A.

Audit Framework & Regulation

. Tbe Concept of audit and otber assurance engagements

f% Ident|fy fnd descr|be the ob[ect|ve fnd generf pr|nc|pes of externf fd|t engfgements
2

Leve 1
rovlde 8easonable Assurance Lo lnLended parLy LhaL sub[ecL maLLer ls free from maLerlal error
Assurance LhaL lnformaLlon provlded by responslble parLy ls Lrue and falr (reasonable assurance) due Lo
lack of LrusL of lnLended users (shareholders) on Lhe responslble parLy (managemenL) ln oLher words a
SLewardshlp Check"

Secondary 8eneflLs
O lnLernal ConLrol Check
O Advlce Lo managemenL
O CredlblllLy ln sLaLemenLs ln percepLlon of Lax auLhorlLles lendlng lnsLlLuLlons
O elps SeLLllng A/Cs beLween arLners
O rovldes Assurance Lo Sleeplng parLner
LxLernal Shareholders wlll wanL an unblased or an lndependenL oplnlon
AssumpLlon
on Lhe accuracy of
flnanclal sLaLemenLs posslble only Lhrough exLernal arrangemenLs lnLernal ConLrol ls llkely Lo blas
AssumpLlon

as lnLernal ConLrol Manager mosL llkely accounLable Lo dlrecLors
AudlL by exLernal and lndependenL pracLlLloner may
AssumpLlon
also lead Lo speclallsL knowledgeable vlew
helplng Lo lmprove sysLem of conLrol and reduclng buslness rlsks
lndependenL Cplnlon unblased noL explolLlng lnfo gap of lnLended users Alms Lo reduce corporaLe
fallures by enforclng a sysLem of check and balances
ow Lhls ob[ecLlve ls achleved
O Sub[ecL maLLer ln all maLerlal aspecLs are ln accordance wlLh Lhe sulLable crlLerla afLer Laklng
lnLo accounL sufflclenLly approprlaLe evldence collecLed by Lhe audlLor ln a wrlLLen form Lo
lnLended users
All underllned are assumpLlon as conLrollable aspecLs of exLernal audlL Lhe reason belng Lhe general prlnclples are noL
belng adhered Lo

Leve 2
AssumpLlon(s)
O eneral rlnclples are all belng adhered Lo
O lnherenL LlmlLaLlons of AudlL
O -aLure of AudlL evldence
O @esL Checklng by AudlLor
eneral rlnclples*
LxplanaLlon from @ 8ook pg 7

O Code of eLhlcs (lndependence lnLegrlLy Cb[ecLlvlLy rofesslonal CompeLence due care
ConfldenLlallLy rofesslonal behavlor @echnlcal sLandards)
O ln accordance wlLh lSA
O rofesslonal SkepLlclsm (lf audlLor suspecLs fraud has Laken place Lhen he should lnvesLlgaLe
Lhe hlgher Lhe skepLlclsm Lhe hlgher Lhe audlL quallLy)
O rofesslonal !udgmenL (Sub[ecLlve MaLLers robablllLy 8lsk Sufflclency and
approprlaLeness of evldence lnLerpreLaLlon of lSA maLerlallLy AudlL 8lsk LxLenL and Llmlng
of procedure Arrlvlng aL a concluslon)
O SufflclenL ApproprlaLe Lvldence

b% xpf|n the nftre fnd deveopment of fd|t fnd other fssrfnce engfgements
1

Leve 1
-aLure lnLrlnslc or essenLlal feaLures exlsL as defaulL or would lf no exLernal lnLervenLlon
uevelopmenL LvenLs LhaL led Lo change ln Lhe naLure 8LMLM8L8 lL's noL Lhe evenLs LhaL are more
lmporLanL buL Lhe changes Lhey boughL wlLh Lhemselves however boLh are requlred ln a compleLe
answer
AudlL -CW as explalned above
ulfferences
O l- 88CAu @L8MS
accounLlng for all evenLs ln pasL
was merely a publlc funcLlon a check lf Lhere ls no
mlsappllcaLlon or defalcaLlon
mlsapproprlaLlon
of funds ow ln Loday's Llme audlL ls used ln every
secLor of lndusLry provldlng quallLaLlve assurances also Carrled ouL by prlvaLe pracLlLloners
raLher by sLaLe for Lhe obvlous reasons
lnefflclencles (lack of moLlve moLlvaLlon) 8ureaucracy AppllcaLlon/8equesL would
flood ln Lhus lnLended users would noL be able Lo beneflL from lL ln a Llmely manner

O

lndusLrlal 8evoluLlon lndusLrlal 8evoluLlon sLlmulaLed Lhe formaLlon of caplLal markeLs and
Lhe separaLlon of owners and managers WlLh Lhls separaLlon came Lhe poLenLlal for
opporLunlsLlc managemenL behavlor @hls ln Lurn creaLed a markeL for lndependenL audlLors
volunLarlly hlred by some Lo provlde a way Lo check on managemenLs' performance wlLh Lhe
owner's resources AudlLuevelopmenLpdf
see end of noLes

