COMPLETION AND REVIEW

7.21

CHAPTER
7
COMPLETION AND

REVIEW

LEARNING OUTCOMES
After studying this chapter, you would be able to understand-
 Meaning of “Subsequent Events”
 SA 560- Subsequent Events
 Meaning of “Going Concern” and its significance
 SA 570- Going Concern
 SA 450- Evaluation of misstatements identified during the audit
 Meaning of Written representations
 SA 580-Written representations
 Significance of Communication with Those charged with governance
 Overview of SA 260 -concerning Communication with Those charged
with governance
 Necessity of communication of significant deficiencies in internal
control
 Overview of SA 265- Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management
 Practicality of above concepts using examples and case studies.

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 7.2 AUDITING AND ETHICS

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 COMPLETION AND REVIEW
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1. SA 560 : SUBSEQUENT EVENT

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 7.4 AUDITING AND ETHICS

financial reporting frameworks ordinarily identify two types of

events: -
(a) Those that provide evidence of conditions that existed at
the date of the financial statements and (adjusting)
(b) Those that provide evidence of conditions that arose after
the date of the financial statements. (non adjusting)
Examples of events providing evidence of conditions that
existed at the date of the financial statements
• Declaration of insolvency of a major debtor of the entity
between the date of financial statements and the date of
auditor’s report providing evidence on the recoverability of
the money due from debtor as on date of the financial
statements.
• Settling a legal claim outside the court at a reduced
amount between the date of financial statements and the
date of auditor’s report for which provision
Examples of events providing evidence of conditions that
arose after the date of the financial statements
• Issue of new share capital.
• Planned merger of the company.

Subsequent events

Events occuring Facts which become know

n to Facts which become
between the date of the auditor after the date
of known to the auditor
the financial statementsthe auditor's report but
ore
bef after the financial
and the date of the the date the financial statements have been
auditor's report statements are issued issued

1.1 SA 560 Subsequent Events

SA 560 deals with the auditor’s responsibilities relating to
subsequent events in an audit of financial statements.

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 COMPLETION AND REVIEW
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1.2 Objectives of auditor in accordance with

SA 560
The objectives of the auditor are to: -
(a) Obtain sufficient appropriate audit evidence about
whether events occurring between the date of the financial
statements and the date of the auditor’s report that
require adjustment of, or disclosure in, the financial
statements are appropriately reflected in those financial
statements and
(b) Respond appropriately to facts that become known to the
auditor after the date of the auditor’s report, that had
they been known to the auditor at that date, may have
caused the auditor to amend the auditor’s report.

1.3 Audit procedures relating to events

occurring between the date of the
financial statements and the date of the
auditor’s report
 The auditor shall perform audit procedures designed to obtain
sufficient appropriate audit evidence that all events occurring
between the date of the financial statements and the date of the
auditor’s report that require adjustment of, or disclosure in, the
financial statements have been identified.
 The auditor is not, however, expected to perform additional audit
procedures on matters to which previously applied audit
procedures have provided satisfactory conclusions.
 The auditor shall perform the following procedures :
o Obtaining an understanding of any management procedures
has established.
o Inquiring of management and, where appropriate, those
charged with governance as to whether any subsequent
events have occurred which might affect the financial
statements.
o Reading minutes, if any, of the meetings, of the entity’s
owners, management and those charged with
governance, that have been held after the date of the
financial statements.

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 7.6 AUDITING AND ETHICS

o Reading the entity’s latest subsequent interim financial

statements, if any.
 Such information may also be obtained by auditor from accounting
records pertaining to period after date of financial statements,
reading entity’s latest available budgets etc.
 When the auditor identifies events that require adjustment of, or
disclosure in, the financial statements, the auditor shall determine
whether each such event is appropriately reflected in those
financial statements.
 Seek written representation in accordance with SA 580, “Written
Representations” from management and TCWG that all events that
requires adjustment or disclosure have been adjusted or
disclosed.

1.4 Facts which become known to the auditor after

the date of the auditor’s report but before the
date the financial statements are issued
 The auditor has no obligation to perform any audit procedures
regarding the financial statements after the date of the auditor’s
report.
 However, when, after the date of the auditor’s report but before
the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the
date of the auditor’s report, may have caused the auditor to
amend the auditor’s report, the auditor shall:
a) Discuss the matter with management and, where
appropriate, those charged with governance.
b) Determine whether the financial statements need
amendment and, if so,
c) Inquire how management intends to address the
matter in the financial statements.

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1.5 Facts which become known to the auditor after

the financial statements have been issued
 After the financial statements have been issued, the auditor has
no obligation to perform any audit procedures regarding such
financial statements.
 However, when, after the financial statements have been issued,
a fact becomes known to the auditor that, had it been known to
the auditor at the date of the auditor’s report, may have caused
the auditor to amend the auditor’s report, the auditor shall: -
a) Discuss the matter with management and, where
appropriate, those charged with governance.
b) Determine whether the financial statements need
amendment and, if so,
c) Inquire how management intends to address the matter
in the financial statements.
If the management amends the financial statements, the auditor
shall: -
(a) Review the steps taken by management to ensure that anyone in
receipt of financial statements together with the auditor’s
report thereon is informed of the situation.
Management amends financial statement but only for sunsequent
event identified: (SAME)
 When law, regulation or the financial reporting framework does
not prohibit management from amendment and approving of
the financial statements to the effects of the subsequent
events, the auditor is permitted to restrict the audit
procedures on subsequent events to that amendment. In such
cases, the auditor shall either: -
(a) Amend the auditor’s report to include an additional date
restricted to that amendment that thereby indicates that the
auditor’s procedures on subsequent events are restricted
solely to the amendment of the financial statements described
in the relevant note to the financial statements.
(b) Provide a new or amended auditor’s report that includes a
statement in an Emphasis of Matter paragraph or Other
Matter(s) paragraph that conveys that auditor’s procedures on
subsequent events are restricted solely to the amendment of
the financial statements as described in the relevant note to the
financial statements.

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 7.8 AUDITING AND ETHICS

When law or regulation of FRFW does not allow to issue amended

financial statement
 In some entities, management may not be required by the
applicable law, regulation or the financial reporting framework to
issue amended financial statements and, accordingly, the auditor
need not provide an amended or new auditor’s report.
However, when management does not amend the financial
statements
 where the auditor believes they need to be amended, then: -

(i) that the auditor will seek to prevent future reliance on

the auditor’s report.

(ii) despite such notification, management or those charged

with governance do not take these necessary steps, the
auditor shall take appropriate action to seek to prevent
reliance on the auditor’s report.

