4.

COMPLETION AND REVIEW

WHAT ARE THE PROCEDURES TO BE PERFORMED BEFORE SIGNING THE AUDIT REPORT?

ANSWER:

There are still procedures to be performed by auditor after completion of substantive procedures
involving detailed checking:
1. An auditor has to deal with effect of subsequent events.

2. He has to obtain sufficient appropriate evidence regarding appropriateness of use by

management of going concern assumption in preparation of financial statements.

3. Misstatements identified during audit have to be evaluated and communicated.

4. Communication regarding significant audit findings and other matters is made to those charged
with governance.

5. Written representations are obtained.

All such procedures are performed before signing of audit report.

155
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 SA 560 SUBSEQUENT EVENTS

DEFINITIONS:

1. SUBSEQUENT EVENTS: the events occurring between the date of the financial statements and
the date of the auditor’s report, and facts that become known to the auditor after the date of
the auditor’s report.

2. DATE OF THE FINANCIAL STATEMENTS: The date of the end of the latest period covered by the
financial statements.

3. DATE OF APPROVAL OF THE FINANCIAL STATEMENTS: The date on which all the statements
that comprise the financial statements, including the related notes, have been prepared and
those with the recognised authority have asserted that they have taken responsibility for those
financial statements.

4. DATE OF THE AUDITOR’S REPORT: The date the auditor dates the report on the financial
statements in accordance with SA 700.

5. DATE THE FINANCIAL STATEMENTS ARE ISSUED: The date that the auditor’s report and audited
financial statements are made available to third parties.

The date the financial statements are issued generally depends on the regulatory environment
of the entity. In some circumstances, the date the financial statements are issued may be the
date that they are filed with a regulatory authority. Since audited financial statements cannot be
issued without an auditor’s report, the date that the audited financial statements are issued
must not only be at or later than the date of the auditor’s report, but must also be at or later
than the date the auditor’s report is provided to the entity.

Q NO 1. WHAT DO YOU MEAN BY SUBSEQUENT EVENTS AND GIVE FEW EXAMPLES?

ANSWER:

1. SUBSEQUENT EVENTS: Events occurring between the date of the financial statements and the
date of the auditor’s report and facts that become known to the auditor after the date of the
auditor’s report are known as subsequent events.

For Example:
156

a. a company which may have planned an agreement to merge between the date of the
financial statements and the date of the auditor’s report or
Page

b. a fire claim amount of an entity receivable from insurance company as on date of financial
SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 statements may have been settled at a reduced amount before date of auditor’s report.

2. TYPES: Financial statements may be affected by certain events that occur after the date of
THE financial statements. Many financial reporting frameworks specifically refer to such events.
Such financial reporting frameworks ordinarily identify 2 types of events:

a. ADJUSTING EVENTS: Those that provide evidence of conditions that existed at the date of
the financial statements and

Examples:
1. Declaration of insolvency of a major debtor of the entity between the date of financial
statements and the date of auditor’s report providing evidence on the recoverability of
the money due from debtor as on date of the financial statements.

2. Settling a legal claim outside the court at a reduced amount between the date of
financial statements and the date of auditor’s report for which provision has already
been made in financial statements. It provides evidence onadjustment in provision
amount already made in financial statements, if any.

b. NON-ADJUSTING EVENTS: Those that provide evidence of conditions that arose after the
date of the financial statements.

Examples:
1. Issue of new share capital.
2. Planned merger of the company.
3. Destruction of substantial inventories due to fire between the date of the financial
statements and the date of auditor’s report.

Q NO 2. WRITE ABOUT SCOPE AND OBJECTIVE OF SA 560?

ANSWER:

1. SCOPE: SA 560 deals with the auditor’s responsibilities relating to subsequent events in an
audit of financial statements.

2. OBJECTIVES OF AUDITOR IN ACCORDANCE WITH SA 560: The objectives of the auditor are to:

a. Obtain sufficient appropriate audit evidence about whether events occurring between the
date of the financial statements and the date of the auditor’s report that require
157

adjustment of, or disclosure in, the financial statementsare appropriately reflected in

those financial statements and
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 b. Respond appropriately to facts that become known to the auditor after the date of the
auditor’s report, that, had they been known to the auditor at that date, may have caused
the auditor to amend the auditor’s report.

Q NO 3. WRITE ABOUT AUDIT PROCEDURES RELATING TO EVENTS OCCURRING BETWEEN THE

DATE OF THE FINANCIAL STATEMENTS AND THE DATE OF THE AUDITOR’S REPORT?

ANSWER:

1 . The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the date
of the auditor’s report that require adjustment of, or disclosure in, the financial statements
have been identified.

2. The auditor is not, however, expected to perform additional audit procedures on matters to
which previously applied audit procedures have provided satisfactory conclusions.

3 . The auditor shall perform the procedures required above so that they cover the period from the
date of the financial statements to the date of the auditor’s report, or as near as practicable
thereto.

4. AUDIT PROCEDURES: The auditor shall take into account the auditor’s risk assessment in
determining the nature and extent of such audit procedures, which shall include the following:

a. Obtaining an understanding of any procedures management has established to ensure

that subsequent events are identified.

b. Inquiring of management and, where appropriate, those charged with governance as to

whether any subsequent events have occurred which might affect the financial
statements.

c. Reading minutes, if any, of the meetings, of the entity’s owners, management and those
charged with governance, that have been held after the date of the financial statements
and inquiring about matters discussed at any such meetings for which minutes are not
yet available.

d. Reading the entity’s latest subsequent interim financial statements, if any.

e. Such information may also be obtained by auditor from accounting records pertaining to
158

period after date of financial statements, reading entity’s latest available budgets etc.
Page

VERIFY ADJUSTEMENTS: When, as a result of the procedures performed, the auditor identifies

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
events that require adjustment of, or disclosure in, the financial statements, the auditor shall
determine whether each such event is appropriately reflected in those financialstatements.

WRITTEN REPRESENTATION: The auditor shall request management and, where appropriate, those
charged with governance, to provide a written representation in accordance with SA 580,
“Written Representations” that all events occurring subsequent to the date of the financial
statements and for which the applicable financial reporting framework requires adjustment or
disclosure have been adjusted or disclosed.

Q NO 4. WRITE ABOUT THE AUDIT PROCEDURES WHEN THE FACTS WHICH BECOME KNOWN TO
THE AUDITOR AFTER THE DATE OF THE AUDITOR’S REPORT BUT BEFORE THE DATE THE
FINANCIAL STATEMENTS ARE ISSUED?

ANSWER:

1. DISCUSS WITH MANAGEMENT: The auditor has no obligation to perform any audit procedures
regarding the financial statements after the date of the auditor’s report. However, when, after
the date of the auditor’s report but before the date the financial statements are issued, a fact
becomes known to the auditor that, had it been known to the auditor at the date of the
auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:

a. Discuss the matter with management and, where appropriate, those charged with
governance.

b. Determine whether the financial statements need amendment and, if so,

c. Inquire how management intends to address the matter in the financial statements.

2. MANAGEMENT AMENDS F/S : If management amends the financial statements, the auditor
shall:
a. Carry out the audit procedures necessary in the circumstances on the amendment.

b. Extend the audit procedures, already referred, to the date of the new auditor’s
report and

c. Provide a new auditor’s report on the amended financial statements.

d. The new auditor’s report shall not be dated earlier than the date of approval of the
amended financial statements.
159

3. AMENDED F/S OF ONLY SUBSEQUENT EVENTS: When law, regulation or the financial reporting
Page

framework does not prohibit management from restricting the amendment of the financial

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 statements to the effects of the subsequent events or events causing that amendments and
those responsible for approving the financial statements are not prohibited from restricting
their approval to that amendment, the auditor is permitted to restrict the procedures on
subsequent events to that amendment. In such cases, the auditor shall either:

a. Amend the auditor’s report to include an additional date restricted to that

amendment that thereby indicates that the auditor’s procedures on subsequent
events are restricted solely to the amendment of the financial statements described
in the relevant note to the financial statements OR

b. Provide a new or amended auditor’s report that includes a statement in an Emphasis

of Matter paragraph or Other Matter(s) paragraph that conveys that auditor’s
procedures on subsequent events are restricted solely to the amendment of the
financial statements as described in the relevant note to the financial statements.

4. NO REQUIREMENT TO AMEND AS PER LAW: In some entities, management may not be

required by the applicable law, regulation or the financial reporting framework to issue
amended financial statements and, accordingly, the auditor need not provide an amended or
new auditor’s report. However, when management does not amend the financial statements in
circumstances where the auditor believes they need to be amended, then:

a. If the auditor’s report has not yet been provided to the entity, the auditor shall
modify the opinion as required by SA 705 and then provide the auditor’s report or

b. If the auditor’s report has already been provided to the entity, the auditor shall
notify management and, unless all of those charged with governance are
involved in managing the entity, those charged with governance, not to issue the
financial statements to third parties before the necessary amendments have been
made.

c. If the financial statements are nevertheless subsequently issued without the

necessary amendments, the auditor shall take appropriate action, to seek to
prevent reliance on the auditor’s report.

