1. SA 230 AUDIT DOCUMENTATION
BY:- CA R. A. SHARMA FCA, DISA
JAIPUR
19/10/2019
R. A. SHARMA FCA,DISA

2. Challenginh Scenario for Attest Function
Audit is exclussive Domain of CA
Increased Regulatory setup –NFRA
Non cooperation of Client-resulted mass resignations by top brass audit firm
Negative approach of Beauracrats and Politicians
Public perception is misguided
Colossal Frauds detected and in process of detection
Other professional bodies like CS and CMA are aggressive to share domain
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3. Standards of Auditing
A set of audit procedures and methodology to be followed by CA
To maintain uniform approach to audit
For quality audits
For regulatory compliance
SA 200 require to comply the SA in audit
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4. Why to comply SA Professional ethical requirements
Companies Act requires
explicit point in Audit report
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5. PURPOSE OF SA
(a) Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor; and
(b) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements
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6. ADDITIONAL PURPOSES
Assisting the engagement team to plan and perform the audit.
Assisting audit tean to review responsibilities in accordance with SA 220
Enabling the engagement team to be accountable for its work.
Retaining a record of matters of continuing significance to future audits.
Enabling the conduct of quality control reviews and inspections in accordance with SQC 12.
Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.
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7. Form, Content and Extent of Audit Documentation
The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements;
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.
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8. Contd……
The auditor shall document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place.
If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding a significant matter, the auditor shall document how the auditor addressed the inconsistency.
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9. Discussions of Significant Matters with Management, TCWG and Others
A14. The documentation is not limited to records prepared by the auditor but may include other appropriate records such as minutes of meetings prepared by the entity’s personnel and agreed by the auditor. Others with whom the auditor may discuss significant matters may include other personnel within the entity, and external parties, such as persons providing professional advice to the entity.
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10. Documentation of How Inconsistencies have been addressed
A15. The requirement to document how the auditor addressed inconsistencies in information does not imply that the auditor needs to retain documentation that is incorrect or superseded.
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11. Considerations Specific to Smaller Entities
an audit where the engagement partner performs all the audit work, the documentation will not include matters that might have to be documented solely to inform or instruct members of an engagement team, or to provide evidence of review by other members of the team
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12. Retention of Audit Documents
SA 230 prescribes the minimum period of retention of engagement documentation as seven years since, the provisions of the Chartered Accountants Act, 1949, and regulations made there under, prescribe the minimum period of retention of working papers as seven years.
Form of documentation may be electronic also
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13. SA 570 Going Concern Fundamental Accounting Assumptions
1. Going concern concept
2. Accrual concept
3. Consistency
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14. Going Concern Concept
financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future
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15. Who has to assess ability of Going Concern
May or may not be the requirement of reporting Framework
Management has to assess the entity’s ability to continue as a going concern
involves making a judgment, at a particular point in time, about inherently uncertain future outcomes of events or conditions
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16. Responsibilities of the Auditor
to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern. (May or may not the requirement of Financial reporting framework)
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17. Responsibilities of the Auditor contd…
However, as described in SA 200, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly, the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.
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18. Audit procedures
If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern through performing additional audit procedures, including consideration of mitigating factors.
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19. Audit procedures contd…
Request management to make assessment
Evaluate management’s future Plans and actions
Future cash flow forecast
Any additional facts after management’s assessment
Management written representation on future plans and actions
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20. Auditor Conclusions
Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary
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21. Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material Uncertainty Exists
If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern but, based on the audit evidence obtained the auditor concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework, the financial statements provide adequate disclosures about these events or conditions.
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22. Use of Going Concern Basis of Accounting is Inappropriate
If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion.
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23. Use of Going Concern Basis of Accounting is Appropriate but a Material Uncertainty Exists
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going Concern
Draw attention to the note in the financial statements; and
State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the matter.
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24. If adequate disclosure about the material uncertainty is not made in the financial statements
the auditor shall:
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised); and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter
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25. Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going Concern
Financial
Net liability or net current liability position.
Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment; or excessive reliance on short-term borrowings
Indications of withdrawal of financial support by creditors.
Negative operating cash flows indicated by historical or prospective financial statements.
Adverse key financial ratios.
Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
Arrears or discontinuance of dividends.
Inability to comply with the terms of loan agreements.
Change from credit to cash-on-delivery transactions with suppliers.
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26. Operating issues
Management intentions to liquidate the entity or to cease operations.
