Overview of Standards on Auditing

The landscape of financial audits is intricate and demanding, necessitating a robust framework to guide auditors in delivering high-quality, reliable audits. Standards on Auditing (SAs) provide this framework, ensuring that audits are conducted with precision, integrity, and in accordance with professional standards. This article delves into the essence of SAs, their structure, and the imperative role they play in the auditing process.

Importance of Standards on Auditing (SAs): 

• Effective implementation of SAs is crucial for ensuring quality in audits. 
• The application depth may vary, but evidence of compliance with applicable SAs is necessary. 

Documentation for Compliance: 

• Audit files should contain a list of SAs with remarks indicating whether each standard is applied. 
• This practice promotes discipline among staff and signatories. 

Structure of Standards on Auditing: 

• General principles & Responsibilities: SA 200 to SA 299 
• Risk assessment & Response to assessed risks: SA 300 to SA 499 
• Audit Evidence: SA 500 to SA 599 
• Using the Work of Others: SA 600 to SA 699 
• Audit Conclusions & Reporting: SA 700 to SA 799 
• Specialized Areas: SA 800 to SA 899 

Checklists for Compliance: 

• Checklists for SAs should be maintained in the audit documentation file to ensure completeness and compliance. 
• A table provides the scope, objective, and auditor’s remarks for each SA.

Detailed Overview of Select SAs: 

1. SA-220 (Quality Control for an Audit of Financial Statements):

• Objective: Ensure compliance with professional standards and legal requirements, and issue an appropriate auditor’s report. 
• Implement quality control procedures at the engagement level. 
• The engagement quality control reviewer evaluates significant judgments made by the engagement team and the conclusions in the auditor’s report. 

2. SA-230 (Audit Documentation):

• Objective: Prepare documentation that provides a sufficient and appropriate record for the auditor’s report and evidence that the audit was planned and performed according to SAs and legal requirements. 
• Applicable to all audit engagements, and the auditor should comply with specific documentation requirements of other SAs and any additional requirements under laws or regulations. 

3. SA-240 (The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements):

• Objectives: Identify and assess risks of material misstatement in financial statements due to fraud. 
• Obtain sufficient appropriate audit evidence about assessed risks through designing and implementing appropriate responses. 
• Respond appropriately to identified or suspected fraud. 

4. SA-250 (Consideration of Laws and Regulations in an Audit of Financial Statements):

• Objectives: Obtain sufficient appropriate audit evidence regarding compliance with laws and regulations having a direct effect on material amounts and disclosures.
• Perform specified audit procedures to identify instances of non-compliance with other laws and regulations. 
• Respond appropriately to identified non-compliance or suspected non-compliance. 

5. SA-260 (Revised) Communication with Those Charged with Governance:

• Objectives: Communicate clearly with those charged with governance regarding auditor responsibilities, planned scope, and timing of the audit. 
• Obtain relevant information from those charged with governance. 
• Provide timely significant and relevant audit observations to those charged with governance.
• Promote effective two-way communication between the auditor and those charged with governance. 

6. SA-265 (Communicating Deficiencies in Internal Control to Those Charged with Governance and Management):

• Objective: Communicate deficiencies in internal control identified during the audit to those charged with governance and management, which are deemed of sufficient importance to merit attention. 

7. SA-299 (Revised) Joint Audit of Financial Statements:

• Objectives: Lay down broad principles for joint auditors in conducting the joint audit.
• Provide a uniform approach to the joint audit process.
• Identify distinct areas of work and coverage by each joint auditor.
• Identify individual and joint responsibilities of joint auditors in relation to the audit. 

8. SA-300 (Planning an Audit of Financial Statements):

• Objective: Plan the audit effectively, especially in recurring audits, involving the engagement partner and key members of the engagement team in planning and discussions.

9. SA-315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment):

• Objective: Identify and assess the risks of material misstatement (fraud or error) at the financial statement and assertion levels by understanding the entity, its environment, and internal control. This understanding forms the basis for designing and implementing responses to reduce the risk of material misstatement to an acceptably low level. 

10. SA-320 (Materiality in Planning and Performing an Audit):

• Objective: Apply the concept of materiality appropriately in planning and performing the audit. Materiality is crucial in determining the nature, timing, and extent of audit procedures to obtain sufficient appropriate audit evidence. 