1.6 Reporting senarios

If management amends the financial statements, the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on
the amendment.
b) If amendment is not restricted only to the subsequent events : -
a. Extend the audit procedures, already referred, to the date of
the new auditor’s report and
b. Provide a new auditor’s report on the amended financial
statements.
c) The new auditor’s report shall not be dated earlier than the date
approval of the amended financial statements.
Management amends financial statement but only for sunsequent
event identified:
 When law, regulation or the financial reporting framework does
not prohibit management from amendment and approving of
the financial statements to the effects of the subsequent
events, the auditor is permitted to restrict the audit
procedures on subsequent events to that amendment. In such
cases, the auditor shall either: -
a) Amend the auditor’s report to include an additional date
restricted to that amendment that thereby indicates that
the auditor’s procedures on subsequent events are
restricted solely to the amendment of the financial

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statements described in the relevant note to the

financial statements.
b) Provide a new or amended auditor’s report that includes a
statement in an Emphasis of Matter paragraph or Other
Matter(s) paragraph that conveys that auditor’s
procedures on subsequent events are restricted solely to
the amendment of the financial statements as described
in the relevant note to the financial statements.
When law or regulation of FRFW does no allow to issue amended
financial statement
 In some entities, management may not be required by the
applicable law, regulation or the financial reporting framework to
issue amended financial statements and, accordingly, the auditor
need not provide an amended or new auditor’s report.

However, when management does not amend the financial

statements

 where the auditor believes they need to be amended, then: -

(a) If the auditor’s report has not yet been provided to the entity,
the auditor shall modify the opinion as required by SA 705 and
then provide the auditor’s report.
(b) If the auditor’s report has already been provided to the entity,
the auditor shall notify management and, unless all of those
charged with governance not to issue the financial statements to
third parties.

(c) If the financial statements are nevertheless subsequently issued

without the necessary amendments, the auditor shall take
appropriate action, to seek to prevent reliance on the auditor’s
report.

Test Your Understanding 1

CA PK Jacob is conducting audit of a company for year 2021-22. The
company is engaged in export of ethnic rugs to buyers in Europe. The audit
is nearing completion in month of July 2022. However, it becomes known to
the auditor that one of overseas buyers has made a legal claim against the
company on 1st June 2022 for injury caused to a customer of one European
buyer due to sub-standard dyes used in rugs of one lot of order shipped in
August, 2021. The management of company has decided to agree to an out

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 7.10 AUDITING AND ETHICS

of court settlement of Rs.5 crore to protect its reputation. The financial

statements of the company are silent on this issue.
Discuss, how, CA PK Jacob should proceed to deal with above issue.

Test Your Understanding 2

CA Chandni Khanna is going to complete audit of a company within next few
days. She has performed necessary audit procedures like inquiry of
management personnel, reading minutes of meetings held after date of
financial statements, going through books of accounts after date of financial
statements to make sure that all subsequent events before signing audit
report have been considered by her. Still, she wants to be certain that no
such events have been left out. What she should do in such a situation?
Also, discuss the rationale of doing so.

2. SA 570: GOING CONCERN

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2.1 SA 570 Going Concern

SA 570 Going Concern deals with the auditor’s responsibilities in the audit
of financial statements relating to going concern and the implications for
the auditor’s report.

2.2 Responsibilities of the auditor

 The auditor’s responsibilities are to obtain sufficient appropriate
audit evidence regarding and conclude on the appropriateness of
management’s use of the going concern basis of accounting in the
preparation of the financial statements.
 conclude, based on the audit evidence obtained, whether a material
uncertainty exists about the entity’s ability to continue as a
going concern.

2.3 Objectives of auditor in accordance with SA 570

(IMP)
The objectives of the auditor are: -
(a) To obtain sufficient appropriate audit evidence regarding and
conclude on the appropriateness of management’s use of the

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going concern basis of accounting in the preparation of the financial
statements;
(b) To conclude, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going
concern; and
(c) To report in accordance with this SA.

2.4 Risk assessment procedures and related

activities (IMP)
 In so doing, the auditor shall determine whether management has
already performed a preliminary assessment of the entity’s
ability to continue as a going concern and: -
i If such an assessment has been performed, the auditor
shall discuss the assessment with management and
determine whether management has identified events or
conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a
going concern and, if so, management’s plans to
address them or
ii If such an assessment has not yet been performed, the
auditor shall discuss with management the basis for the
intended use of the going concern basis of accounting, and
inquire of management whether events or conditions exist
that, individually or collectively, may cast significant doubt
on the entity’s ability to continue as a going concern.
 The auditor shall remain alert throughout the audit for audit evidence
of events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.

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 7.12 AUDITING AND ETHICS

Examples of events or conditions that may cast significant doubt

on the entity’s ability to continue as a going concern (MCQ)
The following are examples of events or conditions that, individually or
collectively, may cast significant doubt on the entity’s ability to continue
as a going concern
Financial events or conditions
• Net liability or net current liability position
• Indications of withdrawal of financial support by creditors
• Negative operating cash flows indicated by historical or prospective
financial statements
• Adverse key financial ratios
• Substantial operating losses or significant deterioration in the value
of assets used to generate cash flows
• Inability to pay creditors on due dates
• Inability to comply with the terms of loan agreements
• Change from credit to cash-on-delivery transactions with suppliers
Operating events or conditions
• Management intentions to liquidate the entity or to cease operations
• Loss of key management without replacement
• Loss of a major market, key customer(s), franchise, license, or
principal supplier(s)
• Labour difficulties
• Shortages of important supplies

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• Emergence of a highly successful competitor
Other events or conditions
• Non-compliance with capital or other statutory or regulatory
requirements, such as solvency or liquidity requirements for financial
institutions
• Pending legal or regulatory proceedings against the entity that may,
if successful, result in claims that the entity is unlikely to be able to
satisfy
• Changes in law or regulation or government policy expected to
adversely
affect the entity
• Uninsured or underinsured catastrophes when they occur
2.5 Additional audit procedures when events or
conditions are identified
If events or conditions have been identified that may cast significant doubt
on the entity’s ability to continue as a going concern :
 the auditor shall obtain sufficient appropriate audit evidence to
determine whether or not a material uncertainty exists related to
events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern through performing additional
audit procedures, including consideration of mitigating factors. These
procedures shall include: -
i Where management has not yet performed an assessment of
the entity’s ability to continue as a going concern, requesting
management to make its assessment.
ii Evaluating management’s plans for future actions in relation
to its going concern assessment, whether the outcome of
these plans is likely to improve the situation and whether
management’s plans are feasible in the circumstances.
iii Where the entity has prepared a cash flow forecast, and
analysis of the forecast is a significant factor in considering
the future outcome of events or conditions in the evaluation
of management’s plans for future actions:
1 Evaluating the reliability of the underlying data
generated to prepare the forecast; and

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2 Determining whether there is adequate support for the

assumptions underlying the forecast.
iv Requesting written representations from management and,
where appropriate, those charged with governance,
regarding their plans for future actions and the feasibility of
these plans.

Examples of audit procedures when events or conditions have been

identified that may cast significant doubt on the entity’s ability to
continue as going concern

• Analysing and discussing cash flow, profit and other relevant forecasts
with management

• Analysing and discussing the entity’s latest available interim financial

statements
• Reading minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to financing
difficulties

• Evaluating the entity’s plans to deal with unfilled customer orders

• Confirming the existence, terms and adequacy of borrowing facilities

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2.6 Auditor’s conclusions

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 7.16 AUDITING AND ETHICS

Test Your Understanding 3

During course of audit of a company, CA. Varun Aggarwal notices that
company is facing significant skilled labour shortages resulting in
hampering of operations of company. The company’s manufacturing is
dependent upon skilled labour coming from villages in certain districts of
Eastern UP. However, due to job opportunities available near villages now,
many are not interested in going out from their native villages.
Such a situation has led to company not being able to keep its
commitments, losing out on orders and fall in its revenues. Fixed costs of
the company remain at a high level. As a result, company is facing a
liquidity crunch and is not able to pay its creditors on time. The bankers of
company are also not willing to help the company to tide over liquidity
crisis. The auditor is having doubts over going concern status of the
company.
How should management of the company try to address auditor’s
concerns? What audit procedures may be performed by auditor in such a
situation?

