CHAPTER 1

SA 200 Revised
Overall Objectives of the Independent Auditor and the Conduct of an Audit
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.
Scope of Overall Objectives of the Independent Auditor and the Conduct of an Audit
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
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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 assurance is a high level 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 low level. 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. The concept 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 statements1. 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 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 and maintain professional 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.
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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.
Effective Date
10. This SA 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 acceptable in view of the nature of the entity
and the objective of the financial statements, or that is required by law or regulation.
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The term fair presentation framework is used to refer to a financial 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 statements and other information. For purposes of
the SAs:
(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 the risks of
material misstatement and also by the quality of such audit 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
4

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 economic conditions or 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, executive members of a governance board, or an
owner-manager.
(i) Misstatement A difference between the amount, classification, presentation, or disclosure
of a reported financial statement item and 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
presented fairly, 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 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
(ii) To provide the auditor with:
a. All information, such as records and documentation, and other matters that are relevant to
5

the
preparation and presentation of the financial statements;
b. Any additional information that the auditor may request from management and, where
appropriate, those charged with governance; and
c. Unrestricted access to those within the entity from whom the 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 statements in accordance with the financial reporting framework;
or the preparation of financial statements that give a true and fair view in accordance with the
financial reporting framework. This applies to all 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 referred to 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.
(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 consideration of 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 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
6

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.
Application and Other Explanatory Material An Audit of Financial Statements
Scope of the Audit
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,
however, the applicable laws and regulations may require auditors to provide opinions on
other specific matters, such as 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
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
7

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 judgments are made in the context of the applicable financial reporting
framework.

A4. The financial statements may be prepared in accordance with a financial reporting
framework designed to meet:
The common financial information needs of a wide range of users (i.e., general purpose
financial statements); or
The financial information needs of specific users (i.e., special purpose financial
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;
8

 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 reporting frameworks that encompass primarily 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 statements are often designed to achieve fair presentation.
A8. The requirements of the applicable financial reporting framework also determine what
constitutes a complete set of financial statements. In the case of many frameworks, financial
statements are intended to provide information about 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 flow statement; and related
notes. For some other 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 related notes,
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
9

acceptability of the applicable financial reporting framework4. SA 800 deals with special
considerations when financial statements are prepared in accordance with a special purpose
framework5.
A10. Because of the significance of the premise to the conduct of an audit, the auditor is
required to obtain agreement from management and, where appropriate, those charged with
governance that they acknowledge and understand their responsibilities set out in paragraph
A2 as a precondition for accepting the audit engagement6. The auditor is also required to
obtain written representations about whether management and, where appropriate, those
charged with governance have fulfilled those responsibilities. Considerations Specific to
Central/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 a result, the premise, relating to
managements 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
execution of transactions
and events in accordance with legislation or proper authority. Form of 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
10

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;
(d) Confidentiality; and
(e) Professional behaviour.
A16. In the case of an audit engagement it is in the public interest and, therefore, required by
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 with relevant ethical requirements, including those pertaining
to independence8. 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, and
forming a conclusion on compliance with independence requirements that apply to the audit
engagement9. 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
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.

11

 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 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, the auditor is required to consider the reliability of
information to be used as audit evidence10. 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.
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.

12

CHAPTER 3
SA 200 A
Objective and Scope of the Audit of Financial Statements
Introduction
1. This Standard describes the overall objective and scope of the audit of general purpose
financial statements of an enterprise by an independent auditor. According to para 3.3 of the
Preface to the Statements of Accounting Standards issued by the Institute of Chartered
Accountants of India, the term General Purpose Financial Statements includes balance
sheet, statement of profit and loss and other statements and explanatory notes which form
part thereof, issued for the use of shareholders/members, creditors, employees and public at
large. References to financial statements in this Standard should be construed to refer to
general purpose financial statements.
Objective of an Audit
2. The objective of an audit of financial statements, prepared within a framework of
recognised accounting policies and practices and relevant statutory requirements, if any, is to
enable an auditor to express an opinion on such financial statements.
3. The auditors opinion helps determination of the true and fair view of the financial position
and operating results of an enterprise. The user, however, should not assume that the auditors
opinion is an assurance as to the future viability of the enterprise or the efficiency or
effectiveness with which management has conducted the affairs of the enterprise.
Responsibility for the Financial Statements
4. While the auditor is responsible for forming and expressing his opinion on the financial
statements, the responsibility for their preparation is that of the management of the enterprise.
Managements responsibilities include the maintenance of adequate accounting records and
internal controls, the selection and application of accounting policies and the safeguarding of
the assets of the enterprise. The audit of the financial statements does not relieve management
13

