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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
Study_Material
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[Concept: Theory] ## 8. WHAT IS AN ENGAGEMENT? Engagement means an arrangement to do something. In the context of auditing, it means a formal agreement between auditor and client under which auditor agrees to provide auditing services. It takes the shape of engagement letter.
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## 8.1 External audit engagements The purpose of external audit engagements is to enhance the degree of confidence of intended users of financial statements. Such engagements are also reasonable assurance engagements. For example, in India, companies are required to get their annual accoun...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 9. BENEFITS OF AUDIT-WHY AUDIT IS NEEDED? - ♦ Audited accounts provide high quality information. It gives confidence to users that information on which they are relying is qualitative and it is the outcome of an exercise carried out by following Auditing Standards recognized globally...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## AUDITING AND ETHICS - ♦ Audited financial statements are helpful to government authorities for determining tax liabilities. - ♦ Audited financial statements can be relied upon by lenders, bankers for making their credit decisions i.e. whether to lend or not to lend to a particular entity. ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 10. AUDIT- MANDATORY OR VOLUNTARY? It is not necessary that audit is always legally mandatory. There are entities like companies who are compulsorily required to get their accounts audited under law. Even non-corporate entities may be compulsorily requiring audit of their accounts unde...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## 11. WHO APPOINTS AN AUDITOR? Generally, an auditor is appointed by owners or in some cases by constitutional or government authorities in accordance with applicable laws and regulations. For example, in case of companies, auditor is appointed by members (shareholders) in Annual General ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## 12. TO WHOM REPORT IS SUBMITTED BY AN AUDITOR? The outcome of an audit is written audit report in which auditor expresses an opinion. The report is submitted to person making the appointment. In case of companies, these are shareholders- in case of a firm, to partners who have engaged him. ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## CASE STUDY-1 Rohit, Gurpreet, Ali and Goreti are friends since their school days based in Mumbai. They have cleared CA foundation exams in the same attempt and now plan to appear for CA Intermediate exams. All of them are avid news listeners and regularly keep track of business news e...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## Based on above, answer the following questions: - 1. Gurpreet was of the view that audited financial statements are not a guarantee against probable wrong doings in financial matters of companies. What kind of assurance does audit of financial statements provide? 2. (a) It provides reasonable assu...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## Test Your Understanding 4 Zeeba Products is a partnership firm engaged in trading of designer dresses. The firm has appointed JJ & Co, Chartered accountants to audit their accounts for a year. The auditors were satisfied with control systems of firm, carried out required procedures and necess...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 13. MEANING OF ASSURANCE ENGAGEMENT 'Assurance engagement' means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subj...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 1 A three party relationship involving a practitioner, a responsible party, and intended users An assurance engagement involves abovesaid three parties. A practitioner is a person who provides the assurance. The term practitioner is broader than auditor. Audit is related to historical information ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## 4. Sufficient appropriate evidence The practitioner performs an assurance engagement to obtain sufficient appropriate evidence. It is on the basis of evidence that conclusions are arrived and an opinion is formed by auditor. 'Sufficient' relates to quantity of evidence obtained...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## Overview of Elements of assurance engagement | Checkbox | Elements of an assurance engagement | |------------|----------------------------------------------| |  | Three Party relationship | |  | An appropriate subject matter | |  ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## 13.2 Meaning of Review; Audit Vs. Review We have learnt that audit is a reasonable assurance engagement. It provides reasonable assurance. However, review is a limited assurance engagement. It provides lower level of assurance than audit. Further, review involves fewer ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 13.3 Types of Assurance Engagements- Reasonable assurance engagement vs. Limited assurance engagement As already discussed, assurance engagements provide assurance to users. The difference is of degree. Reasonable assurance engagement like audit provides reasonable assurance w...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## Examples of assurance engagements | Checkbox | Example of assurance engagement | Type of assurance engagement | |------------|--------------------------------------------------|------------------------...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## Test Your Understanding 5 The management of Exotic Tours and Travels Limited requests its auditor Raja & Co.to provide an assurance report on the financial information for first quarter of a year by skipping required detailed procedures. Can Raja & Co. provide such a report? What would be...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 14. QUALITIES OF AUDITOR An auditor is concerned with the reporting on financial matters of business and other institutions. Financial matters inherently are to be set with the problems of human fallibility; errors and frauds are frequent. Tact, caution, firmness, good temper, integrity, d...