F8/audit and assurance

INDEX
CHAPTER 1: INTRODUCTION TO AUDIT

Chapter 2: REGULATION

CHAPTER 3: CORPORATE GOVERNANCE

CHAPTER 4: PROFESSIONAL ETHICS

Chapter 5 INTERNAL AUDIT

Chapter 6: Audit Reports

CHAPTER 7: SUBSEQUENT EVENTS

Chapter 8: GOING CONCERN

CHAPTER 9: WRITTEN REPRESENTATION

CHAPTER 10: INTERNAL CONTROL

CHAPTER 11: SUBSTANTIVE PROCEDURES .

CHAPTER 12: SUBSTANTIVE PROCEDURES

CHAPTER 13: AUDIT PLANNING

Classes 1-13

CHAPTER 1: INTRODUCTION TO AUDIT(sec A)

Company k real owners jin external logou ko hire krta hai apni company ko audit krne k liye k waqai Jo
co. ke managers bolre hain k itna profit hua hai itna loss hua hai sach hai ya nai yeh check krne wala
banda auditor hota hai,

Who banda independent, honest aur professionally qualified hona chahye jiska kaam hota financial
statements ko audit karna ke usme andr k bandou ki taraf se koi cheating to nahi hui.

The real owners of business are share holders because they have invested money however shareholders
don’t run business, they appoint directors to run business for them at the year end directors makes
financial statements and hand it to SH. SH doubt that so they want an independent honest and
professionally qualified person to check FS and assure them that its correct. Such person is called
auditor and his activity is AUDIT.

Relationship between SH and directors

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 1. AGENCY RELATION: directors are agent of SH, they can act on their behalf.

SH ke behalf py decision leskte hain.

2. STEWARDSHIP RELATION: care takers

Yeh khayal rkhte hain SH ke investments ka other than running their business

WHAT IS AUDIT

AN audit is an independent examination of FS which the auditor to express an opinion on:

Audit srf or srf FS (P&L, SOCIE, cash flows, SOFP, notes) check krta hai logou aur system ko nahi.

-whether FS are prepared (in all material aspects) in accordance with an applicable framework
FS IAS/IFRS/ framework ke mutabiq banai hai ya nahi. Koi material difference tou nahi

-whether FS give a truthful an fair view.

Truth: can be verified by supporting documents.

Fair: made with true intentions Unfair example

Fake invoice from supplier, increasing production at year
end to increase closing stock hence profits etc.

Two types of audit:

Statuary audit:

1. Required by law
2. Mandatory
3. No advantages or disadvantages because required by law

Non statuary:

1. Not required by law

2. Voluntary

Advantages: of non statuary audit

 It is a mean of setting accounts b/w partners (account me mistake check hoti)
 Helps in getting loan from bank (audited FS hai tou bank loan b dega)
 Acceptance to tax authorities (audited stamp laga hai tou tax authorities bhi trust kregi)
 Enhances public image

Disadvantages

 Time consuming
 Costly

GUARANTEE

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Auditor never gives absolute assurance/guarantee (100%) that everything is correct

He only gives a reasonable assurance (80-85%). Public thinks that auditor gives guarantee whereas in
reality he only gives reasonable assurance. This difference b/w public perception and reality is
expectation gap.

Why auditor doesnot give absolute assurance or guarantee? Why he gives reasonable assurance?

This is because of some inherent limitations of audit

1. Auditors are humans so there is always a possibility of human error

2. Not all items are tested i.e audit is on sample basis ratio rather than population basis.(auditing
me ek ek cheez test nhi hoti kiunke obsiously itne saare customers hain inventory hain etc tou
woh ek ek cheez tou test nhi krskta na)
3. Sometimes management is itself involved in fraud and it is very difficult to identify management
fraud ( agar management hi poori trail chupade ksi cheez ki, management ne h data provide nai
kiya tou usko audit kia krengay)
4. FS are based on estimates and estimates can be incorrect.

Limitations yeh hai ke public smjhti hai k agar humne auditor ko pese dedie tou baa b hmari FS achi hi
ayengi lkn agar internal fault hai tou ussy auditor ek hadh tk monitor kr skta hai baaqi internal
management ki zimmedari hai.

