Assurance

Professional Stage: Knowledge level

Concept and Need for Assurance (Chapter- 1)

1. What is an Assurance Engagement?

An assurance engagement is one in which a practitioner express a conclusion, design to enhance

the degree of confidence of the intended users other then responsible party, about the outcome of
the evaluation or measurement of subject matter against criteria.

2. What are the key elements of an assurance engagement?

The key elements of an assurance engagement are as follows:

i) Three party relationship

● The practitioner;
● The intended user;
● The responsible party.

ii) A subject matter

● Data;
● System or Process;
● Behavior.

iii) Suitable criteria;

iv) Sufficient and appropriate audit evidence; and
v) A written report in appropriate form.

3. How the level of assurance varies?

Type of agreement Evidence Required Conclusion Given

● Reasonable assurance Sufficient and appropriate Positive

● Limited assurance Sufficient and appropriate (lower level) Negative

4. Explain types of assurance engagements and the way of expressing opinion?

The Formwork identifies two types of assurance engagement:

● Reasonable assurance
Reasonable level of assurance is a high, but not the absolute level of assurance.
● Limited assurance
5. What is the factor making the basic difference between these two types of engagement?

The key difference between the two types of assurance engagement depends on:

● the evidence obtained; and

● The type of opinion given.

6. What level of evidence will be required for a reasonable assurance engagement and a lower level of
assurance engagement?

A sufficient and appropriate level of evidence will be required for a reasonable level of assurance
and a lower level of evidence will be required for a limited assurance engagement.

7. What are the types of expressing opinion, and how is it expressed?

The types of expressing opinion depend on the type of engagement dividing into positively and
negatively.

● Positive Opinion
Assurance: PS - Knowledge level
 In our opinion, the statement regarding something is reasonable.

● Negative Opinion
In the course of my seeking evidence about the statement, nothing has come to my attention
indicating that the statement is not reasonable.

8. Give examples of assurance engagement.

The key example of an assurance engagement in Bangladesh is a statuary audit.

Other example of assurance engagement includes other audits, which may be specialized due to
the nature of the business:

● Local authority audit;

● Insurance company audit;
● Bank audit;
● Pension scheme audit;
● Charity audit; and
● Branch audit.

There are also many issues user want assurance on, where the terms of the engagement will be
agreed booth the practitioner and the person commissioning the report, for example:

● Value of money studies;

● Circulation of report;
● Cost/benefit report;
● Due diligence;
● Internal audit;
● Internal control report;
● Fraud investigation;
● Inventories and receivable report; and
● Report on business plan.

8. What is audit?

Audit is the independent examination of books, records, documents and all papers maintained by
client with a view to expressing an independent opinion.

An audit is historically the most important type of assurance service in Bangladesh, because all
limited liabilities companies registered with Registrar of the Joint Stock Companies and Firms have
been required by law to have an audit.

9. What is the objective of an audit?

The objective of an audit of financial statements is to enable the auditor to express an independent
opinion whether the financial statements are prepared all material respect in accordance with an
applicable financial reporting framework.

10. How will you define “True and Fair”?

True
Information is factual and confirm with reality, not false confirming with required standards and
law. The accounts have been correctly extracted from the books and record.

Fair
Information is free from discrimination and bias in compliance with expected standards and rules.
The account should reflect the commercial substance of the company’s transaction.

Assurance: PS - Knowledge level

11. Who are not eligible for being a company auditor?

The Companies Act 1994, sets out factors which make a person ineligible for being a Company
auditor, for example if he or she is:

● an office or employee of the Company;

● a partner or employee of any officer employee to the company;
● a person who is indebt to the company exceeding Tk. 1,000;
● a person who is a director or member of a private company or a partner of a firm,
which is the managing agent of the company;
● a person who is director or holder of shares exceeding 5% of the subscribed capital.

12. Why is assurance important? Describe the benefit of assurance.

The key benefits of assurance are:

● Independent; and
● Professional Verification.

Subsidiary benefits are:

● Adds confidence to others; and

● Deterrent to error or fraud.

13. Why can assurance never be absolute?

Assurance can never be absolute because assurance provision has limitations. This limitation
includes:

● Subjective exercise; ● Limitation in report;

● Sampling; ● Information from third Party; and
● Limitation in systems; ● Estimations are used.

14. Explain 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 the legal and professional reality on the other.

It can also be defined, what the assurance providers understand they do and what the users of the
information believe they do.

====================THE END====================

Assurance: PS - Knowledge level

 Process of Assurance: Obtaining an Engagement (Chapter- 02)

1. What matters to be considered before accepting an engagement?

(i) The present and proposed auditors should normally communicate about the client
prior to the audit being accepted;
(ii) The client must be asked to give permission for communication to occur; and
(iii) The auditors must ensure that they have sufficient resources to carry out the
appointment.

2. What is the appointment consideration for engagement as per Schedule C of ICAB Code of
Ethics as well as IFAC Code of Ethics?

As per Schedule C of ICAB Code of Ethics as well as IFAC Code of Ethics, before accepting a new
audit client, the auditors must ensure that there is no independence or other ethical issues
likely to cause significant problems with the ethical code.

Furthermore, new auditors should ensure that they have been appointed in a proper and legal
manner.

The nominee auditors must carry out the following procedures:

(i) Ensure professionally qualified to act;

(ii) Ensure existing resources are adequate;
(iii) Obtain references; and
(iv) Communicate with present auditors.

3. How will you determine the low risk and high risk clients?

Low risk clients High risk clients

a. Good long term prospects a. Poor recent forecast performance

b. Well-financed b. Likely to have lack of finance
c. Strong internal controls c. Significance control, weaknesses
d. Conservative prudent d. Doubtful accounting policies
e. Accounting policies e. Lack of finance director
f. Competent, honest f. Significant unexplained transaction or
management transaction with connected companies.
g. Few unusual transactions.

4. What may be the sources of information about new client?

The followings are the sources of information about new client:

 Enquiries of other source- These may be Bankers and Solicitors;

 Review of documents- Most recent annual accounts, listing particulars, credit rating;
 Previous accountants and auditors- Previous auditors should be invited to disclose fully
call relevant information; and
 Review of rules and standards- Consider specific laws and standards that relate to
industry.

5. What procedures should be carried out after accepting nomination?

The following procedures should be carried out after accepting the nomination:

 Ensure that the outgoing auditors removed or resignation has been property conducted in
accordance with national legislation;
 Ensure that the auditor’s appointment is valid; and
 Set up and submit a letter of engagement to the client.

Assurance: PS - Knowledge level

 6. What is an engagement letter? What are the objectives of it?

Engagement letter
An engagement letter documents and confirms the auditor’s acceptance of the appointment,
the objective and scope of the audit, the extent of the auditor’s responsibilities to the client, and
the form of any report.

The objective of an engagement letter is to:

 Define clearly the extent of the firm’s responsibilities and so minimize the possibility of
any misunderstanding between the client and the firm;
 Provide written confirmation of the firm’s acceptance of the appointment the scope of
the engagement and the form of their report.

7. What are the form and remaining content of audit engagement letter?

The form and content of audit engagement letter may very for each client but they would
generally include the followings:

 The objective of the audit;

 Management’s responsibility;
 The scope of the audit;
 The form of any report;
 Unrestricted access to whatever records and documents; and
 Inherent limitation and unavoidable risk that may remain undiscovered

The auditor may also wish to include the followings:

 Planning of the audit;

 Written confirmation of management representations;
 Acknowledge receipt of the engagement letter;
 Any other reports that the auditor expects to issue;
 Basic of computing fees; and
 A reference to any further agreements between the auditor and the client.

8. When should it be appropriate to send a new letter?

On recurring audits, the auditor should consider whether the terms of the engagement to be
revised or need to remind the client of the exiting terms of engagement.

