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(AAS) 3

(AAS) 3. DOCUMENTATION . Harinderjit Singh. NIRC / ICAI. 9.7.2005. DOCUMENTATION (AAS 3) OVERVIEW . Introduction Form and content Ownership and Custody of Working Papers Exposure Draft on Revised (AAS) 3 - Audit Documentation. DOCUMENTATION (AAS 3) INTRODUCTION .

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(AAS) 3

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  1. (AAS) 3 DOCUMENTATION Harinderjit Singh NIRC / ICAI 9.7.2005

  2. DOCUMENTATION (AAS 3)OVERVIEW • Introduction • Form and content • Ownership and Custody of Working Papers • Exposure Draft on Revised (AAS) 3 - Audit Documentation

  3. DOCUMENTATION (AAS 3)INTRODUCTION • Document evidence that audit carried out in accordance with basic principles (AAS2) • Documentation refers to working papers prepared or obtained by auditor • Working papers aid in : • Planning and performance of audit • Supervision and review of audit work • Providing evidence of audit work performed

  4. DOCUMENTATION (AAS 3)FORM AND CONTENT • Working Paper to record: • audit plan, • nature, timing & extent of audit procedures • conclusions drawn from evidence obtained

  5. DOCUMENTATION (AAS 3)FORM AND CONTENT Form & content affected by : • nature of engagement • form of auditor’s report • nature & complexity of client’s business • nature & conditions of client’s records & degree of reliance on internal controls • need in particular circumstances for direction, supervision and review of work performed by assistants

  6. DOCUMENTATION (AAS 3)FORM AND CONTENT • Standardisation of working papers (e.g. checklists, specimen letters, standard organisation of working papers) • Working Paper sufficiently complete and detailed • Significant matters together with auditor’s conclusion thereon • Ensure working papers obtained from client properly prepared • Permanent & current audit files (PAF & CAF)

  7. DOCUMENTATION (AAS 3)FORM AND CONTENT - PAF • PAF includes • Legal & organisational structure of entity • Legal documents & agreements • Study & evaluation of internal controls • Audited F/S for PYs • Significant ratios & trends • Management letters, if any • Significant accounting policies • Significant audit observations of earlier years.

  8. DOCUMENTATION (AAS 3)FORM AND CONTENT - PAF • CAF includes: • Acceptance of annual reappointment • Board & general meetings minutes • Nature, timing & extent of audit procedures- review • Audit matters communicated/discussed with client including terms of engagement etc. • Representation letters • Significant aspects of audit –Experts / third party • FS & related audit report

  9. DOCUMENTATION (AAS 3)OWNERSHIP AND CUSTODY OF WORKING PAPERS • Working Papers • Property of auditor • Extracts of working papers available to client at auditor’s discretion. • Reasonable procedures for custody & confidentiality of working papers • Retention of working papers

  10. EXPOSURE DRAFT REVISED (AAS) 3 AUDIT DOCUMENTATION SALIENT MATTERS • Caption changed from “Documentation” to “Audit Documentation” • Fallout of Enron • Changes to Audit Documentation • New concept of Experienced Auditor • Identification of Prepares & Reviewer • Retention period - 10 years vis-à-vis 8 years prescribed by Companies Act

  11. (AAS) 6 (REVISED) RISK ASSESSMENT AND INTERNAL CONTROL NIRC /ICAI 9.7.2005

  12. AAS 6 (Revised) - Risk Assessment and Internal Control Overview • Introduction • Inherent Risk • Accounting & Internal Control Systems • Control Risk • Detection Risk • Audit Risk in Small Business • Communication of Weaknesses

  13. AAS 6 (Revised) - Risk Assessment and Internal Control Introduction • Understanding of accounting & internal control system and audit risk • Sufficient to plan & develop an effective audit approach • Professional judgment to assess audit risk & design audit procedures • Applicability – 1.4.2002

  14. AAS 6 (Revised) - Risk Assessment and Internal Control Introduction • Certain terminologies: • Inappropriate opinion • Inherent Risk • Control risk • Detection risk • Control environment • Control procedures • Internal Control System • Accounting System

  15. AAS 6 (Revised) - Risk Assessment and Internal Control Inherent Risk • Relate inherent risk assessment to material account balance & classes of transactions in developing audit program. • High inherent risk assessments are made taking into account factors relevant both to F/S as a whole & to specific assertions. • Reasons for assessing inherent risk as not high should be documented.

