It refers to Nature, timing and extent of Audit procedures.

Auditor assesses the risk of

material misstatement as per SA 315 and determine its appropriate responses as per SA
330. If Auditor determines high risk related to financial statement, He should extent his audit
procedures and obtain more persuasive audit evidences to bring the level of assurance. For
ex: If Auditor while performing assessment of risk, finds there might be risks associated with
Inventory figures, then he will design the nature, timing and extent of audit procedures for
the same. The Nature of Audit procedure can be Physical Verification, Timing can be
September and March End and extent will be twice in a year.

-----------------

It is "nature, timing and extent".

And usually this phrase is used with respect to Audit procedures. This phrase has got to do with
Audit planning.
By nature we generally mean, based on the walk through testing performed, are you going to
perform test of controls or are substantive audit procedures required (i.e, assertions, use of
analytical methods etc.)
Timing depends on the size and complexity of the client's business. Higher the complexity,
higher is the attention(of auditor) required. If client's entity is simple and small, sometimes very
few visits would suffice.
Extent depends on how well the auditor knows his client, the effectiveness and efficiency of
internal controls in the client's entity, details and assistance provided by client, Audit history of
auditor etc. Based on the above the auditor decides the performance materiality levels
(amount(s) set by the auditor at less than materiality level for the financial statements as a
whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial statements as a
whole.)---------

Nature: Refers to the type of procedures, and the mix of those procedures, to address
the audit risk for each account-assertion. Procedures could be controls testing, data
analysis, substantive analytics, key item testing, representative sampling, inquiries,
representations, etc.

Timing: (This is where I want to differ from Meghana Sarma's answer) Relates to when
the work is performed. In a controls-driven entity with high governance, audit work can
be performed well in advance of year end date, with only update procedures for the
remaining period. On the other extreme of this paradigm, some entities may require
procedures only at or very close to year end.

Extent: Refers to how much work is done, based on materiality, expected errors, error
rate, etc. Again, depending on the comfort obtained from other procedures, tests of
details could be based on transactions with different value thresholds.
The nature, timing and extent of the procedures performed by the auditor to obtain an
understanding of the accounting and internal control systems will vary with, among
other things:

• The size and complexity of the entity and of its computer system.

• Materiality considerations.

• The type of internal controls involved.

• The nature of the entity’s documentation of specific internal controls.

• The auditor’s assessment of inherent risk.

• Experience gained from prior audits

The following are examples of ways in which planned audit procedures may be modified
to address assessed fraud risks:

1. Changing the nature of audit procedures to obtain evidence that is more

reliable or to obtain additional corroborative information;
2. Changing the timing of audit procedures to be closer to the end of the period or
to the points during the period in which fraudulent transactions are more likely
to occur; and
3. Changing the extent of the procedures applied to obtain more evidence, e.g., by
increasing sample sizes or applying computer-assisted audit techniques to all
of the items in an account.
FOR LAYMAN(dn't mind ><)

Nature- First of all keep in mind that ‘nature’ is used for nature of an audit procedure,
it simply means the type of audit procedure you are performinh whether it is
inspection,observation,etc see the follwing extract(ICAI MODULE OF AUDITING) for
knowing the types of audit procedures

TIMING- Learn it from example ,as we know that inventory is valued at the year end
for finding out closing stock, now some intelligent auditor will say i want to apply
observation(nature of audit procedure) for inventory audit on say 30th of September -_-
because i have less work load than on 31st march ;here is where timing is important ,its
very important to know for the auditor the timing to apply an audit procedure which is
in above example clear is YEAR END ,ofcourse.

NOTE:MUTATIS MUTANDIS

EXTENT- The best and most simple example is of bank audit ,auditor may face
difficulty in determining the extent of INSPECTION(it is an audit procedure-it means to
 examine books, documents,etc) as he cant go to every branch especially in rural area
branches, so here he would like to limit the extent of HIS audit procedure and may apply
alternative procedure of relying on SA600(USING THE WORK OF ANOTHER
AUDIT).Other explanation in the answers below/above also holds true as to SAMPLING
EXTENT.

