Standards on Auditing for LLPs by ICAI

ICAI has proposed Standards on Auditing for Limited Liability Partnerships (LLPs), let's discuss this with explanation of each SA applicable to LLPs:

ICAI Proposes Comprehensive Auditing Standards for Limited Liability Partnerships

In a move to enhance the transparency and accountability of Limited Liability Partnerships (LLPs), the Institute of Chartered Accountants of India (ICAI) has proposed a set of 35 Standards on Auditing (SAs) specifically tailored for LLP audits. This initiative aims to bring the auditing practices for LLPs in line with those of companies, ensuring that LLPs adhere to the same high standards of financial reporting and governance.

Background and Rationale

The growing importance of LLPs in the Indian business landscape has necessitated the implementation of robust auditing standards to ensure the reliability of their financial statements. Section 34A of the Limited Liability Partnership Act, 2008, empowers the Central Government, in consultation with the National Financial Reporting Authority (NFRA), to prescribe auditing standards for LLPs based on the recommendations of the ICAI. Recognizing the need for consistency in auditing standards across different business entities, the ICAI has proposed extending the applicability of the SAs, initially recommended for auditing companies, to LLP audits as well.

Key Features of the Proposed SAs

The proposed SAs for LLP audits encompass a wide range of auditing procedures, covering all aspects of the audit process, from planning and conducting the audit to evaluating misstatements and communicating findings to relevant stakeholders. These standards provide a structured framework for auditors to ensure that LLP audits are conducted with due diligence, professionalism, and adherence to ethical principles.

Significance of the Proposed SAs

The adoption of these SAs will have far-reaching implications for LLPs, bringing about a number of positive outcomes:

• Enhanced Transparency and Accountability: LLPs will be subjected to the same rigorous auditing standards as companies, fostering greater transparency in their financial reporting practices and increasing accountability to stakeholders.
• Strengthened Credibility: Adherence to standardized auditing practices will enhance the credibility of LLPs, instill confidence among investors and lenders, and facilitate access to capital.
• Improved Governance Practices: The implementation of these SAs will promote sound corporate governance practices within LLPs, aligning their governance standards with those of established companies.
• Consistency in Auditing Practices: By applying the same auditing standards across companies and LLPs, the ICAI is ensuring uniformity and consistency in auditing practices, promoting a more cohesive auditing environment.

Comprehensive Explanation of Applicable SAs

The proposed SAs for LLP audits cover a broad spectrum of auditing procedures, encompassing various aspects of the audit process. Here's a comprehensive overview of the key SAs and their implications for LLP audits:

• SA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing: This SA establishes the overarching principles and objectives of an auditor's engagement, emphasizing the auditor's responsibility to conduct an independent and ethical audit in accordance with auditing standards.
• SA 210 - Agreeing the Terms of Audit Engagements: This SA outlines the auditor's responsibilities in agreeing on the terms of the audit engagement with the LLP, including the scope of the audit, the auditor's responsibilities, and the expected form of audit report.
• SA 220 - Quality Control for an Audit of Financial Statements: This SA sets out the overarching principles and requirements for auditors to establish and maintain quality control within their firms, ensuring that LLP audits are conducted with competence, due care, and professional skepticism.
• SA 230 - Audit Documentation: This SA provides guidance on the documentation of the audit process, emphasizing the need for auditors to maintain sufficient and appropriate audit documentation to support their conclusions and provide evidence of the audit procedures performed.
• SA 240 - The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements: This SA addresses the auditor's responsibility to identify and assess the risks of fraud in an audit and to respond appropriately to identified or suspected fraud.
• SA 250 - Consideration of Laws and Regulations in an Audit of Financial Statements: This SA outlines the auditor's responsibility to consider the applicability of laws and regulations to the audit and to assess the effects of non-compliance on the financial statements.
• SA 260(Revised) - Communication with Those Charged with Governance: This SA sets out the auditor's responsibilities in communicating with those charged with governance (TCGG) of the LLP, including the nature and timing of communications, the form and content of audit reports, and significant matters arising from the audit.
• SA 265 - Communicating Deficiencies in Internal Control to Those Charged with Governance and Management: This SA addresses the auditor's responsibility to communicate appropriately to those charged with governance (TCGG) and management deficiencies in internal control that the auditor has identified during the audit of financial statements.
• SA 280 - The Auditor's Responsibilities for Sampling in an Audit of Financial Statements: This SA provides guidance on the application of sampling in an audit, including the selection of samples, the evaluation of sampling results, and the use of sampling techniques in specific audit procedures.
• SA 315 - Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment: This SA outlines the auditor's responsibilities in identifying and assessing the risks of material misstatement in the financial statements through an understanding of the entity and its environment.
• SA 330 - The Auditor's Responses to Assessed Risks: This SA describes the auditor's responsibilities in responding to the risks of material misstatement identified in the audit, including designing and performing audit procedures and evaluating the sufficiency and appropriateness of the obtained audit evidence.
• SA 345 - Audit Procedures in Response to Risks: This SA provides guidance on the design and performance of audit procedures in response to the identified risks of material misstatement, including the use of substantive procedures and tests of controls.
• SA 365 - Auditing Group Financial Statements: This SA addresses the auditor's responsibilities in auditing group financial statements, including the consideration of group-specific risks and the application of consolidated audit procedures.
• SA 390 - Audit Procedures in Relation to Going Concern: This SA outlines the auditor's responsibilities in assessing the entity's ability to continue as a going concern and in communicating any significant matters related to going concern in the audit report.
• SA 405 - Audit of Accounting Estimates, Including Fair Value Estimates: This SA provides guidance on the auditor's responsibilities in auditing accounting estimates, including the assessment of the reasonableness of estimates and the existence of appropriate supporting evidence.
• SA 410 - Audit of Related Party Transactions: This SA deals with the auditor's responsibilities in the audit of related party transactions, which are transactions between an entity and its related parties, such as affiliated companies, key management personnel, or major shareholders. It requires the auditor to identify and disclose related party transactions and assess the risks of material misstatement arising from such transactions.
• SA 500 - Audit Evidence: This SA defines and explains the concept of audit evidence, which is the information obtained by the auditor to support their conclusions regarding the financial statements. It also provides guidance on the nature, sufficiency, and appropriateness of audit evidence.
• SA 505 - Audit Evidence Contained in External Confirmations: This SA outlines the auditor's responsibilities in obtaining external confirmations, which are written communications from third parties to corroborate audit evidence. It provides guidance on the circumstances in which external confirmations should be obtained, the form and content of confirmation requests, and the evaluation of confirmation responses.
• SA 508 - Audit Evidence – Special Considerations – Audits of Groups of Entities: This SA addresses the auditor's responsibilities in obtaining audit evidence for group audits, considering the unique challenges and opportunities presented by group structures. It emphasizes the need for the auditor to consider the group as a whole while also performing audit procedures at the individual entity level.
• SA 520 - Analytical Procedures: This SA provides guidance on the application of analytical procedures, which involve the analysis of relationships and trends in financial data to identify potential areas of misstatement or unusual items. It describes the various types of analytical procedures, the auditor's responsibilities in applying analytical procedures, and the evaluation of analytical results.
• SA 530 - Audit Sampling: This SA provides comprehensive guidance on the application of sampling in an audit, encompassing the selection of samples, the evaluation of sampling results, and the use of sampling techniques in specific audit procedures. It emphasizes the auditor's judgment in determining the appropriate sampling approach and the need to consider both qualitative and quantitative factors when assessing the sufficiency of audit evidence.
• SA 540 - Auditing Accounting Estimates: This SA provides guidance on the auditor's responsibilities in auditing accounting estimates, which involve significant judgments by management. It emphasizes the need for the auditor to assess the reasonableness of estimates and the existence of appropriate supporting evidence.
• SA 550 - Audit Procedures in Response to Audit Evidence Obtained: This SA addresses the auditor's responsibilities in evaluating the sufficiency and appropriateness of the obtained audit evidence and in responding to identified misstatements or unusual items. It provides guidance on the performance of additional audit procedures, the consideration of the effects of misstatements on the financial statements, and the communication of significant matters to those charged with governance and management.

Conclusion

The adoption of these SAs will significantly enhance the auditing practices for LLPs.

The downloadable version of the Exposure Draft is available here