Session Title

1
Session 1

• Session Title
• Nature of certification audit, Statutory
  provisions, Financial Auditing Standards, Primary
  and General audit objective of certification
  audit, Audit assertions for receipt and payment
  or income and expenditure account, Audit
  Assertions for Balance Sheet or Items of Assets
  and Liabilities, . Audit materiality

2

• Session Learning Objectives
• At the end of the session, the participants have
  gained knowledge about nature and objective of
  certification/attest audit, auditee entities
  whose accounts are to be certified, statutory
  provisions for it, various auditing standards,
  audit assertions and audit materiality

3

• Session overview
• Certification audit is the independent auditors
  opinion on the reliability of some assertions
  made by the audited entity. For this, the auditor
  has go through the process of examination and
  evaluations of financial records, evaluation of
  compliance with applicable statutes, regulations,
  internal controls, by adopting various
  established auditing standards and audit
  procedures

4

• Session Structure
• 1. Nature of certification audit
• 2. Statutory provisions.
• 3. Financial Auditing Standards
• 4. Primary and General audit objective of
  certification audit
• 5. Audit assertions for receipt and payment or
  income and expenditure account.
• 6. Audit Assertions for Balance Sheet or Items of
  Assets and Liabilities
• 7. Audit materiality
• 8. Exercise and Group discussion.

5

• Nature of certification/attest audit
• Certification Audit refers to an independent
  Auditors opinion on the reliability of some
  assertions made by the audited entity. The
  opinion given by the Auditor could be on the set
  of financial statements prepared by the entity or
  part of a financial statement. It may include
• Examination and evaluation of financial records
  and expression of opinions on financial
  statements.
• Audit of financial systems, evaluation of
  compliance with applicable statutes and
  regulations which affect the accuracy and
  completeness of accounting records
• Audit of internal controls and internal audit
  function which helps in safeguarding assets and
  resources. It assures the accuracy and
  completeness of accounting records.
• It extends to examination of risk to regularity,
  propriety and financial control. The opinion on
  the financial statements provides annual
  assurance on the financial statements to
  Parliament or Legislature.
• It focuses on a Government Department or its
  units rather than on the Financial statements.
• It also seeks to cover risk of significant
  irregularity, which may not be material for the
  purpose of qualifying audit opinion on the
  financial statements.

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Types of Auditee Entities, Types of Financial
Statements audited
Entity Types of Financial Statements Audited Remarks
Union Government /Union Territory Governments/ State Governments Finance Accounts, Appropriation Accounts Certification done by CAG
Autonomous Bodies Balance Sheet, Income Expenditure Account/ Revenue Accounts
Statutory Corporation Balance Sheet, Profit and Loss Account/ Revenue Account
Government Companies Balance Sheet, Profit and Loss Account The Statutory Auditor i.e., Chartered Accountants certify the financial Statements of Government Companies. The CAG conduct supplementary audit and issue comments,
Externally Aided Projects (EAPs) Project Financial Statements (PFS)/ Statements of Expenditure (SOE) relating to Externally Aided Projects CAG is sole auditor
7
Statutory Provisions
Major Area of Audit CAGs (DPC) Act, 1971 Remarks
Audit of all expenditure from the Consolidated Fund/Contingency Fund/ Public Accounts of India, of each State and each Union Territory having a Legislative Assembly Section 13 It also includes audit all trading, manufacturing, profit and loss accounts, balance sheets and other subsidiary accounts kept in any department of the Union or of State or a Union Territory.
Audit of the Accounts of Authorities and bodies receiving financial assistance in the form of grants/ and/ or loans from the Government of India or a State or Union Territory subject to certain criteria Section 14 and 15 Authority means a person or body exercising power or command. Body means an aggregate of persons, incorporated or unincorporated.
Audit of Accounts of certain bodies or authorities, not covered by Section 19 Section 20 Here it contains those whose audit has not been entrusted by or under any law made by Parliament to the CAG .

