Overview of Standards on Auditing
NITINA R JACOB
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.
The standards on auditing have been divided into 38 standards presently grouped into 6 categories as detailed below:
SA 100-199: Introductory Matters
- Such standards have not been issued yet
SA 200-299: General Principles and responsibilities (9 Standards)
- Four Standards were introduced on 01.04.2010
- Four Standards were introduced on 01.04.2009
- One Standard (SA 299) was introduced on 01.04.1996
SA 300-499: Risk assessment and response to assessed risk (6 Standards)
- Three standards were introduced on 01.04.2010
- Three standards were introduced on 01.04.2008
SA 500-599: Audit Evidences (11 Standards)
- Five standards were introduced on 01.04.2010
- Six standards were introduced on 01.04.2009
SA 600-699: Using work of others (3 standards)
- One standard was introduced on 01.04.2002
- Two standards were introduced on 01.04.2010
SA 700-799: Audit Conclusion and reporting (6 standards)
- Three standards were introduced on 01.04.2012
- One standard was introduced on 01.04.2011
- One standard was introduced on 01.04.2010
SA 800-899: Specialized Areas (3 standards)
- All the three standards were introduced on 01.04.2011
Structure of Standards:
Each Standard has a uniform structure which includes the following:
- Application and other explanatory material
Key Aspects covered in standards on Auditing:
Standards on Auditing basically provides an overview on why we need an audit, who needs an audit, how should audit be performed and so on. The underlying principles of Standards on Auditing are given below:
The standards on auditing issued by the ICAI are applicable to audit of all entities irrespective of its nature, size and legal form.
Why do we not have different Auditing Standards for different sized entities?
The standard setters have stated on numerous occasions that the auditing standards are capable of being applied to the audits of entities of all sizes. Therefore the word audit should not be associated with any other level of assurance as this would confuse users of the financial statements. The auditor’s objectives are the same for audits of entities of different sizes and complexities. This, however, does not mean that every audit will be planned and performed in exactly the same way.
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.
- Assessing the risks of material misstatement in the financial statements
- Designing and performing further audit procedures that respond to assessed risks and reduce the risks of material misstatements in the financial statements to an acceptably low level
- Issuing an appropriate audit report based on the audit evidence obtained.
The Auditor also needs to keep in mind the following risk of material misstatement:
- There can be risk due to fraud which are intentional and hard to find
- Risk related to management override of controls
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”.
Many other standards apart from SA 200 specify the need for using professional skepticism while auditing.
The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest.
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.
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users of the financial statements of the company. Materiality is relative to the size and particular circumstances of individual companies. Determining materiality involves the exercise of professional judgment by the auditor.
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 auditing evidence is meant to support the company's claims made in the financial statements and their adherence to the accounting laws of their legal jurisdiction. Good auditing evidence should be sufficient, reliable, provided from an appropriate source, and relevant to the audit at hand.
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 ‘work papers’ 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 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.
The auditor's report is a document containing the auditor's opinion on whether a company's financial statements comply with GAAP and are free from material misstatement. The audit report is important because banks, creditors, and regulators require an audit of a company's financial statements.
A clean audit report means a company followed accounting standards while an unqualified report means there might be errors. An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn't adhere to GAAP.