SA-230 � Audit Documentation

Scope: This standard deals with auditors responsibilities in preparation of audit documentation while auditing financial statements. Specific documentation requirements of other Standards on auditing do not limit its scope.

Nature and Purpose: Audit Documentation provides evidence as to whether the overall objective of the auditor was achieved as well as whether it was planned and performed in accordance with Standards of Auditing as also applicable legal and regulatory requirements.

It assists in planning, performing, fixation of accountability and responsibility, supervision and review of audits. Retaining the records for future audits, as also conduct of quality controls (SQC 1).

Definitions: Audit Documentation: The record of audit procedures performed, relevant audit evidence obtained and conclusions the auditor reached (working papers, work papers).

Audit File: One or more folders or other storage media in physical or electronic form, containing the records that comprise of the audit documentation for a specific engagement.

Experienced Auditor: An Individual (whether Internal or external to the firm) who has practical audit experience and a reasonable understanding of audit processes, SAs and applicable legal and regulatory requirements, the business environment in which the entity operates and auditing and financial reporting issues relevant to the entity’s industry.

Form, Content and Extent in addition to the Nature and Purpose

An auditor should prepare audit documentation sufficient to enable an experienced auditor having no previous connection with the audit to understand.

1. Nature, timing and extent of audit procedures:
   • Identifying characteristics of specific items and matters tested.
   • Who performed the audit and the date of completion.
   • Who reviewed the report, the date and extent of review.
2. Results of the audit procedures performed and evidence obtained:
   • Document discussions of significant matters.
   • Nature of the significant matters – when and with whom discussed.
3. Significant matters arising during the audit:
   • Document how the inconsistencies have been addressed.
   • In case of departure from the standard, the relevant requirements and the reason for departure, the alternative audit procedures performed to achieve the aim of that requirement.

Matters arising after the date of the Auditor's Report

If, in the exceptional circumstances, auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor’s report, the auditor shall document:

• Circumstances encountered
• Newer additional procedures performed, evidence obtained, conclusions reached and its effect on auditor’s report.
• When and by whom the resulting changes to audit documentation were made and reviewed.

Additional Points

• Assembling of the final Audit file should be completed on a timely basis after the date of the auditor’s report.
• After assembling the same, the auditor shall not delete or discard documentation of any nature before the end of its retention period.
• In case the auditor finds it necessary to modify existing or add new documentation post assembly, he should specify the reasons for them and when and by whom it was made and reviewed.

Application and Other Explanatory Material

• Timely preparation enhances quality, review, evaluation of the audit evidence and conclusions reached before finalisation of the auditor’s report. Documentation prepared after audit work is less accurate than that prepared during audit.
• Form, content and extent depends on size and complexity of the entity, nature of procedures performed, risks, exceptions, audit methodology, tools used and professional judgment.
• Audit documentation may be recorded on paper or on electronic or other media. Examples: Audit programmes, checklists, analysis, correspondence.
• Audit documentation should not include superseded drafts of working papers and financial statements, notes reflecting incomplete and preliminary thinking.
• Oral explanations can clarify or explain information contained in audit documentation.
• It is not necessary nor practicable for the auditor to document every matter considered or professional judgment made.
• Judging the significance of a matter requires an objective analysis of the facts and circumstances.
• Summary describing significant matters identified during the audit and how they were addressed, or that includes cross-references to other relevant supporting audit documentation that provides such information.
• The identifying characteristics should be recorded which helps serve a number of purposes.
• Documentation also includes records prepared by the entity’s personnel .
• Retention period of audit engagements is no shorter than seven years from the date of the auditor’s report.
• Unless otherwise stated audit documentation is the property of the auditor. He may make disclosures but these should not affect his independence nor invalidate his work.

(SA) 250 – Consideration of Laws and Regulations in an Audit of Financial Statements

Scope:— This Standard on Auditing (SA) deals with the auditor’s responsibility to consider laws and regulations while performing an audit of financial statements and not compliance with specific laws or regulations.

