customized product orders with specific delivery terms and extended
warranties and after-sales services.
The auditor has to verify that all sales are accurately measured as per
applicable accounting standards and correctly journalized, summarized and
posted in the financial statements,
Explain the audit procedures to ensure the same.
(5 Marks)
(b) SA 701 "Communicating Key Audit Matters in the Auditor's Report" deals
with the auditor's responsibility to communicate key audit matters in the
auditor's report.
Explain the definition of Key Audit Matter and how an auditor will determine
the Key Audit Matters?
(5 Marks)
(c) Luck Ltd., a mid-sized manufacturing company, has approached CA S, a
qualified Chartered Accountant, to conduct the audit for the financial year
ended March 31, 2025. The company requests CA S to give acceptance for
the audit so that audit can be commenced within time.
With reference to SA 210, how the auditor will establish that whether the
preconditions for an audit are present?
(4 Marks)
Answer
(a) The auditor will apply the following audit procedures to verify that all
sales are accurately measured as per applicable accounting standards
and correctly journalised, summarised, and posted in the financial
statements are:
•
Trace a few transactions from inception to completion. (Examination in
depth)
•
Eg: Take few sales transaction, and check from the receipt of sales order
to the payment of receivable balance, every underlying document to
ensure if it is properly recorded at every stage and measured accurately
taking into consideration all the incentives, discounts, if any. The
recognition shall be according to the revenue recognition policy of the
entity.
•
If the client is engaged in export sales, then compliance with AS 11
shall be ensured.
AUDITING AND ETHICS
•
Auditor must understand client’s operations and related GAAP issues
e.g. point of sale revenue recognition vs. percentage of completion,
wherever applicable.
•
Compare the rate of sales affected with related parties and review them
for collectability, as well as whether they were properly authorised and
the value of such transactions were reasonable and at arm’s length.
(b) Definition of Key Audit Matter: 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. Key audit matters
are selected from matters communicated with those charged with
governance.
Determining Key Audit Matters: The auditor shall determine, from the
matters communicated with those charged with governance, those matters
that required significant auditor attention in performing the audit. In
making this determination, the auditor shall take into account the
following:
•
Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315.
•
Significant auditor judgments relating to areas in the financial statements
that involved significant management judgment, including accounting
estimates that have been identified as having high estimation
uncertainty.
•
The effect on the audit of significant events or transactions that occurred
during the period.
(c) In order to establish whether the preconditions for an audit are
present, CA S shall:
(I) Determine whether the financial reporting framework is acceptable
and
(II) Obtain the agreement of management that it acknowledges
and understands its responsibility:
(i) For the preparation of the financial statements in accordance with
the applicable financial reporting framework including where
relevant their fair representation;
50
SUGGESTED ANSWER
(ii) For such internal control as management considers necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
•
Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;
•
Additional information that the auditor may request from
management for the purpose of the audit; and
•
Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.