chapter 1

Reintroduction to audit and assurance

Worked example: Assurance engagement
Predator Ltd, a large listed company, is considering taking over Target Ltd, a small, family owned company.
Predator has asked Talbot and Co, chartered accountants, to carry out due diligence in relation to this
prospective purchase. They want them to review the financial statements of the last three years and
ensure that they were prepared under BFRS/BAS. They also want them to review the budgets for the
coming 12 months and ensure that they are reasonably and internally consistent.
You can see the elements of the assurance service as these:

  Practitioner: Talbot and Co 

  Responsible party: Target Ltd management 
  Users: Predator Ltd management 
  Subject matter: Financial statements/budgets 
 Criteria: BFRS/BAS/reasonable and internally consistent 
Talbot and Co will plan and carry out work to obtain sufficient appropriate evidence to support their
assurance opinion, which will be given in a written report.
The benefits of this service to Predator Ltd are that:
 They are given assurance that the financial statements are in line with BFRS/BAS and therefore are
understandable and comparable with other companies they might be considering for takeover. 

 They are given assurance that the budgets are reasonable and internally consistent and therefore can
be trusted as an indicator of the company’s future operating ability. 

 They can therefore make an informed decision about whether to buy Target and for how much. 

Worked example: How audit is an assurance engagement

The key criteria of an assurance engagement can be seen in an audit as follows.
(1) Three party involvement

  The shareholders (users) 

  The board of directors (the responsible party) 
 The audit firm (the practitioner) 

(2) Subject matter
The financial statements

(3) Relevant criteria

Law and accounting standards
(4) Evidence
The auditor is required by Bangladesh standards on auditing (BSAs) to obtain sufficient and appropriate
evidence to support the audit opinion.
(5) Written report in a suitable form
As required by BSA 700 the audit report is a written report issued in a prescribed form.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic Group,

Cell-01711981920 E-mail: [email protected] Page 1
 chapter 2

Responsibilities
Worked example: Computer controls
Katie is the receivables ledger clerk for Happy Limited. She enters sales invoices to the ledger in batches.
The computer has a number of inbuilt controls to ensure that Katie does not make mistakes when she is
inputting information.
It has a data range query function so that if Katie enters a figure that exceeds a pre-set limit, it will
automatically prompt her to check she is correct.
It has a data type query function so that if Katie enters a figure where she was supposed to enter a letter, it
will automatically prompt her to check she is correct.
It has several calculation functions, so that if Katie enters an incorrect amount in relation to VAT or
invoice total, or does not enter such a figure, it will automatically prompt her to check she is correct.
It has a batch total calculation, that Katie then compares the total for all the invoices she has entered per
her own calculation to the calculation on the computer, to ensure that all the invoices have been entered.
All these controls operate to ensure that Katie does not enter the wrong amounts in respect of each sales
invoice, which ultimately helps to ensure that the revenue figure in the financial statements does not
contain errors.
We discussed the limitations of systems of internal control in your studies for Assurance.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 chapter 5

Quality control
Worked example: Need for quality
Take a moment to think about what the areas of risk are for the firm. The list you came up with might look
something like this.
The terms 'auditor' and 'audit' are used here, because audits are a common form of assurance engagements but
the same principles will apply to any assurance engagement.
Let us start, as it were, from the bottom up.
The client

  Could be incompetent 
  Could be negligent 
 May mislead the audit team 
The individual auditor

  May not have adequate understanding of the client’s business 

  May not perform the right work to an adequate standard 
 May not record the work done adequately 

The supervisor

  May not have an adequate understanding of the client’s business 

  May not brief and direct the staff properly 
  May not carry out sufficient supervision so that the wrong work is done by the audit team 
  May fail to deal with issues raised adequately 
 May fail to communicate the issues arising to the engagement partner 
The engagement partner

  May have insufficient knowledge of the client and its environment 

  May fail to pass knowledge of the business on to the audit team 
  May select the wrong team for the audit 
  May not adequately brief and supervise the team 
  May not consult sufficiently with colleagues and outside experts 
  May not review the work carried out by the team with sufficient care 
  May fail to deal with issues raised adequately 
 May not draw the correct conclusions from the evidence available 

