Audit Short Notes - Chapter 7

Chapter 7 - Completion And Review

●​ obtain SAAE
●​ about the appropriateness of management's use of the going
concern assumption.
SA 570 - Going Concern
SA 570 requires the auditor to evaluate and report on whether He shall consider
management’s use of the going concern basis of accounting is ●​ whether there is a material uncertainty related to events and
appropriate and whether any material uncertainty exists that may conditions
cast significant doubt on the entity’s ability to continue as a going ●​ that may cast significant doubt
concern. ●​ about the entity's ability to continue as a going concern.

Basics of Going Concern

Report in accordance with this SA
●​ Going concern is a fundamental accounting assumption
○​ Entity is normally viewed as continuing in operation for No Assurance of Future Viability (SA 200)
the foreseeable future As per SA 200 The absence of any reference to going concern
○​ It is assumed that the enterprise has neither the intention uncertainty in an auditor's report cannot be viewed as a guarantee as
or necessity of liquidation or curtailing operation to the entity's ability to continue as a going concern.
○​ It is Used unless management intends to liquidate or cease
operations, or has no realistic alternative Risk assessment procedures and related activities

●​ Impact on assets and liabilities Consider events and conditions

○​ Assets and liabilities recorded assuming entity will realize When performing risk assessment procedures as required by SA 315,
assets and discharge liabilities in the normal course of the auditor shall consider whether events or conditions exist that
business may cast significant doubt on the entity's ability to continue as a
●​ Liquidation basis going concern
○​ When an entity is not viewed as a going concern, FS
prepared on liquidation basis The auditor shall determine whether management has already
○​ Inventories may be written down, assets recorded at likely performed a preliminary assessment of the entity's ability to
prices they will fetch continue as a going concern.
●​ If done - discuss it and check if doubt exists and what plans
Responsibility for assessment of the entity’s ability to continue as a management has.
going concern
●​ If not - discuss the basis for using going concern and inquire
Management is required to assess the entity’s ability to continue as about any such events or conditions.
a going concern even if the financial reporting framework does not
include an explicit requirement to do so. Management’s assessment Auditors must stay alert during the audit for evidence of such events
of the entity’s ability to continue as a going concern involves making
or conditions.
a judgment, at a particular point in time, about future outcomes of
events or conditions. Factors relevant for judgment about future
Evaluating Management’s Assessment
outcomes of events or conditions are: ●​ Auditor shall evaluate management's assessment of going
●​ Degree of Uncertainty increases as the timing of the event or concern.
outcome is further in the future. ●​ It is not the auditor's responsibility to fix lack of analysis by
●​ The size and complexity of the entity, the nature and condition management.
of its business and the degree to which it is affected by external ●​ Lack of detailed analysis may still allow auditor to conclude if
factors. going concern basis is appropriate.
●​ Information available at the time at which the judgment is made. ●​ Example: If there is a history of profits and easy access to
funds, detailed analysis may not be needed.
●​
●​ In other cases, auditor evaluates management's process,
A startup forecasting cash flows for 6 months is more reliable than

forecasting for 3 years due to higher future uncertainty.

●​ A large multinational in a volatile industry like oil & gas faces more
assumptions, and feasibility of plans.
uncertainty than a small local grocery store. ●​ Auditor shall evaluate for the same period as management or
●​ Management may judge the company stable based on current orders,
longer if required by law.
●​ If assessment covers less than 12 months from FS date, auditor
but a sudden government ban later may change the actual outcome.

shall ask to extend it to at least 12 months.

Responsibilities of the auditor (These are also objectives of auditor)

The auditor's responsibility is to

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Additional audit procedures when events or conditions are identified

When events or conditions have been identified that may cast

significant doubt on the entity's ability to continue as a going
concern, the auditor shall perform procedures as follows:
●​ If management hasn't assessed going concern, auditor shall
request it.
●​ Evaluating management's plans for future actions in relation to
its going concern assessment
●​ When the entity has prepared a cash flow forecast, then consider
○​ its reliability and
○​ also the underlying assumptions.
●​ Consider new facts or information after management's
assessment.
●​ Requesting written representations from management or
TCWG, regarding their plans for future action and the
feasibility of these plans.
​
Material Uncertainty

A material uncertainty exists when the

●​ magnitude of its potential impact and
●​ likelihood of occurrence
●​ is such that,
●​ in the auditor’s judgment,
●​ appropriate disclosure of the nature and implications of the
uncertainty is necessary as per the AFRF.

