To prevent recurrence of Satyam-like frauds, the ICAI on Monday tightened the auditing standards by introducing new guidelines which will enable auditors interlink information and reports of other stakeholders and evaluate them.
The two new standards on auditing, said Atul Kumar Gupta, member of the regional council of Institute of Chartered Accountants of India (ICAI), "will enable auditors to interlink the information and reports of other stakeholders, evaluate them, and substantiate the credibility of financial statement."
The Standard of Accounting (SA 720), introduced for the first time by the ICAI, deals with auditor's responsibilities in relation to information, other than audited financial statements, provided by companies in annual reports. These auditing standards, Gupta said, will also help auditors "to go beyond just receiving the evidences by evaluating them on prudence principles."
So, auditors will now play a wider role in the affairs of a company and apart from financial statements, they will also inspect 'other information' to look for possible material inconsistencies. Other information includes a report by management or those charged with governance on operations; financial summaries or highlights; planned capital expenditures; financial ratios and selected quarterly data.
The standard (SA 720) specifies an auditor's responsibility in relation to other information in documents containing audited financial statements like an annual report. The standard is a first of its kind for Indian auditors who need to study other information to identify any material inconsistencies vis-a-vis the audited financial statements to make the audit reports fool-proof.
The standard effective for audits of all financial statements for periods beginning on or after April 1, 2010 said the auditor shall make appropriate arrangements with management or those charged with governance to obtain the other information before preparing report. "If it is not possible to obtain all the other information prior to the date of the auditors report, the auditor shall read such other information as soon as practicable," the standard says.
If the auditor comes across an apparent material misstatement of fact while scrutinising other information, he should raise the matter with management. And in case the management refuses to correct the misstatement, the auditor should report the matter.
The other matter approved by the ICAI council is a revision of the standard related to audit evidence. "Audit evidence is fundamental aspect on which the final audit opinion and the audit report is based. The quality and effectiveness of an audit is, therefore, to a large extent affected by the adequacy and appropriateness of the auditors procedures in gathering and evaluating the audit evidence," ICAI said.
The revised version contains greater guidance for the auditors on critical aspects of audit evidence such as what constitutes sufficient appropriate audit evidence, information to be used as audit evidence, factors to consider in selecting items for testing, how to respond in case of inconsistency in or doubts over reliability of audit evidence.