of its responsibilities.
Scope of an Audit
5. The scope of an audit of financial statements will be determined by the auditor having
regard to the terms of the engagement, the requirements of relevant legislation and the
pronouncements of the Institute. The terms of engagement cannot, however, restrict the scope
of an audit in relation to matters which are prescribed by legislation or by the
pronouncements of the Institute.
6. The audit should be organised to cover adequately all aspects of the enterprise as far as
they are relevant to the financial statements being audited. To form an opinion on the
financial statements, the auditor should be reasonably satisfied as to whether the information
contained in the underlying accounting records and other source data is reliable and sufficient
as the basis for the preparation of the financial statements. In forming his opinion, the auditor
should also decide whether the relevant information is properly disclosed in the financial
statements subject to statutory requirements, where applicable.
7. The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
(a) making a study and evaluation of accounting systems and internal controls on which he
wishes to rely and testing those internal controls to determine the nature, extent and timing of
other auditing procedures; and
(b) carrying out such other tests, enquiries and other verification procedures of accounting
transactions and account balances as he considers appropriate in the particular circumstances.
8. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
(a) comparing the financial statements with the underlying accounting records and other
source data to see whether they properly summarise the transactions and events recorded
therein; and
(b) considering the judgements that management has made in preparing the financial
statements; accordingly, the auditor assesses the selection and consistent application of
accounting policies, the manner in which the information has been classified, and the
adequacy of disclosure.
9. The auditors work involves exercise of judgement, for example, in deciding the extent of
audit procedures and in assessing the reasonableness of the judgements and estimates made
by management in preparing the financial statements. Furthermore, much of the evidence
available to the auditor can enable him to draw only reasonable conclusions therefrom.
Because of these factors, absolute certainty in auditing is rarely attainable.
14

10. In forming his opinion on the financial statements, the auditor follows procedures
designed to satisfy himself that the financial statements reflect a true and fair view of the
financial position and operating results of the enterprise. The auditor recognises that because
of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any system of internal control, there is an unavoidable risk that some material
misstatement may remain undiscovered. While in many situations the discovery of a material
misstatement by management may often arise during the conduct of the audit, such discovery
is not the main objective of audit nor is the auditors programme of work specifically
designed for such discovery. The audit cannot, therefore, be relied upon to ensure the
discovery of all frauds or errors but where the auditor has any indication that some fraud or
error may have occurred which could result in material misstatement, the auditor should
extend his procedures to confirm or dispel his suspicions.
11. The auditor is primarily concerned with items which either individually or as a group are
material in relation to the affairs of an enterprise. However, it is difficult to lay down any
definite standard by which materiality can be judged. Material items are those which might
influence the decisions of the user of the financial statements[1]. It is a matter in which a
decision is arrived at on the basis of the auditors professional experience and judgement.
12. The auditor is not expected to perform duties which fall outside the scope of his
competence. For example, the professional skill required of an auditor does not include that
of a technical expert for determining physical condition of certain assets.
13. Constraints on the scope of the audit of financial statements that impair the auditors
ability to express an unqualified opinion on such financial statements should be set out in his
report, and a qualified opinion or disclaimer of opinion should be expressed, as appropriate.
Effective Date
14. This Auditing and Assurance Standard becomes operative for all audits relating to
accounting periods beginning on or after April 1, 1985.

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CHAPTER 4
SA 210 (Revised)
Agreeing the Terms of the Audit Engagements
Scope of Standard on Auditing (SA) 210
1. This Standard on Auditing (SA) deals with the auditors responsibilities in agreeing the
terms of the audit engagement with management and, where appropriate, those charged with
governance. This includes establishing that certain preconditions for an audit, responsibility
for which rests with management and, where appropriate, those charged with governance, are
present. Proposed SA 220 (Revised) deals with those aspects of engagement acceptance that
are within the control of the auditor.
Effective Date
2. This SA is effective for audits of financial statements for periods beginning on or after
April 1, 2010.
Objective of SA 210
3. The objective of the auditor is to accept or continue an audit engagement only when the
basis upon which it is to be performed has been agreed, through:
a. Establishing whether the preconditions for an audit are present; and
b. Confirming that there is a common understanding between the auditor and management
and, where appropriate, those charged with governance of the terms of the audit engagement.
Preconditions for an audit
The use by management of an acceptable financial reporting framework in the preparation of
the financial statements and the agreement of management and, where appropriate, those
charged with governance to the premise5 on which an audit is conducted.

16

For the purposes of this SA, references to management should be read hereafter as
management and, where appropriate, those charged with governance.
Requirements of Preconditions for an Audit
In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework to be applied in the preparation of
the financial statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its
responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation;
(ii) For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to
fraud or error; and
(iii) To provide the auditor with:
a. Access to all information of which management is aware that is relevant to the preparation
of the financial statements such as records, documentation and other matters;
b. Additional information that the auditor may request from management for the purpose of
the audit; and
c. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
Limitation on Scope Prior to Audit Engagement Acceptance
If management or those charged with governance impose a limitation on the scope of the
auditors work in the terms of a proposed audit engagement such that the auditor believes the
limitation will result in the auditor disclaiming an opinion on the financial statements, the
auditor shall not accept such a limited engagement as an audit engagement, unless required
by law or regulation to do so.
Other Factors Affecting Audit Engagement Acceptance
If the preconditions for an audit are not present, the auditor shall discuss the matter with
management. Unless required by law or regulation to do so, the auditor shall not accept the
proposed audit engagement:

17

a. If the auditor has determined that the financial reporting framework to be applied in the
preparation of the financial statements is unacceptable, except as provided in paragraph 19; or
b. If the agreement referred to in paragraph 6(b) has not been obtained.
Agreement on Audit Engagement Terms
9. The auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate. (Ref: Para. A20)
10. Subject to paragraph 11, the agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written agreement and shall include: (Ref:
Para. A21-A24)
a. The objective and scope of the audit of the financial statements;
b. The responsibilities of the auditor;
c. The responsibilities of management;
d. Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
e. Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected
form and content.
11. If law or regulation prescribes in sufficient detail the terms of the audit engagement
referred to in paragraph 10, the auditor need not record them in a written agreement, except
for the fact that such law or regulation applies and that management acknowledges and
understands its responsibilities as set out
12. If law or regulation prescribes responsibilities of management similar to those described
in paragraph 6(b), the auditor may determine that the law or regulation includes
responsibilities that, in the auditors judgment, are equivalent in effect to those set out in that
paragraph. For such responsibilities that are equivalent, the auditor may use the wording of
the law or regulation to describe them in the written agreement. For those responsibilities that
are not prescribed by law or regulation such that their effect is equivalent
Recurring Audits
13. On recurring audits, the auditor shall assess whether circumstances require the terms of
the audit engagement to be revised and whether there is a need to remind the entity of the
existing terms of the audit engagement.

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CHAPTER 5
SA 220 (Revised)
Quality Control for an Audit of Financial Statements
Scope of Quality Control for an Audit of Financial Statements
This Standard on Auditing (SA) deals with the specific responsibilities of the auditor
regarding quality control procedures for an audit of financial statements. It also addresses,
where applicable, the responsibilities of the engagement quality control reviewer. This SA is
to be read in conjunction with relevant ethical requirements.
System of Quality Control and Role of Engagement Teams
2. Quality control systems, policies and procedures are the responsibility of the audit firm.
Under SQC 1, the firm has an obligation to establish and maintain a system of quality control
to provide it with reasonable assurance that:
(a) The firm and its personnel comply with professional standards and regulatory and legal
requirements; and
(b) The reports issued by the firm or engagement partners are appropriate in the
circumstances2.
This SA is premised on the basis that the firm is subject to SQC 1. (Ref: Para. A1)
3. Within the context of the firms system of quality control, engagement teams have a
responsibility to implement quality control procedures that are applicable to the audit
engagement and provide the firm with relevant information to enable the functioning of that
part of the firms system of quality control relating to independence.
4. Engagement teams are entitled to rely on the firms system of quality control, unless
information provided by the firm or other parties suggests otherwise
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Effective Date
Quality Control for an Audit of Financial Statements is effective for audits of financial
statements for periods beginning on or after April 1, 2010.
Objective
6. The objective of the auditor is to implement quality control procedures at the engagement
level that provide the auditor with reasonable assurance that:
(a) The audit complies with professional standards and regulatory and legal requirements; and
(b) The auditors report issued is appropriate in the circumstances.
Engagement partner
the partner or other person in the firm who is a member of the Institute of Chartered
Accountants of India and is in full time practice and is responsible for the engagement and its
performance, and for the report that is issued on behalf of the firm, and who, where required,
has the appropriate authority from a professional, legal or regulatory body.
Engagement quality control review
a process designed to provide an objective evaluation, before the report is issued, of the
significant judgments the engagement team made and the conclusions they reached in
formulating the report.
Engagement quality control reviewer
a partner, other person3 in the firm, suitably qualified external person, or a team made up of
such individuals, with sufficient and appropriate experience and authority to objectively
evaluate, before the report is issued, the significant judgments the engagement team made
and the conclusions they reached in formulating the report. However, in case the review is
done by a team of individuals, such team should be headed by a member of the Institute.
Engagement team
all personnel performing an engagement, including any experts contracted by the firm in
connection with that engagement.
Firm
a sole practitioner/proprietor, partnership, or any such entity of professional accountants, as
may be permitted by law.

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CHAPTER 6
SA 230 (Revised)
Audit Documentation
Scope of Audit Documentation
1. This Standard on Auditing (SA) deals with the auditors responsibility to prepare audit
documentation for an audit of financial statements. It is to be adapted as necessary in the
circumstances when applied to audits of other historical financial information. The specific
documentation requirements of other SAs do not limit the application of this SA. Laws or
regulations may establish additional documentation requirements.
Nature and Purposes of Audit Documentation
2. Audit documentation that meets the requirements of this SA and the specific
documentation requirements of other relevant SAs provides:
(a) Evidence of the auditors basis for a conclusion about the achievement of the overall
objective of the auditor; and
(b) Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
3. Audit documentation serves a number of additional purposes, including the following:
Assisting the engagement team to plan and perform the audit.
Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work, and to discharge their review responsibilities in accordance with
Proposed SA 220 (Revised)3.
Enabling the engagement team to be accountable for its work.
Retaining a record of matters of continuing significance to future audits.
Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.
Enabling the conduct of external inspections in accordance with applicable legal, regulatory
or other requirements.
21

Effective Date
4. This SA is effective for audits of financial statements for periods beginning on or after
April 1, 2009.