Loss of key management without replacement.
Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
Labor difficulties.
Shortages of important supplies.
Emergence of a highly successful competitor.
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27. Other Factors
Non-compliance with capital or other statutory or regulatory requirements, such as solvency or liquidity requirements for financial institutions.
Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy.
Changes in law or regulation or government policy expected to adversely affect the entity.
Uninsured or underinsured catastrophes when they occur.
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28. SA 240
The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statement
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29. Mushroom growth of Frauds
Provided impetus by slow and sluggish economy
Govt has strong approach to combat
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30. Responsibility for the Prevention and Detection of Fraud
The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
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31. Responsibilities of the Auditor
An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. inherent limitations of an audit, some material misstatements may not be detected, even though the audit is planned and performed in accordance with the SAs.
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32. Responsibility of Auditor contdd….
The auditor’s ability to detect a fraud depends on factors such as the skillfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved
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33. Confronting with FRAUDS
Present Scenario of Frauds-anywhere-everywhere
Kind of Frauds:
A. Corporate Frauds
B. Banking Frauds
C. Non Corporate Frauds
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34. Study Framework of FRAUD
Companies Act 2013-Section 143(12), 447
Companies (Auditor’s Report) Order, 2003
Companies (Audit and Auditors) Rules, 2014,
Companies (Audit and Auditors) Amendment Rules, 2015,
SA 240
GN on Frauds
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35. Why he should report and what are consequences of non reporting
Corporate Frauds
When Auditor confront any situation of Fraud:
Why he should report and what are consequences of non reporting
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36. Corporate Frauds –Contd..
Section 147(2) in the context of punishment to auditors for contravention with the provisions, inter alia, of Section 143 of the 2013 Act-
“if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.”
The penalty is deterrent and huge
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37. Corporate Frauds definition u/s 447
“fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
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38. act, omission, concealment of any fact or abuse of position
by any person or any other person with the connivance in any manner
with intent to deceive, to gain undue advantage from, or to injure the interests of,
the company or its shareholders or its creditors or any other person
No need of wrongful gain or wrongful loss
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39. Definition U/S447 contd..
(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled; (iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.
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40. Other Definition of Fraud
SA 240:
An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage
Many others given in SA
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41. Corporate Frauds section 143(12)
Notwithstanding anything contained in this
section, if an auditor of a company, in
the course of the performance of his duties as
auditor, has reason to believe that an offence
involving fraud is being or has been committed
against the company by officers or employees
of the company, he shall immediately report the
matter to the Central Government within such
time and in such manner as may be prescribed.
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42. Reporting of Fraud
Responsibility to protect the asset from fraud is with TCWG Sec 143(5)
Fraud which first time came to notice to auditor is to be reported by auditor u/s 143(12)
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43. Reporting of Fraud individually involving amount 1 Cr or excess
(a) the auditor shall report to the Board or the Audit Committee, within two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
(b) on receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
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44. Reporting of Fraud 1 Cr or excess Contd….
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;
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45. Reporting of Fraud 1 Cr or excess Contdd….
(d) The report shall be sent to the Secretary, Ministry of
Corporate Affairs in a sealed cover by Registered Post
with Acknowledgement Due or by Speed post followed by
an in confirmation of the same.
(e) The report shall be on the letter-head of the auditor
containing postal address, address and contact
telephone number or mobile number and be signed by
the auditor with his seal and shall indicate his
Membership Number; and
(f) The report shall be in the form of a statement as specified in Form ADT-4.
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46. Reporting of cases below 1 Cr
the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
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47. Reporting of cases below 1 Cr
The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:-
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial action taken.
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48. Reporting in CARO
Point no. x Whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.
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49. Non Corporate Frauds
If found during the course of audit are to be included in the Audit report
No specific regulation except SA240
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50. Banking Fraud
RBI has issued a Master Circular no. DBS.CO.CFMC.BC.No. 1/ / dated July 1,2015 on “Frauds–Classification and Reporting” on the matters relating to classification and reporting of frauds and laying down a suitable reporting system. As per the said circular, the primary responsibility for preventing frauds is that of the Bank management. Banks are required to report frauds to the Board of Directors and also to the RBI
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51. Examples
Tax authorities surveyed-unaccounted sales found-matter compounded by Company-tax deposited with compounding fees
Illegal act of Officer
Unauthorised act of Officer
Misuse of Asset of the company
Inflating Income or expenses illegally
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