Documentation requirements under Standards on Auditing (SAs) Presented By C.A. Abhijit Sanzgiri 22/12/2018 CA Abhijit Sanzgiri
Standards on Auditing Ensures information in FS is of high quality & acceptable worldwide Formulated by AASB under ICAI in line with IAASB & are MANDATORY cohesive set of guidelines & not to be viewed in isolation Codification of professional best practices promoting uniformity & comparability 22/12/2018 CA Abhijit Sanzgiri
Auditors Responsibility We conducted our audit in accordance the SA’s issued by the ICAI – These Standards require that we comply with the ethical requirements & plan & perform the audit to obtain reasonable assurance whether the financial statements are free from MM 22/12/2018 CA Abhijit Sanzgiri
Material Misstatement (MM) Material - important, significant, substantial Misstatement – false incorrect statement MM is untrue information in FS that could affect the financial decision of one who relies on the statement / misleads users MM – not true and fair MM - result of omissions - errors of transactions & balances 22/12/2018 CA Abhijit Sanzgiri
True and Fair – Factually correct & faithfully represent without bias Faithfully represent economic substance of the transaction rather than the legal form Over-under valuation of asset/ liability Omission of asset / liability Non disclosure of charges on assets Accounting policies not followed consistently unusual- exceptional, non recurring items not disclosed separately Accounts not drawn as per ARFF / Schedule III of Co’s Act Non Compliance with AS - Sec 143(3)(e) / IFRS - disclosure of deviation with reasons & financial impact 22/12/2018 CA Abhijit Sanzgiri
Standards on Auditing 1. Standards of Quality Control (SQCs ) All services under Engagement Standards. Performance of audits & reviews of historical financial information - Assurances & related service engagements. 2. Standards on Auditing (SAs) Any independent audit of historical financial information 22/12/2018 CA Abhijit Sanzgiri
Standards on Auditing (Continued) 3. Standards on Review Engagements (SREs) Review of historical financial information 4. Standards on Assurance Engagements (SAEs) other than audits & reviews of financial information 5. Standards on Related Services (SRSs) engagements on application of agreed procedures to information, compilation engagements, & other related service engagements 22/12/2018 CA Abhijit Sanzgiri
NFRA Co’s Act, 2013 provided for creation of National Financial Reporting Authority (NFRA) Sec 143(10) /(11) MCA notification - 13.1.18, framed (NFRA) Rules, 2018 determining jurisdiction, function duties & powers. 22/12/2018 CA Abhijit Sanzgiri
NFRA (Continued) regulates accounting & audit standards / service quality of Cos - • with securities listed in India / outside • Unlisted Co’s o n March 31 of immediately preceding FY - Paid up capital > Rs 500 crore; or Annual turnover > Rs 1,000 crore; or O/S loans, Debentures & deposits > Rs 500 crore • Insurance & Banking Co’s • engaged in generation or supply of electricity • large offshore subsidiaries & associates of these Co’s (if it’s income or NW > 20% of income or NW of parent company) 22/12/2018 CA Abhijit Sanzgiri
NFRA (Continued) Key Functions & Duties - protect interest of public, investors, creditors & others associated with Co’s by • establishing high quality accounting & auditing standards • exercising effective functional oversight on accounting of Co’s & auditing of auditors. 22/12/2018 CA Abhijit Sanzgiri
NFRA (Continued) Monitoring Compliance: review FS, seek further information from Co’s & auditors to enforce compliance with accounting & auditing standards. Publish findings on non-compliances on website in a manner it deems fit, unless it reasons not to do so in public interest & records the same in writing. 22/12/2018 CA Abhijit Sanzgiri
1. Institution of NFRA (Continued) Powers of NFRA: Direct auditors to take measures to improve audit quality. Investigation Powers into professional misconduct. Imposing monetary penalty &/or debarring an audit member or firm in case of professional & other misconduct. 22/12/2018 CA Abhijit Sanzgiri
Current Status (Continued) 2. Uday Kotak “ 1 of the weakest links in fiduciary chain of governance in India is accounting. Time & again we find that this situation is leading to significant issues for many listed companies whether on equity or debt markets.“ said at a corporate governance summit. 22/12/2018 CA Abhijit Sanzgiri
