CA Final Advanced Auditing and Professional Ethics, Paper 3, Chapter 1, Part 3 of 7 CA. Siddharth Agarwal

To understand the Standards on Auditing conceptually. To be able to apply the knowledge acquired in solving practical cases in exam.

500-599 Audit Evidence SA 500 SA 501 SA 505 SA 510 SA 520 SA 530 SA 540 SA 550 SA 560 SA 570 SA 580 Audit Evidence (Revised) Audit Evidence Specific Considerations for Selected Items External Confirmation Initial Audit Engagements Opening Balances (Revised) Analytical Procedures Audit Sampling (Revised) Auditing Accounting Estimates, Including Fair Value Accounting Estimates & Related Disclosure (Revised) Related Parties (Revised) Subsequent Events (Revised) Going Concern (Revised) Written Representation (Revised)

Meaning Meaning of Sufficient Appropriate Audit Evidence Sources Sources of Audit Evidence Management s Expert Using the work of a Management s Expert

Audit Evidence Appropriate Sufficient Quality of the Evidence Quantity of the Evidence Relevance Reliability Quality ROMM Assessment

Inspection Analytical Procedures Observation Confirmation Inquiry Inquiry alone, ordinarily does not provide SAAE

Scope SA 500 Deals with SA 620 Deals with Using the work of a Management s Expert Using the work of an Auditor s Expert The procedure to be adopted for using the Work of a Management s Expert and that of an Auditor s Expert is almost same except that when the Auditor appoints the expert for gathering Audit Evidence, he has a better coordination with the expert and instruct or direct the expert about the use of his work for the purpose of audit. We will cover the topic Use of the work of an Expert in detail in SA 620.

Inventory Existence & Condition Litigation & Claims Completeness Segment Information Presentation & Disclosure in accordance with AS-17

Obtain SAAE Inventory Litigation & Claims Segment Information Existence & Condition Completeness Presentation & Disclosure in accordance with AS - 17

Auditor s Procedures Attendance at Physical Inventory counting AND Audit Inventory Records Evaluate mgmt instruction & procedures for recording & controlling results Observe performance of Mgmt procedures Records accurately reflect actual inventory count Perform test counts Inspect Inventory

If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. Apply:- Roll Forward Procedure or, Roll Backward Procedure

When inventory under the custody and control of a third party is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of that inventory by performing one or both of the following: (a) Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity. (b) Perform inspection of documents or other audit procedures appropriate in the circumstances i.e. check documentation regarding issue of goods to third party along with reasons such as Job Work (verify Excise Register) or (c) if possible conduct an inspection at the third party s site.

If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures i.e.(inspecting documents for purchase or Bill of Material) to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall express Qualified Opinion.

Inquiry Inquiry of management & others within the entity. Review Review of minutes of meetings of TCWG, communication between entity & external legal counsel. Review Review of legal expenses account. Lawyer If ROMM regarding litigation/ claims is identified, auditor shall ALSO communicate directly with entity s external legal counsel.

If Unlikely that the entity s external legal counsel will respond appropriately to a letter of general inquiry the auditor may seek direct communication through a letter of specific inquiry. (a) A list of litigation and claims; (b) Where available, mgt s assessment of the outcome of each of the identified litigation and claims and its estimate of the financial implications, including costs involved; and (c) A request that the entity s external legal counsel confirm the reasonableness of mgt s assessments and provide the auditor with further information if the list is considered by the entity s external legal counsel to be incomplete or incorrect.

Mgt refuses to permit auditor to communicate/ meet with external legal counsel. External legal counsel refuses to respond appropriately/ prohibited from responding. Auditor unable to obtain SAAE by performing alternative audit procedures.

Request mgt & where appropriate, TCWG to provide written representations that: (1) All known actual or possible L&C whose effects should be considered when preparing FS have been disclosed to the auditor; and (2) Appropriately accounted for and disclosed in accordance with the applicable FRF.