.----------

They are the three key components of an audit plan.

1. Nature covers what audit procedures will be performed for the company.
2. Timing indicates when the audit procedures will be performed.
3. Extent is how the audit will be performed on a test basis of large or small
sample sizes to gather evidence.

So the “assertion level” is the level at which statements are presented as completely true. E.G.
Management tells the auditor the financial statements show a true valuation of inventory –
management are formally “asserting” this statement as being correct, so we call this at the
“assertion level”.

Definition. Audit Assertions are the implicit or explicit claims and representations made by the
management responsible for the preparation of financial statements regarding the
appropriateness of the various elements of financial statements and disclosures.

The 5 assertions are

 Existence or occurrence.
 Completeness.
 Rights and obligations.
 Valuation or Allocation.
 Presentation and disclosure. Note that each line in the financial statements contains all
assertions. However, the risk of misstatement for each assertion will vary according to
the type of account.
Management assertions are claims made by members of management regarding certain
aspects of a business. The concept is primarily used in regard to the audit of a company's
financial statements, where the auditors rely upon a variety ofassertions regarding the
business.

An accountant evaluates financial records based on assertions imbedded in thefinancial

statements. Financial statement assertions are management's explanation about the
recognition, measurement, presentation and disclosure of information in the financial
statements.

Substantive testing is an audit procedure that examines the financial statements and
supporting documentation to see if they contain errors. These tests are needed as evidence to
support the assertion that the financial records of an entity are complete, valid, and accurate.

Substantive procedures (or substantive tests) are those activities performed by the auditor to
detect material misstatement or fraud at the assertion level. The different assertions of balances
are: existence, rights and obligations, validity, and.

Rights and Obligations — the transactions and disclosures pertain to the

entity.Completeness — all disclosures have been included in the financial statements.
Classification — financial statements are clear and appropriately presented.Accuracy and
Valuation — information is disclosed at the appropriate amounts.

--

Assertions about classes of transactions and events and related disclosures for the period
under audit. (i) Occurrence – the transactions and events that have been recorded or
disclosed, have occurred, and such transactions and events pertain to the entity.

An assertion is a declaration that's made emphatically, especially as part of an argument or as

if it's to be understood as a statement of fact. To assert is to state with force. So if someone
makes an assertion, they're not just trying out an idea — they really mean it.

Test of controls is an audit test to test the effectiveness of the client's

internalcontrol system. substantive procedures is an audit test to test the reasonableness of
items in the finincial statements. If the internal control is effective, then the auditor will use
more test of controls and less substantive tests.-------------

Substantive Procedures Defined. A substantive procedure is a process, step, or test that

creates conclusive evidence regarding the completeness, existence, disclosure, rights, or
valuation (the five audit assertions) of assets and/or accounts on the financial statements.--------
--------
Audit undertaken to confirm whether a firm is following the rules and regulations (prescribed by
its internal authority or control system) applicable to an activity or practice.
A compliance audit is a comprehensive review of an organization's adherence to regulatory
guidelines. Independent accounting, security or IT consultants evaluate the strength and
thoroughness of compliance preparations.

Analytical procedures are one of many financial audit processes which help an auditor
understand the client's business and changes in the business, and to identify potential risk
areas to plan other audit procedures. Analytical procedures include comparison of financial
information (data in financial statement) with.

Auditors design detailed audit procedures to obtain sufficient

appropriate auditevidence. Procedures can include inspection, observation, confirmation,
recalculation, reperformance, and analytical procedures, often in some combination.

--est of controls is an audit test to test the effectiveness of the client's

internalcontrol system. substantive procedures is an audit test to test the reasonableness of
items in the finincial statements. If the internal control is effective, then the auditor will use
more test of controls and less substantive tests.

An “assertion” is a statement given as absolute fact.

So the “assertion level” is the level at which statements are presented as completely true.

E.G

Management tells the auditor the financial statements show a true valuation of inventory –
management are formally “asserting” this statement as being correct, so we call this at the “assertion
level”.

Just because management give a statement at the assertion level, doesn’t mean it is actually true –
but I didn’t need to tell you that!