8
Statutory Provisions cont
Major Area of Audit CAGs (DPC) Act, 1971 Remarks
Audit of all Receipts which are payable into the Consolidated Fund of India and of each State and of each Union Territory with Legislative. Section 16 It requires the CAG to be satisfied that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and report on it.
Audit of Stores and Stock Section 17 CAG has the authority to audit and report on accounts of the Stores and Stock kept in any office or department of the Union or a State or a Union Territory.
Audit of Government Companies and Corporations Section 19 Government Companies In accordance with the provisions of Companies Act, 1956 contained in Sections 617 and 619 thereof Corporation set up by or under law made by the Parliament, in accordance with provisions of the respective Legislations. It deals with the duties and powers of the CAG in relation to the audit of accounts of the Government Companies and Corporations.


9
Financial Auditing Standards

• Why we follow auditing standards in Certification
  Audit?
• The main purpose for following the auditing
  standards is to improve the auditing practices.
• The Auditing Standards provides a framework for
  auditing steps and procedures.
• It gives reassurance to people making use of the
  financial statements and audit reports. Following
  Auditing Standards will enhance the quality of
  the audit work done.

10

• 2. IFAC Standards
• The International Federation of Accountants
  (IFAC) was established in 1977 by accounting
  bodies of various countries with the main
  objective to develop and enhance a coordinated
  worldwide accountancy profession.
• The International Auditing Practices Committee
  (IAPC), a standing committee of IFAC, issues
  standards on auditing and related services.
• The IFAC has issued a number of International
  Standards on Auditing (ISAs).
• It is not binding on the auditors of a Supreme
  Audit Institutions (SAI).

11

• List of the Standards (ISAs)
• Respective responsibilities
• ISA 200 Objective and General Principles
  Governing an Audit of Financial Statements
• ISA 210 Terms of Audit Engagements
• ISA 220 Quality Control for Audits of Historical
  Financial Information
• ISA 230 Documentation
• ISA 240 The Auditor's Responsibility to Consider
  Fraud in an Audit of Financial Statements
• ISA 250 Consideration of Laws and Regulations in
  an Audit of Financial Statements
• ISA 260 Communication of Audit Matters with Those
  Charged with Governance
• Cont.

12

• Audit planning
• ISA 300 Planning an Audit of Financial Statements
  
• ISA 310 Knowledge of the Business
• ISA 315 Understanding the Entity and its
  Environment and Assessing the Risks of Material
  Misstatement
• ISA 320 Audit Materiality
• ISA 330 The Auditor's Procedures in Response to
  Assessed Risks
• Internal Control
• ISA 400 Risk Assessments and Internal Control
• ISA 401 Auditing in a Computer Information
  Systems Environment (withdrawn, superseded by ISA
  315, ISA 330 and ISA 402)
• ISA 402 Audit Considerations Relating to Entities
  Using Service Organizations

13

• Audit evidence
• ISA 500 Audit Evidence
• ISA 501 Audit Evidence - Additional
  Considerations for Specific Items
• ISA 505 External Confirmations
• ISA 510 Initial Engagements - Opening Balances
• ISA 520 Analytical Procedures
• ISA 530 Audit Sampling and Other Means of Testing
  
• ISA 540 Audit of Accounting Estimates
• ISA 545 Auditing Fair Value Measurements and
  Disclosures
• ISA 550 Related Parties
• ISA 560 Subsequent Events
• ISA 570 Going Concern
• ISA 580 Management Representations

14

• Using work of other experts
• ISA 600 Using the Work of Another Auditor
• ISA 610 Considering the Work of Internal Auditing
  
• ISA 620 Using the Work of an Expert
• Audit conclusions and Audit report
• ISA 700 Forming an Opinion and Reporting on
  Financial Statements
• ISA 705 Modifications to the Opinion in the
  Independent Auditor's Report
• ISA 706 Emphasis of Matter Paragraph and Other
  Matter Paragraphs in the Independent Auditor's
  Report
• ISA 710 Comparatives
• ISA 720 Other Information in Documents Containing
  Audited Financial Statements
• Specialized areas
• ISA 800 The Auditor's Report on Special Purpose
  Audit Engagements
• ISA 810 The Examination of Prospective Financial
  Information

