CA Intermediate PAPER 5: AUDITING AND ETHICS Syllabus

What does 'sufficient appropriate audit evidence' mean (SA 500)?

Sufficiency is the measure of the quantity of audit evidence (affected by assessed RMM and quality of evidence). Appropriateness is the measure of its quality — its relevance and reliability in supporting the conclusions on which the opinion is based.

State the factors affecting the reliability of audit evidence.

Reliability is greater when evidence is: obtained from independent external sources; generated internally under effective controls; obtained directly by the auditor; in documentary form (paper/electronic) rather than oral; and provided by original documents rather than copies.

List the categories of assertions about classes of transactions and events for the period under audit.

Occurrence, Completeness, Accuracy, Cut-off, and Classification (and Presentation).

List the assertions about account balances at the period end.

Existence, Rights and Obligations, Completeness, and Accuracy, Valuation and Allocation (and Classification/Presentation).

What is the 'occurrence' assertion?

Occurrence means that transactions and events that have been recorded or disclosed have actually occurred and pertain to the entity (guards against overstatement/fictitious transactions).

What is the 'completeness' assertion?

Completeness means that all transactions, events, assets, liabilities, equity interests and disclosures that should have been recorded/disclosed have been recorded/disclosed (guards against understatement/omission).

Name key audit procedures for the audit of sale of products and services (revenue).

Verify sales against invoices, dispatch/delivery documents and customer orders; check cut-off around year-end; reconcile sales with output GST returns and stock movement; perform ratio/analytical review of gross margins; verify recognition as per Ind AS 115; and confirm trade receivables.

What are the key cut-off concerns in the audit of sales?

To ensure sales are recorded in the correct period — that goods dispatched before year-end are recorded as current-year sales and goods dispatched after year-end are not, and that no fictitious sales are booked at period end to inflate revenue (window dressing).

State key audit procedures for the audit of purchases.

Verify purchases against purchase orders, goods received notes (GRN) and supplier invoices; check authorisation; verify cut-off; reconcile with input GST/stock records; confirm balances with creditors; and check for unrecorded liabilities and that purchases pertain to the business.

What should the auditor verify in the audit of share capital?

Verify the authorised, issued, subscribed and paid-up capital against the MOA/AOA; check Board/shareholder resolutions; verify the prospectus/allotment for new issues; reconcile with the register of members; confirm compliance with the Companies Act 2013; and verify receipt of consideration and proper accounting of securities premium.

What are the key audit procedures for loans and advances?

Verify authorisation as per the Companies Act (Sec 185/186); examine loan agreements for terms, interest and security; confirm balances directly; verify recoverability and provisioning for doubtful advances; check classification (secured/unsecured, current/non-current); and verify interest accrual.

Define 'audit documentation' (SA 230).

Audit documentation is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (also known as 'working papers' or 'work papers').

State the purposes/objectives of audit documentation.

It provides evidence of the auditor's basis for the opinion and that the audit was planned and performed in accordance with SAs and legal requirements. It also assists in planning/performing, supervision and review, accountability, retention of matters of continuing significance, quality control reviews, and inspections.

What is the 'audit file' assembly and retention period under SA 230?

The auditor should assemble the final audit file on a timely basis after the date of the auditor's report, ordinarily not more than 60 days. The audit documentation should be retained for a period not shorter than seven years from the date of the auditor's report.

Who owns and has custody of audit documentation?

Audit documentation is the property of the auditor. The auditor may, at their discretion, make portions available to clients, but documentation is the auditor's own property, and the auditor must maintain its confidentiality and safe custody.

Define 'subsequent events' as per SA 560.

Subsequent events are events occurring between the date of the financial statements and the date of the auditor's report, and facts that become known to the auditor after the date of the auditor's report.

Distinguish between adjusting and non-adjusting subsequent events.

Adjusting events provide evidence of conditions that existed at the date of the financial statements and require adjustment of the FS. Non-adjusting events are indicative of conditions that arose after the date of the FS and, if material, require disclosure but not adjustment.

What is the auditor's responsibility for events between the FS date and the auditor's report date (SA 560)?

The auditor must perform audit procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor's report that require adjustment of, or disclosure in, the financial statements have been identified and appropriately reflected.

What is the 'going concern' assumption?

Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity will continue its operations for the foreseeable future and has neither the intention nor the necessity to liquidate or curtail materially the scale of its operations.

State the auditor's responsibilities regarding the going concern assumption (SA 570).

To obtain sufficient appropriate evidence regarding, and conclude on, the appropriateness of management's use of the going concern basis; to conclude whether a material uncertainty exists about going concern; and to report appropriately, including whether adequate disclosure is made.

How does the auditor report when a material uncertainty related to going concern exists but is adequately disclosed?

The auditor expresses an unmodified opinion and includes a separate section headed 'Material Uncertainty Related to Going Concern' in the auditor's report, drawing attention to the relevant disclosures in the financial statements.

What must the auditor do to form an opinion on the financial statements (SA 700)?