Worked example: Policy in respect of employees' shareholdings

Freshfields & Co is a large accountancy practice. It has a number of assurance clients. At the beginning of
every year it circulates a memorandum to all staff employed in the assurance division requesting that they
disclose any shareholdings in a list of named assurance clients. It further emphasises the need for
disclosure of such shareholdings should they arise in the year. Every staff member joining the assurance
department during the year is also asked to make the disclosure.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 chapter 6
Accepting engagements
Worked example: Two clients
Imagine two clients of a similar size, in the same industry:
Client A
You have never had to make any adjustments to client A’s financial statements, which are produced
by their qualified chief accountant and his experienced and competent staff from proprietary
software which both you and they know and understand well. The company’s chief executive is a
stickler for deadlines, but takes a genuine interest in the financial statements so that accurate
numbers are produced on time on a regular basis.
Client B
The chief executive of client B is a 'seat of the pants' man, who has little time for accountants and
the financial statements they produce. The accounts department is understaffed, those working
there are unqualified and using an accounting package on which they have received no formal
training. Every year you go through a lengthy process of correcting the trial balance before you can
even start to think about analytical procedures and audit work proper. You are always under
pressure to finish the engagement on time and there is always an argument about the fee.
Think carefully about the differences between these two clients:
Clearly client A is better organised than client B on the accounting front. Client A therefore starts
out as a lower risk proposition than client B.

Why?

  Because history tells us that they are less likely to make mistakes. 
  Because the culture is such that accuracy and good record keeping is encouraged. 
 Because, probably, there are systems in place to pick up mistakes and correct them as they occur. 
This is looking quite simple then – client A is lower risk than client B, therefore you do less work on
client A, client A is charged a lower fee.
Think now about your attitude to risk after the financial statements for both clients are finalised.
 For client B you have unpicked and re-assembled every single element in its financial statements. 

 You have considered in detail every item in the balance sheet, and you have reviewed every account in
the income statement. 
The trouble with clients like client B is that you are usually under a certain amount of pressure to finalise
the financial statements and there tend to be a few loose ends left about which you 'take a view', but it
would not be impossible to end the audit of client B feeling more confident about its figures than client A’s,
because you had looked at them in more depth.
Another question
If
 You were a fraudster, hoping to inflate the value of your company so that a venture capital fund would
invest, or a bank would continue with finance, or a large multinational would purchase it; 
or
 You were a money launderer wanting to introduce the profits from your drug smuggling and dealing
activities into an otherwise legitimate business; 
would you prefer to be operating client A or client B?

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 You could argue that things are so chaotic at client B that no one would notice a few stray transactions.
Or you might think that the auditors have to spend so much time on the detail that they would have quite a
good chance of picking something up.
Perhaps the well organised, reliable client A, where the auditors don’t seem to do very much
detailed checking, might be a better bet.
The most that can be said therefore is that the assessment of risk is something of a balancing act between
your judgement of how reliable the information coming from the client is likely to be and the things you can
actually do.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 2
 chapter 8

Understanding the entity and its environment

Worked example: Enron – a cautionary tale
Originally Enron operated gas pipelines in the US. It charged its customers, the gas producers, for using its
pipelines.
Think about what sort of information you would need about the nature of Enron's business at this stage in
its development.
 Probably something about how it charged its customers – on a time basis perhaps or on a volume basis.
If it was based on volume how did they measure volume? How reliable are the flow meters etc? You
would need to know this in quite a lot of detail. 

 Presumably the company would need to maintain its network of pipelines – so you would need to
know something about its capital budgeting procedures and whether its finances might come under
pressure. You would need to watch out for going concern problems if there were difficulties, but
providing it had good systems to monitor the risks, less detailed knowledge would probably be
sufficient. 
 You would be interested in the ability of its customers to pay, which might mean you would need to
know something about the general state of the economy and whether its customers had cash flow
problems. But on the whole this would be relatively general, background information. 
Then Enron starts to buy power production facilities:

 How does it finance them? 

 How is it regulated? 
 Are there transfer pricing issues? 
Then it starts to trade energy (and other things such as cargo space on ships) and this is when it starts to
get tricky! How is your knowledge of:

 Swaps 

 Futures 
 Options and similar transactions? 
Enron starts to use an accounting technique called 'mark to market' whereby its earnings are calculated on
the movements in the market values of its deals, rather than on the traditional combination of invoicing
and cash flows.
 What do you know about this technique? It had a material impact on Enron's earnings. (Mark to
market is not in the syllabus – this is simply an example of how a client can become more and
more complex) 

 Is it being used properly or is it being abused? 

 Are the assumptions and calculations valid? 
Finally we find that Enron is using 'Special Purpose Entities’ – usually offshore partnerships in which it has
a significant interest – to hide debt and generate earnings which are highly questionable.
 What do you know about the rules for excluding subsidiary undertakings from consolidation? (Again,
do not panic, if you do not know very much about this at this stage – it is simply an example to get
you thinking) 

 What do you think about the ethics of using techniques which, whilst they may comply with the letter

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 of the rules, undoubtedly are highly artificial and do serve to conceal debt and generate controversial
earnings? 

 How would you feel if your firm had either suggested such schemes or been consulted about their
acceptability before the audit had begun? 
Source: BBC Money Programme 'Inside the Enron Scandal'

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 2
 chapter 9

Risk assessment
Worked example: Industry level risk
The obvious example of a sector which in relatively recent years, was characterised by high
risk was the 'dot com' boom of the 1990s.
 You could argue that this was not a sector at all – as the various players in the market
were dealing in a wide variety of goods and services, and the only thing they had in
common was that they were all attempting to deal over the Internet. 