The auditor may not require to send a new engagement letter each period.
However, the following may make it appropriate to send a new letter:

 Any misunderstanding I respect of objective and scope;

 Any revise or special terms;
 Change of senior management;
 Any change in nature or size of the client’s business; and
 Legal requirement.

9. Draft an engagement letter.

To the Board of directors or the appropriate representative of senior management

You have requested that we audit the financial statement of ABC Co. Ltd. Which companies the
balance sheet as at dd/mm/yy, and the profit and loss account, statement for the year then
ended. We are pleased to confirm our acceptance and our understanding of this engagement
by means of this letter. Our audit will be made the objective of our expressing an opinion of the
financial statement.
Responsibilities of directors and auditors

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 As directors of ABC Co. Ltd. you are responsible for ensuring that the company maintains proper
accounting records and for preparing financial statement which give a true and fair view and
have been prepared in accordance with the companies Act. 1994. You are also responsible for
making available to us all records.
We have a statutory responsibility to report to the members whether in our opinion the financial
statements give a true and fair view, whether they have been properly prepared in accordance
with the Companies Act. 1994.
Scope of audit
Our audit will be conducted in accordance with the Bangladesh Standard on Auditing and will
include such test of transactions and of the existence, ownership and valuation of assets and
liability for as we consider necessary.
The responsibility for safeguarding the as sets of the company and for the prevention and
detection of guard and error and noncompliance with law or regulations rests with yourselves
This letter will be effective for future years unless it is terminated amended or superseded.
Please sign and return the attached copy of this letter to indicate that it is in accordance with
your understanding of this arrangement for our audit of the financial statements,

XYZ Co.

Acknowledge on behalf of

ABC Co. Ltd. by

(Sign)
Name, Title & Date

====================THE END====================

Assurance: PS - Knowledge level

 Process of Assurance- Planning the Assignment (Chapter- 03)

1. Define audit strategy and audit plan.

Audit Strategy
Audit strategy is the formulation of the general strategy for the audit, which stets the scope, timing
and direction of the audit and guides the development of the audit plan.

Audit plan
An audit plan shows the overall implementation of the audit strategy, being detailed than audit
strategy and sets out the nature, timing and extent of the audit procedures to obtain sufficient
appropriate audit evidence.

2. Identify the key contents of an audit plan or how audits are planned?

Audits are planned to:

 Ensure appropriate attention is devoted to important areas of the audit;
 Identify the potential problems are resolved on a timely basis;
 Ensure that the audit is properly organized and managed;
 Assign work to engagement team members properly;
 Facilitate direction to supervision of engagement team members; and
 Facilitate review of work.

3. What are the key contents of an overall audit strategy?

a) Understanding the entity’s environment

 General economic factors and industry conditions; and
 Important characteristics of the client.

b) Understanding the accounting and internal control system

 The accounting policies and charges in those police;
 The effect of new accounting or auditing pronouncements; and
 The auditor’s cumulative knowledge of the accounting and internal control systems.

c) Risk and materiality

 The expected assessments of risks of fraud or error;
 The setting of materiality for audit planning purposes;
 The possibility of material misstatements.
 The identification of complex accounting areas including those involving estimates.

d) Consequent nature, timing and extent of procedures

 Possible change of emphasis on specific audit areas; and
 The effect of information technology on the audit.

e) Coordination, direction, supervision and review

 The number of locations;
 Staffing requirements; and
 Need to attend client premises for inventory count or other year-end procedures.

f) Other matters
 The possibility that the going concern basis may be subject to question;
 Conditions requiring special attention;
 The terms of the engagement and any statutory responsibilities; and
 The nature and timing of reports.

Assurance: PS - Knowledge level

4. What are the appropriate procedures used by the auditor in obtaining an understanding of the
entity?

Understanding the entity

BSA 315, followed for obtaining an understanding of the entity and its environment and assessing
the risks of material misstatements states that, “the auditor should obtain an understanding of the
entity and its environment, including its internal control, sufficient to identify and assess the risks of
material misstatement of the financial statements whether due to fraud or error, and sufficient to
design and perform further audit procedures.

The appropriate procedures to obtain an understanding of the entity and its involvement include:
Why
1. To identify and assess the risks of material misstatement in the financial statements;
2. To enable the auditor to design and perform further audit procedures;
3. To provide a frame of reference for exercising audit judgment, for example, when setting audit
materiality.

What
1. Industry, regulatory and other external factors, including the reporting framework.
2. Nature of the entity, including selection and application of accounting policies, internal control.
3. Measurement and review of the entity’s financial Performance.

How
1. Inquiries of management others within the entity.
2. Analytical procedures, observation and inspection.
3. Prior period knowledge.
4. Discussion of the susceptibility of the financial statement to material misstatement among the
engagement team.

5. Describe an attitude of professional skepticism.

An attitude of professional skepticism means, the auditor makes a critical assessment, with a
questioning mind neither assuming that the management is dishonest nor assuming unquestioned
honesty.
6. Identify the sources of information for analytical procedures applied through the course of the
audit.

Analytical procedures should be used at the risk assessment stage.

Possible sources of information about the client:

 Interim financial information;

 Budgets;
 Management accounts;
 Non financial information;
 Bank and cash records;
 VAT returns;
 Board minutes; and
 Discussions or correspondence with the client at the year end.

7. Define materiality. When should it be considered?

Materiality
BSA framework for the preparation and presentation of financial statements states that a matter is
material if its omission or misstatement would reasonably influence the economic discussion of
users taken on the basis of financial statements.

BSA 320 Audit materiality states that materiality should be considered by the auditor when:
 Determining the nature, timing and extent of audit procedures; and
 Evaluating the effect of misstatements.
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 Materiality assessment will help the auditors to decide:
 How many and what extent items to examine;
 Whether to use sampling techniques; and
 What level of error is likely to permit an auditor to conclude the financial statements don’t give
a true and fair view.

Materiality must be reviewed constantly as the audit progresses and changes may be required
because:
 Draft accounts are altered due to material error, and
 External factors may cause changes in risk estimates.

8. How is materiality used in the cause of an assurance engagement?

Planning materiality based

on draft financial
statements and other
available information
Compare and consider need
for additional testing

Apply planning materiality

to individual audit
objectives or balances

Test all items Actual errors detected

Sample from remaining Actual errors detected

items

Final materiality based on Actual errors projected to

results obtained final population
financial statements

Figure: Audit Materiality

8. How do you define tolerable error? What is the available approach of the percentage of
materiality?

Tolerable error
Tolerable error is the maximum error that an auditor is prepared to accept in a class of transactions
or balances in the financial statements.

Different firm has different methods to calculate materiality level and this is one of the available
approaches as thus rule:

Items %
Profit before tax 5
Gross profit 0.50 – 1.00
Revenue 0.50 – 1.00
Total assets 1-2
Net Assets 2–5
Profit after tax 5 – 10
Assurance: PS - Knowledge level
 It is also important to bear up in mind that, materiality has qualitative as well as quantitative
aspects. For example, transactions relating to directors are considered material by nature
regardless of their value.

9. Define analytical procedures.

Analytical procedures mean evaluation of financial information made by a study of plausible

relationships among both financial and non financial data. Analytical procedures also encompass
the investigation of identified fluctuations and relationships that are inconsistent with other
relevant information or significantly divided from predicted amounts.

10. What is audit risk? Draw a diagram containing contents ad sub contents of audit risk.

Audit risk
Audit risk is the risk that the auditors give an impropriate opinion on the financial statements.

Audit Risk

Risk that the financial Risk that the auditors will fail
statements contain a material to detect any material
misstatement misstatement

Detection risk
Inherent Risk Control Risk
Figure: Audit risk including contents and sub-contents

Define inherent risk, control risk and detection risk.

Inherent risk
The susceptibility of an account balance or class of transactions to misstatement that could be
material individually or when aggregated with misstatements in other balances or classes,
assuming there were no related internal controls.

