, Oct. 18]
Or
The chief utility of audit lies in reliable financial statements on the basis of which
the state of affairs may be easy to understand. Apart from this obvious utility,
there are other advantages of audit. Some or all of these are of considerable
value even to those enterprises and organisations where audit is not compulsory.
Explain. [RTP-Nov. 18]
Explain stating clearly the five types of threats as contained in Code of Ethics for
Professional Accountants, prepared by the International Federation of Accountants
(IFAC). [MTP-Oct. 18]
Meaning  Independence means
Judgment of a person is not sub-ordinate to wishes of another
person who might have engaged him or to his own self interest
 Independent audit means doing audit under complete unbiased
manner i.e. not under anybody’s influence.
 The independence is a condition of mind and personal character and
should not be confused with the superficial and visible standards
of independence which are sometime imposed by law
Why  Increase credibility of F.S.
Independence  Independent audit report will be accepted and respected by all
Advantages of 1) Management  To know exact financial position of company
Independent / Owners  To know reliability of A. Syst.
Audit (A) [N 93, 2) Employees  Put Moral Check on them
M 01, 06, 08,  Reasonableness of Wages
12 ][P.M]  Exact Bonus calculation
3) Lenders or  See audited F.S. to judge credit worthiness of
creditors company
 Will help in judging recoverability of dues.
4) Government  Computing and depositing correct Tax.
 Less government intervention.
5) Arbitrations  In dispute audited F.S. helps in solving claims
6) Investors  Create positive image of company and attract
investments.
Threats to 1. Self-interest threats- which occur when an auditing firm, its

Independence partner or associate could benefit from a financial interest in an
(C) audit client. Examples include (i) direct financial interest or
materially significant indirect financial interest in a client, (ii)
loan or guarantee to or from the concerned client, (iii) undue
dependence on a client’s fees and, hence, concerns about losing
the engagement, (iv) close business relationship with an audit
client, (v) potential employment with the client, and (vi) contingent
fees for the audit engagement.
2. Self-review threats, which occur when during a review of any
judgement or conclusion reached in a previous audit or non-audit
engagement
3. Advocacy threats - which occur when the auditor promotes, or is
perceived to promote, a client’s opinion to a point where people
may believe that objectivity is getting compromised, e.g. when an
auditor deals with shares or securities of the audited company, or
becomes the client’s advocate in litigation and third party
disputes.
4. Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too
sympathetic to the client’s interests. This can occur in many ways:
(i) close relative of the audit team working in a senior position in
the client company, (ii) former partner of the audit firm being a
director or senior employee of the client, (iii) long association
between specific auditors and their specific client counterparts,
and (iv) acceptance of significant gifts or hospitality from the
client company, its directors or employees.
5. Intimidation threats - which occur when auditors are deterred
from acting objectively with an adequate degree of professional
skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of
accounting principles, or pressure to disproportionately reduce
work in response to reduced audit fees.
Safeguards to a) Auditors should always be and appears to be independent of the entities

Independence that they are auditing.
b) Auditor should abide himself with the key fundamental principles are
integrity, objectivity and professional scepticism.
c) Auditor should consider threats to independence before accepting any
audit assignment.
d) In case of existence of any threats to independence, auditor should not
accept the engagement or put in place safeguards that eliminate them.
e) If necessary safeguards cannot be put in place due to circumstances,
auditor should withdraw.
T/F Audited financial statements help the lenders

TRUE :Lenders can rely on audited financial statements while making decision about
H Hint credit worthiness of loan applicant & later on, they can judge recoverability of
their funds
The term independence implies that the auditor should respect the
T/F
confidentiality of client information.
Statement is False.
 To respect the confidentiality of client information is one of the
H Hint ethical requirements an auditor must possess in terms of SA 200.
 The term independence implies that the auditor must be and appear
to be free of any interest which is incompatible with his integrity.
An Auditor is considered to lack independence if the partner of the audit firm

T/F deals with shares and securities of the audited entity. [May 18 (2 Marks)]
(module)
Statement is correct.
 As per SA 200 "Overall objectives of the Independent Auditor and
Conduct of an Audit in accordance with standards on Auditing" auditor
is required to comply with ethical requirements including
Hint
independence. Independence comprises both independence of mind and
H
independence of appearance.
 Self-interest threat to independence may occur if auditor or his
relative is having any financial or other interests in the entity.
Familiarity threats, which occur when auditors are deterred from acting
T/F
objectively with an adequate degree of professional skepticism. Basically,
these could happen because of threat of replacement over disagreements

with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees. [RTP -
May 21]
 Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too sympathetic
to the client's interests.
 Threats, which occur when auditors are deterred from acting
Hint
objectively with an adequate degree of professional skepticism are
H
known as intimidation threats. Basically, these could happen because

of threat of replacement over disagreements with the application of
accounting principles, or pressure to disproportionately reduce work
in response to reduced audit fees.
Let’s 
Practice Write a note on "Self-review threats". [RTP-Nov. 19]
Let’s  Familiarity threats are self-evident, and occur when auditors form
Practice relationships with the client where they end up being too sympathetic to the
client's interests. Explain. [MTP-April 19]
The Chartered Accountant has a responsibility to remain independent by

taking into account the context in which they practice, the threats to
independence and the safeguards available to eliminate the threats. State
the guiding principles in this regard.
[RTP-Nov. 19, MTP-May 20, April-21; RTP-May 21]
Let’s 
Practice
Or
Describe the guiding principles which the auditor should take into account
which serves as the safeguards to eliminate the threats to independence.
[Nov. 20 (4 Marks)]
Independence of mind and independence in appearance are interlinked