3. EVALUATION OF MISSTATEMENTS
IDENTIFIED DURING THE AUDIT

Before forming an opinion on the financial statements, the auditor evaluates

effects of identified misstatements on the audit and of uncorrected
misstatements on financial statements after consideration of materiality.

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Uncorrected misstatements refer to those misstatements that the auditor
has accumulated during the audit and that have not been corrected.

3.1 SA 450 Evaluation of Misstatements Identified

during the Audit
SA 450 deals with the auditor’s responsibility to evaluate the effect of
identified misstatements on the audit and of uncorrected misstatements,
if any, on the financial statements.

3.2 Objectives of auditor in accordance with SA 450

The objective of the auditor is to evaluate: -
(a) The effect of identified misstatements on the audit and
(b) The effect of uncorrected misstatements, if any, on the financial
statements.

3.3 Accumulation of misstatements identified during

the audit
The auditor shall accumulate misstatements identified during the audit,
other than those that are clearly trivial. A misstatement may arise from a
variety of factors. For example, an inaccuracy in gathering or processing
data from which financial statements are prepared or an omission of an
amount or disclosure can result into a misstatement.
An entity has wrongly capitalized machinery repair expenses amounting to
Rs.5 lacs resulting in overstatement of profits. It is an example of
misstatement.

3.4 Consideration of identified misstatements as the

audit progresses
The auditor shall determine whether the overall audit strategy and
audit plan need to be revised if: -
(a) The nature of identified misstatements and the circumstances of their
occurrence indicate that other misstatements may exist that, when
aggregated with misstatements accumulated during the audit, could
be material or
(b) The aggregate of misstatements accumulated during the audit
approaches materiality determined in accordance with SA 320.

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 7.18 AUDITING AND ETHICS

The auditor may request management to examine a class of transactions,

account balance or disclosure in order for management to understand the
cause of a misstatement identified by the auditor, perform procedures to
determine the amount of the actual misstatement in the class of
transactions, account balance or disclosure, and to make appropriate
adjustments to the financial statements. Such a request may be made, for
example, based on the auditor’s projection of misstatements.
If, at the auditor’s request, management has examined a class of
transactions, account balance or disclosure and corrected misstatements
that were detected, the auditor shall perform additional audit procedures
to determine whether misstatements remain.

3.5 Communication and correction of misstatements

The auditor shall communicate on a timely basis all misstatements
accumulated during the audit with the appropriate level of management,
unless prohibited by law or regulation. The auditor shall request
management to correct those misstatements. Timely communication of
misstatements to the appropriate level of management is important as it
enables management to evaluate whether the items are misstatements,
inform the auditor if it disagrees and take action as necessary.
The correction by management of all misstatements, including those
communicated by the auditor, enables management to maintain accurate
accounting books and records and reduces the risks of material
misstatement of future financial statements because of the cumulative
effect of immaterial uncorrected misstatements related to prior periods.
If management refuses to correct some or all of the misstatements
communicated by the auditor, the auditor shall obtain an understanding of
management’s reasons for not making the corrections and shall take that
understanding into account when evaluating whether the financial
statements as a whole are free from material misstatement.

3.6 Evaluating the effect of uncorrected

misstatements
Prior to evaluating the effect of uncorrected misstatements, the auditor
shall reassess materiality determined in accordance with SA 320 to confirm
whether it remains appropriate in the context of the entity’s actual financial
results.

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The auditor shall determine whether uncorrected misstatements
are material, individually or in aggregate. In making this
determination, the auditor shall consider: -
(a) The size and nature of the misstatements, both in relation to
particular classes of transactions, account balances or disclosures
and the financial statements as a whole, and the particular
circumstances of their occurrence and
(b) The effect of uncorrected misstatements related to prior periods on
the relevant classes of transactions, account balances or disclosures,
and the financial statements as a whole.

3.7 Communication with those charged with

governance
The auditor shall communicate with those charged with governance
regarding uncorrected misstatements and the effect that they, individually
or in aggregate, may have on the opinion in the auditor’s report, unless
prohibited by law or regulation. The auditor’s communication shall identify
material uncorrected misstatements individually. The auditor shall request
that uncorrected misstatements be corrected.
The auditor shall also communicate with those charged with governance
the effect of uncorrected misstatements related to prior periods on the
relevant classes of transactions, account balances or disclosures, and the
financial statements as a whole.

3.8 Written Representation from management

regarding effects of uncorrected statements
The auditor shall request a written representation from management and,
where appropriate, those charged with governance whether they believe
the effects of uncorrected misstatements are immaterial, individually and
in aggregate, to the financial statements as a whole. A summary of such
items shall be included in or attached to the written representation.

3.9 Documentation regarding misstatements

identified during audit
The audit documentation shall include: -
(a) The amount below which misstatements would be regarded as clearly
trivial;

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(b) All misstatements accumulated during the audit and whether they
have been corrected; and
(c) The auditor’s conclusion as to whether uncorrected misstatements are
material, individually or in aggregate, and the basis for that
conclusion.
Overview of auditor’s responsibilities regarding evaluation of
misstatements identified during the audit
Checkbo Auditor’s responsibilities regarding evaluation of
x misstatements identified during the audit
✓ Accumulate misstatements identified during the audit other
than those that are clearly trivial.
✓ Consider if the above process indicates that other
misstatements may exist that, when aggregated with
misstatements accumulated during the audit, could be
material or the aggregate of misstatements accumulated
during the audit approaches materiality determined in
accordance with SA 320.
✓ If so, consider if revision is necessary in audit strategy and
plan.
✓ Communicate on a timely basis all misstatements
accumulated during the audit with the appropriate level of
management and request for correction of all
misstatements.
✓ Upon management refusal to correct some or all of the
misstatements communicated, obtain an understanding of
management’s reasons for not making the corrections and
consider the same at time of evaluating whether the
financial statements as a whole are free from material
misstatement.
✓ In case of failure of management to correct all of the
misstatements, reassess materiality to confirm whether it
remains appropriate in the context of the entity’s actual
financial results.
✓ Determine whether uncorrected misstatements are material,
individually or in aggregate.
✓ Communicate with those charged with governance regarding

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uncorrected misstatements and the effect that they,

individually or in aggregate, may have on the opinion in the
auditor’s report.
✓ Request written representation from management that they
believe that effects of uncorrected statements are
immaterial.
✓ Maintain documentation.
Test Your Understanding 4
You are nearing completion of audit of a company. On going through your
working papers, it is noticed that finished goods inventory was overvalued
by Rs. 2 crore. It has also been noticed that freight of Rs.10 lacs paid on
import of machinery was charged to statement of profit and loss.
Discuss, how you should, proceed and communicate in above situation
before signing audit report.

