Session II – Compliance with Technical Standards Peer Review Board of ICAI Hosted by Baroda Branch of WIRC of ICAI One Day Training Programme for Peer Reviewers Session II – Compliance with Technical Standards CA Niranjan Joshi VADODARA 19.12.2014

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Agenda Objective Peer Review Objective Technical Standards Compliance with Technical Standards

Objective Review of the work done by a professional, by another member of the same profession with similar standing It is examination and review of systems and procedures to determine whether the same have been put in place by Practice Unit for ensuring the quality of assurance services as envisaged by the Technical, Professional and Ethical Standards and whether the same were consistently applied in the period under review.

Scope Peer Review process shall apply to all the assurance services provided by Practice Unit Reviewer shall cover Compliance with Technical, Professional and Ethical Standards.

Compliance with Technical Standards means Accounting Standards issued by ICAI/Central Government Standards issued by ICAI including: Engagement Standards Statements Guidance Notes Standards on Internal Audit Statements on Quality Control Notifications/Directions/Announcements/ Guidelines / Pronouncements / Professional Standards issued by Council of ICAI or any of its committees.

Compliance with Technical Standards means Framework for preparation and presentation of FS Standard on Auditing, Standard on Assurance Engagements, Standards on Quality Control, Guidance Notes on related services Provision of relevant statutes / regulations as applicable Reviewer shall focus on compliance by PU with all the Technical, Professional and Ethical Standards requirements in respect of services rendered while performing a particular assurance assignment. Peer Review seeks to ensure that these standards are implemented both in letter and spirit. Objective is to improve the quality of services rendered.

Auditing Standards Nature of Service Audit Review Agreed upon procedure Compilation Level of Assurance High but not absolute Moderate Assurance No Assurance No Assurance Report Provided positive assurance on assersions negative assurance on assersions Factual findings Identification of info compiled

Applicable Standards on Auditing Number Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements SQC 1 General Principles and Responsibilities 200 – 299 Risk Assessment and Response to Assessed Risks 300 – 499 Audit Evidence 500 – 599 Using work of Others 600 – 699 Audit Conclusions and Reporting 700 – 799 Specialised Areas 800 – 899 Standard on Review Engagements (SRE’s) 2000 – 2999 Standards on Assurance Engagements (SAE’s) 3000 – 3600 Standards on Related Services (SRS’s) 4000 – 4600

SA 200- Basic Principles Governing an Audit Integrity, Objectivity and Independence Confidentiality Skills and Competence Work Performed by Others Documentation Planning Audit Evidence Accounting System and Internal Control Audit Conclusions and Reporting

SA 230- Documentation The form and content of - Plan, Audit Procedures, Audit Evidence and Conclusions Permanent vs Current file Ownership-Property of Auditor Custody and Confidentiality

SA240 -The Auditor’s Responsibility To Consider Fraud and Error Identify whether the fraud is management fraud or employee fraud Provide reasonable assurance that Financial Statements are free from material misstatements. Inquiries of management Documentation Management Representation Communications To Management To Regulators and Enforcement authorities To Incoming Auditor Auditor unable to complete the engagement

SA 220- Quality Control for Audit Work Quality Control Policies- Audit Firm’s Level Professional Requirements Skills and Competence Assignment Delegation Consultation Acceptance and Retention of client Monitoring Quality control policies –Individual Audit Level Direction Supervision Review

SA 250- Consideration of Laws and Regulation in an Audit of Financial Statements Auditor to recognise non-compliance may materially affect Financial Statements At planning: understand entity’s legal/regulatory framework and compliance. Perform procedure to identify non-compliance – inquiry document exam Auditor to have sufficient understanding of relevant Laws and Regulation to consider their applicability, impact and disclosure Communication/Reporting of Non-compliance

SA-210 Terms of Audit Engagement To agree on the terms of the engagement and changes, if any-Auditor and the client Auditor to sent an engagement letter before the commencement of engagement Avoid any misunderstanding between the client and the auditor Provide written confirmation of:- Acceptance of appointment / Scope /Nature Management’s Responsibility / Unrestricted access to record and information Reference to Management representation Any restriction on auditor’s liability no need for sending the letter every year/ Review.