perspectives of independence of auditors." Explain.
[May 19 (3 Marks]]
There are two interlinked perspectives of independence of auditors, one,
independence of mind; and two, independence in appearance. Explain.
[MTP-Oct. 20]
Independence of Auditors:
 As per SA 200 "Overall Objectives of the IndependentAuditor and
Conduct of Audit in accordance with SAs" the auditor shall comply with
relevant ethical requirements, including independence.
 Independence comprises both independence of mind and independence of
appearance.
 In the case of an audit engagement it is in the public interest and,
therefore, required by the Code of Ethics, that the auditor be
independent of the entity subject to the audit. The Code describes
independence as comprising both independence of mind and independence
in appearance.
 The auditor's independence from the entity safeguards the auditor's
Ans : ability to form an audit opinion without being affected by influences
that might compromise that opinion.
 Independence of mind implies the state of mind that permits the
provision of an opinion without being affected by influences allowing an
individual to act with integrity, and exercise objectivity and professional
skepticism.
 Independence in appearance implies the avoidance of facts and
circumstances that are so significant that a third party would
reasonably conclude an auditor's integrity, objectivity or professional
skepticism had been compromised.
 Independence enhances the auditor's ability to act with integrity, to be
objective and to maintain an attitude of professional skepticism.
Outline the relationship of Auditing with other disciplines (C)
The relationship of Auditing with other disciplines in highlighted as under-

Discipline Relationship
1. Accounting Auditing process reviews the Financial Statements, which are the
[May 95] result of the overall accounting process. The Auditor should have
thorough and sound knowledge of Accounting Standards and
Generally Accepted Accounting Principles for reviewing the Financial
Statements.
2. Behavioral During the course of his work, the Auditor is required to obtain
Science information and explanations from the Client’s staff. He has to
[N 13] interact with the organization’s staff in analyzing the financial
figures. Hence. The Auditor should have the knack of getting along
with people, and obtain relevant information to meet his audit needs.
3. Business Auditing deals with the financial results of operational affairs of an
Functions enterprise. The operational functions, i.e. Finance, Production, Cost
Systems, and Marketing, Personnel, Purchase, Logistics and other
general areas of business management are inter-related and have an
impact on the accounting process.
4. Economics Accounting is concerned with the accumulation and presentation of
data relating to economic activity. Auditing reviews the same from
the micro-economic viewpoint. Also the Auditor also takes into
account, the general economic environment affecting the business,
during the course of his work.
5. EDP Systems Clients carry out their financial accounting activities with the help
of computers. To keep pace with technological developments,
computer –aided Audit Techniques are adopted. EDP Auditing is
considered as a discipline in itself.
6. Financial The Auditor should have a goods knowledge of financial techniques
Management such as Working Capital Management, Funds Flow, Ration Analysis,
Capital Budgeting, etc. this will help him provide value added services
to the Client rather than traditional ticking and reporting work.
7. Language The knowledge of language is considered essential in auditing field,
as the Auditor is required to communicate, both in writing as well as
orally, in day – to – day work.
8. Law 1) Auditing involves examination of transactions from the viewpoint

of whether or not they are in tune with the legal provisions. [SA
- 250]
2) The Auditor should have good background in business laws
affecting the entity, the law of Contracts, Negotiable
Instruments & Taxation Laws.
9. Logic The Auditing Discipline itself is a logical construct. All audit
processes and techniques focus on audit evidence evaluation and
verifying assertions, which are bound by the rules of logic.
10. Mathematics As the Auditor deals with financial figures, mathematics plays an
important role in audit work. Also, the Auditor arrives at meaningful
conclusions through analytical reviews or ratio analysis, for which
the knowledge of mathematics is essential.
11. Statistics Due to time, cost and other limitations, test check and sample check
procedures are considered generally accepted auditing procedures.
Knowledge of probability and statistical theory will help in arriving
at meaningful audit conclusions.
The relationship between auditing and law is very close one. Discuss. [MTP -
Oct. 19]
Let’s 
Practice Discuss the following : The discipline of behavioural science is closely linked
with the subject of attditing. [Nov. 13 (5 Marks)]
Both accounting and auditing are closely related with each other. Explain.
[RTP-Nov 20]
QUALITIES OF AUDITOR (C) [N 04, M 13]
(a) Integrity Auditor should be honest, sincere & straightforward while

performing his professional duties.
(b) Objectivity He must adopt unbiased & impersonal approach.
(c) Independence  He should not subordinate his judgement to the will of others
(client or other person).
 He should be free of any interest apparently as well as in
reality.
 He should audit the financial statements prepared by the
management in unbiased way.
(d) Knowledge  He should have general knowledge of client's business and
economic trends etc.
 Awareness about laws like Taxation laws & Contract Act,
Partnership Act, Companies Act etc, is also required.
 He must continuously update his knowledge to conduct audit
effectively.
(e) Communication During conduct of audit, he has to interact with various officers
skills & staff of organisation & third parties, thus he requires goods
oral & written communication abilities.
(f) Tact He must be able to deal with different person in different
situation. He has to direct & supervise his own staff as well,
thus he should be tactful.
(g) Judgement He should be capable to taking firm judgement as to which
items are to be checked & what should be the sample size.
(h) Logical skills He must be able to analyse & interpret problems so that he
can accordingly deal with the same.
(i) Technical skills He must have good hand on accounting & auditing etc. Moreover,
he should be aware of latest development in auditing standards
so that he can perform audit in effective manner.
(j) Confidentiality He should not disclose, confidential information acquired during
conduct of his professional duties, to any third party except
when
 Permitted by client or
 Required by law
(k) Caution Whatever he does, he must do with proper skill & care.
1. Auditor does not need communication skills, as he is concerned only with financial
T/F information
FALSE, During conduct of audit, he has to interact with various officers and staff of
Hint
client & third parties, which requires good written & oral communication skills
H
T/F 2. Auditor must maintain confidentiality subject to certain exceptions