4. WRITTEN REPRESENTATIONS

written to confirm to support

provided to
statement by certain other audit
the auditor
management matters or evidence

4.1 Written representations as audit evidence

Although written representations provide necessary audit evidence,
they do not provide sufficient appropriate audit evidence on their
own about any of the matters with which they deal. Furthermore, the fact
that management has provided reliable written representations does not
affect the nature or extent of other audit evidence that the auditor obtains
about the fulfilment of management’s responsibilities, or about specific
assertions.

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4.2 SA 580- Written Representations

SA 580- Written representations deals with the auditor’s responsibility to
obtain written representations from management and, where appropriate,
those charged with governance.

4.3 Objectives of auditor in accordance with SA 580

(IMP)
The objectives of the auditor are: -
(a) To obtain written representations from management and, where
appropriate, those charged with governance that they believe that
they have fulfilled their responsibility for the preparation of the
financial statements and for the completeness of the information
provided to the auditor;
(b) To support other audit evidence relevant to the financial statements
or specific assertions in the financial statements by means of written
representations, if determined necessary by the auditor or required
by other SAs; and
(c) To respond appropriately to written representations provided by
management and, where appropriate, those charged with
governance, or if management or, where appropriate, those charged
with governance do not provide the written representations
requested by the auditor.

4.4 From whom Written representations are

requested by auditor?
The auditor shall request written representations from management with
appropriate responsibilities for the financial statements and
knowledge of the matters concerned. Written representations relate to
fulfilment of management’s responsibilities or to support other audit

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evidence relevant to the financial statements or one or more specific
assertions in the financial statements.

4.5 Written representations about

management’s responsibilities
Written representation about management’s responsibilities involves
confirmation of fulfilment of management’s responsibilities in following
areas: -
(I) Preparation of the financial statements
The auditor shall request management to provide a written representation
that it has fulfilled its responsibility for the preparation of the
financial statements in accordance with the applicable financial
reporting framework, including, where relevant, their fair
presentation, as set out in the terms of the audit engagement.

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Due to its responsibility for the preparation and presentation of the

financial statements and its responsibilities for the conduct of the
entity’s business, management would be expected to have sufficient
knowledge of the process followed by the entity in preparing and
presenting the financial statements and the assertions therein on
which to base the written representations.
In some cases, however, management may decide to make inquiries of
others who participate in preparing and presenting the financial
statements and assertions therein, including individuals who have
specialized knowledge relating to the matters about which written
representations are requested.
Such individuals may include:
• An actuary responsible for actuarially determined accounting
measurements.
• Staff engineers who may have responsibility for and specialized
knowledge about environmental liability measurements.
• Internal counsel who may provide information essential to
provisions for legal claims.
In some cases, management may include in the written representations
qualifying language to the effect that representations are made to
the best of its knowledge and belief. It is reasonable for the auditor to
accept such wording if the auditor is satisfied that the
representations are being made by those with appropriate
responsibilities and knowledge of the matters included in the
representations. To reinforce the need for management to make
informed representations, the auditor may request that management
include in the written representations, confirmation that it has made
such inquiries as it considered appropriate to place it in the position
to be able to make the requested written representations.
(II) Information provided and completeness of transactions
The auditor shall request management to provide a written
representation that: -
(a) It has provided the auditor with all relevant information and
access as agreed in the terms of the audit engagement and
(b) All transactions have been recorded and are reflected in the
financial statements.

4.6 Why Written representations about

management responsibilities are necessary?

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Audit evidence obtained during the audit that management has fulfilled its
responsibilities regarding preparation of financial statements and about
information provided and completeness of transactions is not sufficient
without obtaining confirmation from management that it believes that it
has fulfilled those responsibilities. This is because the auditor is not able to
judge solely on other audit evidence whether management has prepared
and presented the financial statements and provided information to the
auditor on the basis of the agreed acknowledgement and understanding of
its responsibilities.
For example, the auditor could not conclude that management has
provided the auditor with all relevant information agreed in the terms of
the audit engagement without asking it whether, and receiving
confirmation that, such information has been provided.
The written representations requiring fulfilment of management
responsibilities in relation to above draw on the agreed acknowledgement
and understanding of management of its responsibilities in the terms of
the audit engagement by requesting confirmation that it has fulfilled
them. The auditor may also ask management to reconfirm its
acknowledgement and understanding of those responsibilities in written
representations.
This is particularly appropriate when: -
• Those who signed the terms of the audit engagement on behalf of
the entity no longer have the relevant responsibilities;
• The terms of the audit engagement were prepared in a previous
year;
• There is any indication that management
misunderstands those
responsibilities; or
• Changes in circumstances make it appropriate to do so.

4.7 Description of management’s responsibilities in

the Written representations
Management’s responsibilities shall be described in the “Written
representations required about management responsibilities” in the
manner in which these responsibilities are described in the terms of the
audit engagement.

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4.8 Other Written representations

Other SAs require the auditor to request written representations. If, in
addition to such required representations, the auditor determines that it is
necessary to obtain one or more written representations to support other
audit evidence relevant to the financial statements or one or more specific
assertions in the financial statements, the auditor shall request such other
written representations.
In addition to the written representation about management’s
responsibilities regarding preparation of financial statements, the auditor
may consider it necessary to request other written representations about
the financial statements. Such written representations may supplement,
but do not form part of, the written representation relating to
management’s responsibilities regarding preparation of financial
statements. They may include representations about the following: -

• Whether the selection and application of accounting policies are

appropriate; and

• Whether matters such as the following, where relevant under the

applicable financial reporting framework, have been recognized,
measured, presented or disclosed in accordance with that
framework: - o Plans or intentions that may affect the carrying value
or classification of assets and liabilities; o Liabilities, both actual and
contingent; o Title to, or control over, assets, the liens or
encumbrances on assets, and assets pledged as collateral; and o
Aspects of laws, regulations and contractual agreements that may
affect the financial statements, including non-compliance.

4.9 Additional Written representations about

information provided to the auditor
In addition to the written representation required by auditor regarding
management responsibility about information provided to auditor, the
auditor may consider it necessary to request management to provide a
written representation that it has communicated to the auditor all
deficiencies in internal control of which management is aware.

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4.10 Written representations about specific

assertions
When obtaining evidence about, or evaluating, judgments and
intentions, the auditor may consider one or more of the following:
• The entity’s past history in carrying out its stated intentions.
• The entity’s reasons for choosing a particular course of action.
• The entity’s ability to pursue a specific course of action.
• The existence or lack of any other information that might have been
obtained during the course of the audit that may be inconsistent with
management’s judgment or intent.
In addition, the auditor may consider it necessary to request management
to provide written representations about specific assertions in the financial
statements, in particular, to support an understanding that the auditor has
obtained from other audit evidence of management’s judgment or intent
in relation to, or the completeness of, a specific assertion.
For example, if the intent of management is important to the valuation
basis for investments, it may not be possible to obtain sufficient
appropriate audit evidence without a written representation from
management about its intentions. Although such written representations
provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own for that assertion.

