Standards on Auditing SAs DocumentationSA 230 Audit Evidence

Standards on Auditing (SAs) - Documentation(SA 230) - Audit Evidence (SA 500) - Audit Evidence: Specific Consideration for Selected Items (SA 501) CA (Dr. ) Sanjib Kumar Basu Kolkata 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 1

Standards on Auditing (SAs) Mandatory as provided in Section 143 (11) of the Companies Act, 2013 Applied in audit of Financial Statements by an independent auditor Objective of Audit is to obtain reasonable assurance Unable to fulfill objective of an audit, SAs require the auditor to ◦ Modify his audit opinion ◦ Withdraw from the engagement 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 2

Format of SA SA Section I Requirements section • Objective • Introductory • Definitions • Requirements • Represented by use of SHALL Section II Application Material • Explanatory guidance • Appendices 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 3

Other Significant Aspects Compliance with SAs ◦ Mandatory ◦ Departure only if alternate audit procedures achieve objective of SAs ◦ Document reasons for departure ◦ Document alternative procedures ◦ Report to draw attention SA not applicable if situation outlined in SA is absent. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 4

Classification of SAs Engagement Standards Process Standards/ Field Standards Reporting Standards Objectives and Scope Responsibility Supporting Communication Techniques Risk Individual Consolidated 200 210 220 240 250 230 501 260 265 505 510 520 530 580 300 315 320 330 450 701 705 706 720 810 Using the works of Others 299 600 610 620 Others: 402, 540, 550, 560, 570, 710, 805 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 5

Standards on Auditing (SA) SA- 230 Audit Documentation 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 6

Why Documentation? With the quality of audit work getting increasingly questioned, documentation is the only way for an auditor to substantiate that he was not negligent. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 7

What is Documentation? Documentation refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of his audit. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 8

Purpose of Audit Documentation ◦ Provides evidence of the auditor’s basis for a conclusion about the overall objective of the audit. ◦ Provides evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. ◦ Enables the conduct of quality control reviews and inspections in accordance with SQC 1. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 9

Audit Documentation- Definition ◦ It is the records of Audit procedures performed, Relevant audit evidence obtained and Conclusions the auditor reached ◦ Prepared on timely basis. ◦ Should enable an experienced auditor, having no connection with the audit , to understand: audit procedure performed, results of the audit procedures performed and the audit evidence obtained and significant judgments made in reaching the conclusion. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 10

Documentation of audit procedure performed The auditor has to record: The identifying characteristics of the specific items of matter tested. Who performed the audit work and the date when it was completed. Who reviewed the audit work performed and the date and extent of such review. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 11

Documentation of audit procedure performed The auditor has to document: Discussions of the significant matters with the management, those charged with the governance and others. The nature and significance of the matters discussed. When and with whom discussions took place. If some information is identified that is inconsistent with the auditor's conclusion, how that was addressed. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 12

Assembly of the final audit file The auditor has to assemble the documentation in an audit file on timely basis after the date of the auditors’ report. If circumstances so required, some new audit documentation is added after the assembly of the audit file, the auditor to document the specific reasons for making them and to record when and by whom they were made and reviewed. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 13

Requirements of Documentation Recording of the audit plan Nature, timing and extent of audit procedures performed Conclusions drawn from the evidence obtained May be recorded on paper or on electronic or other media 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 14

Examples of audit documentation of compliance with SAs Audit plan demonstrates that auditor has planned the audit. Signed engagement letter demonstrates the auditor has agreed the terms of engagement with management. Qualified opinion demonstrates that the auditor has complied with the reporting requirement. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 15

Classification of Documentation In the case of recurring audits: ◦ Permanent audit files: year ◦ Current audit files: Updated year to Year specific. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 16

Mandatory Permanent File Contents Information about legal/organisational structure Extracts of legal documents, agreements, minutes Record of evaluation of internal controls Past audited financial statements Analysis of significant ratios/trends Copies of management letters Record of communication with the retiring auditor Notes regarding significant accounting policies Significant past audit observations 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 17

Mandatory Current Files Contents Evidence of planning process and audit programme Analysis of transactions and balances Record of nature, timing and extent of audit work performed & results thereof Evidence of supervision of assistants’ work Communication with other auditors, experts and third parties Letters of management Conclusions about significant audit issues, including how exceptions/unusual matters were resolved/treated Copies of financial information under report and related audit reports representation/confirmation 6/17/2021 received Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata from 18

Ownership of Audit Documentation SQC 1 provides that unless otherwise provided by law or regulation, audit documentation is the property of the auditor. He may at his discretion, make portions of, or extracts from, audit documentation available to clients, provided such disclosure does not undermine the validity of the work performed. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 19

Effective Date This SA is effective for audits of financial statements for periods beginning on or after 1 April 2009. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 20

Standards on Auditing (SA) SA- 500 Audit Evidence 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 21

Scope What constitutes audit evidence in an audit of financial statements is explained in this SA. The auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion are also dealt with by this SA. Concept of Audit Evidence: Audit evidence may be defined as any document, record or information which is available to substantiate any assertion made in financial statements or transactions recorded in the books of accounts. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 22

Techniques of obtaining evidence The auditor obtains evidence in performing compliance and substantive procedures by one or more of the following methods: > Inspection > Observation > Enquiry and Confirmation > Computation > Analytical Review 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 23

Information to be used as Audit Evidence When using information produced by the entity, the auditor shall evaluate whether the information is sufficiently reliable for the auditor’s purposes, including as necessary in the circumstances by: Obtaining and audit evidence about the information; Evaluating whether the information is sufficiently precise and detailed for the auditor’s Dr. Sanjib Kumar Basu- St. Xavier's purposes. 6/17/2021 College, Kolkata 24

