StandardonAuditing (SA)200

*
(Revised)
OverallObjectivesoftheIndependentAuditorandthe Conductofan
AuditinAccordancewithStandardson Auditing
Contents
Paragraph(s)
Introduction
Scope of this SA........................................................................................................................................................12
AnAudit of Financial Statements................................................................................... ...........................................39
EffectiveDate................................................................................................................. .............................................10
Overall Objectives of the Auditor .......................................................................................................................1112
Definitions ..................................................................................................................................................................13
Requirements
Ethical Requirements Relating to an Audit of Financial Statements.............................. .............................................14
Professional Skepticism.................................................................................................. ............................................15
Professional Judgment ................................................................................................................................................16
Sufficient Appropriate Audit Evidence andAudit Risk.................................................................................................17
Conduct of anAudit inAccordance with SAs............................................................... .........................................1824
Applicationand Other Explanatory Material
AnAudit of Financial Statements................................................................................... ....................................A1A13
Ethical Requirements Relating to anAudit of Financial Statements...................... ..........................................A14A17
Professional Skepticism......................................................................................... ..........................................A18A22
Professional Judgment .....................................................................................................................................A23A27
Sufficient Appropriate Audit Evidence andAudit Risk......................................................................................A28A52
Conduct of anAudit inAccordance with SAs...................................................................................................A53A75
Modifications vis--visISA 200, Overall Objectives of the Independent Auditor and the Conduct of
anAudit in Accordance with International Standards on Auditing
Limited Revisions Consequential to issuance of theStandard on Auditing (SA) 200 (Revised),
Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing
Standard on Auditing (SA) 200 Revised, Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing should be read in the context of the Preface to the Standards on Quality
Control, Auditing, Review, Other Assurance and Related Services

, which sets out the authority of SAs.

*
The date this Revised Standard on Auditing (SA) 200 comes into effect, SA 200, Basic Principles Governing an Audit, issued by ICAI in April,
1985 and SA 200A, Objective and Scope of an Audit of Financial Statements, issued by ICAI in April, 1985 shall stand withdrawn.

Published in the July, 2007 issue of the Journal.

Overall Objectives of the Independent Auditor and the Conduct of an Audit
Introduction
Scope of this SA
1. This Standard on Auditing (SA) establishes the independent auditors overall responsibilities when conducting an
audit of financial statements in accordance with SAs. Specifically, it sets out the overall objectives of the independent
auditor, and explains the nature and scope of an audit designed to enable the independent auditor to meet those
objectives. It also explains the scope, authority and structure of the SAs, and includes requirements establishing the
general responsibilities of the independent auditor applicable in all audits, including the obligation to comply with the
SAs. The independent auditor is referred to as the auditor hereafter.
2. SAs are written in the context of an audit of financial statements by an auditor. They are to be adapted as
necessary in the circumstances when applied to audits of other historical financial information.
An Audit of Financial Statements
3. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This
is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose
frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a
true and fair view in accordance with the framework. An audit conducted in accordance with SAs and relevant ethical
requirements enables the auditor to form that opinion. (Ref: Para. A1)
4. The financial statements subject to audit are those of the entity, prepared and presented by management of the
entity with oversight from those charged with governance. SAs do not impose responsibilities on management or those
charged with governance and do not override laws and regulations that govern their responsibilities. However, an audit
in accordance with SAs is conducted on the premise that management and, where appropriate, those charged with
governance have responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements
does not relieve management or those charged with governance of those responsibilities. (Ref: Para. A2-A11)
5. As the basis for the auditors opinion, SAs require the auditor to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable
assuranceis ahighlevel of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence
to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate opinion when the financial statements are
materially misstated) to an acceptably lowlevel. However, reasonable assurance is not an absolute level of assurance,
because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws
conclusions and bases the auditors opinion being persuasive rather than conclusive. (Ref: Para. A28-A52)
6. Theconcept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the
effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements
1
. In
general, misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Judgments about materiality are made in the light of surrounding circumstances, and are affected by the auditors
perception of the financial information needs of users of the financial statements, and by the size or nature of a
misstatement, or a combination of both. The auditors opinion deals with the financial statements as a whole and
1
SA320(Revised), MaterialityinPlanningandPerforminganAudit andSA450, Evaluationof Misstatements Identified during theAudit.
therefore the auditor is not responsible for the detection of misstatements that are not material to the financial statements
as a whole.
7. The SAs contain objectives, requirements and application and other explanatory material that are designed to
support the auditor in obtaining reasonable assurance. The SAs require that the auditor exercise professional judgment
andmaintainprofessional skepticism throughout the planning and performance of the audit and, among other things:
+ Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the
entity and its environment, including the entitys internal control.
+ Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and
implementing appropriate responses to the assessed risks.
+ Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained.
8. The form of opinion expressed by the auditor will depend upon the applicable financial reporting framework and any
applicable laws or regulations. (Ref: Para. A12-A13)
9. The auditor may also have certain other communication and reporting responsibilities to users, management, those
charged with governance, or parties outside the entity, in relation to matters arising from the audit. These may be
established by the SAs or by applicable laws or regulations
2
.
Effective Date
10. ThisSA is effective for audits of financial statements for periods beginning on or after April 1, 2010.
Overall Objectives of the Auditor
11. In conducting an audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance with an applicable financial reporting
framework; and
(b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditors
findings.
12. In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditors report is
insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, the SAs
require that the auditor disclaim an opinion or withdraw from the engagement, where withdrawal is legally permitted.
Definitions
13. For purposes of the SAs, the following terms have the meanings attributed below:
(a) Applicable financial reporting framework The financial reporting framework adopted by management and, where
appropriate, those charged with governance in the preparation and presentation of the financial statements that is
2
See, for example, SA260(Revised), CommunicationwithThoseChargedwithGovernance; andparagraph 43of SA240(Revised), TheAuditors
ResponsibilitiesRelatingtoFraudinanAudit of Financial Statements.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law
or regulation.
The termfair presentation framework is used to refer to afinancial reporting framework that requires compliance
with the requirements of the framework and:
(i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be
necessary for management to provide disclosures beyond those specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the
framework to achieve fair presentation of the financial statements. Such departures are expected to be
necessary only in extremely rare circumstances.
The term compliance framework is used to refer to a financial reporting framework that requires compliance
with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above.
(b) Audit evidence Information used by the auditor in arriving at the conclusions on which the auditors opinion is
based. Audit evidence includes both information contained in the accounting records underlying the financial
statementsandother information. For purposes of theSAs:
(i) Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of the audit
evidence needed is affected by the auditors assessment of therisks of material misstatement andalsoby the
qualityof suchaudit evidence.
(ii) Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditors opinion is based.
(c) Audit risk The risk that the auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.
(d) Auditor Auditor is used to refer to the person or persons conducting the audit, usually the engagement partner
or other members of the engagement team, or, as applicable, the firm. Where an SA expressly intends that a
requirement or responsibility be fulfilled by the engagement partner, the term engagement partner rather than
auditor is used. Engagement partner and firm are to be read as referring to their public sector equivalents
where relevant.
(e) Detection risk The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low
level will not detect a misstatement that exists and that could be material, either individually or when aggregated
with other misstatements.
(f) Financial statements A structured representation of historical financial information, including related notes,
intended to communicate an entitys economic resources or obligations at a point in time or the changes therein for
a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a
summary of significant accounting policies and other explanatory information. The term financial statements
ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable
financial reporting framework, but can also refer to a single financial statement.
(g) Historical financial information Information expressed in financial terms in relation to a particular entity, derived
primarily from that entitys accounting system, about economic events occurring in past time periods or about
economicconditionsor circumstances at points in time in the past.
(h) Management The person(s) with executive responsibility for the conduct of the entitys operations. For some
entities in some jurisdictions, management includes some or all of those charged with governance, for example,
executivemembersof agovernance board, or an owner-manager.