4.11 Date of and Period(s) covered by

Written Representations
The date of the written representations shall be as near as practicable to,
but not after, the date of the auditor’s report on the financial
statements. The written representations shall be for all financial
statements and period(s) referred to in the auditor’s report.
Because written representations are necessary audit evidence, the
auditor’s opinion cannot be expressed, and the auditor’s report cannot be
dated, before the date of the written representations. Furthermore,
because the auditor is concerned with events occurring up to the date of
the auditor’s report that may require adjustment to or disclosure in the
financial statements, the written representations are dated as near as
practicable to, but not after, the date of the auditor’s report on the
financial statements.

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The written representations are for all periods referred to in the auditor’s
report because management needs to reaffirm that the written
representations it previously made with respect to the prior periods
remain appropriate.
Situations may arise where current management were not present during
all periods referred to in the auditor’s report. Such persons may assert
that they are not in a position to provide some or all of the written
representations because they were not in place during the period. This
fact, however, does not diminish such persons’ responsibilities for the
financial statements as a whole. Accordingly, the requirement for the
auditor to request from them written representations that cover the whole
of the relevant period(s) still applies.

4.12 Form of Written representations

The written representations shall be in the form of a representation letter
addressed to the auditor. If law or regulation requires management to
make written public statements about its responsibilities, and the auditor
determines that such statements provide some or all of the
representations required regarding management responsibilities, the
relevant matters covered by such statements need not be included in the
representation letter.
Illustrative Written representation letter
On the letterhead of the entity

To
PJ Shrimali & Co. 15th July, 2022
Chartered Accountants
Dear Sir,
This representation letter is provided in connection with your audit of the
financial statements of XXXX Limited for the year ended March 31, 2022
for the purpose of expressing an opinion as to whether the financial
statements give a true and fair view in accordance with the applicable
accounting standards in India.
We confirm that (to the best of our knowledge and belief, having made
such inquiries as we considered necessary for the purpose of appropriately
informing ourselves):

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Financial Statements
• We have fulfilled our responsibilities, as set out in the terms of the
audit engagement dated 17th August 2021, for the preparation of the
financial statements in accordance with financial reporting
Standards, in particular, the financial statements give a true and fair
view in accordance with the applicable accounting standards in India.
• Significant assumptions used by us in making accounting estimates,
including those measured at fair value, are reasonable.
• Related party relationships and transactions have been appropriately
accounted for and disclosed in accordance with the requirements of
applicable accounting standards in India. (SA 550)
• All events subsequent to the date of the financial statements and for
which applicable accounting standards in India require adjustment or
disclosure have been adjusted or disclosed. (SA 560)
• The effects of uncorrected misstatements are immaterial, both
individually and in the aggregate, to the financial statements as a
whole. A list of the uncorrected misstatements is attached to the
representation letter. (SA 450)
Information provided
• We have provided you with: -
Access to all information of which we are aware that is relevant to the
preparation of the financial statements such as records,
documentation and other matters;
Additional information that you have requested from us for the purpose of
the audit; and
Unrestricted access to persons within the entity from whom you
determined it necessary to obtain audit evidence.
• All transactions have been recorded in the accounting records and
are reflected in the financial statements.
• We have disclosed to you the results of our assessment of the risk
that the financial statements may be materially misstated as a result
of fraud.

• We have disclosed to you all information in relation to fraud or

suspected fraud that we are aware of and that affects the entity and
involves: -

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- Management;
- Employees who have significant roles in internal control; or
- Others where the fraud could have a material effect on the financial
statements.
• We have disclosed to you all information in relation to allegations of
fraud, or suspected fraud, affecting the entity’s financial statements
communicated by employees, former employees, analysts, regulators
or others.
• We have disclosed to you all known instances of non-compliance or
suspected non-compliance with laws and regulations whose effects
should be considered when preparing financial statements.
• We have disclosed to you the identity of the entity’s related parties
and all the related party relationships and transactions of which we
are aware. (SA 550)
Chief Financial Officer

4.13 Doubt as to the reliability of Written

representations
If the auditor has concerns about the competence, integrity, ethical values
or diligence of management, or about its commitment to or enforcement
of these, the auditor shall determine the effect that such concerns may
have on the reliability of representations and audit evidence in general.
In particular, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve
the matter. If the matter remains unresolved, the auditor shall reconsider
the assessment of the competence, integrity, ethical values or diligence of
management, or of its commitment to or enforcement of these, and shall
determine the effect that this may have on the reliability of
representations and audit evidence in general.
If the auditor concludes that the written representations are not reliable,
the auditor shall take appropriate actions, including determining the
possible effect on the opinion in the auditor’s report in accordance with SA
705, having regard to the requirement of disclaimer of opinion.

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4.14 Requested Written representations not
provided
If management does not provide one or more of the requested
written representations, the auditor shall: - (a) Discuss the matter
with management;
(b) Re-evaluate the integrity of management and evaluate the effect
that this may have on the reliability of representations and audit
evidence in general; and
(c) Take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report in accordance with SA 705 having
regard to the requirement of disclaimer of opinion.

4.15 Disclaimer of opinion in case of non-reliability

of Written Representations about
management’s responsibilities or failure to
provide such Written Representations
The auditor shall disclaim an opinion on the financial statements
in accordance with SA 705 if:
(a) The auditor concludes that there is sufficient doubt about the
integrity of management such that the written representations about
management fulfilling its responsibilities regarding preparation of
financial statements and about information provided and
completeness of transactions are not reliable; or
(b) Management does not provide the written representations relating to
fulfilling its responsibilities regarding preparation of financial
statements and about information provided and completeness of
transactions.
Overview of auditor’s responsibilities regarding Written
representations
Checkbo Auditor’s responsibilities regarding Written
x representations
✓ Obtain Written representations from management and,
where appropriate, those charged with governance that
they believe that they have fulfilled their responsibility for
the preparation of the
financial statements and for the completeness of the
information provided to the auditor.

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✓ Obtain Written representations to support other audit

evidence relevant to the financial statements or specific
assertions in the financial statements, if determined
necessary by the auditor or required by other SAs.
✓ Respond appropriately to written representations provided
by management and, where appropriate, those charged
with governance, or if the written representations requested
by the auditor are not provided, then discuss the matter
with management, re-evaluate the integrity of the
management and evaluate effect on auditor’s opinion.

✓ Disclaim opinion on financial statements in accordance with

SA 705 in case of non-reliability of Written representations
about management responsibilities or non-providing of
Written representations about management responsibilities.

Test Your Understanding 5

CA R Gurumurthy is about to complete audit of a company. Before
completion, he asks management to provide him a written representation
confirming that management has fulfilled its responsibilities regarding
preparation of financial statements. He also wants management to
confirm in writing about providing of all the necessary information and
completeness of transactions to him. The management feels that auditor
is seeking irrelevant documents near the completion of audit. Why view of
management is not proper? What possible implications it may lead to?

5. SA 260 COMMUNICATION WITH THOSE

CHARGED WITH GOVERNANCE
Communication from auditor is important with those charged with
governance. An effective two-way communication is important in
assisting: -
(a) The auditor and those charged with governance in understanding
matters related to the audit in context, and in developing a
constructive working relationship.
(b) The auditor in obtaining from those charged with governance
information relevant to the audit.