When the impact is big and the chance of happening is high Example:

If a company is facing a major lawsuit that could lead to huge losses and has a high

chance of losing, this creates material uncertainty and must be disclosed in the

financial statements.

Adequacy of Disclosures When Events or Conditions Have Been

Identified but No Material Uncertainty Exists

The auditor shall evaluate whether, in view of the requirements of

the applicable financial reporting framework, the FSs provide
adequate disclosures about these events or conditions.

Management Unwilling to Make or Extend Its Assessment

If management is unwilling to make or extend its assessment when

requested to do so by the auditor, the auditor shall consider the
implications for the auditor’s report. A qualified opinion or a

disclaimer of opinion may be appropriate, because the auditor is

unable to obtain SAAE regarding management's use of the GC basis
of accounting in the preparation of the F.S.

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Examples of audit procedures when events or conditions have been Operating events or conditions

identified that may cast significant doubt on the entity’s ability to ●​ Shortages of important supplies
continue as going concern ●​ M anagement intentions to liquidate the entity or to cease
●​ Analysing and discussing cash flow, profit and other relevant operations
forecasts with management ●​ Emergence of a highly successful competitor

●​ Analysing and discussing the entity’s latest available interim ●​ Loss of key management without replacement

●​ Loss of a major market, key customer(s), franchise, license, or

FSs

●​ Reading the terms of debentures and loan agreements and principal supplier(s)
determining whether any have been breached ●​ Labour difficulties

●​ Reading minutes of the meetings of shareholders, TCWG and

relevant committees for reference to financing difficulties Other events or conditions

●​ Inquiring of the entity’s legal counsel regarding the existence ●​ Uninsured or underinsured catastrophes when they occur
of litigation and claims and the reasonableness of ●​ Pending legal or regulatory proceedings against the entity that
management’s assessments of their outcome and the estimate may, if successful, result in claims that the entity is unlikely to
of their financial implications be able to satisfy
●​ Confirming the existence, legality and enforceability of ●​ Statutory or regulatory requirements

arrangements to provide or maintain financial support with ○​ Non-compliance with capital or other statutory or
related and third parties and assessing the financial ability of regulatory requirements, such as solvency or liquidity
such parties to provide additional funds requirements for financial institutions
●​ Evaluating the entity’s plans to deal with unfilled customer ●​ Changes in law or regulation or government policy expected to
orders adversely affect the entity.
●​ Performing audit procedures regarding subsequent events to
identify those that either mitigate or otherwise affect the
entity’s ability to continue as a going concern
●​ Confirming the existence, terms and adequacy of borrowing
facilities

●​ Obtaining and reviewing reports of regulatory actions

●​ Determining the adequacy of support for any planned disposals
of assets

Examples of events or conditions that may cast significant doubt on

the entity’s ability to continue as a going concern

Financial events or conditions

●​ Net liability or net current liability position

●​ Adverse key financial ratios
●​ Negative operating cash flows indicated by historical or
prospective FSs
●​ Fixed-term borrowings approaching maturity without realistic
prospects of renewal or repayment; or excessive reliance on
short-term borrowings to finance long-term assets
●​ Inability to comply with the terms of loan agreements
●​ Inability to obtain financing for essential new product
development or other essential investments
●​ Indications of withdrawal of financial support by creditors
●​ Inability to pay creditors on due dates
●​ Change from credit to cash-on-delivery transactions with
suppliers.
●​ Arrears or discontinuance of dividends.
●​ Substantial operating losses or significant deterioration in the
value of assets used to generate cash flows.

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SA 450 - Evaluation of misstatements identified

●​ Timely communication of misstatements to the appropriate
level of management is important as it enables management to
during the audit
evaluate whether the items are misstatements, inform the
Objective
auditor if it disagrees and take action as necessary.
The objective of the auditor is to evaluate:
●​ The auditor shall request management to correct those
●​ The effect of identified misstatements on the audit; and
misstatements.
●​ The effect of uncorrected misstatements, if any, on the FSs.
●​ If, at the auditor’s request, management has examined a class
of transactions, account balance or disclosure and corrected
Definitions
misstatements that were detected, the auditor shall perform
Misstatement