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## 15. ENGAGEMENT AND QUALITY CONTROL STANDARDS: AN OVERVIEW The following Standards issued under authority of ICAI Council are collectively known as Engagement Standards: - 1. Standards on auditing (SAs) which apply in audit of historical financial information. 2. Standards on ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 15.1 Standards on Auditing Standards on Auditing apply in the context of an audit of financial statements by an independent auditor. It is important to remember that Standards on Auditing apply in audit of historical information. These establish high quality benchmarks and are followed by audito...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 15.2 Standards on Review Engagements Standards on review engagements apply in the context of review of financial statements. We have already understood that review is a limited assurance engagement and it provides assurance which is lower than that provided by audit. It is du...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## 15.3 Standards on Assurance Engagements There is another set of standards which apply in assurance engagements dealing with subject matters other than historical financial information. Such assurance engagements do not include 'audit' or 'review' of historical financial information. These...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## 15.4 Standards on Related Services Lastly, there are standards on related services. These standards apply in engagements to perform agreed-upon procedures regarding financial information. For example, an engagement to perform agreed-upon procedures may require the auditor to perform certain proce...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## 15.5 Standards on Quality Control Standards on Quality Control (SQCs) have been issued to establish standards and provide guidance regarding a firm's responsibilities for its system of quality control for the conduct of audit and review of historical financial information and for other assurance a...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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N/A
[Concept: Theory] ## 15.6 Why are Standards needed? - Standards ensure carrying out of audit against established benchmarks at par with global practices. - Standards improve quality of financial reporting thereby helping users to make diligent decisions. - Standards promote uniformity as audit of financial s...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## 15.7 Duties in relation to Engagement and Quality Control Standards It is the duty of professional accountants to see that Standards are followed in engagements undertaken by them. Ordinarily, these are to be followed by professional accountants. However, a situation may ari...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## Overview of Engagement and Quality Control Standards | Checkbox | Engagement and Quality Control Standards | |-...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## Test Your Understanding 6 CA. P Babu is conducting audit of financial statements of Quick Buy Private Limited. He was not able to obtain external confirmations from certain debtors due to practical difficulties and peculiar circumstances. However, such a procedure is mandated ...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## CASE STUDY-2 Me and You Private Limited has been newly incorporated. The plant of the company has recently started production with the help of funds provided by a bank for purchase and installation of machinery. Further, the company is also utilizing working capital credit...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## Based on above, answer the following questions: - 1. The management of company has engaged CA P to issue a duly signed report for half year, as referred to in last para of case study. Which of the following standards, if any, issued by ICAI are relevant for CA P? 2. (a) Standards on Review Engagem...
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Inter_P5_Audit_Mod1_Chapter_1_Nature_Objective_and_Scope_of_Audit.pdf
Audit
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[Concept: Theory] ## SUMMARY - ♦ 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. - ♦ An audit provides assurance. ...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## After studying this chapter, you would be able to - - ♦ Understand the Audit Planning and its benefits. - ♦ Learn about Planning Process and its Elements. - ♦ Learn about establishing overall strategy and developing audit plan in detail. - ♦ Learn about audit programme. - ♦ Gain the knowledg...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## AUDITOR'S RESPONSIBILITY TO PLAN AN AUDIT OF FINANCIAL STATEMENTS SA 300Planning an audit of financial statements deals with the auditor's responsibility to plan an audit of financial statements. It states that objective of the auditor is to plan the audit so that it will be performed...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 1.1 Why Planning an audit is necessary? - Its Benefits Planning an audit is necessary to carry out it effectively in a timely manner. Besides ensuring compliance with professional standards, it helps in performing audit engagement effectively. Adequate planning benefits the audit o...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 1.2 Nature of Audit Planning- A Continuous and iterative process Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of t...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## Involvement of key engagement team members in planning audit The engagement partner and other key members of the engagement team shall be involved in planning the audit including planning and participating in the discussion among engagement team members. The involvement of the engagement...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## Discussion of elements of planning with entity's management The auditor may decide to discuss elements of planning with the entity's management to facilitate the conduct and management of the audit engagement. When discussing matters included in the overall audit strategy or audit plan,...