11. SA-330 (The Auditor’s Responses to Assessed Risks):

• Objective: Design and implement responses to the risks of material misstatement identified and assessed in a financial statement audit (in accordance with SA-315). Obtain sufficient appropriate audit evidence through these responses to support the audit conclusions. 

12. SA-402 (Audit Considerations Relating to an Entity Using a Service Organization):

Objectives of the User Auditor: 

• Obtain an understanding of the nature and significance of services provided by a service organization and their impact on the user entity’s internal control. 
• Design and perform audit procedures responsive to the identified risks of material misstatement related to service organization activities. 

13. SA-450 (Evaluation of Misstatements Identified during the Audit):

• Objectives: Evaluate the effect of identified misstatements on the audit. 
• Evaluate the effect of uncorrected misstatements (if any) on the financial statements. 

14. SA-500 (Audit Evidence):

• Objective: Explain what constitutes audit evidence in a financial statement audit and detail the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence. The goal is to draw reasonable conclusions on which to base the auditor’s opinion. 

15. SA-501 (Audit Evidence – Specific Considerations for Selected Items):

• Objective: Provide specific considerations for auditors in obtaining sufficient appropriate audit evidence related to inventory, litigation and claims, and segment information in a financial statement audit. 

Key Objectives of the Auditor: 

• Verify the existence and condition of inventory. 
• Confirm the completeness of litigation and claims involving the entity. 
• Ensure the proper presentation and disclosure of segment information as per the applicable financial reporting framework. 

16. SA-505 (External Confirmations):

• Objective: Guide auditors in using external confirmation procedures to obtain relevant and reliable audit evidence, aligned with the requirements of SA 330 and SA 500. 
• Auditor’s Objective: Design and perform external confirmation procedures effectively to enhance the audit evidence obtained. 

17. SA-510 (Initial Audit Engagements – Opening Balances):

• Objective: Outline the auditor’s responsibilities regarding opening balances in an initial audit engagement, encompassing financial statement amounts and matters requiring disclosure. 

Auditor’s Objective in Initial Engagements:

• Obtain sufficient appropriate audit evidence regarding: 
• Misstatements in opening balances that materially affect the current period’s financial statements. 
• Consistent application of accounting policies reflected in opening balances in the current period’s financial statements. 

18. SA-520 (Analytical Procedures):

• Objectives: Obtain relevant and reliable audit evidence through the use of substantive analytical procedures.
• Design and perform analytical procedures near the end of the audit to assist in forming an overall conclusion on the financial statements. 

Auditor’s Response to Inconsistent Fluctuations:

• Investigate differences by inquiring of management and obtaining relevant audit evidence, and perform additional audit procedures as necessary in the circumstances. 

19. SA-530 (Audit Sampling):

• Scope: Applicable when the auditor decides to use audit sampling in audit procedures, covering statistical and non-statistical sampling. 
• Objectives: Provide a reasonable basis for the auditor to draw conclusions about the population from the selected sample. 
• Guide in designing, selecting, and evaluating results from the audit sample during tests of controls and tests of details. 

20. SA-540 (Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures):

• Scope: Addresses auditor responsibilities concerning accounting estimates, fair value accounting estimates, and related disclosures in financial statement audits. 
• Objectives: Obtain sufficient appropriate audit evidence regarding the reasonableness of accounting estimates and related disclosures. 
• Apply SA 315, SA 330, and other relevant SAs to assess risks associated with accounting estimates, including indicators of management bias. 
• Evaluate whether accounting estimates and related disclosures comply with the applicable financial reporting framework. 

21. SA-550 (Related Parties):

• Scope: Focuses on the auditor’s responsibilities regarding related party relationships and transactions in financial statement audits. 
• Objectives: Obtain an understanding of related party relationships and transactions to identify fraud risks and assess risks of material misstatement. 
• Conclude on the financial statements’ true and fair presentation (for fair presentation frameworks) or non-misleading nature (for compliance frameworks) concerning related party relationships. 
• If the financial reporting framework has related party requirements, obtain sufficient audit evidence to ensure appropriate identification, accounting, and disclosure of related party relationships and transactions. 