Objective
The objective of the auditor is to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditors report; and
(b) Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
Audit file
One or more folders or other storage media, in physical or electronic form, containing the
records that comprise the audit documentation for a specific engagement.
Meaning of Experienced auditor
An individual (whether internal or external to the firm) who has practical audit experience,
and a reasonable understanding of:
(i) Audit processes;
(ii) SAs and applicable legal and regulatory requirements;
(iii) The business environment in which the entity operates; and
(iv) Auditing and financial reporting issues relevant to the entitys industry.
Requirements
Timely Preparation of Audit Documentation
7. The auditor shall prepare audit documentation on a timely basis.
Documentation of the Audit Procedures Performed and Audit Evidence Obtained
Form, Content and Extent of Audit Documentation
22

8. The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:
(a) The nature, timing, and extent of the audit procedures performed to comply with the SAs
and applicable legal and regulatory requirements;
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
9. In documenting the nature, timing and extent of audit procedures performed, the auditor
shall record:
(a) The identifying characteristics of the specific items or matters tested;
(b) Who performed the audit work and the date such work was completed; and
(c) Who reviewed the audit work performed and the date and extent of such review.
10. The auditor shall document discussions of significant matters with management, those
charged with governance, and others, including the nature of the significant matters discussed
and when and with whom the discussions took place.
11. If the auditor identified information that is inconsistent with the auditors final conclusion
regarding a significant matter, the auditor shall document how the auditor addressed the
inconsistency.

23

CHAPTER 7
SA 240 (Revised)
The Auditor's Responsibilities Relating to Fraud in an Audit of Financial
Statements
Introduction
1. The purpose of this Auditing and Assurance Standard (AAS) is to establish standards on
the auditor's responsibility to consider fraud and error in an audit of financial statements.
While this AAS focuses on the auditor's responsibilities with respect to fraud and error, the
primary responsibility for the prevention and detection of fraud and error rests with both
those charged with governance and the management of an entity. In this Standard, the term
'financial information' encompasses 'financial statements'. In some circumstances, specific
legislations and regulations may require the auditor to undertake procedures additional to
those set out in this AAS.
2. When planning and performing audit procedures and evaluating and reporting the results
thereof, the auditor should consider the risk of material misstatements in the financial
statements resulting from fraud or error.
Fraud and Error and Their Characteristics
3. Misstatements in the financial statements can arise from fraud or error. The term "error"
refers to an unintentional misstatement in the financial statements, including the omission of
an amount or a disclosure, such as:
A mistake in gathering or processing data from which financial statements are prepared.
An incorrect accounting estimate arising from oversight or misinterpretation of facts.
A mistake in the application of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
4. The term "fraud" refers to an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving the use
of deception to obtain an unjust or illegal advantage. Although fraud is a broad legal concept,
the auditor is concerned with fraudulent acts that cause a material misstatement in the
financial statements. Misstatement of the financial statements may not be the objective of
some frauds. Auditors do not make legal determinations of whether fraud has actually
occurred. Fraud involving one or more members of management or those charged with
24

governance is referred to as "management fraud"; fraud involving only employees of the

entity is referred to as "employee fraud". In either case, there may be collusion with third
parties outside the entity.
5. Two types of intentional misstatements are relevant to the auditor's consideration of fraudmisstatements resulting from fraudulent financial reporting and misstatements resulting from
misappropriation of assets.
6. Fraudulent financial reporting involves intentional misstatements or omissions of amounts
or disclosures in financial statements to deceive financial statement users. Fraudulent
financial reporting may involve:
Deception such as manipulation, falsification, or alteration of accounting records or
supporting documents from which the financial statements are prepared.
Misrepresentation in, or intentional omission from, the financial statements of events,
transactions or other significant information.
Intentional misapplication of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
7. Misappropriation of assets involves the theft of an entity's assets. Misappropriation of
assets can be accomplished in a variety of ways (including embezzling receipts, stealing
physical or intangible assets, or causing an entity to pay for goods and services not received);
it is often accompanied by false or misleading records or documents in order to conceal the
fact that the assets are missing.
8. Fraud involves motivation to commit fraud and a perceived opportunity to do so.
Individuals might be motivated to misappropriate assets, for example, because the individuals
are living beyond their means. Fraudulent financial reporting may be committed because
management is under pressure, from sources outside or inside the entity, to achieve an
expected (and perhaps unrealistic) earnings target particularly when the consequences to
management of failing to meet financial goals can be significant. A perceived opportunity for
fraudulent financial reporting or misappropriation of assets may exist when an individual
believes internal control could be circumvented, for example, because the individual is in a
position of trust or has knowledge of specific weaknesses in the internal control system.
9. The distinguishing factor between fraud and error is whether the underlying action that
results in the misstatement in the financial statements is intentional or unintentional. Unlike
error, fraud is intentional and usually involves deliberate concealment of the facts. While the
auditor may be able to identify potential opportunities for fraud to be perpetrated, it is
difficult, if not impossible, for the auditor to determine intent, particularly in matters
involving management judgment, such as accounting estimates and the appropriate
application of accounting principles.
Responsibility of Those Charged With Governance and of Management