Difference between auditing and reviewing

AUDIT REVIEW
Of financial statements Of financial statements
Done by auditors Done by auditors
Fees applicable Fees applicable
Detailed examination of FS Less Detailed examination of FS
WORM eye view EAGLE eye view
Confidence level-high Confidence level-low
Auditor gives reasonable assurance (80-85%) Auditor gives limited assurance (40-45%)
Positive wordings (true and fair view) Negative wordings (“ nothing has come to our
(yeh acha hai/ yeh bura hai) attention that causes us to believe that FS donot
give a true and fair view”)
(mene aysa kch nhi dekha key eh mjhhy acha/bura
lagay)
What is a review?? Companies usually prepare its FS after every 3 months and SH doubt these FS , but
to overcome their doubt if we call auditor after every 3 months, this will lead to huge cost for the
company so 3 month FS are subject to a less detailed examination called review whereas full year are
subject to audit like audit review is also mandatory requirement

Kabhi kabhi humari financial statements monthly/ quarterly/ weekly update hoti hai, amooman uhone
audit karwana parta hai takay hum baad me koi bara fraud na pakre aur loss me na jaen, ab agar
comoanies itna ziada frequently audit krwaegi tou who costly parega islye prefer krti hai ka ussy short
periods me bas review krwalena and yearly/ half yearly audit karwale.

services given by audit firms:

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 1. audit
2. review
3. Agreed upon procedures:

In agreed upon procedures audit firm and client agree on a task and audit firm takes fee and performs
that task, since it is not an audit or review so no assurance is given

4.Compilation engagement:

In compilation engagement company gives data and records to audit firm and asks them to compile this
for them, audit firms takes fees and compiles FS for them, since it is not an audit not a review so no
assurance is given

(aysa kese hoskta hai k companies ko FS banana nhi aate? Jese CANADA me pehle GAAP follow hota tha
lkn ab IFRS to who jou beech ka time that b unhy IFRS k mutabiq FS banana nhi aati thi tou ussme who
audit firms hire krte the)

5. Due delegance:

If any company plans to takeover a company they sometimes hire audit firms and ask them to do
due diligence i.e check financial health of that company. Audit firms take fee and perform due
diligence. This helps the company to decide whether they should takeover that company or not

NOTE: AUDIT IS AN EXAMPLE OF “ASSURANCE ENGAGEMENT “

Any activity can be called assurance engagement if it has 5 elements.

5 elements of assurance engagement (CREST):

CRITERIA: the assurance must be done in some suitable criteria is ISA’s

REPORT: the assurance must be followed by a written report like in case of audit written report is
submitted in the end.

EVIDENCE: The assurance must be based on some evidence like in case of audit sufficient appropriate
evidence is gathered.

SUBJECT MATTER: the assurance must be on some subject like in case of audit subject is FS.

TRIPARTY RELATION: there must be 3 parties involved.

 Practitioner: one who practices i.e auditor

 Intended user: for whom report is being made i.e SH
 Responsible party: one who is being doubted i.e directors

DIRECTOR AUDITOR
 Directors are responsible for preparation  Auditors are responsible for audit of FS
of FS  Auditors are responsible to assess
 Directors are responsible for making reasonableness of those assumptions
assumptions (useful life of asset, provision (asses krna key eh assumptions reasonable
etc) ye likhna kaam hai hai ya nai)

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  Directors are responsible to prevent and  Auditors are responsible to ensure FS are
detect fraud and error free from any fraud and error
 Directors are responsible to assess  Auditors are responsible to ensure
whether company is going concern assessment of co. is correct

Chapter 2: REGULATION
TOPICS EXAMINED

Audit of SME

Rights and duties of auditor

Apportionment and removal of auditor

Role of IFAC

ISA’s & IAASB

AUDIT OF Small and medium entities’S: (chota idaara)

As per UK law SME’s are those companies having:

 Turnover less than 6.5m or less

 Balance sheet 2.6m or less
 Employees 50 or less

Other characteristics of SME’s:

 Fewer product lines

 Less complex operations
 Fewer control etc
Eg: school, local markets etc

NOTE: audit is exempt for SME’s because:

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  Cost benefit analysis is unfavorable (wese hi kum kamaraha hai audit ke pese aur daaldiye
tou barbaadi)
 Owners and directors are usually same so there is no agency problem (lkn phr bhi aksar
single owner entities karati hai auditing takay khd par check rkh saken)