Q NO 5. WRITE ABOUT THE AUDIT PROCEDURES RELATED TO SUBSEQUENT EVENTS WHEN FACTS
WHICH BECOME KNOWN TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS HAVE BEEN
ISSUED?

ANSWER:
160

1. After the financial statements have been issued, the auditor has no obligation to perform any
Page

audit procedures regarding such financial statements. However, when, after the financial
SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 statements have been issued, a fact becomes known to the auditor that, had it been known
to the auditor at the date of the auditor’s report,may have caused the auditor to amend the
auditor’s report, the auditor shall:

a. Discuss the matter with management and, where appropriate, those charged with
governance.

b. Determine whether the financial statements need amendment and, if so,

c. Inquire how management intends to address the matter in the financial statements.

2. MANAGEMENT AMENDS F/S: If the management amends the financial statements, the auditor
shall:
a. Carry out the audit procedures necessary in the circumstances on the amendment.

b. Review the steps taken by management to ensure that anyone in receipt ofthe
previously issued financial statements together with the auditor’s report thereon is
informed of the situation.

c. Unless such circumstances when law, regulation or the financial reporting framework
does not prohibit management from restricting the amendment of the financial
statements to the effects of the subsequent events or events causing that amendments
and those responsible for approving the financial statements are not prohibited from
restricting their approval to thatamendment apply:

i. Extend the audit procedures, already referred, to the date of the new auditor’s
report, and the date the new auditor’s report no earlier than the date of
approval of the amended financial statements and

ii. Provide a new auditor’s report on the amended financial statements.

iii. When the circumstances are such that law, regulation or the financial reporting
framework does not prohibit management from restricting the amendment of
the financial statements to the effects of the subsequent events or events
causing that amendments and those responsible for approving the financial
statements are not prohibited from restricting their approval to that amendment,
amend the auditor’s report, or provide a new auditor’s report as already
discussed.

d. The auditor shall include in the new or amended auditor’s report an Emphasis of Matter
161

paragraph or Other Matter(s) paragraph referring to a note to the financial statements

that more extensively discusses the reason for the amendment of the previously issued
Page

financial statements and to the earlier report provided by the auditor.

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
3. If management does not take the necessary steps to ensure that anyone in receipt of the
previously issued financial statements is informed of the situation and does not amend the
financial statements in circumstances where the auditor believes they need to be amended,
the auditor shall notify management and, unless all of those charged with governance are
involved in managing the entity, those charged with governance, that the auditor will seek to
prevent future reliance on the auditor’s report.

4. If, despite such notification, management or those charged with governance do not take these
necessary steps, the auditor shall take appropriate action to seek to prevent reliance on the
auditor’s report.

ILLUSTRATION 1.

CA PK Jacob is conducting audit of a company for year 2021-22. The company is engaged in export
of ethnic rugs to buyers in Europe. The audit is nearing completion in month of July 2022.
However, it becomes known to the auditor that one of overseas buyers has made a legal claim
against the company on 1st June 2022 for injury caused to a customer of one European buyer due
to sub-standard dyes used in rugs of one lot of order shipped in August, 2021. The management of
company has decided to agree to an out of court settlement of Rs.5 crore to protect its
reputation. The financial statements of the company are silent on this issue.
Discuss, how, CA PK Jacob should proceed to deal with above issue.

ANSWER:

In the given case, the auditor has come to know of legal claim against the company before issue of
audit report. It has also come to his knowledge that management of company has agreed to an out
of court settlement of Rs.5 crore. It is an example of subsequent event between the date of the
financial statements and the date of the auditor’s report. It provides evidence of conditions that
existed at the date of the financial statements and requires adjustment in financial statements.
He should ask company management to make necessary adjustment to the financial statements. If
adjustment is not made by management, he should consider impact on auditor’s report.

ILLUSTRATION 2.

CA Chandni Khanna is going to complete audit of a company within next few days. She has
performed necessary audit procedures like inquiry of management personnel, reading minutes of
meetings held after date of financial statements, going through books of accounts after date of
financial statements to make sure that all subsequent events before signing audit report have
162

been considered by her. Still, she wants to be certain that no such events have been left out.
What she should do in such a situation? Also, discuss the rationale of doing so.
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
ANSWER:

She has already performed necessary audit procedures like inquiry of management personnel,
reading minutes of meetings after date of financial statements and going through books after date
of financial statements.

Now, she should request management and, where appropriate, those charged with governance, to
provide a written representation in accordance with SA 580, “Written Representations” that all
events occurring subsequent to the date of the financial statements and for which the applicable
financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.
The rationale of obtaining written representations is that even after performing abovesaid
procedures, she may not come to know all subsequent events.

Therefore, it is necessary from an auditor’s point of view to obtain acknowledgment from

management in the form of Written representations that all such events for which the applicable
financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.

163
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 SA 570 GOING CONCERN

Q NO 1. WRITE ABOUT MEANING OF GOING CONCERN AND ITS SIGNIFICANCE IN FINANCIAL

REPORTING AND RELEVANT STANDARD ON AUDITING?

ANSWER:

1. Going concern is one of the fundamental accounting assumptions. The enterprise is normally
viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is
assumed that the enterprise has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of the operations.

2. General purpose financial statements are prepared using the going concern basis of accounting,
unless management either intends to liquidatethe entity or to cease operations, or has no
realistic alternative but to do so.

3. The significance of Going Concern is due to its effect on preparation of financial statements.
Ability or otherwise of an enterprise to be viewed as going concern affects its preparation of
financial statements.

4. When the use of the going concern basis of accounting is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realize its assets and discharge its
liabilities in the normal course of business.

5. When an enterprise is not viewed as a going concern, the financial statements are prepared on
liquidation basis. For example, inventories may need to be writtendown as these may be
sold for a lower price. Assets may have to be recorded atthe likely prices they will fetch.

6. SA 570 Going Concern deals with the auditor’s responsibilities in the audit of financial
statements relating to going concern and the implications for the auditor’s report.

Q NO 2. WRITE ABOUT RESPONSIBILITY FOR ASSESSMENT OF THE ENTITY’S ABILITY TO CONTINUE

AS A GOING CONCERN?

ANSWER:

1. The preparation of the financial statements requires management to assess the entity’s ability
to continue as a going concern even if the financial reporting framework does not include an
explicit requirement to do so.
164

2. Management’s assessment of the entity’s ability to continue as a going concern involves making
a judgment, at a particular point in time, about inherently uncertain future outcomes of
Page

events or conditions. The following factors are relevant to that judgment:

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 a. The degree of uncertainty associated with the outcome of an event or condition
increases significantly the further into the future an event or condition or the outcome
occurs.

b. The size and complexity of the entity, the nature and condition of its business and the
degree to which it is affected by external factors affect the judgment regarding the
outcome of events or conditions.

c. Any judgment about the future is based on information available at the time at which
the judgment is made. Subsequent events may result in outcomes that are
inconsistent with judgments that were reasonable at the time theywere made.

Q NO 3. WRITE ABOUT OBJECTIVES OF AUDITOR IN ACCORDANCE WITH SA 570?

ANSWER:

The objectives of the auditor are:

1. To obtain sufficient appropriate audit evidence regarding and conclude onthe
appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements;

2. To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern and

3. To report in accordance with this SA.

Q NO 4. WRITE ABOUT RESPONSIBILITIES OF THE AUDITOR UNDER SA 570?

ANSWER:

1 . The auditor’s responsibilities are:

a . To obtain sufficient appropriate audit evidence regarding and conclude on the
appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements and

b . To conclude, based on the audit evidence obtained, whether a material uncertainty

exists about the entity’s ability to continue as a going concern.
165

2. These responsibilities exist even if the financial reporting framework used in the preparation of
Page

the financial statements does not include an explicit requirement for management to make a

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 specific assessment of the entity’s ability to continue as a going concern.

3. However, as described in SA 200, the potential effects of inherent limitations on the auditor’s
ability to detect material misstatements are greater for future events or conditions that may
cause an entity to cease to continue as a going concern. The auditor cannot predict such future
events or conditions. Accordingly, the absence of any reference to a material uncertainty
about the entity’s ability to continue asa going concern in an auditor’s report cannot be
viewed as a guarantee as to the entity’s ability to continue as a going concern.

Q NO 5. WRITE ABOUT RISK ASSESSMENT PROCEDURES AND RELATED ACTIVITIES RELATED TO

ASSESSMENT OF GOING CONCERN?

ANSWER:

1. When performing risk assessment procedures as required by SA 315, the auditor shall consider
whether events or conditions exist that may cast significant doubt on the entity’s ability to
continue as a going concern.