25

10. The primary responsibility for the prevention and detection of fraud and error rests with
both those charged with the governance and the management of an entity. The respective
responsibilities of those charged with governance and management may vary from entity to
entity. Management, with the oversight of those charged with governance, needs to set the
proper tone, create and maintain a culture of honesty and high ethics, and establish
appropriate controls to prevent and detect fraud and error within the entity.
11. It is the responsibility of those charged with governance of an entity to ensure, through
oversight of management, the integrity of an entity's accounting and financial reporting
systems and that appropriate controls are in place, including those for monitoring risk,
financial control and compliance with the laws and regulations.
12. It is the responsibility of the management of an entity to establish a control environment
and maintain policies and procedures to assist in achieving the objective of ensuring, as far as
possible, the orderly and efficient conduct of the entity's business. This responsibility
includes implementing and ensuring the continued operation of accounting and internal
control systems, which are designed to prevent and detect fraud and error. Such systems
reduce but do not eliminate the risk of misstatements, whether caused by fraud or error.
Accordingly, management assumes responsibility for any remaining risk.
Responsibilities of the Auditor
13. As described in AAS 2, "Objective and Scope of the Audit of Financial Statements", the
objective of an audit of financial statements, prepared within a framework of recognised
accounting policies and practices and relevant statutory requirements, if any, is to enable an
auditor to express an opinion on such financial statements. An audit conducted in accordance
with the auditing standards generally accepted in India[1] is designed to provide reasonable
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error. The fact that an audit is carried out may act as a deterrent,
but the auditor is not and cannot be held responsible for the prevention of fraud and error.
Inherent Limitations of an Audit
14. An auditor cannot obtain absolute assurance that material misstatements in the financial
statements will be detected. 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
auditing standards generally accepted in India. An audit does not guarantee that all material
misstatements will be detected because of such factors as the use of judgment, the use of
testing, the inherent limitations of internal control and the fact that much of the evidence
available to the auditor is persuasive rather than conclusive in nature. For these reasons, the
auditor is able to obtain only a reasonable assurance that material misstatements in the
financial statements will be detected.

26

15. The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting a material misstatement resulting from error because fraud, generally,
involves 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 evidence is
persuasive when it is, in fact, false. The auditor's ability to detect a fraud depends on factors
such as the skillfulness of the perpetrator, the frequency and extent of manipulation, the
degree of collusion involved, the relative size of individual amounts manipulated, and the
seniority of those involved. Audit procedures that are effective for detecting an error may be
ineffective for detecting fraud.
16. Furthermore, the risk of the auditor not detecting a material misstatement resulting from
management fraud is greater than for employee fraud, because those charged with governance
and management are often in a position that assumes their integrity and enables them to
override the formally established control procedures. Certain levels of management may be in
a position to override control procedures designed to prevent similar frauds by other
employees, for example, by directing subordinates to record transactions incorrectly or to
conceal them. Given its position of authority within an entity, management has the ability to
either direct employees to do something or solicit their help to assist management in carrying
out a fraud, with or without the employees' knowledge.
17. The auditor's opinion on the financial statements is based on the concept of obtaining
reasonable assurance; hence, in an audit, the auditor does not guarantee that material
misstatements, whether from fraud or error, will be detected. Therefore, the subsequent
discovery of a material misstatement of the financial statements resulting from fraud or error
does not, in and of itself, indicate:
(a) failure to obtain reasonable assurance,
(b) inadequate planning, performance or judgment,
(c) absence of professional competence and due care, or,
(d) failure to comply with auditing standards generally accepted in India.
This is particularly the case for certain kinds of intentional misstatements, since auditing
procedures may be ineffective for detecting an intentional misstatement that is concealed
through collusion between or among one or more individuals among management, those
charged with governance, employees, or third parties, or involves falsified documentation.
Whether the auditor has performed an audit in accordance with auditing standards generally
accepted in India is determined by the adequacy of the audit procedures performed in the
circumstances and the suitability of the auditor's report based on the result of these
procedures.
Professional Skepticism
18. The auditor plans and performs an audit with an attitude of professional skepticism. Such
an attitude is necessary for the auditor to identify and properly evaluate, for example:
Matters that increase the risk of a material misstatement in the financial statements resulting
27

from fraud or error (for instance, management's characteristics and influence over the control
environment, industry conditions, and operating characteristics and financial stability).
Circumstances that make the auditor suspect that the financial statements are materially
misstated.
Evidence obtained (including the auditor's knowledge from previous audits) that brings into
question the reliability of management representations.

19. However, unless the audit reveals evidence to the contrary, the auditor is entitled to accept
records and documents as genuine. Accordingly, an audit performed in accordance with
auditing standards generally accepted in India rarely contemplate authentication of
documentation, nor are auditors trained as, or expected to be, experts in such authentication.
Planning Discussions
20. In planning the audit, the auditor should discuss with other members of the audit team,
the susceptibility of the entity to material misstatements in the financial statements resulting
from fraud or error.
21. Such discussions would involve considering, for example, in the context of the particular
entity, where errors may be more likely to occur or how fraud might be perpetrated. Based on
these discussions, members of the audit team may gain a better understanding of the potential
for material misstatements in the financial statements resulting from fraud or error in the
specific areas of the audit assigned to them, and how the results of the audit procedures that
they perform may affect other aspects of the audit. Decisions may also be made as to which
members of the audit team will conduct certain inquiries or audit procedures, and how the
results of those inquiries and procedures will be shared.
Inquiries of Management
22. When planning the audit, the auditor should make inquiries of management:
(a) to obtain an understanding of:
(i) management's assessment of the risk that the financial statements may be materially
misstated as a result of fraud; and
(ii) the accounting and internal control systems management has put in place to address such
risk;
(b) to obtain knowledge of management's understanding regarding the accounting and
internal control systems in place to prevent and detect error;
(c) to determine whether management is aware of any known fraud that has affected the
entity or suspected fraud that the entity is investigating; and
(d) to determine whether management has discovered any material errors.