TRUE : He (Auditor) should not disclose any confidential information relating to client.
Hint
However, he can disclose if it is permitted by client or required by law
H
T/F 3. Auditor does not need knowledge of accounting

FALSE, Auditor expresses opinion on financial statements. If he does not have expert
H Hint knowledge on accounting, he cannot check whether financial statements prepared by
entity’s management are true & fair or not.
T/F 4. Auditor should have knowledge of CIS

TRUE :Now a days, most of the client maintain their accounts in computer information
H Hint system. Thus, working knowledge on computer is required for auditors to conduct audit
in an effective way
T/F 5. Audit doesn’t require knowledge of business operations on part of auditor

FALSE :In financial statements of client, results of various operations/functions are
H Hint shown. Unless auditor has knowledge about basic business operations, he can’t judge
their financial results in effective way.
T/F 6. Documentation is required to be kept by auditor

TRUE: He should document matters relating to the audit (maintain working
H Hint papers).W0rking papers are maintained to demonstrate that the audit was carried out
accordance with the basic principles
State briefly the Qualities of Auditors.[Nov. 04 (4 Marks)]

Or
Let’s  Lord Justice Lindley in the course of the judgment in the famous London &
Practice General Bank case had succinctly summed up the overall view of what an
auditor should be as regards the personal qualities. Explain stating also the
qualities of Auditor. [RTP-May 19]
Or
Lord Justice Lindley in the course of the judgment in the famous London &
General Bank case had succinctly summed up the overall view of what an
auditor should be as regards the personal qualities. He said, "an auditor must
be honest that is, he must not certify what he does not believe to be true
and must take reasonable care and skill before he believes that what he
certifies is true"
Explain stating clearly the qualities of an auditor. [MTP-March 21]
Role of International Auditing and Assurance Standards Board
In 1977, the International Federation of Accountants (IFAC) was set up with a view to
bringing harmony in the profession of accountancy on an international scale.
In pursuing this mission, the IFAC Board has established the International Auditing and
Assurance Standards Board (IAASB) to develop and issue, in the public interest and under
its own authority, high quality auditing standards for use around the world.
The IAASB functions as an independent standard-setting body under the auspices of
IFAC. The objective of the IAASB is to serve the public interest by setting high quality
auditing standards and by facilitating the convergence of international and national
standards, thereby enhancing the quality and uniformity of practice throughout the
world and strengthening public confidence in the global auditing and assurance
profession.
The IAASB achieves this objective by:
 Establishing high quality auditing standards and guidance for financial statement
audits that are generally accepted and recognized by investors, auditors,
governments, banking regulators, securities regulators and other key stakeholders
across the world;
 Establishing high quality standards and guidance for other types of assurance services
on both financial and non-financial matters;
 Establishing high quality standards and guidance for other related services;
 Establishing high quality standards for quality control covering the scope of services
addressed by the IAASB; and
 Publishing other pronouncements on auditing and assurance matters, thereby
advancing public understanding of the roles and responsibility of professional auditors
and assurance service providers.
Auditing and Assurance Standards Board: ICAI is a member of the IFAC and is committed
to work towards the implementation of the guidelines issued by the IFAC. ICAI
constituted the AASB (erstwhile Auditing Practices Committee) to review the existing
auditing practices in India and to develop Engagement and Quality Control Standards
(erstwhile Statements on Standard Auditing Practices) so that these may be issued by
the Council of the Institute.
The objective of the IAASB is to serve the public interest by setting high
quality auditing standards and by facilitating the convergence of
international and national standards, thereby enhancing the quality and
uniformity of practice throughout the world and strengthening public
Let’s 
Practice confidence in the global auditing and assurance profession. State how this
objective is achieved.[MTP-March 18, March 19]
Or
The IAASB functions as an independent standard-setting body under the
auspices of IFAC. Explain stating the objective of IAASB and also how it
achieves those objectives. [RTP-May 19]
Let’s 
Practice Explain the Auditing Standard setting process of AASB of ICAI.
Auditing Standards Setting Process:

The Auditing and Assurance Standards Board (AASB) of the Institute
formulates the auditing standards. The steps followed in formulating
auditing standards are:
1. AASB identifies the areas where auditing standards need to be
formulated and the priority in regard to their selection.
2. In the preparation of the auditing standards, the Board is normally,
assisted by study groups comprising of a cross section of members of
Ans : the Institute.
3. On the basis of the work of the study groups, an Exposure Draft of the
proposed auditing standard is prepared by the Board and issued for
comments of the members.
4. After taking into the comments received, the draft of the proposed
auditing standard is finalised by the Board and submitted to the Council
of the Institute.
5. The Council considers the final draft of the proposed auditing standard
and, if necessary, modifies the same in consultation with the Board. The
auditing standard is then issued under the authority of the Council.

6. While formulating the auditing standards, the Board also takes into
consideration the applicable laws, customs, usages and business
environment in the country.
Let’s 
Practice What are the objectives,and functions of Auditing and Assurance Standard
Board (AASB)? [May 15 (6 Marks)]
Ans : Objectives and Functions of AASB:

1. To review the existing and emerging auditing practices worldwide and
identify areas in which Standards on Quality Control, Engagement
Standards and Statements on Auditing need to be developed.
2. To formulate Engagement Standards, Standards on Quality Control and
Statements on Auditing so that these may be issued under the authority
of the Council of the Institute.
3. To review the existing Standards and Statements on Auditing to assess
their relevance in the changed conditions and to undertake their revision,
if necessary.
4. To develop Guidance Notes on issues arising out of any Standard, auditing
issues pertaining to any specific industry or on generic issues, so that
those may be issued under the authority of the Council of the Institute.
5. To review the existing Guidance Notes to assess their relevance in the
changed circumstances and to undertake their revision, if necessary.
6. To formulate General Clarifications, where necessary, on issues arising
from Standards.
7. To formulate and issue Technical Guides, Practice Manuals, Studies and
other papers under its own authority for guidance of professional
accountants in the cases felt appropriate by the Board.
INTRODUCTION TO ENGAGEMENT & QUALITY STANDARDS
1. WHY STANDARD IS REQUIRED?
 To assist professional to provide assurance & related services.