(i) Misstatement Adifference between the amount, classification, presentation, or disclosure of a reported financial
statement itemand the amount, classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
When the auditor expresses an opinion on whether the financial statements are presented fairly, in all material
respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications,
presentation, or disclosures that, in the auditors judgment, are necessary for the financial statements to be
presentedfairly, in all material respects, or to give a true and fair view.
(j) Premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on
which an audit is conducted That management and, where appropriate, those charged with governance have the
following responsibilities that are fundamental to the conduct of an audit in accordance with SAs. That is,
responsibility:
(i) For the preparation and presentation of the financial statements in accordance with the applicable financial
reportingframework; this includes the design, implementation and maintenance of internal control relevant to
the preparation and presentation of financial statements that are free from material misstatement, whether
due to fraud or error; and
(ii) To provide the auditor with:
a. All information, such as records and documentation, and other matters that are relevant to the
preparation and presentation of the financial statements;
b. Anyadditional information that the auditor may request from management and, where appropriate, those
charged with governance; and
c. Unrestricted access to those within the entity fromwhomthe auditor determines it necessary to obtain
audit evidence.
In the case of a fair presentation framework, the responsibility is for the preparation and fair presentation of the
financial statementsinaccordancewiththefinancial reporting framework; or the preparation of financial statements
that give a true and fair viewinaccordancewiththefinancial reportingframework. This applies toall references to
preparation and presentation of the financial statements in the SAs.
The premise, relating to the responsibilities of management and, where appropriate, those charged with
governance, on which an audit is conducted may also be referredto as the premise.
(k) Professional judgment The application of relevant training, knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action
that are appropriate in the circumstances of the audit engagement.
(l) Professional skepticism 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.
(m) Reasonable assurance In the context of an audit of financial statements, a high, but not absolute, level of
assurance.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
(n) Risk of material misstatement The risk that the financial statements are materially misstated prior to audit. This
consists of two components, described as follows at the assertion level:
(i) Inherent risk The susceptibility of an assertion about a class of transaction, account balance or disclosure to
a misstatement that could be material, either individually or when aggregated with other misstatements,
before considerationof any related controls.
(ii) Control risk The risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure and that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entitys internal
control.
(o) Those charged with governance The person(s) or organisation(s) (e.g., a corporatetrustee) with responsibility for
overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This
includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with
governance may include management personnel, for example, executive members of a governance board of a
private or public sector entity, or an owner-manager.
Requirements
Ethical Requirements Relating to an Audit of Financial Statements
14. The auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating to
financial statement audit engagements. (Ref: Para. A14-A17)
Professional Skepticism
15. The auditor shall plan and perform an audit with professional skepticism recognising that circumstances may exist
that cause the financial statements to be materially misstated. (Ref: Para. A18-A22)
Professional Judgment
16. The auditor shall exercise professional judgment in planning and performing an audit of financial statements. (Ref:
Para. A23-A27)
Sufficient Appropriate Audit Evidence and Audit Risk
17. To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidencetoreduceaudit riskto
an acceptably lowlevel and thereby enable the auditor to draw reasonable conclusions on which to base the auditors
opinion. (Ref: Para. A28-A52)
Conduct of an Audit in Accordance with SAs
Complying withSAs Relevant to the Audit
18. The auditor shall comply with all SAs relevant to the audit. An SA is relevant to the audit when the SA is in effect
and the circumstances addressed by the SA exist. (Ref: Para. A53-A56)
19. The auditor shall have an understanding of the entire text of an SA, including its application and other explanatory
material, to understand its objectives and to apply its requirements properly. (Ref: Para. A57-A65)
20. The auditor shall not represent compliance with SAs in the auditors report unless the auditor has complied with the
requirements of this SA and all other SAs relevant to the audit.
Objectives Stated in IndividuaI SAs
21. To achieve the overall objectives of the auditor, the auditor shall use the objectives stated in relevant SAs in
planning and performing the audit, having regard to the interrelationships among the SAs, to: (Ref: Para. A66-A68)
(a) Determine whether any audit procedures in addition to those required by the SAs are necessary in pursuance of
the objectives stated in the SAs; and(Ref: Para. A69)
(b) Evaluate whether sufficient appropriate audit evidence has been obtained. (Ref: Para. A70)
Complying with Relevant Requirements
22. Subject to paragraph 23, the auditor shall comply with each requirement of an SA unless, in the circumstances of
the audit:
(a) The entire SA is not relevant; or
(b) The requirement is not relevant because it is conditional and the condition does not exist. (Ref: Para. A71-A72)
23. In exceptional circumstances, the auditor may judge it necessary to depart from a relevant requirement in an SA. In
such circumstances, the auditor shall perform alternative audit procedures to achieve the aim of that requirement. The
need for the auditor to depart from a relevant requirement is expected to arise only where the requirement is for a
specific procedure to be performed and, in the specific circumstances of the audit, that procedure would be ineffective in
achieving the aim of the requirement. (Ref: Para. A73)
Failure to Achieve an Objective
24. If an objective in a relevant SA cannot be achieved, the auditor shall evaluate whether this prevents the auditor
from achieving the overall objectives of the auditor and thereby requires the auditor, in accordance with the SAs, to
modify the auditors opinion or withdraw fromthe engagement. Failure to achieve an objective represents a significant
matter requiring documentation in accordance with SA 230 (Revised)
3
. (Ref: Para. A74-A75)
***
Application and Other Explanatory Material
An Audit of Financial Statements
Scope of theAudit (Ref: Para. 3)
A1. The auditors opinion on the financial statements deals with whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework. Such an opinion is common to all
audits of financial statements. The auditors opinion therefore does not assure, for example, the future viability of the
entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity. In some cases,
3
SA230 (Revised), Audit Documentation, paragraph 8(c).
Overall Objectives of the Independent Auditor and the Conduct of an Audit
however, the applicable laws and regulations may require auditors to provide opinions onother specific matters, suchas
the effectiveness of internal control, or the consistency of a separate management report with the financial statements.
While the SAs include requirements and guidance in relation to such matters to the extent that they are relevant to
forming an opinion on the financial statements, the auditor would be required to undertake further work if the auditor had
additional responsibilities to provide such opinions.
Preparation of the Financial Statements (Ref: Para. 4)
A2. An audit in accordance with SAs is conducted on the premise that management and, where appropriate, those
charged with governance have responsibility:
(a) For the preparation and presentation of the financial statements in accordance with the applicable financial
reporting framework; this includes the design, implementation and maintenance of internal control relevant to the
preparation and presentation of financial statements that are free from material misstatement, whether due to fraud
or error; and
(b) To provide the auditor with:
(i) All information, such as records and documentation, and other matters that are relevant to the preparation
and presentation of the financial statements;
(ii) Any additional information that the auditor may request from management and, where appropriate, those
charged with governance; and
(iii) Unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit
evidence.
A3. As part of their responsibility for the preparation and presentation of the financial statements, management and,
where appropriate, those charged with governance are responsible for:
The identification of the applicable financial reporting framework, in the context of any relevant laws or regulations.
The preparation and presentation of the financial statements in accordance with that framework.
An adequate description of that framework in the financial statements.
The preparation of the financial statements requires management to exercise judgment in making accounting estimates
that are reasonable in the circumstances, as well as to select and apply appropriate accounting policies. These
judgmentsaremadeinthecontext of the applicable financial reporting framework.
A4. The financial statements may be prepared in accordance with a financial reporting framework designed to meet:
Thecommonfinancial informationneedsof awiderangeof users(i.e., general purpose financial statements); or
Thefinancial informationneedsof specificusers(i.e., special purposefinancial statements).