Control risk
Control risk is the risk that the material misstatement would not be prevented, detected or
corrected by the accounting and internal control system.

Detection risk
Detection risk is the risk that the auditor’s procedures will not detect a material misstatement that
exists in an account balance or class of transactions that could be material either individually or
when aggregated with other misstatements.

11. Give few examples that might increase inherent risk.

Inherent risk is the risk that items will be misstated due to characteristics of those items. Example
of issues that might increase inherent risk is:

1) Balance is or includes an estimates;

2) Balance is improper in the accounts;
3) Financial statements are liable to misstatements because
 company is in trouble;
 company is seeking to raise fund; and
 other motivation for directors to misstate the figures. and
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 4) Financial statements contain balances with complex financial accounting requirements or a
choice of treatments.

The auditor must use their professional judgment and all available knowledge to assess inherent
risk and if no such information and knowledge is available then the inherent risk is high.

12. Which factors indicate the significant risk?

Some risks may be significant risks, which require special auditor concentration. BSA 315 sets out
the following factors which indicate that a risk might be a significant risk.

1) Risk of fraud;
2) Related to recent significant economic, accounting or other development;
3) The complexity of the transaction; and
4) Unusual transaction.

15.What are the risk assessment procedures performed by an auditor to obtain an understanding
about an entity and its internal control?

The auditor should perform the following risk assessment procedures to obtain an understanding of
an entity and its internal control:

1) Inquiries of management and others within with-in the entity;

2) Analytical procedures;
3) Observation and inspection.

16. Identifying and assessing the risk (BSA 315.100).s

The auditor should identify and assess the risks of material misstatements at the financial
statements level and at the assertion level for classes of transactions, account balances, and
disclosures.

The End

Assurance: PS - Knowledge level

 Process of Assurance: Evidence and Reporting (Chapter- 4)

1. What is the objective of an assurance engagement?

The objective of an assurance engagement is to enable the practitioners to express an opinion

whether the subject of the assurance engagement is in accordance with the identified criteria.

2. Define audit evidence. What are the potentially tests carry out to gather evidence? Define
those.

Audit evidence
Audit evidence is all of the information used by the auditor in arriving at the conclusions on
which the audit opinion is based. This also includes, all the information contained within the
accounting records underlying the financial statements, and other information gathered by the
auditors from various parties.

There are potentially two types of test carry out to gather evidence, are:

 Test of controls
Test of controls performed to obtain audit evidence about the effectiveness of controls
in preventing, detecting and correcting material misstatement at the assertion level.

 Substantive procedure
Audit procedures performed to detect material misstatements at the assertion level
including:
i) test of detail of classes of transaction, account balances and disclosures; and
ii) Substantive analytical procedures.

3. How will you explain sufficient appropriate audit evidence?

BSA 500, Audit Evidence requires auditors to obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the audit opinion. Sufficiency and
appropriateness are interrelated and apply to both tests of controls and substantive procedure,
where
 Sufficiency is the measure of the quantity of audit evidence; and
 Appropriateness is the measure of quality or reliability of the audit evidence.

The quality of audit evidence required is affected by the level of risk in the area being audited,
as well as by the quality of evidence obtained. If the evidence is high quality, the auditor may
require less than it were poor quality. However, obtaining a high quantity of poor quality
evidence will not cancel out its poor quality.

4. What may the generalization be to help in assessing the reliability of audit evidence? i. e.
Quality of evidence.

 External
Audit evidence from external source is more reliable than that obtained from the records;
 Auditor
Evidence obtained directly by the auditors is more reliable than obtained directly;
 Entity
Evidence obtained from the entities records is more reliable when related control systems
operate effectively;
 Written
Evidence is the form of documents or written representations are more reliable than oral
representations; and
 Originals
Original documents are more reliable than photocopies.

Assurance: PS - Knowledge level

 5. What are financial statements assertions? Describe financial statement assertions.

Financial statements assertions:

 Financial statements assertions are the representations by the management, explicit or
otherwise, that are embodied in the financial statements.
 The auditor should use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of
risks of material misstatement and the design and performances of further audit
procedure.

Assertions used by the auditors are:

Assertions about classes of transactions and events for the period under audit:
 Occurrence
Transactions and events that have been recorded have occurred and pertain to the
entity;
 Completers
All transactions and events that should have been recorded;
 Accuracy
Amounts and other data relating to recorded transactions and events have been
recorded appropriately;
 Cut off
Transactions and events have been recorded in correct accounting period; and
 Classification
Transactions and events have been recorded in proper accounts classifying correctly;
Assertions about account balances at the period end:
 Existence
Assets, liability and equity interests exist;
 Right and obligations
The entity holds or controls the rights to assets and liabilities are the obligations of the
entity;
 Completeness
All assets, liabilities and equity interests that should have been recorded; and
 Valuation and allocation
Related valuation and allocation adjustments are properly recorded.

Assertions about presentation and disclosure

 Completeness
All disclosures that have been disclosed;
 Classification and understandability
Financial information is appropriately presented describe, and disclosures are clearly
expressed; and
 Accuracy and valuation
Financial and other information relating to valuation are disclosed fairly.

6. What is an unqualified review report opinion?

Base on our review, nothing has come to our attention that causes us to believe that the
accompanying financial statements do not give a true and fair view in accordance with identified
financial reporting framework.

7. What are explicit opinions?

 In respect of the state of the company’s affairs at the end of the financial year ;
 In respect of the company’s profit or loss for the financial year; and
 The information given in the director’s report is consistent with the financial statements.

The companies Act require the auditors to state explicitly whether in their opinion the above explicit
opinions are expressed.

Assurance: PS - Knowledge level

8. What may be few example of substantive procedure?

The auditor must always carry out substantive test procedure on the material items as follows:

Agreeing the financial statements to the underlying accounting records;

 Examine other material journal entries;
 Examine other adjustments made in preparing the FSs.

Substantive procedures fall into two categories. Those are:

a. Analytical procedure and
b. Other procedures.
9. What are the audit procedures for obtaining audit evidence?

The auditor obtains audit evidence to draw reasonable conclusion on which to base the audit
opinion by performing audit procedures to:

 Risk assessment procedure;

 Test of controls; and
 Substantive procedures.

10. What are the matters with which the auditors imply satisfaction in an unqualified report under the
CA 1994?

Certain requirements are reported on by exception. The auditor has to report if they have not been
met. The following are the matters with which the auditor implies satisfaction in an unqualified
report under the Companies Act 1994:

 All sums of money received and expended by the company and the matters in respect of which
the receipt and expenditure takes place;
 All sales and purchase of goods by the company;
 The assets and liabilities of the company; and
 In the case of a company engaged in production, distribution, marketing, transportation,
processing, manufacturing, milling, extracting and mining activities, and such particulars
relating to utilization of material, labor and overhead cost.

11. In what cases the auditors’ report is considered to be modified?

An auditors report is considered to be modified:

 Emphasis of matter;
 Matter that affect the auditors’ opinion;
 Qualified opinion;
 Disclaimer opinion; and
 Adverse opinion.

12. What are the basic elements of an audit report?

 Title;
 Address;
 Introductory paragraph identifying the financial statements audited;
 A statement of management’s responsibility for the FSs;
 A statement of auditor’s responsibility;
 Scope paragraph, including a description of the work performed by the auditor;
 Opinion paragraph containing an expression of opinion on the financial statements;
 Date of the report;
 Auditor’s address; and
 Auditor’s signature.

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13. What is expectation gap?

The expectation gap is defined as the difference between the apparent public perceptions of the
responsibilities of auditors on the other hand the legal and professional reality.

It can also be said, the expectation gap is, what the assurance provider understands, he does and
what the user of the information believes, he does.