  16. AAS 6 (Revised) - Risk Assessment and Internal ControlAssessing Inherent Risk • Factors for Evaluation At Level of F/S • integrity of management • management experience & knowledge & changes in management during period • unusual pressures on management • nature of entity’s business • factors affecting industry in which entity operates.

  17. AAS 6 (Revised) - Risk Assessment and Internal ControlAssessing Inherent Risk • At Level of Account Balance & Class of Transactions • quality of accounting system • F/S susceptible to misstatement • complexity of transactions & events • degree of judgement • susceptibility of assets to loss or misappropriation • unusual & complex transactions at or near period end • transactions not subject to ordinary processing

  18. AAS 6 (Revised) - Risk Assessment and Internal Control Inherent Limitations of Internal Controls • Reasonable but not absolute assurance • Control be cost effective • Addressing unusual transactions • Human error • Collusion by employees & third parties • Management overriding control • Manipulation in estimates & judgments in FS.

  19. AAS 6 (Revised) - Risk Assessment and Internal Control Understanding Accounting & Internal Control Systems • CAKE • inquiries of appropriate level of personnel • inspection of documents & records • observation of activities & operation

  20. AAS 6 (Revised) - Risk Assessment and Internal Control Accounting Systems - Understanding • major classes of transactions • how such transactions initiated • significant accounting records, supporting documents & specific accounts • accounting & financial reporting process - initiation to inclusion in FS

  21. AAS 6 (Revised) - Risk Assessment and Internal Control Control Environment - Understanding • Management’s attitudes,awareness & actions regarding internal controls & their importance in entity.

  22. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Preliminary Assessment of Control Risk • At assertion level for each material account balance or class of transaction.

  23. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Preliminary Assessment of Control Risk • Control risk assessed at high level for some or all assertions where accounting & internal controls not effective or evaluating not efficient. • Preliminary assessment of control risk for a FS assertion high unless: • internal controls identified • tests of control to support assessment planned

  24. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Documentation of Understanding & Assessment of Control Risk • Document : • understanding of entity’s accounting & internal control system; • assessment of control risk. • When control risk assessed at less than high, document basis. • Different techniques for documentation: • narrative • questionnaires • checklists • flow charts

  25. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Tests of Control • Audit evidence re. effectiveness of accounting & internal control system & operation of controls throughout period.

  26. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Tests of Control • Tests of control may include: • inspection of documents for controls re.authorisation • inquiries & observation of controls which have no audit trail • testing computerized application or overall IT function Lower assessments of control risk more audit evidence should be obtained

  27. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Tests of Control • Considering effectiveness of controls: • How applied? • Consistency on application during period • By whom applied? • Deviations from prescribed controls • Results of tests of control evaluates whether controls operating as contemplated in preliminary assessment of control risk.

  28. AAS 6 (Revised) - Risk Assessment and Internal ControlControl Risk • Final Assessment of Control Risk • When preliminary assessment of control risk not supported: • revise assessed level of control risk • modify nature, timing & extent of planned substantive procedures.

  29. AAS 6 (Revised) - Risk Assessment and Internal ControlDetection Risk • Consider assessed levels of inherent & control risks in determining nature, timing & extent of substantive procedures. • To reduce audit risk to an acceptably low level consider: • nature of substantive procedure • timing of substantive procedure • extent of substantive procedures • Inverse relationship between detection risk & combined level of inherent and control risk

  30. AAS 6 (Revised) - Risk Assessment and Internal ControlDetection Risk • Regardless of assessed levels of inherent and control risks, some substantive procedures performed • Higher assessment of inherent & control risks means more of substantive procedures • Qualified or declaimer of opinion when detection risk regarding an assertion for material balance or transaction cannot be reduced to an acceptable level,

  31. AAS 6 (Revised) - Risk Assessment and Internal Control Audit Risk in Small Business • Inadequate segregation of duties & lack of supervisory controls • Audit evidence may have to be obtained entirely through substantive procedures.

  32. AAS 6 (Revised) - Risk Assessment and Internal Control Communication of Weaknesses • Communicate material weaknesses in accounting & internal control at an appropriate level of management. • Ordinarily in writing • Important to indicate that only weaknesses which have come to the auditor’s attention as a result of audit have been reported.

