speaker ca. aniket s talati
TRANSCRIPT
Engagement Standards
Speaker – CA. Aniket S TalatiCentral Council Member, ICAI
COLOUR FULL LIBRARY..?Significance
Definition
“Assurance engagement”means an engagement in
which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other
than the responsible party about the outcome of the
evaluation or measurement of a subject
matter against criteria.
Ethical Principles• The Chartered Accountants Act,1949
• Code of Ethics
• Other Relevant Pronouncements
FRAMEWORK FOR
ASSURANCE ENGAGEMENTS
➤ Applies to SAs, SREs, SAEs
➤ Does not apply to SRSs ( since no assurance is provided)
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Frame work for quality control in all kinds of
engagements
Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements
Standards on Quality Control (SQC1)
Framework for Assurance Services
Audits and Reviews of historical financial information
Standards on Auditing
(SAs): 100 – 999
Standards on Review Engagements (SREs): 2000 – 2699
Assurance engagements other than audits and reviews of historical financial information Standards on Assurance
Engagements (SAEs): 3000 – 3699
Framework for Related Services
Engagements of related services such as agreed upon procedures, compilation engagements and other related services
Standards on Related Services (SRSs): 4000 – 4699
Engagement Standards – An Overview
Hierarchy of Audit - Review - Compilation
Engagement Standards – An Overview
Framework of auditing, assurance and other related services
AuditingReview and Assurance
Related Services
Nature of services
Audit Review Agreed uponprocedures
Compilation
Level of assurance
High assurance (not absolute)
Moderateassurance
No assurance No assurance
Report provided
Positive assurance on assertion
“In our opinion …..true and fair view
Negative assurance on assertion
“Nothing has come to our attention”
Factual findings of procedures
Identification of information
complied. Not attempt to verify
SQC – 1Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements
The objective of SQC – 1 is that the firm should form asystem of quality control intended for providingreasonable assurance that a firm and its employeesadhere to the professional standards and legal andregulatory requirements and that the reports which areissued by such firm or its engagement partners are apt inthe circumstances.
According to SQC – 1, the firm’s system of quality controlshall include policies and procedures addressing each of theelements as mentioned in the diagram. (Details elucidatedin subsequent slides)
The quality control policies and procedures should bedocumented and communicated to the firm’s personnel.
Leadership responsibilities for quality within the firm
Ethical requirements
Acceptance and continuance of client relationships and specific engagements
Human resources
Engagement performance
Monitoring
Standard on Quality Control (SQC) 1
Elements
Element – 1: Leadership responsibilities for quality within the firm
• To promote internal culture that quality is essential
in performing engagements by discussions with the
team
• Managing Partner or equivalent must assume
responsibilities for firm’s system of quality control
• Leadership must set an example by their own
conduct
• Communicate the system of quality control to the
personnel through formal newsletters, workshops
and training
• To recognize that the firm’s business strategy is
subject to the overriding requirement of the firm’s
commitment to quality
• To design the processes to deal with any non
compliances
Elements of SQC - 1
The Firm can satisfy this objective by establishing and maintaining the policies and procedures described below:
Element – 1: Leadership responsibilities for quality within the firm
Policy 1 – The Firm's Managing Partner assumes ultimate responsibility for the Firm's system of QC
Ultimately responsible for the design,implementation and operatingeffectiveness of the Firm’s system of QC
Disciplinary action may be warranted iffailure in adherence to the Firm’s policiesand procedures regarding performancequality and commitment to ethicalprinciples
Policy 2 – Commercial considerations do not override the quality of the work performed.
continually evaluate client relationships andspecific engagements
fee considerations and scope of servicesshould not infringe upon quality of work,documentation and other QCs
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Element – 1: Leadership responsibilities for quality within the firm
Policy 3 – Performance evaluation, compensation, and advancement
reward partners and staff for the quality oftheir work and their compliance withprofessional standards
takes into consideration the Firm'sfeedback based on monitoring results andpeer reviews
Policy 4 – Deploy Sufficient and appropriate resources for the development, communication, and
support of its QC policies and procedures
designated QC partner with authority, andresources responsible for QC
reviewing the Firm's QC policies andprocedures periodically
Element – 2: Ethical requirements
• To establish policies with a notion that the firm andthe personnel adhere to the related ethicalrequirements as provided in the Code of Ethics
• To develop a conceptual approach to independencefor assurance engagements, including aspects such asthreats to independence, accepted safeguards and thepublic interest and to obtain written confirmationevery year.
