Use of Audit Evidence Obtained In Previous Audits

In determining whether it is appropriate to use audit evidence about the operating effectiveness of controls obtained in previous audits, and, if so, the length of the time period that may elapse before retesting a control, the auditor shall consider the following:

1	Effectiveness of other elemnts of internal control	The effectiveness of other elements of internal control, including the control environment, the entity's monitoring of controls, and the entity's risk assessment process;
2	Risk from internal control	The risks arising from the characteristics of the control, including whether it is manual or automated;
3	Effectiveness of IT Controls	The effectiveness of general IT-controls;
4	Effectiveness of internal control	The effectiveness of the control and its application by the entity, including the nature and extent of deviations in the application of the control noted in previous audits, and whether there have been personnel changes that significantly affect the application of the control;
5	Risk because of change	Whether the lack of a change in a particular control poses a risk due to changing circumstances
6	Risk of material misstatement	The risks of material misstatement and the extent of reliance on the control. If the auditor plans to use audit evidence from a previous audit about the operating effectiveness of specific controls, the auditor shall establish the continuing relevance of that evidence by obtaining audit evidence about whether significant changes in those controls have occurred subsequent to the previous audit.

Evaluating The Operating Effectiveness Of Controls

When evaluating the operating effectiveness of relevant controls. The auditor shall evaluate whether misstatements that have been detected by substantive procedures indicate that controls are not operating effectively. But absence of misstatements detected by substantive procedures ,does not provide audit evidence that controls related to the assertion being tested are effective.

A material misstatement detected by the auditor’s procedures is a strong indicator of the existence of a significant deficiency in internal control.

Specific Inquiries By Auditor When Deviations From Controls Are Detected

When deviation is detected in that control on which auditor is dependent, then auditor shall make specific inquiries to understand these matters and their potential consequences, and shall determine whether

Appropriate basis

The test of controls that have been performed provide an appropriate basis for reliance on the controls;

Additional test is necessary

Additional test of controls are necessary

Potential risk

The potential risks of misstatements need to be addressed using substantive procedures.

Meaning of Written Representations

Written representations may be defined as a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context does not include financial statements, the assertions therein, or supporting books and records.

Importance of Written Representations in Auditor wriiten representaon as audit evidence

written representations provide necessary audit evidence, they complement other auditing procedures and do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, obtaining reliable written representations does not affect the nature or extent of other audit procedures that the auditor applies to obtain audit evidence about the fulfillment of management's responsibilities or about specific assertions.

Illustration of written representation

The auditor P of PAR and Co., a firm of Chartered Accountants is conducting audit of Kapur Industries Ltd. The auditor requests management to provide Banker's certificate in support of Fixed deposits whereas management provides only written representation on the matter.

Required

Discuss how would you deal as an auditor.

SOLUTION

Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management's responsibilities, or about specific assertions.

Applying the above to the given problem, the auditor would further request the management to provide him with the Banker's certificate in support of fixed deposits held by the company.

Objectives Of The Auditor Regarding Written Representation

The objectives of the auditor are to:

To obtain written represenation

To obtain written representations from management. Also that management believes that it has fulfilled its responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor;

To Support other audit evidence

support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations if determined necessary by the auditor or required by other AU-C sections

To responded appropriately

Respond appropriately to written representations provided by management and, when appropriate, those charged with governance or if management or, when appropriate, those charged with governance do not provide the written representations requested by the auditor.

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