 You could argue that the problems in the sector were really systems and controls
problems, and that the people setting up dot com businesses did not have the experience
or acumen to run any business successfully. 
Nevertheless all the dot com businesses needed a high level of start-up capital because not
only did they have to fund the normal things which a business has to do – marketing,
research and development, the purchase of initial inventory, the financing of working capital
needs – they also had to develop the IT platform which was so fundamental to the business.

Worked example: Entity level risk

For two similar clients A and B, if one of the companies was:

  A takeover target 
  Up to its overdraft limit 
 Had a major supplier or customer in difficulties 
it would clearly be more inherently risky than the other.
Again you should remember that the picture does not remain static.

Worked example: Balance level risk

The inventory at a jewellers, for example might be considered higher risk than the same company’s
non-current assets, consisting of shopfittings, office equipment and, hopefully, some rather impressive
safes and security equipment.
Remember that the inventory itself will still be inherently risky, even though the company may have well
thought out security arrangements. The impact of these fall into the category of 'control risk' which we
will revisit in a moment.

Worked example: Assessing the risks of material misstatement

Your firm has recently been appointed auditor of Trendy Products Ltd, a wholesaler of clothing and
fashion accessories geared to the younger market. You are responsible for planning the audit, and have
obtained the following background information.
The company imports most of its goods from manufacturers in the Far East. The suppliers issue invoices in
dollars, payable within 30 days. The finance director uses a mixture of forward exchange contracts and
spot purchases of dollars to pay these suppliers.
Most of the company’s customers are small retailers. However, the company has increased its sales by 50%

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 in the last quarter due to a new contract to supply a large retailer. In order to secure this new business,
credit terms had to be relaxed from the standard 30 days to 60 days for this customer.
As a result of this expansion the company is finding it difficult to stay within its overdraft limit and
is currently negotiating with the bank to increase the facility.
The company recently upgraded its PC-based modular purchases, sales and nominal ledger systems to
an integrated system. The accounting package was supplied by a software company which had recently
commenced trading.
The software supplier assisted the company with the changeover from the old system to the new. As a
result management decided that there was no need to involve the previous auditor or to have a parallel
run.
Mrs Evans is solely responsible for the input of data, but due to the changeover she is several weeks behind
with her work. She hopes to be up-to-date by the time of the audit as she intends to work overtime to
clear the backlog.
A number of circumstances which add risk to the audit can be noted. These circumstances, the reasons
they must be taken into account when planning the audit and the effect they will have on the audit
work carried out are shown below.

Circumstance Why taken into account Effect on audit work

This is a new audit New appointment Accounting systems and internal
appointment. increases detection risk controls need to be ascertained.
due to lack of
Current period audit work should
cumulative/prior
have regard to the opening balances
knowledge from previous
and comparatives. BSA 510 and BSA
audits.
710 will assist the auditor.
 Trendy Products Ltd The nature of the industry Evaluate inventory count instructions
operates in the fashion contributes to high for procedure to identify obsolete
industry. inherent risk, as clothes items.
and accessories do not
Review post year-end order book to
stay in fashion and year
establish adequacy of inventory
end inventory provisions
provisions.
may be inadequate.
 Most purchases are Inherent risk is increased Any gains and losses on dollar
imported and paid for in by exposure to dollar transactions/year-end balances
dollars. fluctuations. should be taken to the income
statement and monetary items
should be translated at the year-end
rate.
Economic dependencePressure from the new  Having expanded to
on a principal customer. customer may increase accommodate this customer,
inherent risk. ensure the going concern
assumption remains appropriate if
the new contract is terminated. 

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 2
Circumstance Why taken into account Effect on audit work

 The company is Deterioration of cash The auditor should review

currently renegotiating flows increases going management assessment of going
its overdraft. concern risk, which will be concern.
made worse if the
The effect on liquidity ratios, debtor
overdraft is withdrawn.
days etc should be calculated and
actions to remedy the cash flow
problems discussed with directors.
The bank may seek to This increases risk as Particular attention should be given
place reliance on the management have a to
audited accounts before motive to manipulate the
– Bank overdraft/creditor cut-off
negotiations are finalised. accounts.
– Most likely areas of misstatement
and significant areas where
judgement is involved, e.g.
provisions
– Impact of potential audit
adjustments on key ratios
If a satisfactory outcome to the
negotiations is not reached before
the audit is completed, a qualification
is likely.
 The software company Inherent risk may be The level of audit testing of the new
being used has only increased by inexperience system is likely to be higher than for
recently commenced of the software company. an accounting package with a good
trading. track record.
There is a potential risk If any significant problems The lack of proper accounting
that data transfer was with the changeover are records may need referring to in the
inaccurate or encountered then, in the audit report.
incomplete. absence of a parallel run,
proper accounting records
may not have been kept.
 There is a backlog  Human error is more  Cut-off should be carefully
of data input.  likely if overtime working reviewed as errors are more likely
is excessive, therefore if data processing is not up-to-date
inherent risk is increased.  at the year end. 