Obtain SAAE regarding presentation & disclosure of segment info in accordance with applicable FRF:- (1) Obtain understanding of methods used by mgt in determining segment information. (2) Evaluating whether such methods are likely to result in disclosure in accordance with applicable FRF i.e. AS 17.

1. Sales, transfers and charges between segments, and elimination of inter-segment amounts. 2. Comparisons with budgets and other expected results, for example, operating profits as a percentage of sales. 3. The allocation of assets and costs among segments. 4. Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.

Meaning & types Negative Confirmations Situations Procedures Management s Refusal Positive confirmation request Negative confirmation request Use of Negative Confirmations Situations where external confirmations are used External Confirmation Procedures Management s Refusal to Allow the Auditor to Send a Confirmation Request

External confirmation Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium. Positive confirmation request Negative confirmation request A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information. A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request

Negative Confirmations provide less persuasive audit evidence than positive confirmations. Not to use NCR as sole substantive audit procedure to address assessed RMM at assertion level unless all the following conditions are met: (1) Auditor assessed RMM as low & has obtained SAAE regarding operating effectiveness of controls relevant to assertion. (2) Population of relevant items comprises large number of small, homogeneous account balances/ transactions/ conditions. (3) Very low exception rate is expected. (4) Auditor not aware of any circumstances/ conditions that would cause recipients of negative confirmation requests to disregard the request.

Bank balances from bankers. Accounts receivable balances. Accounts payable balances. Stocks held by third parties. Property title deeds held by third parties. Investments purchased but delivery not taken. Loans from lenders. Long outstanding share application money.

When using external confirmation procedures, the auditor shall maintain control over external confirmation requests, including: (1) Determining the information to be confirmed or requested; (2) Selecting the appropriate confirming party; (3) Designing the confirmation requests, including determining that requests are properly addressed and contain return information for responses to be sent directly to the auditor; and (4) Sending the requests, including follow-up requests when applicable, to the confirming party.

If management refuses to allow the auditor to send a confirmation request, the auditor shall: Inquire as to management s reasons for the refusal, and seek audit evidence as to their validity and reasonableness; Evaluate the implications of management s refusal on the auditor s assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; Perform alternative audit procedures designed to obtain relevant and reliable audit evidence. If the auditor concludes that management s refusal to allow the auditor to send a confirmation request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor shall communicate with those charged with governance in accordance with SA 260. The auditor also shall determine the implications for the audit and the auditor s opinion in accordance with SA 705.

The accountant of C Ltd. Has requested you, not to send balance confirmations to a particular group of debtors since the said balances are under dispute and the matter is pending in the court. (4 marks) (Final May 2005, 2011)

Auditor s Objective Meaning Audit Procedure Audit Conclusions and Reporting Auditor s Objective regarding Opening Balances Initial Audit Engagement Opening Balances Financial Statements Audited by Another Auditor Audit of Financial Statements for the First Time Modified Opinion

Obtain SAAE in respect of opening balances about whether: (1) Material Misstatements affecting current period FS. (2) Consistent application of: (a) Appropriate Accounting Policies; OR (b) Changes have been properly accounted for and presented in FS.

Initial Audit Engagement An engagement in which Prior Period FS: (a) Not audited; or (b) Audited by a predecessor auditor. Opening Balances Accounting Balances existing at the beginning: (a) Closing balances of prior period Reflect the effect of prior period transactions and events, and accounting policies applied. (b) Disclosure of accounts i.e., contingency and commitments.

In an initial audit engagement the auditor will have to satisfy about the sufficiency and appropriateness of Opening Balances to ensure that they are free from misstatements, which may materially affect the current financial statements. Lay down the audit procedure, you will follow in cases (i) when the financial statements are audited for the preceding period by another auditor; and (ii) when financial statements are audited for the first time. (7 marks)

(a) Ordinarily the current auditor can place reliance on the closing balances contained in the audited financial statements of the preceding period. Sufficient audit evidence will be obtained for verifying opening balances, which are closing balances of the earlier period by perusing the copies of the audited financial statements. (b) If during the performance of audit for the current period the possibility of misstatements in opening balances is indicated, some indirect audit evidence can be obtained as part of the audit procedures performed during the current period. For example, the collections and payments of opening balances in the accounts of debtors and creditors respectively during the current period will provide evidence as to their existence, correctness and valuation at the beginning of the period.

