Audit Planning, Strategy and Execution
Comprehensive, exhaustive CA Final study notes based strictly on the ICAI Study Material. Mastering the full operational framework of modern audits: SA 300 (Planning an Audit of Financial Statements), establishing the Overall Audit Strategy, tailoring the Audit Plan & Audit Programme, and mastering execution standards: SA 600 (Using the Work of Another Auditor), SA 610 (Using the Work of Internal Auditors & Direct Assistance bans), SA 620 (Auditor’s Expert), SA 540 (Auditing Accounting Estimates & Fair Values), SA 520 (Analytical Procedures), and SA 450 (Evaluation of Misstatements Identified During the Audit).
CA B recently qualified his CA Final exams and set up an independent practice. He accepted the statutory audit of an emerging "fintech" company. The company relies heavily on Big Data and Artificial Intelligence, is working towards adopting Blockchain technology, and is an active participant in the RBI Regulatory Sandbox (live testing of innovative financial products in a controlled environment).
While planning the audit, CA B realized the critical need to involve an expert IT specialist to understand automated application controls and complex IT laws.
- Resource Factor in Audit Strategy: Is involving an IT expert a factor to be considered in establishing the overall audit strategy under SA 300? *(Yes, qualitative resource allocation)*.
- Auditor Responsibility under SA 620: If an expert is involved, is the auditor's sole responsibility shared or reduced? *(No, auditor remains solely responsible for the opinion)*. Should a formal agreement be entered into? *(Yes, mandatory under SA 620 when working for the first time or dealing with sensitive data)*. Does it violate client confidentiality? *(No, the expert is bound by professional confidentiality)*.
- Knowledge of Client's Business: CA B proceeded to study the regulatory web of the fintech sector (RBI guidelines, MeitY regulations under the Digital India initiative, and the Ombudsman scheme for digital transactions). Does this fulfill the core requirement of developing an overall audit plan? *(Yes, vital for risk assessment under SA 315 & SA 300)*.
- Relying on Internal Audit under SA 610: The internal audit department is scantily staffed and headed by a retired public sector bank manager who is not tech-savvy and was hired on political recommendation. Can CA B rely on the internal auditor's work? *(No, lacks technical competence and objectivity under SA 610)*.
1. Commencing an Audit (SA 200 & SA 300)
SA 200 states that in order to achieve the overall objectives of the audit, the auditor shall use the objectives stated in relevant SAs in planning and performing the audit. Without a careful plan, the overall objective of an audit may not be achieved. Audit planning is necessary to conduct an effective audit in an efficient and timely manner.
The nature and extent of planning activities vary according to:
- The size and complexity of the entity;
- The key engagement team members' previous experience with the entity; and
- Changes in circumstances that occur during the audit engagement.
Planning is NOT a discrete, one-time phase of an audit, but rather a continual and iterative process. It often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.
Planning includes the need to consider the timing of certain activities and procedures, such as:
- The analytical procedures to be applied as risk assessment procedures;
- Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity complies with it;
- The determination of materiality;
- The involvement of experts; and
- The performance of other risk assessment procedures under SA 315.
1.3 Responsibility of the Auditor for Audit Strategy and Plan
The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit (e.g., to coordinate planned audit procedures with the work of client staff).
Although these discussions often occur, the overall audit strategy and the audit plan remain the SOLE RESPONSIBILITY of the auditor.
When discussing matters, care is required not to compromise the effectiveness of the audit by making audit procedures too predictable (e.g., discussing the exact nature, timing, and sample size of detailed audit procedures).
Involvement of Key Engagement Team Members: The engagement partner and other key members of the engagement team shall be involved in planning the audit. Their involvement draws on their experience and insights, thereby enhancing the effectiveness and efficiency of the planning process.
The auditor shall undertake the following preliminary engagement activities at the beginning of the current audit engagement:
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Performing procedures required by SA 220 regarding continuance of the client relationship and the specific audit engagement. In accordance with SQC 1 and SA 220, the auditor determines whether:
- The principal owners, key management, and TCWG possess integrity;
- The engagement team is competent to perform the engagement and has necessary capabilities, time, and resources;
- The firm and engagement team can comply with relevant ethical requirements; and
- Significant matters that arose during the current or previous audit have been considered.
