Page 53 - CA Inter Audit PARAM

CA Ravi Taori
has improved from previous year. There could be a possibility of misstatement in current assets and
current liabilities. It is possible that improvement in current ratio is artificial due to misstatements and
has been done to secure good response to the proposed issue of company next year.

CNO Using Observation & Inquiry as Risk Assessment Old Course -- (M21E)
315.06.50 Procedure Bhaskar CNO- SA315-P1.040
CA L is in the process of finalizing his Risk Assessment Procedures of Effluent Limited which include
observation inspection that may support inquiries of management and others. Discuss few examples of
audit procedures which include observation or inspection of the entity's operations.
Answer Observation and inspection may support inquiries of management and others and may also provide
information about the entity and its environment.

Examples of such audit procedures include observation or inspection of the following:
➢ The entity’s premises and plant facilities.
➢ The entity’s operations.
➢ Documents (such as business plans and strategies), records, and internal control manuals.
➢ Reports prepared by management (such as quarterly management reports and interim
financial statements) and those charged with governance (such as minutes of board of
directors’ meetings).

QNO Understanding Entity & its Environment Old Course --
315.07 Bhaskar CNO- SA315-P1.060 (P16M/N17R/N17E/SM17/N19M/M21R/M22R/M23E)
In performing an audit of financial statements, the auditor should have or obtain knowledge of the
business. Explain in the light of SA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment.
OR

Prince Blankets is engaged in business of blankets. Its major portion of sales is taking place through internet.
Advise the auditor how he would proceed in this regard as to understanding the entity and its environment.
OR
'Knowledge of Client business is one of the important principles in developing an overall audit plan. Explain.
Answer ➢ The auditor shall obtain an understanding of the following:
Relevant industry, regulatory, and other external factors including the applicable financial
reporting framework.

The nature of the entity, including:
• its operations;
• its ownership and governance structures;
• The types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and
• The way that the entity is structured and how it is financed; to enable the auditor
to understand the classes of transactions, account balances, and disclosures to be
expected in the financial statements.

The entity’s selection and application of accounting policies, including the reasons for
changes thereto. The auditor shall evaluate whether the entity’s accounting policies are
appropriate for its business and consistent with the applicable financial reporting framework
and accounting policies used in the relevant industry.

The entity’s objectives and strategies, and those related business risks that may result in
risks of material misstatement.

The measurement and review of the entity’s financial performance.

➢ In addition to the importance of knowledge of the client’s business in establishing the overall
audit plan, such knowledge helps the auditor to identify areas of special audit consideration, to

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