14. What are the contents of the assurance report of the International Standard on Assurance
Engagement?

The international standard on assurance engagements requires that an assurance report must
have the following components:

 A title that clearly indicates the report is an independent assurance report;

 An address;
 An identification and description of the subject matter information and when appropriate, the
subject matter;
 Identification of the criteria;
 Where appropriate, a description of any significant inherent limitation associated with the
evolution or measurement of the subject matter against the criteria;
 When the criteria used to evaluate or measure the subject matter are available only to specific
intended users, or are relevant only to a specific purpose, a statement restricting the use of the
assurance report to those intended users or that purpose;
 A statement to identify the responsible party and to describe the responsibilities of the
responsible party and the practitioner;
 A statement that the engagement was performed in accordance with ISAEs;
 A summary of the work performed;
 The practitioner’s conclusion (positive or negative);
 The assurance report date; and
 The name of the firm or practitioner with a specific location that has responsibility for the
engagement.

The End

Assurance: PS - Knowledge level

 Introduction to Internal Control (Chap- 5)

1. Define internal control.

Bangladesh Standard on Auditing (BSA) 315 followed for “Understanding the Entity and its
Environment and Assessing the Risks of Material Misstatement” contains, “ Internal control is
the process designed and effected by those charged with governance, management and other
personnel to provide reasonable assurance about the achievement of the entity’s objectives
with regard to reliability of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations”.

2. What are the company’s objectives?

The objectives of the company are to ensure:

i) Reporting financial position correctly to shareholders;
ii) Operating effectively and efficiently; and
iii) Complying with relevant laws and regulation.

3. What are the objectives of internal controls?

The objectives of internal controls are:

i) Minimizing the company’s business risks;
ii) Ensuring the continuing effective functioning of the company; and
iii) Ensuring compliance with relevant laws and regulations.

4. What are the limitations of internal controls?

Internal controls have the following limitations:

i) Expense
A key limitation of controls is expensive and the continual use of the control is more
expensive than the cost of the risk arising;
ii) Human element
Another important limitation of controls is the human element; and
iii) Unusual transactions
Standard controls may not be relevant to the unusual transaction.

5. What are the components of internal controls?

Internal control comprises five components:

i) Control environment;
ii) Risk management process;
iii) Information system;
iv) Control environment; and
v) Monitoring of controls.

The components of internal controls are discussed below:

i) The control environment

The control environment includes the governance and management functions and
attitudes, awareness and actions of those charged with governance and management
concerning the entity’s internal control and its importance in the entity;

ii) Business risk and the entity’s risk assessment process

The process by which management in a business identities, business risks relevant to
financial reporting objectives and decides what action to take to address those risks;

Business risk
The risk inherent to the company in its operations at all levels.

iii) The information system relevant to financial reporting objectives

Assurance: PS - Knowledge level

 Information system relevant to financial reporting objectives includes the procedures
and records designed to initiate, record, process and report entity transactions and to
maintain accountability for the related assets, liabilities and equity;

iv) Control activities

The policies and procedures that help ensure that management directives are carried
out;

v) Monitoring of controls
An entity should review its overall control system to ensure that it still meets its
objectives, it still operates effectively and efficiently and that necessary corrections to
the system are made on a timely basis.

6. What is an audit committee? What are the activities of this committee?

Audit committee

An audit committee is a subsection of the board of directors which has a particular interest in
the finance and accounting activities of the company.

The activities of an audit committee include

i) to review the integrity of the financial statements and announcements of performance;

ii) to review the internal financial controls and risk management systems;
iii) to monitor and review the effectiveness of the internal audit function;
iv) to recommend the board about the external auditor;
v) to monitor the independence of the external auditors;
vi) to implement policy on the provision of non- audit services by the external auditor.

7. Draw a flow chart of an entity’s risk assessment process.

If the risk assessment process is weak, the resulting internal controls may not be effective. The
process involves the following elements:

Identifying relevant business risks

Estimating the impact of risks

Assessing the likelihood of occurrence

Deciding upon actions to manage them

Figure: Entity’s risk assessment process

8. Give few examples of control activities. Types of control activities.

Types of control activity Examples

Authorization Approval and control of documents.

 Reconciliations; and
Performance review  Comparing internal data with external sources of
information.
Information processing Checking the arithmetic accuracy of records.
Comparing the results of cash, security and inventory counts
Physical control
with accounting records.
 Segregation of functions;
 The various steps in carrying out the transactions;
Segregation of duties
and
 The carrying out of various accounting operations.

Assurance: PS - Knowledge level

9. Explain IT controls with application and general controls.
IT controls
The internal controls in a computerized environment include both manual procedures and
procedures designed to computer programs. Such manual and computer control procedures
comprise two types of control.
Application controls
Application controls are manual and automated procedures that ensure transactions are
completely and accurately recorded processed.
General controls
General controls are policies and procedures that ensure the continued proper operation of
information system.
10. Give examples of application controls and general controls.
Few examples application controls
 Controls over input in completeness;
 Controls over input accuracy;
 Controls over input authorization;
 Controls over processing; and
 Controls over master files and standing data.
Few examples general controls
 Developments of computer applications;
 Prevention of unauthorized changes to programs;
 Testing and documentation of programs changes;
 Controls over wrong programs;
 Controls over unauthorized amendments to data files; and
 Controls to ensure continuity of operation.

11. How the auditor collects information about internal controls?

Auditors will obtain information about internal controls from a variety of sources:
 Studying manuals of internal controls and copies of internal controls polices, or minutes
of meeting of the risk assessment group;
 Talking to the people involved with internal control at all stages and asking them what
the controls are and why they have been implemented;
 Observing controls in operations.
12. Briefly discuss about recording of internal controls.
Auditors will record information about the internal control in a variety of ways in their life. There
are broadly three types of documents which are used for recording the understanding of the
business:
a. Narrative notes;
b. Questionnaires and checklists; and
c. Diagrams like.
Narrative notes are good for things like
 Short notes of simple systems; and
 Background information.
These are less good when things get much more complex.
Questionnaires and checklists
There are good as aide memories to ensure covering all the bases but:
 Can lead to a mechanical approach so that an important extra question is never asked;
and
 Tick boxes after gate ticked whether the brain is engaged or not.
Diagrams like
 Flowcharts;
 Organization charts;
 Family trees; and
 Records of related parties.
Assurance: PS - Knowledge level
 Internal Audit (Chapter- 9)

1. What is internal audit?

Internal audit is an appraisal or monitoring activity established within an entity as a service

which includes examining, evaluating and monitoring to management and directors on the
adequacy and effectiveness of components of the accounting and internal control systems.

2. How the internal audit function can assist the board?

The internal audit function can assist the board:

 By acting as auditors for board reports not audited by external auditors;

 By being the experts in auditing and accounting standards and assessing in
implementation of new standards;
 By leasing with external auditors, particularly where external auditors can use internal
audits work and reduce the time and therefore cost of the external audit.

3. Distinguish between internal audit and external audit.

 Reason
i) Internal audit is an activity designed to add value and to improve an
organization’s operations;
ii) External audit is an exercise to enable auditors to express an opinion on the
financial statements.

 Reporting to
i) Internal auditors report to the board of directors or the audit committee;
ii) External auditors report the shareholders on the truth and fairness of the
financial statements.

 Relating to
i) Internal audits work relates to the operation of the organization;
ii) External audit’s work relates to the financial statements.

 Relationship with the company

i) Internal auditors are very often employees of the organization;
ii) External auditors are independent of the company.

 Appointment
i) Internal auditors are appointed by the management;
ii) External auditors are appointed by the shareholders.

4. What are the key roles of internal audit in relation to risk management?

Internal audit or internal audit department has two key roles to play in relation to organizational
risk management:
 Ensuring the company’s overall risk management policy to ensure its effective
operation; i.e. Overall risk management policy; and
 Ensuring that strategies implemented respect of business risks operate effectively; i.e.
implemented strategies.

