Question01. A: Define auditing. What are the characteristic of fraud & error?

Auditing: The term audit is an effort to find out the fairness and to establish the reliability or
unreliability of an entitys financial statements which consist of balance sheet, profit and loss
accounts, cash flow statement, notes and other statement and explanatory notes.
The authoritative definitions of an audit of financial statements are given as under- an audit is the
independent examination of an expression of opinion on the financial statements of an enterprise
by an appointed auditor in pursuance of that appointment and in compliance with any relevant
statutory obligations.
Characteristics of fraud & error:
1. The term error refers to an unintentional misstatement in financial statement.
1. A mistake in gathering or processing data from which financial statements are prepared.
2. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
3. A mistake in the application of accounting principles relating to measurement,
recognition, classification, presentation or disclosure.
2. Fraud refers to an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of deception to obtain an
unjust or illegal advantage.
3. Fraudulent financial reporting misstatements resulting from misappropriation of assets.
4. Fraudulent financial reporting involves omissions of amounts.
1. Manipulation, falsification or alteration of accounting records.
2. Intentional omission from statement or events.
3. Misapplication of accounting principles.
5. Management override of controls.
1. Fictitious journal
2. Inappropriately adjusting entries
3. Disclosing, facts
4. Complex transactions
5. Unusual transactions
6. Misappropriation of assets involves.
1. Misappropriating collections on accounts receivable.
2. Stealing physical assets
3. Pay for goods and services not received
4. Takes assets for general use
7. Fraud involves incentive or pressure to commit fraud a perceived opportunity to do so and
some rationalization of the act.
Question01. B: To responsibilities of the auditor to detecting material misstatement.
1. An auditor conducting an audit in accordance with ISAs obtains reasonable assurance that the
financial statements taken as a whole are free from material misstatement, whether caused by
fraud or error.
2. Audit procedures that are effective for detecting error may not be appropriate in the context of
an indentified risk of material misstatement due to fraud.
Question01. C: ISA 200 Professional skepticism
1 .ISA 200 the auditor plans and performs an audit with an attitude of professional skepticism
recognizing the circumstances may exist that causes the financial statements to be materially
misstated. Professional skepticism is an attitude that includes a questioning mind an ongoing
questioning of whether the information and audit evidence obtained suggests that a material
misstatement due to fraud may exist.
2. The auditor should maintain an attitude of professional skepticism throughout the audit,
recognizing the possibility that a material misstatement due to fraud could exist.
3. ISA 315 the auditors previous experience with the entity contributes to an understanding of
the entity. However, although the auditor cannot be expected to the fully disregard past
experience with the entity about the honesty and integrity of management.

Question02. A: Responsibility to the auditor when unable to continue the engagement.

The auditor encounters exceptional circumstances that bring into question the auditors ability to
continue performing the audit work the auditor should:
1. Consider the professional and legal responsibilities including whether there is a requirement for
the auditor to report to the person who made the audit appointment.
2. Consider the possibility of withdrawing from the engagement.
3. If the auditor withdraws:
a) Discuss with the appropriate level of management and those charged with governance
the auditors withdrawal from the engagement.
b) Consider whether there is a professional or legal requirement to report to the person or
person who made the auditor appointment or in some case to regulatory authorities.
Some exceptional circumstances can arise. When
a) The entity does not take the appropriate action regarding fraud.
b) The auditors consideration of the risks of material misstatement due to fraud.
The auditors has significant concern about the competence or integrity of management.
Question02. B: Example of an audit Engagement Letter
To the Board of Director
You have requested that we audit the balance sheet of 31 December as of 2015 and the related
statements of income and cash flows for the then ending. We are pleased to confirm our
acceptance and our understanding of this engagement.
We will conduct our audit in accordance with Bangladesh standards on Auditing. Those Standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements.
Because of the inherent limitations of an audit, there is an unavoidable risk that some material
misstatement may remain undiscovered.
In addition to our report we will inform you concerning any material weaknesses in accounting
and internal control system.
We remained you that the responsibility for the preparation of financial statements is that of the
management of the company. We will request from management written confirmation concerning
representations.
We look forward to full cooperation with your staff and we trust that they will make available to
us whatever records; documentation and other information are requested in connection with our
audit. Our fees, which will be billed as work progresses.
This letter will be effective for future years unless it is terminated, amended.
Please sign and return the attached copy of this letter to indicate that it is in accordance with
your understanding for our audit of the financial statements.
XYZ & Co.
Acknowledged on behalf of ABC Company by
.....
Name and Title
Date
Question03. A: Constraining factors for the audit approach
Constraining factors:
1. Audit risk: An auditor is required to make an audit report which is an expression of opinion
on the fairness of the clients financial statement. Such opinion can be made only when
the auditor is certain about reasonableness and reliability of the available evidence. So to
reduce audit risk sufficient competent evidence should be obtained through inspection,
observation, inquiries.
2. Materiality: Since the object of an audit is to enable an auditor to express an opinion on
the financial statements as a whole, the auditor should gather evidence on the material

