The Audit of Financial Statements SA 200A

Objective of an audit 3.1 As per this SA 200 A, objective is to express an opinion on financial statements by the auditor. Opinion helps the users of the financial statements to determine the true and fir view of the financial statements.

Auditor’s opinion and future viability3.2 This SA clarifies that auditor’s opinion on financial statements is not an assurance on the future viability of the enterprise nor it is an assurance on efficiency or effectiveness of the management in conducting the business of an enterprise.

Responsibility of preparing the financial statements 3.3 Responsibility of preparation of financial statements is of the management and not of the auditor. Auditor’s responsibility is to express an opinion on financial statements prepared by the management.Further maintenance of accounting records and control and selection of accounting policies is the sole responsibility of the management.

How the auditor should determine the scope and extent of auditing 3.4 The auditor should consider the following:

Terms of engagements. Requirements of law: If the audit client is a company registered under the

Companies Act, 1956, requirement of Schedule VI is to be compiled with. If it is insurance company, then Insurance Act, 1938 and IRDA requirements and so on.

Pronouncements of ICAI: Accounting Standards, Guidance Notes on various accounting subjects and Auditing Standards.

Can terms of engagements restrict the scope of audit?3.5 Terms of engagements prescribing the scope of the audit are determined by the appointing authority of the auditor. However, the appointing authority cannot restrict the scope of an audit in relation to matters prescribed by law and any pronouncements on the subject by the ICAI.

How audit should be organised?3.6 Audit should be organised in such a way that:

It covers all aspect of enterprise. It ensures that accounting records on which basis financial statements are

prepared are reliable and sufficient. Statutory requirements of disclosure are compile with in preparation of

financial statements.

3.6-1- How to assess the reliability and sufficiency of accounting records – The same can be done by:

Study and evaluation of accounting system and internal control. Carrying out test checking, and enquiries and confirmation, etc, of accounting

records and balances. Assessment of accounting policies followed.

Forming an opinion by the auditor3.7 Auditor has to report whether the financial statements reflects the true and fair view of the financial position and operating result of the enterprise. For forming such an opinion auditor follows a procedure to satisfy himself.

Limitation faced by the auditor:3.8 While forming an opinion by following certain audit procedures auditor faces certain limitations, which are as under;

High and uncontrollable volume of transaction – for example, if ‘A’ an auditor, conducts the audit of Bank of Baroda having more than 2000 branches and billions of transactions, it will not be possible for him to check the accuracy of all the transactions. Therefore, he has to conduct Test Check.

Limitation of any system of internal control. Lack of technical knowledge of the enterprise’s business.

Does audit ensure that there are no frauds or errors?3.9 SA 200 A states that audit cannot ensure that there are no frauds and error in audited financial statements. In fact the objective of the audit is not o detect the fraud and error.

Technical expertness and auditor Auditor should not perform the audit of the area, which is of technical nature and is outside his competence.

Auditor’s report and constraints There may be certain constraints, and problems due to which the auditor cannot express unqualified opinion on the financial statements. Those constraints/problems should be set out in his report.