Effect of Laws & Regulations

The effect on financial statements depends on the fact that whether they are directly or indirectly related to the operational business. Non-compliance of the same shall attract fines, litigations or other consequences.

Responsibility of Management

The management must ensure that entity’s operations are conducted in accordance and with compliance of the various provisions of laws and regulations that determine the reported amounts and disclosures. The management should:—

Monitor legal requirements

Ensure employees are properly trained

Institute and operate appropriate systems of internal controls

Monitor compliance with code of conduct

Develop, publish and follow a code of conduct

Engage legal advisors

In larger companies the policies and procedures are assigned to:

• An Internal Audit function, An Audit Committee, Compliance function.

Responsibility of the Auditor

This SA is designed to assist the auditor in identifying material misstatement of the financial statements. He is responsible for obtaining a reasonable assurance that the financial statements as a whole are free from any material misstatement. However, due to inherent limitations of audit there exists an unavoidable risk.

Effective date: Audit of Financial Statements for period beginning on or after 1st April, 2009.

Objectives: The objectives of an auditor are:—

• To obtain sufficient audit evidence regarding compliance with provisions of laws and regulations,
• To perform audit procedures to help identify areas to non-compliance,
• To respond appropriately to non-compliance or suspected compliance,
• To maintain an attitude of professional skepticism.

Definition of Non-compliance

Acts of omission or commission by the entity either intentional or unintentional which are contrary in nature other than personal misconduct.

Duties of Auditor

• Obtain knowledge about legal and regulatory framework
• Know-how the entity is complying with the same
• Obtain Audit evidence w.r.t. compliance
• Conduct audit procedures to identity non-compliance
• Ensure compliance by management
• Inspect correspondence, if any, with authorities
• Remain alert to suspection, if any
• Obtain written representations from management where necessary.

Audit Procedures when Non-compliance is Identified or Suspected

Firstly understand the nature of act and circumstances and then evaluate the possible effects. Then if there is any suspection, discuss the same with those charged with governance and if sufficient information is not obtained then the auditor can seek legal advice.

SA – 260 Communication with those charged with Governance

The auditor shall communicate with those charged with governance and if there exist any Audit Committee or supervisory board, the auditor shall communicate the matter to them.

Reporting Non-compliance in the Auditor’s Report on Financial Statements

• The auditor shall express a qualified or adverse opinion on the financial statements in case of non-compliance.
• If he is precluded from obtaining sufficient appropriate audit evidence, the auditor shall express a qualified opinion or disclaim an opinion.
• If he is unable to determine as to how exactly non-compliance has occurred, he shall evaluate the effect on auditor’s opinion in accordance with proposed SA 705.

Reporting Non-compliance to Regulatory and Enforcement Authorities

The auditor has to determine whether he has the responsibility to report the identified or suspected non-compliance to parties outside the entity.

Documentation

• Copies of records or documents relating to identified or suspected non-compliance.
• Minutes of discussions with management and those charged with governance or parties outside the entity.

(SA) – 700

Forming an Opinion and Reporting on Financial Statements (Earlier known as ‘The Auditor’s Report on Financial Statements’)

Scope

This SA deals with the auditor’s responsibility to form an opinion on the financial statements and with the form and content of the auditor’s report issued as a result of an audit of financial statements.

It also promotes consistency in the auditor’s report.

Effective date

For audits of financial statements for periods beginning on or after 1-4-2012.

Objectives

• To form an opinion on the Financial Statements (FS) based on an evaluation of conclusion drawn from the audit evidence obtained.
• To express clearly that opinion through a written report.