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (I) Preliminary engagement activities The auditor considers whether relationship with client should be continued and whether ethical requirements including independence continue to be complied with. It includes: - - ( A ) Performing procedures regarding the continuance of the client rela...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## Acceptance and Continuance of Client Relationships and Audit Engagements It should be ensured that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed and that conclusions reached in this regard are appropriate. The firm...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (B) Evaluating compliance with ethical requirements including independence The auditor shall continuously evaluate compliance with ethical requirements including independence. 'Independence' means that the judgement of a person is not subordinate to the wishes or direction of another perso...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (C) Establishing an understanding of terms of engagement It is in the interests of both the entity and the auditor that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. It ensures that there is no confusion...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (A) Establishing the overall audit strategy- Assistance for the auditor Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. The auditor shall establish an overall audit strategy that sets the scope, timing and direc...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (a) Identify the characteristics of the engagement that define its scope It is important for auditor to identify scope of the engagement. Only a well identified scope can lead to establishment of a sound audit strategy. There are many characteristics of engagement defining its ...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. The ascertaining of reporting objectives of engagement helps the auditor to plan timing of different audit procedures and also nature of communications. S...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (c) Consider the factors that, in the auditor's professional judgment, are significant in directing the engagement team's efforts The auditor needs to direct efforts of engagement team towards matters that in his professional judgment are significant. Preliminary identification of...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## AUDITING AND ETHICS -  Significant industry developments such as changes in industry regulations and new reporting requirements. -  Significant changes in the financial reporting framework, such as changes in accounting standards. -  Other significant relevant developments, such as chang...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## (e) Ascertain the nature, timing and extent of resources necessary to perform the engagement. Selection of engagement team and assignment of audit work to team members is a significant factor in establishing overall audit strategy. Experienced team members may be assigned in areas where ther...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## (B) Development of Audit plan Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the audito...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## Test Your Understanding 1 MG & Co, a firm of auditors, having a standing of 30 years is appointed as a statutory auditor of company engaged in manufacturing of defence equipment. Due to opening of defence sector by government to private players in recent times, many new companies...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## Test Your Understanding 2 CA Kartik is planning for audit of a company engaged in manufacturing of cosmetics. Considering nature of operations of the company, he had planned to include testing of controls of the company over purchases, sales and inventories. One fine day, he reaches th...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## RELATIONSHIP BETWEEN AUDIT STRATEGY Audit strategy sets the broad overall approach to the audit whereas audit plan addresses the various matters identified in the overall audit strategy. Audit strategy determines scope, timing and direction of audit. Audit plan describes how strategy i...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## OVERALL AUDIT STRATEGY AND THE AUDIT PLAN- THE AUDITOR'S RESPONSIBILITY The overall audit strategy and the audit plan remain the auditor's responsibility. It is the auditor who is responsible for establishing overall audit strategy and developing audit plan. However, as discussed earlier, auditor ...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## ILLUSTRATION 2 W, the auditor of SKM Ltd. asks its finance and audit head to prepare audit strategy for conducting audit of SKM Ltd. W also insists him to draw detailed audit procedures. On the request of auditor W completes audit strategy as well as audit procedures as prepared by finance hea...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## CHANGES TO PLANNING DECISIONS The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of audit proce...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 6. PLANNING SUPERVISION AND REVIEW OF WORK OF ENGAGEMENT TEAM MEMBERS The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. The nature, timing and extent of the direction and supervision of engagement team mem...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 7. DOCUMENTATION The auditor shall document: - - (a) the overall audit strategy - (b) the audit plan and - (c) any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes. The documentation of the overall au...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## Test Your Understanding 3 CA Mary, while planning audit of a company, feels that she would inquire from inhouse legal counsel of the company status of pending litigation matters against the company to identify and assess risks of material misstatements. Considering above description, are you able ...