28

23. The auditor supplements his own knowledge of the entity's business by making inquiries
of management regarding management's own assessment of the risk of fraud and the systems
in place to prevent and detect it. In addition, the auditor makes inquiries of management
regarding the accounting and internal control systems in place to prevent and detect error.
Since management is responsible for the entity's accounting and internal control systems and
for the preparation of the financial statements, it is appropriate for the auditor to inquire of
management how it is discharging these responsibilities. Matters that might be discussed as
part of these inquiries include:
(a) whether there are particular subsidiary locations, business segments, types of transactions,
account balances or financial statement categories where the possibility of error may be high,
or where fraud risk factors may exist, and how they are being addressed by management;
(b) the work of the entity's internal audit function and whether internal audit has identified
fraud or any serious weaknesses in the system of internal control; and
(c) how management communicates to employees its view on responsible business practices
and ethical behaviour, such as through ethics policies or codes of conduct.
24. The nature, extent and frequency of management's assessment of such systems and risk
vary from entity to entity. In some entities, management may make detailed assessments on
an annual basis or as part of continuous monitoring. In other entities, management's
assessment may be less formal and less frequent. The nature, extent and frequency of
management's assessment are relevant to the auditor's understanding of the entity's control
environment. For example, the fact that management has not made an assessment of the risk
of fraud may be indicative of the lack of importance that management places on internal
control.
25. It is also important that the auditor obtains an understanding of the design of the
accounting and internal control systems within the entity. In designing such systems,
management makes informed judgments on the nature and extent of the control procedures it
chooses to implement and the nature and extent of the risks it chooses to assume. As a result
of making these inquiries of management, the auditor may learn, for example, that
management has consciously chosen to accept the risk associated with a lack of segregation
of duties. Information from these inquiries may also be useful in identifying fraud risk factors
that may affect the auditor's assessment of the risk that the financial statements may contain
material misstatements caused by fraud.
26. It is also important for the auditor to inquire about management's knowledge of frauds
that have affected the entity, suspected frauds that are being investigated, and material errors
that have been discovered. Such inquiries might indicate possible weaknesses in control
procedures if, for example, a number of errors have been found in certain areas. Alternatively,
such inquiries might indicate that control procedures are operating effectively because
anomalies are being identified and investigated promptly.
27. Although the auditor's inquiries of management may provide useful information
concerning the risk of material misstatements in the financial statements resulting from
29

employee fraud, such inquiries are unlikely to provide useful information regarding the risk
of material misstatements in the financial statements resulting from management fraud.
Accordingly, the auditor's follow-up of fraud risk factors, as discussed in paragraph 39, is of
particular relevance in relation to management fraud.
Discussions with Those Charged with Governance
28. Those charged with governance of an entity have oversight responsibility for systems for
monitoring risk, financial control and compliance with the law. In case of clients whose
corporate governance practices are well developed and those charged with governance play
an active role in oversight of how management has discharged its responsibilities, auditors
are encouraged to seek the views of those charged with governance on the adequacy of
accounting and internal control systems in place to prevent and detect fraud and error, the risk
of fraud and error, and the competence and integrity of management. Such inquiries may, for
example, provide insights regarding the susceptibility of the entity to management fraud. The
auditor may have an opportunity to seek the views of those charged with governance during,
for example, a meeting with the audit committee to discuss the general approach and overall
scope of the audit and eliciting views of independent directors. This discussion may also
provide those charged with governance with the opportunity to bring matters of concern to
the auditor's attention.
29. Since the responsibilities of those charged with governance and management may vary by
entity, it is important that the auditor understands the nature of these responsibilities within an
entity to ensure that the inquiries and communications described above are directed to the
appropriate individuals[2].

30. In addition, following the inquiries of management described in paragraphs 22-27, the
auditor considers whether there are any matters of governance interest to be discussed with
those charged with governance of the entity[3]. Such matters may include for example:
Concerns about the nature, extent and frequency of management's assessments of the
accounting and control systems in place to prevent and detect fraud and error, and of the risk
that the financial statements may be misstated.
A failure by management to address appropriately material weaknesses in internal control
identified during the prior period's audit.
The auditor's evaluation of the entity's control environment, including questions regarding
managements competence and integrity.
The effect of any matters, such as those above, on the general approach and overall scope of
the audit, including additional procedures that the auditor may need to perform.
Audit Risk
31. AAS 6 (Revised), "Risk Assessments and Internal Control," paragraph 3, states that "audit
risk" is the risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated. Such misstatements can result from either fraud or error.
30

AAS 6 (Revised) identifies the three components of audit risk i.e., inherent risk, control risk
and detection risk, and also provides guidance on how to assess these risks.
Inherent Risk and Control Risk
32. When assessing inherent risk and control risk in accordance with AAS 6 (Revised), Risk
Assessments and Internal Control, the auditor should consider how the financial statements
might be materially misstated as a result of fraud or error. In considering the risk of material
misstatement resulting from fraud, the auditor should consider whether fraud risk factors are
present that indicate the possibility of either fraudulent financial reporting or
misappropriation of assets.
33. AAS 6 (Revised), Risk Assessments and Internal Control, describes the auditor's
assessment of inherent risk and control risk, and how those assessments affect the nature,
timing and extent of the audit procedures. In making those assessments, the auditor considers
how the financial statements might be materially misstated as a result of fraud or error.
34. The fact that fraud is usually concealed can make it very difficult to detect. Nevertheless,
using the auditor's knowledge of the business, the auditor may identify events or conditions
that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may
already have occurred. Such events or conditions are referred to as "fraud risk factors". For
example, a document may be missing, a general ledger may be out of balance, or an
analytical procedure may not make sense. However, these conditions may be the result of
circumstances other than fraud. Therefore, fraud risk factors do not necessarily indicate the
existence of fraud, however, they often have been present in circumstances where frauds have
occurred. The presence of fraud risk factors may affect the auditor's assessment of inherent
risk or control risk. Examples of fraud risk factors are set out in Appendix 1 to this AAS.