A5. The applicable financial reporting framework often encompasses financial reporting standards established by an
authorised or recognised standards setting organisation, or legislative or regulatory requirements. In some cases, the
financial reporting framework may encompass both financial reporting standards established by an authorised or
recognised standards setting organisation and legislative or regulatory requirements. Other sources may provide
direction on the application of the applicable financial reporting framework. In some cases, the applicable financial
reporting framework may encompass such other sources, or may even consist only of such sources. Such other sources
may include:
The legal and ethical environment, including statutes, regulations, court decisions, and professional ethical
obligations in relation to accounting matters;
Published accounting interpretations of varying authority issued by standards setting, professional or regulatory
organisations;
Published views of varying authority on emerging accounting issues issued by standards setting, professional or
regulatory organisations;
General and industry practices widely recognised and prevalent; and
Accounting literature.
Where conflicts exist between the financial reporting framework and the sources from which direction on its application
may be obtained, or among the sources that encompass the financial reporting framework, the source with the highest
authority prevails.
A6. The requirements of the applicable financial reporting framework determine the form and content of the financial
statements. Although the framework may not specify how to account for or disclose all transactions or events, it ordinarily
embodies sufficient broad principles that can serve as a basis for developing and applying accounting policies that are
consistent with the concepts underlying the requirements of the framework.
A7. Some financial reporting frameworks are fair presentation frameworks, while others are compliance frameworks.
Financial reportingframeworks that encompassprimarily the financial reporting standards established by an organisation
that is authorised or recognised to promulgate standards to be used by entities for preparing and presenting general
purpose financial statementsareoftendesignedtoachievefair presentation.
A8. Therequirements of theapplicablefinancial reportingframework alsodeterminewhat constitutes a complete set of
financial statements. In the case of many frameworks, financial statements areintendedtoprovideinformationabout the
state of affairs, results of operations and cash flows of an entity. For such frameworks, a complete set of financial
statements would include a balance sheet; statement of profit and loss; a cash flowstatement; and related notes. For
someother financial reporting frameworks, a single financial statement and the related notes might constitute a complete
set of financial statements:
For example, normally, in government departments and local bodies, the primary financial statement is a statement
of cash receipts and payments.
Other examples of a single financial statement, each of which would include relatednotes, are:
Balance sheet.
Statement of profit &loss.
Statement of cash flows.
Statement of operations by product lines.
A9. SA 210 (Revised) establishes requirements and provides guidance on determining the acceptability of the
applicable financial reporting framework
4
. SA 800 deals with special considerations when financial statements are
4
SA 210 (Revised), Agreeing the Terms of Audit Engagements, paragraph 6(a).
Overall Objectives of the Independent Auditor and the Conduct of an Audit
prepared in accordance with a special purpose framework
5
.
A10. Because of the significance of the premise to the conduct of an audit, the auditor is required to obtain agreement
frommanagement and, whereappropriate, thosechargedwith governance that they acknowledge and understand their
responsibilities set out in paragraph A2 as a precondition for accepting the audit engagement
6
. The auditor is also
required to obtain written representations about whether management and, where appropriate, those charged with
governance have fulfilled those responsibilities
7
.
Considerations Specific toCentral/State Governments and Related Government Entities
A11. The mandates for audits of the financial statements of certain entities, such as, Central/State governments and
related government entities (for example, agencies, boards, commissions), may be broader than those of other entities.
As aresult, thepremise, relatingtomanagements responsibilities, on which an audit of the financial statements of such
an entity is conducted may include additional responsibilities, such as, the responsibility for the executionof transactions
and events in accordance with legislation or proper authority.
Formof the Auditors Opinion(Ref: Para. 8)
A12. The opinion expressed by the auditor is on whether the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework. The form of the auditors opinion, however, will depend
upon the applicable financial reporting framework and any applicable laws or regulations. Most financial reporting
frameworks include requirements relating to the presentation of the financial statements; for such frameworks,
preparation of the financial statements in accordance with the applicable financial reporting framework includes
presentation.
A13. Where the financial reporting framework is a fair presentation framework, as is generally the case for general
purpose financial statements, the opinion required by the SAs is on whether the financial statements are presented fairly,
in all material respects, or give a true and fair view. Where the financial reporting framework is a compliance framework,
the opinion required is on whether the financial statements are prepared, in all material respects, in accordance with the
framework. Unless specifically stated otherwise, references in the SAs to the auditors opinion cover both forms of
opinion.
Ethical Requirements Relating to an Audit of Financial Statements(Ref: Para. 14)
A14. The auditor is subject to relevant ethical requirements, including those pertaining to independence, relating to
financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by
the Institute of Chartered Accountants of India.
A15. The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor
when conducting an audit of financial statements and provides a conceptual framework for applying those principles;
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
5
SA 800, Special ConsiderationsAudits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, paragraph8.
6
SA 210 (Revised), paragraph 6(b).
7
SA 580 (Revised), Written Representations, paragraphs 10-11.
(d) Confidentiality; and
(e) Professional behavior.
A16. In the case of an audit engagement it is in the public interest and, therefore, requiredby the Code of Ethics, that the
auditor be independent of the entity subject to the audit. The Code describes independence as comprising both
independence of mind and independence in appearance. The auditors independence from the entity safeguards the
auditors ability to form an audit opinion without being affected by influences that might compromise that opinion.
Independence enhances the auditors ability to act with integrity, to be objective and to maintain an attitude of
professional skepticism.
A17. Standard on Quality Control (SQC) 1 sets out the responsibilities of the firm for establishing policies and
procedures designed to provide it with reasonable assurance that the firm and its personnel comply withrelevant ethical
requirements, including those pertaining to independence
8
. Revised SA 220 sets out the engagement partners
responsibilities with respect to relevant ethical requirements. These include evaluating whether members of the
engagement team have complied with relevant ethical requirements, determining the appropriate action if matters come
to the engagement partners attention that indicate that members of the engagement team have not complied with
relevant ethical requirements, andformingaconclusiononcompliancewithindependence requirements that apply to the
audit engagement
9
. Revised SA 220 recognises that the engagement team is entitled to rely on a firms systems in
meeting its responsibilities with respect to quality control procedures applicable to the individual audit engagement,
unless information provided by the firm or other parties suggests otherwise.
Professional Skepticism(Ref: Para. 15)
A18. Professional skepticism includes being alert to, for example:
Audit evidence that contradicts other audit evidence obtained.
Information that brings into question the reliability of documents and responses to inquiries to be used as audit
evidence.
Conditions that may indicate possible fraud.
Circumstances that suggest the need for audit procedures in addition to those required by the SAs.
A19. Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the
risks of:
Overlooking unusual circumstances.
Over generalising when drawing conclusions from audit observations.
Using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and
evaluating the results thereof.
A20. Professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning
contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained
from management and those charged with governance. It also includes consideration of the sufficiency and
8
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.
9
SA 220 (Revised), Quality Control for anAudit of Financial Statements.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
appropriateness of audit evidence obtained in the light of the circumstances, for example in the case where fraud risk
factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material
financial statement amount.
A21. The auditor may accept records and documents as genuine unless the auditor has reason to believe the contrary.
Nevertheless, theauditor is required to consider the reliability of informationtobe used as audit evidence
10
. In cases of
doubt about the reliability of information or indications of possible fraud (for example, if conditions identified during the
audit cause the auditor to believe that a document may not be authentic or that terms in a document may have been
falsified), the SAs require that the auditor investigate further and determine what modifications or additions to audit
procedures are necessary to resolve the matter
11
.
A22. The auditor cannot be expected to disregard past experience of the honesty and integrity of the entitys
management and those charged with governance. Nevertheless, a belief that management and those charged with
governance are honest and have integrity does not relieve the auditor of the need to maintain professional skepticism or
allow the auditor to be satisfied with less-than-persuasive audit evidence when obtaining reasonable assurance.