items in the financial statements. An item is financial statements may be described as

material if its omission or non-discloser or misstatement would likely to distort the truth &
fairness of financial information.
3.
Practicality: One of the crucial constraints already confronted by an auditor is the clients
time table and reporting deadlines. The auditors plan should contain the audit time table
and dates agreed with the client for starting and completing the audit.
Identification of constraining factors:
The auditor while planning an audit approach for carrying out an efficient and effective audit
should consider the following factors:
1. Knowledge of the clients business
2. Assessment of clients system
Question03. B: Evaluations of Evidence
Obtaining relevant and reliable audit evidence: The audit approach adopted by an auditor should
enable him to obtain sufficient appropriate audit evidence for drawing reasonable conclusions
there from to form the basis of his opinion as to the truth and fairness of the financial of the
statement. The auditor should examine and identify the assertions in the financial statements as
regards existence, ownership, valuation and presentation, as well income and expense.
Sources for deriving evidence: The available sources in term of their adequacy, validity and
relevance as regarding materiality efficiency and effectives in each case.
Substantive and compliance tests: Substantive tests mean those tests of transactions and
balances and other procedures such analytical review, which seek to provide audit evidence as to
complete accuracy. Compliance procedures on the other hand are the tests which are designed to
obtain reasonable assurance that those internal controls on which audit reliance is to be placed
are in effect.
Volume of evidence: When the volume of transactions is large then test requires the testing of
large samples of items to form an efficient opinion. In such case the auditor should consider up to
what extent he can rely upon the substantive testing by using other sources.
Accounting system: The audit approach to a great extent depends on the system of accounting
followed by the client. The business transaction documents etc.
Relevant internal control procedure: The competence and acceptability of the evidence in the
form of accounting and information system will depend on the effectiveness of the system of
control operation.
Question04. A: What is audit planning? Planning procedures for an audit?
Audit planning means that the action to be taken by an auditor in respect of any particular field of
verification and reporting should be so designed that it may enable his auditor to conduct an
audit more effectively.
Planning Procedure
It can be classified under the following stages:
1) Obtaining the knowledge about clients business both existing.
2) Developing the overall audit plan by paying specific emphasis on such activities like audit
strategy, timing, staffing.
3) Implementing the audit plan through the process of audit programmers.
4) Updating the audit plan in the light of current circumstance
Post audit planning review in form of suggestions from all levels of audit staff.
Question04. B: Internal & external factors affecting an audit planning.
Audit Planning are affecting by internal and external factors:
a. Nature, complexity and size of enterprise.
b. Environment in which an enterprise operates.
c. Methods of processing transactions.
d. Reporting requirements.
e. Previous experience with the client.
f. Knowledge of client business.

g. Industry in which the enterprise is involved.

Question05. A: Factors for adjustment of planning.
No planning may be as perfect as not to require adjustment as the audit work proceeds. The
auditor should be continuously amendable to circumstances with which he is confronted during
the course of compliance testing the progress made. The enquires had and the error noticed
should be given due consideration. The auditor while considering the scope of adjustments to be
made in the audit strategy should keep in view the following point:
1) How far the high risk areas have been given consideration.
2) Low risk areas have not been given attention more than it was needed.
3) Whether insignificant areas were left out.
4) To what extent the possibilities of existence of errors and omissions have been
safeguarded by audit planning.
5) Whether all transaction in view of their materially in amount have been given due
attention in verification.
6) Whether decision based on judgment have been suitably document and support by
reason.
Question05. B: Factors affecting the quality control of an audit.
The exact nature and extent of the policies and procedures required for each individual firm will
depend on a number of factors, like:
a) Size of the firm
b) Nature of firms practice
c) Number of firms offices
Question05. C: 7 policies of quality control
The policies of quality control are listed below:
Policy 1: Professional requirements: Personnel in the firm should adhere to the principles of
independence, integrity, confidentiality and professional behavior.
Policy 2: Skills and Competences: the firm should be staffed by personnel who have attained and
maintained the technical standards and professional competence required to enable to fulfill their
responsibilities with due care.
Policy 3: Assignment: Audit work is to be assigned to personnel who have the degree of technical
training and proficiency required in the circumstances.
Policy 4: Delegation: There should be sufficient direction, supervision and review at all levels to
provide reasonable assurance that the work performed meet appropriate standards of quality.
Policy 5: Consultation: Whenever necessary consultation within or outside the firm is to occur
with those who have appropriate expertise.
Policy 6: Acceptance and Retention O Clients: An evaluation of prospective clients and a review,
on an ongoing basis, of existing clients is to be conducted. In making a decision accept or retain a
client, the firms independence and ability to serve the client properly and the integrity of the
clients management are to be considered.
Policy 7: Monitoring or Review: The continued adequacy and operational effectiveness of quality
control policies and procedures should be monitored.
Question06. A: ISA 580 written representation the auditor must obtain from the management.
Management representation letter is written to the external auditor, which is signed by a senior
company management officer. The letter confirms the accuracy of the financial statements that
the company has submitted to the auditors for their analysis. The CEO and the most senior
accounting person such as chief financial officer (CFO) are usually required to sign the letter.
Following are the representations that may be included in the management representation letter:
1. Management is responsible for the proper presentation of the financial statements in
accordance with the applicable accounting framework (GAAP).
2. All financial records have been made available to the auditors.
3. All shareholders and board of directors minutes is completed and disclosed.