A difference between the amounts, classification, presentation, or additional audit procedures to determine whether misstatements
remain.
disclosure of a reported financial statement item and the amount,
classification, presentation, or disclosure that is required for the ●​ The correction by management of all misstatements, including
item to be in accordance with the applicable financial reporting those communicated by the auditor, helps maintain accurate
framework. Misstatements can arise from error or fraud. records and reduces future misstatement risk from prior period
uncorrected items.
An entity has wrongly capitalized machinery repair expenses ●​ If management refuses
amounting to Rs.5 lacs resulting in overstatement of profits. It is an ○​ Understand reasons for refusal.
example of misstatement. ○​ shall take that understanding into account when evaluating
whether the FS as a whole are free from material
Uncorrected misstatements misstatement.
Misstatements that the auditor has accumulated during the audit and
that have not been corrected. Evaluating the Effect of Uncorrected Misstatements

●​ Reassess materiality (SA 320) based on final results.

Requirements
●​ Determine if uncorrected misstatements are material
Accumulation of Identified Misstatements
○​ Individually or in aggregate
The auditor shall accumulate misstatements identified during the ○​ Consider size, nature, circumstances, prior period effects.
audit, other than those that are clearly trivial.
In FY 20XX–YY, Alpha Ltd. had a ₹ 50,000 uncorrected misstatement (minor

repair wrongly capitalized).In FY 20YY–ZZ, a similar ₹

1.2 lakh error was
Consideration of Identified Misstatements as the Audit Progresses
found and left uncorrected. Auditors must now evaluate ₹ ₹
1.7 lakh ( 1.2L +
The auditor shall revise the overall audit strategy and audit plan if :
₹ 50k) If the combined amount is material, it may affect audit opinion .
●​ Nature and circumstances of identified misstatements indicate
other possible misstatements that may be material when Communication with TCWG

aggregated.; or The auditor shall communicate with TCWG

●​ Aggregate misstatements during audit approach materiality as ●​ All uncorrected misstatements (individually, if material)
per SA 320. ●​ Their effect on opinion.
●​ Impact of prior period’s uncorrected items.
Nature and circumstances suggest other possible misstatements
●​ The auditor shall request that uncorrected misstatements be
●​ If the kind of error found may exist elsewhere, more errors might be
corrected.
present

●​ ₹
₹
Example:Auditor finds 5 lakhs of repair expense wrongly capitalized

in one [Link] suggests other similar capitalizations may also

●​ Auditor tells Audit Committee about 1.2 lakh wrongly capitalized

expense not corrected by management.

₹
be [Link] expands testing in fixed assets.
●​ Auditor says if 1.2 lakh remains uncorrected, qualified opinion may

be needed.

₹ ₹ ₹
Aggregate misstatements approach materiality (SA 320)

●​ Even if each misstatement is small, their total value may become

●​ 50,000 from last year + 1.2 lakh this year = 1.7 lakh total impact

must be considered.
material.

●​ ₹ ₹ ₹ ​ ●​ Auditor requests Audit Committee to instruct CFO to pass journal

₹
Example:Auditor finds multiple small errors ( 1L, 2L, 1.5L).

Total = ₹ 4.5L. If materiality is ₹ →

5L Close enough to revise plan
entry for 1.2 lakh correction.

and perform more checks.

Written Representation

Communication and Correction of Misstatements

Request written confirmation from management/TCWG
●​ Communicate all accumulated misstatements on a timely basis. ●​ That they believe effect of uncorrected misstatements are
immaterial

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●​ Attach list/summary of such misstatements.

Documentation

The audit documentation shall include

●​ The amount below which misstatements would be regarded as
clearly trivial;

●​ All misstatements accumulated during the audit and whether

they have been corrected; and
●​ The auditor’s conclusion as to whether uncorrected
misstatements are material, individually or in aggregate, and

the basis for that conclusion.

Mr. D an auditor, while auditing ACE Ltd., identified certain misstatements in

relation to particular class of transactions and account balances. He had

communicated same to those charged with governance and also taken

written representation for the same. State the audit documentation

required by the auditor regarding misstatements identified during the audit.

(SA, May 2024, 3 Marks)

Up and High Private Limited has started its export business during the year

2023-24. The company was catering to the domestic market only in past

years. CA H, statutory auditor of the company, is of the view that the

company has understated its revenue by ₹ 50.00 lacs in the year 2023-24

by not complying with requirements of AS 9 relating to revenue

recognition.