- Evaluating compliance with ethical requirements, including independence, as required by SA 220; and
- Establishing an understanding of the terms of engagement, as required by SA 210 (written engagement letter).
1.5 Contents of an Audit Plan
The auditor should develop an audit plan that shall include a description of:
- The nature, timing, and extent of planned Risk Assessment Procedures, as determined under SA 315;
- The nature, timing, and extent of planned Further Audit Procedures at the assertion level, as determined under SA 330 (Tests of Controls and Substantive Procedures); and
- Other planned audit procedures that are required to be carried out so that the engagement complies with SAs.
The audit plan is more detailed than the overall audit strategy. Planning for further audit procedures takes place over the course of the audit as the outcome of risk assessment procedures becomes known.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. Modification is required when:
- Unexpected events occur;
- Changes in conditions arise (e.g., changes in law, tax rules, government policies); or
- Audit evidence obtained contradicts prior expectations: For example, audit evidence obtained through substantive procedures may contradict audit evidence obtained from tests of controls, indicating that internal controls are ineffective. The auditor must revise the risk assessment and modify the planned nature, timing, and extent of further audit procedures.
2. Overall Audit Strategy (SA 300)
The auditor shall establish an overall audit strategy that sets the scope, timing, and direction of the audit, and that guides the development of the audit plan.
- 1. Determination of Characteristics of the Engagement (Scope): Identify the characteristics of the engagement that define its scope (e.g., applicable financial reporting framework, industry-specific reporting requirements, expected audit coverage of components in group audits).
- 2. Reporting Objectives (Timing & Communications): Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of communications required (e.g., deadlines for interim and final reporting, dates of meetings with TCWG and management).
- 3. Directing Team's Efforts (Direction): Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts (e.g., determination of materiality, areas of higher RMM, results of internal control evaluation, volume of transactions).
- 4. Considering Results of Preliminary Engagement Activities: Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed for the entity by the engagement partner is relevant.
- 5. Nature, Timing, and Extent of Resources: Ascertain the nature, timing, and extent of resources necessary to perform the engagement.
The process of establishing the overall audit strategy assists the auditor to determine:
- 1. Deployment of Qualitative Resources: The resources to deploy for specific audit areas, such as using experienced team members for high-risk areas or involving experts on complex matters (e.g., valuation of complex financial instruments, actuarial liabilities).
- 2. Allocation of Quantity of Resources: The amount of resources to allocate to specific audit areas, such as the number of team members assigned to observe inventory counts at material locations, the extent of review of other auditors' work, or the allocation of audit budget hours to high-risk areas.
- 3. Timing of Deployment: When these resources are to be deployed, such as whether at an interim audit stage or at or close to key cut-off dates.
- 4. Management, Direction & Supervision: How such resources are managed, directed, and supervised, such as when briefing and debriefing meetings are held, how engagement partner and manager reviews take place (on-site or off-site), and whether to conduct an Engagement Quality Control Review (EQCR).
The auditor shall document:
- The overall audit strategy: Serves as a record of key decisions considered necessary to properly plan the audit and communicate significant matters to the team.
- The audit plan: Serves as a record of planned nature, timing, and extent of risk assessment procedures and further audit procedures at the assertion level in response to assessed risks.
- Any significant changes made to the strategy or plan during the audit engagement, and the reasons for such changes. This explains why significant deviations occurred and reflects the auditor’s appropriate response to unexpected developments.
2.4 Relationship Between Audit Strategy and Audit Plan
The audit strategy and audit plan are closely interrelated because a change in one results in a change in the other:
- The audit strategy is established first. It sets the broad parameters (scope, timing, direction) and provides guidelines for developing the detailed audit plan.
- The audit plan is more detailed than the audit strategy. It translates the broad direction into specific audit procedures (nature, timing, and extent) to be performed by team members to obtain sufficient appropriate audit evidence.
- Both strategy and plan must take into consideration materiality and its relationship with assessed risks. If materiality is lowered during audit execution (e.g., due to discovered internal control deficiencies), the overall strategy must first be amended, and the audit plan updated accordingly!
