Financial Audit

Chapter- 01: Objective and general principles of governing an audit (BSA- 00! "SA- 00# Objective of an audit- The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared in all material respects in accordance with an identified financial reporting framework. $eneral principles of an audit- The auditor should comply with the code of ethics for professional accountants issued by the International Federation of Accountants (IFA ! or the council of the Institute of hartered Accountants of "angladesh (I A"! or the council of the Institute of ost and #anagement Accountants of "angladesh (I #A"!. $thical principles governing the auditors professional responsibilities are% a! independence&to ensure the credibility of financial statement to the interested user' it is re(uired to honest assessment and evaluation. To achieve the objective of audit is depend on conducting the audit independently.

b! integrity& This means that an accountant must be straight forward and honest. It involves fair dealing and truthfulness. c! objectivity& This is a state of mind that excludes partiality' unfairness and compromise and that gives fair and neutral consideration to all matters that are relevant to the task in hand.

d! professional competence and due care& A professional accountant has a continuing duty to maintain professional knowledge and skill at the level re(uired to ensure that a client or employer receives competent professional service based on current developments in practice' legislation and techni(ues. e! confidentiality& lient information must be kept confidential unless there is a genuine exception to this re(uirement technical standards& An auditor should have knowledge on technical standards to justify the technical information included in accounts.

f!

%rue and Fair vie& of presentation& The auditor is re(uired to report that the financial statements give a true and fair view of (present fairly' in all material respects! the financial position' results and cash flows for the company concerned. As per IA)&* +Fair, presentation re(uires that faithful representation of the effects of transactions' other events and conditions in accordance with the definitions and recognition criteria for assets' liabilities' income and expenses setout in the framework for the preparation and presentation of Financial )tatements. 'easonable assurance& -o auditor can give *../ assurance. The highest level of assurance given' as the case of statutory audit' is described as +0easonable Assurance,. 0easonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. 0easonable assurance relates to the whole audit process. (i)itation of reasonable assurance*"nherent li)itations of an audit & 0easonable assurance is less than absolute assurance. 0educing assurance engagements risk to 1ero is very rarely attainable or cost beneficial as a result of factors such as the following% a! the use of testing

b! the inherent limitations of material control c! the fact that much of the evidence available to the practitioner is persuasive rather than conclusive

d! the use of judgement in gathering and evaluating evidence and forming conclusions based on that evidence e! in some cases' the characteristics of the subject matter when evaluated or measured against the identified criteria.

'esponsibilit+ for the financial state)ents & 2hile the auditor is responsible for forming and expressing an opinion on the financial statements' the responsibility for prepairing and presenting the financial statements is that of the management of the entity. The audit of the financial statements does not relieve management of its responsibilities. Assurance engage)ent& An assurance engagement is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the reponsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Assurance engagements are generally voluntary but may be a re(uirement imposed on the entity by another party. $xamples of assurance engagements are as follows% a! b! c! d! e! Annual external audit of financial statements 3alf&year review of results 4oing concern review 0eview of effectiveness of entity5s IT system 0eview of compliance with corporate governance re(uirements

Benefits of assurance report& An assurance report provides the following benefits to the users of financial information% a! Independent opinion from an external source that enhances the credibility of the information b! #anagement bias is reduced c! #odified opinion draws attention to risk d! The relevance of the information may be improved by the expertise and knowledge of the assurance firm Activities in assurance engage)ents& All assurance engagements' whether subjected to legal regulation such as statutory audit or a contractual arrangement should be performed in a similar manner% a! Agree the scope of work to be performed b! Formalise all of the terms of the engagements in a contract (engagement letter! c! 6lan the work. The level of work should be based on the risk and level of assurance desired d! 7btain sufficient appropriate evidence on which to base the conclusions e! 6erform overall review and form opinion f! Issue report to the client ,aterialit+ ("SA - 0#& The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared in all material respects' with an identified financial reporting framework. Information or items will be material if the following things happen% a! Information is material if its ommission or misstatement could influence the economic decisions of the users on the basis of financial statements b! The auditor must be concerned with identifying material errors' ommissions and misstatements in both (uantity and (uality. c! To put this into practice the auditor therefore has to set his own mateiality levels by his own judgement and experience d! The level set has a critical impact on two areas% The nature' timing and extent of audit procedures8 and $valuating the effect of misstatements% *. whether to seek adjustments8 or 9. the degree of any auditor5s report modification "ndependence of auditor& An auditor is in independent% to develop audit program by applying audit techni(ue and procedure