Discuss responsibilities of statutory auditor to communicate with

management in the above situation in accordance with SA 450. Also explain

the usefulness of such communication.

If management refuses to correct misstatement as communicated by the

statutory auditor, how should he proceed?

(MTP1, May 2024, 4 Marks)

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SA 560 Subsequent Events

○​ are appropriately reflected in those FSs; and
Basic
●​ Respond appropriately

●​ SA 560, “Subsequent Events” deals with the auditor’s ○​ to facts that become known to the auditor after the date of
responsibilities relating to subsequent events in an audit of FSs. the auditor's report,
●​ SA 700 explains that the date of the auditor’s report informs ■​ that, had they been known to the auditor at that date,
the reader that the auditor has considered the effect of events ■​ may have caused the auditor to amend the auditor's
and transactions of which the auditor becomes aware and that report.
occurred up to that date.
Audit Procedure Regarding Events Occurring between the Date of the

Meaning of Subsequent Event FSs and the Date of the Auditor’s Report

Subsequent Events The auditor shall perform audit procedures designed to obtain
●​ Events occurring between the date of the FSs and the date of the sufficient appropriate audit evidence that
auditor's report, and ●​ all events occurring between the date of the FSs and the date of
●​ facts that become known to the auditor after the date of the the auditor’s report
auditor's report ●​ that require adjustment of, or disclosure in, the FSs
○​ had they been known to the auditor at that date, ●​ have been identified and are appropriately reflected in those FSs.
○​ may have caused the auditor to amend the auditor's report.
Risk assessment w.r.t Subsequent Event Shall Include

Types of Subsequent Events The auditor shall take into account the auditor’s risk assessment
Type 1 which shall include the following:
Those events that provide additional evidence with respect to ●​ Obtaining an understanding of any procedures management has
conditions that existed on the date of balance sheet and effect the established to ensure that subsequent events are identified.
estimation made in the preparation of the FSs. The FS should be ●​ Inquiring of management and, where appropriate, TCWG as to
adjusted for any change in estimates resulting from the use of whether any subsequent events have occurred which might affect
evidence of subsequent events. the FSs.
●​ Read the minutes of meeting of board of directors, executive
For example committee, meeting of shareholders held after balance sheet
●​ Debtors as on balance sheet date are declared insolvent after date
the balance sheet date but before auditor's report ●​ Read latest interim FSs
●​ Settlement of legal disputes before audit report date, which
arose before balance sheet date. Written Representations

The auditor shall request management and, where appropriate,

Type 2 TCWG, to provide a written representation that
Those events which provide evidence with respect to conditions that ●​ all events occurring subsequent to the date of the FSs and for
did not exist on the date of the balance sheet being reported on but which the applicable financial reporting framework requires
arose subsequent to the date. These events should not result in adjustment or disclosure have been adjusted or disclosed
adjustments of the FSs. Some of these events however may be of
such a nature that disclosure of them is required to keep the FSs Meaning of “Date the FSs are issued”

from not being misleading. ●​ It reflects the date that the auditor’s report and audited FSs are
made available to third parties. The date the FSs are issued
For example generally depends on the regulatory environment of the entity.
Purchase of business, Sale of shares and debentures, Loss of plant or ●​ In some circumstances, the date the FSs are issued may be the
inventory as a result of fire. date that they are filed with a regulatory authority.
●​ Since audited FSs cannot be issued without an auditor’s report,
Objective of Auditor
the date that the audited FSs are issued must not only be at or
●​ Obtain Sufficient and Appropriate Evidence about whether later than the date of the auditor’s report, but must also be at
○​ events or later than the date the auditor’s report is provided to the
■​ occurring between the date of the FSs and the date of entity.
the auditor's report that require
●​ adjustment of, or
●​ disclosure in, the FSs