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(c) Those charged with governance in fulfilling their responsibility to
oversee the financial reporting process, thereby reducing the
risks of material misstatement of the financial statements.

5.1 Who are “Those charged with governance”?

 The person(s) or organization(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity
and obligations related to the accountability of the entity.
 Governance structures vary by entities to entities ,For example,
in some entities, a supervisory board exists that is separate
from executive board.
 In other entities, both supervisory and executive functions are
performed by a single board.
 all of those charged with governance are involved in managing
the entity. however, as per companies act a separate audit
comitee is reqired to be constituted.
 In such cases, the auditor may need to discuss and agree with
the engaging party the relevant persons with whom to
communicate.

5.2 Objectives of auditor in accordance with SA 260

The objectives of the auditor are: -

(a) To communicate clearly with those charged with governance

the
responsibilities of the auditor in relation to the financial statement
audit, and an overview of the planned scope and timing of the
audit;
(b) To obtain from those charged with governance information
relevant to the audit;
(c) To provide those charged with governance with timely
observations arising from the audit that are significant and relevant
to their responsibility to oversee the financial reporting process and
(d) To promote effective two-way communication between the
auditor and those charged with governance.

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5.3 Matters to be communicated by auditor

Following matters are required to be communicated by auditor
with those charged with governance: -
(a) The auditor’s responsibilities in relation to the financial
statement audit
 The auditor shall communicate with those charged with governance
the responsibilities of the auditor in relation to the financial
statement audit, including that:
(a) The auditor is responsible for forming and expressing an
opinion on the financial statements that have been prepared
by management with the oversight of those charged with
governance and
(b) The audit of the financial statements does not relieve
management or those charged with governance of their
responsibilities.
(b) Planned scope and timing of the audit
 The auditor shall communicate with those charged with governance
an overview of the planned scope and timing of the audit,
which includes communicating about the significant risks
identified by the auditor.
(c) Significant findings from the audit ( IMP )
 The auditor shall communicate with those charged with
governance: -
a) The auditor’s views about significant qualitative aspects of the
entity’s accounting practices, including accounting policies,
accounting estimates and financial statement disclosures.
b) Significant difficulties, if any, encountered during the audit
c) Unless all of those charged with governance are involved in
managing the entity: -
a. Significant matters arising during the audit,
b. Written representations the auditor is requesting
d) Circumstances that affect the form and content of the
auditor’s report, if any and
e) Any other significant matters arising during the audit that, in the
auditor’s professional judgment, are relevant to the
oversight of the financial reporting process.

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5.4 Communication of auditor’s independence in
case of listed entities
In the case of listed entities, the auditor shall communicate with
those charged with governance: -
(a) A statement that the engagement team and others in the firm as
appropriate, the firm and, when applicable, network firms have
complied with relevant ethical requirements regarding
independence and
(b)
a All relationships and other matters between the firm,
network firms, and the entity that, in the auditor’s professional
judgment, may reasonably be thought to bear on
independence. This shall include total fees charged during
the period covered by the financial statements for audit and
non-audit services provided by the firm and network firms to
the entity and components controlled by the entity.
b The related safeguards that have been applied to eliminate
identified threats to independence or reduce them to an
acceptable level.

5.5 Adequacy of the communication process

 The auditor shall evaluate whether the two-way communication
between the auditor and those charged with governance has
been adequate for the purpose of the audit.

5.6 Documentation
 Where matters required by SA 260 to be communicated are
communicated orally, the auditor shall include them in the
audit documentation, and when and to whom they were
communicated.
 Where matters have been communicated in writing, the auditor
shall retain a copy of the communication as part of the audit
documentation.

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6. SA 265 Communicating Deficiencies in

Internal Control to Those Charged with
Governance and Management

SA 265 deals with the auditor’s responsibility to communicate

appropriately to those charged with governance and management
deficiencies in internal control that the auditor has identified in an audit of
financial statements.
The auditor is required to obtain an understanding of internal control
relevant to the audit when identifying and assessing the risks of material
misstatement. In making those risk assessments, the auditor considers
internal control in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control. The auditor may identify deficiencies in
internal control not only during this risk assessment process but also at
any other stage of the audit. SA 265 specifies which identified deficiencies
the auditor is required to communicate to those charged with governance
and management.

6.2 Objective of auditor in accordance with SA 265

The objective of the auditor is to communicate appropriately to those
charged with governance and management deficiencies in internal control
that the auditor has identified during the audit and that, in the auditor’s
professional judgment, are of sufficient importance to merit their
respective attentions.

6.3 Meaning of “Deficiency in internal control” and

“significant deficiency in internal control”
 Deficiency in internal control – This exists when: -
o A control is designed, implemented or operated in such a
way that it is unable to prevent, or detect and correct,
misstatements in the financial statements on a timely
basis or
o A control necessary to prevent, or detect and correct,
misstatements in the financial statements on a timely
basis is missing.
 Significant deficiency in internal control –

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 deficiency or combination of deficiencies in internal

control that, in the auditor’s professional judgment, is of
sufficient importance to merit the attention of those
charged with governance.
The significance of a deficiency or a combination of deficiencies in
internal control depends not only on whether a misstatement has
actually occurred, but also on the likelihood that a misstatement
could occur and the potential magnitude of the misstatement.
Significant deficiencies may, therefore, exist even though the auditor
has not identified misstatements during the audit.
Examples of matters that the auditor may consider in determining
whether a deficiency or combination of deficiencies in internal
control constitutes a significant deficiency

• The likelihood of the deficiencies leading to material

misstatements in the financial statements in the future.

• The susceptibility to loss or fraud of the related asset or liability.

• The subjectivity and complexity of determining estimated
amounts, such as fair value accounting estimates.

• The financial statement amounts exposed to the deficiencies.

• The volume of activity that has occurred or could occur in the
account balance or class of transactions exposed to the deficiency
or deficiencies.

• The importance of the controls to the financial reporting

process, for example:
▪ General monitoring controls (such as oversight of
management).
▪ Controls over the prevention and detection of fraud.
▪ Controls over the selection and application of significant
accounting policies.
▪ Controls over significant transactions with related parties.
▪ Controls over significant transactions outside the entity’s
normal course of business.
▪ Controls over the period-end financial reporting process (such
as controls over non-recurring journal entries).

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• The interaction of the deficiency with other deficiencies in

internal control.
Examples of indicators of significant deficiencies in internal
control
• Evidence of ineffective aspects of the control environment, such as: -
▪ Indications that significant transactions in which management
is financially interested are not being appropriately
scrutinised by those charged with governance.
▪ Identification of management fraud, whether or not material,
that was not prevented by the entity’s internal control.
▪ Management’s failure to implement appropriate remedial
action on significant deficiencies previously communicated.
• Absence of a risk assessment process within the entity where such a
process would ordinarily be expected to have been established.
• Evidence of an ineffective entity risk assessment process, such as
management’s failure to identify a risk of material misstatement
that the auditor would expect the entity’s risk assessment process
to have identified.
• Evidence of an ineffective response to identified significant risks .
• Misstatements detected by the auditor’s procedures that were not
prevented, or detected and corrected, by the entity’s internal
control.