4. Management has made available all letters from regulatory agencies regarding financial
reporting noncompliance.
5. There are no unrecorded transactions.
6. The impact of all uncorrected misstatements is immaterial.
7. The management team acknowledges its responsibility for financial control.
8. All related party transactions have been disclosed.
9. All contingent liabilities have been disclosed.
10. All unasserted claims or assessments have been disclosed.
Auditors typically do not allow management to make any changes to the content of this letter
before signing it, since this would effectively reduce the liability of the management.
Question06. B: Example of a management representation.
Example of a Management Representation Letter
The following letter is intended to be a standard letter. Though, representations by management
will vary from one entity to another and from one period to the next.
Entity Letterhead
To Auditor
Date
This representation letter is provided in connection with your audit of the financial statements of
ABC company for the year ended December 31, 20__ for the purpose of expressing an opinion as
to whether the financial statements give a true and fair view of the financial position of ABC
Company as of December 31,19X1 and of the results of its operations and its cash flows for the
year then ended in accordance with financial reporting framework (GAAP).
We acknowledge our responsibility for the fair presentation of the financial statements in
accordance with applicable financial reporting framework (GAAP). We confirm, to the best of our
knowledge and belief, the following representations:
A. There have been on irregularities involving management or employees who have a
significant role in internal control.
B. We have made available to you all books of account and supporting documentation.
C. We confirm the completeness of the information provided regarding the identification of
related parties.
D. The financial statements are free of materials misstatements due to fraud and error,
including omissions.
E. The company has complied with all aspects of contractual agreements.
F. There has been no noncompliance with requirements of regulatory authorities.
G. The following have been properly recorded.
a) The identity and balances of transactions with related parties.
b) Losses arising from sale and purchase commitments.
c) Agreements and options to buy back assets previously sold.
d) Assets pledged as collateral.
H. We have no plans or intentions that may materially alter the assets and liabilities.
I. We have no plans to abandon lines of product or other plans or intentions.
J. We have recorded or disclosed as appropriate, all liabilities, both actual and contingent.
K. The .. Claim by XYZ Company has been settled.
L. We have properly recorded or disclosed in the financial statements the capital stock
repurchase options and agreements.
Chief Executive Officer
Chief Financial Officer
Question07. A: Define the terms disclaimer of opinion and opinion shopping.
Opinion and opinion shopping: Refer to audits who contract or reject auditors based on the type
of opinion they will issue on the audit. The underlying principles of this concept are:

1. Audit determines the compensation to auditors for their work as well as awarding future
audit engagements.
2. Such fees are the auditors main source of income.
3. Audits may try to contract auditors that will issue audit opinions based on the audits
needs, and
4. Auditors are willing to comply with such demands so long as they are assured future audit
engagements.
The most common example is an audit that knows that the current auditor is going to issue a
qualified, adverse, or disclaimer of opinion report, who then rescinds or terminate the audit
engagement before the opinion is issued and subsequently shops for another auditor who is
willing to issue an unqualified opinion regardless of any qualifying situations mentioned in the
previous sections. However, opinion shopping is not limited to audits contracting auditors based
on issuing opinions.
Question07. B: Example of an unqualified independent audit report.
Board of directors, Stockholders, Owners, and /or Management of
ABC Company, Inc.
123 Main St.
Any town, any country
We have audited the accompanying financial statements of ABC Company, Inc. which comprise
the balance sheet as of December 31, 2016, and the related statements of income, retained
earnings and cash flows for the year then ended, and the related notes to the financial
statements.
Managements Responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial
statements in accordance with General Accepted Accounting Principles: this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to
fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with Bangladesh Standards on auditing (BSA). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement. An audit involves
performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments; the auditor considers internal
control relevant to the entitys preparation and fair presentation of the financial statements. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well evaluating the
overall presentation of the financial statements.
We believe that that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion the financial statements of ABC Company presented fairly, in all material aspects
and are free from material misstatement whether due to fraud or error. The financial position of
ABC Company, Inc. as of December 31, 2016 and the results of its operations for the year then
ended in accordance with Generally Accepted Accounting Principles.
Auditors Signature
Auditors name and address
Date: Last day of any significant field work