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Assurance Answer Mock Test March 2021 (Final)

This document contains the solutions to a mock assurance test from March 2021. It addresses topics such as the characteristics of true and fair financial information, eligibility requirements for company auditors, terms to include in an audit engagement letter, factors to consider when identifying significant audit risks, elements that must be included in an auditor's report, and the components of internal control systems. The solutions define key assurance and auditing concepts and identify applicable standards and regulations.

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Farjana Akter
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0% found this document useful (0 votes)
109 views10 pages

Assurance Answer Mock Test March 2021 (Final)

This document contains the solutions to a mock assurance test from March 2021. It addresses topics such as the characteristics of true and fair financial information, eligibility requirements for company auditors, terms to include in an audit engagement letter, factors to consider when identifying significant audit risks, elements that must be included in an auditor's report, and the components of internal control systems. The solutions define key assurance and auditing concepts and identify applicable standards and regulations.

Uploaded by

Farjana Akter
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Solution of Assurance

Mock test
March 2021

1. a) Ans:
True: Information is factual and confirms with reality, not false. In addition, the information confirms
with required standards and laws. The accounts have been correctly extracted from the books and
records.
Fair: Information is free from discrimination and bias in compliance with expected standards and rules.
The accounts should reflect the commercial substances of the Company’s underlying transactions.
1. b) Ans:
He or she will be ineligible for being company auditor if he or she is
(i) an officer or employee of the company;
(ii) a person who is partner, or who is in the employment of an officer or employee of the company;
(iii) a person who is indebted to the company for an amount exceeding one thousand taka, or who had
given any guarantee or provided any security in connection with the indebtedness of any third person to
the company for an amount exceeding one thousand taka:
(iv) a person who is director or member of a partner company, or a partner of a firm, which is the
managing agent of the company;
(v) a person who is a director, or the holder of shares exceeding five percent in nominal value of the
subscribed capital, of anybody corporate which is the managing agent of the company.

2. a) Ans:
Agree the terms of audit engagement with management or those charges with governance and
Engagement letter shall at least include:

• The objective and scope of the audit of the financial statements;


• The responsibilities of the auditor;
• The responsibilities of management;
• Identification of the applicable financial reporting framework for the preparation of the financial
statements; and
• Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.
• A statement that there may be circumstances in which a report may differ from its expected form
and content.

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2. b) Ans:
In exercising judgment as to which risks are significant risks, the auditor shall consider at least the
following:
(i) Whether the risk is a risk of fraud;
(ii) Whether the risk is related to recent significant economic, accounting or other developments
and, therefore, requires specific attention;
(iii) The complexity of transactions;
(iv) Whether the risk involves significant transactions with related parties;
(v) The degree of subjectivity in the measurement of financial information related to the risk,
especially those measurements involving a wide range of measurement uncertainty; and
(vi) Whether the risk involves significant transactions that are outside the normal course of business
for the entity, or that otherwise appear to be unusual.

This is because unusual transactions are likely to have more:

• Management intervention;
• Manual Intervention;
• Complex accounting principles or calculations
• Opportunity for control procedures not to be followed.

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3. a) Ans:
If the auditor is required by law or regulation of a specific jurisdiction to use a specific layout, or wording
of the auditor’s report, the auditor’s report shall refer to International Standards on Auditing only if the
auditor’s report includes, at a minimum, each of the following elements:

(a) A title.

(b) An addressee, as required by the circumstances of the engagement.

(c) An Opinion section containing an expression of opinion on the financial statements and a reference
to the applicable financial reporting framework used to prepare the financial statements (including
identifying the jurisdiction of origin of the financial reporting framework that is not International
Financial Reporting Standards or International Public Sector Accounting Standards).

(d) An identification of the entity’s financial statements that have been audited.

(e) A statement that the auditor is independent of the entity in accordance with the relevant ethical
requirements relating to the audit and has fulfilled the auditor’s other ethical responsibilities in
accordance with these requirements. The statement shall identify the jurisdiction of origin of the relevant
ethical requirements or refer to the IESBA Code.

(f) Where applicable, a section that addresses, and is not inconsistent with, the reporting requirements.

(g) Where applicable, a Basis for Qualified (or Adverse) Opinion section that addresses, and is not
inconsistent with, the reporting requirements.

(h) Where applicable, a section that includes the information required by ISA 701, or additional
information about the audit that is prescribed by law or regulation and that addresses, and is not
inconsistent with, the reporting requirements in that ISA.

(i) A description of management’s responsibilities for the preparation of the financial statements and an
identification of those responsible for the oversight of the financial reporting process that addresses, and
is not inconsistent with, the requirements.

(j) A reference to International Standards on Auditing and the law or regulation, and a description of the
auditor’s responsibilities for an audit of the financial statements that addresses, and is not inconsistent
with, the requirements.

(k) For audits of complete sets of general-purpose financial statements of listed entities, the name of the
engagement partner unless, in rare circumstances, such disclosure is reasonably expected to lead to a
significant personal security threat.

(l) The auditor’s signature.

(m) The auditor’s address.

(n) The date of the auditor’s report.

