Auditing and EthicsSubjectiveQuestion 6202 of 213
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Question 1 (a) AP & Co., Chartered Accountants, are appointed as statutory auditor of Heavy Industries Limited, a listed company engaged in manufacturing of electric vehicles, for the F.Y. 2023-24. As per the recent guideline issued by the regulatory authority, every listed company is required to maintain the digital database of all those personnel who could access the books of the company to avoid Insider Trading. In case of non-compliance, hefty fines may be imposed on the company. CA P is the engagement partner from auditor firm for the audit of Heavy Industries Limited. During planning, CA P planned that he would inquire from in-house IT Head of the company about the maintenance of the digital database to identify and assess the risk of non- compliance with regulatory guidelines. In the light of above facts, explain : (i) Whether CA P is required to consider about the maintenance of digital database while framing audit strategy ? (3 Marks) (ii) Whether the procedures planned by CA P are in line with SA-300 ? (2 Marks) (b) Fashion Garments Limited (FOL) is a company engaged in the manufacturing and sale of ready-made garments. The products manufactured by FGL cater to clothing requirements of men, women and kids section. Pearl & Associates, Chartered Accountants, is the statutory auditor of FGL. Partner CA Pearl asked her audit assistant to go through the segment information disclosed and presented in the financial statements. Assistant is new to the audit engagements and seeks her guidance on what is the key responsibility of the auditor in relation to segment information. What should CA Pearl guide the assistant on the said matter ? (2 Marks) What audit procedures should CA Pearl perform to ensure that methods used by the management to present segment information are in accordance with the applicable financial reporting framework ? (3 Marks) AUDITING AND ETHICS (c) Spare Parts Limited received an input from internal auditors that internal controls implemented by the company appears to be reasonable but not so strong that any fraudulent activity can be prevented or timely detected by such controls. Accordingly a qualified person should head the internal controls department. CA Raj has been appointed as an Internal Control Head of the company. His scope of work includes development of internal controls in various departments/areas of the company. On his joining, he studied the various verticals and after identifying the important areas (prone to fraud) implemented strong controls in those areas. In his meeting with senior management and statutory auditors, he assured that satisfactory control environment exists and fraud cannot happen. Whether existence of a satisfactory control environment can be considered as an absolute deterrent to fraud ? (4 Marks)

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Detailed Solution & Explanation

(a) (i) As per SA 300, “Planning an Audit of Financial Statements”, the auditor should establish an overall audit strategy that sets the scope, timing, and direction of the audit, and that guides the development of the audit plan. The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, key resources to be employed to conduct audit. The auditor shall take following factors into consideration while establishing or framing audit strategy viz. identify the characteristics of the engagement that define its scope, consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts, etc. In the given situation, the regulatory guideline requires Heavy Industries Ltd., a listed company, to maintain a digital database of all those personnel who could access the company's books to prevent insider trading. Further, hefty fines may be imposed in case of non- compliance with this guideline. Therefore, it is very essential that auditor while establishing overall audit strategy evaluate whether the company maintains such a database and complies with the regulatory requirement. 12 SUGGESTED ANSWER Thus, in view of above, it can be concluded that CA P should incorporate the assessment of digital database maintenance into the overall audit strategy. (ii) As per SA 300, “Planning an Audit of Financial Statements”, planning includes the need to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such matters as obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework, etc. In the given situation, CA P planned to inquire from in-house IT Head of the company regarding maintenance of the digital database to identify and assess the risk of non-compliance with regulatory guidelines. Inquiry with the IT Head regarding the maintenance of the digital database is an appropriate procedure to understand whether the company complies with the regulations. This inquiry will help CA P in obtaining a general understanding of the legal and regulatory framework applicable to the company and how the entity is complying with that framework and other risk assessment procedures. Thus, the planned inquiry with the IT Head is in line with SA 300. (b) As per SA 501, “Audit Evidence-Specific Considerations for Selected Items”, the auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure of segment information in accordance with the applicable financial reporting framework by: (1) Obtaining an understanding of the methods used by management in determining segment information, and (2) Performing analytical procedures or other audit procedures appropriate in the circumstances. The auditor’s responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements taken as a whole. Accordingly, the auditor is not required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a standalone basis. AUDITING AND ETHICS Further, audit procedure performed by CA Pearl to ensure methods used by the management to present segment information are in accordance with the applicable financial reporting framework should include: • Sales, transfers and charges between segments, and elimination of intersegment amounts. • Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales. • The allocation of assets and costs among segments. • Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies. (c) • Existence of a satisfactory control environment is not an absolute deterrent to fraud. The existence of a satisfactory control environment can be a positive factor when the auditor assesses the risks of material misstatement. • However, although it may help reduce the risk of fraud, a satisfactory control environment is not an absolute deterrent to fraud. • Conversely, deficiencies in the control environment may undermine the effectiveness of controls, in particular in relation to fraud. For example, management’s failure to commit sufficient resources to address IT security risks may adversely affect internal control by allowing improper changes to be made to computer programs or to data, or unauthorised transactions to be processed. • The control environment in itself does not prevent, or detect and correct, a material misstatement. It may, however, influence the auditor’s evaluation of the effectiveness of other controls. • For example, the monitoring of controls and the operation of specific control activities and thereby, the auditor’s assessment of the risks of material misstatement.

Key Concepts to Understand

Fraud

A false representation of a material fact made by a party to a contract knowingly, without belief in its truth, or recklessly, with intent to deceive the other party or induce them to enter a contract (Section 17, ICA 1872). Contract is Voidable + right to claim damages.

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