Objectivity Integrity Confidentiality
Professional Competence
Due DiligenceProfessional Behaviour
Elements of SQC - 1
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Element – 2: Ethical Requirements
Policy 1 – Personnel adhere to ethical requirements
designate an Independence and Ethicspartner and all professional personnelshould attend training in ethics andindependence
regularly consulting the ICAI's journal and website for information about changes in professional ethics and independence standards/requirements
Policy 2 – Procedures to communicate independence requirements to Firm personnel
informing personnel of their responsibilitiesthrough preparing and maintaining a list ofentities with which financial and businessrelation is prohibited
providing frequent reminders of professionalresponsibilities to personnel to be cautiousthat their independence or objectivity is notimpaired
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Element – 2: Ethical Requirements
Policy 3 – Identify and evaluate possible threats
(that may be created by using the same senior personnel on an audit or attest engagement over a long period of time)
consider relevant information about client engagements, including the scope of services, to enable him to evaluate the overall impact, if any, on independence requirements.
to promptly report circumstances and relationships that create a threat to independence
Policy 4 – Withdraw from the engagement if threat cannot be reduced
Consulting within the Firm, and with legal counsel
safeguards to reduce threats to independenceto an acceptable level cannot be effectivelyapplied
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Element – 2: Ethical Requirements
Policy 5 – Obtain written confirmation within firm
written representations from Firmpersonnel, upon hire and on an annual basisand reviewing and resolving reportedexceptions
engagement partner to sign a step in theengagement program attesting tocompliance with independencerequirements
Policy 6 – Procedures for confirming the independence of another Firm that performs part of
the engagement.
practice aids that prescribe the form andcontent and frequency of independencerepresentations
representations be documented in theengagement working papers file
Independence confirmation form
(1/2)
Independence confirmation form
(2/2)
Element – 3: Acceptance and continuance of client relationships and specific engagements – consider the integrity of the clients.
For example: Identifying
• The business reputation of the owner, KMP and others
charged with governance
• Attitude towards the issues such as good governance,
internal control environment and accounting standards
• Reasons for such proposed appointment of firm and non-
reappointment of the firm been engaged previously
• Whether the owner/KMP are specifically concerned with
keeping firm’s fee to the lowest as possible
• Whether the firm is competent for performing such
engagement and has the time, capabilities, and
resources in doing so
Elements of SQC - 1
CAF / EAF(1/4)
CAF / EAF(2/4)
CAF / EAF(3/4)
CAF / EAF(4/4)
Element – 4: Human Resources
• To provide the reasonable assurance that the firm has sufficient personnel
with the capabilities, competence, and commitment to ethical principles
• Such policies and procedures may address the personnel issue such as:
1. Recruitment,
2. Performance evaluation,
3. Career development,
4. Promotion,
5. Compensation and
6. estimation of personnel needs
Elements of SQC - 1
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Element – 4: Human Resources
Policy 1 – Assign personnel based on the knowledge, skills, and abilities
designate a partner responsible forassigning personnel to engagements
requiring approval of partner and managerassignments from the MP in the case ofhigh-risk or significant clientengagements.
Policy 2 – Personnel participate continuing professional education and development (CPED)
activities
completing external CPED programsincluding
- self-study courses,
- becoming members of professionalorganizations,
- serving on professional committees,writing for professional publications, and
-speaking to professional groups
Element – 5 Engagement Performance
• How assignment is to be performed? (professionalrequirement)
• How team is to be briefed about the objectives of theassignment?
• How to supervise and review the work performed? (trackingthe progress, modify planned approach, etc.)
• How to appropriately document the work performed?
• When and how to take Consultation in case of complicatedissues?
• Consultation – It includes discussion with the expert within oroutside the firm and the firm should ensure that nature, scopeand conclusions of consultation are properly documented.
How to resolve difference of opinion?