15

• 3. ICAI Standards
• The Institute of Chartered Accountants of India
  (ICAI) issued a number of Auditing and Assurance
  Standards (AASs) which are generally based on the
  corresponding ISAs issued by IFAC, taking into
  consideration the applicable laws, customs,
  usages and business environment in India.
• Since under the Companies Act, companies in India
  are required to be audited by Chartered
  Accountants, these standards have a significant
  effect on the way audit of companies is conducted
  in India.
• The list of AASs are given in next slides

16
Summary of Auditing Assurance Standards as
prescribed by ICAI
AAS No. Deals with Description Effective date
AAS-1 Basic Principals governing an Audit it seeks to lie down and briefly explain the basic principles which govern the auditor's professional responsibilities and which should be complied with whenever an audit is carried out. These principles are, namely, integrity, objectivity and independence, confidentiality, skills and competence, work performed by others, documentation, planning, audit evidence, accounting system and internal control, and, finally, audit conclusions and reporting. on or after April 1, 1985
AAS-2 Objective and Scope of the Audit of Financial Statements Objective of an Audit expression of opinion, the concept of true and fair view Responsibility for Financial Statements responsibility of the management vis-a-vis auditor Scope of Audit factors determining scope, reliability and sufficiency of audit evidence, disclosure aspects, undiscovered material misstatements, etc. on or after April 1, 1985
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AAS No. Deals with Description Effective date
AAS-3 Documentation The Standard explains as to what constitute working papers, need for working papers. The Standard also touches upon the following areas Form and Content factors affecting form and content, quantum of working papers, permanent audit file, and current audit file. Ownership and Custody of Working Papers on or after July 1, 1985
AAS-4 The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements The following would give an overview of the contents of this AAS Fraud and error and their characteristics Responsibility of those charged with governance Responsibility of management Responsibility of the auditor Indication of possible misstatement Evaluation and disposition of misstatements. Effect on auditor's report Documentation Management representations Communication Auditor unable to complete engagement The appendices to the AAS contain examples of risk factors relating to misstatements resulting from fraud/ error, examples of modifications in auditor's procedures, and indicators of possible fraud or error. on or after April 1, 2003
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AAS No. Deals with Description Effective date
AAS-5 Audit Evidence The AAS explains the concept of sufficient appropriate audit evidence, factors affecting it as also the various types of assertions, internal vis-a-vis external evidence. The Standard also deals with the methods of obtaining evidence, namely, inspection, observation, inquiry and confirmation, computation and analytical review. on or after January 1, 1989
AAS-6 Risk Assessment and Internal Control The purpose of this AAS is to establish Standards on the procedures to be followed to obtain an understanding of the accounting and internal control systems and on audit risk and its components inherent risk, control risk and detection risk. on or after April 1, 2002.
AAS-7 Relying on the Work of an Internal Auditor The Standard touches upon topics like scope and objective of internal audit function, relationship between internal and external auditor, aspects to be considered in evaluating the internal audit function, coordination between internal and external auditor, evaluating specific internal audit work on or after April 1, 1989.
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AAS No. Deals with Description Effective date
AAS-8 Audit Planning The AAS covers topics such as advantages of audit planning, sources of obtaining knowledge of the client's business, topics on which discussion with client might be useful, factors to consider in development of an overall plan,developing an audit Programme etc. on or after April 1, 1989
AAS-9 Using the Work of an Expert The AAS explains the concept of an 'expert', situations in which the need for using the work of an expert might arise, factors to consider when deciding whether to use the work of an expert or not, evaluating the skills and competence and objectivity of an expert, procedures for evaluating the work of an expert, references to an expert auditor's report, etc. on or after April 1, 1991
AAS-10 Using the Work of another Auditor This AAS discusses the procedures to be applied in situations where an independent auditor (principal auditor) reporting on the financial statements of the entity uses the work of another auditor (other auditor) with respect to the financial statements of one or more components included in the financial statements of the entity. on or after April 1, 2002.
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AAS No. Deals with Description Effective date
AAS-11 Representations by the Management The AAS was issued to establish standards on the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations, and the action to be taken if management refuses to provide appropriate representations. on or after April 1, 1995
AAS-12 Responsibility of Joint Auditors The important aspect of joint audit assignments as covered by this AAS include possible bases of division of work among joint auditors, coordination among joint auditors, joint and several liability of joint auditors, responsibility for obtaining and evaluating information and explanation from management, responsibility for scrutiny of branch accounts and returns, need for review of work performed by one joint auditor by other joint auditor(s), reporting responsibilities etc. on or after April 1, 1996