 To improve efficiency & effectiveness.
 To bring consistency in professional work.
 To maintain quality (Reliability).
 To improve trust of society on professional.
2. MEANING OF STANDARDS.
Standards are well researched, defined principles issued by authority which guides us on
who to perform assurance & related services.
3. DRAFTING OF SA’s
DRAFTING OF SA
Section I Section II
INTRODUCTION EXPLANATORY GUIDANCE
DEFINITION APPENDICES
OBJECTIVES
REQUIREMENTS
INTRODUCTION
Deals with the purpose and scope of the Standard, subject matter of the Standard and
effective date of the Standard.
OBJECTIVES
The aim of the auditor is to achieve the objectives as specified in all Standards of Auditing
(SAs).
DEFINITIONS
The ‘Definitions’ sections deals with the meaning attributed to certain expressions for the
purpose of SAs.
REQUIREMENTS
 The fundamental principles of the standard are contained in the Requirements sections
 The ‘Requirements’ section also contains cross references to the relevant Application
and other Explanatory Material.
APPLICATION AND OTHER EXPLANATORY MATERIAL
 The ‘Application and Other Explanatory Material’ contained in an SA is an Integral

part of the SA as it provides further explanations of, and guidance for carrying out,
the requirements of an SA, along with the background information on the matters
addressed in the SA.
 It may include examples of procedures, some of which the auditor may judges to be
appropriate in the circumstances. Such guidance is, however, not intended to impose a
requirement.
Various Professional Pronouncements.
REMARKS
Statements The ‘Statements’ have been issued with a view to securing compliance
by members on matters which, in the opinion of the Council, are
critical for the proper discharge of their functions. ‘Statements’
therefore are mandatory.
Guidance are primarily designed to provide guidance to members on matters

notes which may arise in the course of their professional work and on
which they may rely in the course of their professional work and on
which they may desire assistance in resolving issues which may pose
difficulty. Guidance Notes are recommendatory in nature.
Let’s 
Practice Discuss the following: "Statements" and ''Guidance Notes" of ICAI - Whether
mandatory or recommendatory. [May 14 (5 Marks)]
T/F Guidance Notes are mandatory in Nature.

 Guidance notes are designed to provide guidance to members on matters
H Hint which may arise in the course of their professional work and on which they
may desire assistance.
 Guidance Notes are recommendatory in nature.
Types of “Engagement Standards” (A) (RTP)
Following Standards issued by AASB under the authority of the Council are collectively
known as the Engagement Standards-
1. Standards on Auditing (SAs) :
(a) These Standards are to be applied in the audit of Historical Financial Information.
(b) The objective of an audit of Financial Statements is to enable the Auditor to
express an opinion, whether the financial Statements are prepared, in all material
respects, in accordance with an identified Financial Reporting Framework. The
phrase used to express the Auditor’s opinion is “give a true and fair view”.
Framework. The phrase used to express the Auditor’s opinion is “give a true and
fair view”.
(c) The Auditor’s opinion enhances the credibility of Financial Statements by providing
a high, but not absolute, level of assurance.
2. Standards on Review Engagements (SREs) :
(a) These Standards are to be applied in the review of Historical Financial Information.
(b) The objective of a Review of Financial Statements is to enable an Auditor to state
whether on the basis of procedures (which do not provide all the evidence that
would be required in an audit) anything has come to the Auditor’s attention that
causes the Auditor to believe that the Financial Statements are not prepared (in
all material respects) in accordance with an identified Financial reporting
Framework.
(c) While a Review involves the application of audit skills and techniques and the
gathering of evidence, it does not involve a detailed assessment of accounting and
internal control systems, which are procedures ordinarily performed during an audit.
(d) The level of assurance provided in a Review Report is correspondingly less than
that given in an Audit report.
3. Standards on Assurance Engagements (SAEs) – These standards are to be applied in
Assurance Engagements, dealing with subject matters other than audits or reviews of
Historical Financial Information (i.e. Prospective Financial Information or Review of
Forecasts).
4. Standards on Related Services (SRSs) – These Standards are to be applied to
engagements involving application of Agreed upon Procedures to information,
Compilation Engagements, and Other Related Services Engagements, as may be
specified by the ICAI.
(a) Agreed-upon procedures: In this engagement, an Auditor is engaged to carry out
those procedures to which the Auditor and the entity and any appropriate third
parties have agreed and to report on factual findings (i.e. engagement to review
the Debtors).
(b) Compilations: In a Compilation Engagement, a Member of ICAI is engaged to collect,

classify and summaries Financial Information. The Member does a reducing of
detailed data to a manageable and understandable form without a requirement to
test the assertions underlying that information.
SA No. Description
I. STANDARDS ON QUALITY CONTROL SQC 1 -99
SQC 001 Quality Control for Firms that perform audits and reviews of historical
financial information, and other assurance and related services
engagements
II. STATNDARDS ON AUDITING (SA)
1. SA 200 – 299 General Principles and Responsibilities.
1. SA 200 Overall objectives of Audit and conduct of audit in accordance with
2. SA 210 standards
3. SA 220 Terms of Audit Engagement
4. SA 230 Quality Control for Audit Work
5. SA 240 Documentation
The Auditor’s Responsibility to Consider Fraud and Error in an Audit of
6. SA 250 Financial Statements (Note 2)
7. SA 260 Consideration of laws & Regulations in an Audit of Financial Statements
8. SA 265 Communication of Audit Matter with Those Charged with Governance
Communicating deficiency in internal control system with TCWG and
9. SA 299 Management
Responsibility of Joint Auditors.
2. SA 300 – 499 Risk Assessment and Response to Assessed Risks