to examine any transactions through accessing books' records' documents and (uestioning of employee. %hreats to independence of auditor& Following are the threats for auditor% self interest threat like financial interest' loan and guaranties' overdue fees' high percentage of fees' gifts and hospitality self review threat that is tax service' internal audit service' corporate finance etc. advocacy threats that is legal service' corporate finance service etc. familiarity threat that is family and personal relationship' recruitment' team members' move to employment with client intimidation threat that arises when audit team members pressured by client staff due to close business relationship or family and personal relationship or team members move to employment with client accepting new client without considering ethical issue Suggestion to i)prove or safeguard or overco)e threats& Following are the steps that could help to overcome the audit threats% educational training and experience re(uirements for entry into the profession continuing professional development re(uirements corporate governance regulations professional standards professional or regulatory monitoring and disciplinay procedures involving an additional professional accountant to review the work done or otherwise advise as necessary consulting an independent third party' such as a committee of independent directors' a professional regulatory body or another professional accountant discussing ethical issues with those in charge of client governance Chapter- 0 : %er)s of Audit .ngage)ents (BSA- 10! "SA- 10# Audit engage)ent letters& It is the interest of both client and auditor that the auditor sends an engagement letter' preferably before the commencement of the engagement' to help in avoiding misunderstandings with respect to the engagement. The engagement letter documents and confirms the auditors acceptance of the appointment' the objective and scope of the auditors responsibilities to the client and the form of any reports. The auditor should regularly review the terms of engagement and if appropriate issue a new engagement letter or agree any updates in writing. Contents in engage)ent letter& The form and content of the engagement letters may vary for each client' but they would generally include% a! 7bjective of the audit of financial statements b! #anagements responsibility for the financial statements c! The scope of the audit' including reference to applicable legislation' regulations' or pronouncements of professional bodies to which the auditor adheres d! The form of any reports or other communication of results of the engagements e! The fact that because of the test nature and other inherent limitations of an audit' together with the inherent limitations of internal control' there is an unavoidable risk that even some material misstatement may remain undiscovered f! :nresrticted access to whatever records' documentation and other information re(uested in connection with the audit. g! Arrangements regarding the planning and performance of the audit h! $xpectation of receiving a management representation letter i! 0e(uest to confirm terms by acknowledging receipt of engagement letter /istinction bet&een reasonable assurance engage)ents and li)ited assurance engage)ents & ;ifferences between reasonable assurance engagements and limited assurance engagements are as follows% 'easonable assurance engage)ents dictates the sufficient appropriate evidence is obtained as part of a systematic engagement process that includes% 7btaining an understanding of the engagement circumstances Assessing risks 0esponding to assessed risks

