Standards on Auditing and its usage in auditing

Why standards?
Imagine that I ask you to express an opinion about someone. Different people would base their opinion
on different criteria. Some people would base their examination on physique, some on the way of
speaking, some on behavior, some on habits, and maybe some would interact and then form an opinion.
All of those opinions would fulfill the answer I ask of you. And yet, there will not be any uniformity in
your examination. You have all examined differently, and come to different, or maybe even the same,
opinion.

What is auditing? Auditing is the independent examination of financial statements and expressing an
opinion on them. The opinions may be divided into unqualified (True and fair), Qualified (True and fair
subject to certain reservations), Adverse ( Not true and fair), and Disclaimer of opinion (The auditor is
unable to express an opinion).

Club these two together. I ask you to examine a Balance Sheet, or a statement of Profit and Loss, and to
give me an opinion on them. Some of you would painstakingly verify the frills of different accounts and
transactions. But then of course, some of us would rather do a very superficial examination and give an
opinion. But this will not do. We represent, as Chartered Accountants, The Institute of Chartered
Accountants of India, and there is a standard of quality that we have to uphold. In a perfect world,
theory and practice do not have differences. Whether or not there is, is a matter for debate. Of course,
it is up to us to strive for perfection and bridge the gaps between the two, if any.

It is to ensure a uniformity in the quality of our work that we have Standards on Auditing in our work.
Thus, what we have done through these Standards, is that we have codified the best practices that were
being done in auditing. We have laid down as the desirable courses of action, the best ways to examine
financial statements.

A SLIGHT HISTORY

Where did they come from? The International Federation of Accountants, through the International
Auditing and Assurance Board, laid out the standards in international auditing. These have been subject
to periodical review and revision. The ICAI has adopted these international auditing practices in the
Indian scenario so as to ensure that the quality of audit provided by Indian Chartered Accountants will
match up to international standards.

NUMBERING OF STANDARDS
Standards on auditing have distinct numbers associated with them. The standards start with SA 200, and
go on up to 810. There are 9 standards in the 200s, 4 in the 300s, 2 in the 400s, 11 in the 500s, 3 in the
600s, 5 in the 700s, and 3 in the 800s.

Phew! So many standards! And such bizarre numbering!

But there is some method in this chaos. There are common-links for these standards, in different
numbers. And at least from, but not limited to the exam perspective, knowing these links would make it
easier to understand SAs.

The 200 Series : Responsibilities of the auditor

The entire 200 series deals with different responsibilities of the auditor. SA 200, Overall objectives of
the independent auditor and conduct of an audit in accordance with Standards on Auditing, gives the
Who, Why, and How of auditing.

Who : Qualities that an auditor should have : Independence, Integrity, Confidentiality, and Skill &
Competence. Just as the other standards and the concepts discussed there, this is just common sense.

The Why of the audit is divided into audit : Expressing an opinion, giving a reasonable assurance that
there are no misstatements, ensuring that financial statements are prepared as per financial reporting
framework.

SA 210 is another responsibility; that of sending an engagement letter to the client in response to the
appointment letter. SA 220 is about maintaining the quality of work in the entire audit engagement
team.

While SA 230 specifically gives the what and how of audit documentation, SA 240 gives the
responsibilities of the auditor in case of a fraud in the entity. SA 250 is about considering the different
laws and regulations that are applicable to the entity.

SA 260 and SA 265 are similar. The former lays down those matters that should be communicated to
Those charged with governance (TCWG), and SA 265 is about communicating deficiencies in internal
control, to both management and TCWG.

The last standard in the 200 series is SA 299: Responsibilities of Joint auditors, where the different
considerations in case of joint audits are given, i.e, where two different auditors have been appointed to
audit the same entity.

Look back at the 200 series and you realize that every one of the standards, from drafting the
engagement letter, to the auditors responsibilities relating to fraud, to responsibilities of joint auditors,
the nine standards deal with responsibilities of the auditor.

SA 300 and 400 Series : Risk Assessment and Responding to assessed risks

The idea of standards is to uphold a quality in the audit work, and it is essential that the audit is planned
well, so that the chances of missing something can be reduced. These standards are also about
identifying and assessing those areas which may be riskier, or more vulnerable to errors or frauds than
others.
SA 300 is the Institute saying Plan the audit, and audit the plan. Make the plan flexible, and record the
plan. It tells the auditor to make an overall audit strategy, to guide the audit engagement team, before
the actual commencement of the audit.

SA 315 is about identifying the vulnerable areas and also evaluating/assessing the vulnerabilities; How
risky are the risky areas, by understanding the entitys internal control.