RIGHTS AND DUTIES OF AUDITOR

Duties of auditor

 Duty to maintain confidentiality

 Duty to report all findings at the end of audit in the form of a written report
 Duty to maintain consistency between accounting records and FS
 Duty to maintain consistency between other info and FS

(Other info: any relevant source, financial statement se vary kr rhi hou)

Rights of auditor

 Rights to have access to all records

 Right to attend AGM of the company
 Right to speak and be heard at AGM of the company

(kiunke yeh who wahid mauqa hota hai jahan saare SHs aate hain tou is mauqay py auditor unsy baat
krskta hai, srf ussy AGM me bulana nai hai balke ussy right aur respect b di jae aur use sunna jae)

 right to receive all notices which members of co. (SH) are entitled to receive
 right to seek explanations from management on any other matter

it is a criminal offence to make false, deceptive or misleading and statement. (kiunke yeh auditor ka
right hai k who us se explanation maange)

APPOINTEMENT AND REMOVAL OF AUDITORS

Appointment of auditors: auditors are appointed by SH vote in AGM but

 first time appointment by directors

 subsequent appointment by SH vote in AGM
 if SH fail to appoint again directors should appoint
 if directors fail to appoint security of state will appoint

Removal of auditors:

 audior can be removed by SH vote in AGM

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  auditor had right to speak
 auditor must be sent notice in advance that company plans to remove him in AGM, notice to be
sent to regulator too
 after removal, auditor can still retain office by giving statement of circumstances

Resignation of auditor:

 auditor can resign by giving a resignation letter

 he maybe asked to give statement of circumstances
 he must send notice in advance if he plans to resign, notice should be sent to regulator too
 he has right to speak

Statement of circumstances: wajah batani hai auditor ko co. chorne ki SHs ko

ROLE OF IFAC (INTERNATIONAL FEDERATION OF ACCOUNTANTS)

After qualification of ACCA, ICAEW, ICAP we become members of IFAC, because all of tthese bodies are
controlled by IFAC, therefore it is IFAC responsibility to resolve any conflicts between all of these bodies
or their members, to explain the syllabus and duties of these bodies, and to explain practical experience
requirement of each body in any respective organization.

ISA’s (International standard on auditing)

ISA’s are developed by IAASB and they must be applied during audit of financial statements

IAS (international a/c standard) is made by IASB (international accounting standard board) and must be
applied during preparation of FS

ISA (international standards on auditing) is made by IAASB (international audit and assurance standard
board) & must be applied during audit of FS following is the process of issuing an ISA

Process of issuing an ISA: (banta kese hai)

Jab bhi accounting world me lagta hai k kisi standard ki need hai tou IAASB ek task force banata hai 3 4
logou ki aur unhy bolta hai k who ek draft standard banae, phr ussy ek public meeting me discuss krte
hain recommendation lete hain and then un suggestions to IAASB ki website py 120 days k liye rkhte
hain kiunke wahan tou poori dunya dekhskti hai phr wahan jou bhi positive comments hote hain unhy
IAASB ke board k smny rkha hua phr uspy voting ki gyi aur jispy vote ziada huwe ussy approve krdia

 a task force is made which is given task to make a draft standard

 the draft standard is then discovered in a meeting open to public
 any comments and recommendations received from public are incorporated and draft standard
is kept on IAASB website for minimum 120 days
 any suggestions received are accommodated and draft standard is updated
 the updated standard is then presented to IAASB board and approved if it has 2/3 majority votes

how ISA’s are applied in individual countries

if there is a similarity in local laws and ISA’s, it is very simple to apply ISA’s. however if there is a conflict
between local laws prevail, however IAASB is constantly working for convergence between local laws
and ISA’s

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QUALITY CONTROL REVIEW (QCR)
Audit of companies is done by audit firm but audit firms are also subject to audit. Audit of audit firm s is
done by RSB (recognized supervisory)who are given power by parliament. These RSB’s conduct audit of
audit firms, give them ratings and publish results of ratings on RSB’s website so that clients can see them
when opting for firms, this activity of audit of audit firm is called QCR.

(agar audit firms ko itni power di jaarhi hai k who companies ko audit kr rhi hai yeh power ayse aati hai k
RSBs unpr check rkhti hai through auditing them)

CHAPTER 3: CORPORATE GOVERNANCE

Corporate governance is a system followed by companies.