Difference of opinion may exist between:
Engagement Partner and Reviewer
Engagement Partner and Independent
consultants
Engagement Partner and staff
Elements of SQC - 1
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Policy 1 – Planning for engagements that meets professional, regulatory, and the Firm's
requirements
developing or updating backgroundinformation on the client and theengagement and considering clientsignificance to the Firm.
developing a planning document which includes the various records
Policy 2 – Qualified engagement team members review work performed by other team members
evidence of appropriate review ofdocumentation of the work performed,conclusions reached, the financialstatements, and the report
engagement documentation is reviewedto determine nature, timing, and extent ofwork performed are appropriate and do notneed revision
Element – 5 Engagement Performance
The Firm satisfies this objective by establishing and maintaining the policies and procedures described below:
Policy 3 – Deal with and resolve differences of opinion, document and implement conclusions
reached
all differences of professional judgment areresolved and that the report not bereleased until the matter is resolved.
conclusions reached are appropriately documented
Policy 4 – Consultation is taken when appropriate
informing personnel of the Firm'sconsultation policies and procedures
documenting the issue on whichconsultation was sought and the results ofthe consultation, including any decisionstaken, the basis for those decisions, andhow they were implemented
Element – 5 Engagement Performance
Engagement Quality Control Review (EQCR):
(To be completed before issuing report)
• Require EQCR for all audits of financial statements ofthe listed entities
• Set out criteria for all other audits and reviews ofhistorical financial information, other assurance andrelated services engagements and evaluation to bedone to determine whether EQCR has to be done ornot
• To decide the nature, timing and extent of EQCR,criteria for the eligibility of the reviewers anddocumentation requirements
• To maintain the objectivity of the EQCR (For eg:reviewer is not selected by engagement partner, doesnot participate or make decisions for engagementteam, etc.)
Engagement Documentation –
Property of the firm
• Completion and assembly of final engagement files
• To maintain:
o confidentiality,
o safe custody,
o integrity,
o accessibility and
o retrievability of files
• Retention of engagement documentation – for SEVEN years as per Para 83 of SQC – 1
Element – 5 Engagement Performance
Element – 6: Monitoring
• The firm should ensure that the policies and procedures
relating to the system of quality control are relevant,
adequate, operating effectively and complied within the
practice.
• Ongoing consideration and evaluation of the system of
quality control includes analysis of:
o New developments of professional standards and
regulatory and legal requirements
o Written confirmation of compliance on independence
o Continuing professional development
o Decisions related to acceptance and continuance of client
relationships and engagements
Elements of SQC - 1
Element – 6: Monitoring
Elements of SQC - 1
At least annually, the firm should communicate theresults of monitoring of its quality control systemto engagement partners, managing partner orother appropriate personnel.
Information communicated shall include:
• Description of monitoring proceduresperformed
• Conclusion drawn from such procedures
• Description of systematic, repetitive andor significant deficiencies and actionstaken to resolve or amend those deficiencies
Inspection cycle which ordinarily spans for three years to be organized such that the completed engagements of each partner is selected once in a cycle.
The firm should establish policies and procedures requiring
• Appropriate documentationto provide evidence of theoperation of each element ofits system of quality control.
How much matters are documented is the
firm’s decision. For eg:
• Large firms may useelectronic databases todocument matters such asindependenceconfirmations, performanceevaluations and the resultsof monitoring inspections.
• Smaller firms may usemore simpler and informalmethods such as manualnotes, checklists and forms.
Factors to consider when determining the
form and content of documentation
• Size of the firm and thenumber of offices
• Degree of authority bothpersonnel and offices have
• Nature and complexity ofthe firm’s practice andorganization
Retention of documents
• For a period of timesufficient to permit thoseperforming monitoringprocedures to evaluate thefirm’s compliance with itssystem of quality control, orfor a longer period ifrequired by law orregulation
Standard on Quality Control (SQC) 1
Documentation
Reference link for SQC – 1 from ICAI’s Knowledge bank - https://resource.cdn.icai.org/15366Link1.pdf
Retention – Para 83
In the specific case of audit engagements, the
retention period ordinarily is no shorter than seven
years from the date of the auditor’s report, or, if later, the date of the
group auditor’s report.”