Professional Judgment(Ref: Para. 16)
A23. Professional judgment is essential to the proper conduct of an audit. This is because interpretation of relevant
ethical requirements and the SAs and the informed decisions required throughout the audit cannot be made without the
application of relevant knowledge and experiencetothefacts andcircumstances. Professional judgment is necessary in
particular regarding decisions about:
Materiality and audit risk.
The nature, timing, and extent of audit procedures used to meet the requirements of the SAs and gather audit
evidence.
Evaluatingwhether sufficient appropriateaudit evidencehasbeenobtained, and whether more needs to be done to
achieve the objectives of the SAs and thereby, the overall objectives of the auditor.
The evaluation of managements judgments in applying the entitys applicable financial reporting framework.
The drawing of conclusions based on the audit evidence obtained, for example, assessing the reasonableness of
the estimates made by management in preparing the financial statements.
A24. The distinguishing feature of the professional judgment expected of an auditor is that it is exercised by an auditor
whose training, knowledge and experience have assisted in developing the necessary competencies to achieve
reasonable judgments.
A25. The exercise of professional judgment in any particular case is based on the facts and circumstances that are
known by the auditor. Consultation on difficult or contentious matters during the course of the audit, both within the
engagement team and between the engagement team and others at the appropriate level within or outside the firm, such
as that required by RevisedSA 220
12
, assist the auditor in making informed and reasonable judgments.
A26. Professional judgment can be evaluated based on whether the judgment reached reflects a competent application
of auditing and accounting principles and is appropriate in the light of, and consistent with, the facts and circumstances
that were known to the auditor up to the dateof the auditors report.
10
SA500 (Revised), Audit Evidence, paragraphs 7-9.
11
SA240(Revised), paragraph13; SA500(Revised), paragraph11; andSA505(Revised), External Confirmations, paragraphs10-11, and 16.
12
See footnote 9.
A27. Professional judgment needs to be exercised throughout the audit. It also needs to be appropriately documented.
Inthis regard, theauditor is requiredtoprepareaudit documentation sufficient to enable an experienced auditor, having
no previous connection with the audit, to understand the significant professional judgments made in reaching
conclusions on significant matters arising during the audit
13
. Professional judgment is not to be used as the justification
for decisions that are not otherwise supported by the facts and circumstances of the engagement or sufficient
appropriate audit evidence.
Sufficient Appropriate Audit Evidence and Audit Risk(Ref: Para. 5 and 17)
Sufficiency and Appropriateness of Audit Evidence
A28. Audit evidence is necessary to support the auditors opinion and report. It is cumulative in nature and is primarily
obtained from audit procedures performed during the course of the audit. It may, however, also include information
obtained from other sources such as previous audits (provided the auditor has determined whether changes have
occurred sincethe previous audit that may affect its relevance to the current audit
14
) or a firms quality control procedures
for client acceptance and continuance. In addition to other sources inside andoutside theentity, the entitys accounting
records areanimportant sourceof audit evidence. Also, information that may be used as audit evidence may have been
prepared by an expert employed or engaged by the entity. Audit evidence comprises both information that supports and
corroborates managements assertions, and any information that contradicts such assertions. Inaddition, insomecases,
the absence of information (for example, managements refusal to provide a requested representation) is used by the
auditor, and therefore, also constitutes audit evidence. Most of the auditors work in forming the auditors opinion
consists of obtaining and evaluating audit evidence.
A29. The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the measure of the quantity of
audit evidence. The quantity of audit evidence needed is affected by the auditors assessment of the risks of
misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of
such audit evidence(the higher the quality, the less may be required). Obtaining more audit evidence, however, may not
compensate for its poor quality.
A30. Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing
support for the conclusions on which the auditors opinion is based. The reliability of evidence is influenced by its source
and by its nature, and is dependent on the individual circumstances under which it is obtained.
A31. Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level,
and thereby enable the auditor to draw reasonable conclusions on which to base the auditors opinion, is a matter of
professional judgment. SA 500 (Revised) and other relevant SAs establish additional requirements and provide further
guidance applicable throughout the audit regarding the auditors considerations in obtaining sufficient appropriate audit
evidence.
Audit Risk
A32. Audit riskis afunctionof therisks of material misstatement anddetectionrisk. The assessment of risks is based on
audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit. The
assessment of risks is a matter of professional judgment, rather than a matter capable of precise measurement.
A33. For purposes of the SAs, audit risk does not include the risk that the auditor might express an opinion that the
13
SA230(Revised), paragraph8.
14
SA315, Identifying andAssessing the Risksof Material Misstatement Through Understandingthe Entity and ItsEnvironment, paragraph 9.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
financial statements are materially misstated when they are not. This risk is ordinarily insignificant. Further, audit risk is a
technical term related to the process of auditing; it does not refer to the auditors business risks such as loss from
litigation, adverse publicity, or other events arising in connection with the audit of financial statements.
Risks of Material Misstatement
A34. The risks of material misstatement may exist at two levels:
The overall financial statement level; and
The assertion level for classes of transactions, account balances, and disclosures.
A35. Risks of material misstatement at the overall financial statement level refer to risks of material misstatement that
relate pervasively to the financial statements as a whole and potentially affect many assertions.
A36. Risks of material misstatement at the assertion level are assessed in order to determine the nature, timing, and
extent of further audit procedures necessary to obtain sufficient appropriate audit evidence. This evidence enables the
auditor to express an opinion on the financial statements at an acceptably low level of audit risk. Auditors use various
approaches to accomplish the objective of assessing the risks of material misstatement. For example, the auditor may
make use of a model that expresses the general relationship of the components of audit risk in mathematical terms to
arrive at an acceptable level of detection risk. Some auditors find such a model to be useful when planning audit
procedures.
A37. The risks of material misstatement at the assertion level consist of two components: inherent risk and control risk.
Inherent riskandcontrol riskaretheentitysrisks; theyexist independently of the audit of the financial statements.
A38. Inherent risk is higher for some assertions and related classes of transactions, account balances, and disclosures
than for others. For example, it may be higher for complex calculations or for accounts consisting of amounts derived
from accounting estimates that are subject to significant estimation uncertainty. External circumstances giving rise to
business risks may also influence inherent risk. For example, technological developments might make a particular
product obsolete, thereby causing inventory to be more susceptible to overstatement. Factors in the entity and its
environment that relate to several or all of the classes of transactions, account balances, or disclosures may also
influence the inherent risk related to a specific assertion. Such factors may include, for example, a lack of sufficient
workingcapital tocontinueoperationsor adecliningindustrycharacterisedbyalarge number of business failures.
A39. Control risk is a function of the effectiveness of the design, implementation and maintenance of internal control by
management to address identified risks that threaten the achievement of the entitys objectives relevant to preparation of
the entitys financial statements. However, internal control, no matter how well designed and operated, can only reduce,
but not eliminate, risks of material misstatement in the financial statements, because of the inherent limitations of internal
control. These include, for example, the possibility of human errors or mistakes, or of controls being circumvented by
collusion or inappropriate management override. Accordingly, some control risk will always exist. The SAs provide the
conditions under which the auditor is required to, or may choose to, test the operating effectiveness of controls in
determining thenature, timing and extent of substantive procedures to be performed
15
.
A40. The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a combined assessment of
the risks of material misstatement. However, the auditor may make separate or combined assessments of inherent and
control risk depending on preferred audit techniques or methodologies and practical considerations. The assessment of
the risksof material misstatement may be expressed in quantitative terms, such as in percentages, or in non-quantitative
15
SA330, TheAuditors Reponses toAssessed Risks, paragraphs7-17.
terms. In any case, the need for the auditor to make appropriate risk assessments is more important than the different
approaches by which they may be made.
A41. SA 315 establishes requirements and provides guidance on identifying and assessing the risks of material
misstatement at the financial statement and assertion levels.