3. Audit Programme
An Audit Programme is a detailed list of audit procedures and instructions to be followed by assistants in executing the audit, along with estimated time budgets for each audit area.
- Nature of the Business: On first appointment, examine in detail the financial and accounting organization by visiting the client’s office, observing how documents pass before authorization, and reviewing books maintained. For manufacturing entities, visit the factory to inspect processes, production flows, and waste/loss records.
- Internal Control Evaluation: Study the system of internal control and tests of controls. An audit programme must be tailored based on the strength or weakness of internal controls.
- Clear Audit Objectives: State clear audit objectives for each operational area to link procedures with assertions.
- Co-ordination of Procedures: Coordinate procedures so that related accounts (e.g., purchases and trade payables; sales and trade receivables) are verified simultaneously.
- Reliance on Management Information: Determine the extent to which reliance can be placed on internal reports and automated system controls.
- Timing & Cut-Offs: Schedule procedures to coincide with inventory counts, cash verifications, and period-end cut-offs.
3.2 Drawing Up the Audit Programme: Advantages & Inherent Dangers
- Provides clear, written instructions to audit assistants.
- Fixes responsibility on assistants who initial completed steps.
- Prevents omission of vital audit procedures.
- Serves as a progress tracker and time budget monitor.
- Provides evidence of work performed in defending negligence claims.
- Work may become mechanical and rigid, killing initiative.
- Incompetent assistants may sign off steps without applying judgment.
- Uniform checklists may fail to address unique client risks.
- May fail to detect new types of transactions if not updated periodically.
4. Audit Execution & Key Standards (SA 600, 610, 620, 540, 520, 450)
Refining materiality thresholds, allocating audit budgets, and scheduling on-site visits.
Performing walkthroughs, evaluating control design, and testing operating effectiveness.
Tests of details, substantive analytical procedures, third-party confirmations, cut-off tests.
Evaluating uncorrected misstatements under SA 450, post-balance sheet review, audit opinion.
4.5.1 SA 600: Using the Work of Another Auditor
SA 600 applies when an independent auditor (Principal Auditor), reporting on the financial statements of an entity (such as a company with branches or subsidiaries), uses the financial information of one or more components audited by another independent auditor (Other Auditor).
- Advise Other Auditor: Advise the other auditor of the use that is to be made of their work and report, and make sufficient arrangements for coordination at the planning stage. Inform them of areas requiring special consideration, inter-component transactions, and time tables.
- Obtain Representation on Requirements: Advise the other auditor of significant accounting, auditing, and reporting requirements and obtain written representations as to compliance.
- Review Written Summary: Review a written summary of the other auditor’s procedures and findings (e.g., completed questionnaires or checklists).
- Consider Significant Findings: Consider the significant findings of the other auditor, and discuss audit findings with them or management.
- Supplemental Testing: If considered necessary, perform supplemental tests of the records or financial information of the component.
General Rule: The principal auditor is NOT responsible for the work entrusted to other auditors, except in circumstances which should have aroused their suspicion about the reliability of the work.
Right to Visit: Although the principal auditor may visit the component and examine books if necessary, ordinarily the principal auditor can rely on the other auditor's work without visiting the component, provided proper coordination and reviews are conducted.
Reporting Division of Responsibility: When basing an opinion on the entity's financial statements as a whole relying on other auditors, the principal auditor’s report SHALL state clearly the division of responsibility, indicating the extent to which the financial information of components audited by other auditors has been included (e.g., total assets, revenues, number of branches/subsidiaries).
Modified Component Report: If the other auditor issues a modified report, the principal auditor considers whether the subject of modification is of such a nature and significance to the entity as a whole that it requires a modification in the principal auditor's report under SA 705.
4.5.2 SA 610: Using the Work of Internal Auditors
SA 610 deals with the external auditor’s responsibilities if using the work of internal auditors. This encompasses two distinct avenues:
- Using the work of the internal audit function; and
- Using internal auditors to provide DIRECT ASSISTANCE under the direction, supervision, and review of the external auditor.