5. What does internal audit do?

Internal audit successfully carries on the followings:

 Internal audit has two key roles to play in relation to organizational risk management:
i) Ensuring the companies risk management system operates effectively;
ii) Ensuring that implemented strategies in respect of business risks operate
effectively.
Assurance: PS - Knowledge level
  Internal auditors undertake operational audit;
 Internal auditors also undertake special investigations; and
 Internal auditors must be far from getting involved in operational decision making
matters.

6. Identify the key role of internal audit as part of internal control.

The key role of internal audit will be in monitoring the overall process and in providing
assurance that the systems designed by the departments meet objectives and operates
effectively.

7. What activities are usually involved in internal audit?

The following activities are usually involved in and internal audit:

 Monitoring internal control;
 Examining financial and operational information;
 Review of the economy, efficiency and effectiveness of operations;
 Review of compliance with laws, regulations and other external requirements;
 Special investigations.

8. What is an operational audit? What are the aspects of an operational assignment?

Operational audit
Operational audits are the audits of the operational processes of the organization with the
objective of monitoring management’s performance and ensuring company policy.

There are two aspects of an operational assignment:

 Ensure policies are adequate; and
 Ensure polices work effectively.
What are the other functions of an internal audit in addition to regular function?

Internal audit may also carry out other functions for the directors in a company. They might
undertake special investigations in respect of a suspected fraud, or they might carry out
traditional audits as done by external auditors.

Assurance: PS - Knowledge level

 Documentation (Chapter- 10)

1. What is documentation? What are the purposes of it?

Audit documentation as working papers is the record of procedures performed, relevant
evidence obtained and conclusions reached.
The purposes of documentation are:
 This should be a record of the procedures performed. The evidence obtained and the
conclusions reached;
 This provides evidence that the engagement was performed in accordance with any
relevant standards, laws and regulatory requirements; and
 A record of work done also assists the team to plan and direct work, facilities review
by senior staffs, provided accountability for work and enables to carry out any
additional review requirements.
2. What should audit documentation provide?
Audit documentation should provide:
 A sufficient and appropriate record of the basis for the assurance provider’s report;
 Evidence that the engagement was performed in accordance with standards and
applicable legal and regulatory requirements.
3. “The form and content of working papers should be affected by various matters”- explain.
The form and content of working papers are affected by various maters such as:

 The nature of the audit procedures to be performed;

 The identified risks of material misstatements;
 The extent of judgment required in performing the work and evaluating the results;
 The significance of the audit evidence obtained;
 The nature of extent of problems or exceptions from expected test results identified;
 The audit methodology and tools used.
4. What is an audit file? Explain types of it briefly.
An audit file is a file in which the working papers are documented.

 Permanent audit file

Permanent audit file is a file which contains all the permanent information that
requires year to years and is updated every year continuously.
Those are:
a) Engagement letter;
b) Board minutes;
c) New client questionnaires;
d) Accounting system notes;
e) Memorandum system articles of association; and
f) Previous years signed accounts.

 Current audit file

Current audit file is a file which contains information relating to a single period.
Those are:
a) Financial statements relating to the year under review;
b) Management letter;
c) Accounts checklists;
d) Audit planning memo;
e) Time budget;
f) Review notes;
g) Letter of representation;
h) Third party communication or confirmation; and
i) A summary of unadjusted errors.

Assurance: PS - Knowledge level

 5. What kind of information to be shown in the working paper?
Following information should be shown in the working paper:
 The name of the client;
 The balance sheet date;
 The name of the preparer and date of preparation;
 Subject of the working paper;
 The name of the reviewer and date of review;
 The source of information ;
 The results obtained;
 Analysis of errors;
 Other significant observations;
 The conclusion drawn; and
 The key points highlighted.
6. What is automated working paper? What are the advantages of it?
Automated working papers package have been developed to make the audit documentation
much easier. Such programs aid preparation of working papers, lead schedules, trial balance
and the financial statements themselves. These are automatically cross referenced, adjusted
and balanced by the computer.
The advantages of automated working papers are:
 The risks of errors is reduced;
 The working papers will be neater and easier to review;
 The time saved will be substantial as adjustments can be made easily;
 Standards forms don’t have to be carried o audit locations; and
 Audit working papers can be emailed or faxed for review.
7. What is the various safe custody and retention of documentation procedure?
General safe custody and retention of documentation:
 Assurance provides should retain documents for a certain period of time. Judgments
may have to be used in holding or destructing them; and
 Documents must be kept secure during this period due to confidentiality
requirements;
Safe custody and retention of documentation according to Section 181(5) of Companies Act
1994:
According to Companies Act 1994, Section 181(5), states that, “The books of accounts of every
company relating to a period of not less than twelve years immediately preceding the current
year together with vouchers relating to any entry in such books of account shall be preserved in
good order”.
Safe custody and retention of documentation as per BSA 230.13:
The auditor should adopt appropriate procedures for maintaining the confidentiality and safe
custody of the working papers and for retaining them for a period sufficient to meet the needs
of the practice and in accordance with legal and professional requirements of records retention.
8. Ownership of and right of access to documentation.
The following matters to be in mind in case of ownership of and right of access to
documentation:
 Working papers belongs to the assurance providers;
 The report , once issued , belongs to the client;
 The assurance providers must keep working papers confidential;
 They may show working papers to the to the clients at their discretion; and
 They should obtain clients permission before showing working papers to third parties.

As per BSA 230.14, ownership of and right of access to documentation:

Working papers are properly of the auditor. Although portions of or extracts from the working
papers may be made available to the entity at the discretion of the auditor, they are not a
substitute for the entity’s accounting records.
Evidence and Sampling (Chapter-11)
Assurance: PS - Knowledge level
 1. What are included in the evidence?
Evidence includes all the information contained within the accounting records underlying the
financial statements and other information gathered by the assurance provides such as
confirmations from third parties.
2. What are the procedures followed to obtain evidence?
Assurance provides obtain evidence by one or more of the following procedures:
 Inspection of tangible assets;
 Inspection of documentation;
 Observation;
 Inquiry;
 Confirmation;
 Recalculation;
 Re-performance; and
 Analytical procedures.
3. What is the objective of audit evidence?
The objective of audit evidence:
 To enable the auditor to express an opinion whether the financial statements are
prepared in all material respects, in accordance with an identified financial reporting
frame work; and
 To enable the auditor to draw conclusions on which to base the audit opinion.
4. What is CAAT? Describe it elaborately.
CAAT
Computer Assisted Audit Techniques is applications of auditing procedures using the computer
as on audit tool.
There are two main types of it:
 Test data:
Test data is a test of control where the assurance provider supervises the process of
running data through the clients system. The stages in the use of test data are as
follows:
a) Note controls in clients system;
b) Decide upon test data;
c) Run the test data;
d) Compare results with expectations; and
e) Conclude on whether controls are operating properly.
 Audit software:
Audit software means working on the basis of interrogating the clients system,
extracting and analyzing information carrying out a whole range of substantive
procedures across all sorts of different data.
Examples of audit software are:
a) Extract a sample according to specified criteria;
b) Calculate ratios of those outside criteria;
c) Check calculations performed by the system;
d) Prepare reports; and
e) Follow items through a system and flag where they are posted.
5. What factors should be considered while using analytical procedures?
There are a number of factors that the auditors should consider when using analytical
procedures as substantive procedures:
 Objective of the analytical procedures;
 Suitability of analytical procedures; and
 Reliability of analytical procedures.

Assurance: PS - Knowledge level

 6. What is suitability factor of analytical procedures?

Suitability factor of analytical procedures are:

 Materiality of the items involved assessment; and
 Other audit procedures directed towards the same financial statements assertions.
7. What are reliability factors of analytical procedure?
Reliability factors of analytical procedure are:
 The degree to which information can be analyzed;
 The availability of information;
 The accuracy of prediction;
 The frequency of observation;
 The relevance of the information;
 The source of the information;
 The comparability of information; and
 The knowledge gained during previous audits.