200-299 General Principles and Responsibilities
SA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing
SA 210 - Agreeing the Terms of Audit Engagements
SA 220 - Quality Control for an Audit of Financial Statements
SA 230 - Audit Documentation
SA 240 - The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
SA 250 - Consideration of Laws and Regulations in an Audit of Financial Statements
SA 260 - Communication with Those Charged with Governance
SA 265 – Communicating Deficiencies in Internal Control with those Charged with Governance and Management
SA 299 – Joint Audit of Financial Statements
Audits of historical financial information
Standards on Auditing (SA)
300-499 Risk Assessment and Response to Assessed Risks
SA 300 - Planning an Audit of Financial Statements
SA 315 - Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment
SA 320 - Materiality in Planning and Performing an Audit
SA 330 - The Auditor’s Responses to Assessed Risks
SA 402 - Audit Considerations Relating to an Entity Using a Service Organisation
SA – 450 Evaluation of Misstatements Identified During the Audit
500-599 Audit Evidence
SA 500 - Audit Evidence
SA 501 - Audit Evidence-Specific Considerations for Selected Items
SA 505 - External Confirmations
SA 510 - Initial Audit Engagements – Opening Balances
SA 520 - Analytical Procedures
SA 530 - Audit Sampling
SA 540 - Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
SA 550 - Related Parties
SA 560 - Subsequent Events
SA 570 - Going Concern
SA 580 - Written Representations
Standards on Auditing (SA)
600-699 Using work of others
SA 600 - Using the Work of Another Auditor
SA 610 - Using the Work of Internal Auditors
SA 620 - Using the Work of an Auditor’s Expert
800-899 Specialized Areas
SA 800 - Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
SA 805 - Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
SA 810 - Engagements to Report on Summary Financial Statements
Standards on Auditing (SA)
700-799 Audit Conclusions and Reporting
SA 700 - Forming an Opinion and Reporting on Financial Statements
SA 701 - Communicating Key Audit Matters in the Independent Auditor’s Report
SA 705 - Modifications to the Opinion in the Independent Auditor’s Report
SA 706 - Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
SA 710 - Comparative Information—Corresponding Figures and Comparative Financial Statements
SA 720 - The Auditor’s Responsibility Relating to Other Information in Documents
Standards on Auditing (SA)
Reviews of historical financial information
Standards on Review Engagement (SRE)
2000-2699 Standards on Review Engagements (SREs)
SRE 2400 - Engagements to ReviewHistorical Financial Statements
Example - Limited Review of FinancialStatements carried out by a practitioner(other than statutory auditor of thecompany) at special request ofmanagement to take decision aboutprospective demerger.
SRE 2410 - Review of Interim FinancialInformation Performed by the IndependentAuditor of the Entity
Example - Quarterly / Half yearly LimitedReview performed by statutory auditor ofthe listed company to comply with therequirements laid down by SEBI
SRE - 2410Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Purpose• To provide guidance on the professional responsibilities of an auditor when he/she assumes any engagement for reviewing the
interim financial information of the audit client.
Objective
• To allow an auditor in expressing a conclusion whether, on basis of such review, anything grabs the attention of the auditor which causes his/her to believe that interim financial information isn’t prepared, in all the material aspects, as per applicable financial reporting framework.
• The auditor makes inquiries, and performs analytical and other review procedures in order to reduce to a moderate level the risk of expressing an inappropriate conclusion when the interim financial information is materially misstated.
Interim financial
information
• "Interim Financial Information" is financial information that is prepared and presented in accordance with an applicable financial reporting framework and comprises either a complete or a condensed set of financial statements for a period that is shorter than the entity’s financial year.
Point to consider
• A practitioner who is engaged to perform a review of interim financial information, and who is not the auditor of the entity,performs the review in accordance with SRE 2400 (Revised), “Engagements to Review Financial Statements.”
SRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity
SRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Acceptance of an Engagement as per SA 210
• The client and the auditor must agree and align on the engagement terms:
• Objective of a review of interim financial information
• Scope of the review
• Management’s responsibility (for preparation of interim financial information, establishing and maintaining effective internal control, making all financial records and related information available to the auditor)
• Management’s agreement to provide written representations
• The anticipated form and content of the report to be issued, including the identity of the addressee of the report
• Management’s agreement that where any document containing interim financial information indicates that the interim financial information has been reviewed, the review report will also be included in the document.
SRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Procedures for Review of Interim Financial Statements
Understanding the entity and its environment including its internal control as per SA 315: Recognize the types of likely material misstatement and determine the chances of their happening by considering:
• documentation of prior period or current interim period,
• risk of management override of controls and material weaknesses in internal control
• nature of any corrected material misstatements and any uncorrected immaterial misstatements
• results of any internal audit performed and actions by management
• management's assessment of material misstatement as a result of fraud
• effect of changes in the entity’s business activities
Inquiries, Analytical, and Other Review Procedures: The auditor may perform procedures such as:
• reading the minutes of board meeting, share holder's meeting and other committees' meeting
• inquiring of members of management responsible for financial and accounting matters
• communicating with component auditors, if any
• applying analytical procedures to the interim financial information
The auditor should also consider subsequent events, going concern, material adjustment and effect of misstatements.
SRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Examples of analytical procedures the auditor may consider when performing a review of interim financial information include the following (1/2):
• with the interim financial information of the immediately preceding interim period,
• with the interim financial information of the corresponding interim period of the preceding financial year,
• with the interim financial information that was expected by management for the current period, and
• with the most recent audited annual financial statements
Comparing the interim financial information
Comparing ratios and indicators for the current interim period with those of entities in the same industry
Comparing current interim financial information with relevant non-financial
information.
SRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Examples of analytical procedures the auditor may consider when performing a review of interim financial information include the following (2/2):
• expense by type as a percentage of sales, • assets by type as a percentage of total assets, and• percentage of change in sales to percentage of change in receivables.
Comparing relationships among elements in the current interim financial information with corresponding relationships in the interim financial information of prior periods, for example,
• By period, for example, revenue or expense items disaggregated into quarterly, monthly, or weekly amounts.• By product line or source of revenue.• By location, for example, by component.• By attributes of the transaction, for example, revenue generated by designers, architects, or craftsmen.• By several attributes of the transaction, for example, sales by product and month.
Comparing disaggregated data. The following are examples of how data may be disaggregated:
design and implementation of internal control system
preparation of interim financial information as per applicable financial reporting framework
aggregated uncorrected misstatements are immaterial
disclosing the facts related to fraud known to management
disclosing the result of its assessment of the risk that interim financial information may be materially misstated due to fraud
Management’s Representation:
An auditor must obtain the writtenrepresentation from the managementthat Management is responsible for:
SRE 2410 - Review of Interim Financial Information Performed
by the Independent Auditor of the Entity
Documentation:The auditor should prepare review documentation that is sufficient and appropriate to provide a basis for the auditor’s conclusion and to provide evidence that the review was performed in accordance with this SRE and applicable legal and regulatory requirements.
• he believes that a substantial adjustment is required,
• he believes there is non compliance or fraud
Communication by the auditor with the proper level of management when
• modification to opinion,
• withdrawal from engagement, or
• resignation from auditing the annual financial statements.
What if persons charged with the governance don’t appropriately respond within a sensible time frame? The auditor may opt to :
Communication with the management
The level of assurance provided by the auditor in case of review engagement under SRE 2410 is MODERATE level
Report is provided with negative assurance on assertion “Nothing has come to our attention”
SRE 2410 - Review of Interim Financial Information Performed
by the Independent Auditor of the Entity
Reports
SRE 2410 – What say?
1. The auditor should make ______, primarily of persons who are responsible for accounting and financial matters.a) Observationb) Inquiries
2. The auditor should ______ whether the management has changed its assessment of the entity’s ability to continue as a going concern.
a) Observeb) Obtain written representationc) Inquired) Investigate
3. The auditor should exercise professional skepticism while:a) Planning reviewb) Performing reviewc) Planning and Performing review
4. If the auditor’s preliminary knowledge of the engagement circumstances indicates inability to complete review due to limitation on scope of the auditor’s review imposed by management, the auditor:
a) Should accept the review engagementb) Should communicate this fact to those charged with governancec) Should not accept the review engagement
3000-3699 Standards on Assurance Engagements (SAEs)
3000-3399 Applicable to All Assurance Engagements
3400-3699 Subject Specific Standards
SAE 3400 - The Examination of Prospective Financial Information
Example - Financial information examined by a practitioner for variouspurpose like Loan Finance, Valuation of Business, etc.
SAE 3402 - Assurance Reports on Controls At a Service Organisation
Example - Audit of a Knowledge Process Outsourcing (KPO) Organisation onbehalf of an entity whose accounts are being maintained by KPO
SAE 3420 - Assurance Engagements to Report on the Compilation of ProForma Financial Information Included in a Prospectus
Example - Audit of Financial Information to be included in Prospectus withreference to Initial Public Offer of the company
Standards on Assurance Engagement (SAE)
Assurance engagements other than audits and reviews of historical financial information
SAE – 3400 The Examination of Prospective Financial Information
SAE 3400 - The Examination of Prospective Financial Information
Purpose
• To provide guidance on
engagements to examine and
report on prospective financial
information including
examination procedures for best-
estimate and hypothetical
assumptions.
Not applicable to
• Examination of prospective
financial information expressed
in general or narrative terms,
such as that found in
management’s discussion and
analysis in an entity’s annual
report.
Prospective financialinformation (PFI)
• “Prospective financialinformation” means financialinformation based onassumptions about events thatmay occur in the future andpossible actions by an entity. It ishighly subjective in nature and itspreparation requires the exerciseof considerable judgment.