6.4 Determination of significant deficiencies in

internal control
The auditor shall determine whether, on the basis of the audit work
performed, the auditor has identified one or more deficiencies in internal
control.
If the auditor has identified one or more deficiencies in internal control,
the auditor shall determine, on the basis of the audit work performed,
whether, individually or in combination, they constitute significant
deficiencies.

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6.5 Communication of significant deficiencies in
internal control to those charged with
governance
 The auditor shall communicate in writing significant deficiencies in
internal control identified during the audit to those charged with
governance on a timely basis.
 The auditor shall include in the written communication of
significant deficiencies in internal control: -
a A description of the deficiencies and an explanation of their
potential effects; and
b Sufficient information to enable those charged with
governance and management to understand the context of
the communication.
 In particular, the auditor shall explain that: -
a The purpose of the audit was for the auditor to express an
opinion on the financial statements;
b The audit included consideration of internal control not for
the purpose of expressing an opinion on the effectiveness of
internal control; and

Test Your Understanding 6

On reviewing internal control over inventories as part of statutory audit of
a company, auditor finds that physical verification is not being conducted
at regular intervals as stipulated by the management. The auditor finds it
to be significant deficiency in internal control over inventories.
He points it out to the management in a one-liner as under: -
“Physical verification of inventories is not being conducted at regular
intervals as stipulated by management.”
Is above communication by auditor proper? Ignore statutory reporting
requirements, if any in this regard.

CASE STUDY
CA. Gaurav Gogoi is about to conclude audit of a company. It has been
noticed during the course of audit that there is shortage of important raw
material supplies being imported from China due to prevailing geo-political
situation. The company has shared with him its plan to deal with the

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situation. He is satisfied with assessment of the company for dealing with

the matter. The issue is disclosed in

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financial statements and considering management’s assessment, it is felt

that use of going concern assumption by company in preparation of
financial statements is appropriate.
Besides, he also wants to be sure that all subsequent events till now have
been considered and accounted for, where ever necessary, in financial
statements.
Before concluding audit, he requests written representations from
management regarding its responsibilities. However, it is noticed that such
written representations provided by management use qualifying language.
He has also communicated significant findings from audit in writing with
those charged with governance in the company and has retained copy of
relevant mails. Besides, there are certain matters which were
communicated by him orally from time to time during the course of audit
to those charged with governance.

Based on above, answer the following questions: -

(1) As regards description of matter above concerning issue of going
concern, which of the following statements is most appropriate for
auditor’s report?
(a) The auditor should express an unmodified opinion.
(b) The auditor should express a qualified opinion as material
uncertainty exists related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going
concern.
(c) Besides expressing an unmodified opinion, the auditor’s report
shall include a separate section under the heading “Material
Uncertainty Related to Going Concern” drawing attention to the
note in which such disclosure is made in financial statements
along with related matters.
(d) Such an issue does not affect auditor’s opinion.
(2) As regards going concern basis of accounting is concerned, which of
the following statements is true?
(a) A company showing net loss in its financial statements is
essentially not a going concern.
(b) Following going concern assumption of accounting is primary
duty of auditor.

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(c) In case, a company is not a going concern, its financial

statements must be prepared on liquidation basis.
(d) Audit procedure seeking confirmation from banker regarding
outstanding balance relates to verification of going concern
assumption.
(3) Which of the following statements is true in respect of auditor’s
responsibilities in respect of subsequent events?
(a) There is no obligation for an auditor to perform audit
procedures for events occurring between date of financial
statements and date of auditor’s report.
(b) There is no obligation for an auditor to perform audit
procedures after signing of auditor’s report, even if he comes to
know of an event, which if known to him earlier would have
caused him to amend the audit report.
(c) The auditor has only to rely upon written representation of
management regarding subsequent events. He has no other
means to know about such events.
(d) The auditor should perform necessary audit procedures to know
about events occurring between the date of financial
statements and date of auditor’s report.
(4) As regards use of qualifying language in written representations,
which of the following statement is most appropriate?
(a) It is reasonable for the auditor to accept such wording if the
auditor is satisfied that the representations are being made by
those with appropriate responsibilities and knowledge of the
matters included in the representations.
(b) Written representations should be unconditional. Such a
wording is not acceptable.
(c) Such a wording dilutes intent of written representations.
However, it can be accepted by auditor only in exceptional
circumstances.
(d) Qualifying language in written representations is compulsory.

(5) As regards auditor’s responsibility regarding matters communicated

orally with those charged with governance, which of following is
most appropriate?

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(a) Matters communicated orally have to be documented by the

auditor stating when and to whom these were communicated.
(b) Matters communicated orally need not be put into writing. It is
sufficient for auditor to have communicated orally.
(c) Matters communicated orally need not be put into writing. It is
not practically feasible.
(d) Matters communicated orally have to be documented by the
auditor stating to whom these were communicated.

Answers to MCQs involving case study

1. c 2. c 3. d 4. a 5. a

SUMMARY
 Events occurring between the date of the financial statements and
the date of the auditor’s report and facts that become known to the
auditor after the date of the auditor’s report are known as
subsequent events.
 Such events may be those that provide evidence of conditions that
existed at the date of the financial statements and those that provide
evidence of conditions that arose after the date of the financial
statements.
 SA 560 deals with the auditor’s responsibilities relating to
subsequent events in an audit of financial statements.
 Going concern is one of the fundamental accounting assumptions.
The enterprise is normally viewed as a going concern, that is, as
continuing in operation for the foreseeable future. It is assumed that
the enterprise has neither the intention nor the necessity of
liquidation or of curtailing materially the scale of the operations.
 SA 570 Going Concern deals with the auditor’s responsibilities in the
audit of financial statements relating to going concern and the
implications for the auditor’s report.
 Before forming an opinion on the financial statements, the auditor
evaluates effects of identified misstatements on the audit and of
uncorrected misstatements on financial statements after
consideration of materiality.

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 Uncorrected misstatements refer to those misstatements that the

auditor has accumulated during the audit and that have not been
corrected.
 SA 450- Evaluation of misstatements identified during the audit deals
with the auditor’s responsibility to evaluate the effect of identified
misstatements on the audit and of uncorrected misstatements, if
any, on the financial statements.
 A written representation is a written statement by management
provided to the auditor to confirm certain matters or to support other
audit evidence. Written representations in this context do not include
financial statements, the assertions therein, or supporting books and
records.
 Although written representations provide necessary audit evidence,
they do not provide sufficient appropriate audit evidence on their
own about any of the matters with which they deal.
 SA 580 Written representations deals with the auditor’s responsibility
to obtain written representations from management and, where
appropriate, those charged with governance.
 Communication from auditor is important with those charged with
governance.
 “Those Charged with Governance” refer to the person(s) or
organization(s) with responsibility for overseeing the strategic
direction of the entity and obligations related to the accountability of
the entity. This includes overseeing the financial reporting process.
 SA 260- Communication with Those Charged with Governance deals
with the auditor’s responsibility to communicate with those charged
with governance in an audit of financial statements.
 Communicating significant deficiencies in internal control in writing
to those charged with governance reflects the importance of these
matters and assists those charged with governance in fulfilling their
oversight responsibilities.
 SA 265 Communicating Deficiencies in Internal Control to Those
Charged with Governance and Management deals with the auditor’s
responsibility to communicate appropriately to those charged with
governance and management, deficiencies in internal control that
the auditor has identified in an audit of financial statements.