8. What are the possible sources of information about the client at the risk assessment stage?
The possible sources of information about the client at the risk assessment stage are:
 Interim financial information;
 Budgets;
 Management accounts;
 Non financial information;
 Bank and cash records;
 Sales tax returns;
 Board minutes; and
 Discussions and correspondence.

9. What are the categories of subordinate procedures?

Subordinate procedures can be fallen broadly into two categories:
 Tests to discover errors; and
 Tests to discover omissions.

These are called as directional testing.

10. What methods can be applied to audit of accounting estimates?

Following methods can be applied to audit of accounting estimates:
 Test the process that management used to estimate the figure;
 Use an independent estimates; and
 Use subsequent events.

11. What is audit sampling and population?

Audit sampling
Audit sampling involves the application of audit procedures to less than 100% of the items
within an account balance or class of transformation such that all sampling units have a chance
selection.
Population
Population is the entire set of data from which a sample is selected and about which an auditor
wishes to draw conclusions.

12. What are the testing procedures do not involve in sampling?

Following testing procedures do not involve in sampling:

 Testing 100% of items in a population; and
 Testing all items with a certain characteristic.

Assurance: PS - Knowledge level

 13. Discuss classes of sampling?
Statistical sampling
Statistical sampling involves random selection of a sample using probability theory; including
measurement of sampling risk.

Non-statistical sampling
Non statistical sampling is a sampling where mathematical techniques are not used
continuously; in determining sample size, selecting the sample or evaluating sample results.
14. What are errors, expected error and sampling units?

Errors
Errors mean either control deviations, when performing tests of control or misstatements when
performing substantive procedures.

Expected error
Expected error is the error that the auditor expects to be present in the population.

Sampling units
Sampling units are the individual items constituting a population.

15. What is tolerable error?

Tolerable error is the maximum error in the population that the auditor would be willing to
accept.

16. What are the methods of selecting sample?

There are a number of selection methods:

Random selection (RS)

Random selection ensures that all items in the population have an equal chance of selection.

Systematic selection (SS)

Systematic selection involves selecting items using a constant interval but not selections.

Haphazard selection (HS)

Haphazard selection may be an alternative to random selection.

Sequence or block selection (SBS)

SBS may be used to check whether certain items have particulars characteristics.

To follow SBS, an auditor may wish to sample 50 consecutive cheques to check whether
cheques are signed by authorized signatories rather than picking 50 single cheques.

Monetary unit sampling (MUS)

MUS is a selection method that ensures that every BDT 1 in a population has an equal chance
of being selected for testing.

Management Representation (Chapter-12)

Assurance: PS - Knowledge level
 1. Who are the management? Identify the purpose of management representation letter?

Management comprises officers i.e. directors and company secretary and others who perform
senior managerial functions.

Written confirmation of oral representations avoids confusion and disagreement to ensure that
the responsible for giving the written confirmation understand what they are confirming.

2. What is management representation? What are the elements require auditors to confirm in
writing?

Management representation
Representation made by the management to the auditor during the course of audit either
unsolicited or in response to specific inquiry.

General matter
 Auditors to confirm in writing that the management acknowledges its responsibilities
for the preparation of financial statements;
 Auditors to confirm in writing that management acknowledges its responsibility for
the design and implementation of internal control; and
 Auditors to conform in writing that management believe that the effects of
uncorrected misstatements aggregated by the auditors during the audit are
immaterial.

Audit evidence
Representation relating to responsibility for the financial statements, the auditor may wish to
rely on management representations as audit evidence.

3. When management representations are required? Or

What may the instances be where management representations are the only audit evidence?

There are instances where management representations may be the only audit evidence
available.
 When the facts are a matter of management intention; and
 When the matter is judgmental on an opinion.

4. What matters should be considered when the auditors receive representations?

Seek corroborative audit evidence from sources.

 Evaluate whether the representations made by management is consistent with other
audit evidence; and
 Consider whether the individuals making the representations are well-informed on the
matters.

5. What should be done by the auditors when the representations received don’t agree with other
audit evidence?

 Investigate the circumstance of the disagreement;

 Carry out alternative audit procedures in case of insufficient answers of inquiry; and
 Consider whether the disagreements costs doubt on other representations by
management.

6. What are the methods of obtaining representations?

 Oral; and
 Written:
 Representation letter duty signed by management;
 Obtain relevant minutes of meeting; and
 Signed copy of financial statements.
Assurance: PS - Knowledge level
 7. What are the basic elements of mgt. representation?

 Entity letterhead;
 Title;
 Addresses;
 Date of the letter;
 Specific material information related FSs; and
 Material information related information provided.

8. What should auditor do when mgt. refuges to provide representation?

 The auditor should consider scope limitation; and

 The auditor should modify the report.

9. Draft a management representation letter.

Entity Letterhead

To Auditors

Date:

This representation letter is provided in connection with your audit of the financial statements
of ABC Co. Ltd. For the year ended December 31, 2010 for the purpose of expressing an opinion
as to whether the FSs give a true and fair view of the financial position of ABC Co. Ltd. As of
December 31, 2010 and of the results of its operations and cash flows for the year then ended
in accordance with BFRSs.

We acknowledge as directors our responsibilities under the companies Act 1994 for preparing
financial statements that give a true and fair view. All the accounting records have been made
available to you for the purpose of your audit and all the transactions undertaken by the
company have been properly reflected and recorded in the accounting records. All other records
and related information including minutes of all management and shareholders meetings have
been made available to you.

We also acknowledge our responsibility for the design and implementation of internal control to
prevent and detect fraud.

We confirm to the best of our knowledge and belief the following representations.

 There have been no irregularities involving mgt. or employees what have a significant
role in the accounting and internal control systems or that could have a material effect
on the FSs and we have disclosed to you our assessment of the risk that the financial
statements might be materially misstated as a result of fraud;
 The FSs are free of material misstatements including omissions;
 We have no plans or intentions that may materially after the carrying value of assets
and liabilities reflected in the FSs; and
 We have no plans to abandon lines of product or other plans or intentions that will result
in any excess or absolute inventory and inventory is stated at an amount in excess of
net reliable value.

Senior Executive Officer

Senior Financial Officer,

Substantive Procedures- Key Financial Statements Figures (Chapter-13)

Assurance: PS - Knowledge level
 NON-CURRENT ASSETS

A. What are the key areas for testing?

1. Tangible non-current assets;

2. Intangible non-current assets; and
3. Investments.

1. What are the key areas when testing tangible non-current assets?

 Confirmation of ownership to ensure rights and obligations;

 Inspection of non-current assets to ensure existence and valuation;
 Valuation, preferable by third parties for accurate valuation; and
 Adequacy of depreciation rates for actual valuation.

2. What are the key areas when testing intangible non-current assets?

 Confirmation that assets exist; and

 Confirmation of appropriate valuation.

3. What are the key areas when testing investments?

 Confirmation of existence; and

 Confirmation of ownership.

4. What are the reasons of tangible non-current assets balances to be misstated in the financial
statements?

The major risks of the tangible non-current assets balances in the financial statements being
misstated are due to:

 The company not actually owing the assets;

 The assets not actually existing or having been sold;
 Omission of assets owed by the company;
 The assets being overvalued, either by inflating cost or valuation or by undercharging
depreciation;
 The assets being undervalued by not including an appropriate revaluation in a policy of
revaluation or by overcharging depreciation; and
 The assets being incorrectly presented in the FSs.

5. What are the resources of information about non-current assets?

 The non-current assets register;

 Purchase invoices for assets purchased within the year;
 Sales invoices for the assets sold within the year;
 Registration documents or other documents;
 Valuation carried out by employees or third parties;
 Lease or hire purchase documentation in respect of assets;
 Physical inspection of the assets; and
 Depreciation records and calculations.