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Facts Which Become Known To The Auditor After The Date Of The ●​ However, when, after the FSs have been issued, a fact becomes
Auditor's Report But Before The Date The FSs Are Issued known to the auditor that,
The auditor has no obligation to perform any audit procedures ○​ had it been known to the auditor at the date of the auditor’s
regarding the FSs after the date of the auditor’s report. report,
●​ However, when, after the date of the auditor’s report but before ○​ may have caused the auditor to amend the auditor’s report,
the date the FSs are issued, a fact becomes known to the auditor the auditor shall
that, ■​ Discuss the matter with management and, where
○​ had it been known to the auditor at the date of the auditor’s appropriate, TCWG.
report,
■​ Determine whether the FSs need amendment and, if
○​ may have caused the auditor to amend the auditor’s report,
so,
the auditor shall
■​ Discuss the matter with management and, where ■​ Inquire how management intends to address the
appropriate, TCWG. matter in the FSs.
■​ Determine whether the FSs need amendment and, if
Management Amends
so, If the management amends the FSs, the auditor shall
■​ Inquire how management intends to address the a.​ Carry out the audit procedures necessary in the circumstances
matter in the FSs. on the amendment.
b.​ Review the steps taken by management to ensure that anyone in
Management Amends receipt of the previously issued FSs together with the auditor’s

If management amends the FSs, the auditor shall report thereon is informed of the situation.
a.​ Carry out the audit procedures necessary in the circumstances c.​ Extend the audit procedures to the date of the new auditor’s
on the amendment. report, and
b.​ Extend the audit procedures to the date of the new auditor’s d.​ Provide a new auditor’s report on the amended FSs.
report

c.​ Provide a new auditor’s report on the amended FSs. Emphasis of Matter paragraph or Other Matter Paragraph

The auditor shall include in the new or amended auditor’s report an

The new auditor’s report shall not be dated earlier than the date of Emphasis of Matter paragraph or Other Matter(s) paragraph
approval of the amended FSs. referring to a note to the FSs that more extensively discusses the
reason for the amendment of the previously issued FSs and to the

No Amendment By Management
earlier report provided by the auditor.
When management does not amend the FSs in circumstances where
the auditor believes they need to be amended No Steps by Management and No Amendments

●​ If the auditor’s report has not yet been provided to the entity, If management
the auditor shall modify the opinion as required by SA 705 and ●​ does not take the necessary steps to ensure that anyone in
then provide the auditor’s report or receipt of the previously issued FSs is informed of the situation
●​ If the auditor’s report has already been provided to the entity, and
○​ the auditor shall notify management and TCWG, ●​ does not amend the FSs in circumstances where the auditor
■​ not to issue the FSs to third parties before the believes they need to be amended,
necessary amendments have been made.
○​ If the FSs are nevertheless subsequently the auditor shall
issued without the necessary amendments, ●​ notify management and TCWG,
●​ the auditor shall take appropriate ●​ that the auditor will seek to prevent future reliance on the
auditor’s report.
action, to seek to prevent reliance on
●​ If, despite such notification, management or TCWG do not take
the auditor’s report.
these necessary steps,
●​ the auditor shall take appropriate action to seek to prevent
reliance on the auditor’s report.
Facts Which Become Known to the Auditor After the FSs have been

Issued.

After the FSs have been issued, the auditor has no obligation to
perform any audit procedures regarding such FSs.

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Written representations about management’s responsibilities

SA 580 Written Representation
Meaning
Written representation about management’s responsibilities
●​ A written representation is a involves confirmation of fulfilment of management’s responsibilities
○​ written statement by management provided to the auditor in following areas: -
○​ to confirm certain matters or to support other audit
evidence. Preparation of the FSs

●​ Auditors must seek WR from management on their duty in

●​ Written representations in this context do not include FSs, the
responsibility for the preparation of the FSs in accordance with
assertions therein, or supporting books and records.
the applicable financial reporting framework, including, where
relevant, their fair presentation.
Written representations as audit evidence
●​ In some cases, management may include in the written
●​ Similar to responses to inquiries, written representations are
audit evidence.
representations qualifying language to the effect that
●​ Although written representations provide necessary audit representations are made to the best of its knowledge and
evidence they do not provide sufficient appropriate audit belief.
evidence on their own.
○​ It is reasonable for the auditor to accept such wording if
●​ The fact that management has provided reliable written the auditor is satisfied that the representations are being
representations does not affect the nature or extent of other made by those with appropriate responsibilities and
audit evidence that the auditor obtains. knowledge of the matters included in the representations.
●​ Auditors can ask management to confirm in written
Objective of Auditor
representations that appropriate inquiries were made for
The objectives of the auditor are: informed decision-making.

a.​ To obtain
○​ written representations from management and, where Information provided and completeness of transactions