2. In so doing, the auditor shall determine whether management has already performed a
preliminary assessment of the entity’s ability to continue as a going concern and:

a. If such an assessment has been performed, the auditor shall discuss the assessment with
management and determine whether management has identified events or conditions
that, individually or collectively, may cast significant doubt on the entity’s ability to
continue as a going concern and, if so, management’s plans to address them or

b. If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basisof accounting,
and inquire of management whether events or conditions exist that, individually or
collectively, may cast significant doubt on the entity’sability to continue as a going
concern.

3. The auditor shall remain alert throughout the audit for audit evidence of events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern.

Examples of events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern:
166

The following are examples of events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern:
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
FINANCIAL EVENTS OR CONDITIONS
1. Net liability or net current liability position
2. Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets
3. Indications of withdrawal of financial support by creditors
4. Negative operating cash flows indicated by historical or prospective financial statements
5. Adverse key financial ratios
6. Substantial operating losses or significant deterioration in the value of assets used to generate
cash flows
7. Arrears or discontinuance of dividends
8. Inability to pay creditors on due dates
9. Inability to comply with the terms of loan agreements
10. Change from credit to cash-on-delivery transactions with suppliers
11. Inability to obtain financing for essential new product development or other essential
investments

OPERATING EVENTS OR CONDITIONS:

1. Management intentions to liquidate the entity or to cease operations
2. Loss of key management without replacement
3. Loss of a major market, key customer(s), franchise, license, or principal supplier(s)
4. Labour difficulties
5. Shortages of important supplies
6. Emergence of a highly successful competitor

OTHER EVENTS OR CONDITIONS

1. Non-compliance with capital or other statutory or regulatory requirements, such as solvency
or liquidity requirements for financial institutions
2. Pending legal or regulatory proceedings against the entity that may, if successful, result in
claims that the entity is unlikely to be able to satisfy
3. Changes in law or regulation or government policy expected to adversely affect the entity
4. Uninsured or underinsured catastrophes when they occur

Q NO 6. WRITE ABOUT Evaluating management’s assessment OF GOING CONCERN

ANSWER:

1. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a
going concern. Management’s assessment of the entity’s ability to continue as a going concern is
167

a key part of the auditor’s consideration of management’s use of the going concern basis of
accounting.
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
2. It is not the auditor’s responsibility to rectify the lack of analysis by management.In some
circumstances, however, the lack of detailed analysis by management to support its assessment
may not prevent the auditor from concluding whether management’s use of the going concern
basis of accounting is appropriate in the circumstances.

3. For example, when there is a history of profitable operations and a ready access to financial
resources, management may make its assessment without detailed analysis. In this case, the
auditor’s evaluation of the appropriateness of management’s assessment may be made without
performing detailed evaluation procedures if the auditor’s other audit procedures are sufficient
to enable the auditor to conclude whether management’s use of the going concern basis of
accounting in the preparation of the financial statements is appropriate in the circumstances.

4. In other circumstances, evaluating management’s assessment of the entity’s abilityto

continue as a going concern, may include an evaluation of the process management followed to
make its assessment, the assumptions on which the assessment is based and management’s
plans for future action and whether management’s plans are feasible in the circumstances.

5. PERIOD OF ASSESSMENT:

a. AS PER MANAGEMENT AND AFRFW: In evaluating management’s assessment of the

entity’s ability to continue as a going concern, the auditor shall cover the same
period as that used by management to make its assessment as required by the
applicable financial reporting framework, or by law or regulation if it specifies a
longer period.

b. MINIMUM 12 MONTHS: If management’s assessment of the entity’s ability to

continue as a going concern covers less than 12 months from the date of the
financial statements, the auditor shall request management to extend its
assessment period to at least 12 months from that date.

Q NO 7. WHAT ARE THE ADDITIONAL AUDIT PROCEDURES WHEN EVENTS OR CONDITIONS ARE
IDENTIFIED THAT CASE SIGNIFICANT DOUBT ON ENTITIES ABILITY TO CONTINUE AS A GOING
CONCERN?

ANSWER:

If events or conditions have been identified that may cast significant doubt on the entity’s ability to
continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to
determine whether or not a material uncertainty exists related to events or conditions that may
168

cast significant doubt on the entity’s ability to continue as a going concern through performing
additional audit procedures, including consideration of mitigating factors. These procedures shall
Page

include:
SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
1. Where management has not yet performed an assessment of the entity’sability to continue as a
going concern, requesting management to make its assessment.

2. Evaluating management’s plans for future actions in relation to its going concern assessment,
whether the outcome of these plans is likely to improve the situation and whether
management’s plans are feasible in the circumstances.

3. Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant
factor in considering the future outcome of events or conditions in the evaluation of
management’s plans for future actions:

a. Evaluating the reliability of the underlying data generated to preparethe forecast

and

b. Determining whether there is adequate support for the assumptions underlying the
forecast.

4. Considering whether any additional facts or information have become available since the date
on which management made its assessment.

5. Requesting written representations from management and, where appropriate, those charged
with governance, regarding their plans for future actions and the feasibility of these plans.

Examples of audit procedures when events or conditions have been identified that may cast
significant doubt on the entity’s ability to continue as going concern:

1. Analysing and discussing cash flow, profit and other relevant forecasts with management
2. Analysing and discussing the entity’s latest available interim financial statements
3. Reading the terms of debentures and loan agreements and determining whether any have been
breached
4. Reading minutes of the meetings of shareholders, those charged with governance and relevant
committees for reference to financing difficulties
5. Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the
reasonableness of management’s assessments of their outcome and the estimate of their
financial implications
6. Confirming the existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing the financial ability of such parties
to provide additional funds
169

7. Evaluating the entity’s plans to deal with unfilled customer orders

8. Performing audit procedures regarding subsequent events to identify those that either mitigate
Page

or otherwise affect the entity’s ability to continue as a going concern

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
9. Confirming the existence, terms and adequacy of borrowing facilities
10. Obtaining and reviewing reports of regulatory actions
11. Determining the adequacy of support for any planned disposals of assets

Q NO 8. WRITE ABOUT AUDITOR’S CONCLUSIONS ON ENTITIES ABILITY TO CONTINUE AS A GOING

COCNERN?

ANSWER:

1. The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained
regarding, and shall conclude on, the appropriateness of management’s use of the going
concern basis of accounting in the preparation of the financial statements.

2 . Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s
judgment, a material uncertainty exists related to events or conditions that, individually or
collectively, may cast significant doubt on the entity’s ability to continue as a going concern.

3. A material uncertainty exists when the magnitude of its potential impact and likelihood of
occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and
implications of the uncertainty is necessary.

Q NO 9. WRITE ABOUT AUDITORS CONCLUSION ON ADEQUACY OF DISCLOSURES WHEN EVENTS

OR CONDITIONS HAVE BEEN IDENTIFIED?

ANSWER:

1. MATERIAL UNCERTAINTY EXIST: If the auditor concludes that management’s use of the going
concern basis of accounting is appropriate in the circumstances but a material uncertainty
exists, the auditor shall determine whether the financial statements:

a. Adequately disclose the principal events or conditions that may castsignificant

doubt on the entity’s ability to continue as a going concern and management’s plans
to deal with these events or conditions and

b. Disclose clearly that there is a material uncertainty related to events or conditions

that may cast significant doubt on the entity’s ability to continue as a going concern
and, therefore, that it may be unable to realize its assets and discharge its liabilities
in the normal course of business.
170

2. NO MATERIAL UNCERTAINTY EXIST: If events or conditions have been identified that may cast
Page

significant doubt on the entity’s ability to continue as a going concern but, based on the audit

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 evidence obtained the auditor concludes that no material uncertainty exists, the auditor shall
evaluate whether, in view of the requirements of the applicable financial reporting framework,
the financial statements provide adequate disclosures about these events or conditions.

Q NO 10. WRITE ABOUT IMPLICATIONS FOR THE AUDITOR’S REPORT RELATED TO GOING
COCERN?

ANSWER:

I. IF USE OF GOING CONCERN BASIS OF ACCOUNTING IS INAPPROPRIATE:

If the financial statements have been prepared using the going concern basis of accounting
but, in the auditor’s judgment, management’s use of the going concern basis of accounting in
the preparation of the financial statements is inappropriate, the auditor shall express an
adverse opinion.

II. IF USE OF GOING CONCERN BASIS OF ACCOUNTING IS APPROPRIATE BUT A MATERIAL

UNCERTAINTY EXISTS:

A. ADEQUATE DISCLOSURE IS MADE IN THE FINANCIAL STATEMENTS: If adequate disclosure

about the material uncertainty is made in the financial statements, the auditor shall express
an unmodified opinion and the auditor’s report shall include a separate section under the
heading “Material Uncertainty Related to Going Concern” to:

a. Draw attention to the note in the financial statements that discloses such matters.

b. State that these events or conditions indicate that a material uncertainty exists that may
cast significant doubt on the entity’s ability to continue as a going concern and that the
auditor’s opinion is not modified in respect of the matter.