O owever recenL corporaLe fallures have polnLed ouL Lhe need for subsLanLlve lmprovemenLs ln
Lhese componenLs
Lnron CversLaLlng roflLs ArLhur Anderson (AudlLor) was lacklng ob[ecLlvlLy
8ankrupLcy of Lnron led Lo bubble bursL ln 2000
allouLs of rauds llke WorldCom armalaL Cable Wlreless and xerox led Lo
SarbanesCxley AcL ln 2002
SarbanesCxley AcL creaLed new sLandards for corporaLe accounLablllLy as well as
new penalLles for acLs of wrongdolng lL removes Lhe defense of l wasnL aware of
flnanclal lssues and oLher radlcal changes ln reporLlng sLandards
Lehman 8roLher used accounLlng maneuver known as 8epo 103" le loanlng
subsLandard or bad asseLs for shorL Lerm flnanclng
c% |scss the concepts of fccontfb||ty stewfrdsh|p fnd fgency
2

Leve 1
AccounLancy 8equlred/LxpecLed Lo [usLlfy acLlons/declslons by auLhorlLy or morallLy
CbllgaLlon/Wllllngness Lo accepL responslblllLy for once acLlons
O uuLles of an eLhlcal naLure can'L be regulaLed by an auLhorlLy AuLhorlLles usually lay down
mlnlmum sLandards where as eLhlcs usually requlre a hlgher sense of morallLy
O ulrecLors or offlcers of Lhe hlghesL posL are usually held responslble aL Lhe annual general
meeLlng lf Lhelr performance was unsaLlsfacLory Lhey can be removed from Lhelr offlces
SLewardshlp uuLles CbllgaLlons of anoLher person's properLy
O ulrecLors usually are called sLewards for Lhe properLy of shareholders as Lhey have Lo ensure or
proLecL Lhelr properLy from any 8lSk of loss
O -oL Lo acL ln Lhelr own Self lnLeresL aL Lhe expense of shareholders properLy
O 8y lnLernal ConLrol and 8lsk ManagemenL ollcles
Agency @he reclprocal rlghLs and llablllLles beLween a prlnclpal and an agenL reflecL commerclal and legal
reallLles rlnclpal raLlfles LhaL Lhe agenL wlll perform ln Lhe scope of Lhelr speclflc agency relaLlon some
duLles on behalf of Lhe prlnclpal
O ulrecLors can be called agenLs of Lhe shareholders as Lhey are employed Lo carry ouL speclflc
funcLlons as descrlbed by Lhe shareholders wlLh cerLaln Lhlrd parLles for Lhe general purpose of
beneflLlng Lhe shareholders
Leve 2
AccounLancy
O lf Lhere ls a sLrlcL conLrol over Lhe acLlons of dlrecLors CreaLlve AccounLlng can be used by
dlrecLors Lo fulflll Lhelr own lnLeresL Such examples are found ln Lhe pasL
O ;uallLy of AudlL eneral rlnclples
SLewardshlp
O AccounLlng maneuvers
O urposeless lf Lhere ls no sense of accounLablllLy Lhus such sLandards should noL be muLually
excluslve
Agency
O Ilcarlous LlablllLy Shareholders wlll be responslble for acLlons by dlrecLors
O @herefore Shareholders musL adhere Lo sLrlcL condlLlon lald down by law for an agency
relaLlonshlp
d% |scss the concepts of tre fnd ff|r presentft|on fnd refsonfbe fssrfnce
2

Leve 1 2
@rue resenLaLlon lnformaLlon ls acLual and conforms Lo reallLy Conforms Lo requlred law and sLandards

Margln llne/mlnlmum requlremenLs may be C8LA@lILL? dlsclosed
/S correcLly exLracLed from 8ooks and 8ecords
creaLlve accounLlng Lhus
falr presenLaLlon necessary

alr resenLaLlon lnformaLlon ls free from dlscrlmlnaLlon and blas
assumpLlon works only wlLh eLhlcs Sub[ecLlve

Complles wlLh expecLed
ueflne whaL ls expecLed
sLandards and rules
noL laws!
8eflecLs Commerclal subsLance of
LransacLlon
economic

reality that underlies a transaction or arrangement sale and lease ls accounLed as no sale occurred buL a loan C8 sale Lo subsldlary aL
dlscounLed raLe ls Lherefore accounLed on MarkeL Ialue/alr Ialue

8easonable Assurance reducLlon ln assurance engagemenL rlsk Lo an accepLably low level
Such Level sub[ecLlve Lo
[udgmenL
ln Lhe clrcumsLances of Lhe engagemenL as Lhe basls for a poslLlve form of expresslon
sub[ecLlve Lo dlfferenL
users
of Lhe pracLlLloner's concluslon
O lnfo ls @rue and alr
e% xpf|n report|ng fs f mefns of commn|cft|on to d|fferent stfehoders
1