35. Fraud risk factors cannot easily be ranked in order of importance or combined into
effective predictive models. The significance of fraud risk factors varies widely. Some of
these factors will be present in entities where the specific conditions do not present a risk of
material misstatement. Accordingly, the auditor exercises professional judgment when
considering fraud risk factors individually or in combination and whether there are specific
controls that mitigate the risk.
36. Although the fraud risk factors described in Appendix 1 cover a broad range of situations
typically faced by auditors, they are only examples. Moreover, not all of these examples are
relevant in all circumstances, and some may be of greater or lesser significance in entities of
different size, with different ownership characteristics, in different industries, or because of
other differing characteristics or circumstances. Accordingly, the auditor uses professional
judgment when assessing the significance and relevance of fraud risk factors and determining
the appropriate audit response.
31

37. The size, complexity, and ownership characteristics of the entity have a significant
influence on the consideration of relevant fraud risk factors. For example, in the case of a
large entity, the auditor ordinarily considers factors that generally constrain improper conduct
by management, such as the effectiveness of those charged with governance, and the internal
audit function. The auditor also considers what steps have been taken to enforce a formal
code of conduct, and the effectiveness of the budgeting system. In the case of a small entity,
some or all of these considerations may be inapplicable or less important. For example, a
smaller entity might not have a written code of conduct but, instead, may have developed a
culture that emphasizes the importance of integrity and ethical behaviour through oral
communication and by management example. Domination of management by a single
individual in a small entity does not generally, in and of itself, indicate a failure by
management to display and communicate an appropriate attitude regarding internal control
and the financial reporting process. Furthermore, fraud risk factors considered at a business
segment operating level may provide different insights than the consideration thereof at an
entity-wide level.
38. The presence of fraud risk factors may indicate that the auditor will be unable to assess
control risk at less than high for certain financial statement assertions. On the other hand, the
auditor may be able to identify internal controls designed to mitigate those fraud risk factors
that the auditor can test to support a control risk assessment below high.
Detection Risk
39. Based on the auditor's assessment of inherent and control risks (including the results of
any tests of controls), the auditor should design substantive procedures to reduce to an
acceptably low level the risk that misstatements resulting from fraud and error that are
material to the financial statements taken as a whole will not be detected. In designing the
substantive procedures, the auditor should address the fraud risk factors that the auditor has
identified as being present.
40. AAS 6 (Revised) Risk Assessments and Internal Control, explains that the auditor's
control risk assessment, together with the inherent risk assessment, influences the nature,
timing and extent of substantive procedures to be performed to reduce detection risk to an
acceptably low level. In designing substantive procedures, the auditor addresses fraud risk
factors that the auditor has identified as being present. The auditor's response to those factors
is influenced by their nature and significance. In some cases, even though fraud risk factors
have been identified as being present, the auditor's judgment may be that the audit
procedures, including both tests of control, and substantive procedures, already planned, are
sufficient to respond to the fraud risk factors.
41. In other circumstances, the auditor may conclude that there is a need to modify the nature,
timing and extent of substantive procedures to address fraud risk factors present. In these
32

circumstances, the auditor considers whether the assessment of the risk of material
misstatement calls for an overall response, a response that is specific to a particular account
balance, class of transactions or assertion, or both types of response. The auditor considers
whether changing the nature of audit procedures, rather than the extent of them, may be more
effective in responding to identified fraud risk factors. Examples of response procedures are
set out in Appendix 2 to this AAS, including examples of responses to the auditor's
assessment of the risk of material misstatement resulting from both fraudulent financial
reporting and misappropriation of assets.
Procedures when Circumstances Indicate a Possible Misstatement
When the auditor encounters circumstances that may indicate that there is a material
misstatement in the financial statements resulting from fraud or error, the auditor should
perform procedures to determine whether the financial statements are materially misstated.
During the course of the audit, the auditor may encounter circumstances that indicate that the
financial statements may contain a material misstatement resulting from fraud or error.
Examples of such circumstances that, individually or in combination, may make the auditor
suspect that such a misstatement exists are set out in Appendix 3 to this AAS.
When the auditor encounters such circumstances, the nature, timing and extent of the
procedures to be performed depends on the auditor's judgment as to the type of fraud or error
indicated, the likelihood of its occurrence, and the likelihood that a particular type of fraud or
error could have a material effect on the financial statements. Ordinarily, the auditor is able to
perform sufficient procedures to confirm or dispel a suspicion that the financial statements
are materially misstated resulting from fraud or error. If not, the auditor considers the effect
on the auditor's report, as discussed in paragraph 48.
The auditor cannot assume that an instance of fraud or error is an isolated occurrence and
therefore, before the conclusion of the audit, the auditor considers whether the assessment of
the components of audit risk made during the planning of the audit may need to be revised
and whether the nature, timing and extent of the auditor's other procedures may need to be
reconsidered. {See AAS 6 (Revised), "Risk Assessments and Internal Control," paragraphs 40
and 47} For example, the auditor would consider:
The nature, timing and extent of substantive procedures.
The assessment of the effectiveness of internal controls if control risk was assessed below
high.
The assignment of audit team members that may be appropriate in the circumstances.
Considering Whether an Identified Misstatement may be Indicative of Fraud
When the auditor identifies a misstatement, the auditor should consider whether such a
misstatement may be indicative of fraud and if there is such an indication, the auditor should
consider the implications of the misstatement in relation to other aspects of the audit,
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particularly the reliability of management representations.