AAS-13 Audit Materiality This AAS establishes standards on the concept of materiality and its relationship with audit risk. It deals with aspects such as establishment of acceptable materiality levels, relationship between materiality and audit risk, procedures to reduce audit risk, materiality and audit risk in evaluating audit evidence, components of aggregate of uncorrected misstatements and auditor's plan of action, review of materiality level and subsequent changes therein, etc. on or after April 1, 1996
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AAS No. Deals with Description Effective date
AAS-14 Analytical Procedure The AAS deals with aspects like nature and purpose of analytical procedures, analytical procedures in planning the audit, analytical procedures as substantive procedures, analytical procedures in the overall review at the end of the audit, extent of reliance on analytical procedures, investigating unusual items etc. on or after April 1, 1997
AAS-15 Audit Sampling The purpose of AAS is to establish standards on the design and selection of an audit sample and the evaluation of sample results and applies equally to statistical and non-statistical sampling. The areas covered by the AAS include design of sample, audit objectives, population, stratification, sample size and risk, tolerable and expected error, selection of sample, evaluation of sample results, analysis of errors in the sample, projection of errors, reassessing sampling risk. on or after April 1, 1998
AAS-16 Going Concern The AAS deals with the relevant areas in this regard such as indications - financial, operating and other - of appropriateness or otherwise of the going concern assumption, audit evidence, illustrative audit conclusions and reporting in case going concern assumption considered appropriate/ going concern question not resolved/ going concern assumption considered inappropriate. on or after April 1, 1999
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AAS No. Deals with Description Effective date
AAS-17 Quality Control for Audit Work The purpose of this Standard is to establish standards on quality control policies and procedures of an audit firm regarding audit work generally and procedures regarding the work delegated to assistants on an individual audit. on or after April 1, 1999.
AAS-18 Audit of Accounting Estimates This AAS, deals with such aspects, including, nature of accounting estimates, audit procedures, reviewing and testing the process used by management, evaluation of data and consideration of assumptions, testing of calculations, comparison of previous estimates with actual results, use of independent estimates, review of subsequent events, evaluation of results of audit procedures. on or after April 1, 2000.
AAS-19 Subsequent Events Subsequent events refer to significant events occurring between the balance sheet date and the date of the auditor's report. This AAS lays down the responsibility of the auditor in respect of subsequent events. on or after April 1, 2000.
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AAS No. Deals with Description Effective date
AAS-20 Knowledge of the Business This Standard establishes standards on what is knowledge of the business, why it is important to the auditor, and to the audit staff working on an engagement. on or after April 1, 2000.
AAS-21 Consideration of Laws and Regulations in an Audit of Financial Statements. The AAS deals with aspects such as responsibility of the management for compliance with laws and regulations, auditor's consideration of compliance with laws and regulations, audit procedures where non compliance is discovered, communicating/ reporting non compliance to management/users of audited financial statements/ regulators, and situations for withdrawal from engagement. The Appendix to the AAS contains indications that non compliance might have occurred. on or after July 1, 2001.
AAS-22 Initial Engagements-Opening Balances This AAS establishes standards regarding audit of opening balances in case of initial engagements. The Standard, therefore, deals with audit procedures for obtaining sufficient appropriate evidence in respect of opening balances. The Standard also provides guidance to the auditors on situations warranting qualified opinion/ disclaimer of opinion. on or after July 1, 2001.
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AAS No. Deals with Description Effective date
AAS-23 Related Parties The purpose of this AAS is to lay standards on auditor's responsibilities and audit procedures regarding related parties and related party transaction, as defined in AS 18 on or after April 1, 2001
AAS-24 Audit Considerations relating to Entities Using Service Organizations The AAS therefore first explains the concept of a "service organisation" and then goes on to describe the considerations for the auditor of the client, factors to be considered in determining the significance of the activities of the service organisation to the client and their relevance to audit, obtaining necessary information from service organizations, auditor's procedures in case such information is insufficient etc. on or after April 1, 2003
AAS-25 Comparatives The AAS therefore explains the concept of comparatives in financial statements, corresponding figures and comparative financial statements. It also deals with the requirement for obtaining sufficient appropriate audit evidence in respect of comparatives, audit procedures where prior period financial statements are unaudited, audit procedures in case of material misstatements in comparatives or where prior period audit report contains a modified opinion, etc. on or after April 1, 2003.
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AAS No. Deals with Description Effective date