Leve 1
Stfehoders keport|ng fs f mefns of commn|cft|on
Shareholders LffecLlveness Lfflclency and mosL lmporLanLly lf lnvesLmenL ls safe
Lmployees SecurlLy of !obs Adequacy of ays
ulrecLors/ManagemenL erformance of LnLlLy
8ankers CredlblllLy olng Concern ln 8lsk AssessmenL
@axaLlon AuLhorlLles lf Laxes pald are correcL
overnmenL Subsldles and Llcenslng
Consumers Suppllers lf ls lL safe Lo have flnanclal deallngs wlLh Lhe enLlLy

f% ef|ne fnd prov|de the ob[ect|ves of fn fssrfnce engfgement
1

Leve 1
Measure and evaluaLe a sub[ecL maLLer ln compllance wlLh Lhe sLandards lL express an oplnlon LhaL glves a
level of assurance Lo lnLended user
8y gaLherlng SufflclenL and approprlaLe Lvldence and uslng professlonal [udgmenL Lo arrlve aL a concluslon
@wo Lypes 8easonable LlmlLed
O 8easonable as explalned above
O LlmlLed reducLlon ln assurance engagemenL rlsk Lo a level LhaL ls accepLable ln Lhe
clrcumsLances of Lhe engagemenL buL where LhaL rlsk ls greaLer Lhan for a reasonable
assurance engagemenL as a basls for a negaLlve form of Lhe pracLlLloner's concluslon
oslLlve cannoL be provlded due Lo uncerLalnLy abouL Lhe procedure
lndlngs based on a
llmlLed scale oLher areas of buslness unknown

Assurance cannoL conclude LhaL daLa ls Lrue and falr
g% xpf|n the f|ve eements of fn fssrfnce engfgement
2

Leve 1 2
@hree parLy relaLlonshlp
* oLenLlal

users and responslble parLy mlghL be Lhe same

O oLenLlal users for whom Lhe pracLlLloner prepares Lhe assurance reporL
O 8esponslble parLy 8esponslble for provldlng Lhe sub[ecL maLLer or sub[ecL maLLer
lnformaLlon
O racLlLloner lndlvldual provldlng professlonal servlces LhaL wlll revlew Lhe sub[ecL maLLer and
provlde assurance
Sub[ecL MaLLer
O uaLa
(;uallLy of commodlLy

eg)
Lo be evaluaLed prepared
provlded
by Lhe responslble parLy
O /S non/S
SulLable CrlLerla
O lSA
O l8S
O ;uallLy SLandards lSC
O C8 LnLlLy's own sLandards
assumlng lL doesn'L come lnLo confllcL wlLh sLaLuary sLandards

O Analysls lf lL does noL resulL ln Lhe /S belng unfalr
SufflclenL and ApproprlaLe Lvldence
O acLual lndlngs
O SufflclenL amounL of audlL evldence requlred Lo affecL audlLor's rlsk of mlssLaLemenL
O ApproprlaLe 8elevance 8ellablllLy of Lhe audlL evldence
O Analysls Sub[ecLlve rofesslonal !udgmenL
Assurance 8eporL
O lndependenL Cplnlon
assumlng general prlnclples are belng adhered Lo

O @o Lhe lnLended user
O Analysls 8ased on CompeLence of pracLlLloner and how sLrlcLly audlL procedures are Laken
h% xpf|n the eve of fssrfnce prov|de by fd|t fnd other rev|ew engfgements
1

AudlL 8easonable Assurance due Lo
O lnherenL LlmlLaLlons of AudlL
O -aLure of AudlL evldence
O @esL Checklng by AudlLor
8evlew LngagemenL LlmlLed Assurance ocus on speclflc area ln more deLall llke
O SLudy and evaluaLlon of lnLernal accounLlng conLrols
O ueLalled LesL of accounLlng records
O CorroboraLlve
sLrengLhen evldence wlLh evldence
evldence Lhrough lnspecLlon
O Any lnqulry or analyLlcal revlew
O Cheap Lhan full audlL as focuses on speclflc lssues
Lhus less work ls requlred

O LlmlLed Assurance/-egaLlve Assurance
O CrlLerla for revlew engagemenL ls whaLever Lerm agreed upon
crlLerla for an audlL ls lfrs

Agreed upon rocedures
O -C ASSu8A-CL
O Cnly facLual flndlngs
O ln whlch an audlLor ls engaged Lo carry ouL procedures of an audlL naLure concernlng speclflc
lLem such as accounL recelvable @o whlch audlLor and Lhe enLlLy and approprlaLe Lhlrd
parLles have agreed and Lo reporL on facLual flndlngs only
O Cplnlon noL expressed
CompllaLlon
O @o collecL classlfy and summarlze flnanclal sLaLemenLs
O -C ASSu8A-CL
O lnanclals provlded by Lhe audlLor have noL audlLed or revlewed as Lhe audlLor glves no
oplnlon