Inconsistency in or Doubts over Reliability of Audit Evidence If audit evidence obtained from one source is inconsistent with that obtained from another or The auditor has doubts over the reliability of information to be used as audit evidence - The auditor shall determine what modifications or additions to audit procedures are necessary to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the audit. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 25

Presumption about reliability of audit evidence The reliability of audit evidence can be assessed to some extent on the following presumptions: Documentary evidence is more reliable than oral evidence. Evidence from outside the enterprise is more reliable than that secured solely from within the enterprise. Evidence originated by the auditor by such means as analysis and physical inspection is more reliable than evidence obtained from others. Auditors always say ‘show me’ not ‘tell me’. Original documents are more reliable than photocopies or facsimiles. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 26

Comment on constraints of audit evidence The quality and quantity of evidence needs is constrained by the following: Absolute proof is impossible. Some assertions are not material. Time is limited. Accounts must be produced within a time scale and the auditor may have to do with less than perfection to comply with the time scale. Money is limited. The ideal evidence may be too expensive to obtain. Sensitivity. Some items are of greater importance than others. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 27

Effective Date This Standard on Auditing is effective for audits of financial statements for periods beginning on or after April 1, 2009. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 28

Standards on Auditing (SA) SA- 501 Audit Evidence. Specific Consideration for Selective Items 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 29

Objective The objective of the auditor is to obtain sufficient appropriate audit evidence regarding: Existence and condition of inventory; Completeness of involving the entity; litigation and claims Presentation and disclosure of segment information in accordance with the applicable financial reporting framework. Dr. Sanjib Kumar Basu- St. Xavier's 6/17/2021 College, Kolkata 30

Inventory Attendance at Physical Inventory Counting When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by: (a) Attending at physical inventory counting, unless impracticable, to: Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting; Observe the performance of management’s count procedures; Inspect the inventory; and Perform test counts; and (b) Performing audit procedures over the entity’s final inventory records to determine whether they accurately reflect actual inventory count results. Dr. Sanjib Kumar Basu- St. Xavier's 6/17/2021 College, Kolkata 31

Inventory: Physical Verification If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. If the auditor is unable to attend physical inventory counting due to unforeseen circumstances, the auditor shall make or observe some physical counts on an alternative date, and perform audit procedures on intervening transactions. If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 32

Inventory under Control of Third Party When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following: (a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity; (b) Perform inspection or other audit procedures appropriate in. Dr. the Sanjibcircumstances. Kumar Basu- St. Xavier's 6/17/2021 College, Kolkata 33

Inventory: Audit Conclusions and Reporting If the auditor is unable to obtain sufficient appropriate audit evidence concerning the existence of inventory or adequacy of procedures adopted by the management in respect of physical inventory count, the auditor should make a reference to a scope limitation in his audit report. If inventory is not disclosed appropriately in the financial statements, the auditor should issue a qualified opinion. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 34

Litigation and Claims The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including: (a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel; (b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and (c) Reviewing legal expense accounts. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 35

Litigation and Claims If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, seek direct communication with the entity’s external legal counsel. The auditor shall do so through a letter of inquiry, prepared by management and sent by the auditor, requesting the entity’s external legal counsel to communicate directly with the auditor. If law, regulation or the respective legal professional body prohibits the entity’s external legal counsel from communicating directly with the auditor, the auditor shall perform alternative audit procedures. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 36

Litigation and Claims If: (a) Management refuses to give the auditor permission to communicate or meet with the entity’s external legal counsel, or the entity’s external legal counsel refuses to respond appropriately to the letter of inquiry, or is prohibited from responding; and (b) The auditor is unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures; the auditor shall modify the opinion in the auditor’s report. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 37

Litigation and Claims Written Representations The auditor shall request management and, where appropriate, those charged with governance to provide written representations that All known actual or possible litigation and claims whose effects should be considered when preparing the financial statements have been disclosed in accordance with the applicable financial reporting framework. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 38

Segment Information The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by: Obtaining an understanding of the methods used by management in determining segment information, and: (i) Evaluating whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework; and (ii) Where appropriate, testing the application of such methods; and Performing analytical procedures or other audit Sanjib Kumar Basu- St. Xavier's procedures appropriate in the. Dr. circumstances. 6/17/2021 College, Kolkata 39

Segment Information When segment information is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding its disclosure in accordance with the applicable identified financial reporting framework. Comment: The auditor would discuss with the management about the methods used in determining segment information and consider whether such methods are likely to result in disclosure in accordance with the applicable financial reporting framework and test the applications of such methods. The auditor would consider sales, transfer and charges between segments, elimination of inter-segment amounts, comparison with budgets and other expected results and the allocation of assets and costs among different segments. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 40

Segment Information Management Representations The auditor should obtain a written representation from management concerning: The completeness of information regarding segments and disclosure thereof; Appropriateness of the selected segments based on risks and returns; and The organisational structure of an enterprise and its internal financial reporting system and any deviations therefrom. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 41

Segment Information Audit Conclusions and Reporting If the auditor is unable to obtain sufficient appropriate audit evidence concerning segment information or concludes that their disclosure in the financial statements is not adequate, - the auditor should express a qualified opinion or a disclaimer of opinion in the audit report, as may be appropriate. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 42

Effective Date This Standard on Auditing is effective for audits of financial statements for periods beginning on or after April 1, 2010. 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 43

Thank you 6/17/2021 Dr. Sanjib Kumar Basu- St. Xavier's College, Kolkata 44