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic Group,

Cell-01711981920 E-mail: [email protected] Page 3
 Worked example: Significant risks
  Property purchases and sales 
  Acquisition and disposal of businesses 
  Decision to factor receivables 
  Potential sale of the business 
 Diversification into new sectors 

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 4
 chapter 10

Audit approach
Worked example: Audit of inventories
You could audit inventory by counting it all and working out what it is worth by exhaustive checking to
invoices etc – reliance on tests of details (substantive approach)
or
You could:
 Look at the client’s system for recording purchases and sales and working out what it has left in
inventory 

 Check that all goods are checked when they arrive by a reliable storeman, who you know will not let
anything leave the warehouse without proper authorisation 

 Check that the warehouse is securely locked when no one is on site 
and so on.
Having looked at all this you might decide that it is highly likely that the inventory figure which the client
produces will be correct and that there really is not much point in going through all that counting rigmarole
on a cold winter’s morning – you would be wrong and you would be in breach of the auditing
standards – but you might feel that way – absolute reliance on controls.
or
You could look at the breakdown of inventory over the last few years, consider the normal inventorylevels
the client carries and their relationship to purchases and cost of sales, the basis for overhead and labour
recovery, and you might think that, all in all the inventory figure looks about right – reliance on
analytical procedures

In practice you are likely to do a combination of all three. Auditing standards require you to carry out some substantive
procedures (tests of details or analytical procedures). Carrying out some controls testing reduces the amount of
substantive testing to be carried out. The precise mix changes depending on the nature of the client:
 For a small scale client at a single location it may be just as efficient to observe the inventory count and to carry
out a number of test counts as it is to spend a great deal of time evaluating the system, or calculating ratios. You
will be relying on controls such as the reliability of the inventory checkers to a limited extent, but you will also
have a good deal of confidence about the final figure deriving from the substantive work you have done; i.e. your
own test counts. 

 For a large national building supplies company with a large number of depots, you are likely to rely to a greater
extent on your assessment of controls and analytical review. 
You may be tempted to say that, with all those depots, it would be simply impossible to visit them all. However, this is not
the appropriate reason for your chosen audit approach. What matters is the level of risk and reducing it to an acceptable
level. If the only way to be confident enough that there are no material errors in the inventory figure was to attend all the
depots, then that is what you would have to do.
However, in order to control a business of that size management will need to have installed systems and controls, so
rather than attend all the depots and test count everything yourself, assuming the controls appear capable of being
effective, you can chose to rely on them and test that they are effective.
For a business such as a software company or a consultancy business, where the 'inventory' is going toconsist of
people’s time costs carried forward to be amortised against sales in future periods, you are likely to rely to a very large
extent on analytical review for your audit confidence.

Worked example: Using the work of internal audit

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic Group,

Cell-01711981920 E-mail: [email protected] Page 1
 You are currently involved in planning the audit of Midget Ltd. At the beginning of the year that you are
auditing, the company set up an internal audit department, and this is the first visit since you were aware
of its existence. From your initial discussions with the managing director, you have established that Mr
Gnome, the internal auditor, has undertaken a number of assignments across the company, and fed back to
the board on his findings.
The following factors should be taken into account when considering whether you can rely on the
work undertaken by Mr Gnome and his staff:
 The organisational status of the department, including its ability to be objective and the level of
management it reports to. In this case, you know that Mr Gnome reports directly to the board of
directors, so the department has an important status in the company. 

 The scope of the internal audit function, including the nature and extent of assignments carried out
and whether management acts on its reports. In this case, you would need to inquire further into the
types of assignments that the internal audit department has carried out and whether there has been
any action as a result of these assignments. 

 The technical competence of the people carrying out the work. In this case it would be necessary to
inquire about the competence of Mr Gnome, for example, is he a qualified accountant? It would also
be necessary to identify the other members of the internal audit team (if there are any) and assess
their competence as well. 

 The application of due professional care. The external auditors should review the work carried out by
the internal auditors to check that it was documented in the first place, and to assess whether it was
planned and whether there is evidence of its being supervised and reviewed. 