Detection Risk
A42. For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the assessed
risks of material misstatement at the assertion level. For example, the greater the risks of material misstatement the
auditor believes exists, the less the detection risk that can be accepted and, accordingly, the more persuasive the audit
evidence requiredby the auditor.
A43. Detection risk relates to the nature, timing, and extent of the auditors procedures that are determined by the auditor
to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness of an audit procedure and of
its application by the auditor. Matters such as:
adequate planning;
proper assignment of personnel to the engagement team;
the application of professional skepticism; and
supervision and review of the audit work performed,
assist to enhance the effectiveness of an audit procedure and of its application and reduce the possibility that anauditor
might select aninappropriateaudit procedure, misapplyan appropriate audit procedure, or misinterpret the audit results.
A44. SA 300 (Revised)
16
and SA 330 establish requirements and provide guidance on planning an audit of financial
statements and the auditors responses to assessed risks. Detection risk, however, canonly bereduced, not eliminated,
becauseof theinherent limitations of an audit. Accordingly, some detection risk will always exist.
Inherent Limitations of an Audit
A45. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or error. This is because there
are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions
and bases the auditors opinion being persuasive rather than conclusive. Theinherent limitations of an audit arise from:
The nature of financial reporting;
The nature of audit procedures; and
The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
The Nature of Financial Reporting
A46. The preparation of financial statements involves judgment by management in applying the requirements of the
entitys applicable financial reporting framework to the facts and circumstances of the entity. In addition, many financial
statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made. Consequently, some financial statement items are subject to
an inherent level of variability which cannot be eliminated by the application of additional auditing procedures. For
example, this is often the case with respect to certain accounting estimates. Nevertheless, the SAs require the auditor to
16
SA300(Revised), Planning anAudit of Financial Statements.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
give specific consideration to whether accounting estimates are reasonable in the context of the applicable financial
reporting framework and related disclosures, and to the qualitative aspects of the entitys accounting practices, including
indicators of possible bias in managements judgments
17
.
The Nature of AuditProcedures
A47. There are practical and legal limitations on the auditors ability to obtain audit evidence. For example:
There is the possibility that management or others may not provide, intentionally or unintentionally, the complete
information that is relevant to the preparation and presentation of the financial statements or that has been
requested by the auditor. Accordingly, the auditor cannot be certain of the completeness of information, even
though the auditor has performed audit procedures to obtain assurance that all relevant information has been
obtained.
Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit
procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that
involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence
is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of
documents.
An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal
powers, such as the power of search, which may be necessary for such an investigation.
Timeliness of Financial Reporting and the Balance between Benefit and Cost
A48. The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure
for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate planning
assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance
of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the
reliability of information and its cost. This is recognised in certain financial reporting frameworks (see, for example, the
Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered
Accountants of India (ICAI)). Therefore, there is an expectation by users of financial statements that the auditor will form
an opinion on the financial statements within areasonableperiodof timeandat areasonablecost, recognisingthat it is
impracticable to address all information that may exist or to pursue every matter exhaustively on the assumption that
information is in error or fraudulent until proved otherwise.
A49. Consequently, it is necessary for the auditor to:
Plan the audit so that it will be performed in an effective manner;
Direct audit effort to areas most expected to contain risks of material misstatement, whether due to fraud or error,
with correspondingly less effort directed at other areas; and
Use testing and other means of examining populations for misstatements.
A50. In light of the approaches described in paragraph A49, the SAs contain requirements for the planning and
performance of the audit and require the auditor, among other things, to:
Have a basis for the identification and assessment of risks of material misstatement at the financial statement and
17
SA540(Revised), AuditingAccountingEstimates, IncludingFair ValueAccountingEstimates, and Related Disclosures, and SA700 (Revised),
ForminganOpinionandReportingonFinancial Statements, paragraph12.
assertion levels by performing risk assessment procedures and related activities
18
; and
Use testing and other means of examining populations in a manner that provides a reasonable basis for the auditor
to draw conclusions about the population
19
.
Other Matters that Affect the Inherent Limitations of an Audit
A51. In the case of certain assertions or subject matters, the potential effects of the inherent limitations onthe auditors
abilitytodetect material misstatementsareparticularly significant. Such assertions or subject matters include:
Fraud, particularlyfraudinvolvingsenior management or collusion. See SA 240(Revised) for further discussion.
The existence and completeness of related party relationships and transactions. See SA550 (Revised)
20
for further
discussion.
Theoccurrenceof non-compliancewithlawsandregulations. SeeSA250(Revised)
21
for further discussion.
Future events or conditions that may cause an entity to cease to continue as a going concern. See SA 570
(Revised)
22
for further discussion.
Relevant SAs identify specific audit procedures to assist in mitigating the effect of the inherent limitations.
A52. Becauseof theinherent limitationsof anaudit, thereisanunavoidablerisk that some material misstatements of the
financial statements may not be detected, even though the audit is properly planned and performed in accordance with
SAs. Accordingly, the subsequent discovery of a material misstatement of the financial statements resulting from fraud or
error does not by itself indicate a failure to conduct an audit in accordance with SAs. However, the inherent limitations of
an audit are not a justification for the auditor to be satisfied with less-than-persuasive audit evidence. Whether the
auditor has performed an audit in accordance with SAs is determined by the audit procedures performed in the
circumstances, the sufficiency and appropriateness of the audit evidence obtained as a result thereof and the suitability
of the auditors report based on an evaluation of that evidence in light of the overall objectives of the auditor.
Conduct of an Audit in Accordance with SAs
Nature of theSAs (Ref: Para. 18)
A53. The SAs, taken together, provide the standards for the auditors work in fulfilling the overall objectives of the
auditor. The SAs deal with the general responsibilities of the auditor, as well as the auditors further considerations
relevant to the application of those responsibilities to specific topics.
A54. The scope, effective date and any specific limitation of the applicability of a specific SA is made clear in the SA.
Unless otherwise stated in the SA, the auditor is permitted to apply an SA before the effective date specified therein.
A55. In performing an audit, the auditor may be required to comply with legal or regulatory requirements in addition to
the SAs. The SAs do not override laws and regulations that govern an audit of financial statements. In the event that
those laws and regulations differ from the SAs, an audit conducted only in accordance with laws and regulations will not
automatically comply with SAs.
18
SA315, paragraphs 5-10.
19
SA330; SA500(Revised); SA520(Revised), Analytical Procedures, andSA 530 (Revised), Audit Sampling.
20
SA550 (Revised), RelatedParties.
21
SA250(Revised), Considerationof Laws andRegulations in anAudit of Financial Statements.
22
SA570 (Revised), GoingConcern.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
A56. The SAs are also relevant to engagements in case of certain entities, such as, Central/State governments and
related government entities (for example, agencies, boards, commissions).Theauditors responsibilities of those entities,
however, may be affected by the audit mandate, or by obligations on those entities arising from legislation, regulation,
ministerial directives, government policy requirements, or resolutions of the legislature, which may encompass a broader
scope than an audit of financial statements in accordance with the SAs. These additional responsibilities are not dealt
withintheSAs. They maybedealt withintherelevant laws and regulations in which the entities are operating.
Contents of theSAs (Ref: Para. 19)
A57. In addition to objectives and requirements (requirements are expressed in the SAs using shall), an SA contains
related guidance in the form of application and other explanatory material. It may also contain introductory material that
provides context relevant to a proper understanding of the SA, and definitions. The entire text of an SA, therefore, is
relevant toanunderstandingof theobjectivesstatedinanSAandtheproper applicationof the requirements of an SA.
A58. Where necessary, the application and other explanatory material provides further explanation of the requirements
of an SA and guidance for carrying them out. In particular, it may:
Explain more precisely what a requirement means or is intended to cover.
Include examples of procedures that may be appropriate in the circumstances.
While such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements
of an SA. The application and other explanatory material may also provide background information on matters
addressed in an SA.