Requirements

• Prepared in all material respects and in accordance with the applicable financial reporting framework.
• To conclude that the Financial Statements are free from material misstatement, whether due to fraud or error after taking into account:

1. Obtaining sufficient appropriate audit evidence
   (SA 330)
2. Uncorrected misstatement are not material, individually or in aggregate (SA 450) and
3. Evaluation as to FS are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework which is based on:—

• Consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgment.
• Significant accounting policies are disclosed.
• Accounting policies are appropriate and consistent with applicable financial reporting framework.
• Estimates made are reasonable.
• Information is relevant, reliable, comparable and understandable.
• Consider overall presentation, structure, contents and whether related notes represent the underlying transactions and events to achieve fair presentation.

1. Financial statements adequately refer to or describe the applicable financial reporting framework.

Form of Opinion

• Unmodified Opinion : An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for preparation and presentation of the financial statements.
• Modified Opinion :In the following situations auditor’s report may have to be modified :

1. In respect of the matters that do not affect the auditor’s opinion, the auditor should modify the report by adding a paragraph to highlight a matter.

For example Corporate Debt Restructuring pending with banks affecting "going concern" or a legal dispute which involves significant uncertainty affecting the financial statements and the same has already been incorporated by management in financial statement. In such matters, the opinion paragraph would refer to the fact that the auditor’s opinion is not qualified in this respect.

1. In respect of the matters that do affect the auditor’s opinion:-

A ‘qualified opinion’ should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with the management is not so material and pervasive as to require an adverse opinion, or limitation on scope is not material and pervasive as to require a disclaimer of opinion.

A ‘disclaimer of opinion’ should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor is unable to obtain sufficient appropriate audit evidence and is hence, unable to express an opinion on the financial statements.

An ‘adverse opinion’ should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is inadequate to disclose the misleading or incomplete nature of the financial statements

• Opinion other than an unqualified opinion:Whenever the auditor requires an opinion other than unqualified, a description of all the substantive reasons should be included in the report and quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the report.
• Limitation on Scope: The SA also requires that in case there is a limitation on scope that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the possible adjustments that might have been necessary had the limitations not existed.

Auditor’s Report

For Audits conducted in accordance with SA’s Auditor’s Report :

Shall be in writing

Shall be addressed to the appropriate authorities

Shall include a section with the heading "Management’s responsibility for the financial statements" which shall state that it is the responsibility of the management for the preparation of the financial statements

Shall include a section with the heading "Auditors responsibility”

Shall be dated signifying completion of audit

Shall mention the place of signing

Shall be signed in the name of the firm with Firm Registration Number of ICAI, and the personal name of the person with Membership number of ICAI, as applicable

Shall also incorporate the matters specified by a statute or regulator and/or form prescribed by them e.g. banking and insurance Act or forms prescribed by RBI

We draw attention of the readers to the illustrative formats of reporting issued by the ICAI.

AASB of The Institute of Chartered Accountants’ of India vide its announcement dated 16th December, 2014 has given illustrative formats of the Independent Auditor’s Report on standalone Financial Statements under the Companies Act, 2013 and Rules thereunder:

The Auditing and Assurance Standards Board is issuing the following illustrative formats of the Independent Auditor’s Report on the Standalone Financial Statements under the Companies Act, 2013 and the Rules thereunder. These illustrative formats were approved by the Council of the Institute of Chartered Accountants of India (ICAI) at its Meeting held in November 2014. These illustrative formats would be added to the respective Appendices of Standard on Auditing (SA) 700, Forming An Opinion and Reporting On Financial Statements and Standard on Auditing (SA) 705, Modifications to the Opinion in the Independent Auditor’s Report, issued by ICAI.