B. ADEQUATE DISCLOSURE IS NOT MADE IN THE FINANCIAL STATEMENTS:

If adequate disclosure about the material uncertainty is not made in the financial
statements, the auditor shall:

a. Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA

705.

b. In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to
continue as a going concern and that the financial statements do not adequately
171

disclose this matter.

Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
III. MANAGEMENT UNWILLING TO MAKE OR EXTEND ITS ASSESSMENT:
If management is unwilling to make or extend its assessment when requested to do so by the
auditor, the auditor shall consider the implications for the auditor’s report. In such a situation, a
qualified opinion or a disclaimer of opinion in the auditor’s report may be appropriate, because
it may not be possible for the auditor to obtain sufficient appropriate audit evidence
regarding management’s use of the going concern basis of accounting in the preparation of
the financial statements.

During course of audit of a company, CA. Varun Aggarwal notices that company is facing
significant skilled labour shortages resulting in hampering of operations of company. The
company’s manufacturing is dependent upon skilled labour coming from villages in certain
districts of Eastern UP. However, due to job opportunities available near villages now, many are
not interested in going out from their native villages.
Such a situation has led to company not being able to keep its commitments, losing out on orders
and fall in its revenues. Fixed costs of the company remain at a high level. As a result, company is
facing a liquidity crunch and is not able to pay its creditors on time. The bankers of company are
also not willing to help the company to tide over liquidity crisis. The auditor is having doubts over
going concern status of the company.
How should management of the company try to address auditor’s concerns? What audit
procedures may be performed by auditor in such a situation?

ANSWER:

Significant shortage of skilled labour, inability to pay creditors on time and overall liquidity crisis
faced by the company are examples of events or conditions that, individually or collectively, may
cast significant doubt on the entity’s ability to continue as a going concern.
In such a situation, management should try to address auditor’s concerns by preparing its future
plan of action including preparation of cash flow forecast showing inflow and outflow of cash. Such
a cash flow forecast should address auditor’s concerns regarding liquidity crisis being faced by the
company.

The auditor should perform audit procedures to evaluate the reliability of the underlying data to
prepare the forecast and determining whether there is adequate support for the assumptions
underlying the forecast. The auditor should also consider whether any additional facts or
information have become available since the date on which management made its assessment.
172
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 SA 450 EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT

Q NO 1. WRITE ABOUT EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT AS PER

SA 450 AND STATE ITS OBJECTIVES?

ANSWER:

1. Before forming an opinion on the financial statements, the auditor evaluates effects of
identified misstatements on the audit and of uncorrected misstatements on financial
statements after consideration of materiality.

2. Uncorrected misstatements refer to those misstatements that the auditor has accumulated
during the audit and that have not been corrected.

3. SA 450 deals with the auditor’s responsibility to evaluate the effect of identified misstatements
on the audit and of uncorrected misstatements, if any, on the financial statements.

4. The objective of the auditor is to evaluate:

a. The effect of identified misstatements on the audit and

b. The effect of uncorrected misstatements, if any, on the financial statements.

Q NO 2. WRITE ABOUT ACCUMULATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT

AND CONSIDERATION OF IDENTIFIED MISSTATEMENTS AS THE AUDIT PROGRESSES?

ANSWER:

1. ACCUMULATION OF MISSTATEMENTS: The auditor shall accumulate misstatements identified

during the audit, other than those that are clearly trivial.

2. A misstatement may arise from a variety of factors. For example,

a. An inaccuracy in gathering or processing data from which financial statements are
prepared or

b. An omission of an amount or disclosure can result into a misstatement.

c. An entity has wrongly capitalized machinery repair expenses amounting to Rs.5 lacs
resulting in overstatement of profits. It is an example of misstatement.
173

3. CONSIDERATION OF IDENTIFIED MISSTATEMENTS: The auditor shall determine whether the

overall audit strategy and audit plan need to be revised if:
Page

a. The nature of identified misstatements and the circumstances of their occurrence

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 indicate that other misstatements may exist that, when aggregated with
misstatements accumulated during the audit, could be material or

b. The aggregate of misstatements accumulated during the audit approaches

materiality determined in accordance with SA 320.

4. The auditor may request management to examine a class of transactions, account balance or
disclosure in order for management to understand the cause of a misstatement identified by the
auditor, perform procedures to determine the amount of the actual misstatement in the class
of transactions, account balance or disclosure, and to make appropriate adjustments to the
financial statements. Sucha request may be made, for example, based on the auditor’s
projection of misstatements.

5. If, at the auditor’s request, management has examined a class of transactions, account balance
or disclosure and corrected misstatements that were detected, the auditor shall perform
additional audit procedures to determine whether misstatements remain.

Q NO 3. WRITE ABOUT COMMUNICATION AND CORRECTION OF MISSTATEMENTS IDENTIFIED?

ANSWER:

1. TIMELY COMMUNICATION: The auditor shall communicate on a timely basis all misstatements
accumulated during the audit with the appropriate level of management, unless prohibited by
law or regulation. Timely communication of misstatements to the appropriate level of
management is important as it enables management to evaluate whether the items are
misstatements, inform the auditor if it disagrees and take action as necessary.

a. MANAGEMENT CORRECTS MMS: The auditor shall request management to correct those
misstatements. The correction by management of all misstatements, including those
communicated by the auditor, enables management to maintain accurate accounting books
and records and reduces the risks of material misstatement of future financial statements
because of the cumulative effect of immaterial uncorrected misstatements related to prior
periods.

b. MANAGEMENT REFUSES TO CORRECT: If management refuses to correct some or all of

the misstatements communicatedby the auditor, the auditor shall obtain an understanding
of management’s reasons for not making the corrections and shall take that understanding
into account when evaluating whether the financial statements as a whole are free from
material misstatement.
174
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
2. EVALUATING THE EFFECT OF UNCORRECTED MISSTATEMENTS:

a. REEVALUATE MATERIALITY: Prior to evaluating the effect of uncorrected

misstatements, the auditor shall reassess materiality determined in accordance with SA
320 to confirm whether it remains appropriate in the context of the entity’s actual
financial results.

b. MATERIALITY OF UNCORRECTED MISSTATEMENTS: The auditor shall determine whether

uncorrected misstatements are material, individually or in aggregate. In making this
determination, the auditor shall consider:

i. The size and nature of the misstatements, both in relation to particular classes of
transactions, account balances or disclosures and the financial statementsas a
whole, and the particular circumstances of their occurrence and

ii. The effect of uncorrected misstatements related to prior periods on the relevant
classes of transactions, account balances or disclosures, and the financial statements
as a whole.

3. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE:

a. The auditor shall communicate with those charged with governance regarding uncorrected
misstatements and the effect that they, individually or in aggregate,may have on the
opinion in the auditor’s report, unless prohibited by law or regulation.

b. The auditor’s communication shall identify material uncorrected misstatements individually.

The auditor shall request that uncorrected misstatements be corrected.

c. The auditor shall also communicate with those charged with governance the effectof
uncorrected misstatements related to prior periods on the relevant classes of transactions,
account balances or disclosures, and the financial statements as awhole.

4. WRITTEN REPRESENTATION FROM MANAGEMENT: The auditor shall request a written

representation from management and, where appropriate, those charged with governance
whether they believe the effects of uncorrected misstatements are immaterial, individually and
in aggregate, to the financial statements as a whole. A summary of such items shall be included
in or attached to the written representation.
175
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
Q NO 4. WRITE ABOUT DOCUMENTATION REGARDING MISSTATEMENTS IDENTIFIED DURING
AUDIT?

ANSWER:

The audit documentation shall include:

1. The amount below which misstatements would be regarded as clearly trivial.

2. All misstatements accumulated during the audit and whether they have beencorrected; and

3. The auditor’s conclusion as to whether uncorrected misstatements are material,

individually or in aggregate, and the basis for that conclusion.

You are nearing completion of audit of a company. On going through your working papers, it is
noticed that finished goods inventory was overvalued by Rs. 2 crore. It has also been noticed that
freight of Rs.10 lacs paid on import of machinery was charged to statement of profit and loss.
Discuss, how you should, proceed and communicate in above situation before signing audit
report.

ANSWER:

The instances highlighted in above situation are examples of misstatements identified during the
audit. Over valuation of inventory of finished goods by Rs. 2 crore and wrongly charging freight of
Rs. 10 lacs paid on machinery to statement of profit and loss instead of capitalizing are examples of
misstatements.

The auditor should communicate above identified misstatements to those charged with
governance and request for correction of these misstatements. In case, these are not corrected,
understand the reasons for not making the corrections and reassess materiality. It should also be
considered whether uncorrected statements are material individually or in aggregate. Effect of
uncorrected misstatements on the opinion in auditor’s report should be communicated to those
charged with governance.
176
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 SA 580 WRITTEN REPRESENTATIONS

Q NO 1. WRITE MEANING OF WRITTEN REPRESENTATION AND HOW IT IS USED AS AUDIT

EVIDENE?