22. SA-560 (Subsequent Events):

• Scope: Addresses the auditor’s responsibilities concerning subsequent events in financial statement audits, excluding matters related to other information obtained after the auditor’s report (covered by SA 720(Revised)). 
• Objectives: Obtain sufficient appropriate audit evidence regarding events occurring between the financial statement date and the auditor’s report date that require adjustment or disclosure. 
• Respond appropriately to facts discovered after the report date that, if known earlier, might have led to amendments in the auditor’s report. 

23. SA-570 (Revised) (Going Concern):

• Scope: Focuses on the auditor’s responsibilities in auditing financial statements related to the going concern assumption and its implications on the auditor’s report.
• Objectives: Obtain sufficient appropriate audit evidence to assess the appropriateness of management’s use of the going concern basis in financial statement preparation.
• Conclude, based on obtained evidence, whether a material uncertainty exists regarding the entity’s ability to continue as a going concern.
• Report in accordance with the requirements of this SA.

24. SA-580 (Written Representations):

• Scope: Deals with the auditor’s responsibility to obtain written representations from management and, if applicable, those charged with governance.
• Objectives: Obtain written representations affirming that management and, if applicable, those charged with governance believe they fulfilled their responsibilities for financial statement preparation.
• Use written representations to support other audit evidence when necessary.
• Respond appropriately if written representations are not provided or are incomplete.

25. SA-600 (Using the Work of Another Auditor):

• Scope: Addresses standards applicable when the principal auditor utilizes the work of another auditor in relation to components included in the financial information of the entity. 
• Objectives: Establish standards for situations where the principal auditor relies on the work of another auditor.
• Define the principal auditor’s responsibilities regarding the use of another auditor’s work. 

26. SA-610 (Revised) (Using the Work of Internal Auditors):

• Scope: Deals with the responsibilities of the external auditor when utilizing the work of internal auditors, including using internal audit work to obtain audit evidence and seeking direct assistance. 
• Objectives: Determine the appropriateness and extent of using the internal audit function’s work or obtaining direct assistance from internal auditors.
• If using internal audit work, assess its adequacy for audit purposes. 
• When using internal auditors for direct assistance, appropriately direct, supervise, and review their work. 

27. SA-620 (Using the Work of an Auditor’s Expert):

• Scope: Addresses the auditor’s responsibilities when utilizing the work of an individual or organization possessing expertise outside accounting or auditing. 
• Objectives: Determine whether to use the work of an auditor’s expert. 
• If using the expert’s work, assess its adequacy for the auditor’s purposes. 

28. SA-700 (Revised) – Forming an Opinion and Reporting on Financial Statements:

• Scope: This standard addresses the auditor’s duty to form an opinion on the financial statements and details the form and content of the auditor’s report following an audit. 
• Objectives: Form an opinion on the financial statements based on an evaluation of conclusions drawn from obtained audit evidence. 
• Express the opinion clearly through a written report. 

29. SA-701 – Communicating Key Audit Matters in the Independent Auditor’s Report:

• Scope: Focuses on the auditor’s obligation to communicate key audit matters in the auditor’s report, encompassing the judgment of what to communicate and the form and content of such communication. 
• Objectives: Determine key audit matters, which are of utmost significance, and communicate them in the auditor’s report after forming an opinion on the financial statements. 
• Key audit matters are selected from issues communicated with those charged with governance. 

30. SA-705 (Revised) – Modifications to the Opinion in the Independent Auditor’s Report:

• Scope: Deals with the auditor’s responsibility in situations requiring modification to the auditor’s opinion and addresses the impact on the form and content of the auditor’s report. 
• Objective: Clearly express an appropriately modified opinion on the financial statements when:
  • The auditor concludes the financial statements are not free from material misstatement.
  • The auditor is unable to obtain sufficient appropriate audit evidence to conclude on the absence of material misstatement. 

31. SA-706 (Revised) – Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report:

• Scope: Addresses additional communication in the auditor’s report when the auditor deems it necessary to draw users’ attention to specific matters. 
• Objective: Draw users’ attention through clear additional communication in the auditor’s report to matters fundamental to users’ understanding of the financial statements or relevant to the audit, auditor’s responsibilities, or the auditor’s report. 