10. SA 300 Audit Planning
11. SA 315 Understanding the Entity and Its Environment and Assessing the Risk of
Material Mis-statement
12. SA 320 Audit Materiality
13. SA 330 The Auditor’s Procedures in Response to Assessed Risks
14. SA 402 Audit Considerations Relating to Entities Using Service Organisations.
15. SA 450 Evaluations of Misstatements identified during audit
3. SA 500- 599 Audit Evidence
16. SA 500 Audit Evidence
17. SA 501 Audit Evidence – Additional Considerations for Specific Items

18. SA 505 External Confirmations
19. SA 510 Initial Engagements – Opening Balances
20. SA 520 Analytical Procedures
21. SA 530 Audit Sampling
22. SA 540 Auditing of Accounting Estimates
23. SA 550 Related Parties
24. SA 560 Subsequent Events
25. SA 570 Going Concern
26. SA 580 Representations by Management (Note 3)
4. SA 600 – 699 Using Work of Others
27. SA 600 Using the Work of Another Auditor
28. SA 610 Relying Upon the Work of an Internal Auditor
29. SA 620 Using the Work of an Expert
5. SA 700- 799 Audit Conclusions and Reporting
30. SA 700 The Auditor’s Report on Financial Statements
31. SA 705 Modifications to the opinion in Independent Auditors report
32. SA 706 Emphasis of Matter paragraph and other matter paragraph
33. SA 710 Comparatives
34. SA 720 Auditor's Responsibility in Relation to Other Information in
Documents Containing Audited Financial Statements
Management of the organisation is solely responsible for the compliance of auditing
standards while preparing financial statements.
[Nov. 18 (2 Marks)]
Ans : Statement is incorrect.
 Responsibility for the compliance of Auditing Standards is of Auditor. While
carrying out the audit, auditor is required to ensure that audit is been performed
in accordance with Standards on Auditing and appropriate Report is issued.
 Management is responsible for the compliance of Accounting Standards.
MULTIPLE CHOICE QUESTIONS
1. Objective of Audit is to ________:

a. safeguarding of assets
b. prevention and detection of fraud and error
c. compliance of laws and regulations
d. express an opinion on financial Statements
2. As per SA-200 "Overall Objectives of the Independent Auditor'', in conducting an audit of
financial statements, the overall objectives of the auditor is:
a. to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement and to report on the financial statements, and
communicate as required by the SAs, in accordance with the auditor's findings
b. to guide the management as to design, implementation and maintenance of internal
controls which are necessary to obtain reasonable assurance that financial statements
are free from material misstatements
c. to communication with Those Charged with Governance, the weaknesses identified
during the course of audit
d. to ensure compliance of laws and regulations that are applicable over the entity
3. Which of the following is an example of Voluntary Audit?
a. Audit of companies governed by Companies Act, 2013
b. Audit of Individuals under Section 44AB of Income Tax Act, 1961
c. Audit of companies under Section 44AB of Income Tax Act, 1961
d. Audit of Individuals on the directives of Government for the purpose of sanction of
grants
4. Which of the following is not an inherent limitation of audit?
a. Nature of Financial Reporting
b. Nature of Audit procedures
c. Nature and Size of Business Entity
d. Existence of related party transactions
5. The IAASB functions as an independent standard-setting body under the auspices of________
a. International Federation of Auditors
b. International Federation of Accountants
c. Auditing Practices Committee
d. International Ethical Standard Board of Accountants
6. As per SQC-1, which of the following element not part of the firm's system of quality control:
a. Leadership responsibilities for quality within the firm
b. Ethical requirements including independence
c. Preparation of financial statements in compliance of applicable Financial reporting

Framework
d. Acceptance and continuance of client relationships and specific engagements
7. SQC 1 requires the firm to obtain information before accepting an engagement. Which of the
following information will not assist the engagement partner in determining whether the
decisions regarding the acceptance and continuance of audit engagements are appropriate:
a. The integrity of the principal owners, key management and those charged with
governance of the entity;
b. Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
c. Whether the firm and the engagement team can comply with relevant ethical
requirements;
d. Whether the firm and the engagement partner are able to communicate with the
TCWG
8. SQC 1 'Quality Control for Firms that perform Audits and Review of Historical Financial
Information, and other Assurance and related services", requires firms 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
a. Ordinarily not more than 60 days after the date of the auditor's report
b. Ordinarily not more than 30 days after the date of the auditor's report
c. Ordinarily not more than 90 days after the date of the auditor's report
d. Ordinarily not more than 120 days after the date of the auditor's report
9. 9. SQC 1 requires firms to establish policies and procedures for the retention of
a. Audit File
b. Engagement documentation
c. Final Audit file
d. Audit Documentation
10. SQC requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is
a. No shorter than eight years from the date of the auditor's report, or, if later, the
date of the group auditor's report
b. No shorter than six years from the date of the auditor's report, or, if later, the date
of the group auditor's report
c. No shorter than seven years from the date of the auditor's report, or, if later, the
date of the group auditor's report
d. No shorter than ten years from the date of the auditor's report, or, if later, the date
of the group auditor's report
11. As per SA 210 'Agreeing the Terms of Audit Engagements", preconditions for an audit may be
defined as the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management a n d, where
appropriate, those charged with governance to the premise on which an audit is conducted. in
order to establish whether the preconditions tor an audit are present, the auditor shall:
a. determine whether the audit can be performed in accordance with Quality Control and
Engagement Standards
b. determine whether the financial reporting framework is acceptable
c. determine whether the audit can be performed in accordance with legal and regulatory
requirements
d. determine whether policies and procedures as followed for internal control are
acceptable
12. The agreed terms of the audit engagement shall be recorded in an audit engagement letter
which shall include the following except
a. Responsibilities of the auditor
b. Description of methods to be followed for obtaining audit evidence
c. Responsibilities of management
d. Objective and scope of the audit of the financial statements
13. Which of the following is correct?
a. Auditing implies systematic, critical and special examination of the records of a business
for a specific purpose
b. The purpose of an audit is to enhance the degree of confidence of intended users in
the financial statements
c. Auditing is legally obligatory for all types ofbusiness organisations
d. Auditor's Opinion is an assurance as to the future viability of the enterprise or the
efficiency or effectiveness with which management has conducted the affairs of the
enterprise
14. Which of the following is not an advantage of independent audit?
a. Settlement of Taxes
b. Protection of Interest of Stakeholders
c. Guarantee as to future viability of the entity
d. Moral Check on employees
15. Threats occur when, because of a relationship, a professional accountant becomes too
sympathetic to the interests of others, are known as:
a. Self-interest threats
b. Self-review threats
c. Familiarity threats
d. Intimidation threats
16. Loan or guarantee to or from the concerned client is an example of -