CHAIRMAN

BOARD OF DIRECTOR

CHIEF EXECUTIVE DIRECTOR

HR MANAGER FINANCE MANAGER PROD.MANAGER SALES MANAGER

HR DEPARTMENT FINANCE PROD. SALES

DEPARTMENT DEPARTMENT DEPARTMENT

SYSTEMATICALLY all departments are given a manager to overlook its operation like HR dept is given HR
manager and so on in order to keep a check on all these managers a CEO is appointed, who is basically
the head of the company and has the highest rank within the company who over looks every decision
and operation and make main decisions is the company, but he his accountable to the board of director
which is a team of several members, who discuss the position and performance of company and report
any important information to the chairman.

IF only the managers are appointed as the board of director team then they will feel no pressure from
the CEO and if CEO is made the chairman as well then he will not feel accountable to the board of
directors, that is why this system called CORPORATE GOVERNANCE was introduced to avoid the
clashing of the system.

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CORPORATE GOVERNANCE:

1. the board of director team should be made of equal number of executive directors and
non-executive directors to avoid any biased decisions.

BOARD OF DIRECTORS EXECUTIVE DIRECTORS

NON-EXECUTIVE
DIRECTORS

EXECUTIVE DIRETORS: they are member of the company (finance manager, HR manager, Sales manager
and other head managers of the company.

NON-EXECUTIVE DIRECTORS: they are members hired externally from the company especially for the
purpose of the board meeting(they are professional people )

Now in order to avoid executive directors hiring their preferred non executive members within the non-
executive team in order to help them make biased decision these member are NOMINATED (not hired)
by other committee within the company called NOMINATION COMMITTEE. And then by voting,
selected.

2. CEO can never be the chairman

3. Chairman should be NED whereas CEO should be ED.
Agar ek bande ko dono CEO or chairman banadia tou uskey haath me bht ziada power ajaegi and he can work against the
benefits of the company. Chaiman humesha bahar wala banda hou takay who apne faida k mutabiq apni company se kaam
na karwae whereas CEO andr ka banda hou takay who company ke faiday ko zehen me rkh ke operation run karwae jis se
ussy bhi faida mily aur takay ussy internally saare operations ka pata hou.

4. Remuneration committee (sub committee) is also set, and their job is to decide the salaries of
the directors, before directors used to set their salaries themselves and used to overpay
themselves but now they set the salaries according to market rates and other policies. And NEDs
are paid according to their time invested and skills or a fixed salary
5. Risk management committee (sub committee) is set to monitor and assign control

These three committees may consist of NED or EDs but audit committee is only made of NEDs
(examinable in detail)

6. Audit committee: first time auditors are hired by directors but after that if directors hire the
auditor then again they’ll hire someone who’ll audit according to their demands and hide any
information that they want to hide, therefore this committee is set by N.E.D’s in order to avoid
any biased decisions.

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More details in handout

ROLES:

1. FS honesty se banai hai ya nahi banai

2. Agar separate risk management committee nahi hai tou control review karegi
3. Internal auditing to bhi review karegi
4. External auditor ki hiring k baaray me mashwaray dengay
5. Auditor ayengay audit karengay aur chle jaengay tou yeh dekhte hain k in auditors se sahi audit
kiya hai ya nhi kiya hai.
6. Kbhi kbhi external auditor me aur co. ke directors me conflicts/disputes hote hain tou yeh unhy
solve karate hain (because they are middle party)

Paper pattern

MTQs Application based(writing)

In this we have to do learning and For eg: they will give us a scenario
answer mcq based questions. based questions of Corporate
governance we have to write about
its weakness and suggest ways to
overcome it.

(examples in handout-solved
below)

Method (application based question)

Weakness Recommendation
1. Copy the weakness Write the recommendation to that reason (own
2. Write the reason for that weakness(own wording)
wording)
(handout questions)

Q1. JUMPER CO.