When the audit of financial statements is being conducted for the first time, the auditor has to perform auditing procedures to obtain sufficient appropriate audit evidence. Since it will not be possible for auditor to perform certain procedures, e.g., observing physical verification of inventories, etc. the auditor may obtain confirmation, etc. and perform suitable procedures in respect of fixed assets, investments, etc. The auditor can also obtain management representation with regards to the opening balances.

(1) Qualified Opinion or Disclaimer of Opinion : Unable to obtain SAAE regarding OB. (2) Qualified Opinion or Adverse Opinion : OB contain misstatements: That materially affect current FS, and Effect not properly accounted for or disclosed. Accounting policies not consistently applied. Accounting policies changes not properly accounted or disclosed.

Meaning Meaning of Analytical Procedures Stage When is AP applied? Final ARD Document APs when Forming an Overall Opinion Final ARD Document Investigation Investigating Results of APs

Meaning The term analytical procedures means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data including resulting investigation therefrom. Example Among elements of financial information that would be expected to conform to a predictable pattern based on the entity s experience, such as gross margin percentages. Between financial information and relevant nonfinancial information, such as payroll costs to number of employees.

2012-13 2011-12 Total Salary Cost Rs. 600 lacs Rs. 500 lacs No. of Employees 550 500 Salary Cost per employee 1.09 lacs 1 lac per employee

At the beginning of the audit i.e, Planning Stage During the Audit At the end of the Audit

(1) Design & perform APs. (2) Near/ end of audit. (3) When forming overall audit opinion. (4) Whether FS are consistent with auditor s understanding of entity. May throw up previously unrecognised RMM, leading to revised risk assessment & modification in further audit procedures

Fluctuations/ inconsistencies/ significant variations thrown up by APs: (1) Inquiry of management. (2) Obtain appropriate evidence relevant to mgt response

Meaning Sampling Risk Sampling Method Requirements Results Meaning of Audit sampling Risk that auditor s conclusion based on sample may be different from the conclusion if the entire population were subjected to the same audit procedure Top Down approach Monetary Unit Sampling 4 Steps Procedure Audit Sampling has not provided a reasonable basis for conclusions

Application of audit procedures to less than 100% of items within a population of audit relevance. Such that all sampling units have a chance of selection. To provide a reasonable basis on which to draw conclusions about entire population.

Risk that auditor s conclusion based on sample may be different from the conclusion if the entire population were subjected to the same audit procedure Leads to 2 types of erroneous conclusions Good Items Test of Controls More effective than they actually are Test of Details Material Misstatement does not exist when it does Bad Items Test of Controls Less effective than they actually are Test of Details Material Misstatement exists when in fact it does not Leads to inappropriate audit opinion Leads to additional work

Top Down Approach Monetary Unit Sampling (MUS) done through IDEA Software.

Step 1 Sample Design, Size and Selection of Items for Testing Step 2 Performing Audit Procedures Step 3 Projecting Misstatements Step 4 Adjustments of misstatements identified

Population Total Sales by the Company during the year = Rs. 500 crores Total Sales transactions = 10,000 transactions Samples selected Total Sample size = Rs. 50 crores consisting of 500 transactions. Misstatements identified in Sample = Rs. 20 lacs Therefore, Projected misstatement = 20 lacs X {500 crores/50 crores} = Rs. 200 lacs.

If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the population that has been tested, the auditor may: (1) Tailor the nature, timing and extent of those further audit procedures to best achieve the required assurance. For example, in the case of tests of controls, the auditor might extend the sample size, test an alternative control or modify related substantive procedures. (2) Request management to investigate misstatements that have been identified and the potential for further misstatements and to make any necessary adjustments; or

Accounting Estimates Fair value Accounting Estimates Auditor s Objective Written Representations Accounting Estimates - Examples Fair value Accounting Estimates - Examples AE are reasonable. Disclosures related to AE are adequate. Obtain Written Representations

Provision for Bad and doubtful debts. Provision for Inventory obsolescence. Provision for Warranty. Depreciation method or asset useful life. Provision against the carrying amount of an investment. Outcome of long term contracts. Financial Obligations/ Costs arising from litigation settlements and judgments.