The auditor shall request management to provide a written

appropriate, TCWG
representation that: -
○​ that they believe that they have fulfilled their
a.​ It has provided the auditor with all relevant information and
responsibility for the preparation of the FSs and for the
access as agreed in the terms of the audit engagement and
completeness of the information provided to the auditor;
b.​ All transactions have been recorded and are reflected in the FSs.
b.​ To support
○​ other audit evidence relevant to the FSs or specific
assertions in the FSs by means of written representations, Why Written representations about management responsibilities

necessary?
and
●​ Obtaining audit evidence on management's role in financial
c.​ To respond appropriately
statement preparation and transaction completeness requires
○​ to written representations provided or
management's confirmation of fulfilling these responsibilities.
○​ Written representations requested by the auditor but not
●​ The reason is that Auditors can't rely only on other audit
provided.
evidence to judge if management prepared FSs and provided the
information as per their agreed and acknowledged
responsibilities.
From Whom

●​ Auditors shall request written representations from

●​ For example, the auditor could not conclude that management
management with appropriate responsibilities for the FSs and
has provided the auditor with all relevant information agreed in
knowledge of the matters concerned.
the terms of the audit engagement without asking it whether,
and receiving confirmation that, such information has been
provided.
Form of Written Representations

●​ The written representations shall be in the form of a

●​ The auditor may also ask management to reconfirm its
representation letter addressed to the auditor.
acknowledgement and understanding of those responsibilities in
●​ If law or regulation requires management to make written
written representations.
public statements about its responsibilities, and the auditor
determines that such statements provide representations as
This is particularly appropriate when: -
required by this SA regarding management responsibilities, the
●​ Those who signed the terms of the audit engagement on behalf
relevant matters covered by such statements need not be
of the entity no longer have the relevant responsibilities;
included in the representation letter.

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●​ The terms of the audit engagement were prepared in a previous

year;

●​ There is any indication that management misunderstands those

responsibilities; or

●​ Changes in circumstances make it appropriate to do so.

Additional WR for deficiencies in IC

In addition to WR provided to auditor regarding management

responsibility, auditor may consider it necessary to request
management to provide a WR that it has communicated to the auditor
all deficiencies in IC of which management is aware.

Written representations about specific assertions

In addition, the auditor may consider it necessary to request

management to provide written representations about specific
assertions in the FSs to support an understanding that the auditor
has obtained from other audit evidence of management’s judgment
or intent in relation to a specific assertion.
Other Written representations

For example, Let us say The auditor needs to understand management's ●​ Other SAs require the auditor to request written
intentions to accurately value investments. When it comes to investments, representations. If, in addition to such required representations,
their value can be significantly affected by the intentions of management auditor determines that it is necessary to obtain one or more
regarding the holding period of the investment, plans to sell it, or to use it
written representations, he shall request such other written
for some business operations. If an auditor cannot independently verify the
intent of management through other means, they may require management
representations.
to provide a written statement of their intentions regarding the ●​ They may include representations about the following: -
investments. This representation serves as audit evidence and is part of the ○​ Whether the selection and application of accounting
auditor's documentation. policies are appropriate; and
○​ Whether following matters have been recognized,
Considerations while obtaining evidence about, or evaluating, measured, presented or disclosed in accordance with the
judgments and intentions FRF:
●​ The entity’s past history in carrying out its stated intentions. ■​ Plans or intentions that may affect the carrying
●​ The entity’s reasons for choosing a particular course of action. value or classification of assets and liabilities;
●​ The entity’s ability to pursue a specific course of action. ■​ Liabilities, both actual and contingent;
●​ The existence or lack of any other information that might have ■​ Title to, or control over, assets, the liens or
been obtained during the course of the audit that may be encumbrances on assets, and assets pledged as
inconsistent with management’s judgment or intent. collateral; and
■​ Aspects of laws, regulations and contractual
Date of and Period(s) Covered by Written Representations agreements that may affect the financial statements,
●​ The date of the written representations shall be as near as including non-compliance
practicable to, but not after, the date of the auditor’s report on

the FSs.
●​ The written representations shall be for all FSs and period(s)
referred to in the auditor’s report.