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 COMPLETION AND REVIEW
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TEST YOUR KNOWLEDGE

MCQs based Questions
(1) An auditor of a company communicates significant findings from
audit with those charged with governance in the company. Which of
the statements is false in regard to communication made?
(a) Evaluation of adequacy of communication process is required
on part of the auditor.
(b) Planned scope and timing of audit has also to be
communicated.
(c) Communication of rationale behind audit procedures is
necessary.
(d) Significant difficulties encountered during audit, if any, have to
be communicated.
(2) Written representations are: - (a) Necessary audit evidence
(b) Sufficient appropriate audit evidence
(c) Not audit evidence
(d) Audit evidence depending upon auditor’s professional judgment
(3) Which of the following is false regarding communication of
misstatements identified during course of an audit?
(a) The auditor should request those charged with governance for
correction of identified misstatements.
(b) The auditor should obtain written representation acknowledging
management belief that effect of uncorrected misstatements is
material.
(c) The auditor should obtain written representation acknowledging
management belief that effect of uncorrected misstatements is
immaterial.
(d) The auditor should communicate effect of uncorrected
misstatements related to prior periods on the relevant classes
of transactions, account balances or disclosures, and the
financial statements as a whole.
(4) Which of the following is not an example of subsequent event?

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 7.6 AUDITING AND ETHICS

(a) Event occurring between date of financial statements and date

of auditor’s report.
(b) Event occurring on date of financial statements.
(c) Event occurring after filing audit report with tax authorities. Had
such an event been known earlier, auditor would have amended
report.
(d) Event occurring during course of performing audit procedures
after date of financial statements.
(5) Which of the following is not an example of events or conditions that
may cast significant doubt on the entity’s ability to continue as a
going concern?
(a) Adverse key financial ratios
(b) Inability to invest in modernisation of plant
(c) Inability to pay creditors on time
(d) Inability to pay salary of staff

Descriptive Questions
1. List out some matters that the auditor may consider in determining
whether a deficiency or combination of deficiencies in internal
control constitutes a “significant deficiency”.
2. In what ways an effective two-way communication between auditor
and those charged with governance is important?
3. The auditor of a company is having concerns about following of
going concern basis of accounting followed by management for
preparation of financial statements. It asks the management to
justify preparation of financial statements. However, management is
not willing to make its assessment and
share with auditor. What are implications for auditor’s report in such
a scenario?
4. Discuss documentation requirements for an auditor regarding
misstatements identified during audit under SA 450.
5. Discuss meaning of “Date the financial statements are issued” under
SA 560.

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ANSWERS/SOLUTIONS
Answers to the MCQs based Questions
1. (c) 2. (a) 3. (b) 4. (b) 5. (b)

Answers to Questions involving Descriptive

Questions
1. Refer to topic on “Examples of some matters that the auditor may
consider in determining whether a deficiency or combination of
deficiencies in internal control constitutes a significant deficiency”.
2. Refer to topic on “Significance of Communication with Those charged
with governance.”
3. Refer to topic on “Implication for auditor’s report” under heading SA
570 Going Concern
4. Refer to topic on “Documentation regarding misstatements identified
during audit”
5. Refer to topic on “Meaning of “Date the financial statements are
issued” under SA 560.

Answers to Questions involving Test Your

Understanding
1. In the given case, the auditor has come to know of legal claim
against the company before issue of audit report. It has also come to
his knowledge that management of company has agreed to an out of
court settlement of Rs.5 crore. It is an example of subsequent event
between the date of the financial statements and the date of the
auditor’s report. It provides evidence of conditions that existed at the
date of the financial statements and requires adjustment in financial
statements.
He should ask company management to make necessary adjustment to
the financial statements. If adjustment is not made by management,
he should consider impact on auditor’s report.
2. She has already performed necessary audit procedures like inquiry of
management personnel, reading minutes of meetings after date of
financial statements and going through books after date of financial
statements.

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 7.8 AUDITING AND ETHICS

Now, she should request management and, where appropriate, those

charged with governance, to provide a written representation in
accordance with SA 580, “Written Representations” that all events
occurring subsequent to the date of the financial statements and for
which the applicable financial reporting framework requires
adjustment or disclosure have been adjusted or disclosed.
The rationale of obtaining written representations is that even after
performing abovesaid procedures, she may not come to know all
subsequent events. Therefore, it is necessary from an auditor’s point
of view to obtain acknowledgment from management in the form of
Written representations that all such events for which the applicable
financial reporting framework requires adjustment or disclosure have
been adjusted or disclosed.
3 Significant shortage of skilled labour, inability to pay creditors on time
and overall liquidity crisis faced by the company are examples of
events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going
concern.
In such a situation, management should try to address auditor’s concerns
by preparing its future plan of action including preparation of cash
flow forecast showing inflow and outflow of cash. Such a cash flow
forecast should address auditor’s concerns regarding liquidity crisis
being faced by the company.
The auditor should perform audit procedures to evaluate the reliability of
the underlying data to prepare the forecast and determining whether
there is adequate support for the assumptions underlying the
forecast. The auditor should also consider whether any additional
facts or information have become available since the date on which
management made its assessment.
4. The instances highlighted in above situation are examples of
misstatements identified during the audit. Over valuation of
inventory of finished goods by
Rs. 2 crore and wrongly charging freight of Rs. 10 lacs paid on
machinery to statement of profit and loss instead of capitalizing are
examples of misstatements.
The auditor should communicate above identified misstatements to those
charged with governance and request for correction of these
misstatements. In case, these are not corrected, understand the
reasons for not making the corrections and reassess materiality. It

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 COMPLETION AND REVIEW
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should also be considered whether uncorrected statements are

material individually or in aggregate. Effect of uncorrected
misstatements on the opinion in auditor’s report should be
communicated to those charged with governance.
5. The view of management is not proper. Audit evidence obtained
during the audit that management has fulfilled its responsibilities
regarding preparation of financial statements and about information
provided and completeness of transactions is not sufficient without
obtaining confirmation from management that it believes that it has
fulfilled those responsibilities. This is because the auditor is not able
to judge solely on other audit evidence whether management has
prepared and presented the financial statements and provided
information to the auditor on the basis of the agreed
acknowledgement and understanding of its responsibilities.
In case of refusal of management to provide such a confirmation, it may
lead to disclaimer of opinion by the auditor.
6. While pointing out significant deficiencies in internal control, auditor
has not only to communicate significant deficiencies giving their
description but also explain the potential effects and sufficient
information to those charged with governance and management to
understand context of communication.
Therefore, the above communication is not proper. Not only significant
deficiency has to be communicated, it should also be explained to
management the potential effects of not carrying out physical
verification of inventories at regular intervals as stipulated by
management. It should explain that such a significant deficiency can
lead to misstatement of inventories impacting profits of the company.
Highlighting importance of such a control, it should be stated that
responsibility be fixed for concerned persons for adhering to such an
important control.

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© The Institute of Chartered Accountants of India