6erforming further procedures using a combination of inspection' confirmation' re&calculation' re& performance' analytical procedures and in(uiry (i)ited assurance engage)ents dictates the sufficient appropriate evidence is obtained as part of a systematic engagement process that includes obtaining an understanding of the subject matter and other engagement circumstances' but in which the procedures are deliberately limited relative to a reasonable assurance engagement. The procedures may include only in(uiry and analytical procedures. Audits of co)ponents&2hen the auditor of a parent entity is also the auditor of its subsidiary' branch or division (component!' the factors that influence the decision whether to send a separate engagement letter to the component include the following% who appoints the auditor of the component whether a separate auditors report is to be issued on the component legal re(uirements the extent of any work performed by other auditors degree of ownership by parent degree of independence of the components management .0a)ple of an audit engage)ent letter The following letter is for use as a guide an conjunction with the considerations outlined in he ")A<I)A and will need to be varied according to individual re(uirements and cicumstances. To the "oard of ;irectors or the appropriate representative of senior management. =ou have re(uested that we audit the balance sheet of >*st ;ec. of 9.?*' and the related statements of income and cash flows for the year then ending. 2e are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. 7ur audit will be made with the objective of our expressing an opinion on the financial statements. 2e will conduct our audit in accordance with "angladesh )tandards on Auditing. Those standards re(uire that we plan and perform the audit to obtain reasonable assurance about whether the fianancial statements are free of material misstatements. An audit includes examining' on a test basis' evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management' as well as evaluating the overall financial statement presentation. "ecause of the test nature and other inherent limitations of an audit' together with the inherent limitations of any accounting and internal control system' there is an unavoidable risk that even some material misstatements may remain undiscovered. In addition to our report on the financial statements' we except to provide you with a separate letter concerning any material weakness in accounting and internal control systems which come to our notice. 2e remind you that the responsibility for the preparation of financial statements including ade(uate disclosure is that of the management of the company. This includes the maintenance of ade(uate accounting records and internal controls' the selection and application of accounting policies' and the safeguarding of the assets of the company. As part of our audit process' we will re(uest from management written confirmation concerning representations made to us in connection with the audit. 2e look forward to full cooperation with your staff and we trust that they will make available to us whatever records' documentation and other information are re(uested in connection with our audit. 7ur fees' which will be billed as work progresses' are based on the time re(uired by the individuals assigned to the engagement plus out&of&pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill re(uired. This letter will be effective for future years unless it is terminated' amended or suspected. 6lease sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements. ?=@ A o.

Acknowldeged on behalf of A" ()igned! ........................ -ame and Title ;ate%..................

ompany by

Chapter- 0-: 1ualit+ Control for Audit 2or3 (BSA- 0! "SA-

0#

1ualit+ control polic+ 4 procedures&Buality control policies and procedures should be implemented at both the level of the audit firm and on individual audits. The audit firm should implement (uality control policies and procedures designed to ensure that all audits are conducted in accordance with ")As or relevant international standards or practices. The nature' timing and extent of an audit firm5s (uality control policies and procedures depend on a number of factors such as the si1e and naure of its practice' its geographic dispersion' its organisation and approximate cost<benefit considerations. Accordingly' the policies and procedures adopted by individual audit firms will vary' as will the extent of their documentation. The objectives of the (uality control policies to be adopted by an audit firm will ordinarily incorporate the following% a. b. c. d. e. f. g. professional re(uirements skills and competence assignment delegation consultation acceptance and retention of clients monitoring

The firm5s general (uality control policies and procedures should be communicated to its personnel in a manner that provides reasonable assurance that the policies and procedures are understood and implemented. Chapter- 05: /ocu)entation (BSA- -0! "SA- -0# Audit docu)entation*2or3ing papers&;ocumentation means the material (working papers! prepared by and for or obtained and retained by the auditor in connection with the performance of the audit. 2orking papers may be in the form of data stored on paper' film' electronic media or other media. 6Audit docu)entation is the integral part of audit7 &2orking papers are designed and organi1ed to meet the circumstances and the auditors needs for each individual audit. The use of standardi1ed working papers (for example' checklists' specimen letters' standard organi1ation of working papers! may improve the efficiency with which such working papers are prepared and reviewed. They facilitate the delegation of work while providing a means to control its (uality. To improve audit efficiency' the auditor may utili1e schedules analyses and other documentation prepared by the entity. In such circumstances' the auditor would need to be satisfied that those materials have been properly prepared. 8ecessit+*purposes of &or3ing papers& The needs for working papers in audit are as follows% a. b. c. d. assist in the planning and performance of the audit assist in the supervision and review of audit work enable the audit team to be accountable for its work retain a record of matters of continuing significance to future audits8 and

e.