●​ Situations may arise where current management were not

present during all periods referred to in the auditor’s report.
Such persons may assert that they are not in a position to
provide some or all of the written representations because they
were not in place during the period. This fact, however, does not
diminish such persons’ responsibilities for the FSs as a whole.
●​ Accordingly, the requirement for the auditor to request from them
WRs that cover the whole of the relevant period (s) still applies.

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SA 260 Communication With TCWG

communicating about the significant risks identified by the
Scope
auditor.
This SA deals with Auditor’s Responsibility to communicate with
TCWG in an audit of FSs Significant Findings from the Audit

The auditor shall communicate with TCWG

Objectives of auditor as per SA 260
a.​ The auditor’s views about significant qualitative aspects of the
a.​ To communicate clearly with TCWG responsibilities of auditor entity's accounting practices, including accounting policies,
and planned scope and timing of the audit; accounting estimates and financial statement disclosures.
b.​ To obtain from TCWG information relevant to the audit; b.​ Significant difficulties, if any, encountered during the audit;
c.​ To provide TCWG with timely observations that are significant c.​ Significant matters arising during the audit that were discussed,
and relevant to their responsibility to oversee the financial or subject to correspondence, with management; and
reporting process and d.​ Written representations the auditor is requesting;
d.​ To promote effective two-way communication between auditor e.​ Circumstances that affect the form and content of the auditor's
and TCWG. report, if any; and
f.​ Any other significant matters arising during the audit that, in
Role of Communication
the auditor's professional judgment, are relevant to the
There must be two way communication. This two-way communication oversight of the financial reporting process.
is important in assisting ( basically now we are going to discuss
importance of two way communication) Communication of auditor’s independence in case of listed entities

1.​ Constructive working relationship and understanding the A statement that the engagement team and others in the firm as
matters related to audit. This relationship is developed while appropriate, the firm and, when applicable, network firms have
complied with relevant ethical requirements regarding independence;
maintaining auditor's Independence and objectivity.
2.​ The auditor in obtaining from TCWG information relevant to the and
audit. For example TCWG may assist the auditor in ●​ We have identified and considered all relationships that may have
understanding the entity and its environment in identifying an impact on Independence including the impact of non audit
appropriate sources of audit evidence and in providing services.
information about specific transactions or events. ●​ The related safeguards that have been applied to eliminate
3.​ TCWG in fulfilling their responsibility to oversee the financial identified threats to independence or reduce them to an
reporting process thereby reducing the risk of material
acceptable level.
misstatement of the FSs.
The Communication Process

Establishing the Communication Process

Communication

With whom? IDENTIFY

The auditor shall communicate with TCWG the form, timing and
●​ The auditor shall determine the appropriate person(s) within the expected general content of communications.

entity’s governance structure with whom to communicate. ​

Forms of Communication

The auditor shall communicate in writing with TCWG regarding

Matters to Be Communicated
significant findings from the audit if, in the auditor's professional
The Auditor’s Responsibilities in Relation to the Financial Statement

Audit
judgment, oral communication would not be adequate. Written
●​ The auditor shall communicate with TCWG the responsibilities of communications need not include all matters that arose during the
the auditor in relation to the financial statement audit, including course of the audit.
that:
○​ The auditor is responsible for forming and expressing an Independence

opinion on the FSs that have been prepared by The auditor shall communicate in writing with TCWG regarding
management with the oversight of TCWG; and
auditor independence when required
○​ The audit of the FSs does not relieve management or TCWG
of their responsibilities. Timing of Communications

The auditor shall communicate with TCWG on a timely basis.

Planned Scope and Timing of the Audit

●​ The auditor shall communicate with TCWG an overview of the

planned scope and timing of the audit, which includes

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Adequacy of the Communication Process (Adequate, Effect)

The auditor shall evaluate whether the two-way communication

between the auditor and TCWG has been adequate for the purpose of
the audit. If it has not, the auditor shall evaluate the effect, if any, on
the auditor's assessment of the risks of material misstatement and
ability to obtain sufficient appropriate audit evidence, and shall take
appropriate action.

Documentation

Where matters required by SA 260 to be communicated are

communicated orally, the auditor shall include them in the audit
documentation, and when and to whom they were communicated.
Where matters have been communicated in writing, the auditor shall
retain a copy of the communication as part of the audit
documentation.