a. Self-review threats
b. Self-interest threats
c. Advocacy threats
17. When an auditor deals with shares or securities of the audited company is an example of :
c. Advocacy threats
18. Intimidation threats occur:
a. when a professional accountant may be deterred from acting objectively by threats,
actual or perceived
b. when a professional accountant promotes a position or opinion to the point that
subsequent objectivity may be compromised
c. when a previous judgment needs to be re-evaluated by the professional accountant
responsible for that judgment
d. as a result of the financial or other interests of a professional accountant or of a
relative
a. To maintain an adequate accounting system incorporating various controls is the
responsibility of Management
b. The term independence implies that the auditor should respect the confidentiality of
client information
c. An unqualified opinion in audit report is a guarantee as to the future viability of the
company
d. The audit engagement letter is sent by the client to auditor
20. An attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error ot fraud, and a critical assessment of audit evidence, is
known as
a. Professional Judgment
b. Professional Skepticism
c. Professional Competence
d. Professional Behaviour
21. The application of relevant training, knowledge and experience, within the context provided
by auditing, accounting and ethical standards, in making informed decisions about the courses
of action that are appropriate in the circumstances of the audit engagement, is known as:
a. Professional Judgment
b. Professional Skepticism
c. Professional Competence
d. Professional Behaviour
22. SA 210 deals with:
a. Agreeing the terms of Review Engagement
b. Agreeing the terms of Audit Engagement
c. Agreeing the terms of Compilation Engagement
d. Agreeing the terms of Other Assurance Engagement
23. Which OAR following is incorrect?
a. Auditor is able to obtain only reasonable assurance due to inherent limitation of audit
b. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
material misstatement due to fraud or error
c. An Auditor is considered to lack independence if the partner of the audit firm deals
with shares and securities of the audited entity
d. The preparation of financial statements does not involve judgment by management in
applying the requirements of the entity's applicable financial reporting frameworkto
the facts and circumstances of the entity
24. Which of the following standard requires implementation of quality control procedures while
performing an audit engagement:
a. SQC 1
b. SA 220
c. SQC 1 and SA 220
d. SA 200 and SA 220
25. Which of the following aspect is not covered in audit of financial statements:
a. Examination of Accounting System & Internal Control
b. Vouching of the transactions
c. Verification of Assets & Liabilities
d. Design, implementation and maintenance of Internal Control System
26. Which of the following is true?
a. Managementof the organisation is solely responsible for the compliance of auditing
standards while preparing financial statements
b. The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative
c. The basic objective of audit does not change with reference to nature, size or form of
the entity
d. Audit procedures used to gather audit evidence may be effective for detecting an
intentional misstatement
27. Standards on Assurance Engagements are to be applied in:

a. the audit of historical financial information
b. the review-of historical financial information
c. assurance engagements, engagements dealing with subject matter other than historical
financial information
d. engagements involving application of agreed upon procedures to information and other
related services such as compilation engagements
28. Ethical requiretnents are defined as the Code of Ethics issued by the ICAI establishes the
fundamental principles of professional ethics. Which of the following is not specified in Code
of Ethics, as such:
a. Objectivity
b. Professional competence
c. Confidentiality
d. Communication Skills
29. Which of the following is false?
a. Engagement letter need to be entered for each year of the period of auditor's
appointment
b. The objective of auditor is to obtain reasonable assurance and to report on the financial
statements
c. An audit is not an official investigation into alleged wrongdoing
d. Guidance Notes are recommendatory in Nature
30. In case of recurring audits, the auditor shall assess whether circumstances require revision in
terms of the audit engagement and whether there is a need to remind the entity of the
existing terms of the audit engagement. Which of the following circumstance do not require
revision in the terms of the audit engagement or to remind the entity of existing terms:
a. significant change of senior management
b. significant change in ownership
c. significant change in nature or size of the entity's business
d. significant change in engagement ream members
QUESTIONS FROM RTPs, MTPs AND PAST EXAMS (MEMORY BASED) OE ICAI
31. Judging the significance of a matter requires _________analysis of the facts and
circumstances.
a. objective
b. subjective
c. both subjective and objective
d. qualitative
32. An important factor in determining the form, content and extent of audit documentation of
significant matters is the extent of_____exercised in performing the work and evaluating
the results.
a. professional skepticism
b. professional integrity
c. professional judgment
d. professional sincerity
33. Standard on Quality Control (SQC) 1 provides that, unless otherwise specified by law or
regulation, audit documentation is the property of
a. Management.
b. Those charged with governance.
c. Management or Those charged with governance.
d. Auditor.
34. Professional skepticism is necessary to the critical assessment of
a. audit documentation
b. audit evidence
c. audit procedures and techniques
d. none of the above
35. As per SA 210 "Agreeing the Terms of Audit Engagements". the auditor shall agree the terms
of the audit engagement with:
a. Management
b. Those charged with governance
c. Management or those charged with governance, as appropriate.
d. Engagement team members
36. The matter of difficulty, time, or cost involved is:
a. not in itself a valid basis for the auditor to omit an audit procedure for which there is
no alternative.
b. in itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative.
c. not in itself a valid basis for the auditor to omit an audit procedure for which
alternative exists.
d. not in itself a valid basis for the auditor to omit an audit procedure.
37. ___________ are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests.
b. Familiarity threats
c. Intimidation threats
d. Advocacy threats
38. If the auditor concludes that there is reasonable justification to change the engagement and
if the audit work performed complied with the SAs applicable to the changed engagement,
the report issued would be appropriate for the revised terms of engagement. In order to avoid
confusion, the report would not include reference to:
a. the original engagement; or any procedures that may have been performed in the
b. the original engagement;
c. any procedures that may have been performed in the original engagement
d. the original engagement and any procedures that may have been performed in the
a. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
material misstatement due to fraud or error,
b. The auditor is expected to and can reduce audit risk to zero and can therefore obtain
absolute assurance.
c. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain reasonable assurance that the financial statements are free from
material misstatement due to fraud or error.
d. The auditor is expected to and can reduce audit risk to zero and can therefore obtain
reasonable assurance that the financial statements are free from material
misstatement due to fraud or error.
40. Direct financial interest or materially significant indirect financial interest in a client is an
example of
c. Advocacy threats
41. M/s KYC & Co. is reputed Audit firm in Mumbai, They are appointed as Statutory Auditors of
Blessed Ltd. Which of the below is the responsibility of M/s KYC &Co ,
a. Preparation of financial statements
b. Designing, implementation and maintenance of internal control system
c. Reporting on true and fair view of financial statements
d. Compliance with the applicable law and regulation
42. Mr, A, auditor and Mr CA, Finance Manager of XYZ Pvt. LW, are friends, Mr. It prepares
the audit report according to the wishes and directions of Mr. B. In this situation which
essential utility of the auditor: has been compromised:
a. Professional Competence
b. Independence
c. Professional Skepticism
d. Due care
43. Mr. Salmon, is an engagement partner of Khan & Co. Chartered Accountants for an audit of
Lava Ltd., he died of a stroke pan 30.09,2020 after completing the entire routine audit work
of Lava Ltd. Mr. Shoaib, one of the partners of Khan & Co, will be signing the accounts of
Lava Ltd. What is the course of action to be taken by Mr, Shoaib?
a. Sign the accounts of Lava Ltd. without reviewing the work of his partner
b. Sign the balance sheet after reviewing the work of his partner
c. Withdraw the audit as the person who has performed the audit is no more
d. Issue an adverse report
44. _______ is the threat which occurs when auditors are deterred from acting objectively with
an adequate degree of professional skepticism.
a. Familiarity threat
b. Advocacy threat
c. Self Review threat
d. Intimidation threat
45. As per SQC 1 the retention period for audit engagements ordinarily is no shorter than ____
from the date of the auditor’s report
a. ten years
b. five years
c. seven years
d. four years
46. In relation to completed engagements, procedures designed to provide evidence of compliance
by engagements terms with the firm’s quality control policies and procedures is known as:
a. Monitoring
b. Inspection
c. Subsequent Audit procedures
d. Compliance procedures
47. The persons with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity are:
a. management
b. those charged with governance
c. audit committee
d. board of directors
48. if the auditor is unable to agree to a change of the terms of the audit engagement and is not
permited by management to continue the original audit engagement, the auditor shall:
a. Withdraw from the audit engagement where possible under applicable law or
regulation.
b. Determine whether, there is any obligation, either contractual or otherwise, to report
the circumstances to other parties, such as those charged with governance, owners or
regulators.
c. Withdraw from the audit engagement where possible under applicable law or regulation
and determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with governance„
owners or regulators.
d. Withdraw from the audit engagement where possible under applicable law or regulation
or determine whether there is any obligation, either contractual or otherwise, to report
the circumstances to other parties, such as those charged with governance, owners or
regulators.
Answers
1. d 2. a 3. d 4. c 5. b 6. c 7. d
8. a 9. b 10. c 11. b 12. b 13. b 14. c
15. c 16. b 17. c 18. a 19. a 20. b 21. a
22. b 23. d 24. b 25. d 26. c 27. c 28. d
29. a 30. d 31. a 32. c 33. d 34. b 35. c
36. a 37. b 38. a 39. a 40. b 41. c 42. b
43. b 44. d 45. c 46. b 47. b 48. c
Extra Module Questions for Practise
Correct /Incorrect
State with reasons (in short) whether the following statements are correct or incorrect:
(i) Specific disclosure is required of the fundamental accounting assumptions followed
in the financial statements.
Incorrect, as per AS 1, “Disclosure of Accounting Policies”, specific disclosure of
the fundamental accounting assumption is required if they are not followed in the
(vii) Mr. S, one of the new team members of the auditor of Extremely Effective Limited
was of the view that for the purpose of conducting an audit, only knowledge of
direct tax is required whereas no knowledge of indirect tax is required.
Incorrect: The viewpoint of Mr. S is incorrect because for the purpose of
conducting an audit, proper knowledge of both direct tax as well as indirect tax
is required.
(viii) The term “Engagement Standards” refer to Standards on Auditing only.