(Look up the definition of assertion.)

Assertion is the representation made by management about FS. for example management say
” all transaction that should have been recorded haven been recorded”
this is an assertion for FS as a whole .

ASSertion levels are three

1.About classes of transaction
2.about account balances
3.about presentations&disclosure.

The auditor actually does not “do these assertions”. These are the assertions management makes.
The auditor in planning the audit will assess the risk inherent in the assertions management makes,
by assessing what could go wrong with the control.

n a Layman’s language, whatever that has been stated in the Financial statements
(whether it may be sales, purchases, Expenses, Debtor balances, Creditor Balances,
Advances paid, Liabilities incurred, any disclosures made regarding Contingent
liabilities etc), Management is implicitly stating that such transactions have really
occured (Sales, Purchases, Additions to Assets etc), the account balances shown as such
are correct (eg: Debtor Balance is 10,000/-) and disclosures have been made based on
fair estimates. For most of the transactions embodied in FS, Management need not
agree explicitly with the auditor that these transactions are correct as per the view and
judgement of management.

So Assertions are nothing but facts stated by the members of management that form
part of Financial Statements, implicitly or otherwise. Every Journal entry recorded by
the management is a assertion. Financial Statements is a group of assertions made by
the management. Risks arising at this level (i.e, whether a transaction is not recorded in
full, not posted to appropriate head, not recorded in the relevant period, not classified
appropriately etc) are called Assertion Level Risks as they are directly related to
particular assertion concerned.

As Auditors, we will conduct audit procedures to verify whether such

representations/assertions made the management are correct by several means of audit
tools such as Vouching, Verification, etc.

In contrast, Financial Statement Level risk do not relate to a particular assertion, but for
entire Financial Statements, affects the reliability and genuineness of many assertions
made by the management. Eg - Fraud by management may bring into question many
assertions made by management. Hence evaluation of integrity of management shall be
made.
Assertions - Representations by management, explicit or otherwise, that are embodied
in the financial statements, as used by the auditor to consider the different types of
potential misstatements that may occur.

A representation means a statement of facts or reasons.

What are the representations made by the management?

They are -

1. Occurrence
2. Completeness
3. Accuracy
4. Cut off
5. Classifications
6. Existence
7. Rights and obligations
8. Valuation and allocation
The above assertions are used by the auditor to assess potential misstatements which
may be present in the financial statements. He assesses the risk of material
misstatement at the assertion level for ABCOTD level. (Account balances , class of
transaction and disclosures)

Example,

He assesses the risk that fixed assets though mentioned in the financial statements, may
not exist at all. (Existence )

He assesses the risk that some transactions of previous period have been recorded in the
current period. (cut off )

The assertions evaluated are for -

1. Transactions during the year (COT)

2. Account balances at the end the year (AB)
3. Presentation and disclosure (D)

Meaning of assertion

a confident and forceful statement of fact or belief.

Audit Procedure is something an auditor does or should do in order to do audit. Audit

Technique means how the Audit procedure is conducted. Audit procedure for audit of
Receivables may be as follows 1. Vouch the Credit Sales Transaction; 2. Vouch for
payment received; 3. Recompute the discount or any kind of concession if any; 4. Pay
Special attention towards Bad Debts; 5. Analyse whether any (or any additional)Provision
for Doubtfull Debts is required.

Now in order to perform audit procedure like Vouch the Credit Sales Transaction, Sampling
& External Confirmations etc are audit technique. In short, Audit Procedure means “What
you have to do.” & Audit Technique means “How you will do it.” Following are the audit
techniques as per Chapter 5 of CA Final Study Material 1. Confirmations; 2. Enquiry; 3.
Observation; 4. Analytical review procedures.

Dividend is appropriation to profits and interest is charge to profit and loss account, if only
profit accrues to the entity dividend shall be paid . It cannot be paid out of capital.

Appropriate meaning- devote (money or assets) to a special purpose.

"there can be problems in appropriating funds for legal expenses"
synonyms: allocate, assign, allot, earmark, set apart/aside, devote, apportion, budget
"there can be constitutional problems in appropriating funds for these expenses"