Conclude whether reasonable assurance has been obtained that the FS as a whole are free from material misstatement, evaluating whether the FS are prepared in accordance with the framework, including evaluating whether they achieve fair presentation and whether adequate disclosures are made.

What are the types of audit opinion?

Unmodified (clean) opinion; and modified opinions under SA 705 — Qualified opinion, Adverse opinion, and Disclaimer of opinion.

When does the auditor express a 'qualified' versus an 'adverse' opinion?

Qualified: misstatements (or inability to obtain evidence) are material but NOT pervasive ('except for'). Adverse: misstatements are both material AND pervasive, so the FS as a whole are misleading. Disclaimer: inability to obtain evidence is both material and pervasive.

Define 'Key Audit Matters' (KAM) under SA 701.

Key Audit Matters are those matters that, in the auditor's professional judgement, were of most significance in the audit of the financial statements of the current period. They are selected from matters communicated with those charged with governance.

To which audits does communication of Key Audit Matters (SA 701) mandatorily apply?

SA 701 applies to audits of complete sets of general purpose financial statements of listed entities, and when the auditor otherwise decides (or is required by law/regulation) to communicate KAM in the auditor's report.

How do banks differ in their accounting system from other businesses?

Banks deal in money/credit, have a large volume of high-value transactions across many branches, rely heavily on computerised core banking systems (CBS), are highly regulated by the RBI, and follow specific norms for income recognition, asset classification, and provisioning (IRAC norms).

What are the key audit considerations for revenue items in a bank audit?

Verify interest income is recognised on accrual basis except on NPAs (where it must be recognised only on realisation); check correct computation of interest, commission and fees; ensure no income is recognised on NPAs; and verify proper reversal of income on accounts becoming NPA.

How are bank advances classified under RBI's IRAC norms?

Standard Assets (performing); and Non-Performing Assets (NPAs) sub-classified into Sub-standard (NPA up to 12 months), Doubtful (NPA beyond 12 months), and Loss Assets (loss identified but not written off).

When is a term loan/advance classified as a Non-Performing Asset (NPA)?

A term loan is an NPA when interest and/or principal instalment remains overdue for more than 90 days. (For cash credit/overdraft, the account is 'out of order'; for agricultural advances, norms are linked to crop seasons.)

Define 'ethics' in the context of the profession.

Ethics refers to moral principles and values that govern the conduct of an individual or group, prescribing what is right and wrong. Professional ethics are the standards of behaviour expected of members of a profession, ensuring integrity, objectivity and public trust.

Distinguish between the 'principles-based' and 'rules-based' approaches to ethics.

A principles-based approach sets out fundamental principles and requires professionals to apply judgement using a conceptual framework (identify, evaluate and address threats). A rules-based approach prescribes detailed specific rules for situations, offering certainty but being less adaptable to new circumstances.

What are the two types of independence an auditor must maintain?

Independence of mind (the state of mind permitting expression of a conclusion without being affected by influences that compromise professional judgement) and Independence in appearance (avoidance of facts/circumstances so significant that a reasonable third party would conclude integrity/objectivity is compromised).

Name the threats to the independence of an auditor.

Self-interest threat, Self-review threat, Advocacy threat, Familiarity threat, and Intimidation threat.

What are 'safeguards' to independence, and give their two broad categories?

Safeguards are actions/measures that eliminate threats or reduce them to an acceptable level. The two categories are: (1) safeguards created by the profession, legislation or regulation (e.g., education, CPE, professional standards, monitoring), and (2) safeguards in the work environment of the firm/client.

What is the purpose of agreeing the terms of audit engagements (SA 210)?

To establish whether the preconditions for an audit are present and to confirm a common understanding between the auditor and management (and those charged with governance) of the terms of the engagement, thereby avoiding misunderstanding regarding the audit.

What are the 'preconditions for an audit' under SA 210?

The use by management of an acceptable financial reporting framework in preparing the FS; and the agreement of management to the premise on which an audit is conducted (its responsibility for the FS, for internal control, and to provide the auditor with access to all relevant information and unrestricted access to persons within the entity).

What are the principal contents of an audit engagement letter (SA 210)?

The objective and scope of the audit; the responsibilities of the auditor; the responsibilities of management; identification of the applicable financial reporting framework; and the expected form and content of any reports to be issued and a statement that there may be circumstances in which a report may differ from its expected form/content.

What is the difference between 'occurrence' and 'existence' assertions?

Occurrence relates to transactions and events (that recorded transactions actually took place and pertain to the entity), whereas Existence relates to account balances (that assets, liabilities and equity interests recorded actually exist at the period end).

What is the 'rights and obligations' assertion?

It is an account-balance assertion meaning the entity holds or controls the rights to assets, and liabilities are the obligations of the entity, at the period end.

How does provisioning differ between Standard Assets and Loss Assets in a bank?

Standard Assets require a general provision at prescribed low percentages (e.g., 0.40% for general advances). Loss Assets require 100% provision (the entire outstanding amount), as they are considered uncollectible and of negligible value.