enable (uality control reviews to be performed

Factors that influence the &or3ing papers& The form and content of working papers are affected by matters such as the following% a. nature of the engagement b. form of the auditors report c. nature and complexity of the business d. nature and condition of the entity5s accounting and internal control systems e. needs in the particular circumstances for direction' supervision and review of work performed by assistants f. specific audit methodology and technology used in the course of the audit Content of &or3ing papers& 2orking papers should include the followings% a. information concerning the legal and organi1ational structure of the entity b. extracts copies of important legal documents' agreements and minutes c. information concerning the industry' economic environment and legislative environment within which the entity operates d. evidence of the planning process including audit programs and any charges thereto e. evidence of the auditor5s understanding of the accounting and internal control systems f. evidence of inherent and control risk assessments and any revisions thereof g. evidence of the auditor5s consideration of the work of interal auditing and conclusions reached h. analyses of transactions and balances i. analyses of significant ratios and trends j. a record of the nature' timing and extent of audit procedures performed and the results of such procedures k. evidence that the work performed by assistants was supervised and reviewed l. an indication as to who performed the audit procedures and when they were performed m. details of procedures applied regarding components whose financial statements are audited by another auditor n. copies of communications with other auditors' experts and other third parties o. copies of letters or notes concerning audit matters communicated to or discussed with the entity' including the terms of the engagement and matter weakness in internal control p. letters of representation received from the entity (. conclusions reached by the auditor concerning significant aspects of the audit' including how exceptions and unusual matters' if any' disclosed by the auditor5s procedures were resolved or treated r. copies of the financial statements and auditor5s report. Chapter- 09: Fraud and .rror (BSA- 50! "SA- 50# Fraud and .rror& 2hen planning and performing audit procedures and in evaluating and reporting the results thereof the auditor should consider the risk of material misstatements in the financial statements resulting from fraud or error. The term +Fraud, refers to an intentional act by one or more individuals among management' employees' or third parties' which results in a misrepresentation of financial statements. Fraud may involve% manipulation' falsification or alternation of records or documents misappropriation of assets suppression or omission of the effects of transactions from records or documents recording of transactions without substance misapplication of accounting policies. The term +$rror, refers to unintentional mistakes in financial statements such as% mathematical or clerical mistakes in recrods and accounting data oversight or misinterpretation of facts misapplication of accounting policies 'esponsibilit+ of ,anage)ent & The responsibility for the prevention and detection of fraud and error rests with management through the implementation and continued operation of ade(uate accounting and internal control systems. )uch systems reduce but do not eliminate the possibility of fraud and error. 'esponsibilit+ of the Auditor & The auditor is not and can not be held responsible for the prevention of fraud and error. The fact that an annual audit is carried out may' however' act as a deterrant. In planning the audit' the auditor should assess the risk that fraud and error may cause the financial statements to contain material misstatements and should in(uire of management as to any fraud or significant error which has been discovered.

:rocedures &hen there is an indication that fraud or error )a+ e0ist &2hen the application of audit procedures designed from the risk assessment indicates the possible existence of fraud or error' the auditor should consider the potential effect on the financial statements. If the auditor believes the indicated fraud or error could have a material effect on the financial statements' the auditor should perform appropriate modified or additional procedures. The extent of such modified or additional procedures depends on the auditors as to% the types of fraud and error indicated the likelihood of their occurence the likelihood that a particular type of fraud or error could have a material effect on the financial statements. 'eporting b+ auditors for fraud and errors & The auditors should report to the management and the users as follows% %o )anage)ent& the auditor should communicate factual findings to management as soon as practicable if% a. the auditor suspects fraud may exist' even if' the potential effect on the financial statements would be immaterial8 of b. fraud or significant error is actually found to exist. %o users& the auditor5s report of the financial statements as follows% a. if the auditor concludes that the fraud or error has a material effect on the financial statements and has not been properly reflected or corrected in the financial statements' the auditor should express a (ualified or an adverse opinion. b. if the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether fraud or error that may be material to the financial statements' has' or is likely to have occured' the auditor should express a (ualified opinion or a disclaimer of opinion on the financial statements on the basis of a limitation on the scope of the audit. c. if the auditor is unable to determine whether fraud or error has occured then the auditor should consider the effect on the auditor5s report. %o regulator+ and enforce)ent authorities& the auditor5s duty of confidentiality would ordinarily preclude reporting fraud or error to a third party. 3owever' in certain circumstances' the duty of confidentiality is overridden by statute' law or by courts of law. The auditor may need to seek legal advice in such circumstances giving due consideration to the auditors responsibility to the public interest. .0plain the difference bet&een the responsibilities of internal auditors and e0ternal auditors for the prevention! detection! reporting fraud and error- The responsibilities of internal auditor and external auditors in prevention and detection of fraud and error are as follows% "nternal Auditor .0ternal Auditor ;irectors responsible for prevention and detection an contribute to prevention by assessing the effectiveness of control systems $xistence of internal audit (IA! department may act as deterrent an contribute to detection by reporting suspicions #ay be called on to carry out investigation of suspected fraud -o responsibility for prevention Cimited responsibility for detection onsider risks of material misstatement 0easonable assurance statements are free misstatement. that from financial material