SA 400- Risk Assessment & Internal Control Obtain understanding of accounting and internal control systems to assess risk and plan and develop an effective audit approach Design of audit procedures should ensure mitigation of risk – use professional judgement Inherent risk to be assessed at FS level, relate assessment material account balances, classes of transactions If inherent risk is judges to be not high, reasons for that assessment to be documented

SA 400- Risk Assessment & Internal Control continued… Understanding the control environment: Business cycle controls and computer controls installed sufficient to develop audit plan Management’s attitude, awareness and action Evidence to be obtained and documented to support conclusion that risk is low. Regardless of inherent/ control assurance, some substantive work must be done Higher internal/ control risk, more audit evidence to be obtained

SA 300- Audit Planning Based on the knowlegde of the client, audit plan should be made Audit plan should be made before conduct of audit and revised through progress of audit Audit plan should be descriptive specifying audit program ,area-wise audit objectives

SA320- Audit Materiality Materiality should be considered for determining nature, timing and extent of audit procedure and evaluating the effect of misstatements Auditor should evaluate whether effect of aggregate uncorrected misstatements on FS is material The uncorrected misstatement should be brought to the notice of the management and if management refuses to adjust the financials, then qualified and adverse opinion is required

SA310 – Knowledge of the Business Auditor to obtain sufficient knowledge to understand event, practices and transactions impacting Financial Statements, examination of audit report Preliminary knowledge should be obtained prior to engagement acceptance Subsequent to acceptance more detailed information to be obtained For continuing engagement, update and re-evaluate Knowledge should be passed on to audit team knowledge gained should be in synchronisation with assertion in the Financial statements and the Financial statement as a whole

SA 402- Audit Considerations relating to Entities Using Service Organisations If reliance on work done by a service organization is significant, obtain sufficient information to evaluate its impact on accounting/ control systems. Assess control risk as high unless tests of controls allow for a lower risk In using report of service organisation auditor, evaluate his competence if he is not a CA Assess scope of work done by service organisation auditor and nature and content of his report to decide on its usefulness Evaluate whether nature, timing and extent of tests performed by service organisation auditor provide adequate evidence to support (client auditor’s) assessed level of control risk No reference to be made of service organisation auditor’s report in (client auditor’s) audit report

SA500 – Audit Evidence To evaluate whether auditor has obtained sufficient appropriate audit evidence (SAAE) before drawing conclusion Audit evidence forms the base for an auditor. To form an opinion so he should be thorough in his effort to obtain evidence In case an auditor is unable to obtain sufficient appropriate evidence, auditor should not express an unquilified opinion

SA580 – Representation BY Management Management acknowledges its responsibility for the preparation and presentation of financial statements Exercise professional judgement on matters on which to obtain MRs- when sufficient appropriate evidence cannot reasonably be expected to exist Where MR conflicts with other audit evidence, increase professional skepticism MRs should be documented among the WPs Case of ‘scope limitation’ where management refuses to provide MR that the auditor considers necessary

SA 520- Analytical Procedures Application At planning stage to understand business and identify potential risks Near end of audit to conclude whether FSs correspond to knowledge of business Includes comparison of financial information & comparison of relationships At planning stage use financial/ non- financial information Methods used- simple comparisons/ complex analysis using statistical techniques When analytical procedures identify significant variances or inconsistent relationships further investigation/ explanations/ corroborative evidence needed.

SA 530- Audit Sampling Design and select a representative sample, perform audit procedures thereon, evaluate sample results to provide audit evidence Design- consider specific audit objective, population, sample size Sample size- consider: sampling risk, tolerable error, expected error The auditor should: Analyse errors found in sample Project detected errors into population to estimate likely specific audit objective Reassess the sampling risk, based on aggregate of detected and likely errors.

SA 540- Auditing of Accounting Estimates Examine evidence that estimate is reasonable in the circumstances and is appropriately disclosed To audit an estimate Review and test process used by client in making estimate: and/or Use an independent estimate to compare with recorded estimate: and/or Review subsequent events that confirm validity of recorded estimate Estimate should be consistent with knowledge of business and audit evidence obtained

SA 560- Subsequent Events Consider effect of subsequent events on FSs & audit report Plan and perform procedures to ensure that all subsequent events that might require adjustments/ disclosures are identified If management does not adjust FSs for effect of such events, express qualified/ adverse opinion.