ANSWER:

1. WRITTEN REPRESENTATIONS: A written representation is a written statement by management

provided to the auditor to confirm certain matters or to support other audit evidence. Written
representations in this context do not include financial statements, the assertions therein, or
supporting books and records.

2. WRITTEN REPRESENTATIONS AS AUDIT EVIDENCE:

a. Audit evidence is all the information used by the auditor in arriving at the conclusions on
which the audit opinion is based.

b. Written representations are necessary information that the auditor requires in connection
with the audit of the entity’s financial statements. Accordingly, similar to responses to
inquiries, written representations are audit evidence.

c. Written representations are an important source of audit evidence. If management modifies

or does not provide the requested written representations, it may alert the auditor to
the possibility that one or more significant issues may exist.

d. Further, a request for written, rather than oral, representations in many cases may prompt
management to consider such matters more rigorously, thereby enhancing the quality of the
representations.

e. Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they
deal. Furthermore, the fact that management has provided reliable written representations
does not affect the nature or extent of other audit evidence that the auditor obtains about
the fulfilment of management’s responsibilities, or about specific assertions.

Q NO 2. WRITE ABOUT SCOPE AND OBJECTIVE OF SA 580?

ANSWER:
177

SCOPE: SA 580- Written representations deals with the auditor’s responsibility to obtain written
representations from management and, where appropriate, those charged with governance.
Page

Objectives of auditor in accordance with SA 580

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
THE OBJECTIVES OF THE AUDITOR ARE:
a. To obtain written representations from management and, where appropriate, those charged with
governance that they believe that they have fulfilled their responsibility for the preparation of the
financial statements and for the completeness of the information provided to the auditor.

b. To support other audit evidence relevant to the financial statements or specific assertions in
the financial statements by means of written representations, if determined necessary by the
auditor or required by other SAs and

c. To respond appropriately to written representations provided by management and, where

appropriate, those charged with governance, or if management or, where appropriate, those
charged with governance do not provide the written representations requested by the auditor.

FROM WHOM: The auditor shall request written representations from management with
appropriate responsibilities for the financial statements and knowledge of the matters concerned.
Written representations relate to fulfilment of management’s responsibilities or to support other
audit evidence relevant to the financial statements or one or more specific assertions in the
financial statements.

Q NO 3. WRITE ABOUT WRITTEN REPRESENTATIONS ABOUT MANAGEMENT’S RESPONSIBILITIES?

ANSWER:

Written representation about management’s responsibilities involves confirmation of fulfilment

of management’s responsibilities in following areas:

I. PREPARATION OF THE FINANCIAL STATEMENTS:

1. The auditor shall request management to provide a written representation that it has
fulfilled its responsibility for the preparation of the financial statements in accordance with
the applicable financial reporting framework, including, where relevant, their fair
presentation, as set out in the terms ofthe audit engagement.

2. Due to its responsibility for the preparation and presentation of the financial statements and
its responsibilities for the conduct of the entity’s business, management would be expected
to have sufficient knowledge of the process followed by the entity in preparing and
presenting the financial statementsand the assertions therein on which to base the
written representations.

3. In some cases, however, management may decide to make inquiries of others who
178

participate in preparing and presenting the financial statements and assertions therein,
including individuals who have specialized knowledge relating to the matters about which
Page

written representations are requested. Such individuals may include:

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 a. An actuary responsible for actuarially determined accounting measurements.
b. Staff engineers who may have responsibility for and specializedknowledge about
environmental liability measurements.
c. Internal counsel who may provide information essential to provisionsfor legal
claims.

4 . In some cases, management may include in the written representations qualifying language
to the effect that representations are made to the best of its knowledge and belief. It is
reasonable for the auditor to accept such wording if the auditor is satisfied that the
representations are being made by those with appropriate responsibilities and knowledge
of the mattersincluded in the representations.

5. To reinforce the need for management to make informed representations, the auditor may
request that management include in the written representations, confirmation that it has
made such inquiries as it considered appropriate to place it in the position to be able to
make the requested written representations.

II. INFORMATION PROVIDED AND COMPLETENESS OF TRANSACTIONS: The auditor shall request
management to provide a written representation that:

a. It has provided the auditor with all relevant information and access as agreed in the terms of
the audit engagement and

b. All transactions have been recorded and are reflected in the financial statements.

Q NO 4. WHY WRITTEN REPRESENTATIONS ABOUT MANAGEMENT RESPONSIBILITIES ARE

NECESSARY?

ANSWER:

1. Audit evidence obtained during the audit that management has fulfilled its responsibilities
regarding preparation of financial statements and about information provided and
completeness of transactions is not sufficient without obtaining confirmation from management
that it believes that it has fulfilled those responsibilities.

2. This is because the auditor is not able to judge solely on other audit evidence whether
management has prepared and presented the financial statements and provided information
to the auditor on the basis of the agreed acknowledgement and understanding of its
responsibilities.
179

3. For example, the auditor could not conclude that management has provided the auditor with all
relevant information agreed in the terms of the audit engagement without asking it whether,
Page

and receiving confirmation that, such information has been provided.

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
4. The written representations requiring fulfilment of management responsibilities in relation to
above draw on the agreed acknowledgement and understanding of management of its
responsibilities in the terms of the audit engagement by requesting confirmation that it has
fulfilled them.

5. The auditor may also ask management to reconfirm its acknowledgement and understanding of
those responsibilities in written representations. This is particularly appropriate when:

a. Those who signed the terms of the audit engagement on behalf of the entityno longer
have the relevant responsibilities.

b. The terms of the audit engagement were prepared in a previous year .

c. There is any indication that management misunderstands those responsibilities or

d. Changes in circumstances make it appropriate to do so.

DESCRIPTION OF MANAGEMENT’S RESPONSIBILITIES IN THE WRITTEN REPRESENTATIONS:

Management’s responsibilities shall be described in the “Written representations required about
management responsibilities” in the manner in which these responsibilities are described in the
terms of the audit engagement.

Q NO 5. WRITE ABOUT OTHER WRITTEN REPRESENTATIONS RELATED TO OTHER THAN

MANAGEMENT RESPONSIBILITES?

ANSWER:

1. Other SAs require the auditor to request written representations. If, in addition to such required
representations, the auditor determines that it is necessary to obtain one or more written
representations to support other audit evidence relevant to the financial statements or one or
more specific assertions in the financial statements, the auditor shall request such other
written representations.

2. In addition to the written representation about management’s responsibilities regarding

preparation of financial statements, the auditor may consider it necessary to request other
written representations about the financial statements. Such written representations may
supplement, but do not form part of, the written representation relating to management’s
responsibilities regarding preparation of financial statements. They may include
180

representations about the following:

Page

a. Whether the selection and application of accounting policies are appropriate and

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 b. Whether matters such as the following, where relevant under the applicable financial
reporting framework, have been recognized, measured, presented or disclosed in
accordance with that framework:
i. Plans or intentions that may affect the carrying value or classification of assets
and liabilities.

ii. Liabilities, both actual and contingent.

iii. Title to, or control over, assets, the liens or encumbrances on assets, and assets
pledged as collateral and

iv. Aspects of laws, regulations and contractual agreements that may affect the
financial statements, including non-compliance.

Q NO 6. WRITE ABOUT ADDITIONAL WRITTEN REPRESENTATIONS ABOUT INFORMATION

PROVIDED TO THE AUDITOR?

ANSWER:

In addition to the written representation required by auditor regarding management

responsibility about information provided to auditor, the auditor may consider it necessary to
request management to provide a written representation that it has communicated to the auditor
all deficiencies in internal control of which management is aware.

Q NO 7. WRITE ABOUT WRITTEN REPRESENTATIONS ABOUT SPECIFIC ASSERTIONS/

ANSWER:

1. When obtaining evidence about, or evaluating, judgments and intentions, theauditor may
consider one or more of the following:
a. The entity’s past history in carrying out its stated intentions.
b. The entity’s reasons for choosing a particular course of action.
c. The entity’s ability to pursue a specific course of action.
d. The existence or lack of any other information that might have been obtained during the
course of the audit that may be inconsistent with management’s judgment or intent.

2. In addition, the auditor may consider it necessary to request management to provide written
181

representations about specific assertions in the financial statements, in particular, to support

an understanding that the auditor has obtained from other audit evidence of management’s
Page

judgment or intent in relation to, orthe completeness of, a specific assertion.

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 For example, if the intent of management is important to the valuation basis for investments, it
may not be possible to obtain sufficient appropriate audit evidence without a written
representation from management about its intentions. Although such written representations
provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on
their own for that assertion.

Q NO 8. WRITE ABOUT DATE OF AND PERIOD(S) COVERED BY WRITTEN REPRESENTATIONS?