Incorrect: Engagement Standards refer not only to Standards on auditing but also
to Standards on review engagements, Standards on assurance engagements and
Standards on related services.
(ix) Theoretical Questions

1. Explain clearly meaning of Auditing. How would you as an auditor perform the
audit.
2. “The independent audit of an entity’s financial statements is a vital service to
investors, trade payables, and other participants in economic exchange”. Explain
3. State the objectives of Audit according to SA 200
4. “The Code of Ethics for Professional Accountants, prepared by the International
Federation of Accountants (IFAC) identifies five types of threats”. Explain
5. There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. Explain with examples.
6. In case of certain subject matters, limitations on the auditor’s ability to detect
material misstatements are particularly significant. Explain such assertions or
subject matters.
7. As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor
should obtain information considered necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue
an existing engagement and when considering acceptance of a new engagement
with an existing client. Explain
8. “An auditor who before the completion of the engagement is requested to change
the engagement to one which provides a lower level of assurance should consider
the appropriateness of doing so.” Discuss.
9. An audit is distinct from investigation. However, it is quite possible that sometimes
investigation results from the prima facie findings of the auditor. Discuss.
10. “Integrity’” and “Objectivity” are among the fundamental principles of
professional ethics relevant to an auditor enshrined in IESBA code. Distinguish
between the two.
ANSWERS/SOLUTIONS
Answers to Theoretical Questions

1. Refer 1: Meaning and Definition of Auditing.
9. Audit is distinct from investigation. Investigation is a critical examination of the
accounts with a special purpose. For example, if fraud is suspected and it is
specifically called upon to check the accounts whether fraud really exists, it takes
character of investigation.
The objective of audit, on the other hand as we have already discussed, is to
obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion.
Therefore, audit is never started with a pre-conceived notion about state of
affairs; about wrong-doing; about some wrong having been committed. The auditor
seeks to report what he finds in normal course of examination of accounts.
However, it is quite possible that sometimes investigation results from the prima
facie findings of the auditor. It may happen that auditor has given some findings
of serious concern. Such findings may prompt for calling an investigation.
10. The principle of” Integrity” requires auditor to be straight forward and honest in
all professional and business relationships. It implies fair dealing and truthfulness.
It effectively means that he shall not be associated with reports, returns
communications or other informations which he believes contains a materially false
or misleading statement; contains statements or informations provided recklessly

or omits required information where such omission could be misleading.
The principle of objectivity requires auditor not to compromise professional
judgment because of bias, conflict of interest or undue influence of others.
Hence, integrity requires auditor to be involved in fair dealing and truthfulness
with client and not be associated with materially false or misleading statements,
reports, returns or communications. However, objectivity requires auditor not to
compromise professional judgment because of bias, conflict of interest or undue
influence of others.

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CA Inter | AUDIT AND ASSURANCE Nature, Objective and Scope of Audit

“An audit is an independent examination of financial information of any entity, whether

T/F Audit is independent examination of operations conducted by management

Kunal Mandhania 1|Page

The following points merit consideration in regard to scope of audit:

Kunal Mandhania 2|Page

verification, ARP, inquiry &confirmation, BRS, Check ICS, etc.

Principal/basic Aspects to be covered in Audit/Overall Audit approach

Kunal Mandhania 3|Page

What are the aspects to be covered in an audit. (M 94 - 8M, N15 – 5M)

TYPES OF AUDIT (A) (N 11 – 5M)

Audit is not legally obligatory for all types of business organisations or

1. Statutory audit/ Audit Required under law.

Kunal Mandhania 4|Page

(vi) Corporations set up under an Act of Parliament or State legislature such as

2. Non-statutory audit (or) Voluntary audit:

T/F Auditing is legally obligatory for all types of business organisations.

Advantages of voluntary audit:

"Audit of the accounts of the sole-proprietor is not compulsory. However, he may

Kunal Mandhania 5|Page

Kunal Mandhania 6|Page

SA 200 (REVISED) Overall objectives of Independent audit and conduct of

Objectives of Audit Responsibilities / Pre-requisites /

Requirements / pre- requisites / Responsibilities of auditor (B)

1. Ethical He shall comply with ethical requirements including independence. He

Kunal Mandhania 7|Page

b. Independence: The term independence means that the judgment

Kunal Mandhania 8|Page

Other IMP considerations of S.A. 200 (revised) (A)

Auditor’s opinion does not assure

The London It is no part of Auditor’s duty to give advice either to Directors or

An auditor has nothing to do with prudence or profitability of a company.

The purpose of an audit is to enhance the degree of confidence of intended users

Kunal Mandhania 9|Page

the financial statements are prepared, in all material respects, in

Auditor's Opinion is an assurance as to the future viability of the enterprise or the

 The objective of an audit of financial statements, prepared within a

T/F Auditor’s opinion is on True & Fair view of financial statements

a) To obtain reasonable assurance about whether the financial statements as

conducting an audit of financial statements in accordance with Code of Ethics issued by

Inherent limitations of audit:- (A) [N 96, M 00, N 01, M 03, M05]

The preparation of financial statements does not involve judgment by management

auditor to believe that audit evidence is valid when it is not.

search, which may be necessary for such an investigation.

Conduct of an Audit in Accordance with Standards on Auditing", the auditor

 This is because there are inherent limitations of an audit, which result in

Auditing implies systematic, critical and special examination of the records of a

Auditor is able to obtain only reasonable assurance due to inherent limitation of

 Inherent Limitations of internal control.

Discuss Limitations of audit. [May 11 (8 Marks)]

 auditor to omit an audit procedure for which there is no alternative or to he

SA-210 Agreeing The Terms of Audit Engagements:-

Effective Date:-  1st April 2010.

Scope:-  Deals with auditor’s responsibility in agreeing upon terms of audit

T/F Maintenance of internal Control system is responsibility of Auditor. [May 14 (2 Marks)]

To maintain an adequate accounting system incorporating various controls is the

preparation and presentation of the F.S. in accordance with the applicable

 This responsibility includes the design, implementation and maintenance of

Decision- If management or those charged with governance impose a limitation

Comment on the following: "It is not mandatory to send a new engagement