6. What are the major risks of misstatement of the intangible non-current asset balances in the
financial statements?

The major risks of misstatement of the intangible non-current assets balances in the financial
statements are due to:

Assurance: PS - Knowledge level

  Expenses being capitalized as non-current assets inappropriately.
 Intangible assets being carried at the wrong cost or valuation due to inflating the cost or
valuation;
 Intangible assets being carried at the wrong cost or valuation due to charging in appropriate
amortization, wrongly amortizing or not amortizing;
 Intangible assets being carried at the wrong cost or valuation due to impairment reviews not
being carried out appropriately.

The objective of tests in respect of intangible non-current assets is therefore to prove these
assertions about the assets are correct.

7. What are the sources of information about intangible NCA?

 Accounting standards and auditors knowledge of accounting standards for what constitutes
an intangible assets;
 Purchase invoice or documentation;
 Calculations and schedules ;
 Specialists valuations; and
 Auditors understanding of the entity.

INVENTORY
B. What are the key areas when testing inventory?

Key areas when testing inventory are:

 Attending an inventory count;
 Valuation at lower of cost and net realizable value; and
 In some cases confirmation of ownership.

8. What are the major risks of misstatement of the inventory balance in the FSs?

The major risks of misstatement of the inventory balance in the financial statements are due
to:
 Inventory that does not exist being included in the FSs;
 No all inventories that exists being included in the FSs;
 Inventory being included in the FSs at full value when it is absolute or damaged;
 Inventory being included in the FSs at the wrong value whether due to miscalculation of cost
or valuation method; and
 Inventory that actually belongs to third parties being included in the financial statement.

9. What are the sources of information about inventory?

 The companies control over inventory counting;

 The auditors attendance at the annual inventory count;
 Confirmation with third parties holding inventory or having inventory stored for them by the
company;
 Purchase invoices for inventory;
 Work in progress records for inventory;
 Past year end price lists for inventory; and
 Past year end sales orders.

Inventory may lend itself to analytical review as there is a relationship between inventory,
revenue and purchases.

10. When net realizable value is likely to be less than cost?

Net realizable value is likely to be less than cost when there has been:
 An increase in costs or a fall in selling price:
 Physical deterioration;
Assurance: PS - Knowledge level
  Obsolescence of products;
 A marketing decision to manufacture and sell products at a loss;
 Errors in production or purchasing.

For working progress the ultimate selling price should be compared with the carrying value at
the year-end plus costs be incurred after the year-end to bring work-in-progress to a finished
stage.

RECEIVABLES

C. What are the key areas when testing receivables?

Key areas when testing receivables are:

 Confirming debt owed by customers; and
 Confirming debt is still likely to be collected.

11. What are the major risks of misstatement of the receivables balance in the financial
statements?

The major risks of misstatement of the receivables balance in the financial statements are due
to:
 Debt being uncollectible; and
 Debts being contested by customers;

The objective of audit tests in respect of receivables is therefore to prove that these assertions
about the assets are correct.

12. What are the sources of information about receivables?

 Receivables ledger information;

 Confirmation from customers; and
 Cash payments received after the year end.

13. What are the methods of confirmation from customer and when to exercise?

When confirmation is undertaken the method of requesting information from the customer
may be with positive or negative.

 Positive method
Under the positive method the customer is requested to give the balance or to confirm the
accuracy of the balance shown or state in what respect he is in disagreement; and

 Negative method
Under this method the customer is only requested to reply if the amount stated is disputed.

14. What are the circumstances to apply negative method?

Negative method of confirmation should only be used when:
 Assumed risks of material misstatements is low;
 A large number of small balance is involved ;
 A substantial number of errors is not expected; and
 The auditor has no reason to believe that customers will disregard the request.

15. Draft a positive request for confirmation with balance.

Assurance: PS - Knowledge level
 Entity Letterhead
Date
Messrs (Customer)

In accordance with the request of our Auditors, Messrs ZZKR & Co. we ask that you kindly
confirm to them directly your indebtedness to us as on date which according to our records,
amounted to BDT….as shown by the enclosed statement.

If the above amount is in agreement with your records, please sign in the space provided below
and return this letter directly to our auditors in the enclosed stamped addressed envelope.

If the amount is not in agreement with your records, please notify our auditors directly of the
amount shown by your records and if possible detail on the reverse of this letter full particulars
of the differences.

Yours faithfully,
For Manufacturing Co. Ltd.
Reference No.
(Tear off Slip)

The amount shown is/is not in agreement with our records as on date.

Account no. Signature……………………………

Date…….. ….. Title or position…………………….

The position according to our record is shown overleaf.

16. Define and clarify the confirmation procedure.

When constructing the sample the following classes of account should receive special attention:
Old unpaid accounts
 Accounts written off during the period under review;
 Accounts with credit balances; and
 Accounts settled by round some payments.

Similarly the followings should not be overlooked:

 Accounts with net balances; and
 Accounts that have been paid by the date of the examination.

Assurance provides will have to carry out further work in relation to those receivables who:
 Disagree with the balanced stated; and
 Do not respond.

BANK

D. What are the key areas when testing the balance sheet bank figures?

 Confirming bank balances directly with the bank;

 Confirming reconciliations differences calculated by the client are reasonable; and
 Confirming any material cash balances held at the client are correctly stated.
17. What are the major risks of misstatement of the bank and cash balance in the financial
statements?

The major risks of misstatement of the bank and cash balances in the financial statements are
due to:
 Not all the bank balances owed by the client being disclosed;
 Reconciliation differences between bank balance and cash book balance being misstated;
and
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  Material cash floats being omitted or misstated.

18. What are the sources of information for bank and cash balances?

 Cash book;
 Confirmation from the bank;
 Bank statements; and
 Bank reconciliations carried out by the client.
PAYABLES

E. Key areas when testing payables:

 Ensuring that all liabilities are included; and

 Confirming that all liabilities are bona fied owed by the company

19. The major risks of misstatements of payable in the financial statements are due to:

 The entity understanding its liabilities in the FSs;

 Cut-off between goods inward and liability recorded being incorrect; and
 Non-existent liabilities being declared.

20. The following sources of information can be used:

 Payable ledger records; and

 Confirmations from suppliers.
LONG-TERM LIABILITIES

F. Key areas when testing long term liabilities:

 Risks included failure to make correct disclosures and miscalculation of interest; and
 There should be third party evidence from lender.

21. The major risks of misstatements:

 That all long term liabilities have been disclosed;

 That interest payable has not been calculated correctly and included in the correct
accounting period; and
 That disclosers are incorrect.

22. The following sources of information exist:

 Schedule of loans/ prior year audit file information;

 Statutory books;
 Loan agreement;
 Bank letter and direct confirmations from other lenders;
 Cash book ;
 Board minutes;
 Clients schedules and calculations; and
 Accounting policies in the financial statements.

23. What is the key area when testing income statement items?

The key area for testing income statement items is completeness.

Codes of Professional Ethics (Chapter-14)

Assurance: PS - Knowledge level

1. Why the accountants require ethical codes?

 Accountants require an ethical code because they hold positions of trust and people rely on
them.
 Accountants work in the public interest which extends beyond clients to people associated
with those clients and the general community.
 ICAB members are subject to ICAB guidance.

2. What are the sources of ethical guidelines of ICAB?

ICAB members and employees of member firms are subject to the ICAB code of ethics. This is
influenced by the guidance of the International Federation of Accountants (IFAC) of which ICAB is
a member.

3. What is the principle based guidance? What are the advantages of it?

Principle-based guidance
ICAB members are subject to ICAB guidance contains some rules which tend to be issued in the
form of principles rather than hard and fast rules.

There are a number of advantages of a framework of principles based guidance of ethical rules
which are:

Factor Explanation
Active consideration  A framework of principles places the onus on the accountants to
and demonstration of actively consider independence for every given situation;
conclusions  It also requires him to demonstrate that a responsible
conclusion has been reached about the ethical issues.

