A practicing chartered accountant is generally well versed with tax laws, company law and even the accounting standards. Unfortunately, as is evident from numerous findings of reviews by the Quality Review Board, the focus on standards on auditing is missing. This article aims to highlight the key aspects of the standards on auditing.
In the year 1982, the Institute of Chartered Accountants of India (ICAI) set up The Auditing Practices Committee with the objective of preparing the Statements on Standard Auditing Practices, Guidance Notes on matters related to auditing, etc. In 2002, The Auditing Practices Committee was renamed as the Auditing and Assurance Standards Board. The Statements on Standard Auditing Practices were also renamed as Auditing and Assurance Standards. In 2007, the Auditing and Assurance Standards were renamed as Engagement and Quality Control Standards.
Objective of the Standards
The standards on auditing, review, other assurance, quality control and related services are aimed towards delivery of high-quality audits by improving the quality of practice by professional accountants and ultimately increase public confidence in financial reporting.
Engagement and Quality Control Standards
The Auditing and Assurance Standards Board of the ICAI has issued 46 Engagement and Quality Control Standards. These standards have been classified as:
(i) Standards on Quality Control (SQC)– To be in applied in ensuring quality by firms that performs audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. SQC requires that the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards, regulatory, legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances. SQC, therefore sets the tone for enhancing the quality of audit. [Number of Standards: 1]
(ii) Standards on Auditing (SAs) – To be applied in the audit of historical financial information. [Number of Standards: 38]
(iii) Standards on Review Engagements (SREs) – To be applied in the review of historical financial information. [Number of Standards: 2]
(iv) Standards on Assurance Engagements (SAEs) – To be applied in assurance engagements, other than audits and reviews of historical financial information. [Number of Standards: 3]
(v) Standards on Related Services (SRSs) – To be applied to engagements involving application of agreed- upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. [Number of Standards: 2]
Standards on Auditing
The Standards on Auditing (SAs) issued by ICAI are based on International Standards on Auditing (ISAs) issued by International Federations of Accountants (IFAC). These Standards are issued by the AASB under the authority of the council of the ICAI. Section 143 (2) of the Companies Act 2013 requires the auditor to ensure compliance with these standards on auditing
The standards on auditing have been divided into 38 standards presently grouped into 6 categories as detailed below.
Each Standard has a uniform structure which includes the following:
Key aspects of the Standard on Auditing
Some of the underlying principles of the Standards on auditing are elaborated below:
(i) Risk Based Auditing
The standards of auditing issued by the ICAI require the auditor to perform a ‘Risk Based Audit’. In a risk-based audit, the auditor seeks to obtain a reasonable assurance that no material misstatements whether caused by fraud or errors exist in the financial statements. Risk based auditing primarily involves the following steps:
The Standards on Auditing requires the auditor to consider the following rebuttable presumed risks of material misstatement:
(a) That there are risks of fraud in revenue recognition
(b) Risks related to management override of controls
The standards on auditing issued by the ICAI are applicable to audit of all entities. That is, the nature, size, legal form of the entity is irrelevant while applying these standards. Simply put: “An Audit is an Audit”. The International Federation of Accountants (IFAC) has in its Policy Position 2 mentioned that “IFAC considers that high quality auditing standards should be, and in fact are, capable of being applied to the audits of the financial statements of entities of all sizes.”
Internationally, there is an increased discussion regarding developing separate set of standards on auditing for audit of Small and Less Complex Entities. However, revised standards issued by the International Auditing and Assurance Standards Board like ISA 315 and ISA 540 reinforce the concept of scalability while including additional application guidance specific to audits of smaller, less complex entities.
(iii) Professional Skepticism
SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing” defines Professional Skepticism as “An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence”.
In addition to SA 200, at least 10 other standards such as SA 240, SA 300, etc. emphasize on the need for maintaining professional skepticism while conducting the audit.
(iv) Professional Judgement
An audit requires the auditor to perform procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion. The auditor applies professional judgement in deciding which procedures are to be performed. This requires the auditor to rely on their knowledge, training and experience and professional skepticism.
Standards on Auditing assist the auditor in proper and optimum discharge of their profession duties and promote uniformity in practice as also comparability. However, these standards do not discourage the use of judgement by the auditors.
The standards on auditing refer to the concept of materiality. Information is considered material if its omission or misstatement has the potential to influence the economic decisions of users taken on the basis of the financial statements. Materiality is relative to the size and particular circumstances of individual companies. Determining materiality involves the exercise of professional judgment by the auditor.
(vi) Audit Evidence
Standards on auditing in the series 500-599 provide detailed guidance on obtaining sufficient and appropriate audit evidence. This includes guidance on external confirmations, sampling, specific areas such observation of physical verification of inventories, accounting estimates, related parties among others.
The standards on auditing requires assessment of going concern assumption (SA 570) and also verify subsequent events (SA 560). In view of clause (xix) of the revised CARO 2020, these two concepts/ standards have become more relevant than before.
It is important for the auditor to obtain suitably tailored management representation letters (SA 580). While representation letter is not a substitute for more persuasive audit evidence, in certain matters such as existence of off-balance sheet items, contingent liabilities, the auditor may have little choice to rely on representation letter to safeguard himself/ herself.
Audit Documentation is the record of audit procedures performed (including audit planning), relevant audit evidence obtained, and conclusions the auditor reached. Terms such as ‘working papers’ or ‘workpapers’ are sometimes used for audit documentation.
While SA 230 “Audit Documentation” provides detailed and general guidance on the audit documentation, most standards on auditing require specific documentation to be done by the auditor. Given the increased scrutiny by various regulators, it is important for the auditor to have robust documentation of the work done. The cardinal principle is “Work not Documented is Work not Done”!
The ultimate objective of an audit is to give an audit opinion on the financial statements. SA 700 (Revised) provides the basic structure of an audit report. This format is applicable to audit reports on the financial statements of all entities including companies, trusts, partnership firms, etc.
Based on the audit evidence obtained, auditor’s assessment thereof and professional judgement, the auditor may issue either an unmodified (commonly referred to as ‘clean’) or a modified audit opinion. Most people refer to an audit opinion as either ‘clean’ or ‘qualified’! However, modifications may be either a ‘qualified opinion’, an ‘adverse opinion’, or a ‘disclaimer of opinion’. These are explained in detail SA 705 (Revised). In some situations, the auditor may include an ‘emphasis of matter ‘(‘EOM’) paragraph- which generally draws attention to a significant matter in the financial statements not warranting a modified opinion but assist the user of financial statements to make an informed decision. The concept of EOM is covered by SA 706 (Revised).
Compliance with a large number of standards on auditing may be an onerous task specially for small practitioners and also in case of audit of small and less complex entities. ICAI on its part has issued Implementation Guides on various standards on auditing to assist the auditor in applying these standards.
A large number of reviews by the Quality Review Board has highlighted non-compliances with these mandatory standards on auditing. Moreover, due to increase in number of frauds, there is an increased scrutiny, and the auditors are ‘on the radar’ of most regulators. There are allegations of dereliction of duty by the chartered accountants. This is not only resulting in actions against chartered accountants but also affecting the credibility of the practicing-chartered accountants.
Compliance with standards on auditing together with other authoritative pronouncements, and most importantly adequate documentation is the only way the auditor can defend the audit opinion. The auditors can undermine the importance of standards on auditing only at their own risk!!