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3. b) Ans:
Expectation gap:
The ‘expectation gap’ is defined as the difference between the apparent public perceptions of the
responsibilities of auditors on the one hand (and hence the assurance that their involvement providers)
and the legal and professional reality on other hand.
This is “the difference between what the public and financial statement users believe auditors are
responsible for and what auditors themselves believe their responsibilities are”.
Indicators that create expectation gap in the minds of the assurance users:
 Misunderstanding of the nature of audited financial statements, for example
- The balance sheet provides a fair valuation of the reporting entity;
- The amounts in the financial statements are stated precisely;
- The audited financial statements will guarantee that the entity concerned will continue to exit.

 Misunderstanding as to the type and extent of work undertaken by auditors, for example
- All the items of financial statements are tested
- Auditors will uncover all errors
- Auditors should detect all fraud

 Misunderstanding about the level of assurance provided by auditors, for example that:
- The auditors provide absolute assurance that the figures in financial statements are correct (ignoring
the concept of materiality and the problems of estimation).
4. a) Ans:
Internal Control: Internal control is the process designed and put in place by those whose job it is to
govern and manage the company to provide reasonable assurance about the reliability of financial
reporting, the efficiency and effectiveness of operations and compliance with applicable laws and
regulations.
Limitations of internal control: An internal control can only provide, at best, a reasonable assurance
that objectives are being reached because of inherent limitations, such as, human error and potential for
fraud. These inherent limitations demonstrate why auditors cannot obtain all their evidence from tests
of the systems of internal control.

• Human error;
• Collusion between employees;
• Controls being by-passed or overridden by management;
• Controls maybe design to handle routine transactions and not non-routine transactions;
• The cost of a control may not outweigh the benefit so it may not be implemented.

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4. b) Ans:
Components of internal control are described as follows:

• The control environment


• The entity’s risk assessment process
• The Information system relevant to financial reporting
• Control activities
• Monitoring of controls
Control Environment
The control environment includes the functions, attitudes, awareness and actions of those responsible for
governance and management concerning the entity’s internal control and its importance in the entity.
Because controls are more likely to operate well in an environment where they are treated as being
important a strong control environment does not, by itself, ensure the effectiveness of the overall internal
control system but a weak control environment can undermine the effectiveness of controls.
The Entity’s risk assessment process
The entity’s risk assessment process involves processes the entity has put in place to identify business risk
relevant to financial reporting objectives, estimating the significance of the risk, assessing the likelihood of
their occurrence, and deciding upon actions to address those risk.
The Information System Relevant to Financial Reporting
The information system relevant to financial reporting includes the financial reporting system, it consists
of procedures and records established to start, record, process and report entity transactions and maintain
accountability for the related assets, liabilities and equity.
Control Activities
Control activities are those policies and procedures that help ensure that management directives are carried
out. Control activities include those activities to prevent or to detect and correct errors. This includes
activities relating to authorisation, performance reviews, information processing, physical controls and
segregation of duties.
Monitoring of Controls
Monitoring of controls is a process to assess the effectiveness of internal control performance over time. It
includes assessing the design and operation of controls on a timely basis and taking necessary corrective
actions modified for changes in conditions.

Page 5 of 10
5. a) Ans:
Audit working papers vary depending on the following factors:

• The size and complexity


• The nature of the audit procedures to be performed
• The identified risks of material misstatement
• The significance of the audit evidence obtained.
• The nature and extent of exceptions
However, each of the audit working papers should have the following contents:

• The name of the client;


• The balance sheet date;
• The file reference of working paper;
• The name of the preparer;
• The date of preparation;
• The name of the reviewer;
• The date of review;
• A subject;
• The objective of the work;
• The sources of evidence;
• Method of sampling;
• The same size determined;
• The work done;
• The results;
• The conclusion drawn.
• Reference to relevance working paper should properly cross.

5. b) Ans:

The audit approach required is set out in ISA 540 Audit of Accounting Estimates. Essentially the auditor
has three audit methods to use:

• Test the process of that management used to estimate the figures. For example, looking at
experience, checking the calculation etc.

• Use an independent estimate. For example, if a provision is required in respect of legal action
against the company, the auditor may use evidence from company’s legal advisors.

• Review subsequent events. For example, if a settlement is reached after the year end regarding a
claim against the company which requires a provision, the auditor can use the evidence of the
agreement to establish the correct figures.

Page 6 of 10
6. a) Ans:
The auditor shall perform the procedures required by paragraph 6 so that they cover the period from the
date of the financial statements to the date of the auditor’s report, or as near as practicable thereto. The
auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such
audit procedures, which shall include the following:

• Obtaining an understanding of any procedure’s management has established to ensure that


subsequent events are identified.

• Inquiring of management and, where appropriate, those charged with governance as to whether any
subsequent events have occurred which might affect the financial statements.

• Reading minutes, if any, of the meetings of the entity’s owners, management and those charged
with governance that have been held after the date of the financial statements and inquiring about
matters discussed at any such meetings for which minutes are not yet available.

• Reading the entity’s latest subsequent interim financial statements, if any.