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 weakness recommendation
Mr. shepherd is the chief executive office and Mr. shepherd should resign from the post of
chairman of SGCC. chairman and an independent N.E.D should be
If both the CEO and chairman is same then there is appointed.
misuse of power because of division of (An E.D cannot be chairman or will run company a/c to its
responsibility and the person is not accountable to benefits)
anyone leading to do whatever they want

Mr. shepherds has appointed five executive Atleast half of the members should be EDs and
directors and two non executive directors in the half should be NEDs so that voting on any decision
board of director. is balanced and decided fairly.
Imbalance of EDs and NEDs will lead to decision
being biased in favor of EDs.
Directors CEOs own salaries are both set and paid Salaries should be set by the numeration
by CEO himself. committee according to the market rates and set
This could lead to extra or lower salaries paid policies so, NEDS should be paid according to a
according to satisfaction of ceo. agreement and not favourable/unfavourable
results of board

Mr. shepherd is appointing the directors in the NEDs should be appointed by the nomination
board himself. committee to hire independent people, and
This could lead to him appointing director who he rotated every three to four years, so that they
personally knows and sensitive information maybe donot become extra familiar with company and
hidden through inter personal favours make biased decision.
SGCC donot have an internal audit only senior SGCC should make a internall audit committee and
accountant monitors internal controls and external regularly get externally audited by third party.
audit is only “assumed” to be carried out. But the setting up of new committee should be
Internal audit keeps check on each and every cost beneficial.
function of the company which leads to aiding
external audit being fruitful.
Q2: SERENA CO.

WEAKNESS RECOMMENDATION
SERENA VDW co. board is comprised of six Same number of EDs and NEDs should be
directors, four executive and 2 non executives. appointed, so Serena VDW should hire 2 more
Due to this imbalance of number of non executive NEDs, in this way the voting in board meeting may
and executive directors decisions may be weighed be balanced independently as well
in favour of executive directors
Only the finance director is reviewing financial The reviewing should be done by another internal
statements and budget. audit team, which should be sett up cost
Because these statements are also prepared under effectively so they can see if the records are
finance director so he may commit fraud without correct and fraud free and all monetory things are
anyone knowing. reported, plus this should be reviewed by external
audit as well
The CEO and finance director are sitting in the Audit committee should only comprise of non
internal audit committee along with NEDs. executive directors so any audited controls,
functions and results can not be manipulated by

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They might sugar coat audited information to hide any EDs in that committee,, so CEO should resign
sensitive details to avoid further investigation on
it, resulting in compromising the independence as
CEO will influence NEDs decision
The directors have remained unchanged since the Directors should be changed every 3 to 4 years
listing of the company this will make non executive through elections by SH so they are not chosen by
directors way too familiar with the company and someone and should be independent from the
their decisions won’t be fair then. Fraud won’t be company (NEDs). At current year AGM number of
highlighted directors proposed, remaining next year
The executive director’s remuneration is proposed The salaries should be set by rumination
by the finance director and approved by chairman; committee, bonus on revenue should be based on
they are paid annual salary as well as revenue revenue only if the FS are audited fairly by an
based bonus. internal independent audit.
The finance director is also an ED and he can
manipulate the revenue, whereas increasing bonus
and the other EDs and CEO may be linked frankly
with eachother so they can increase each other’s
salaries as well

Q3: SATSUMA CO.

WEAKNESS RECOMMENDATION
Tangerine board is comprised of six executive Tangerine board should either reduce executive
directors and four non executive directors. director or hire more non executive directors so
The board of director is unbalanced; voting on any the board is balanced
decision will lead to executive votes higher than
non executive and hence lead to un fair decisions.
The chairman NED of board and one of NED were NEDs should be hired independently; they should
former EDs of tangerine and upon reaching have no previous relation with the company or
retirement age were asked to take on NED role. shouldn’t be linked by any means with the
This will cause NEDs taking decision in favor of company; personal relation, benefits etc
EDs, because they already had friendly relation
with the EDs because of previous time they had
here.
The company has formed an audit commitee, all An independent NED having financial experience
the NEDs are members including chairman who should be hired in the audit committee.
chairs the committee, all four members were
previously involved in sales or productions related
sales.
Audit committee should consist atleast one
member who has orviously financial experience, or
they won’t be able to perform this role.
All the board members have been members of the Members of the board shpuld be re-elected by
board for at least four years. shareholders frequently every 3 to 4 years so that
They have been on their seats for very long and new board members can identify previous’ faults
now they have made friendly relations with each and frauds and work on them with new
other so they can easily manipulate the reports perspective. At current year AGM SH will tell which

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according to their selfish needs. director will be reelected and remaining will be
reelected next year
The company has not established an internal audit Should establish a cost effective internal audit
function to monitor internal controls. system to keep check on all the activities and also
If co. doesnot keep internal check many fraud can help to provide external auditors reports on all
be committed plus many errors will go unnoticed functions in detail.
leading to many monetary and non monetary
losses

Q4: SAXOPHONE

(GIVEN IN HANDOUT )

CHAPTER 4: PROFESSIONAL ETHICS

ETHICS KEHTE HAIN MORAL VALUE KO.