Worked example: Valuation of a commercial building
An expert valuation of a commercial building could be compared to the value of other, similar
commercial buildings in estate agent's windows or on the web.
The auditors do not have the expertise to judge the assumptions and methods used; these are the
responsibility of the expert. However, the auditors should seek to obtain an understanding of these
assumptions etc, to consider their reasonableness based on other audit evidence, knowledge of the
business and so on.
This may involve discussion with both the client and the expert. Additional procedures (including use of
another expert) may be necessary.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic Group,

Cell-01711981920 E-mail: [email protected] Page 2
 chapter 12

Audit completion
Worked example: Enron again
As we saw in Chapter 8, Enron devised a way of hiding debt by manipulating the detailed
accounting rules for dealing with subsidiaries. This led to the non-disclosure of debt in
excess of $20bn. According to the Washington Post website, the initial transaction on
which this technique was first used, was to artificially preserve the value of an investment
of $300,000 which was immaterial in terms of the Enron audit, but the use of the
technique led to misstatements which were very material indeed.

Worked example: The way financial statements are prepared

Consider the deceptively simple example of a non-current asset such as a car. We all know that, as soon
as you drive your brand new car away from the showroom it loses a disproportionate amount of its resale
value and that this depreciation happens very rapidly in the early stages of the car's life, before flattening
out after a couple of years or so. However, in financial statements, the depreciation charge and resultant
reduction in the car's net book value is usually dealt with on a straight line basis, because, over time, it is
probably truer and fairer to amortise the car's value evenly over its life – it is, after all, an asset which is
'used up' evenly over its life, whatever its resale value at any particular point in time. It is also
administratively easier to calculate depreciation this way.
The reason why this treatment is acceptable is because the company has no intention of disposing
of the asset at the balance sheet date, but will use it in the normal course of business until the
appropriate time arrives for its disposal. There is, nevertheless, a very real and potentially material
difference between the market value of a company's fleet of vehicles and their carrying value in the
balance sheet.

Worked example: Audit completion memorandum

INTERNATIONAL FOODS LIMITED
31 MARCH 200Y
MATTERS FOR THE ATTENTION OF PARTNER
1 Significant changes to the business
During the year to 31 March 200Y the company consolidated its existing business. Since the year end
several new developments have been on-going. A distribution depot in Guildford is to be opened during
the summer of 200Y. Negotiations are in progress to acquire Bodmin Pasties Limited, a leading name in
the Cornish pasty market, and a French specialist pastry maker in Lille.
2 Review of accounts
INCOME STATEMENT
200Y Change 200X
CU'000 % CU'000
Revenue 6,123 8.4 5,650
Gross profit 2,015 3.4 1,948
Gross profit % 32.9 34.5
Net profit 338 307
Net profit % 5.5 5.4

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 Revenue has grown as 200Y is the first full year of IF's contract with J Waitbury. The lower margins of
this large (CU1m p.a. revenue) contract have depressed overall margins. The directors regard the
performance as satisfactory and anticipate strong growth as a consequence of the new developments
during 200Y.
BALANCE SHEET
200Y 200X
CU'000 CU'000
Property, plant and equipment 3,413 1,633
Inventories 228 317
Receivables 1,157 970
Cash at bank 70 83
1,455 1,370
Current liabilities (704) (803)
Net current assets 751 567
Total 4,164 2,200
(a) Property, plant and equipment
The freehold sites at Darlington and Wolverhampton were revalued upward by CU200k during the
year.
There was a significant capital investment during the year in new plant at Darlington (CU300k)
and in modernising the fleet of distribution vehicles (CU700k).
(b) Inventories
Year-end inventories are reduced due to tighter control of packing materials and raw materials,
and due to timing of deliveries of finished goods.

(c) Receivables
Trade receivables are higher at the year end due to the higher volume during the
year and the timing of deliveries at the year end.
(d) Current liabilities
Tighter inventory control has resulted in a reduction in trade payables. 200X figure
included a large payable in respect of new capital equipment.
3 Significant weaknesses in the company's systems
The only significant weakness identified relates to the failure to count inventory at the
Wolverhampton distribution depot. In the management letter, which will also detail
several minor weaknesses identified, we shall remind the directors of the importance of
counting inventory periodically as a means of control.
4 Significant overrun against budget
The only significant overrun arose from the alternative audit procedures applied as a result
of the cancellation of the Wolverhampton inventory check. Additional staff time was
required to test the Wolverhampton inventories, creating an overrun of some 30 hours at
a cost of CU2,000. We should seek to recover this excess from the client.
5 Scope for the provision of other services
Our international associates:
The proposed acquisition of the pastry maker in Lille provides an opportunity for
introducing our associate in France as auditors of the new subsidiary.
6 Areas of the audit requiring particular attention and significant unresolved matters

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 2
 (a) Inventories
200Y 200X
CU'000 CU'000
Darlington
Finished goods 70 99
Raw materials 67 78
Packing materials 62 76
199 253
Wolverhampton
Finished goods 29 64
228 317
Audit work at Darlington was carried out as planned. The results of all tests
performed were satisfactory.
The planned inventory check at Wolverhampton was not held due to staff
shortages. Revised audit procedures were adopted for testing this balance.
This involved an audit visit to the Wolverhampton depot. The inventory balance in the
accounts was agreed to the inventory records and extensive cut-off testing was
performed. Specific substantive testing was performed on the Wolverhampton
inventory records for both overstatement and understatement. A detailed review of
the inventory balance was performed and the results discussed with the branch
manager.
A representation will be requested concerning the Wolverhampton inventory
balance and the management letter will remind the client of the importance of
carrying out planned inventory checks.
On the basis of the work performed, the Wolverhampton inventory is fairly stated.

