6. What are the objectives of Independent financial audit as per SA 200?
[2020H, 2022 H, 2022 Pass]
[Very Imp for all]*****[Another Ans ahead] [90%]
As per SA 200, Overall Objective of Independent Audit is:
(a) To obtain reasonable assurance that financial statements are free from Material Mismanagement resulting from
either due to fraud or error enabling Auditor to express an opinion on whether financial statements are prepared in
all material respects as per applicable Financial reporting framework.
(b) To Report on Financial Statement & Communicate as required by Standard of Auditings,
(c) The objective of independent audit is to report as 143(2) to Members of Company on Account examined by him &
Financial Statement to be laid in AGM
(d) To ensure that his opinion on Financial Statement is reflecting the True & Fair view,
(e) The objective of independent audit to State in his Report u/s 143(2) whether A/c examined by him & Financial
Statement give True & Fair view
(f) Audit evidence to reduce Audit Risk to Acceptable low level & consider SA 500
9. What do you mean by auditor’s independence? [20P, 22H] (Important)**[90%]
Auditor independence is a principle that ensures that auditors are free from conflicts of interest and financial
interests when auditing a company. This principle applies to both internal and external Auditors
Auditor independence a principle applicable to both internal and external audits and auditors- means that the
individuals who conduct audits and the organizations they represent have no financial interest in and are otherwise
free from conflicts of interest regarding the organizations they audit so as to remain objective and impartial
[BHALOTIA]
Some requirements of auditor independence include
a) Auditors can’t audit their own work
b) Auditors can’t participate in management for their client
c) Auditors can’t advocate for their client
d) Auditors can’t have relationships that create shared or opposing interests with their client.
10. State the importance of Auditor’s Independence. [19H] [90%]
Auditor independence is important because it ensures that auditors can provide objective and reliable financial
statement assessments. This helps maintain investor confidence and the integrity of financial markets. Here are
some reasons why auditor independence is important.
a) High-Quality Financial Reporting: An independent auditor assures the financial statements are accurate,
complete, and free of material misstatements. It helps increase confidence in the financial reporting process.
It also provides stakeholders with the information they need to make informed decisions
b) Investor Protection: Independent auditors check corporate management and help prevent financial crime
and management. It helps to protect investors and increase the overall transparency and accountability of
the financial reporting process.
c) The credibility of Financial Statements: An independent auditor’s opinion on the financial statements adds
credibility to the financial information. It helps companies access capital markets and secure funding.
d) Public Confidence: Independent auditors assure the public that the financial reporting process is credible,
transparent, and trustworthy. It helps to maintain the public’s confidence in the financial reporting process.
e) Regulation Compliance: Independent auditors help companies comply with regulations and reporting
requirements. It helps ensure financial information’s quality and reliability.
13. Discuss the auditor’s responsibility (Duty) towards detection and prevention of error & fraud as per
the relevant Standard on Auditing. [2021 H] [2019 P, 2021 P] (VVI)**[99%]
SA 240 (International Standard on Auditing 240) specifically addresses an auditor’s responsibilities regarding the
detection and prevention of errors and fraud in financial statements
Kev Responsibilities:
a) Professional Skepticism: Auditors must maintain professional skepticism throughout the audit, recognizing
that the financial statements may be materially misstated due to fraud. This means approaching the audit
with a questioning mind and critically evaluating the evidence obtained
b) Risk Assessment: Auditors must assess the risk of material misstatement due to fraud, considering factors
such as the entity’s environment, the industry in which it operates, and the nature of its business. This
assessment helps identify areas where fraud may be more likely to occur.
c) Fraud Risk Assessment Procedures: Auditors must perform fraud risk assessment procedures, such as
inquiries of management, analytical procedures, and consideration of the results of other audit procedures.
These procedures help identify potential indicators of fraud.
d) Response to the Risk of Material Misstatement Due to Fraud: Based on the assessed risk of fraud, auditors
must design and perform audit procedures to respond to that risk. This may involve obtaining additional
evidence, modifying the nature, timing, or extent of audit procedures, or involving experts
e) Communication with Management and Those Charged with Governance: Auditors must communicate with
management and those charged with governance about any significant deficiencies in internal control or
material misstatements that they identify, including any evidence of fraud. This helps to ensure that
appropriate corrective actions are taken.
Specific Considerations:
a) Error vs. Fraud: While both errors and fraud can lead to material misstatements, fraud involves intentional
acts to deceive. Auditors must be particularly vigilant in identifying and addressing fraud risks.
b) Internal Controls: Strong internal controls can help prevent and detect fraud. Auditors must assess the
effectiveness of the entity’s internal controls and identify any weaknesses that could increase the risk of
fraud.
c) Documentation: Auditors must document their work and the evidence they obtain to support their
conclusions. This documentation is essential for demonstrating that they have fulfilled their responsibilities
and provides a record of the audit process.
16. Distinguish between audit & investigation? [20H, 22H] (VVI) [90%] [Hons only]**** [Not in pass course
syllabus Auditing is a process of identifying whether the results of accounting information are accurate and
according to the specified norms or not. Unlike investigation is a severe examination of specific records so as to
highlight a fact.
23. What is balance sheet audit? How is it conducted? [Hons Only] [Not in pass course syllabus] [80%]
Balance sheet audit:
Verification of all items included in the balance sheet combined with the examination of related income and
expenses accounts is known as balance sheet audit. A balance sheet audit is an evaluation of the accuracy of
information found in a company's balance sheet. [BHALOTIA]
How is it conducted?
The auditor follows the following procedure to conduct balance sheet audit.
Previous Period Comparisons
Auditors compare figures from the current balance sheet with numbers from the previous period balance sheet. If
there are significant differences between the financial statements, auditors dig deeper into the records to try to find
a satisfactory reason for the change
Adequacy of Provisions And Reserves
A balance sheet audit includes verification of the company's provisions for depreciation and other anticipated losses,
to ensure they are at reasonable levels.
When conducting balance sheet audits, the auditor looks into the status of credit extended by the firm to its
suppliers and customers. By examining related documentation, they gauge whether the probability of payment for
these debts is high, doubtful or somewhere in between. Based on this determination, they check if the provisions set
aside by the company for bad debts are sufficient.
Accuracy of Valuations
The transparency and accuracy of the financial statements are critical in evaluating a company. Auditors must
therefore examine whether the figures assigned to the various headings under the balance sheet are accurate. They
compare the information in the financial statement with third-party documentation. [BHALOTIA]
Exceptional or Non-Recurring Items
Auditors also scrutinize the balance sheet for special transactions, one-time significant changes or other conditions
with material effects on the figures. For example, they take note of any ongoing litigation that may impact the
company's assets, liabilities or revenues. They pay special attention to any extraordinary transactions that cause
significant changes to company profits.