AAS-26 Terms of Audit Engagement The AAS discusses principal contents of an audit engagement letter, audit engagement letter in case of audit of components, factors affecting audit engagement letter in case of recurring audits. The AAS also extensively deals with the duties and responsibilities of the auditors in case of a change in engagement. on or after 1st April, 2003
AAS-27 Communications of Audit Matters with Those Charged with Governance The AAS establishes standards on communications of audit matters arising from the audit of financial statements between the auditor and those charged with governance of an entity. The AAS therefore provides guidance to auditors as to procedures to identify relevant persons, what are the audit matters of general interest to be communicated, forms of communication, factors affecting communication, confidentiality requirements, laws and regulations etc. on or after April 1, 2003
AAS-28 The Auditor's Report on Financial Statements The AAS deals extensively with the concepts such as the basic elements of an auditor's report, what is an unqualified opinion, the concept of modified audit report - qualified opinion, adverse opinion, disclaimer opinion, matters that affect the auditor's opinion and matters that do not affect the auditor's opinion, emphasis of matter paragraphs, illustrative audit reports in each case. on or after 1st April 2003
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AAS No. Deals with Description Effective date
AAS-29 Auditing in a Computer Information Systems Environment The purpose of this Auditing and Assurance Standard (AAS) is to establish standards on procedures to be followed when an audit is conducted in a computer information systems (CIS) environment. The AAS lays down standard in respect of skills and competence needed by the auditor to conduct an audit of CIS environment, factors to consider while planning such an audit, peculiar features of a CIS environment, assessment of risk, audit procedures to reduce audit risk, documentation in such audits. on or after 1st April, 2003.
AAS-30 External Confirmations For example, relationship of external confirmation procedures to the inherent and control risks, assertions addressed by external confirmations, timing of external confirmations, design of the external confirmation request, nature of information being confirmed, form of confirmations - positive and negative, characteristics of respondents, evaluation of the results of the confirmation process, management requests etc. on or after April 1, 2003
AAS-31 Engagements to Compile Financial Information The AAS deals extensively with significant issues such as the objective of a compilation engagement, basic principles in a compilation engagement, including the ethical requirements, responsibility of the management, the essential ingredients of the terms of a compilation engagement, planning, documentation and procedural aspects of a compilation engagement. The AAS also provides detailed guidance as to the reporting aspects in a compilation engagement. on or after April 1, 2004
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AAS No. Deals with Description Effective date
AAS-32 Engagements to Perform Agreed upon Procedures regarding Financial Information The basic purpose of the AAS is to establish standards on the auditor's professional responsibilities when an engagement to perform agreed upon procedures regarding financial information is undertaken and on the form and content of the report that the auditor issues in connection with such an engagement. The AAS can, however, also be used as a guide to perform agreed upon procedures regarding non-financial information. This also provides detailed guidance to the members as to the objectives of an agreed upon procedures engagement, basic principles involved in an agreed upon procedures engagement, including ethical principles, the essential aspects of the terms of the engagement. The AAS also deals with the planning, documentation and procedures and evidence aspects of such engagements. The AAS also contains standards in respect of report to be issued by the auditor and its essential elements. on or after April 1, 2004
AAS-33 Engagement to Review Financial Statements The AAS on Engagements to Review Financial Statements provides extensive guidance on the types of such procedures and enquiries to be employed by the auditors. The AAS establishes standards and provide guidance on the auditor's professional responsibilities and on the form and content of the report that the auditor issues in connection with a review. The AAS deals with issues such as scope of the review engagement, level of assurance, terms of engagement, planning, documentation, review procedures, conclusions and reporting requirements in the review engagements. on or after 1 April 2005
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AAS No. Deals with Description Effective date
AAS-34 Audit Evidence - Additional Consideration for Specific Items The objective of this AAS is to establish standards on auditor's responsibilities, audit procedures and provide guidance, in addition to that provided in AAS-5, "Audit Evidence", with respect to certain specific financial statement amounts and other disclosures. This AAS assists the auditor to obtain audit evidence with respect to following aspects Part A Attendance at Physical Inventory Counting Part B Inquiry Regarding Litigation and claims Part C Valuation and Disclosure of Long Term Investments. Part D Segment Information. This AAS provides a detailed insight into each of these aspects. on or after 1 April 2005.
AAS-35 The Examination of Prospective Financial Information The purpose of this Auditing and Assurance standards (AAS) is to establish standards and provide guidance on engagements to examine and report on prospective financial information including examination procedures for best estimates and hypothetical assumptions. on or after, 01.04.2007
29