.ffects of fraud and )isstate)ents ("SA- 50#& The auditor5s responsibility to consider fraud in an audit of financial statements is high. 3e has to give particular emphasis on% 7btaining an understanding of how those charged with governance exercise oversight over the identification of the fraud risks and the implementation of controls. 2here the risk assessment suggests there may be material misstatements arising from fraud the main effects on the audit strategy will relate to% Assignment and supervision of personnel

onsideration of accounting policies :npredictability in nature' timing and extent of audit procedures. Chapter- 0;: :lanning (BSA--00! "SA--00#

Audit :lanning& +6lanning, means developing a general strategy and a detailed approach for the expected nature' timing and extent of the audit. The auditor plans to perform the audit in an efficient and timely manner. %he need for planning& 6lanning an audit of financial statements sets out the basic reasoning for audit planning% the auditor should plan the audit work so that the audit will be performed in an efficient manner. Ade(uate planning of the audit work helps to ensure that appropriate attention is devoted to important areas of the audit' that potential problems are identified and that the work is completely expeditiously. 6lanning also assists in proper assignment of work to assistants and in coordination of work done by other auditors and experts. Factors that influence the audit planning& The form and nature of planning is affected by& )i1e of the entity omplexity of the audit Auditors experience with the entity Dnowledge of the business :nderstanding the accounting and internal control systems 0isk and materiality -ature' timing and extent of procedures oordination' ;irection' )upervision and 0eview ommercial environment #ethod of processing transactions 0eporting re(uirements Objectives of the audit planning& The objectives of the audit planning are given below% $nsuring that appropriate attention is devoted to important areas of the audit $nsuring that potential problems are identified $nsuring that the work is completed properly 6roper assignment of work to assistants oordination of work done by other auditors and experts8 and Facilitating review. Audit progra)& The auditor should develop and document an audit program setting out the nature' timing and extent of planned audit procedures re(uired to implement the overall audit plan. The audit program serves as a set of instructions to assistants involved in the audit and as a means to control and record the proper execution of the work. The audit program may also contain the audit objectives for each area and a time budget in which hours are budgeted for the various audit areas or procedures. In preparing the audit program' the auditor would consider the specific assessments of inherent and control risks and the re(uired level of assurance to be provided by substantive procedures. Overall audit plan& The auditor should develop and document an overall audit plan describing the expected scope and conduct of the audit. 2hile the record of the overall audit plan will need to be sufficiently detailed to guide the development of the audit program' its precise form and content will vary depending on the si1e of the entity' the complexity of the audit and the specific methodology and technology used by the auditor. #atters to be considered by the auditor in developing the overall audit plan include the following% Dnowledge of the business :nderstanding the accounting and internal control systems 0isk and materiality -ature' timing and extent of procedures oordination' ;irection' )upervision and 0eview 4oing concern assumption' related parties existence' term of engagement and nature of reports. Audit Strateg+& Audit strategy is concerned with designing optimi1ed audit approaches that seek to achieve the necessary audit assurances at the lowest cost within the constraints of the information available. Audit procedures should be relevant to the important assertions' and as cost effective as possible to perform. Audit strategy generally involves the following steps% 7btaining knowledge of business 6erforming analytical procedures at initial stages

$valuating inherent risks $valuating internal control system for strategy purpose Formulating the strategy Chapter- 0<: Audit ,aterialit+ (BSA-- 0! "SA-- 0#