The external auditor shall determine whether the work of the internal audit function can be used by evaluating:
- 1. Objectivity: The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors (e.g., whether internal audit reports directly to the Audit Committee/TCWG, free from conflicting operational duties).
- 2. Technical Competence: The level of competence of the internal audit team (e.g., whether they hold professional qualifications like CA, adequate technical training, and proficiency).
- 3. Systematic and Disciplined Approach: Whether the internal audit function applies a systematic and disciplined approach, including quality control (e.g., proper audit planning, documented audit programs, supervised working papers).
The external auditor has SOLE RESPONSIBILITY for the audit opinion expressed. The external auditor SHALL NOT use internal auditors to provide direct assistance to perform procedures that:
- Involve making significant judgments in the audit:
- Assessing the risks of material misstatement (RMM);
- Evaluating the sufficiency of tests performed;
- Evaluating the appropriateness of management’s use of the going concern assumption;
- Evaluating significant accounting estimates; and
- Evaluating the adequacy of financial statement disclosures.
- Relate to higher assessed risks of material misstatement where judgment is high;
- Relate to work with which internal auditors have been involved (lack of objectivity); or
- Relate to decisions concerning the internal audit function itself.
Prior to using internal auditors for direct assistance, the external auditor shall: (i) Obtain written agreement from an authorized representative of the entity that internal auditors will follow external auditor instructions and the entity will not intervene, and (ii) Obtain written agreement from the internal auditors that they will keep confidential specific matters as instructed.
4.5.3 SA 620: Using the Work of an Auditor's Expert
An Auditor’s Expert is an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist in obtaining sufficient appropriate audit evidence (can be internal or external to the firm).
- Competence, Capabilities & Objectivity: The auditor shall evaluate whether the expert has necessary competence and capabilities, and in the case of an external expert, inquire regarding any interests and relationships that may create threats to objectivity.
- Understanding the Field: The auditor shall obtain a sufficient understanding of the expert’s field to determine the nature, scope, and objectives of the expert's work and evaluate its adequacy.
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Agreement with Expert (Engagement Letter): The auditor shall agree in writing with the expert on:
- The nature, scope, and objectives of the expert's work;
- The respective roles and responsibilities of the auditor and the expert;
- The nature, timing, and extent of communication; and
- The need for the expert to observe confidentiality requirements.
The auditor shall evaluate the adequacy of the expert’s work by assessing:
- The relevance and reasonableness of the expert’s findings and conclusions, and their consistency with other audit evidence;
- If the work involves significant assumptions and methods: whether they are generally accepted within the field, consistent with the financial reporting framework, and reasonable; and
- If the work involves significant source data: the relevance, completeness, and accuracy of that source data (tested by the auditor).
- Unmodified (Clean) Audit Report: The auditor SHALL NOT refer to the work of an auditor's expert in an unmodified report, unless required by law or regulation. If required by law, the report shall state that the reference does not reduce the auditor’s responsibility for the opinion.
- Modified Audit Report: If reference to the expert is relevant to understanding a modification to the opinion, the auditor may refer to the expert, but MUST explicitly state that the reference does not reduce the auditor’s responsibility for that opinion. (Auditor may need permission of the expert before making such reference).
4.5.4 SA 540: Auditing Accounting Estimates & Related Disclosures
SA 540 deals with the auditor’s responsibilities relating to accounting estimates, including fair value accounting estimates, and related disclosures in an audit of financial statements.
Accounting estimates often involve estimation uncertainty (susceptibility of an estimate to an inherent lack of precision in measurement), subjective assumptions, and potential for management bias.
The auditor shall obtain an understanding of:
- The requirements of the applicable financial reporting framework;
- How management identifies transactions, events, and conditions that give rise to the need for estimates; and
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The estimation-making process adopted by management:
- The method and model used;
- Relevant internal controls;
- Whether management has used an expert;
- The underlying assumptions;
- Whether there has been or ought to have been a change from prior periods and why; and
- Whether and how management has assessed the effect of estimation uncertainty.
The auditor shall review the outcome of accounting estimates included in the prior period financial statements, or their subsequent re-estimation for the current period.
