Page 55 - CA Inter Audit PARAM

CA Ravi Taori
and other external factors including the applicable financial reporting framework. Relevant industry factors
include industry conditions such as the competitive environment, supplier and customer relationships, and
technological developments.

▪ Examples of matters the auditor may consider include market and competition, whether entity is
engaged in seasonal activities, product technology relating to the entity’s products. The industry in
which the entity operates may give rise to specific risks of material misstatement arising from the
nature of the business or the degree of regulation.

▪ Relevant regulatory factors include the regulatory environment. The regulatory environment
includes, among other matters, the applicable financial reporting framework and the legal and
political environment

▪ Examples of matters the auditor may consider include accounting principles and industry specific
practices, regulatory framework for a regulated industry, legislation and regulation that significantly
affect the entity’s operations, including direct supervisory activities, taxation, government policies
currently affecting the conduct of the entity’s business, environmental requirements affecting the
industry and the entity’s business.

▪ Examples of other external factors affecting the entity that the auditor may consider include the
general economic conditions, interest rates and availability of financing, and inflation etc.

QNO Need for Understanding Entity & its Environment Old Course -- (SM17/M20R/SM20/SM21/N23R)
New Course – (M24M)
315.09 Bhaskar CNO- SA315-P1.080
The auditor of ABC Textiles Ltd chalks out an audit plan without understanding the entity’s business. Since
he has carried out many audits of textile companies, there is no need to understand the nature of business
of ABC Ltd. Advise the auditor how he should proceed.
OR
"Obtaining an understanding of the entity and its environment, including the entity’s internal control, is a
continuous, dynamic process of gathering, updating and analysing information throughout the audit.
Analyse and explain giving examples."
Answer ➢ Obtaining an understanding of the entity and its environment, including the entity’s internal
control (referred to hereafter as an “understanding of the entity”), is a continuous, dynamic
process of gathering, updating and Analysing information throughout the audit. The
understanding establishes a frame of reference within which the auditor plans the audit and
exercises professional judgment throughout the audit, for example, when: (M-ain AREAS)
M- Determining materiality in accordance with SA 320;
A-Considering the appropriateness of the selection and application of accounting policies;
R-Assessing risks of material misstatement of the financial statements;
E-Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
appropriateness of assumptions and of management’s oral and written representations.
A-Developing expectations for use when performing analytical procedures;
S-Identifying areas where special audit consideration may be necessary, for example, related
party transactions, the appropriateness of management’s use of the going concern
assumption, or considering the business purpose of transactions;

➢ Obtaining an understanding of the entity and its environment, including the entity’s internal control
(referred to hereafter as an “understanding of the entity”), is a continuous, dynamic process of
gathering, updating and analysing information throughout the audit. The auditor should proceed
accordingly.

QNO Risk of Material Misstatement- Definition & Old Course – (SM17/ SM20/SM21)
315.11 Components Bhaskar CNO- SA315-P1.020 New Course -- (SM25)
Define Risk of material misstatement. Explain its components also.
OR

Risk of material misstatement consists of two components Explain clearly defining risk of material
misstatement
Answer ➢ Risk of Material Misstatement
Definition
www.auditguru.in 3.10