Standards on auditing 600,610,620

Summary of 600 series of Auditing Standards issued by ICAI

1. Standards on Auditing 600,610,620 Presented by – Bhavesh Trilokani

2. What are Standards on Auditing? Auditing Standards provide minimum guidance for the auditor that helps determine the extent of audit steps and procedures that should be applied to fulfill the audit objective. They are criteria or yardsticks against which the quality of the audit results are evaluated.

3. Using the Work of Another Auditor Applicable since :- April 1, 2002 SA 600

4. Scope of this SA The purpose of this Standard on Auditing (SA) is to establish standards to be applied in situations where an Principal auditor , reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more components included in the financial information of the entity. This Standard also discusses the principal auditor’s responsibility in relation to his use of the work of the other auditor. In this Standard, the term 'financial information' encompasses 'financial statements'.

5. Important Terms Principal auditor means the auditor with responsibility for reporting on the financial information of an entity when that financial information includes the financial information of one or more components audited by another auditor. Other auditor means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component which is included in the financial information audited by the principal auditor. Component means a division, branch, subsidiary, joint venture, associated enterprises or other entity whose financial information is included in the financial information audited by the principal auditor.

6. Acceptance as a Principal Auditor- Auditor to decide whether the auditor’s own participation is sufficient to be able to act as the principal auditor with the following consideration: i . The materiality of the portion of the financial information ii. The degree of knowledge regarding the business of the components iii. Risk of material misstatements of the components to be audited by the other auditor iv. Performance of audit procedures per this SA regarding the components audited by the other auditor in which the principal auditor has significant participation.

7. Principal Auditor’s Procedures Consider the professional competence of the other auditor who is a not a member of ICAI in the context of the specific assignment Visit the Component and examine the Books of Accounts and Financial Statements, if essential. To advise the other auditor of matters such as areas requiring special consideration, areas requiring significant accounting, auditing and reporting requirements as to compliance with them. To discuss the other auditor’s procedures applied in the course of audit which may be in a form of questionnaire and check-list. The principal auditor should consider the significant findings of the other auditor. The principal auditor working paper should mention about the financial statements components audited by the other auditor (with the name) and its significance.

8. Co-ordination between the Auditors. There should be sufficient liaison between the principal auditor and the other auditor. For this purpose, the principal auditor may find it necessary to issue written communication(s) to the other auditor . Both Auditors should bring immediate attention to other auditor on significant matters to be dealt with at respective levels. The other auditor, knowing the context in which his work is to be used by the principal auditor, should co-ordinate with the principal auditor. The principal auditor may require the other auditor to answer detailed questionnaire required for discharging duties and the other auditor should reply the same on timely basis.

9. Reporting Considerations If the principal auditor is of the opinion that the work of the other auditor cannot be used and the principal auditor is not able to perform sufficient additional procedures for that component, then a qualified opinion or disclaimer of opinion has to be given. If the other auditor issues or intends to issue a modified auditor’s report, then the principal auditor should consider if it requires modification to the principal auditor’s report based on the nature & significance of the subject of modification.   

10.  Division of Responsibility Principal auditor is not responsible for other auditor’s work except that in case of any suspicion arises about the reliability of the other auditor’s work. The principal auditor should clearly state the division of responsibility by indicating the extent, to which the information audited by the other auditor has been relied upon in forming an opinion on the entity’s financial statement as a whole.

11. SA 610 Using the work of Internal Auditors. Applicablity since :- April 1, 2016

12. Scope of this SA The objectives of the external auditor, where the entity has an internal audit function and the external auditor expects to use the work of the function to modify the nature or timing, or reduce the extent, of audit procedures to be performed directly by the external auditor, or to use internal auditors to provide direct assistance , are: To determine whether the work of the internal audit function or direct assistance from internal auditors can be used, and if so, in which areas and to what extent; and having made that determination: If using the work of the internal audit function, to determine whether that work is adequate for purposes of the audit; and If using internal auditors to provide direct assistance, to appropriately direct, supervise and review their work.

13. Important Terms Internal audit function – A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity’s governance, risk management and internal control processes . Direct assistance – The use of internal auditors to perform audit procedures under the direction, supervision and review of the external auditor.