A59. Appendices form part of the application and other explanatory material. The purpose and intended use of an
appendix are explained in the body of the related SA or within the title and introduction of the appendix itself.
A60. Introductory material may include, as needed, such matters as explanation of:
The purpose and scope of the SA, including how the SA relates to other SAs.
The subject matter of the SA.
The respective responsibilities of the auditor and others in relation to thesubject matter of the SA.
The context in which the SA is set.
A61. An SA may include, in a separate section under the heading Definitions, a description of the meanings attributed
to certain terms for purposes of the SAs. These are provided to assist in the consistent application and interpretation of
the SAs, and are not intended to override definitions that may be established for other purposes, whether in law,
regulation or otherwise. Unless otherwise indicated, those terms will carry the same meanings throughout the SAs. The
Glossary of Terms relating to Engagement and Quality Control Standards issued by the Auditing and Assurance
Standards Board contains a complete listing of terms defined in the SAs. It also includes descriptions of other terms
found in SAsto assist in common and consistent interpretation.
A62. When appropriate, additional considerations specific to audits of smaller entities and to certain entities, such as,
Central/State governments and related government entities (for example, agencies, boards, commissions), are included
within the application and other explanatory material of an SA. These additional considerations assist in the application
of the requirements of the SA in the audit of such entities. They do not, however, limit or reduce the responsibility of the
auditor to apply and comply with the requirements of the SAs.
Considerations Specific to Smaller Entities
A63. For purposes of specifying additional considerations to audits of smaller entities, a smaller entity refers to an
entity which typically possesses qualitative characteristics such as:
(a) Concentration of ownership and management in a small number of individuals (often a single individual either a
natural person or another enterprise that owns the entity provided the owner exhibits the relevant qualitative
characteristics); and
(b) One or more of the following:
(i) Straightforward or uncomplicated transactions;
(ii) Simple record-keeping;
(iii) Few lines of business and few products within business lines;
(iv) Few internal controls;
(v) Few levels of management with responsibility for a broad range of controls; or
(vi) Few personnel, many having a wide range of duties.
These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and smaller entities do not
necessarily display all of these characteristics.
A64. The considerations specific to smaller entities included in the SAs have been developed primarily with unlisted
entities in mind. Some of the considerations, however, may be helpful in audits of smaller listed entities.
A65. The SAs refer to the proprietor of a smaller entity who is involved in running the entity on a day-to-day basis as the
owner-manager.
Objectives Stated in Individual SAs (Ref: Para. 21)
A66. Each SA contains one or more objectives which provide a link between the requirements and the overall objectives
of the auditor. The objectives in individual SAs serve to focus the auditor on the desired outcome of the SA, while being
specific enough to assist the auditor in:
Understanding what needs to be accomplished and, where necessary, the appropriate means of doing so; and
Decidingwhether moreneedstobedonetoachievethemintheparticular circumstances of the audit.
A67. Objectives are to be understood in the context of the overall objectives of the auditor stated in paragraph 11 of this
SA. As with the overall objectives of the auditor, the ability to achieve an individual objective is equally subject to the
inherent limitations of an audit.
A68. In using the objectives, the auditor is required to have regard to the interrelationships among the SAs. This is
because, as indicated in paragraph A53, the SAs deal in some cases with general responsibilities and in others with the
application of those responsibilities to specific topics. For example, this SArequires the auditor to adopt an attitude of
professional skepticism; this is necessary in all aspects of planning and performing an audit but is not repeated as a
requirement of each SA. At a more detailed level, SA 315 and SA 330 contain, among other things, objectives and
requirements that deal with the auditors responsibilities to identify and assess the risks of material misstatement and to
design and perform further audit procedures to respond to those assessed risks, respectively; these objectives and
Overall Objectives of the Independent Auditor and the Conduct of an Audit
requirements apply throughout the audit. An SA dealing with specific aspects of the audit (for example, SA 540
(Revised)) may expand on how the objectives and requirements of such SAs as SA 315 and SA 330are to be applied in
relation to the subject of the SA but does not repeat them. Thus, in achieving the objective stated in SA 540 (Revised),
the auditor has regard to the objectives and requirements of other relevant SAs.
Use of Objectives to Determine Need for Additional Audit Procedures(Ref: Para. 21(a))
A69. The requirements of the SAs are designed to enable the auditor to achieve the objectives specifiedintheSAs, and
thereby the overall objectives of the auditor. The proper application of the requirements of the SAs by the auditor is
therefore expected to provide a sufficient basis for the auditors achievement of the objectives. However, because the
circumstances of audit engagements vary widely and all such circumstances cannot be anticipated in the SAs, the
auditor is responsible for determining the audit procedures necessary to fulfill the requirements of the SAs and to
achieve the objectives. In the circumstances of an engagement, there may be particular matters that require the auditor
to perform audit procedures in addition to those required by the SAs to meet the objectives specified in the SAs.
Use of Objectives to Evaluate Whether Sufficient Appropriate Audit EvidenceHasBeen Obtained(Ref: Para. 21(b))
A70. The auditor is required to use the objectives to evaluate whether sufficient appropriate audit evidence has been
obtained in the context of the overall objectives of the auditor. If as a result the auditor concludes that the audit evidence
is not sufficient and appropriate, then the auditor may follow one or more of the following approaches to meeting the
requirement of paragraph 21(b):
Evaluate whether further relevant audit evidence has been, or will be, obtained as a result of complying with other
SAs;
Extend the work performed in applying one or more requirements; or
Perform other procedures judged by the auditor to be necessary in the circumstances. Where none of the above is
expected to be practical or possible in the circumstances, theauditor will not be able to obtain sufficient appropriate
audit evidence and is required by theSAs to determine the effect on the auditors report or on the auditors ability to
complete the engagement.
Complying with Relevant Requirements
Relevant Requirements(Ref: Para. 22)
A71. In some cases, an SA (and therefore all of its requirements) may not be relevant in the circumstances. For
example, if an entity does not have an internal audit function, nothing in SA 610 (Revised)
23
is not relevant.
A72. Within a relevant SA, there may be conditional requirements. Such a requirement is relevant when the
circumstances envisioned in the requirement apply and the condition exists. In general, the conditionality of a
requirement will either be explicit or implicit, for example:
The requirement to modify the auditors opinion if there is a limitation of scope
24
represents an explicit conditional
requirement.
The requirement to communicate significant deficiencies in internal control identified during the audit to those
23
SA610(Revised), Using theWork of Internal Auditors.
24
SA705, ModificationstotheOpinionintheIndependentAuditorsReport, paragraph13.
charged with governance
25
, which depends on the existence of such identified significant deficiencies; and the
requirement to obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment
information in accordance with the applicable financial reporting framework
26
, which depends on that framework
requiring or permitting such disclosure, represent implicit conditional requirements.
Departure froma Requirement(Ref: Para. 23)
A73. SA 230 (Revised) establishes documentation requirements in those exceptional circumstances where the auditor
departs from a relevant requirement
27
. The SAs do not call for compliance with a requirement that is not relevant in the
circumstances of the audit.
Failure to Achieve an Objective(Ref: Para. 24)
A74. Whether an objective has been achieved is a matter for the auditors professional judgment. That judgment takes
account of the results of audit procedures performed in complying with the requirements of the SAs, and the auditors
evaluation of whether sufficient appropriate audit evidencehasbeenobtainedandwhether moreneedstobedoneinthe
particular circumstances of the audit to achieve the objectives stated in the SAs. Accordingly, circumstances that may
give rise to a failure to achieve an objective include those that:
Prevent the auditor from complying with the relevant requirements of an SA.
Result in its not being practicable or possible for the auditor tocarry out the additional audit procedures or obtain
further audit evidence as determined necessary from the useof the objectives in accordance with paragraph 21, for
example due to a limitation in the available audit evidence.