Auditor=s responsibilit+ for )aterialit+ in the Financial State)ents & In designing the audit plan' the auditor establishes an acceptable materiality level so as to detect (uantitatively material misstatements. The auditor needs to consider the possibility of misstatements of relatively small amounts' that' cumulatively' could have a material effect on the financial statements. The auditor considers materiality at both the overall financial statement level and in relation to individual account balances' classes of transactions and disclosures. 2hen auditor should consider )aterialit+& #ateriality should be considered by the auditor when% ;etermining the nature' timing and extent of audit procedures8 and $valuating the effect of misstatements. 'elationship bet&een )aterialit+ and audit ris3 & There is an inverse relationship between materiality and the level of audit risk' that is the higher the materiality level' the lower the audit risk and vice versa. The auditor takes the inverse relationship between materiality and audit risk into account when determining the nature' timing and extent of audit procedures. Auditor=s position in respect of increased audit ris3 & If' after planning for specific audit procedures' the auditor determines that the acceptable materiality level is lower' audit risk is increased. The auditor would compensate for this by either% 0educing the assessed level of control risk' where this is possible' and supporting the reduced level by carrying out extended or additional tests of control8 or 0educing detection risk by modifying the nature' timing and extent of planned substantive procedures. ,aterialit+ and audit ris3 in evaluating audit evidence & The auditor5s assessment of materiality and audit risk may be different at the time of initially planning the engagement from at the time of evaluating the results of audit procedures. This could be because of a change in circumstances or because of a change in the auditor5s knowledge as a result of the audit. In planning the audit work' the auditor may intentionally set the acceptable materiality level at a lower level than is intended to be used to evaluate the results of the audit. This may be done to reduce the likelihood of undiscovered misstatements and to provide the auditor with a margin of safety when evaluating the effect of misstatements discovered during the audit. .valuating the effect of )isstate)ents& In evaluating the fair presentation of the financial statements the auditor should assess whether the aggregate of incorrect misstatements that have been identified during the audit is material. The aggregate of incorrect misstatements comprises% )pecific misstatements identified by the auditor including the effect of incorrect misstatements identified during the audit of previous periods8 and The auditor5s best estimate of other misstatements which cannot be specifically identified 2hat re)edies should ta3e auditor for reducing audit ris3 & If the auditor concludes that the misstatements may be material the auditor needs to consider reducing the audit risk by extending audit procedures or re(uesting management to adjust the financial statements. In any event' management may want to adjust the financial statements for the misstatements identified. If management refuses to adjust the financial statements and the results of extended audit procedures do not enable the auditor to conclude that the aggregate of incorrect misstatements is not material' the auditor should consider the appropriate modification to the auditor5s report in accordance with I)A or ")A +the Auditor5s 0eport of Financial )tatement,. In undetected misstatements' the aggregate uncorrected misstatements approach the materiality level the auditor would consider reducing the risk by performing additional audit procedures or by re(uesting management to adjust the financial statements for identified misstatements. Calculation of )aterialit+& The calculation of materiality is given as follows% It is a matter of professional judgement #ost firms set criteria for guidance In evaluating whether the financial statements give a true and fair view' the auditor should assess the materiality of the aggregate of uncorrected statements. This is normally documented on a schedule of unadjusted differences. For example% "etween E and */ of revenue "etween * and 9/ of total assets8 or "etween F and *./ of profit before tax

%olerable error& Tolerable error is the maximum error in the population (eg. A specific balance in the financial statements! that auditors are willing to accept and still conclude that the audit objective been achieved. It is normally set as a percentage of planning materiality. It is also used to help determine the si1e of samples. .0a)ple of 1ualitative )aterialit+ & Bualitative misstatements would be the inade(uate or improper description of an accounting policy when it is likely that a user of financial statements would be misled by the description' and failure to disclose the breach of regulatory re(uirements when it is likely that the conse(uent imposition of regulatory restrictions will significantly impair operating capability.

