CMA Intermediate · Corporate Accounting and Auditing

Brief Introduction to Auditing Standards: formula sheet

Full chapter guide

Key formulas

Role of the AASB: AASB (under ICAI Council authority) → issues SAs, SQC 1 and related pronouncements; Know the body and what it issues. Do not credit any other body with issuing SAs.
Quality control link: SQC 1 = firm-level quality control; SA 220 = quality control for an audit of financial statements; SQC 1 itself refers to SA 220 as the standard for audits of historical financial information.
SA 200 coverage: SA 200 = overall objectives + nature and scope of audit + scope, authority and structure of SAs + general responsibilities (including compliance with SAs); Use this as your answer skeleton for any 'what does SA 200 deal with' question.
Scope of the audit opinion: Opinion = financial statements prepared, in all material respects, in accordance with the applicable financial reporting framework; It is not an assurance of future viability or of management's efficiency or effectiveness.
Management's responsibility: Framework identification + preparation and presentation + adequate description of framework; These are the three responsibilities listed for management and, where appropriate, those charged with governance.
Highest authority rule: If sources conflict on applying the framework, the source with the highest authority prevails; Sources include law, court decisions, published interpretations, widely recognised industry practice and accounting literature.
Responsibility split (SA 200): Management and TCWG prepare the financial statements; the auditor forms and reports an opinion on them; The audit does not relieve management or those charged with governance of their responsibilities.
SA 200 and the law: SAs do not override laws and regulations governing management's responsibilities; Applies to responsibilities of management and those charged with governance.
SA 230 and objectives: No separate checklist needed per objective; document any failure to achieve an objective; The failure record helps assess whether overall objectives were still achieved.
SA 220 and SQC 1: SQC 1 = firm-level quality control; SA 220 = engagement-level quality control for an audit; Engagement team may rely on the firm's systems unless information suggests otherwise.
EQCR criteria (SQC 1, non-listed audits and other engagements): Nature and public interest + unusual circumstances or risks + legal requirement; These are criteria a firm considers when choosing engagements for engagement quality control review.
Standards and their subject: SA 200 objectives; SA 210 terms; SA 220 quality control; SA 230 documentation; SA 240 fraud; SA 250 laws and regulations; SA 260 communication with TCWG; Useful for matching-type MCQs.
Audit risk model: Audit risk = Risk of material misstatement × Detection risk; This model is from SA 200. RMM = combination of inherent risk and control risk (not an arithmetic sum). Higher assessed RMM means detection risk must be set lower, so more substantive work.
Components of RMM: RMM = combination of inherent risk and control risk (not an arithmetic sum); This is a conceptual combination. SA 315 (Revised) requires inherent and control risk to be assessed separately.
Materiality (SA 320): Performance materiality < Overall materiality; Performance materiality is set below overall materiality under SA 320. The clearly trivial threshold is a separate SA 450 concept, usually set well below materiality, and is not a level in an SA 320 hierarchy. Clearly trivial misstatements need not be accumulated.
Benchmark-based materiality: Overall materiality = Chosen benchmark × Chosen percentage; Benchmark and percentage are matters of professional judgement. SA 320 does not fix a percentage.
SA 330 responses: Overall responses + Further audit procedures (tests of controls + substantive procedures); Further procedures are designed for assertion level risks, with nature, timing and extent responsive to the assessed risk.
SA 265 communication: Significant deficiencies → in writing to those charged with governance; other deficiencies that merit management's attention → to management; Communicate on a timely basis. Absence of identified deficiencies does not mean controls are effective.
Audit evidence quality: Audit evidence = Sufficiency (quantity) + Appropriateness (relevance + reliability); Higher assessed risk needs more evidence. Better quality evidence reduces the quantity needed, but poor quality cannot be fixed by collecting more of it.
Analytical procedures vs substantive procedures: Substantive procedures = Tests of details + Substantive analytical procedures; SA 520 analytical procedures can be used as risk assessment, substantive, or overall review at the end. They are not a separate category apart from substantive testing when used to detect misstatements.
Sampling risk: Sampling risk = risk that the sample conclusion differs from the conclusion on testing the whole population; Non-sampling risk arises from wrong procedures or misreading evidence. Increasing sample size reduces sampling risk, not non-sampling risk.
Sampling methods: Statistical = random selection + probability theory to evaluate results; otherwise non-statistical; Both can give sufficient appropriate evidence if properly designed. Using random selection alone does not make a sample statistical.
Written representations: Representation from management = supporting evidence, not a substitute for other evidence; Written representations cannot replace other evidence the auditor expects to be available. Representations on management responsibilities are a precondition to accepting the engagement (SA 200, A10).

Quick revision

SAs taken together set the standards for the auditor's work in fulfilling the overall objectives of the auditor.
Some SAs deal with general responsibilities; others apply them to specific topics.
SA 200 covers the overall objectives of the independent auditor and the conduct of an audit under the SAs.
Audit risk is a function of the risks of material misstatement and detection risk.
Assessment of risks is a matter of professional judgment, not precise measurement.
Whether sufficient appropriate evidence has been obtained is a matter of professional judgment.
SA 500 and other relevant SAs give further guidance on audit evidence.
SA 315 identifies and assesses risks; SA 330 designs responses to assessed risks.
Professional skepticism applies throughout the audit and is not repeated in each SA.
The opinion does not assure future viability or the efficiency of management.
Section 143(3)(i) of the Companies Act, 2013 requires the auditor to report on internal financial controls.
SQC 1 is for firms; SA 220 deals with quality control for an audit of financial statements.

Common mistakes

Saying the audit opinion guarantees the company's future viability or management efficiency. Fix: Write that the opinion covers preparation of financial statements, in all material respects, under the applicable framework. It gives no assurance on viability, efficiency or effectiveness.
Attributing SAs to the Institute of Cost Accountants or to the Companies Act itself. Fix: Say SAs are issued by the AASB of ICAI under the authority of the ICAI Council.
Saying the audit relieves management of responsibility for the financial statements. Fix: Remember that management prepares and presents the statements and the audit does not relieve management or those charged with governance of their responsibilities.
Claiming SAs override laws and regulations. Fix: State that SAs do not override laws and regulations governing the responsibilities of management and those charged with governance.
Treating SA 315 and SA 330 as the same thing. Fix: SA 315 identifies and assesses risk. SA 330 designs and performs the response. Say this one-liner in any comparison answer.
Quoting a fixed percentage like 5% of profit as the rule in SA 320. Fix: Say the benchmark and percentage are matters of professional judgement. Give percentages only as an example.
Treating management representations as sufficient evidence on their own. Fix: Write that representations support but cannot replace other audit evidence the auditor expects to obtain.
Saying more evidence always compensates for poor quality evidence. Fix: Explain that sufficiency is quantity and appropriateness is quality. Poor quality evidence is not cured by volume.

Exam tips

Learn SA 200's four content areas as a list. This is the most direct source of short-note questions.
In MCQs, watch for options that assign preparation of financial statements to the auditor or promise assurance of viability. Both are wrong.
Always name the AASB of ICAI as issuer, and link SQC 1 with SA 220 when quality control appears.
Where the question mentions internal financial controls or fraud reporting, add section 143(3)(i) or 143(12) of the Companies Act 2013 as relevant.
Write short bullet-style answers with the standard's number and purpose to earn step marks quickly.
Learn one line of purpose for each standard from SA 200 to SA 260, since MCQs often test matching.
In written answers, split the roles of management, those charged with governance and the auditor under separate bullet points.
For quality control questions, always mention both SQC 1 at firm level and SA 220 at engagement level.