Unmodified Opinion on Standalone Financial Statements, Emphasis of Matter Paragraphs, Reporting on clause 143(3)(i) regarding internal financial controls is required

Will be added to Appendix to SA 700

Unmodified Opinion on Standalone Financial Statements, Emphasis of Matter Paragraphs, Reporting on clause 143(3)(i) regarding internal financial controls is not required

Qualified Opinion on Standalone Financial Statements, Qualification is quantifiable, Reporting on clause 143(3)(i) regarding internal financial controls is not required

Will be added to Appendix to SA 705

Qualified Opinion on Standalone Financial Statements, Qualification is not quantifiable, Reporting on clause 143(3)(i) regarding internal financial controls is not required

Adverse Opinion on Standalone Financial Statements, Reporting on clause 143(3)(i) regarding internal financial controls is not required

Disclaimer of Opinion on Standalone Financial Statements, Reporting on clause 143(3)(i) regarding internal financial controls is not required

AASB of The Institute of Chartered Accountants’ of India vide its announcement dated 1st May, 2015 has given illustrative formats of the Independent Auditor’s Report on consolidated financial statements under the Companies Act, 2013 and Rules thereunder

While reporting on the consolidated financial statements (CFS) of a company under the Companies Act, 2013, the auditors may draw guidance from the aforementioned formats and suitably reword the same, as required, to meet the circumstances of audit of CFS. The auditors of CFS, while reporting in respect of the provisions of, inter alia, section 143(3) and section 143(11) of the Companies Act, 2013 in their report on CFS, are also advised to:

• Consider the observations and comments as given in this regard in the auditors’ reports of the component auditors.
• Include in their report or draw suitable reference to, negative/adverse comments, if any, in respect of section 143(3) and section 143(11) of the Act relating to a component, as appearing in the component auditors’ report.

The auditors of CFS are also advised to apply concept of materiality and professional judgment as provided in the Standards on Audit while reporting on the Consolidated Financial Statements.

The following illustrative formats of an auditors’ report on CFS, covering some of the clauses of section 143(3) of the Companies Act, 2013 (and where the auditor does not have the responsibility for reporting on internal financial controls over financial reporting under section 143(3)(i) of the Companies Act, 2013), are being issued herewith just to provide a broad guidance on how such a report may be prepared. These formats may be applied for the FY 2014-15 and until further announcement. It is reiterated that the auditors of CFS may suitably reword/redraft these formats to suit the circumstances of their audit engagement.

Unmodified opinion on the consolidated financial statements

This format will be added in the Appendix to SA 700

Modified opinion on the consolidated financial statements

This format will be added in the Appendix to SA 705

Reporting on Internal Financial Controls – Section 143(3)(i) of the Companies Act, 2013 has introduced the requirement of reporting by the auditors on whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls with effect from the financial year beginning 1st April, 2015. As per the “Guidance Note on Audit of Internal Financial Controls over Financial Reporting” issued by the ICAI, the reporting on Internal Financial Controls is only in the context of the audit of the financial statements. Hence, reporting by the auditors will be restricted to adequacy and effectiveness of internal financial controls relating to financial reporting. The Guidance Note covers aspects such as scope of reporting on financial controls under the Companies Act, 2013, essential components of internal controls, technical guidance on audit of internal financial controls and implementation guidance on audit of internal financial controls. Appendices to the Guidance Note include illustrative engagement letter, illustrative management representation letter, illustrative reports on internal financial controls, illustrative risks of material misstatements, related control objectives and control activities. The illustrative formats of the report on internal financial controls also include an illustrative format in case of audit of consolidated financial statements.

Report on Fraud Reporting – Section 143(12) of the Companies Act, 2013 has introduced the requirement of reporting by auditors on frauds. The Auditing & Assurance Board of the ICAI has issued the “Revised Guidance Note on Reporting Fraud under section 143(12) of the Companies Act, 2013.” Section 143(12) and Rule 13 of the Companies (Audit and Auditors) Rule, 2014 have been amended with effect from 14th December, 2015. The amended provisions require reporting by the auditor to the Central Government only for individual frauds of ₹ 1 crore and above. The amended provisions have also made certain changes in the procedure and particulars of reporting under this section. The Revised Guidance Note has been issued to take into account the requirements of these amendments.