ANSWER:

1. The date of the written representations shall be as near as practicable to, but not after, the date
of the auditor’s report on the financial statements. The writtenrepresentations shall be for all
financial statements and period(s) referred to in the auditor’s report.

2. Because written representations are necessary audit evidence, the auditor’s opinion cannot be
expressed, and the auditor’s report cannot be dated, before the date of the written
representations. Furthermore, because the auditor is concerned with events occurring up to the
date of the auditor’s report that may require adjustmentto or disclosure in the financial
statements, the written representations are dated as near as practicable to, but not after, the
date of the auditor’s report on the financial statements.

3. The written representations are for all periods referred to in the auditor’s report because
management needs to reaffirm that the written representations it previously made with
respect to the prior periods remain appropriate.

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

Q NO 9. WRITE ABOUT AUDIT PROCEDURES IF THERE EXISTS DOUBT AS TO THE RELIABILITY OF

WRITTEN REPRESENTATIONS OR REQUESTED REPRESENTATION NOT PROVIDED?

ANSWER:

1. NOT RELIABLE:
a. If the auditor has concerns about the competence, integrity, ethical values or
182

diligence of management, or about its commitment to or enforcement of these, the

auditor shall determine the effect that such concerns may have on the reliability of
Page

representations and audit evidence in general.

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 b. In particular, if written representations are inconsistent with other audit
evidence,the auditor shall perform audit procedures to attempt to resolve the
matter. If the matter remains unresolved, the auditor shall reconsider the
assessment of the competence, integrity, ethical values or diligence of management,
or of its commitment to or enforcement of these, and shall determine the effect that
this may have on the reliability of representations and audit evidence in general.

c. If the auditor concludes that the written representations are not reliable, the auditor
shall take appropriate actions, including determining the possible effect on the
opinion in the auditor’s report in accordance with SA 705, having regard to the
requirement of disclaimer of opinion.

2. NOT PROVIDED: If management does not provide one or more of the requested written
representations, the auditor shall:
a. Discuss the matter with management.

b. Re-evaluate the integrity of management and evaluate the effect that thismay
have on the reliability of representations and audit evidence in general and

c. Take appropriate actions, including determining the possible effect on the opinion in
the auditor’s report in accordance with SA 705 having regard to the requirement of
disclaimer of opinion.

3. DISCLAIMER OF OPINION: The auditor shall disclaim an opinion on the financial statements in
accordance with SA 705 if:
a. NOT RELIABLE: The auditor concludes that there is sufficient doubt about the
integrity of management such that the written representations about management
fulfilling its responsibilities regarding preparation of financial statements and about
information provided and completeness of transactions are not reliable; or

b. NOT PROVIDED: Management does not provide the written representations relating
to fulfilling its responsibilities regarding preparation of financial statements and
about information provided and completeness of transactions.

Q NO 10. WRITE ABOUT FORM OF WRITTEN REPRESENTATIONS?

ANSWER:
183

The written representations shall be in the form of a representation letter addressed to the auditor.
Page

If law or regulation requires management to make written public statements about its

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
responsibilities, and the auditor determines that such statements provide some or all of the
representations required regarding management responsibilities, the relevant matters covered by
such statements need not be included in the representation letter.

ILLUSTRATIVE WRITTEN REPRESENTATION LETTER

On the letterhead of the entity

To
PJ Shrimali & Co. 15th July, 2022
Chartered Accountants
Dear Sir,

This representation letter is provided in connection with your audit of the financial statements of
XXXX Limited for the year ended March 31, 2022 for the purpose of expressing an opinion as to
whether the financial statements give a true and fair view in accordance with the applicable
accounting standards in India.

We confirm that (to the best of our knowledge and belief, having made such inquiries as we
considered necessary for the purpose of appropriately informing ourselves):

FINANCIAL STATEMENTS:
• We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated 17th
August 2021, for the preparation of the financial statements in accordance with financial
reporting Standards, in particular, the financial statements give a true and fair view in
accordance with the applicable accounting standards in India.
• Significant assumptions used by us in making accounting estimates, including those measured at
fair value, are reasonable.
• Related party relationships and transactions have been appropriately accounted for and
disclosed in accordance with the requirements ofapplicable accounting standards in India. (SA
550)
• All events subsequent to the date of the financial statements and for which applicable
accounting standards in India require adjustment or disclosure have been adjusted or
disclosed. (SA 560)
• The effects of uncorrected misstatements are immaterial, both individuallyand in the
aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is
attached to the representation letter. (SA 450)

INFORMATION PROVIDED:
• We have provided you with: -
Access to all information of which we are aware that is relevant to the preparation of the
184

financial statements such as records, documentation and other matters;

Additional information that you have requested from us for the purpose of the audit; and
Page

Unrestricted access to persons within the entity from whom you determined it necessary to
SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 obtain audit evidence.
• All transactions have been recorded in the accounting records and are reflected in the
financial statements.
• We have disclosed to you the results of our assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
• We have disclosed to you all information in relation to fraud or suspected fraud that we are
aware of and that affects the entity and involves: -
o Management;
o Employees who have significant roles in internal control; or
o Others where the fraud could have a material effect on the financial statements.
• We have disclosed to you all information in relation to allegations of fraud,or suspected
fraud, affecting the entity’s financial statements communicatedby employees, former
employees, analysts, regulators or others.
• We have disclosed to you all known instances of non-compliance or suspected non-compliance
with laws and regulations whose effects should be considered when preparing financial
statements.
• We have disclosed to you the identity of the entity’s related parties and all the related party
relationships and transactions of which we are aware. (SA 550)

Chief Financial Officer

CA R Gurumurthy is about to complete audit of a company. Before completion, he asks

management to provide him a written representation confirming that management has fulfilled
its responsibilities regarding preparation of financial statements. He also wants management to
confirm in writing about providing of all the necessary information and completeness of
transactions to him. The management feels that auditor is seeking irrelevant documents near the
completion of audit. Why view of management is not proper? What possible implications it may
lead to?

ANSWER:

The view of management is not proper. Audit evidence obtained during the audit that management
has fulfilled its responsibilities regarding preparation of financial statements and about
information provided and completeness of transactions is not sufficient without obtaining
confirmation from management that it believes that it has fulfilled those responsibilities. This is
because the auditor is not able to judge solely on other audit evidence whether management has
prepared and presented the financial statements and provided information to the auditor on the
basis of the agreed acknowledgement and understanding of its responsibilities.
185

In case of refusal of management to provide such a confirmation, it may lead to disclaimer of

opinion by the auditor.
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 SA 260 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

Q NO 1. COMMUNICATION FROM AUDITOR IS IMPORTANT WITH THOSE CHARGED WITH

GOVERNANCE. AN EFFECTIVE TWO-WAY COMMUNICATION IS IMPORTANT.

ANSWER:

1. The auditor and those charged with governance in understanding matters related to the
audit in context, and in developing a constructive working relationship. This relationship is
developed while maintaining the auditor’s independence and objectivity.

2. The auditor in obtaining from those charged with governance information relevant to the audit.

For example, those charged with governance may assist the auditor in understanding the entity
and its environment, in identifying appropriate sources of audit evidence, and in providing
information about specific transactions or events; and

3. Those charged with governance in fulfilling their responsibility to oversee the financial reporting
process, thereby reducing the risks of material misstatement of the financial statements.

Q NO 2. WHO ARE “THOSE CHARGED WITH GOVERNANCE”?

ANSWER:

1. The person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing the
strategic direction of the entity and obligations related to the accountability of the entity. This
includes overseeing the financial reporting process.

2. For some entities, those charged with governance may include management personnel, for
example, executive members of a governance board of a private or public sector entity, or an
owner-manager.

3 . Governance structures vary by entities, reflecting influences such as different cultural and
legal backgrounds, and size and ownership characteristics.

a. For example, in some entities, a supervisory board exists that is separate from
executive board. In other entities, both supervisory and executive functions are
performed bya single board.
186

b. In some entities, those charged with governance hold positions that are an integral
Page

part of the entity’s legal structure. For example, company directors.

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 c. In some cases, some or all of those charged with governance are involved in
managing the entity. In others, those charged with governance and management
comprise different persons.

d. In most entities, governance is the collective responsibility of a governing body,

such as a board of directors, a supervisory board, partners, proprietors, a committee
of management, trustees, or equivalent persons.

e. In some smaller entities, however, one person may be charged with governance, for
example, the owner-manager where there are no other owners, or a sole trustee.

f . Such diversity means that it is not possible to specify for all audits the persons with
whom the auditor is to communicate particular matters.

4. Also, in some cases, the appropriate persons with whom to communicate may not be clearly
identifiable from the applicable legal framework or other engagement circumstances, for
example, entities where the governance structure is not formally defined, such as some family-
owned entities and some not-for-profit organizations.

a. In such cases, the auditor may need to discuss and agree with the engaging party
the relevant persons with whom to communicate.

b. In deciding with whom to communicate, the auditor’s understanding of an entity’s

governance structure and processes obtained in accordance with SA 315 is relevant.
The appropriate persons with whom to communicate may vary depending on the
matter to be communicated.