SA510-Initial Engagement Opening Balances For new engagements auditor to ensure: Correct b/f of prior period closing balances Opening balances b/f are free of misstatements Appropriate accounting policies are consistently applied If sufficient appropriate evidence is not obtained for integrity of opening balances or if effect of any material misstatements therein is not duly accounted/disclosed , express qualified or adverse opinion or disclaimer as considered appropriate

SA550 - Related Parties Perform the following audit procedure on related parties and transactions disclosed by management: Review :- PY working papers / client’s procedure for identifying RP/ Inquire about affiliation of directors/key management personnel with other entities / shareholders records for names of principles shareholders / memorandum , articles, minutes, statutory records / PY audit reports / client’s tax returns/ information given to other regulators/ JV and other key agreements Disclosure - adequate in terms of requirements of AS-18 Adequacy of controls in relation to RP transactions MR - completeness of RP information / disclosure in FS

SA505 – External Confirmation Determine whether external confirmation is necessary to obtain sufficient and appropriate audit evidence to support certain FSs assertions Consult management for employing external confirmation procedure, obtain an understanding of client’s transactions/third party arrangements and also consider information from earlier year audit Design confirmation requests to the specific audit objective and assess whether external confirmations reduces audit risks to an acceptably low level Consider the causes and frequency of exceptions reported. In case of no response to positive external confirmation requests, perform alternative procedures

SA501 - Audit Evidence Additional Consideration for Specific Items Attendance at physical inventory counting Segment Information Appropriate disclosure of segment information as per the financial reporting framework Inquiry regarding litigation of claims Valuation and Disclosure of Long- Term Investment

SA610 – Relying Upon the Work of an Internal Auditor External auditor to evaluate adequacy of internal audit and document his conclusions General Evaluations- Organizational Status/Scope/ Technical Competence/ Due Professional care Also relevant from viewpoint of planning, nature, timing and extent of his own testing and, if appropriate, reducing extensiveness thereof by relying on internal audit Review/test the internal auditor’s work on which he relies, and document his conclusions thereon.

SA 620 – Using the Work of an Export Work done by other auditors/ experts (other than accounting and auditing) should be adequate To decide whether to use the work of expert, to consider To get satisfaction about expert’s skill Source data appropriateness: If it is concluded that work of expert is inconsistent with FSs, or is not sufficient appropriate audit evidence, express qualified/ adverse opinion or disclaimer, as appropriate If unqualified opinion, no mention to expert’s work in audit report To ensure that the expert’s work constitutes appropriate audit evidence consider

SA 600- Using the Work of Another Auditor Principal auditor to decide how work of another auditor will affect audit If the other auditor is not a CA, principal auditor to examine his professional competence Principal auditor to perform procedures to ensure that the work of another auditor is adequate for his purposes Significant findings of other auditor to be considered by principal auditor There should be sufficient liaison/ coordination between principal and other auditor If principal auditor concludes that he cannot use the work of another auditor and is unable to audit that component, he expresses a qualified opinion/ disclaimer, as appropriate- due to scope limitation If principal auditor relies on work of other auditor’s, his report should clearly mention division of responsibility and its extent.

SA299- Responsibility of Joint Auditors JA to mutually divide areas of work or do it jointly & this is to be documented & communicated to client Finding by one affecting work of others or likely to require discussion/disclosure to be communicated to them in writing before finalisation Joint Auditors responsible only for work allotted to them except for work not divided/ procedures decided by all/ matters brought to his notice/ compliance checking of FS and audit report If disagreement on report, each should express his own opinion

SA570 - Going Concern Recognise the risk that Going concern assumption may no longer be appropriate Such indications may be Financial, operating or otherwise When a question arises about the appropriateness of going concern, gather sufficient appropriate evidence for the entity’s ability to continue in operations for the foreseeable future If GC assumption is appropriate due to mitigating factors eg management future plans, consider whether such factors need to be disclosed, if not, consider giving qualified/ adverse opinion Appropriate audit opinion to be expressed

SA 710- Comparatives Comparative figures to comply with financial reporting framework Report not to specifically identify comparatives opinion on the current period as a whole If a matter that caused prior period report to be qualified/ adverse or disclaimer, is unresolved and results in modification of current period report, current period report should also be modified regarding corresponding figures Examine that: Appropriate disclosure are made, If not, issue modified report on current period financials modified with respect to corresponding figures included therein If prior period FSs are not audited, incoming auditor should state in his report that corresponding figures are unaudited

SA 260- Communications of Matters with Those Charged with Governance To communicate audit matters of governance interest arising out of audit of FSs to those relevant persons who are TCWG Determination of TCWG by the auditor TCWG responsible for supervision, control & direction To explain in audit engagement letter General approach and overall scope of the audit including limitation

Questions???

CA Niranjan Joshi, B.Com., FCA, DISA (ICAI) Email: nvjca1@gmail.com Cell: 9819078061