• 4. INTOSAI Standards
• The Auditing Standards Committee of the
  International Organization of Supreme Audit
  Institutions (INTOSAI) issued the Auditing
  Standards. Though they have mandatory
  application, they reflect a best practices
  consensus among the Supreme Audit Institutions
  (SAIs) and each SAI judge the extent to which the
  standards are compatible with the achievement of
  its mandate.

30
Hierarchical level of the text ISSAI series Name Notes
Level 1 Founding Principles ISSAI 1 The Lima Declaration (endorsed 1977) Comprehensive precepts on auditing in the public sector
Level 2 Prerequisites ISSAI 10-40 Prerequisites for the Functioning of Supreme Audit Institutions The 'ISSAI 30' Code of Ethics is the statement of values and principles guiding the daily work of the auditors. One of the principles outlined in the Code of Ethics is the statutory auditors obligation to apply generally accepted auditing standards. (not to be mistaken with the AICPA's Generally accepted auditing standards)
Level 3 Fundamental Auditing Principles ISSAI 100-400 Basic Principles, General Standards, Field Standards (endorsed 2001), and Reporting Standards
31
Hierarchical level of the text ISSAI series Name Notes
Level 4 Auditing Guidelines ISSAI 1000-1810 Financial Audit Guidelines
ISSAI 3000-3100 Performance Audit Guidelines
ISSAI 4000-4200 Compliance Audit Guidelines
ISSAI 5000-5010 Guidelines on auditing International Institutions
ISSAI 5100-5140 Guidelines on Environmental Audit
ISSAI 5200-5240 Guidelines on Privatization
ISSAI 5300-5399 guidelines on IT-audit
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Hierarchical level of the text ISSAI series Name Notes
ISSAI 5400-5499 Guidelines on Audit of Public Debt
ISSAI 5500-5599 Guidelines on Audit of Disaster-related Aid
ISSAI 5600-5699 Guidelines on Peer Reviews
Guidance for Good governance INTOSAI GOVs 9100 - 9230 Internal Control and Accounting Standards
33
5. Auditing Standards of the CAG of IndiaThe
Auditing Standards of the CAG of India were
first issued in 1994. The Standards were
comprehensively restructured and updated in a
second edition of Auditing Standards issued in
2002. These Standards are in harmony with the
INTOSAI Auditing Standards.The Auditing
Standards of the CAG of India are mandatory in
Audit and Accounts Department. Every member of
the audit team should be conversant with them.
Type Concerned with
General Standards It mainly concerned with the relationship of the auditor to the audited organization and with the personal conduct of the auditor in carrying out the audit
Field Standards It regulate the audit activity
Reporting Standards It regulate what the auditor has to say after completing the audit
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Consequences of failing to observe Auditing
Standards

• The auditor is answerable for such failure.
• Failure to observe Auditing Standards may affect
  the quality of the audit work done.
• Any deviation from Auditing Standards should be
  taken at an appropriately high level with the
  approval of the headquarters office of the CAG
  of India and it should be clearly documented.