A75. Audit documentation that meets the requirements of SA 230 (Revised) and the specific documentation
requirements of other relevant SAs provides evidence of the auditors basis for a conclusion about the achievement of
the overall objectives of the auditor. While it is unnecessary for the auditor to document separately (as in a checklist, for
example) that individual objectives have been achieved, the documentation of a failure to achieve an objective assists
the auditors evaluation of whether such a failure has prevented the auditor from achieving the overall objectives of the
auditor.
Modificationsvis--vis ISA200, Overall Objectivesofthe IndependentAuditorandthe
ConductofanAuditinAccordancewithInternational Standards on Auditing
Deletion
Paragraph A11 of ISA 200 deals with the additional responsibilities for the execution of transactions and events in
accordance with legislation or proper authority in case of public sector entities. Further, paragraph A57 of ISA 200 (A56
of Revised SA 200) deals with the auditors additional responsibility arising out of the mandatory or obligatory laws or
regulations applicable to that public sector entity. These additional responsibilities are not dealt by the SAs but dealt by
the laws or regulations under which the public sector entity operates. Also, paragraph A63 of ISA 200 (A62 of Revised
SA 200) deals with the inclusion of the paragraph specific to public sector entities in the application and explanatory
25
SA265, Communicating DeficienciesinInternal Control to Those Charged with Governance and Management, paragraph9.
26
SA501(Revised), Audit EvidenceSpecificConsiderations for Selected Items.
27
SA230(Revised), paragraph12.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
material section. Since as mentioned in the Preface to the Standards on Quality Control, Auditing, Review, Other
Assurance and Related Services, the Standards issued by the Auditing and Assurance Standards Board, apply equally
to all entities, irrespective of their form, nature and size, a specific reference to applicability of the Standard to public
sector entities has been deleted.
Further, it is also possible that such a specific situation may exist in case of Central/State governments or related
government entities, pursuant to a requirement under the statute or regulation under which they operate. Accordingly,
the spirit of paragraphsA11, A57 and A63 in ISA, highlightingsuch fact, has been retained.
Limited Revisions Consequential to issuance of theStandard on Auditing (SA) 200
(Revised), Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing
The amendments to the following have been shown in track change mode.
Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and
RelatedServices (Preface)
Standards issued by AASB Under theAuthority of the Council of ICAI
3. The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council
are collectively known as the Engagement Standards:

(c) Standards on Assurance Engagements (SAEs), to be applied in assurance engagements dealing with subject
matters other thanaudits or reviews of historical financial information.
Standards onAuditing
5. The Standards on Auditing (SAs) referred to in Paragraph 3(a) above are formulated in the context of an audit of
financial statements by an independent auditor. They are to be adapted as necessary in the circumstances when applied
to audits of other historical financial information. The authority of SAs is set out in SA 200 (Revised)
28
.
6. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. It is
undertaken to enhance the degree of confidence of intended users in the financial statements. The Standards on
Auditing, taken together, provide the standards for the auditors work in fulfilling this objective.
7. In conducting an audit, the overall objective of the auditor is to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the
financial statements in accordance with the auditors findings. However, owing to the inherent limitations of an audit,
there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even
though the audit is properly planned and performed in accordance with the SAs. In all cases, when this overall objective
has not been or cannot be achieved, the SAs require the auditor to modify the auditors opinion accordingly or withdraw
from the engagement as may be appropriate, depending upon the facts andcircumstances of each case.
8. The auditor applies each Standard on Auditing (SA) relevant to the audit. An SA is relevant when the SA is in effect
and the circumstances addressed by the SA exist.
9. The SAs deal with the general responsibilities of the auditor, as well as the auditors further considerations relevant
to the application of those responsibilities to specific areas. An SA contains objectives and requirements together with
related guidance in the form of application and other explanatory material. It may also contain introductory material that
provides context to a proper understanding of the SAs, and definitions. It is, therefore, necessary to consider the entire
text of an SA to understand and apply its requirements.
28
SA200 (Revised), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
Objectives
10. Each SAcontains an objective or objectives, which provide the context in which the requirements of the Standards
on Auditing are set. Any limitation of the applicability of a specific Standard is made clear in the Standard itself. An
individual Standard should be read in the context of the objective stated in the Standard as well as this Preface. The
auditor aims to achieve these objectives, having regard to the interrelationships amongst the SAs. For this purpose, the
auditor uses the objectives to judge whether, having complied with the requirements of the SAs, sufficient appropriate
audit evidence has been obtained in the context of the overall objective of the auditor. Where an individual objective has
not been or cannot be achieved, the auditor considers whether this prevents the auditor from achieving his overall
objective.
Requirements
29
11. The requirements of each SA are contained in a separate section and expressed using the word shall. The
auditor applies the requirements in the context of the other material included in the Standard.
12. The auditor complies with the requirements of an SA in all cases where they are relevant in the circumstances of
the audit. In exceptional circumstances, however, the auditor may judge it necessary to depart from a relevant
requirement by performing alternate audit procedures to achieve the aim of that requirement. The need for the auditor to
depart from a relevant requirement is expected to arise only where the requirement is for a specific procedure to be
performed and, in the specific circumstances of the audit, that procedure would be ineffective.
13. When a situation envisaged in paragraph 12 above arises, the auditor is required to document how alternative
procedures performed achieve the aim of the requirement, and, the reasons for the departure. Further, his report also
should draw attention to such departures. However, a mere disclosure in his report does not absolve an auditor from
complying with the applicable Standard(s).
14. A requirement is not relevant only in the cases where the SA is not relevant, or the circumstances envisioned do
not apply because the requirement is conditional and the condition does not exist. The auditor is not required to comply
with a requirement that is not relevant in the circumstances of the audit and this does not constitute a departure from the
requirement. However, the auditor should document the steps undertaken by him to satisfy himself that the process
adopted in the circumstances of the audit assisted him in achieving his overall objective.
Application and Other Explanatory Material
15. The application and other explanatory material contained in an SA is an integral part of the SA as it provides further
explanation of, and guidance for carrying out, the requirements of an SA, along with the background information on the
matters addressed in the SA. It may include examples of procedures, some of which the auditor may judge to be
appropriate in the circumstances. Such guidance is, however, not intended to impose a requirement.
16. Appendices, which form part of the application and other explanatory material, are an integral part of an SA. The
purpose and intended use of an appendix are explained in the body of the related Standard or within the title and
introduction of the appendix itself.
Introductory Material and Definitions
17. Introductory material may include, as needed, such matters as explanation of the purpose and scope of the
29
The International Auditing and Assurance Standards Board, pursuant to its Clarity Project, has adopted a newformat for presentation of the International Standards on Auditing (ISAs)
issued by it. As per the new format, an ISA is divided into two sections, one, the requirements section and second, the application and other explanatory material section. Accordingly, the
practice of presenting the standard portion (i.e., the principles enunciated) in boldlettering and the application/ explanatory guidance in plain lettering has been done away with. The entire
text of the Standard, whether the requirements section or the application and other explanatory material section are presented in plain lettering.
In so far as the Auditing and Assurance Standards (AASs) issued by the Institute are concerned, in the AASs issued prior to December 1997, the entire text of the Standard is presented in
the plain lettering, whereas in case of the AASs issued subsequent to that date, the standard portion/ principles enunciated are given in boldlettering whereas the explanatory/ application
guidance is given in plain lettering. The presentation of the Standards on Auditing, issued subsequent to the date this Preface comes into effect, would be in line with that adopted by the
IAASB for its ISAs pursuant to the Clarity Project. In the due course, the existing Standards would also be brought in line with the abovementioned convention.
Standard, including how the SA relates to other SAs, the subject matter of the SA, specific expectations from the auditor
and others, and the context in which the SA is set.