(b) Receivables
200Y 200X
CU'000 CU'000
Trade receivables 869 809
Loan to Roberts Limited 195 33
Prepayments 93 128
1,157 970
(c) Trade Receivables
A sample of 48 receivables was circularised. The results of the circularisation were:
Notes CU'000 No. % of value
Agreed 177 18 30
Reconciled 1 228 14 37
Disagreed 2 50 1 8
No reply 3 154 15 25
609 48 100
Notes
1 Reconciling items due to differences between the dates at which invoices and payments were
entered in customers' and International Foods' records. These differences appear to have
been short term and these balances are technically agreed.
2 The disagreement relates to an invoice for CU3,000 sent to the customer in December 200X.
The customer is refusing to pay, on the grounds that the goods were damaged in transit. This
item is not material. However, the client is currently investigating the cause of this dispute

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 3
 and is seeking to confirm that this is an isolated incident. The results of this investigation
should be available for the clearance meeting.
3 These balances have been verified by
(i) Matching of paid balances to evidence of receipt including remittance advices and bank
paying-in vouchers.
(ii) Vouching a sample of unpaid balances to supporting evidence to confirm the validity of
the sale. This evidence includes sales invoices, delivery notes and customer orders.
(d) Loan to Roberts Limited
Roberts Limited is a company in which International Foods owns 10 per cent of the share capital.
The loan is unsecured. The original loan of CU33k, made in 200X to provide working capital,
increased to CU195k during the year. No repayments have been received. The finance director was
not willing for this balance to be included in the circularisation and has stated to us that the balance
is wholly recoverable.
At the clearance meeting we should request the finance director to obtain a certificate confirming this
loan for us. We should also request evidence in the form of accounts and forecasts as to Roberts'
ability to repay the loan and the anticipated timing of repayment. A representation concerning the
existence and recoverability of the loan should be requested. We shall discuss the possibility that the
loan should be treated as being recoverable after more than one year.
(e) Property, plant and equipment
Two issues arise which require resolution at the clearance meeting.
(i) Revaluation of land and building
The surplus on a revaluation performed this year has been treated as an 'addition'. This should
be disclosed as a revaluation surplus. The financial statements should disclose that the valuation
was performed by a director. The letter of representation should confirm that the land and
buildings were revalued on an open-market basis, and the board's acknowledgement of the
results.

(ii) Additions to plant

A number of orders outstanding have been accrued rather than disclosed as
capital commitments. The result is a CU75k overstatement of non-current
assets and current liabilities. The client should be asked at the clearance
meeting to correct this.
7 Proposed Audit Opinion
Based on the audit work performed, an unqualified audit opinion is proposed, provided
that all the matters detailed in section 6 above are satisfactorily resolved at the clearance
meeting.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 4
 chapter 13

Reporting
Worked example: Form of Unqualified Review Report
REVIEW REPORT TO…
We have reviewed the accompanying balance sheet of ABC Company at December 31, 20XX,
and the related statements of income and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our responsibility is to issue a
report on these financial statements based on our review.
We conducted our review in accordance with the International Standard on Review Engagement
2400 (or refer to relevant national standards or practices) applicable to review engagements. This
Standard requires that we plan and perform the review to obtain moderate assurance as to
whether the financial statements are free of material misstatement. A review is limited primarily to
inquiries of company personnel and analytical procedures applied to financial data and thus provides
less assurance than an audit. We have not performed an audit and, accordingly, we do not express
an audit opinion.
Based 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 (or 'are not presented fairly, in all material respects,') in
accordance with International Accounting Standards.
Date REPORTING ACCOUNTANT
Address

Worked example: Bangladesh audit report

Auditor's report to the shareholders of ABC Company Limited
We have audited the accompanying balance sheet of the ABC Company Limited as of December 31,
20XX and the related profit and loss account and statement of cash flows for the year then ended.
These financial statements are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

Scope:
We conducted our audit in accordance with Bangladesh Standards on Auditing (BSA).Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Opinion:
In our opinion, the financial statements prepared in accordance with Bangladesh Accounting Standards
(BAS), give a true and fair view of the state of the company's affairs as of December 31, 20XX and of
the results of its operations and its cash flows for the year then ended and comply with the applicable
sections of the Companies Act 1994, the Securities and Exchange Rules 1987 and other applicable
laws and regulations.