Q NO 3. WRITE ABOUT SCOPE AND OBJECTIVE OF SA 260?

ANSWER:

SCOPE: SA 260 deals with the auditor’s responsibility to communicate with those charged with
governance in an audit of financial statements.

OBJECTIVES: The objectives of the auditor are:

a. To communicate clearly with those charged with governance the responsibilities of the auditor
in relation to the financial statement audit, and an overview of the planned scope and timing of
the audit.
187

b. To obtain from those charged with governance information relevant to the audit.
Page

c. To provide those charged with governance with timely observations arising from the audit that

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 are significant and relevant to their responsibility to oversee the financial reporting process
and

d. To promote effective two-way communication between the auditor and those charged with
governance.

Q NO 4. WHAT ARE THE MATTERS TO BE COMMUNICATED BY AUDITOR AS PER SA 260?

ANSWER:

Following matters are required to be communicated by auditor with those charged with
governance:

a. AUDITOR’S RESPONSIBILITIES: The auditor shall communicate with those charged with
governance the responsibilities of the auditor in relation to the financial statement audit,
including that:

i. The auditor is responsible for forming and expressing an opinion on the financial statements
that have been prepared by management with the oversight of those charged with
governance and

ii. The audit of the financial statements does not relieve management or those charged with
governance of their responsibilities.

b. PLANNED SCOPE AND TIMING OF THE AUDIT: The auditor shall communicate with those
charged with governance an overview of the planned scope and timing of the audit, which
includes communicating about the significant risks identified by the auditor.

c. SIGNIFICANT FINDINGS FROM THE AUDIT: The auditor shall communicate with those charged
with governance:

a. The auditor’s views about significant qualitative aspects of the entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
When applicable, the auditor shall explain to those charged with governance why the
auditor considers a significant accounting practice, that is acceptable under the applicable
financial reporting framework, not to be most appropriate to the particular circumstances of
the entity

b. Significant difficulties, if any, encountered during the audit;

188

c. Unless all of those charged with governance are involved in managing the entity:
i. Significant matters arising during the audit that were discussed,or subject to
Page

correspondence, with management;

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 ii. Written representations the auditor is requesting

d. Circumstances that affect the form and content of the auditor’s report, if any and

e. Any other significant matters arising during the audit that, in the auditor’s professional
judgment, are relevant to the oversight of thefinancial reporting process.

d. COMMUNICATION OF AUDITOR’S INDEPENDENCE IN CASE OF LISTED ENTITIES: In the case

of listed entities, the auditor shall communicate with those chargedwith governance:

a. A statement that the engagement team and others in the firm as appropriate, the firm and,
when applicable, network firms have complied with relevant ethical requirements regarding
independence and
b.
i. All relationships and other matters between the firm, network firms, and the entity that,
in the auditor’s professional judgment, may reasonably be thought to bear on
independence. This shall include total fees charged during the period covered by the
financial statements for audit and non-audit services provided by the firm and network
firms to the entity and components controlled by the entity. These fees shall be allocated
to categories that are appropriate to assist those charged with governance in assessing
the effect of services on the independence ofthe auditor and

ii. The related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.

Q NO 5. WRITE ABOUT THE COMMUNICATION PROCESS UNDER SA 260?

ANSWER:

1. The auditor shall communicate with those charged with governance the form, timing and
expected general content of communications.
2. The auditor shall communicate in writing with those charged with governance regarding
significant findings from the audit if, in the auditor’s professional judgment, oral communication
would not be adequate.
3. Written communications need not include all matters that arose during the course of the audit.
The auditor shall communicate in writing with those charged with governance regarding
auditor independence when required in case of listed entities.
4. The auditor shall communicate with those charged with governance on a timely basis.
189

ADEQUACY OF THE COMMUNICATION PROCESS: The auditor shall evaluate whether the two-way
communication between the auditor and those charged with governance has been adequate for
Page

the purpose of the audit. If it has not, the auditor shall evaluate the effect, if any, on the auditor’s

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
assessment of the risks of material misstatement and ability to obtain sufficient appropriate audit
evidence, and shall take appropriate action.

DOCUMENTATION: Where matters required by SA 260 to be communicated are communicated

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

190
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
SA 265 COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE CHARGED
WITH GOVERNANCE AND MANAGEMENT

Q NO 1. WRITE ABOUT SCOPE AND OBJECTIVE OF SA 265?

ANSWER:

1. SCOPE: SA 265 deals with the auditor’s responsibility to communicate appropriately to those
charged with governance and management deficiencies in internal control that the auditor has
identified in an audit of financial statements.

2 . The auditor is required to obtain an understanding of internal control relevant to the audit
when identifying and assessing the risks of material misstatement. In making those risk
assessments, the auditor considers internal control in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control.
3. The auditor may identify deficiencies in internal control not only during this risk assessment
process but also at any other stage of the audit.

4. SA 265 specifies which identified deficiencies the auditor is required to communicate to those
charged with governance and management.

5. OBJECTIVE OF AUDITOR IN ACCORDANCE WITH SA 265: The objective of the auditor is to

communicate appropriately to those charged with governance and management deficiencies in
internal control that the auditor has identified during the audit and that, in the auditor’s
professional judgment, are of sufficient importance to merit their respective attentions.

Q NO 2. WHAT DO YOU MEAN BY “DEFICIENCY IN INTERNAL CONTROL” AND “SIGNIFICANT

DEFICIENCY IN INTERNAL CONTROL”?

ANSWER:

a. DEFICIENCY IN INTERNAL CONTROL: This exists when:

i. A control is designed, implemented or operated in such a way that it is unable to prevent, or

detect and correct, misstatements in the financial statements on a timely basis or

ii. A control necessary to prevent, or detect and correct, misstatements in the financial
191

statements on a timely basis is missing.

Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
b. SIGNIFICANT DEFICIENCY IN INTERNAL CONTROL:
a. A deficiency or combination of deficiencies in internal control that, in the auditor’s
professional judgment, is of sufficient importance to merit the attention of those
charged with governance.

b. The significance of a deficiency or a combination of deficiencies in internal control

depends not only on whether a misstatement has actually occurred,but also on
the likelihood that a misstatement could occur and the potential magnitude of the
misstatement.

c. Significant deficiencies may, therefore, exist even though the auditor has not
identified misstatements during the audit.

Q NO 3. WHAT ARE THE MATTERS THAT THE AUDITOR MAY CONSIDER IN DETERMINING
WHETHER A DEFICIENCY OR COMBINATION OF DEFICIENCIES IN INTERNAL CONTROL
CONSTITUTES A SIGNIFICANT DEFICIENCY, GIVE FEW EXAMPLES?

ANSWER:

The matters that the auditor may consider in determining whether a deficiency or combination of
deficiencies in internal control constitutes a significant deficiency are:

1. The likelihood of the deficiencies leading to material misstatements in the financial statements
in the future.

2. The susceptibility to loss or fraud of the related asset or liability.

3. The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.

4. The financial statement amounts exposed to the deficiencies.

5. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.

6. The importance of the controls to the financial reporting process, for example:
a. General monitoring controls (such as oversight of management).
b. Controls over the prevention and detection of fraud.
c. Controls over the selection and application of significant accounting policies.
d. Controls over significant transactions with related parties.
192

e. Controls over significant transactions outside the entity’s normal course of business.
f. Controls over the period-end financial reporting process (such ascontrols over non-
Page

recurring journal entries).

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
7. The cause and frequency of the exceptions detected as a result of thedeficiencies in the
controls.

8. The interaction of the deficiency with other deficiencies in internal control.

Q NO 4. GIVE FEW EXAMPLES OF INDICATORS OF SIGNIFICANT DEFICIENCIES IN INTERNAL

CONTROL?

ANSWER:

1. Evidence of ineffective aspects of the control environment, such as:

a. Indications that significant transactions in which management is financially interested are

not being appropriately scrutinised by those charged with governance.

b. Identification of management fraud, whether or not material, that was not prevented
by the entity’s internal control.

c. Management’s failure to implement appropriate remedial action on significant

deficiencies previously communicated.

d. Absence of a risk assessment process within the entity where such a process would
ordinarily be expected to have been established.

e. Evidence of an ineffective entity risk assessment process, such as management’s failure

to identify a risk of material misstatement that the auditor would expect the entity’s risk
assessment process to have identified.

f. Evidence of an ineffective response to identified significant risks (e.g., absence of

controls over such a risk).

2. Misstatements detected by the auditor’s procedures that were not prevented, or detected and
corrected, by the entity’s internal control.

3. Disclosure of a material misstatement due to error or fraud as prior period items in the
current year’s Statement of Profit and Loss.