18. A Standard on Auditing may include, in a separate section under the heading Definitions, a description of the
meanings attributed to certain terms for purposes of the SAs. These are provided to assist in the consistent application
and interpretation of the SAs, and are not intended to override definitions that may be established for other purposes,
whether in law, regulation or otherwise. Unless otherwise indicated, those terms will carry the same meanings
throughout the SAs.
Standards on Quality Control
19 6. SQCs are written to apply to firms
30
in respect of all their services falling under the Engagement Standards issued
by the AASB of ICAI. The authority of SQCs is set out in the introduction to the SQCs.
SA230(Revised), AuditDocumentation
Nature and Purposes of Audit Documentation
2. Audit documentationthat meetstherequirementsof thisSAandthespecificdocumentationrequirements of
other relevant SAsprovides:
(a) Evidenceof theauditorsbasisfor aconclusionabout theachievement of theoverall objectivesof the
auditor
1
; and
(b) Evidencethat theaudit wasplannedandperformedinaccordancewithSAsand applicable legal and
regulatory requirements
DocumentationofSignificantMattersandRelatedSignificantProfessional J udgments(Ref: Para. 8(c))
A11. The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary
(sometimes knownas acompletionmemorandum) that describes thesignificant matters identifiedduringthe
audit and how they were addressed, or that includes cross-references to other relevant supporting audit
documentationthat provides suchinformation. Suchasummary may facilitateeffectiveandefficient reviews
and inspections of the audit documentation, particularly for large and complex audits. Further, the
preparation of such a summary may assist the auditors consideration of the significant matters. It may also
help the auditor to consider whether, in light of the audit procedures performed and conclusions
reached, there is any individual relevant SA objective that the auditor cannot achieve has not met or is
unable to meet that would prevent the auditor fromachieving the overall objectives of the auditors overall
objective
Departure fromaRelevant Requirement(Ref: Para. 12)
A18. The objectives and requirements of the in SAs are designed to enable the auditor to achieve the objectives
specified in the SAs, and thereby support the achievement of the overall objectives of the auditor.
7
Accordingly, other
30
The term firm refers to a sole practitioner/proprietor, partnership, or any such entity of professional accountants, as may be permitted by law.
1
SA 200 (Revised), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing,
paragraph 11.
7
Refer paragraph 23-24 of ISA 200 (Revised and Redrafted). SA 200 (AAS 1), Basic Principles Governing an Audit and SA 200A (AAS 2),
Objective and Scope of the Audit of Financial Statements. The Standards are being revised in the light of the corresponding International
Standard.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
than in exceptional circumstances, the SAs call for compliance with each requirement that is relevant in the
circumstances of the audit.
A19. Thedocumentationrequirement applies only torequirements that arerelevant inthe circumstances. A requirement
is not relevant
8
only in the cases where:
(a) The entire SA is not relevant [for example, if an entity does not have an internal audit function in a continuing
engagement, nothinginProposed SA610510 (Revised)
9
is relevant]; or
(b) The circumstances envisioned do not apply because tThe requirement is conditional and the condition does not
exist (for example, the requirement to modify the auditors opinion where there is an inability to obtain sufficient
appropriate audit evidence, and there is nosuch inability).
SA 240 (Revised), The Auditors Responsibilities Relating to Fraud in an Audit of
Financial Statements
Responsibilities of the Auditor
5. 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. As
described in SA 200 (Revised), Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
3
, owing to the inherent limitations of an audit, there is an unavoidable risk that
some material misstatements of the financial statements may will not be detected, even though the audit is properly
planned and performed in accordance with the SAs.
6. As described in SA 200 (Revised)
4
, the potential effects of inherent limitations are particularly significant in the case
of misstatement resulting from fraud. The risk of not detecting a material misstatement resulting from fraud is higher than
the risk of not detecting one resulting from error. This is because fraud may involve sophisticated and carefully organized
schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional
misrepresentations being made to the auditor. Such attempts at concealment may be even more difficult to detect when
accompanied by collusion. Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in
fact, false. The auditors 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. While the auditor may be able to identify potential
opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in judgment
areas such as accounting estimates are caused by fraud or error.
7. Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is
greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate
accounting records, present fraudulent financial information or override control procedures designed to prevent similar
frauds by other employees.
8. When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of professional
skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact
that audit procedures that are effective for detecting error may not be effective in detecting fraud. The requirements in
8
Refer paragraph 22- 23 of ISA 200 (Revisedand Redrafted).
9
The Exposure Draft of SA 510 610 (Revised), Initial Audit EngagementsOpening Balances Using the Work of Internal Auditors, has been
published in theOctober, 2008 August, 2009 issue of the Journal.
3
Published in the March, 2010 issue of the Journal.
4
SA 200 (Revised), paragraph A51.
this SA are designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and
in designing procedures to detect such misstatement. .
Professional Skepticism
12. In accordance with SA 200 (Revised)
5
, the auditor shall maintain an attitude of professional skepticism throughout
the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditors
past experience of the honesty and integrity of the entitys management and those charged with governance. (Ref: Para.
A7- A8)
A7. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.
Maintaining an attitude of professional skepticism requires an ongoing questioning of whether the information and audit
evidence obtained suggests that a material misstatement due to fraud may exist. It includes considering the reliability of
the information to be used as audit evidence and the controls over its preparation and maintenance where relevant. Due
to the characteristics of fraud, the auditors attitude of professional skepticism is particularly important when considering
the risks of material misstatement due to fraud.
A8. Although the auditor cannot be expected to disregard past experience of the honesty and integrity of the entitys
management and those charged with governance, the auditors attitude of professional skepticism is particularly
important in considering the risks of material misstatement due to fraud because there may have been changes in
circumstances. ..
SA260(Revised), CommunicationwithThoseChargedwith Governance
Definitions
6. For purposes of the SAs, the following terms have the meanings attributed below:
(a) Those charged with governance The person(s) or organisation(s) (e.g., a corporate trustee) with responsibility
for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This
includes overseeing the financial reporting process. For some entities those charged with governance may include
management personnel, for example, executive members of a governance board of a private or public sector
undertakings or an owner-manager. In some cases, those charged with governance are responsible for approving
3
the entitys financial statements (in other cases management has this responsibility). For discussion of the diversity
of governance structures, see paragraphs A5-A12.
(b) Management The person(s) with executive responsibility for the conduct of the entitys operations. For some
entities, management includes some or all of those charged with governance, for example, executive members of a
governance board, or an owner-manager. Management is responsible for the preparation of the financial
statements, overseen by those charged with governance, and in some cases management is also responsible for
approving
4
the entitys financial statements (in other cases those charged with governance havethis responsibility).
Those Charged with Governance(Ref: Para. 7)
5
SA 200 (Revised), paragraph15.
3
As described at paragraph [A43] of [proposed] SA 700, (hitherto known as AAS 28) The Independent Auditors Report on General Purpose
Financial Statements. The Standard is being revised in the light of the corresponding International Standard.
4
See footnote 3.
Overall Objectives of the Independent Auditor and the Conduct of an Audit
A5. Governance structures may vary reflecting different size and ownership characteristics. For example:
|+ In most of the entities, those charged with governance hold positions that are an integral part of the entitys legal
structure, for example, company directors. In others, for example, some government undertakings a body that is
not part of the entity is charged with governance.
|+ In some cases, some or all of those charged with governance are involved in managing the entity. In others, those
charged with governance and management comprise different persons.
+ In some cases, those charged with governance are responsible for approving
5
the entitys financial statements (in
other cases management has this responsibility). ..
All Final SAs
Phrases
attitude of professional skepticism
SA 250 (Revised), paragraph 8.
SA 540 (Revised), paragraph A40.
SA 550 (Revised), paragraph A9.
affected by the inherent limitations of inherent tointernal control
SA 315, paragraph A42.
5
As described at paragraph A39 of SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, having responsibility for
approving in this context means having the authority to conclude that all thestatements that comprise the financial statements, including the related
notes, have been prepared.