32. SA-710 Comparative Information—Corresponding Figures and Comparative Financial Statements:

• Scope: Addresses the auditor’s responsibilities regarding comparative information in financial statements, particularly when prior period financial statements were audited by a predecessor auditor or were not audited. 
• Objectives: Obtain sufficient appropriate audit evidence to ensure that comparative information in financial statements adheres, in all material respects, to the requirements for comparative information in the applicable financial reporting framework. 
• Report in accordance with the auditor’s reporting responsibilities. 

33. SA-720 (Revised) The Auditor’s Responsibilities Relating to Other Information:

• Scope: Focuses on the auditor’s responsibilities concerning other information, both financial and non-financial, included in an entity’s annual report, apart from the financial statements and the auditor’s report. 
• Objectives: Consider material inconsistencies between the other information and the financial statements.
• Consider material inconsistencies between the other information and the auditor’s knowledge obtained in the audit. 
• Respond appropriately when material inconsistencies are identified or when the auditor becomes aware of materially misstated other information.
• Report in accordance with this standard. 

34. SA-800 Special Considerations – Audit of Financial Statements Prepared in Accordance with Special Purpose Frameworks:

• Scope: Addresses special considerations in applying SAs to an audit of financial statements prepared under a special purpose framework. 
• Objective: Address appropriately the special considerations relevant to acceptance, planning, performance, forming an opinion, and reporting in such audits. 

35. SA-805 Special Considerations – Audit of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement:

• Scope: Deals with special considerations in applying SAs to audits of a single financial statement or specific elements, accounts, or items of a financial statement. 
• Objective: Address special considerations relevant to acceptance, planning, performance, forming an opinion, and reporting in such audits. 

36. SA-810 Engagements to Report on Summary Financial Statements:

• Scope: Covers the auditor’s responsibilities in engagements reporting on summary financial statements derived from audited financial statements. 
• Objectives: Determine appropriateness of accepting the engagement.
• Form an opinion on the summary financial statements.
• Express a clear opinion in the report along with the basis for that opinion.
• Ensure compliance with SAs during the audit and reporting processes. 

Standard on Quality Control (SQC) 1 – Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements: 

1. Purpose and Scope:

• Purpose: SQC 1 is designed to establish standards and offer guidance on a firm’s responsibilities for implementing a system of quality control. This system is specifically aimed at audits and reviews of historical financial information and other assurance and related services engagements. 
• Scope: This standard applies to all firms involved in audits, reviews, or other assurance and related services engagements. 

2. Objectives:

• General Objective: The overarching goal of SQC 1 is to ensure that a firm’s system of quality control provides reasonable assurance that the firm and its personnel adhere to professional standards, regulatory requirements, and legal obligations. Additionally, it aims to ensure that reports issued by the firm or engagement partners are appropriate for the given circumstances. 
• Specific Objectives: 
  • Compliance with Professional Standards: Establish policies to comply with professional standards, regulatory obligations, and legal requirements. 
  • Report Appropriateness: Develop a system that assures the appropriateness of reports issued by the firm or engagement partners. 

3. Components of Quality Control:

• SQC 1 emphasizes that a system of quality control comprises policies and procedures that help achieve the objectives mentioned above. 
• Policies are designed to ensure compliance with standards and regulations. 
• Procedures are implemented to monitor and enforce adherence to these policies. 

4. Relationship with Other Pronouncements:

• SQC 1 is to be read in conjunction with the Chartered Accountants Act, 1949, the Code of Ethics, and other relevant pronouncements of the Institute of Chartered Accountants. 
• Other pronouncements, such as SA 220, may provide additional guidance on specific types of engagements. 

5. Applicability:

• SQC 1 applies to all firms, and the specific policies and procedures will depend on factors such as the size and operating characteristics of the firm, and whether it is part of a network.

Conclusion:

Standards on Auditing are the backbone of the auditing profession, guiding auditors through the complexities of financial statement audits. By ensuring compliance with these standards, auditors can uphold the quality, integrity, and reliability of their audit engagements. As the auditing landscape continues to evolve, the role of SAs in maintaining high standards of audit quality becomes ever more critical, ensuring that the financial statements audited provide a true and fair view of the entities’ financial positions.