SA 320, Materiality in planning and performing an audit is about understanding the areas that are
material, i.e, important enough to influence the decisions of the users of financial statements.
Materiality is a very relative concept and varies from entity to entity, account to account, is discussed in
this standard.

SA 330 is the logical second part of SA 315. While risks are identified and assessed in SA 315, the
responses to assessed risks are discussed in SA 330. The courses of action, when risk is low, or high, are
covered in SA 330.

SA 402 is about getting a report on the internal control of service organizations whose services are used
by the client. When the client gets a substantial part of its work done by another entity, it would have an
impact on the financial statements of the client. A outsources its accounting work to B. As auditor
should gather an idea of the internal control of B, from Bs auditor.

SA 450, Evaluation of mis-statements identified during the audit ensures that all auditors would treat
mis-statements identified with due caution and adhere to the prescribed course of action, as laid out in
SA 450.

SA 500 series : Audit evidence

The entire SA 500 series deals with Audit evidence. What it is, and the different techniques that will help
in that regard.

SA 500 lays out what audit evidence is, and the different types of evidence. It also gives different
methods of collecting and evaluating audit evidence.

SA 501 is exclusively dedicated to specific directions and considerations for certain selected items.
(Segment reporting, Claims and litigations, and Physical verification of inventory.) SA 505 tells the
auditor how to externally confirm audit evidence, while SA 510 is about getting audit evidence for
opening balance when auditor is conducting the audit of an entity for the first time. SA 520 deals with
Analytical procedures (Ratio analysis, Trend analysis, Comparison and Reasonableness), typically used
by the auditor for comparison both with itself in previous years and also with the industry.

SA 530 gives the know-how of sampling in auditing. The different techniques of selecting samples and
the different considerations associated with it are given in this standard.
SA 540 is on gathering audit evidence for estimated figures in the financial statements, SA 550 deals
with Related parties and related party transactions, and SA 560 (quite similar to AS 4) is about audit
evidence in events that occur after the balance sheet.

SA 570 tells the auditor how to get audit evidence for validating the going concern assumption. The final
standard in the 500 series, SA 580 (written representation) deals with getting a representation from the
management in the absence of adequate or unreliable audit evidence.

SA 600 Series : Using the work of others

The auditor uses the work of some other people while conducting an audit. It may be the audit report of
branch auditors (SA 600) or auditor of a joint venture/associate for a principal auditor, or it may be
relying upon the work of an internal auditor (SA 610), or it may be to use the work of people like
actuaries/lawyers/company secretaries etc, who we call experts (SA 620). The entire SA 600 series deals
with the considerations that an auditor has to keep in mind while using the work of others.

One moral common to all three of these standards is that the auditor is responsible for his/her opinion,
regardless of whose work he/she relies upon.

SA 700 Series : Audit conclusion and reporting

The 700 series is about reporting, and the different considerations to keep in mind, with regard to Audit
report. SA 700, 705 and 706 will be covered in detail in the other session, and we will keep this
discussion limited to SA 710 and 720.

SA 710 is about comparative information, where figures of previous years are given together with those
of the current year. The ones who are familiar with financial statements would recall that figures of the
previous years are given along with those of the current year. These are called corresponding figures
and are an integral part of the financial statements. Sometimes comparative financial statements are
provided, where the figures or two or more previous years are also given (These are not an integral
part).

SA 720 deals with Other information. It deals with the considerations regarding any document
containing the audited financial statements, when there are contradictions from the original.

SA 800 Series : Specialized Areas

Generally financial statements that are made available to public are prepared using such accounting and
reporting framework that cater to the decision making needs of general users and financial statements
prepared using such framework are called general purpose financial statements. On the other hand
financial statements that cater to the special needs of specific users will be called special purpose
financial statements. (E.g: Financial statements prepared at the time of liquidation, Accounts maintained
under cash basis for specific investors.) SA 800 deals with the audit of such special purpose financial
statements.

SA 805 deals with the considerations relating to the acceptance, planning and performance, and forming
an opinion of the audit of a single financial statement, or an account of the financial statement.

SA 810 deals with the audit of summary financial statements. Summary financial statements are
historical data derived from the financial statements that contain less details but still provide a
structural representation consistent with that of the financial statements.

To conclude, Standards on Auditing are the logical conclusion of an attempt to put into words the best
way of conducting an examination of financial statements. I have had fun trying to figure out the Whys
of these standards, and Im sure that investing a little time to think about them would help a lot in
understanding them.

All the best.

Cheers!