4. Evidence of management’s inability to oversee the preparation of the financial statements.

193
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
Q NO 5. DETERMINATION OF SIGNIFICANT DEFICIENCIES IN INTERNAL CONTROL AND
COMMUNICATING TO THOSE CHARGED WITH GOVERNANCE?

ANSWER:

1. DETERMINATION: The auditor shall determine whether, on the basis of the audit work
performed, the auditor has identified one or more deficiencies in internal control. If the auditor
has identified one or more deficiencies in internal control, the auditor shall determine, on the
basis of the audit work performed, whether, individually or in combination, they constitute
significant deficiencies.

2. COMMUNICATION TO THOSE CHARGED WITH GOVERNANCE:

a. The auditor shall communicate in writing significant deficiencies in internal control identified
during the audit to those charged with governance on a timely basis.

b. The auditor shall also communicate to management at an appropriate level of responsibility

on a timely basis:

i. In writing, significant deficiencies in internal control that the auditor has

communicated or intends to communicate to those charged with governance, unless
it would be inappropriate to communicate directly to management in the
circumstances and

ii. Other deficiencies in internal control identified during the audit that have not been
communicated to management by other parties and that, in the auditor’s
professional judgment, are of sufficient importance to meritmanagement’s attention.

3. The auditor shall include in the written communication of significant deficiencies in internal
control:
a. A description of the deficiencies and an explanation of their potential effects;and

b. Sufficient information to enable those charged with governance andmanagement to

understand the context of the communication.

c. In particular, the auditor shall explain that:

i. The purpose of the audit was for the auditor to express an opinion on the financial
statements.

ii. The audit included consideration of internal control relevant to the preparation of
the financial statements in order to design audit proceduresthat are appropriate
194

in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control and
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 iii. The matters being reported are limited to those deficiencies that the auditor has
identified during the audit and that the auditor has concluded are of sufficient
importance to merit being reported to those charged withgovernance.

On reviewing internal control over inventories as part of statutory audit of a company, auditor
finds that physical verification is not being conducted at regular intervals as stipulated by the
management. The auditor finds it to be significant deficiency in internal control over inventories.
He points it out to the management in a one-liner as under: -
“Physical verification of inventories is not being conducted at regular intervals as stipulated by
management.” Is above communication by auditor proper? Ignore statutory reporting
requirements, if any in this regard.

ANSWER:

While pointing out significant deficiencies in internal control, auditor has not only to communicate
significant deficiencies giving their description but also explain the potential effects and sufficient
information to those charged with governance and management to understand context of
communication.

Therefore, the above communication is not proper. Not only significant deficiency has to be
communicated, it should also be explained to management the potential effects of not carrying out
physical verification of inventories at regular intervals as stipulated by management. It should
explain that such a significant deficiency can lead to misstatement of inventories impacting profits
of the company. Highlighting importance of such a control, it should be stated that responsibility
be fixed for concerned persons for adhering to such an important control.

195
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 TEST YOUR KNOWLEDGE

Q.NO.1. List out some matters that the auditor may consider in determining whether a
deficiency or combination of deficiencies in internal control constitutes a “significant deficiency”.

ANSWER:

Q.NO.2. In what ways an effective two-way communication between auditor and those charged
with governance is important?

ANSWER:

Q.NO.3. The auditor of a company is having concerns about following of going concern basis of
accounting followed by management for preparation of financial statements. It asks the
management to justify preparation of financialstatements. However, management is not
willing to make its assessment and share with auditor. What are implications for auditor’s
report in such a scenario?

ANSWER:

Q.NO.4. Discuss documentation requirements for an auditor regarding misstatements

identified during audit under SA 450.

ANSWER:

Q.NO.5. Discuss meaning of “Date the financial statements are issued” under SA 560.

ANSWER:
196
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 MCQS BASED QUESTIONS
1. An auditor of a company communicates significant findings from audit with those charged with
governance in the company. Which of the statements isfalse in regard to communication
made?
a. Evaluation of adequacy of communication process is required on part ofthe auditor.
b. Planned scope and timing of audit has also to be communicated.
c. Communication of rationale behind audit procedures is necessary.
d. Significant difficulties encountered during audit, if any, have to becommunicated.

2. Written representations are: -

a. Necessary audit evidence
b. Sufficient appropriate audit evidence
c. Not audit evidence
d. Audit evidence depending upon auditor’s professional judgment

3. Which of the following is false regarding communication of misstatementsidentified during

course of an audit?
a. The auditor should request those charged with governance for correctionof identified
misstatements.
b. The auditor should obtain written representation acknowledgingmanagement belief that
effect of uncorrected misstatements is material.
c. The auditor should obtain written representation acknowledging management belief that
effect of uncorrected misstatements is immaterial.
d. The auditor should communicate effect of uncorrected misstatements related to prior
periods on the relevant classes of transactions, account balances or disclosures, and the
financial statements as a whole.

4. Which of the following is not an example of subsequent event?

a. Event occurring between date of financial statements and date of auditor’s report.
b. Event occurring on date of financial statements.
c. Event occurring after filing audit report with tax authorities. Had such anevent been
known earlier, auditor would have amended report.
d. Event occurring during course of performing audit procedures after dateof financial
statements.

5. Which of the following is not an example of events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern?
a. Adverse key financial ratios
b. Inability to invest in modernisation of plant
197

c. Inability to pay creditors on time

d. Inability to pay salary of staff
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
Answers to the MCQs based Questions
1. (c) 2. (a) 3. (b) 4. (b) 5. (b)

CASE STUDY BASED QUESTIONS

CA. Gaurav Gogoi is about to conclude audit of a company. It has been noticed during the course of
audit that there is shortage of important raw material supplies being imported from China due to
prevailing geo-political situation. The company has shared with him its plan to deal with the
situation. He is satisfied with assessment of the company for dealing with the matter. The issue is
disclosed in financial statements and considering management’s assessment, it is felt that use of
going concern assumption by company in preparation of financial statements is appropriate.
Besides, he also wants to be sure that all subsequent events till now have been considered and
accounted for, where ever necessary, in financial statements.
Before concluding audit, he requests written representations from management regarding its
responsibilities. However, it is noticed that such written representations provided by management
use qualifying language.
He has also communicated significant findings from audit in writing with those charged with
governance in the company and has retained copy of relevant mails. Besides, there are certain
matters which were communicated by him orally from time to time during the course of audit to
those charged with governance.

Based on above, answer the following questions: -

1. As regards description of matter above concerning issue of going concern, which of the
following statements is most appropriate for auditor’s report?
a. The auditor should express an unmodified opinion.
b. The auditor should express a qualified opinion as material uncertainty exists related to
events or conditions that may cast significant doubt onthe entity’s ability to continue as a
going concern.
c. Besides expressing an unmodified opinion, the auditor’s report shall include a separate
section under the heading “Material Uncertainty Related to Going Concern” drawing
attention to the note in which such disclosure is made in financial statements along with
related matters.
d. Such an issue does not affect auditor’s opinion.

2. As regards going concern basis of accounting is concerned, which of the following statements is
true?
a. A company showing net loss in its financial statements is essentially nota going concern.
198

b. Following going concern assumption of accounting is primary duty of auditor.

c. In case, a company is not a going concern, its financial statements must be prepared on
Page

liquidation basis.

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics
 d. Audit procedure seeking confirmation from banker regarding outstanding balance relates to
verification of going concern assumption.

3. Which of the following statements is true in respect of auditor’s responsibilities in respect of

subsequent events?
a. There is no obligation for an auditor to perform audit procedures for events occurring
between date of financial statements and date of auditor’s report.
b. There is no obligation for an auditor to perform audit procedures after signing of auditor’s
report, even if he comes to know of an event, whichif known to him earlier would have
caused him to amend the audit report.
c. The auditor has only to rely upon written representation of management regarding
subsequent events. He has no other means to know about such events.
d. The auditor should perform necessary audit procedures to know about events occurring
between the date of financial statements and date of auditor’s report.

4. As regards use of qualifying language in written representations, which of the following

statement is most appropriate?
a. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the
representations are being made by those with appropriate responsibilities and knowledge
of the matters included in the representations.
b. Written representations should be unconditional. Such a wording is not acceptable.
c. Such a wording dilutes intent of written representations. However, it can be accepted by
auditor only in exceptional circumstances.
d. Qualifying language in written representations is compulsory.

5. As regards auditor’s responsibility regarding matters communicated orally withthose charged

with governance, which of following is most appropriate?
a. Matters communicated orally have to be documented by the auditorstating when and to
whom these were communicated.
b. Matters communicated orally need not be put into writing. It is sufficientfor auditor to
have communicated orally.
c. Matters communicated orally need not be put into writing. It is notpractically feasible.
d. Matters communicated orally have to be documented by the auditorstating to whom these
were communicated.

Answers to MCQs involving case study

1. c 2. c 3. d 4. a 5. a
199
Page

SHRESHTA For CA and CMA | SHRESHTA Professional Courses | CA Inter (New)| P5 Auditing and Ethics