The objective is NOT to question past judgments that were reasonable based on information available at the time. Rather, the retrospective review assists the auditor in obtaining information regarding the effectiveness of management's estimation process, obtaining evidence pertinent to current period re-estimation, and identifying circumstances indicating the presence of possible management bias!
Under SA 220, the engagement partner assumes responsibility for the overall quality on each audit engagement. This is achieved through:
- Direction: Informing the engagement team of their responsibilities, objectives of the procedures to be performed, nature of entity's business, and risk-related issues.
- Supervision: Tracking the progress of the audit, considering capabilities of individual team members, addressing significant matters arising, and identifying matters for consultation.
- Review: Reviewing work performed by less experienced team members to ensure work was performed in accordance with SAs, objectives achieved, evidence obtained is sufficient and appropriate, and conclusions reached are consistent with results.
Analytical procedures are deployed across three critical stages:
- 1. Risk Assessment Stage (Planning): Applying analytical procedures as risk assessment procedures to obtain an understanding of the entity and its environment and identify unusual transactions or ratios indicating RMM.
- 2. Substantive Testing Stage: Designing and performing substantive analytical procedures to obtain corroborative evidence regarding assertions.
- 3. Overall Review Stage (Finalization): Designing and performing analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.
4.5.7 SA 450: Evaluation of Misstatements Identified During the Audit
SA 450 deals with the auditor’s responsibility to evaluate the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements.
- Accumulation of Identified Misstatements: The auditor shall accumulate misstatements identified during the audit, other than those that are clearly trivial. Clearly trivial matters are of a wholly different (lower) order of magnitude than materiality, and matter whose consequence will not impact the financial statements.
- Consideration as Audit Progresses: The auditor shall determine whether the overall audit strategy and audit plan need to be revised if the nature of identified misstatements indicates that other misstatements may exist, or if the aggregate of accumulated misstatements approaches materiality.
- Communication and Correction: The auditor shall communicate on a timely basis all misstatements accumulated during the audit to the appropriate level of management and request management to correct those misstatements.
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Evaluating Effect of Uncorrected Misstatements: If management refuses correction:
- Reassess materiality determined in accordance with SA 320;
- Determine whether uncorrected misstatements are material, individually or in aggregate, considering size and nature of misstatements and the particular circumstances of their occurrence;
- Communication with TCWG: The auditor shall communicate uncorrected misstatements and their effect on the opinion to TCWG, requesting that uncorrected misstatements be corrected.
- Written Representation: The auditor shall request a written representation from management and TCWG whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole. A summary of such items shall be included in or attached to the written representation.
- Documentation: The amount below which misstatements are regarded as clearly trivial; all misstatements accumulated and whether corrected; and the auditor's conclusion whether uncorrected misstatements are material and the basis therefor.
5. ICAI Test Your Understanding (TYU 1 to 5) — Fully Solved
SA 300 mandates that the auditor plan the audit in such a manner that it is performed effectively. It requires establishing an overall audit strategy that defines scope, and planning the nature, timing, and extent of procedures to achieve audit objectives.
In the given case, CA P didn't visit the client even once and completely failed to understand the business. Dealing in commodity futures trading has zero raw material consumption. Including checklists for "cost of raw material consumed and stores/spares" proves that CA P used a generic, mechanical checklist without understanding client operations.
Furthermore, SA 300 requires documenting the overall audit strategy and audit plan. The working papers contain no documentation of the business nature. CA P committed a blatant professional failure to plan the audit in accordance with SA 300 and SA 315.
NO. The approach of CA Pradyuman is NOT proper.
Under SA 300, the audit plan shall include a description of the nature, timing, and extent of audit procedures. The "extent" of audit procedures specifically encompasses decisions regarding sample sizes to be tested and selection methodology under SA 530.
Planning sample sizes is integral to assessing required resources and directing team efforts. Postponing sample size determinations to the ad-hoc execution stage flouts SA 300 requirements.
YES, CA Nikita definitely requires a refreshening of her professional knowledge.
Under SA 300 (Para 2.3), the auditor is statutorily required to document:
- The overall audit strategy;
- The audit plan; and
- Any significant changes made during the audit engagement to the overall audit strategy or audit plan, AND the reasons for such changes.