Broad interpretation of A principle based framework prevents auditors interpreting

ethical situations legalistic requirements narrowly to get around ethical
requirements.
Individuals situations A principle-based framework allows for the variations that are
covered found in the individual situations.

Flexible to changing It can accommodate a rapidly changing environment.

situation
Can incorporate However a principles-based framework can contain certain
prohibitions prohibitions where these are necessary.

4. What contains in the IFAC code?

The IFAC code contains a number of fundamental principles.

 It also gives guidance on the meaning of independence and the approach accountants should
take to ethical questions
 The IFAC code sets out a number of general threats to independence and categories of
safeguards.

5. What are the fundamental principles of IFAC Code, explain?

The fundamental principles of IFAC Code are:

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

Objectivity
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 A professional accountant should not allow bias, conflict of interest or undue influence of others.
Professional competence and due care
A professional accountant should act diligently to ensure competent professional service when
providing professional services.
Confidentiality
A professional accountant should not disclose any information acquired as a result of professional
and business relationships and should not use for personal advantage of anyone.
Professional behaviors
A professional accountant should comply with relevant laws and regulations and should avoid any
action that discredits the professions.
6. What is independence? What should be an appropriate approach when no safeguard is available?
Independence is the public interest and therefore required by this code of ethics that members of
assurance teams be independent of assurance clients.
When no safeguard is available, it is only appropriate to:
 Eliminate the interest or activities causing the threat
 Decline the engagement or discontinue it.
7. Define independence of mind and independence in appearance.
Independence of mind
Independence of mind is the state of mind that permits the expression of a conclusion without
being affected by influences that comprise professional judgment and skepticism.
Independence of appearance
Independence of appearance is the avoidance of facts and circumstances that are so significant.
8. How many threats are available by the code?
There are five general sources of threat identified by the code. Though other sources identity six
treats:

 Self- interest threat

Having a financial interest in a client;

 Self-review threat
Auditing financial statements prepared by the firm;

 Advocacy threat
Promotion the clients position by detailing in its shares;

 Familiarity threat
An audit team member having family at the client;

 Intimidation threat
Threats of replacement due to disagreement; and

 Management threat
Design and implement IT system.

9. What are the safeguards behind the threats as per code of ethics, give few examples?

There are two general categories of safeguards by the code:

 Safeguards created by the profession, legislation or regulation; and
 Safeguards within the work environment.

10. What are the safeguards created by the profession, legislation or regulation?

Safeguards created by the profession, legislation or regulation are:

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  Educational training and experience requirements for entry into the profession;
 Continuing professional developments requirements;
 Corporate governance regulations;
 Professional standards;
 Professional or regulatory monitoring and disciplinary procedures; and
 External review by a legally empowered third party.

11. What are the safeguards within the work environment?

Safeguards within the work environment are:

 Involving an additional professional accountant to review the work done;

 Continuing an independent third party as professional regulatory body;
 Rotating senior personnel;
 Discuss ethical rules with those in charge of client governance;
 Disclosing the nature of service provided and the extent of fees charged to those charged
with governance; and
 Involving another audit firm to perform or re-perform the part of the engagement.

12. What are ICAB codes?

 The ICAB code is relevant to professional accountants in all of their professional or business
activities; and
 The ICAB incorporates the IFAC codes of ethics to ensure compliance with the IFAC code
and also contains additional rules deemed appropriate by the ICAB.

Integrity, Objectivity and Independence (Chapter- 15)

1. Define integrity, Objectivity and Independence.

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 Independence
Independence is freedom from situations and relationships that make it probable that a
reasonable and informed third party would conclude that objectivity either is impaired or could be
impaired. It is also related to and underpins objectively.
2. Why do independence and objectivity matter so much?

Independence and Objectivity matter so much because of:

 The expectation of those directly affected. The audit should be able to provide objective
assurance that the directors can never provide on the financial statements; and
 The public interest.
3. What can the auditor do to preserve objectivity? What are the disadvantages of auditor’s
withdrawal of engagement?
The auditor may withdraw from any engagement if there is slightest threat to objectively.
The disadvantage of this strict approach by withdrawal of engagement by the auditor causing to
client are:
 Clients may lose an auditor who knows their business; and
 Clients are deprived of having the choice of being advised by the accountants.

4. Self-interest threat may arise in a great number of areas, what are they?
The code of ethics of IFAC and ICAB highlight a great number of areas in which a self-interest
threat may arise:
 Financial interest; and
 Close business relationships;
 Employment with assurance client;
 Partner on client board;
 Family and personal relationships;
 Gifts and hospitality;
 Loans and guarantees;
 Overdue fees;
 Percentage or contingent fees;
 High percentage of fees; and
 Low balling.

5. Which parties are not allowed to own a direct financial interest or an indirect material financial
interest in a client?
The following parties are not allowed to own a direct financial interest or an indirect material
financial interest in a client:
 The assurance firm;
 Any partner in the assurance firm;
 A person in a position to influence; and
 An immediate family member of such a person.

6. What are the areas from where a self-review threat may arise?

 Service with assurance client;

 Preparing accounting records and financial statements;
 Valuation services;
 Tax services;
 Internal audit services;
 Corporate finance; and
 Other services.

7. What are the sources of advocacy threat?

 Legal services;
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  Corporate finance; and
 Contingent fees.

8. What are the sources of familiarity threat?

 Personal relationship between client and firm;

 Employment with assurance client;
 Recent service with assurance client; and
 Recruitment.

9. What are the sources of intimidation threat?

 Close business relationship;

 Family and personal relationships;
 Assurance staff members move to employment with client; and
 Litigation.

10. What threats may be existed to accept new client?

 Illegal activities of the client;

 Apparent dishonesty of the client; and
 Questionable accounting practice of the client.
11. Which matters should a professional accountant consider while resolving ethical conflicts?

The ICAB code states a framework that professional accountant can follow when seeking to
resolve ethical problems. The professional accountant should consider:
 The relevant facts;
 The relevant parties;
 The ethical issues involved;
 The fundamental principles related to the matter in question;
 Established internal procedures; and
 Alternative courses of action.

12. What is the best way of solving conflicts?

It is generally better to resolve conflicts “in house” than to refer to external bodies.

13. What are the implicit or explicit pressures faced by the accountants?

 Act contrary to low or regulation;

 Act contrary to ethical or professional standards;
 Facilitate unethical or illegal earnings management strategies;
 Lie to or mislead auditors or regulators;
 Issue or mislead auditors or regulators; and
 Issue or be associated with published reports that materially misrepresent the facts.

14. What may be the safeguards for mitigating the conflicts?

 Obtaining advice from within the employer, an independent professional advisor or the ICAB;
 Using a formal dispute resolution process; and
 Seeking legal advice.

The End

Confidentiality (Chapter- 16)

1. Why is confidentiality so important?

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 Confidentiality is so important because:

 Confidentiality is a fundamental ethical principle; and

 Confidentiality is important as if a key factor in the trust between client and accountant.

2. What are the safeguards to confidentiality?

Assurance provides should take basic security precautions to prevent accidental disclosure of
information, such as:

 Not discussing client matters with any party outside of the accounting firm or in a public
place;
 Not leaving audit files unattended;
 Not working in unprotected computers; and
 Not removing working papers from office unless strictly necessary.

3. What are the circumstances to disclose confidential information acquired in the course of
professional work?

Information acquired in the course of professional work should only be disclosed where:

 With clients’ permission;

 Public duty to disclose; and
 Legal or professional right or duty to disclose.

4. What are the circumstances to disclose confidential information as per Code of Ethics?

The code of ethics also identifies three circumstances where the professional accountant may be
required to disclose confidential information:

 Disclosure is permitted by law;

 Disclosure is required by law; and
 Professional duty or right to disclose.

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