Complex financial instruments, which are not traded in an active and open market i.e., investments in an Unlisted company. Share-based payments i.e., Employee Stock Options. Certain assets or liabilities acquired in a amalgamation i.e., goodwill. Transactions involving the exchange of assets or liabilities between independent parties without monetary consideration i.e., Barter.

Obtain SAAE in context of applicable FRF: AE including fair value AE in the FS are reasonable. Related disclosures in the FS are adequate.

Auditor to obtain understanding of: Requirements of applicable FRF relevant to AE, including related disclosures How management identifies transactions, events and conditions giving rise to the need for AE to be disclosed in the FS How management makes AE & understanding of the data on which they are based

While auditing Z Ltd., you observe certain material financial statement assertions have been based on estimates made by the management. As the auditor how do you minimize the risk of material misstatements? (6 Marks)

As per SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, the auditor shall obtain an understanding of the following in order to provide a basis for the identification and assessment of the risks of material misstatements for accounting estimates. (1) The requirements of the applicable financial reporting framework relevant to the accounting estimates, including related disclosures. (2) How Management identifies those transactions, events and conditions that may give rise to the need for accounting estimates to be recognised or disclosed, in the financial statements. In obtaining this understanding, the auditor shall make inquiries of management about changes in circumstances that may give rise to new, or the need to revise existing, accounting estimates.

(3) The estimation making process adopted by the management including (a) The method, including where applicable the model, used in making the accounting estimates (b) Relevant controls (c) Whether management has used an expert? (d) The assumption underlying the accounting estimates.

Obtain written representations from mgt and, where appropriate, TCWG whether they believe significant assumptions used in making AE are reasonable. Appropriateness of measurement process AND Assumption Disclosures are complete and appropriate.

Meaning Meaning of Related Party Auditor s Objectives Audit Procedures Written Representations AS 18 has been followed Disclosures are adequate Risk Assessment Procedures (RAPs) & Related Activities Obtain Written Representations

A related party as defined in applicable FRF (Accounting Standard 18). OR Where applicable FRF establishes minimal or no RP requirements: A person/entity having control/significant influence, directly or indirectly, over reporting entity; Entity over which reporting entity has control/significant influence, directly or indirectly; and Entity under common control with reporting entity.

(1) Obtain an understanding of RP relationships & transactions sufficient to be able to Recognize fraud risk factors. (2) Where FRF establishes RP requirements: Obtain SAAE whether RP relationships & transactions have been appropriately identified, accounted for & disclosed in FS in accordance with FRF.

Risk Assessment Procedures & Related Activities (SA 315 & SA 240) Understanding the entity s RP Relationships & Transactions Maintaining Alertness for RP Information when reviewing Records/Docum ents Sharing RP Information with Audit Team.

How can an Auditor identify Related Parties? (8 marks)

Review his working papers for previous years for names of known related parties; Review the entity s procedures for identification of related parties; Inquire as to affiliation of directors, key management personnel and officers with other entities, etc.; Review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a list of principal shareholders from the share register;

Review memorandum and articles of association, minutes of the meetings of shareholders and the board of directors and its committees and other relevant statutory records such as the register of directors interests; Inquire of other auditors such as internal auditor, special auditors appointed under any statute, cost auditors, and concurrent auditors of the entity as to their knowledge of additional related parties and review the report of the predecessor auditors; Review the entity s income tax returns and other information supplied to regulatory agencies; and Review the joint venture and other relevant agreements entered into by the entity. Finally, the auditor should also obtain a written representation from the management concerning the completeness of information provided regarding the identifications of related parties.