Documenting reasons for embarking on extensive round-tripping procedures explains the rationale behind the modified audit response. Failure to document planning changes violates SA 300 and SA 230.
Under SA 600, the principal auditor would not be responsible in respect of the work entrusted to the other auditors, except in circumstances which should have aroused their suspicion about the reliability of the work.
Since the concurrent and inspection reports examined by CA Sourabh did not highlight irregularities and nothing aroused suspicion, CA Sourabh is NOT liable for the lapses of the branch auditor.
The statutory auditor’s report must clearly state the division of responsibility by indicating the extent to which the financial information of components audited by other auditors has been included (explicitly mentioning that 1,034 branches were audited by branch auditors).
NO. The statutory auditor SHOULD NOT rely upon the internal auditor's valuation work.
Under SA 610, the higher the assessed risk of material misstatement at the assertion level, the more judgment is involved. In such cases, the external auditor will need to perform more procedures directly and make less use of the work of the internal audit function.
Because niche newborn baby products held for long periods carry high obsolescence risk, inventory valuation is an area of significant risk requiring substantial auditor judgment. The statutory auditor must directly test Net Realizable Value (NRV) against cost, review aging analyses, and recompute provision for slow-moving inventory.
6. ICAI Test Your Knowledge (TYK 1 to 14) — Fully Solved
As per SA 540, the auditor obtains an understanding of:
- The requirements of the applicable financial reporting framework relevant to accounting estimates and disclosures;
- How management identifies transactions, events, and conditions that may give rise to the need for accounting estimates; and
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The estimation-making process adopted by management:
- The method and models used;
- Relevant internal controls;
- Whether management used an expert;
- Underlying assumptions;
- Changes from prior periods and justification; and
- How management assessed estimation uncertainty.
Under SA 300, the auditor considers:
- Terms of engagement and statutory responsibilities;
- Nature and timing of reports or other communications;
- Applicable legal and statutory requirements (aviation rules, DGCA);
- Accounting policies adopted and changes therein;
- Effects of new accounting and auditing pronouncements;
- Identification of significant audit areas;
- Setting materiality levels;
- Conditions requiring special attention (fraud, related parties);
- Degree of reliance on internal control;
- Possible rotation of emphasis on specific areas;
- Nature and extent of audit evidence to be obtained;
- Work of internal auditors and extent of reliance;
- Involvement of other auditors and experts;
- Allocation of work between joint auditors; and
- Establishing and coordinating staffing requirements.
General Factors: Scope, reporting objectives, team direction, preliminary activities, and resources (Para 2.1).
Specific E-Commerce & IT Factors: Understanding the information system in the following areas:
- Classes of transactions significant to financial statements (online sales, payment gateways, delivery cash-on-delivery flows);
- Procedures by which transactions are initiated, recorded, processed, and transferred to the general ledger;
- Related accounting records, order management systems, inventory sync, and customer return databases;
- How the system captures events like discounts, cancellations, and return logistics; and
- Controls surrounding automated and non-standard journal entries.
Management’s contention is invalid. Under SA 210, the agreed terms shall be recorded in writing and must include:
- The objective and scope of the audit of financial statements;
- The responsibilities of the auditor;
- The responsibilities of management (preparation of financial statements, internal control, unrestricted access to information);
- Identification of the applicable financial reporting framework; and
- Reference to the expected form and content of reports to be issued, with a statement that circumstances may arise where the report may differ from expected form.
- Peruse MOA/AOA to verify objects clause permits multiplex and allied operations.
- Ticket Collections: Verify controls ensuring box office collections are accurately recorded; test online booking aggregators and payment gateway settlement reconciliations; verify daily seat capacity reconciliations.
- Food & Beverage / Shop Rentals: Verify internal control system over cafe, pub, and game zone billings; examine tenancy agreements and fixed vs revenue-share rental inflows.
- Advertisements: Verify contracts for hoardings, slides, and on-screen advertisements against broadcast logs and billing invoices.
- Parking Collections: Verify automated boom barrier systems, ticketing machines, and contractor collection remittances.
- Distributor Share: Verify film distributor contracts (outright buy vs revenue share) and ensure distributor advances are properly adjusted on settlement.