ETHICS

Personal ethics
Professional ethics
(jouethics mjhy mera
religion sikhara hai, this (ethics taught by profession)
is not covered by any
education because there A fault is professionalism effects many people,
therefore no professional body allows its members
are many religions
to operate freely, every body wants its members to
cultures etc, this is
be bound by a code of ethics(eg: auditor,doctor,
covered by our practices lawyers etc)
and beliefs.)
Agar professional se koi galti hogi tou use bht log
effect houngay islye

Similarly ACCA has made a code of ethics.

ACCA CODE OF ETHICS:

There are five fundamental principles of ACCA’s code of ethics (COPPI)

1. CONFIDENTIALITY:

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 Members must not disclose client information to anyone for their own or third party advantage.
Acca member apni ksi bhi client ki koi bhi information kisi ko bhi na dou (kiunke audit krte huwe humme clients ki bht se secrets pata chlte
hain)

Exceptions:

 If allowed by clients
 Public duty to disclose
 To protect clients interest
 If client is involved in serious offences like terrorism and money laundering
(agar client hi bold ke hum falah bande ko uski yeh info deden, agar client k ksi aur party apko contact kre k client use ahi milrha aur hum unhy
uska contact deden jis semclient ko bhi faida hoga, apko lagay k client koi aysa kaam kr rha hai jis se public ko nuqsaan hrha hai tou who bhi)

2. OBJECTIVITY:

Means independence members must avoid bias and conflict of interest and take decisions in
independent manner
(members ko humesha independent rhna hai, hoskta hai ke ACCA members k us comoany se koi internal relation hou (friends, family, rishwat
etc) to ussy yeh cheez avoid krni chahye wrna who us company se professionally koi link ni rkhskta)

3. PROFESSIONAL COMPETENCE AND DUE CARE

Members must remain up to date with all standards be professionally qualified and do all work with
extreme care
(Acca chahta hai k usky members ek tou professionally qualified tou plus har IFRS/IAS se up to date hou islye puranay members ko naye
standards se familiar rkhne k liye ACCA seminars rkhta hai plus har kaam CAREFULLY kare )

4. PROFESSIONAL BEHAVIOUR:

Members must avoid any action that dis-credit the profession

(koi aysi harkat nhi krni jis se humara profession badnaam hou, jese ek police se rishwat li tou saare police waly badnaam hogye)

5. INTEGRITY:

Members must be straight forward and honest in all professional dealings.

(honesty: jaan pooch ke apne clients ko bolte hain k FS khrb hain takay pese nikalwa skte)

(yeh members ki baat hrhi hai students kin hi, jab hum ACCA ke members bante hain tou humme yeh sb follow krna hota hai)

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 MOST IMPORTANT PRINCIPLE : INDEPENDENCE

During the course of audit, there are many events which create a threat to independence. There are 5
threats to independence.

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 Self Self review Familiarity threat Intimidation Advocacy
interest threat threat threat
threat
When auditor When when auditor is too When auditor When auditor is
has a personal auditor is familiar with the is being acting as an
INTRODUCTION
interest in a reviewing client pressurized to advocate of
client his own do certain task client
work
-Auditor When Close Threat of Representing
has shares auditor business/personal litigation client in a
EXAMPLES in a client prepares or family relation Dominant legal dispute
-Auditor is FS and Too long person in Commenting
interested audits association with senior publicly on
in a job them the client position at clients
opening of Auditor client’s events
client was Threat of Meeting
-Expect appointed not giving with
gifts and to value others work investors of
hospitalities assets Over due behalf of the
-Loans at and then fees client
reduced he was encouraging
rates appointed them to
-Overdue auditor invest in
fees The client
-Other clients
services of finance
client manager
-Revenue left
depending company
on client and join
% or auditor
contingent firm
fees
-Partner of
audit in
client board
Dispose off CHINESE Relation with client Never start Auditor should
shares WALL -Rotate the member new work until resign either
SAFEGUARDS Rotate audit METHOD having relation with all dues are one of both
(us auditor ko (Separate client. cleared or a roles- auditor
audit team se teams) Long association- proper or advocate
hatado) If one team Donot send same payment
Politely refuse is preparing person for audit for schedule is
these gifts and FS then send more than 3 years provided.
hospitality. other to (no previous If dominant
Either remove audit familiarity) threats are
that auditor If one team given, bring
from team is valuing matter to the