We also report that:

(a) we have obtained all the information and explanations which to the best of our knowledge
and belief were necessary for the purposes of our audit and made due verification thereof.
(b) in our opinion, proper books of account as required by law have been kept by the company
so far as it appeared from our examination of those books and (where applicable) proper
returns adequate for the purposes of our audit have been received from branches not

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 1
 visited by us.
(c) the company's balance sheet and profit and loss account dealt with by the report are in
agreement with the books of account and returns.
(d) the expenditure incurred was for the purposes of the company's business.

Worked example: Unqualified opinion – emphasis of matter

A firm being audited is awaiting the outcome of a lawsuit and as a result it is not possible to
quantify the effect this will have on the financial statements.
The details are as follows.

 The Bangladesh non-listed company in question prepares BAS financial statements. 


 A lawsuit alleges that the company has infringed certain patent rights and claims royalties and punitive
damages. The company has filed a counter action, and preliminary hearings and discovery proceedings
on both actions are in progress. 

 The ultimate outcome of the matter cannot presently be determined, and no provision for any liability
that may result has been made in the financial statements. 

 The company makes relevant disclosures in the financial statements. 
Requirement
Set out the modification to the audit report that the auditor should make in this instance.

Solution
The auditor issues an unqualified auditor's report with an emphasis of matter paragraph describing the
situation giving rise to the emphasis of matter and its possible effects on the financial statements, including
that the effect on the financial statements of the resolution of the uncertainty cannot be quantified.
Opinion
In our opinion, the financial statements prepared in accordance with Bangladesh Accounting Standards
(BAS), give a true and fair view of the state of the company's affairs as of December 31, 20XX and of the
results of its operations and its cash flows for the year then ended and comply with the applicable
sections of the Companies Act 1994 and other applicable laws and regulations.

We also report that:

(a) we have obtained all the information and explanations which to the best of our knowledge and
belief were necessary for the purposes of our audit and made due verification thereof.
(b) in our opinion, proper books of account as required by law have been kept by the company so far as
(c) the company's balance sheet and profit and loss account dealt with by the report are in agreement
with the books of account and returns.
Emphasis of matter – possible outcome of a lawsuit
In the forming of our opinion on the financial statements, which is not qualified, we have considered the
adequacy of the disclosures made in note x to the financial statements concerning the possible outcome of
a lawsuit, alleging infringement of certain patent rights and claiming royalties and punitive damages, where
the company is the defendant. The company has filed a counter action, and preliminary hearings and
discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot
presently be determined, and no provision for any liability that may result has been made in the financial
statements.
Chartered Accountants Address
Date

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 2
Worked example: Qualified opinion – disagreement
An auditor is in disagreement with management regarding an accounting treatment. The details are
as follows.
 A Bangladesh non-listed company prepares BAS financial statements. 

 Included in the receivables shown on the balance sheet of 31 December 20X4 and 31 December
20X5 is an amount of CUY which is the subject of litigation and against which no provision has been
made. The auditor considers that a full provision of CUY should have been made in the year ended
31 December 20X4. 
Requirement
Set out the opinion that the auditor should make in this instance.

Solution
Qualified opinion arising from disagreement over accounting treatment
Included in the receivables shown on the balance sheets of 31 December 20X4 and 31 December 20X5 is
an amount of CUY which is the subject of litigation and against which no provision has been made. In our
opinion, full provision of CUY should have been made in the year ended 31 December 20X4. Accordingly,
receivables at 31 December 20X4 and 20X5 should be reduced by CUY, deferred taxes at 31 December
20X4 and 20X5 should be reduced by CUX, and profit for the year ended 31 December 20X4 and
retained earnings at 31 December 20X4 and 20X5 should be reduced by CUZ.
In our opinion, except for the effect on the financial statements of the matter referred to in the preceding
paragraph, the financial statements prepared in accordance with Bangladesh Accounting Standards (BAS),
give a true and fair view of the state of the company's affairs as of December 31, 20X5 and of the results
of its operations and its cash flows for the year then ended and comply with the applicable sections of the
Companies Act 1994 and other applicable laws and regulations.
We also report that:
(a) We have obtained all the information and explanations which to the best of our knowledge and
belief were necessary for the purposes of our audit and made due verification thereof.
(b) in our opinion, proper books of account as required by law have been kept by the company so far
as it appeared from our examination of those books and (where applicable) proper returns
adequate for the purposes of our audit have been received from branches not visited by us.
(c) the company's balance sheet and profit and loss account dealt with by the report are in
agreement with the books of account and returns

Chartered Accountants Address

Date

Worked example: Qualified opinion – limitation on scope

An auditor was unable to observe an inventory count because they were not engaged by the company at
the time the count took place. The details are as follows.
 A Bangladesh non-listed non-public traded company prepares BAS financial statements. 