14. The relationship between Internal Auditor and External Auditor

15. Whether and to What Extent to Use of Internal Auditor Work External auditor should determine: If the internal auditor’s work is adequate for audit purpose and evaluate: i . Objectivity of internal audit function ii. Internal auditor’s technical competence iii. Internal auditor’s work is carried out with professional care iv. Effective communication between the internal auditor and the external auditor. Planned effect of internal auditor’s work on the nature, timing or extent of external auditor’s procedures and consider: i . Nature and scope of specific work performed or to be performed ii . Assessed risk of material misstatement at the assertion level for a particular class of transaction, account balance and disclosure iii . The degree of subjectivity involved in evaluating the audit evidence to support the relevant assertions

16. Using the Work of the Internal Auditor of the Internal Audit Function Functions needed to be performed by the External Auditor to use the work of Internal Auditor :- The external auditor shall read the reports of the internal audit function relating to the work of the function that the external auditor plans to use to obtain an understanding of the nature and extent of audit procedures it performed and the related findings. The external auditor shall perform sufficient audit procedures on the work of the internal audit function as a whole that the external auditor plans to use to determine its adequacy for purposes of the audit, including evaluating whether: a . The work of the function had been properly planned, performed, supervised, reviewed and documented ; b . Sufficient appropriate evidence had been obtained to enable the function to draw reasonable conclusions ; and c . Conclusions reached are appropriate in the circumstances and the reports prepared by the function are consistent with the results of the work performed. The nature and extent of the external auditor’s audit procedures shall be responsive to the external auditor’s evaluation of: a . The amount of judgment involved; b . The assessed risk of material misstatement; c . The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors; and d . The level of competence of the function; And shall include re-performance of some of the work. The external auditor shall also evaluate whether the in ternal auditor’s conclusions regarding the internal audit function and the determination of the nature and extent of use of the work of the function for purposes of the audit remain appropriate.

17. Using Internal Auditors to Provide Direct Assistance Prior to using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall : ( a) Obtain written agreement from an authorized representative of the entity that the internal auditors will be allowed to follow the external auditor’s instructions, and that the entity will not intervene in the work the internal auditor performs for the external auditor; and ( b) Obtain written agreement from the internal auditors that they will keep confidential specific matters as instructed by the external auditor and inform the external auditor of any threat to their objectivity. The external auditor shall direct, supervise and review the work performed by internal auditors on the engagement in accordance with SA 220 (Quality control for an audit of financial statements). The direction, supervision and review by the external auditor of the work performed by the internal auditors shall be sufficient in order for the external auditor to be satisfied that the internal auditors have obtained sufficient appropriate audit evidence to support the conclusions based on that work.

18. SA 620 SA 620 Using the Work of an Auditor’s Expert Applicable since :- April 1, 2010

19. Scope of this SA This Standard on Auditing (SA) deals with the auditor’s responsibilities regarding the use of an individual or organization’s work in a field of expertise other than accounting or auditing, when that work is used to assist the auditor in obtaining sufficient appropriate audit evidence. This SA does not deal with : Situations where the engagement team includes a member with expertise in specialized area of accounting or auditing, which is dealt with in SA 220 ;or The auditor’s use of the work of an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements(a management’s expert ), which is dealt with in SA 500.

20. Important Terms Auditor’s expert – An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert. Expertise – Skills, knowledge and experience in a particular field. Management’s expert – An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.

21. Nature, Timing, and Extent of Audit Procedure s To determine the nature, timing, and extent of audit procedures related to expert’s work, the following matters are to be considered by the auditor: Nature of the subject Risk of material misstatement  The significance of expert work to the audit Auditor’s knowledge of and experience with the expert’s work If the expert is subject to the auditor’s firm quality control policies & procedures

22. Some of the requirements related to auditor’s expert work

23. Reference to the Auditor’s Expert in the Auditor’s Report Reference to the auditor’s expert work should not be made in an auditor’s report containing an unmodified opinion unless required by law or regulation. If such reference is- Required by law or regulation or Relevant to an understanding of a modification to the auditor’s opinion, then The auditor should indicate in the auditor’s report that the references do not reduce the auditor’s responsibility for the audit opinion

24. Example of Auditor’s Expert work Valuation of complex financial instruments, land & buildings, machinery, intangible assets, impaired assets etc Estimation of oil and gas reserves, actuarial calculation of liabilities etc. Valuation of environmental liabilities, site clean-up cost, Interpretation of law, contracts, and regulation, and etc.

25. Thank You