Chapter- 0>: %he Auditor=s :rocedures in response to assessed ris3s (BSA---0! "SA---0# Overall response to address ris3s of )aterial )isstate)ent & In order to reduce audit risk to an acceptably low level' the auditor should determine overall responses to assessed risks at the financial statement level' and should design and perform further audit procedures to respond to assessed risks at the assertion level. The overall responses and the nature' timing' and extent of the further audit procedures are matters for the professional judgement of the auditor. In addition to the re(uirements of this ")A' the auditor also complies with the re(uirements and guidance in ")A 9G.' +The Auditor5s 0esponsibility to onsider Fraud and $rror in an Audit of Financial )tatements, in responding to assessed risks of material misstatement due to fraud. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. )uch responses may include emphasi1ing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence' assigning more experienced staff or those with special skills or using experts' providing more supervision ' or incorporating additional elements of unpredictability in the selection of further audit procedures to be performed. The assessment of the risks of material misstatement at the financial statement level is affected by the auditor5s understanding of the control environment. An effective control environment may allow the auditor to have more confidence in internal control and the reliability of audit evidence generated internally within the entity. Audit procedures responsive to ris3s of )aterial )isstate)ent at the assertion level & The auditor should design and perform further audit procedures whose nature' timing and extent are responsive to the assessed risks of material misstatement at the assertion level. The purpose is to provide a clear linkage between the nature' timing and extent of auditor5s further audit procedures and the risk assessment. In designing further audit procedures' the auditor should consider such matters as the following% The significance of the risk The likelihood that a material misstatement will occur The assignment of engagement personnel to the particular engagements reflects the auditors risk assessment' which is based on the auditors understanding of the entity. The characteristics of the class of transactions' account balance' or disclosure involve. The nature of specific controls used by the entity and in particular whether they are manual or automated. 2hether the auditor expects to obtain audit evidence to determine if the entity5s controls are effective in preventing' or detecting and correcting' material misstatements. The nature of the audit procedures is of most importance in responding to the assessed risks. The auditor5s assessment of the identified risks at the assertion level provides a basis for considering the appropriate audit approach for designing and performing further audit procedures. Chapter- 0?: 'is3 Assess)ents and "nternal Control (BSA-500! "SA-500# /istinction bet&een ris3 based and ris3less approach of audit & Following are the differences between risk based audit and other approaches of audit% 'is3 based audit& 0isk based audit performed under the rules A regulations laid down in I)As. In this audit approach' the auditor performed the following steps% 6erform procedures to assess risk of material misstatement 6erform further procedures based on that assessment 'is3less audit or other approaches of audit & 7ther approaches of audit performed without compliance with I)As and this have done on the own jurisdiction of auditor. In this audit approach' the auditor performed the following steps% :se Hprocedural5 approach' i.e. perform audit according to% :sing a set of schedule'

Fixed procedures

Audit ris3& Audit risk is the Hrisk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated5. The auditor should plan and perform the audit to reduce audit risk to an acceptably low level. Audit risk has three components% Inherent risk' ontrol risk A ;etection risk. "nherent ris3& This is the susceptibility of an assertion to a misstatement that could be material' either individually or when aggregated with other misstatements' assuming that there were no related internal controls. The risk of such misstatement is greater for some assertions and related classes of transactions' account balances' and disclosures than for others. For example' omplex calculations are more likely to be misstated than simple calculations Accounts consisting of amounts derived from accounting estimates that are subject to significant measurement uncertainty pose greater risks than accounts consisting of relatively routine' factual data. $xternal circumstances giving rise to business may also influence inherent risk. Control ris3& This is the risk that a misstatement could occur in an assertion and that could be material either individually or when aggregated with other misstatements' will not be prevented' or detected and corrected' on a timely basis by the entity5s internal control. ontrol risk is a function of the effectiveness of the design and operation of internal control in achieving the entity5s objectives relevant to preparation of the entity5s financial statements. )ome control risk will always exist because of the inherent limitations of internal control. /etection ris3& This is the risk that the auditor5s procedures will not detect a misstatement that exists in an assertion that could be material either individually or when aggregated with other misstatements. ;etection risk is a function of the effectiveness of an audit procedure and of its application by the auditor. It is primarily the conse(uence of the fact that the auditor does not' and cannot examine all available evidence (sampling risk!. "nternal control s+ste)s& The term +Internal ontrol )ystem, means all the policies and procedures adopted by the management of an entity to assist in achieving management5s objective of ensuring' as far as practicable' the orderly and efficient conduct of its business segments.