 The evidence available to the auditor was limited because they did not observe the counting of
physical inventory as of 31 December 20X1, since that date was prior to the time the auditor was
initially engaged as auditor for the company. Owing to the nature of the company's records, the
auditor was unable to satisfy themselves as to inventory quantities by other audit procedures. 
Requirement

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 3
 Set out the audit opinion that the auditor should make in this instance.

Solution
 The limitation in audit scope causes the auditor to issue a qualified opinion – except for any
adjustments that might have been found necessary had they been able to obtain sufficient evidence
concerning inventory. 

 The limitation of scope was determined by the auditor not to be so material and pervasive as to
require a disclaimer of opinion. 
Basis of audit opinion
Except as discussed in the following paragraph, we conducted our audit in accordance with Bangladesh
Standards on Auditing (BSA). Those Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting - the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.

Qualified opinion arising from limitation in audit scope

However, with respect to inventory having a carrying amount of CUX the evidence available to us was limited
because we did not observe the counting of the physical inventory as of 31 December 20X1, since that date
was prior to our appointment as auditor of the company. Owing to the nature of the company's records, we
were unable to obtain sufficient appropriate audit evidence regarding the inventories quantities by using other
audit procedures.

Except for the financial effects of such adjustments, if any, as might have been determined to be necessary had
we been able to satisfy ourselves as to physical inventory quantities, in our opinion the financial statements
prepared in accordance with Bangladesh Accounting Standards (BAS), give a true and fair view of the state of
the company's affairs as of December 31, 20X1 and of the results of its operations and its cash flows for the
year then ended and comply with the applicable sections of the Companies Act 1994 and other applicable laws
and regulations.
Subject to the above, we also report that:
(a) We have obtained all the information and explanations which to the best of our knowledge and belief
were necessary for the purposes of our audit and made due verification thereof.
(b) in our opinion, proper books of account as required by law have been kept by the company so far as it
appeared from our examination of those books and (where applicable) proper returns adequate for the
purposes of our audit have been received from branches not visited by us.
(c) the company's balance sheet and profit and loss account dealt with by the report are in agreement
with the books of account and returns

Chartered Accountants

Worked example: Disclaimer of opinion

An auditor was unable to observe all physical inventory and confirm trade receivables during an audit.
The details are as follows.
 A Bangladesh non-listed non-public company prepares BAS financial statements. 

 The evidence available to the auditor was limited because the auditor was not able to observe all
physical inventory and confirm trade receivables due to limitations placed on the scope of the
auditor's work by the directors of the company. 
Requirement
Set out the opinion that the auditor should make in this instance.

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 4
Solution
The auditor has been unable to form a view on the financial statements and issues a modified
opinion disclaiming the view given by the financial statements.
Basis of audit opinion
We were engaged to audit the accompanying balance sheet of the ABC Company as of December
31, 20XX, and the related statements of income and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management.

Opinion: disclaimer
We were not able to observe all physical inventories and confirm accounts receivable due to limitations
placed on the scope of our work by the Company. Because of the significance of the matters discussed
in the preceding paragraph, we do not express an opinion on the financial statements.
Chartered Accountants Address
Date

Worked example: Adverse opinion

A company being audited has made no provision for losses expected to arise on certain long-
term contracts. The details are as follows.
 The Bangladesh non-listed company prepares BAS financial statements. 

 No provision has been made for losses expected to arise on certain long-term contracts currently
in progress, as the directors consider that such losses should be off-set against amounts
recoverable on other long-term contracts. 
Requirement
Set out the opinion that the auditor should make in this instance.

Solution
 In the auditor's opinion, provision should be made for foreseeable losses on individual contracts
as required by (specify accounting standards). 

 The auditor issues an adverse opinion due to the failure to provide losses and quantifies the impact
on the profit for the year the contract work in progress and deferred taxes payable at the year end. 
Adverse opinion on the financial statements
As more fully explained in note ............no provision has been made for losses expected to arise on
certain long-term contracts currently in progress because the directors consider that such losses should
be offset against future profits expected to arise on other long-term contracts. Bangladesh Accounting
Standard (BAS)-11 however requires that provision should be made for foreseeable losses on individual
contracts. If losses had been so recognized the effect would have been to reduce the profit after tax for
the year and contract work in progress at 31 December 20XX........by Tk......

In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial
statements do not give a true and fair view of the financial position of the Company as of December 31, 20XX,
and of the results of its operations and its cash flows for the year then ended in accordance with Bangladesh
Accounting Standards (BAS).

Chartered Accountants Address

Date

Saiful Islam Mozumder, Manager, Finance & Accounts, Organic

Group, Cell-01711981920 E-mail: [email protected] Page 5