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## Test Your Understanding 4 CA Shubhendu is statutory auditor of a social media company. Due to change in information technology regulations by government, it has become mandatory for such companies to constitute 'grievance redressal mechanism' for users of social media platform of the company. Fai...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 8. AUDIT PROGRAMME It is desirable that in respect of each audit and more particularly for bigger audits, an audit programme should be drawn up. Audit programme is a list of examination and verification steps to be applied and set out in such a way that the interrelationship of one s...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 8.1 Evolving one audit programme- Not Practicable for All businesses Businesses vary in nature, size and composition; work which is suitable to one business may not be suitable to others; efficiency and operation of internal controls and the exact nature of the service to be ren...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 8.2 The Assistant to keep an open mind To start with, an auditor having regard to the nature, size and composition of the business and the dependability of the internal control and the given scope of work, should frame a programme which should aim at providing for a minimum essential work which m...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
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[Concept: Theory] ## 8.3 Periodic review of the audit programme There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. Unless this is done, any change in the business policy of the client may not...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## 8.4 Constructing an audit programme The audit planning ideally commences at the conclusion of the previous year's audit, and along with the related programme, it should be reconsidered for modification as the audit progresses. Such consideration is based on the auditor's rev...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## 8.5 Audit ProgrammeDesigned to provide audit evidence Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the f...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## Example 1. For cash in hand, the best evidence is 'count'. 2. For investment pledged with a bank, the banker's certificate. 3. For verifying assertions about book debts, the client's ledger invoices, debit notes, credit notes, monthly accounts statement sent to the customers are all evidence: some...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## The advantages of an audit programme are: - - (a) It provides the assistant carrying out the audit with total and clear set of instructions of the work generally to be done. - (b) It is essential, particularly for major audits, to provide a total perspective of the work to be performe...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## AUDITING AND ETHICS - (e) The assistants, by putting their signature on programme, accept the responsibility for the work carried out by them individually and, if necessary, the work done may be traced back to the assistant. - (f) The principal can control the progress of the vario...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## The disadvantages are: - - (a) The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme. - (b) The programme often tends to become rigid and inflexible following set grooves; th...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## Test Your Understanding 5 Rohit, undergoing practical training, is part of an engagement team conducting audit of a company engaged in manufacturing of paints. He has been provided with audit programme pertaining to sales. It lists out various items to be checked and verified by him including i...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## Extract of Sample audit programme pertaining to sales of an entity Name of concern Fine Industries Financial year 2021-22 Prepared by P (with date) Reviewed by Q (with date) Approved by R (with date) | Serial number | Nature of Procedure ...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## CASE STUDY Kaur & Associates, a sole proprietor firm of Simran Kaur, is offered appointment as auditor of a company engaged in manufacturing of automobile components for the first time. She is fact checking about the integrity of promoters of the company and key managerial persons. Matters suc...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## Based on above, answer following questions: 1. Auditor is fact checking about promoters and key managerial persons. She is also considering competence of staff to perform engagement. What is she trying to do? 2. (a) She is establishing audit strategy. 3. (b) She is conducting preliminary engagemen...
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Inter_P5_Audit_Mod1_Chapter_2_Audit_Strategy_Audit_Planning_and_Audit_Programme.pdf
Audit
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[Concept: Theory] ## SUMMARY - ♦ SA-300 states that objective of the auditor is to plan the audit so that it will be performed in an effective manner. - ♦ Planning is not a discrete phase of an audit, but rather a continual and iterative process. - ♦ Elements of planning include preliminary engagement activities and p...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## After studying this chapter, you would be able to understand- - ♦ Meaning of audit risk and variables affecting it. - ♦ Risk assessment procedures. - ♦ Concept of materiality in planning and performing an audit. - ♦ Importance of understanding the entity and its environment. - ♦ Meaning, objective...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1. AUDIT RISK Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. It means that an auditor expresses an unmodified opinion when financial statements are materially misstated. In such a case, not only rep...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.1 Risks of material misstatement SA 200 states that risk of material statement is the risk that the financial statements are materially misstated prior to audit. It simply means that there is a probability of frauds or errors in financial statements before audit.
