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  • Asked by Aditi Sharma on March 23, 2017, 6:20 p.m.

    0 Upvote  |  1 View  |  1 Reply  |   Asked to: EveryOne

    Explain SA 320 Materiality in planning and performing an audit

    Aditi Sharma

    For the sake of simplicity, let me summarize SA320 in simple words “Information is material i

    Full Answer:

    For the sake of simplicity, let me summarize SA320 in simple words “Information is material if its misstatement could influence the economic decisions of the users taken on the basis of the financial information.” Factors affecting judgment: 1) Materiality is a relative concept. 2) It may be judged on the basis of the impact of the item on the overall financial statement level. 3) Legal and regulatory requirements for example – disclosure requirements regarding payments to directors. 4) Cumulative effect of small amounts may be considered material. Audit risk means the risk that the auditor gives an inappropriate audit opinion when financial statements are materially misstated. Materiality is being closely linked to the concept of audit risk in determining the nature, timing and extent of audit procedures. There is an inverse relationship between materiality and the degree of audit risk which means the higher the materiality level, lower the audit risk and lower the materiality level higher the audit risk. The auditor takes the inverse relationship between materiality and the audit risk into account when determining the nature, timing and extent of audit procedures. For example, if, after planning for specific audit procedures, the auditor determines that the acceptable materiality level is lower, audit risk is increased. In simple words, if the auditor thinks that in this company even Rs.500 is material, it means the auditor is setting the materiality level low. The auditor would compensate for this either by: 1) Reducing the assessed degree of control risk, where this is possible, and supporting the reduced degree by carrying out extended or additional tests of control, or 2) Reducing detection risk by modifying the nature, timing and extent of planned substantive procedures. Materiality level may be changed depending upon the experience gained during the audit process. Materiality may be different at the time of initially planning the audit of the engagement from that at the time of evaluating the audit procedure. Errors detected during the audit may be communicated to the management and the management may be asked to adjust the financial statement. However, if the management does not carry the required adjustment resulting from errors, the auditors after assessing and reviewing may form qualified or adverse opinion.

  • Asked by Kanishka Mehta on March 23, 2017, 2:57 p.m.

    0 Upvote  |  2 View  |  1 Reply | Asked to: Everybody

    How does SA 570 define the concept of going concern?

    Sidant March 23, 2017, 3:37 p.m.

    The going concern principle is the assumption that an entity will remain in business for the fores

    Full Answer:

    The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party An entity’s continuance as a going concern for the foreseeable future is assumed in the preparation of financial statements in the absence of information to the contrary. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. If this assumption is unjustified then entity may not be able to realize its assets at the recorded 3 months and there may be changes in the amounts and maturity dates of liabilities.. As per S.A. 570, while planning and performing audit procedures and evaluating thereof, the auditor should consider the appropriateness of the going concern assumption. When a question arises regarding the appropriateness of the going concern assumption, the auditor should gather sufficient appropriate audit evidence to attempt to resolve, to the auditor’s satisfaction, the question regarding the entity’s ability to continue in operation for the foreseeable future. The statement clarifies that auditor’s report is not a guarantee as to the future viability of the entity. The responsibility of the auditor is to judge the entity’s continuance as a going concern for the foreseeable future. Foreseeable future is generally a period not exceeding one year after the Balance Sheet date in the absence of information. If the going concern is not valid, the assets will be recorded at its disposal value and liabilities at its payment value.

  • Asked by Jeeba Lal on March 23, 2017, 1:40 p.m.

    0 Upvote  |  2 View  |  1 Reply  |   Asked to: EveryOne

    Summarize ‘SA 560: Subsequent events’ in simple language

    Sidant

    Events that occur after Balance Sheet date but before the date of auditor’s report are referred to

    Full Answer:

    Events that occur after Balance Sheet date but before the date of auditor’s report are referred to as “Subsequent Events”, as per S.A. 560. Accounting standard 4, “Contingencies and Events occurring after the balance sheet deals with events between balance sheet and the date of approval of accounting by the Board of Directors”. Type 1 Events – Those events that provide additional evidence with respect to conditions that existed on the date of Balance Sheet and effect the estimation made in preparation of financial statements. The statement should be adjusted for any change in the estimates resulting from the use of evidence of subsequent events. For example, 1) Insolvency of debtors after balance sheet date, 2) Dishonour of cheques/ bills of exchange accepted, due after balance sheet date. 3) Subsequent fixation of purchase price or the proceeds of sale of assets purchased or sold before the year-end. Type 2 Events – Those subsequent events which involve conditions coming into existence after balance sheet date. They require disclosure otherwise financial statements would be misleading. For example, 1) Mergers and Acquisitions after balance sheet 2) Closure of plant/ division due to labour problems 3) Changes in capital structure Audit procedures: 1) Review the procedures that management followed to identify the subsequent events. 2) Read the minutes of the meeting of the Board of Directors, executive committee, shareholders held after the balance sheet date. 3) Read latest interim financial statements. 4) Inquire about latest position of legal cases pending. 5) Inquiring of the management as to whether any subsequent events have occurred after the Balance Sheet which might affect the financial statements. Subsequent Events and Branch Auditor’s Report: If branch auditor has already audited the branch and submitted the report to the principal auditor, the principal auditor would follow audit procedures as mentioned above in respect of events occurring after balance sheet date but before signing of his Company Audit Report. > Auditor’s Report and Subsequent Events: If subsequent events, which are material, are not properly adjusted or disclosed depending upon the type of subsequent events, the auditor should express a qualified report or adverse report.

  • Asked by Jeeba Lal on March 23, 2017, 1:39 p.m.

    0 Upvote  |  2 View  |  1 Reply | Asked to: Everybody

    How is the quality of audit work controlled by Auditor?

    Sidant March 23, 2017, 1:47 p.m.

    There is a separate standard in auditing covering this matter, ‘SA 220-Quality control for audit w

    Full Answer:

    There is a separate standard in auditing covering this matter, ‘SA 220-Quality control for audit work’. Objective of this standard is to prescribe the procedures so that quality of audit conducted by the firm is maintained and enhanced. The standard prescribes the procedure to control the quality of audit by the audit firm. At the firm level: 1) The personnel employed by the firm should be independent, objective and keep the information of the client confidential. 2) The personnel employed should be technically competent to conduct the conduct as per auditing principles. They should have necessary professional qualification. 3) While assigning the work to any audit assistant, the competence of the particular assistant as per the audit requirement should be judged. 4) The audit firm must continuously monitor the policies and procedures followed by it for the purpose of audit. 5) Due supervision should be exercised over the assistants to control whether work is being carried out as per audit program and procedures. 6) Outside consultation may be done by the audit firm for the matter of expertise like in legal cases judgement may be taken after consulting the legal experts. At the individual level: 1) Delegation – involves delegating work to the assistants and ensuring that the work will be performed with due care and by persons having the degree of professional competence. 2) Direction – involves informing the assistants of their responsibilities, objectives of the procedures they are to perform, and the nature of the entity’s business. 3) Supervision – involves monitoring the progress of the audit conducted by the assistants, addressing significant accounting questions raised during the audit, resolving any differences of professional judgement between personnel and considering the level of consultation that is appropriate. 4) Review – involves considering whether work has been performed as per the audit programme, the results obtained have been adequately documented in the working papers. 5) Certain additional audit procedures by the personnel other than personnel deployed in particular audit.

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