  33. AAS 6 (Revised) - Risk Assessment and Internal Control Matters for Discussion • Complex CIS environment-need for specialist • Extent of substantive procedures should reflect reliance/nonreliance on internal controls • Risk based audit approach-prevalent now formalised • Assessing internal controls enables effective and efficient audit

  34. AAS - 21 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS NIRC / ICAI 9.7.2005

  35. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSOverview • Introduction • Responsibility of Management • Auditor’s consideration • Procedures when noncompliance discovered • Communicating/Reporting noncompliance • Withdrawal from Engagement

  36. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSIntroduction • Consideration of laws & regulations in an audit of FS. • Noncompliance of laws & regulations by entity materially affecting F/S • Term `noncompliance’ refers to acts of omission or commission by entity being audited, either intentional or unintentional contrary to prevailing laws & regulations.

  37. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Indications of Noncompliance • Investigation by government departments or payment of fines • Payments for unspecified services or loans to consultants, related parties, employees or government employees • Purchases at prices significantly above or below market price • Unusual payments in cash & other unusual transactions

  38. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Indications of Noncompliance • Unusual transactions with companies registered in tax havens • Payments without proper exchange control documentation • Unauthorized or improperly recorded transactions • Media comment

  39. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSIntroduction • Noncompliance generally based on expert’s advice but ultimately determined by a court of law. • Auditor likely to be aware of those noncompliances linked to events & transactions ordinarily reflected in F/S. • Auditor’s responsibility to consider fraud & error in audit covered by AAS - 4.

  40. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSResponsibility of Management for Compliance • Achieved by: • Monitoring legal requirements • Internal control systems • Establishing legal department and/or engaging legal advisor. • Maintaining register of significant laws affecting entity & records of noncompliances. • Appropriating responsibilities to internal audit & audit committee.

  41. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSAuditor’s Consideration • Audit does not prevent noncompliance but may act as a deterrent. • Risk from noncompliance higher due to: • inherent limitations of accounting & internal control systems • persuasive rather than conclusive audit evidence • override of controls by management etc. • Recognition of conditions or events leading to noncompliance. • Statutory requirements may require to report compliance with certain provisions of laws & regulations.

  42. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSAuditor’s Consideration • Understanding legal & regulation framework: • CAKE • inquiring & discussing with management • Identifying instances of noncompliance: • inquiring with management • inspecting correspondences-regulatory authorities

  43. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSAuditor’s Consideration • Sufficient appropriate audit evidence regarding compliance affecting amounts & disclosures in FS • Other procedures (besides above) outside scope of audit. • Written representations from management. • In absence of evidence to contrary entitled to assume compliance .

  44. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSProcedures When Noncompliance Discovered • Obtain understanding of nature of act & circumstances to evaluate possible effect of noncompliance on FS • Evaluating possible effect on F/S, consider: • potential financial consequences • whether they require disclosure • whether they affect true & fair view • Document findings & discuss with management.

  45. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSProcedures When Noncompliance Discovered • Consult entity’s lawyers or other lawyers on possible effects/consequences • Effect of lack of evidence on auditor’s report. • Reliability of management representations in light of noncompliance.

  46. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSCommunicating/Reporting of Noncompliance • To Management • Communicate to audit committee, BOD and senior management • Intentional and/or material noncompliance communicate without delay • Senior management including members of BOD involved in noncompliance- communicate matter to next higher level.

  47. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSCommunicating/Reporting of Noncompliance • To Users of Auditor’s Report • Qualified or adverse opinion. when material noncompliance not properly reflected in FS. • Qualified or disclaimer of opinion. if precluded from obtaining sufficient appropriate audit evidence regarding material noncompliance. .

  48. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FSCommunicating/Reporting of Noncompliance • To Regulatory and Enforcement Authorities • Report to regulatory and enforcement authorities in case duty of confidentiality overridden by statute, law or by courts of law.

  49. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Withdrawal from Engagement • No remedial action on material noncompliance • Involvement of highest authority affecting reliability of management representations • Communication to incoming auditor re.detailed reasons & attendant circumstances leading to withdrawal

  50. AAS 21 - CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF FS Matters of Discussion • How many Acts are there - mind boggling! • Peculiar Acts • Laws & Regulations affecting F/S • Sufficient understanding of laws & regulations • Expert opinion/ Court of Law

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