Obtain written representations from mgt and TCWG that they have: (1) Disclosed to auditor identity of entity s RP and all RP relationships & transactions of which they are aware. (2) Appropriately accounted for & disclosed such relationships and transactions in accordance with FRF.

Definitions Definitions of Few Dates Subsequent Events Meaning of Subsequent Events Auditor s responsibility Requirements Auditor s responsibility in respect of Events and Facts Events Facts A Facts B

Date of FS Date of Approval of FS Date of Auditor s Report Date of Issuance of FS Date of end of latest period covered by FS. Date on which Board of Directors approve the FS. Cannot be earlier than the date of approval of FS. When AR & audited FS made available to 3rd parties.

Events Events occurring between the date of the Financial Statements and the date of the Auditor s Report Facts A Facts Which Become Known to the Auditor After the Date of the Auditor s Report but Before the Date the Financial Statements are Issued Facts B Facts Which Become Known to the Auditor After the Financial Statements have been Issued.

01-Aug-13 15-Jul-13 01-Jul-13 15-Apr-13 31-Mar-13 Date of Issuance of FS Date of delivery of AR Date of AR Date of Approval of FS Date of FS Facts B Facts A Events

To consider Events only if they require adjustment/ disclosure in Financial Statements. To consider Facts only if they would have impacted the Audit Report.

RAPs Understand Inquire Read Mgt Procedures to identify SEs Mgt/TCWG about SE occurred requiring adjust in FS Minutes of Shareholders mgt/tcwg Latest subsequent interim FS Perform Audit Procedures to Identify SEs For period between date of FS & date of AR or as near as possible Obtain WR from mgt/tcwg that EVENTS have been adjusted/disclosed as per FRF No need to perform additional audit procedures on matters which earlier yielded satisfactory conclusions

Discuss Determine Inquire N FS require Amendment Law restricts amdt of FS Perform audit procedures as In EVENTS on audits Revised AR with Emphasis of Matter Para N Y AR already provided Modify audit opinion & given AR STOP Y As per auditor amdt of FS needed Y Notify Mgt & TCWG not to issue FS to 3 rd parties before FS amended FS issued without amdt Y N Prevent Reliance on AR N

Discuss Determine Inquire FS require amdt Y Audit the amendments Review mgt. s steps to prevent reliance on earlier FS & AR Mgt amends FS & Informs recipients not to rely on earlier FS N Notify mgt & TCWG that the auditor seek to prevent future reliance on AR Mgt takes necessary steps. N Y STOP Revised AR on amended FS EoM Paragraph Take necessary action to prevent reliance on AR

Responsibilities of Auditor RAP Examples of Events/ Conditions Audit Procedures Material uncertainty (MU) Use of GC Assumption Inappropriate Obtain SAAE about GC Assumption Material Uncertainty exists Risk Assessment Procedures Financial Operational Others Audit Procedures I Audit Procedures II Use of GC assumption appropriate but material uncertainty exists Adverse Opinion EMP paragraph

Obtain Sufficient Appropriate Audit Evidence (SAAE) about appropriateness of management s use of GC Assumption Conclude whether there is MATERIAL UNCERTAINTY (MU) about company s ability to continue as GC Absence of any GC uncertainty reference in Auditor s Report not to be viewed as guarantee to company s ability to continue as GC

Determine events/conditions that cast doubt on entity s ability to continue as GC: Financial Operating Other. Auditor to remain alert throughout audit for these events /conditions.

Net liability or net current liability position. Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short term borrowings to finance long-term assets. Indications of withdrawal of financial support by creditors. Negative operating cash flows indicated by historical or prospective financial statements. Adverse key financial ratios. Substantial operating losses or significant deterioration in the value of assets used to generate cash flows, etc.

Operating: Management intentions to liquidate the entity or to cease operations. Loss of key management without replacement. Loss of a major market, key customer(s), franchise, license, or principal supplier(s). Emergence of a highly successful competitor. Other: Non-compliance with capital or other statutory requirements. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy. Changes in law or regulation or government policy expected to adversely affect the entity. Uninsured or underinsured catastrophes when they occur.