If the auditor has determined that a misstatement is, or may be, the result of fraud, the auditor
evaluates the implications, especially those dealing with the organizational position of the
person or persons involved. For example, fraud involving misappropriations of cash from a
small petty cash fund is ordinarily of little significance to the auditor in assessing the risk of
material misstatement due to fraud. This is because both the manner of operating the fund and
its size tend to establish a limit on the amount of potential loss, and the custodianship of such
funds is ordinarily entrusted to an employee with a low level of authority. Conversely, when
the matter involves management with a higher level of authority, even though the amount
itself is not material to the financial statement, it may be indicative of a more pervasive
problem. In such circumstances, the auditor reconsiders the reliability of evidence previously
obtained since there may be doubts about the completeness and truthfulness of
representations made and about the genuineness of accounting records and documentation.
The auditor also considers the possibility of collusion involving employees, management or
third parties when reconsidering the reliability of evidence. If management, particularly at the
highest level, is involved in fraud, the auditor may not be able to obtain the evidence
necessary to complete the audit and report on the financial statements.
Evaluation and Disposition of Misstatements, and the Effect on the Auditor's Report
When the auditor confirms that, or is unable to conclude whether, the financial statements are
materially misstated as a result of fraud or error, the auditor should consider the implications
for the audit. AAS 13, "Audit Materiality," paragraphs 12-16, and AAS 28, The Auditors
Report on Financial Statements, paragraphs 37-47, provide guidance on the evaluation and
disposition of misstatements and the effect on the auditor's report. Where a significant fraud
has occurred or the fraud is committed by those charged with governance, the auditor should
consider the necessity for a disclosure of the fraud in the financial statements. If adequate
disclosure is not made the auditor should consider the necessity for a suitable disclosure in
his report.
Documentation
The auditor should document fraud risk factors identified as being present during the auditor's
assessment process (see paragraph 32) and document the auditor's response to any such
factors (see paragraph 39). If during the performance of the audit, fraud risk factors are
identified that cause the auditor to believe that additional audit procedures are necessary, the
auditor should document the presence of such risk factors and the auditor's response to them.
The auditor must document matters which are important in providing evidence to support the
audit opinion, and the working papers must include the auditor's reasoning on all significant
matters which require the auditor's judgment, together with the auditor's conclusion thereon.
Because of the importance of fraud risk factors in the assessment of the inherent or control
risk of material misstatement, the auditor documents fraud risk factors identified and the
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response considered appropriate by the auditor. (Reference may also be had to AAS 3,
Documentation).
Management Representations
The auditor should obtain written representations from management that
(a) it acknowledges its responsibility for the implementation and operation of accounting and
internal control systems that are designed to prevent and detect fraud and error.
(b) it believes the effects of those uncorrected financial statement misstatements aggregated
by the auditor during the audit are immaterial, both individually and in the aggregate, to the
financial statements taken as a whole. A summary of such items should be included in or
attached to the written representation;
(c) it has disclosed to the auditor all significant facts relating to any frauds or suspected
frauds known to management that may have affected the entity; and
(d) it has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
AAS 11, Representations by Management provides guidance on obtaining appropriate
representations from management in the audit. In addition to acknowledging its responsibility
for the financial statements, it is important that management acknowledges its responsibility
for the accounting and internal control systems designed to prevent and detect fraud and
error.
Because management is responsible for adjusting the financial statements to correct material
misstatements, it is important that the auditor obtains written representation from
management that any uncorrected misstatements resulting from either fraud or error are, in
management's opinion, immaterial, both individually and in the aggregate. Such
representations are not a substitute for obtaining sufficient appropriate audit evidence. In
some circumstances, management may not believe that certain of the uncorrected financial
statement misstatements aggregated by the auditor during the audit are misstatements. For
that reason, management may want to add to their written representation words such as, "We
do not agree that items and . constitute misstatements because [description of
reasons]."
The auditor may designate an amount below which misstatements need not be accumulated
because the auditor expects that the accumulation of such amounts clearly would not have a
material effect on the financial statements. In so doing, the auditor considers the fact that the
determination of materiality involves qualitative as well as quantitative considerations and
that misstatements of a relatively small amount could nevertheless have a material effect on
the financial statements. The summary of uncorrected misstatements included in or attached
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to the written representation need not include such misstatements.

Because of the nature of fraud and the difficulties encountered by auditors in detecting
material misstatements in the financial statements resulting from fraud, it is important that the
auditor obtains a written representation from management confirming that it has disclosed to
the auditor all facts relating to any frauds or suspected frauds that it is aware of that may have
affected the entity, and that management has disclosed to the auditor the results of
management's assessment of the risk that the financial statements may be materially
misstated as a result of fraud.

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