SAE 3400 - The Examination of Prospective Financial Information
Before accepting the engagement, the auditor should consider the following:
• intended use of information• general or limited distribution of reports• nature of assumptions - Best estimate or Hypothetical• elements to be included • period covered by information
Acceptance of Engagement
Management is responsible for the preparation of prospective financial information and the Auditor is required to validate and report on the same.
Responsibilities
SAE 3400 - The Examination of Prospective Financial Information
Factors to be considered:
Operating Cycle
(Example - in construction business, report may be required for duration of the construction project)
Degree of reliability of assumptions
(Example - If the entity is planning to launch new products, then period covered could be short and broken into small segments such as weeks or months. Alternatively, if the entity is into owning a property under long term lease, then comparatively longer period could be covered)
Needs of users
(Example - lender if loan is to be borrowed, shareholders if issue of securities has to be done)
Period Covered
SAE 3400 - The Examination of Prospective Financial Information
Internal controls over the system used to prepare PFI
expertise and experience of person making it
nature of documentation
extent of using mathematical, statistical and computer assisted techniques
method to develop and apply assumptions
comparison with prior PFI, if any
Knowledge of the Business
SAE 3400 - The Examination of Prospective Financial Information
Sufficient and Appropriate Audit Evidence
• Management's best estimate assumptions are not unreasonable
(Eg - External or internal such as government / industry publications, economic forecast, etc.)
• Hypothetical assumptions are consistent with the purpose of information
(Eg - Sale will increase more than existing capacity, then additional cost of expansion or sub contracting production should be considered)
• PFI is prepared based on assumptions
• PFI is properly presented and assumptions are disclosed
Examination Procedures
• knowledge from previous engagements
• management's competence
• likelihood of material misstatement
• source of information
• stability of entity's business
• engagement Team experience
SAE 3400 - The Examination of Prospective Financial Information
Working papers will include:
source of information
basis of forecast and assumptions made in arriving that forecast
evidence supporting the assumptions
management representation letter (MRL)
audit plan
nature, Timing and Extent of procedures
reasons in case of modified opinion or withdrawal of engagement
Documentation
SAE 3400 - The Examination of Prospective Financial Information
Management is responsible for identification and disclosure of uncontrollable factors, outstanding litigations, commitments, etc.
Written Representation
The level of assurance provided by the auditor in case of review engagement under SAE 3400 is MODERATE level
Report is provided with negative assurance on assertion “Nothing has come to our attention”
Reports
• Presentation and Disclosure of PFI is not adequate (Eg - consequences of any assumption)
• reasonable basis not found for one or more assumption
• preclusion of any procedures considered for examination leads to scope limitation
Reasons for modified report
SAE 3400 – What say?
1. The principles laid down in other Standards on Auditing should be used by the auditor, to the extent practicable, in applying SAE 3400.
a) True
b) False
2. Prospective Financial Information is highly ___________ in nature.
a) Subjective
b) Speculative
3. While evidence may be available to support the assumptions on which the prospectivefinancial information is based, such evidence is itself generally future oriented and,therefore, ___________in nature, as distinct from the evidence ordinarily available in theexamination of historical financial information.
a) Subjective
b) Speculative
4. The auditor would need to be satisfied that the hypothetical assumptions are consistentwith the purpose of the prospective financial information and that there is no ___________theyare clearly unrealistic.
a) Indication
b) Reason to believe
4000-4699 Standards on Related Services (SRSs)
SRS 4400 - Engagements to PerformAgreed-upon Procedures RegardingFinancial Information
Example - Report on PhysicalInventory Verification for internal useof management
SRS - 4410 Compilation Engagements
Example - Report on Preparation ofMIS for management’s internalreporting
Standards on Related Services (SRS)
Engagements of related services such as agreed upon procedures, compilation engagements and other related services
You can refer Engagement and Quality Control Standards - Complete Text –https://www.icai.org/post/auditing-review-and-other-standards-formerly-known-as-aas-complete-text
• Depending upon the nature, timing and extent of procedures that can be performed based upon the facts and circumstances of the case, a report or certificate issued by a practitioner can provide either reasonable or limited level of assurance. Therefore, whenever a practitioner is required to give a “certificate” or a “report” for special purpose, the practitioner needs to undertake a careful evaluation of the scope of the engagement.
• Guidance Note covers assurance engagements other than audits or reviews of historical financial information, as described in the Framework for Assurance Engagements (Assurance Framework) issued by the ICAI.
Guidance Note on Reports or Certificates
Extract from FAQs on UDIN