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## What is meant by misstatement? Misstatement refers to a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with t...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## Few examples of misstatements could be: - -  Charging of an item of capital expenditure to revenue or vice-versa -  Difference in disclosure of a financial statement item vis-à-vis its requirement in applicable financial reporting framework -  Selection or application of inappropriate account...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## The risks of material misstatement may exist at two levels : - - (i) The overall financial statement level - (ii) The assertion level for classes of transactions, account balances, and disclosures. Risks of material misstatement at the overall financial statement level refer to risks of ...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.2 Components of risk of material misstatement The risk of material misstatement at assertion level comprises of two components i.e., inherent risk and control risk. Both inherent risk and control risk are the entity's risks and they exist independently of the audit of fin...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.2A Inherent risk Inherent risk is the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements before consideration of any related c...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## Few examples of inherent risks could include: - -  An accounting standard provides guidance on some complex issue which might not be understood by the management. Therefore, recording of this issue in financial statements carries inherent risk of being misstated. -  There are large nu...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.2B Control risk In accordance with SA-200, control risk is the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not b...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## Examples of control risk could include: - -  A company has devised control that cash and cheque books should be kept in a locked safe and access is granted to authorized personnel only. There is risk that control is not being followed. -  An entity has devised a control that fire extinguishers a...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.3 Detection risk SA 200 defines detection risk as the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other ...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## Detection risk comprises sampling and non-sampling risk. -  Sampling risk is the risk that the auditor's conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. It simply means that the sample was not representative of...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## Examples of detection risk could include: - -  Sizeable work-in-progress inventories are expected in financial statements of a company. However, auditor of the company does not devote time to attending inventory count. Instead, he chooses to rely upon alternative audit procedures. -  The auditor...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.4 Audit risk-What is not included? Audit risk is a technical term related to the process of auditing; it does not refer to the auditor's business risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of financial statements. For purposes of...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.5 Assessment of risksA matter of professional Judgment As discussed at the outset, audit risk is a function of the risks of material misstatement and detection risk. The assessment of risks is based on audit procedures to obtain information necessary for that pur...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## An Overview of Audit risk | Checkbox | Audit risk- What is included? | |------------|-----------------------------------------------------------------------------------------...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## 1.5.1 Combined Assessment of the Risk of Material Misstatement Standards on auditing do not ordinarily refer to inherent risk and control risk separately, but rather to a combined assessment of the 'risks of material misstatement'. However, the auditor may make separate or ...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## Audit risk = Risks of material misstatement X Detection risk Since risks of material misstatement is a function of inherent risk and control risk, it can also be shown as: - Audit risk = Inherent risk X Control risk X Detection risk
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
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[Concept: Theory] ## ILLUSTRATION 1 XYZ Ltd is engaged in the business and running several stores dealing in variety of items such as ready made garments for all seasons, shoes, gift items, watches etc. There are security tags on each and every item. Moreover, inventory records are physically verified on monthly basis...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## SOLUTION Inherent Risk: Because items may have been misappropriated by employees, therefore, risk to the auditor is that inventory records would be inaccurate. Control Risk: There is a security tag on each item displayed. Moreover, inventory records are physically verified on monthly ba...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## ILLUSTRATION 2 A Partnership Firm of Chartered Accountants HT and Associates was appointed to audit the books of accounts of Wind and Ice Limited for the financial year 2020-21. There was a risk that HT and Associates would give an inappropriate audit opinion if the financial statements of Wind an...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## SOLUTION The risk mentioned in the question is known as Audit Risk, because risk that auditor of a company will give an inappropriate audit opinion if the financial statements of that company are materially misstated is known as Audit Risk.
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## Test Your Understanding 1 Wear & Tear Private Limited is a 'start-up' engaged in providing holistic solutions to problem of paddy stubble burning mainly catering to needs of farmers of North western India. Due to importance given by governments to this issue, companies have entered in the mark...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## Test Your Understanding 2 A company has devised a control that its inventory of perishable goods is stored in appropriate conditions- in a controlled environment to prevent any damages to inventory. Responsibility is fixed on two persons to monitor environment using sensors and to report on devia...
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Inter_P5_Audit_Mod1_Chapter_3_Risk_Assessment_and_Internal_Control.pdf
Audit
Study_Material
N/A
[Concept: Theory] ## Test Your Understanding 3 Shree Foods Private Limited is engaged in manufacturing of garlic bread. The auditors of company have planned audit procedures in respect of recognition of revenues of the company. Despite that, there is a possibility that misstatements in revenue recognition a...
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