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 Audit Short Notes - Chapter 7

SA 265 Communicating Deficiencies in IC To

○​ Controls over the selection and application of significant
accounting policies.
TCWG and Management
○​ Controls over significant transactions with related parties.
Auditor’s Responsibility
○​ Controls over significant transactions outside the entity’s
SA 265 deals with the auditor’s responsibility to communicate
normal course of business.
appropriately to TCWG and management deficiencies in IC that the
○​ Controls over the period-end financial reporting process
auditor has identified in an audit of FSs.
(such as controls over non-recurring journal entries).
●​ The cause and frequency of the exceptions detected as a result
Objective of auditor as per SA 265
of the deficiencies in the controls.
To communicate appropriately to TCWG and management deficiencies
●​ The interaction of the deficiency with other deficiencies in IC.
in internal control that the auditor has identified during the audit and
that, in the auditor’s professional judgment, are of sufficient
importance to merit their respective attentions
Examples of indicators of significant deficiencies in IC

Indicators of significant deficiencies in IC include

●​ Absence of a risk assessment process within the entity where
Deficiency in IC
such a process would ordinarily be expected to have been
Deficiency in IC

This exists when: established.

●​ A control is designed, implemented or operated in such a way ●​ Evidence of an ineffective entity risk assessment process, such
that it is unable to prevent, or detect and correct, as management’s failure to identify a RMM that the auditor
misstatements in the FSs on a timely basis; or
would expect the entity’s risk assessment process to have
●​ A control necessary to prevent, or detect and correct, identified.
misstatements in the FSs on a timely basis is missing.
●​ Evidence of ineffective aspects of the control environment.
●​ Evidence of an ineffective response to identified significant risks
Significant deficiency in IC
●​ Evidence of management’s inability to oversee the preparation
●​ A deficiency or combination of deficiencies in IC that, in the of the FSs.
auditor’s professional judgement, is of sufficient importance to ●​ Misstatements detected by the auditor’s procedures that were
not prevented, or detected & corrected, by the entity’s IC.
merit the attention of TCWG.

●​ The significance of a deficiency or a combination of deficiencies

in IC depends not only on whether a misstatement has actually Identification of deficiencies in IC

occurred, but also on the likelihood that a misstatement could ●​ The auditor shall determine whether, on the basis of the audit
occur and the potential magnitude of the misstatement. work performed, the auditor has identified one or more
Significant deficiencies may, therefore, exist even though the deficiencies in IC
auditor has not identified misstatements during the audit. ●​ If the auditor has identified one or more deficiencies in IC, the
auditor shall determine, on the basis of the audit work
Examples of matters that the auditor may consider in determining performed, whether, individually or in combination, they
whether a deficiency or combination of deficiencies in IC constitutes a constitute significant deficiencies.

significant deficiency

●​ The likelihood of the deficiencies leading to material Communication of significant deficiencies in IC to TCWG

misstatements in the FSs in the future. The auditor shall communicate in writing significant deficiencies in IC
●​ The susceptibility to loss or fraud of the related asset or identified during the audit to TCWG on a timely basis
liability.
●​ The subjectivity and complexity of determining estimated The auditor shall also communicate to management at an appropriate
amounts, such as fair value accounting estimates. level of responsibility on a timely basis
●​ The financial statement amounts exposed to the deficiencies. a.​ In writing, significant deficiencies in IC that the auditor has
●​ The volume of activity that has occurred or could occur in the communicated or intends to communicate to TCWG, unless it
account balance or class of transactions exposed to the would be inappropriate to communicate directly to management
deficiency or deficiencies. in the circumstances; and
●​ The importance of the controls to the financial reporting b.​ Other deficiencies in IC identified during the audit that have not
process, for example: been communicated to management by other parties and that, in
○​ General monitoring controls (such as oversight of the auditor’s professional judgment, are of sufficient
management). importance to merit management’s attention.

○​ Controls over the prevention and detection of fraud.

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The auditor shall include in the written communication of significant

deficiencies in IC
a.​ A description of the deficiencies and an explanation of their
potential effects; and
b.​ Sufficient information to enable TCWG and management to
understand the context of the communication. In particular, the
auditor shall explain that
○​ The purpose of the audit was for the auditor to express an
opinion on the FSs;

○​ The audit included consideration of IC relevant to the

preparation of the FSs in order to design audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of
IC; and

○​ The matters being reported are limited to those

deficiencies that the auditor has identified during the audit

and that the auditor has concluded are of sufficient

importance to merit being reported to TCWG.

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