35

• Primary Objective of Certification /Attestation
  Audit
• It is a process of certifying/attestations of
  financial accountability of accountable entities,
  involving examination and evaluation of financial
  records.
• Expression of an opinion on the financial
  statements.
• General Audit Objectives Assertions in Financial
  Statements
• It is the responsibility of an auditor, before
  certifying an account, to make sure that
  competent, relevant and reasonable evidence was
  obtained to support the auditors judgment and
  conclusions. For example, to show weather
  accounts are complete and weather the recorded
  transactions have properly occurred and are
  properly classified.
• To be relevant, audit evidence must relate to the
  general audit objectives (also called
  assertions), which are positive statement about
  the state of being
• These general audit objectives (assertions) are
  designed to ensure that the auditor obtains
  evidence to support all aspects of the opinion
  required to be expressed on an account.
• The general audit objectives have to be built in
  during the audit process.

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Assertions for Receipt and Payments or Income and
Expenditure Account Items
Assertions Explanation
Completeness Completeness means that all transactions relevant to the year of account have been recorded and no transactions has been overlooked. This assertions directly tests for potential understatement of figures in accounts.
Occurrence Occurrence means that all recorded transactions occurred and were relevant to the year of account. This assertion directly tests for potential overstatement of figures in the accounts.
Measurement Measurement means that the recorded transactions have been correctly valued, properly calculated, or measured in accordance with established accounting policies, on an acceptable and consistent basis.
Disclosure Disclosure means that the recorded transactions have been properly classified and disclosed where appropriate. This implies that the receipts and expenditures were booked to the proper account head and the disclosures in the notes and footnotes in the accounts are appropriate and adequate.
Regularity Regularity is a unique requirement for Government Accounts. This requires that the recorded transactions are in accordance with the primary and secondary legislation and other specific authorities required by them.
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Assertions for Balance Sheet or Items of Assets
and Liabilities
Assertions Explanation
Completeness Completeness means that all assets and liabilities have been recorded in the accounts and nothing was omitted. This objective directly tests for potential understatement of asset and liabilities
Existence Existence means that all recorded assets and liabilities exist. The objective directly tests for potential overstatement of assets and liabilities.
Valuation Valuation means that the values given to the assets and liabilities are accurate and have arrived at in accordance with the established accounting policies on an acceptable and consistent basis. It requires conformity with accounting policies and standards and their consistent application.
Ownership Ownership means that the assets are owned by the entity, the liabilities are properly those of the entity and both arise solely from regular activities. The balance sheet represents an accumulation of the entitys rights and obligations. Ownership assertion requires that the assets and liabilities reported actually represent those rights and obligations.
Disclosure Disclosure means that the assets and liabilities have benn properly disclosed in accordance with the applicable reporting framework. This implies that the assets and liabilities were booked to the proper head of account and the disclosures in the notes and foot notes in the accounts are appropriate and adequate.
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• Reasonable and not absolute assurance
• The audit opinion provides reasonable assurance
  that the financial statements are free from
  material misstatement and irregularity.
• Financial statements are not required to be
  absolutely correct.
• Since no system of internal control can guarantee
  completeness and accuracy of accounting records
  nor can it be absolute proof against human error
  and fraud, hence the audit opinion should be
  based on reasonable assurance since providing
  assurance with absolute certainty would be vastly
  expensive.
• Audit can give an unmodified opinion on the
  financial statements under audit as long as the
  level of error is not judged to be material. The
  accepted level of error for any particular
  account will be determined in accordance with
  guidelines for materiality that may be laid down
  by the CAG of India.