2. Uday Kotak (Continued) Auditors are 1 of the "weakest link" plaguing corporate governance architecture in country. Issue in the profession stems from a potential "conflict of interest" where an association of accountants, ICAI also acts as sector regulator. 6 layers of corporate governance in our system, including company management, company board, credit rating agencies, auditors & regulators. Of late, these six layers' work has been found wanting & they are not doing their job". 22/12/2018 CA Abhijit Sanzgiri
Satyam Scam On corporate governance & fraudulent auditing practices allegedly in connivance with auditors & CA’s. Misrepresentation of accounts to its board, stock exchanges, regulators, investors & other stakeholders. Misleading market & other stakeholders by lying about Co’s financial health & basic facts on revenue, profits, liabilities & inflating cash balance to show good health. 22/12/2018 CA Abhijit Sanzgiri
Satyam Scam (Continued) Questioned – Role of external 3rd party auditors, tasked to ensure that no financial bungling is undertaken & who carried out promoters’ interest & hid facts, 22/12/2018 CA Abhijit Sanzgiri
Enron Scam Enron - American energy company in Houston,Texas,Est1985 - Kenneth Lay CEO developed a staff of executives that used accounting loopholes, special purpose entities, & poor financial reporting to hide billions of dollars in debt from failed deals & projects. 22/12/2018 CA Abhijit Sanzgiri
Enron Scam (Continued) Enron scam eventually led to it’s bankruptcy & dissolution of Arthur Andersen, then 1- 5 largest audit/accountancy partnerships in the world. CFO & other executives not only misled Enron's Board of Directors & Audit Committee on high-risk accounting practices, but also pressured Arthur Andersen to ignore issues. Some officials at Arthur Andersen LLP , Enron’s accountant, began shredding documents related to Enron audits. Andersen found guilty of illegally destroying documents relevant to SEC investigation, which voided its license to audit public companies & effectively closed the firm. 22/12/2018 CA Abhijit Sanzgiri
Enron Scam (Continued) Consequentially, new regulations & legislation enacted to expand accuracy of financial reporting for public companies. 1 legislation, Sarbanes – Oxley Act, increased - • Penalties for destroying, altering, fabricating records in investigations & for defrauding shareholders. • Accountability of auditing firms to remain unbiased & independent of their clients. 22/12/2018 CA Abhijit Sanzgiri
Documentation • Such adverse Scams/Frauds seriously affects reputation of Profession • Urgent need for Profession to establish credibility & recreate Trust • Audit will have to function transparently & demonstrate conduct of quality audits • Adherence to SA’s in letter & spirit is the start to demonstrate quality & importantly Trust • COMMUNICATE BETTER TRANSPARENTLY 22/12/2018 CA Abhijit Sanzgiri
Documentation Hence, important to conduct audit as per SA & adequately document the same to serve as an audit trail to ensure NIL error or negligence in discharge of professional duties Auditor guilty of professional misconduct if he fails to comply with the requirements of SA’s 22/12/2018 CA Abhijit Sanzgiri
Documentation SA 230 – Audit Documentation Documentation requirements under: SA 220 SA 320 SA 240 SA 330 SA 250 SA 450 SA 260 SA 540 SA 265 SA 550 SA 299 SA 610 SA 300 SA 701 SA 315 22/12/2018 CA Abhijit Sanzgiri
Documentation – • record of audit procedures performed, relevant audit evidence obtained & conclusions reached (working – work papers) • assists planning, performing, accountability & responsibility fixation, audit supervision & review • record retention for future audits, & conduct of quality controls (SQC 1).
SA 230-Audit Documentation: • Objective : Prepare documentation that provides Sufficient & Appropriate Evidence that audit was record of basis of auditor’s planned & performed in report accordance with SAs
SA 230-Audit Documentation: • Provides I. evidence of auditor’s basis to conclude on achieving overall audit objectives ; & II. evidence that audit was planned & performed as per SAs & applicable legal, regulatory requirements. • Timely, sufficient & appropriate audit documentation enhances audit quality, • facilitates effective review & evaluation of audit evidence obtained & conclusions reached before finalizing audit reports.
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