Request mgt. to make GC assessment if not yet performed. Evaluate mgt s plans for future actions (e.g., restructuring, expenditure reduction): Outcome likely to improve situation. Feasible in the circumstances. Consider whether any additional facts/information available since date of mgt assessment.

1. Analysis of cash flow forecast prepared by the entity. Evaluate Reliability of Underlying data generated to prepare forecast Determine whether adequate support for assumptions underlying forecast 2. Request Written Representations from mgt. or, where appropriate, TCWG regarding plans for future action and their feasibility.

Disclosure in FS If adequate, express an unmodified opinion and include an Emphasis of Matter paragraph If not adequate, express a qualified opinion or adverse opinion, as appropriate Highlight existence of a material uncertainty & Draw attention to the Note related to GC in the auditor s report

If FS prepared on a GC basis but, in auditor s judgment, use of GC assumption in FS is inappropriate: Express an ADVERSE OPINION. If mgmt prepares FS on liquidation basis Express UNMODIFIED OPINION along with EMPHASIS OF MATTER PARAGRAPH highlighting liquidation basis provided disclosure is adequate.

WR as Audit Evidence WR about Management s Responsibilities Whether WR can be regarded as Sufficient Appropriate Audit Evidence Obtain a WR that Management has discharged its Responsibilities. Other Written Representations Preparation of FS Deficiencies in IC informed to the Auditor Specific Assertions Extent of Reliance on WR To what extent Auditor can rely on WR

WR are necessary audit evidence: But not sufficient appropriate audit evidence. WR do not dilute auditor s responsibility to obtain other audit evidence for matters covered by WR. Management modifies or does not provide the requested WR - possibility of existence of one or more significant issues.

In the course of audit of ABC Ltd. its management refuses to provide written representations. As an auditor what is your duty? (4 marks) (May 2010)

As per SA 580 (Revised) Written Representations, if the management does not provide one or more of the requested written representations, the auditor shall: Discuss the matter with management Re-evaluate the Integrity of the management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general and Take appropriate actions, including determining the possible effect on the opinion in the auditor s report. The auditor should disclaim an opinion on the financial statements if management does not provide written representations.

Preparation of the FS: Compliance with applicable FRF. Information provided & completeness of transactions: Has provided all relevant information and access as agreed in terms of audit engagement. All transactions recorded & reflected in FS. Description of management s responsibilities in WR.

Additional WR FS Info provided to the auditor Specific Assertions Selection/application of accounting policies Recognition/measurement/p resentation/disclosure in FS in accordance with FRF: Carrying value of assets Liabilities Title/control over assets Compliance with laws & regulations Management has disclosed all known deficiencies in internal controls to the auditor Management intentions/judgements

Extent of Reliance: SA 580, Written Representations, states that management representations whether obtained orally or in writing constitute audit evidence and establishes standards for evaluating the same. SA 580, requires that the auditor may rely upon the management s representation, preferably in writing, as a sort of information or evidence to consider and if the representations relate to matters which are material to financial information, Further, the auditor should: seek corroborative evidence from sources inside or outside the entity. evaluate whether the representations made by the management appear reasonable and consistent with other audit evidence obtained, including other representations; and consider whether the individuals making the representations are expected to be well informed on the matter.

However, it must be note that representations by the management cannot be the substitute for other audit evidence that the auditor could reasonably expected to be available. For example, a representation by the management as to existence, quantity and cost of inventories is not substitute for adopting audit procedures regarding verification and valuation of inventories. If a representation by management is contradicted by other evidence, the auditor should examine the circumstances and, when necessary, reconsider the reliability of other representations made by the management as well.

At the statutory audit of TOR Limited, the physical verification of fixed assets was conducted. However the auditor was not able to confirm the existence of valuables and important machinery. In this connection, the auditor obtained a certificate from the management to prove its existence and value and accepted the same blindly without any further procedures. (4 marks) (Final Nov 2003)

Explain what is meant by Written Representations and indicate to what extent an auditor can place reliance on such representations. (6 marks)(final May 2002)