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• Audit Materiality
• (i) The determination of materiality underlines
  the whole process of audit. As we have already
  discussed that financial statement do not need
  absolute accuracy to make informed decision,
  hence a matter is considered material if its
  omission or misstatement would reasonably
  influence the decision of an intended user of the
  audit report.
• (ii) Materiality should be considered by Audit
  when
• Determining the nature, timing and extent of
  audit procedures and
• Evaluating the effect of misstatements.
• The concept of materiality is used both at
  planning stage of the audit (planning
  materiality), when deciding what and how much
  work needs to be done, and in evaluating the
  results of the audit (reporting materiality)
• In assessing materiality, the prime consideration
  is the total value of the errors in the account,
  the nature of error or the context in which the
  transaction occurs

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(iii).Types of Materiality
Type Description
Materiality by value The point where the total value of errors in an account becomes unacceptable to audit, so that Audit would have to qualify the audit opinion, is called the materiality level of that account The materiality thresholds depend on the basis of accounts and their sensitivity. In this regard, the guidelines lay down by CAG may be followed. Materiality base could be expenditure, income, average surplus or asset values etc,. The level of materiality by value is set at the outset of the audit, as a guide. Audit materiality should be based on the individual circumstances. For example Parliaments/ Legislatures interest/ other users interest and most likely concern.
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(iii).Types of Materiality
Type Description
Materiality by Nature It answers the question that Does the error affect a figure in the accounts which users expect to be stated with a high degree of accuracy or which is likely to be of great interest to them? This recognizes that in any set of accounts, some are more material than others. Specific disclosure requirements of the auditee entity and the interest of Parliament/Legislature and the degree of disclosure required. For example, budgetary excesses, misclassification between voted and charged expenditure, cash balance, write-offs and losses etc.
Materiality by Context The question being addressed here is Is the error material because of its implication for other aspects of the account? For example, if, due to misstatement, the financial statements indicate that a department has savings when it has, in fact, exceeded its budget, it will become material by context.
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Classification of account, materiality base and
Materiality as percentage(a) For accounts
prepared on cash basis (for example presently
Finance and Appropriation Accounts)
Classification of account Materiality Base Materiality as percentage (illustrative only)
Very Sensitive Gross Receipts/ Expenditure ½
Sensitive Gross Receipts/ Expenditure ½ to 2
Not Sensitive Gross Receipts/ Expenditure 2
43
(b) For Accounts Prepared on Accrual Basis
Base Figure for Materiality Sensitivity of Account Sensitivity of Account Sensitivity of Account
Base Figure for Materiality Very Sensitive Sensitive Not Sensitive
Normal net surplus 5 5-10 10
Gross Income/Expenditure ½ ½-2 2
Turn Over sales ½ ½-2 2
Total Assets ½ ½-1 1
Net Assets 1 1-2 2
44
Types of Error and PrecisionThe types of error,
which might be present in accounts , are those
which the general audit objectives seek to
identify. Precision represents the degree of
uncertainty in the auditors estimate of error.
It has to be considered by auditor while
certifying the accounts.
MLE/ Precision MLE/ Precision To be planned by auditor
Most Likely Error (MLE) It is used in planning and evaluating the results of audit. In planning stage, it is also known as anticipated most likely error (AMLE) and the error the auditors predict. At evaluation stage, MLE represents the level of error found and extrapolated. It is used in planning and evaluating the results of audit. In planning stage, it is also known as anticipated most likely error (AMLE) and the error the auditors predict. At evaluation stage, MLE represents the level of error found and extrapolated.
Precision It represents the degree of uncertainty in the auditors estimate of error (the MLE) It is a range of error that auditors could accept in the account between MLE and materiality. Precision forms the basis of the calculation used to determine the sample size which should be tested by auditors to gain audit assurance The auditors should ensure that the level of error predicted in the account is a genuine estimate Precision is calculated by the following formula (Materiality Anticipated Most Likely Error) x Range of error possible but with no room for unexpected error. The range is normally taken as 80 to 90 It represents the degree of uncertainty in the auditors estimate of error (the MLE) It is a range of error that auditors could accept in the account between MLE and materiality. Precision forms the basis of the calculation used to determine the sample size which should be tested by auditors to gain audit assurance The auditors should ensure that the level of error predicted in the account is a genuine estimate Precision is calculated by the following formula (Materiality Anticipated Most Likely Error) x Range of error possible but with no room for unexpected error. The range is normally taken as 80 to 90