**(a) Difference Between Historical and Prospective Financial Information & Assurance Impact:**
**Key Differences:**
1. **Historical Financial Information** relates to information expressed in financial terms about economic events, conditions, or circumstances occurring in past periods. It is based on historical facts and transactions that have already occurred.
2. **Prospective Financial Information** relates to financial information based on assumptions about the occurrence of future events and possible actions by an entity. It is future-oriented and speculative in nature.
**Impact on the Level of Assurance:**
In an assurance engagement on prospective financial information, the practitioner evaluates the reasonableness of management’s assumptions, whether the information is properly prepared based on those assumptions, and whether all material assumptions are adequately disclosed.
Since prospective financial information is based on future events, the evidence available to support the assumptions is itself future-oriented and subjective. The auditor is not in a position to express an opinion on whether the results shown in the prospective financial information will actually be achieved. Consequently, the practitioner provides a report assuring only that nothing has come to their attention to suggest that the assumptions do not provide a reasonable basis for the projection. This constitutes a **moderate** (or negative) level of assurance, which is lower than the high/reasonable assurance provided on historical financial statements.
**(b) Classification of Threats to Independence & Actions Required:**
**Classification of Threats:**
1. **Observation (i)**: CA J performing statutory audit and non-audit engagement for Take Away Private Ltd. creates a **Self-review threat** (arises when the auditor reviews their own work/decisions).
2. **Observation (ii)**: CA M performing a tax audit for Happy Associates where they have a significant indirect financial interest creates a **Self-interest threat** (arises from financial interest in the client).
3. **Observation (iii)**: Client bearing travel and stay costs for the audit team's family members creates a **Familiarity threat** (arises due to a close relationship or receiving excessive hospitality).
4. **Observation (iv)**: Chalk Limited threatening to replace the auditor due to disagreement over expected credit loss provision creates an **Intimidation threat** (arises when the auditor is deterred from acting objectively by actual or perceived threats).
5. **Observation (v)**: CA N acting as an arbitrator for a dispute involving NM Private Ltd. (audit client) creates an **Advocacy threat** (arises when the auditor promotes the client's position to the point of compromising objectivity).
6. **Observation (vi)**: Accepting a tax audit assignment for TRF Industries on a contingent fee basis creates a **Self-interest threat** (as the fee amount depends on the outcome of the tax audit).
**Actions Required by the Auditor:**
When such threats exist, the auditor should:
1. Either desist from the task or eliminate the threat, or put in place robust safeguards to reduce the threat to an acceptable level. All such safeguards must be documented as evidence of compliance.
2. If the auditor is unable to implement credible and adequate safeguards, they must decline or withdraw from the audit engagement.
**(c) Sufficiency of Audit Evidence - Factors to Consider:**
Sufficiency is the measure of the quantity of audit evidence. CA M can ensure that the evidence collected by CA Ravi is sufficient for the purpose of the audit by considering the following factors:
1. **Materiality**: This is the significance of classes of transactions, account balances, and disclosures to users of the financial statements. Less evidence is required for assertions that are less material. For assertions that are highly material, more evidence is required to support the audit opinion.
2. **Risk of Material Misstatement**: This refers to the likelihood that the financial statements are materially misstated prior to the audit (comprising inherent risk and control risk). If the risk of material misstatement is assessed as low, less evidence is required. If the risk is high, a larger quantity of audit evidence must be collected.
3. **Size and Characteristics of the Population**: This refers to the number of items and the degree of homogeneity in the population. If the population is small and homogeneous, less evidence is needed. If the population is large and heterogeneous, a larger sample and more evidence are required.