6. b) Ans:
Management who are responsible to provide written representations to the auditor:

Written representations are requested from those responsible for the preparation of the financial statements.
Those individuals may vary depending on the governance structure of the entity, and relevant law or
regulation; however, management (rather than those charged with governance) is often the responsible
party. Written representations may therefore be requested from the entity’s chief executive officer and chief
financial officer, or other equivalent persons in entities that do not use such titles. In some circumstances,
however, other parties, such as those charged with governance, are also responsible for the preparation of
the financial statements.

The date and periods of written management representation:

The date of the written representations shall be as near as practicable to, but not after, the date of the
auditor’s report on the financial statements. The written representations shall be for all financial statements
and period(s) referred to in the auditor’s report.

Page 7 of 10
7. a) Ans:
If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit
procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of
inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in
accordance with ISA.

Alternative audit procedures, for example, inspection of documentation of the subsequent sale of specific
inventory items acquired or purchased prior to the physical inventory counting, may provide sufficient
appropriate audit evidence about the existence and condition of inventory.

7. b) Ans:
Inventory under the Custody and Control of a Third Party

Confirmation: Sending confirmation to the third party.

Other Audit Procedures:

Depending on the circumstances, for example, where information is obtained that raises doubt about the
integrity and objectivity of the third party, the auditor may consider it appropriate to perform other audit
procedures instead of, or in addition to, confirmation with the third party. Examples of other audit
procedures include:

• Attending, or arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable.
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third party’s
internal control for ensuring that inventory is properly counted and adequately safeguarded.
• Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts.
• Requesting confirmation from other parties when inventory has been pledged as collateral.

8. a) Ans:
Alternatives procedures include the following:

• Check receipt of cash after date;


• Verify valid purchase orders, although these will not necessarily have led to an invoice;
• Examine the account to see if the balance outstanding represents specific invoices and confirm their
validity to dispatch notes;
• Obtain explanations for invoices remaining unpaid after subsequent ones have been paid;
• Check if the balance on account is growing, and if so, why;
• Test company’s control over the issue of credit notes and write off of bad debts.

Page 8 of 10
8. b) Ans:
The Code contains general guidance for all professional accountants regarding disclosure of confidential
information. The Code provides for three circumstances where professional accountants are required, or
may be required, to disclose confidential information:

• Disclosure is permitted by law and is authorized by the client or employer;


• Disclosure is required by law;
• There is a professional duty or right to disclose when not prohibited by law.

9. a) Ans:
The IFAC Code establishes a conceptual framework for all professional accountants to ensure compliance
with the five fundamental principles of ethics:

Integrity: A professional accountant should be straightforward and honest in all professional and business
relationships.

Objectivity: A professional accountant should not allow bias, conflict of interest or undue influence of
others.

Professional Competence and Due Care: A professional accountant has a continuing duty to maintain
professional knowledge and skill at the level required to ensure that a client or employer receives competent
professional services based on current developments in practice, legislation and techniques. A professional
accountant should act diligently and in accordance with applicable technical and professional standards
when providing professional services.

Confidentiality: A professional accountant should respect the confidentiality of information acquired as a


result of professional and business relationships and should not disclose any such information to third
parties without proper and specific authority unless there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business relationships should not be used
for the personal advantage of the professional accountant or third parties.

Professional Behavior: A professional accountant should comply with the relevant laws and regulations
and should avoid any action that discredits the profession.

Page 9 of 10
9. b) Ans:
Threats to compliance with the fundamental ethical principles are grouped into five broad categories:

• Self-interest threats, or conflicts of interest: These occur when the personal interests of the
professional accountant, or a close family member, are (or could be) affected by the accountant’s
decisions or actions.
• Self-review threats: This type of threat occurs when a professional accountant is responsible for
reviewing some work or a judgement that he was responsible for originally. An extreme example
would be a situation where a professional accountant prepares the annual financial statements for
a corporate client and then is appointed to do the audit.
• Advocacy threats: This type of threat can occur when an accountant promotes the point of view
of a client, for example by acting as a professional witness in a legal dispute. Acting as an advocate
for the client can reach the point where the objectivity of the accountant is compromised.
• Familiarity threats: A familiarity threat arises from knowing someone very well, possibly through
a long association in business. The risk is that an accountant might become too familiar with a
client and therefore becomes more sympathetic to the client and more willing to accept the client’s
point of view.
• Intimidation threats: A professional accountant might find that his objectivity and independence
is threatened by intimidation, either real or imagined.

These threats to compliance with the fundamental ethical principles apply to firms of accountants in their
dealings with clients as well as to individual accountants.

10. a) Ans:
The risk is that the member of the audit team has a financial interest in the client, by owning a large number
of the client company shares. There is a potential conflict of interest, which will threaten his or her integrity.
Suitable safeguards would be either to persuade the individual to sell the shares, or to remove the individual
from the audit of ABC Company.

10. b) Ans:
The risk is that the senior partner has a financial interest in the client company, and presumably also has a
familiarity risk. The IESBA (IFAC) Code states that in this situation, there are no safeguards that are strong
enough to reduce the threat from the conflict of interest to an insignificant level. The firm must refuse to
take on the audit work.

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