- Expenditure: Verify salary disbursements, statutory dues (PF, ESI), multiplex air-conditioning & projector maintenance, and comprehensive fire/public liability insurance coverage.
(i) Procedures under SA 600: Advise other auditors of the use of their work, timetable, and areas requiring special attention; advise significant accounting and auditing standards; review a written summary of other auditors' procedures (checklists/questionnaires); consider significant findings.
(ii) Documentation under SA 600: Document components audited by other auditors, procedures performed, and conclusions reached (including results of discussions). Where an other auditor's report is modified, document how the principal auditor has dealt with qualifications or adverse remarks in framing his own report.
Under SA 620 read with SA 540, when the expert's work involves significant assumptions and methods, the auditor evaluates whether they are:
- Generally accepted within the auditor's expert's field;
- Consistent with the requirements of the applicable financial reporting framework (Ind AS 109);
- Dependent on the use of specialized models; and
- Consistent with those of management, and if not, the reasons for and effects of differences.
Under SA 540, for estimates giving rise to significant risks, the auditor evaluates:
- How management has considered alternative assumptions or outcomes, why it rejected them, and how it has otherwise addressed estimation uncertainty;
- Whether the significant assumptions used by management are reasonable; and
- Where relevant, management’s intent to carry out specific courses of action and its ability to do so.
Under SA 450, CA W shall:
- Reassess materiality under SA 320 to confirm whether it remains appropriate;
- Determine whether uncorrected misstatements are material, individually or in aggregate, taking into account size and nature of misstatements and their effect on specific sub-totals;
- Communicate uncorrected misstatements to TCWG, explaining the potential effect on the audit report, and request correction; and
- Obtain written representations from management and TCWG whether they believe the effects of uncorrected misstatements are immaterial.
The action of the auditor is completely DEFECTIVE and violates SA 620 and SA 705.
1. The auditor has sole responsibility for the audit opinion expressed, and that responsibility is NOT reduced by the use of an expert.
2. If the auditor concludes that the expert's work is not adequate and cannot resolve it through additional procedures, the auditor has not obtained SAAE and MUST express a modified opinion (Qualified or Disclaimer) under SA 705.
3. The auditor SHALL NOT refer to the expert in an unmodified report. Doing so to deflect responsibility is a gross professional violation.
Under SA 620, the auditor shall agree with the auditor's expert, in writing when appropriate, on the nature, scope, and objectives of the work, roles and responsibilities, communication protocols, and confidentiality.
A formal written agreement is particularly vital where:
- The expert has access to sensitive entity data;
- The subject matter (derivative valuation) is highly complex; and
- The auditor has not previously used work performed by that expert (first time working together).
Hence, CA Paras erred in not executing a formal engagement agreement with Mr. Sohan.
Management's contention is INCORRECT.
Under SA 540 (Para 4.5.4), the auditor SHALL review the outcome of accounting estimates included in prior period financial statements or their subsequent re-estimation for the current period.
The review is not intended to question past judgments, but to provide information regarding the effectiveness of management's estimation process, obtain evidence pertinent to current period re-estimations, and detect management bias. Refusal by management constitutes an unjustified limitation on the scope of the audit.
NO. CA Ajeet CANNOT ask internal auditors to provide direct assistance for these procedures.
Under SA 610, the external auditor shall NOT use internal auditors to provide direct assistance to perform procedures that involve making significant judgments in the audit.
Evaluating significant accounting estimates and assessing RMM are core professional judgments for which the external auditor holds exclusive, non-delegable responsibility.
Under SA 620, the auditor's responsibility is not reduced by using an expert. The auditor must evaluate the adequacy of the expert's work, including the relevance and reasonableness of assumptions and accuracy of source data.
Liability of Mr. M and Mr. N: Mr. M and Mr. N blindly accepted the faulty valuation report without verifying the reasonableness of assumptions or checking source data. They are guilty of gross professional negligence and will be held jointly liable.
Liability of Mr. O: Under SA 299, a joint auditor is not bound by majority votes and is entitled to issue a separate audit report. Because Mr. O submitted a separate report with his own opinion, Mr. O will NOT be held liable for the faulty valuation.