Page 113 - CA Final PARAM Digital Book.

Answer SA 330 states that irrespective of the assessed risk of material misstatement, the auditor shall design and
perform substantive procedures for each material class of transactions, account balance and disclosure. In
the given situation, the auditor has assessed the risk of material misstatement to be low. However, despite
such assessment, substantive procedures have to be performed.

SA 330 further states that the auditor shall consider whether external confirmation procedures are to be
performed as substantive audit procedures. External confirmation procedures frequently are relevant when
addressing assertions associated with account balances and their elements but need not be restricted to
these items. For example, the auditor may request external confirmation of the terms of agreements,
contracts, or transactions between an entity and other parties.

Despite the low assessed risk of material misstatement, substantive procedures have to be performed due
to the following reasons: -
(i) The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement and
(ii) there are inherent limitations to internal control, including management override.

It is also in accordance with the spirit of professional skepticism. Therefore, as discussed above, the approach
of CA Y is in accordance with Standards on Auditing.

Factors to be considered while deciding whether to go for Old Course – (N21E,N23M)
QNO external confirmation
50.500
TITANIUM CNO—SA330.120
Mr. Agarwal, in the course of audit of PQ Limited, wants to perform external confirmation procedures to
obtain audit evidence. Guide Mr. Agarwal, listing out the factors that may assist him in determining
whether external confirmation procedures are to be performed as substantive audit procedures
Answer Factors that may assist Mr. Agarwal, the auditor in determining whether external confirmation procedures
are to be performed as substantive audit procedures include:

(i) The confirming party’s knowledge of the subject matter – responses may be more reliable if provided by
a person at the confirming party who has the requisite knowledge about the information being confirmed.

(ii) The ability or willingness of the intended confirming party to respond – for example, the confirming party:

• May not accept responsibility for responding to a confirmation request;
• May consider responding too costly or time consuming;
• May have concerns about the potential legal liability resulting from responding;
• May account for transactions in different currencies; or
• May operate in an environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.

In such situations, confirming parties may not respond, may respond in a casual manner or may attempt
to restrict the reliance placed on the response.

(iii) The objectivity of the intended confirming party – if the confirming party is a related party of the entity,
responses to confirmation requests may be less reliable.

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