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 (who have assets then audit
taken loan) or send other committee if
avoid taking team to still not
loan. audit resolved then
No revenue The auditor resign.
should be who
more than previously
15%in our was working
firm.(wither in that
remove that company
client if more shouldn’t be
or joint audit send their to
so revenue is audit
shared)
Request fixed
fee
Rotate partner

EXPLANATION Agar uske share ki Agar auditor khdi Auditor ki client se bht ziada Intimidate=pressurize kisi client ko audit bhi
price giri tou FS banaraha hai jaan pehchan hou to who Pressure kbhi direct krre ho sth me ussy
humme bhi nuqsaan and khdi audit kr uskey khilaaf nhi jaa paega, hi hote hain kbhi court me represent
hoga islye humne rha hai tou who kareebi rishtaydaari ya dsti indirect bhi bhi krre hou tou
bataya hi nai wrna kbhi bhi apni (takay taluqaat khrb na agar koi client bole dunya bolegi k kl tou
humme bhi nuqsaan mistakes nhi houn). tou tmhare khilaaf court me ussy defend
hoga(lkn zruri nai pakar paega. Bht lambay arsay se kisi ko case krdengay etc kr rha tha ab use
har auditor hi yeh audit krhe hou tou jaan (direct) auditing me ganda kr
chalaki kre kch pehchan bngyi uthna indirect: aap humara rha hai tou yeh
imaandari se show bethna sth hogya tou dil me FS me acha report auditor hi bekaar hai.
krdengay) dsti ka relation banjaega krte tou hum apko Dunya ke samny ussy
Client ke pas koi islye FS me sach chupane ki falah contract bhi acha show kr rhe
achi job opening ayi sochega dedete lkn chalen koi houlkn phr audit krte
humne bola k agar baat nhi huwe uski buraiyan
humne FS me yeh pese khaa ke bhi show kr rhe tou
masla report krdia pressurize krna public interest uthega
tou who client client pr sy bhi aur
humme us job py auditor sy bhi
nhi rkhega
Hum ksi company ke
auditor hai aur jese
hi unka koi product
launch hita hai who
humme gift dete
hain, agar humne
koi fault report kri
tou hum report nh
krengay wrna who
expensive gift nhi
milyga.
Ap ksi bank ko audit
kr rhe hou aur
unhone bola k hum
apko low interest py
loan dedengy ab
baad me unky FS me
koi fault nikla tou ap
sochogay k humne
issy report kiya tou
yeh loan waps
lelega.

17
 Apne audit k sth koi
aur service bhi di,
tou dono py $ mily
apko, islye FS report
krte huwe phr apki
independence
compromise hogi.
Apki audit firm ka
major revenue ksi
ek client se ata hai
tou aap usko khush
rkhne k liye FS acha
acha show krne ka
sochogay takay
client naraz na hou.
Itne revenue py itni
%revenue mila tou
hum ziada se ziada
revenue acha
dikhaengay
Hmara koi audit
partner client ki
board me hai tou
humme usky khilaaf
ni jaane dega
Yeh sab factors independence ko srf danger me dalte hain zaroori nhi ke bura hi hou jou auditors imaandar hote hain tou who imaandari se
hi audit krengay

Pg 26 LV FONES

THREATS SAFEGUARDS
The audit team have been offered a discount rate Only immaterial gifts, hospitality and favors are
of 10%to purchase mobile phones in previous allowed, since offer of discount is likely to be
years, this is a personal interest threat due to this material it should be politely refused.
due to this independence may be compromised
because of the fear of loss of discount.
The partner and finance director know each other the partner should ideally be rotated off the
socially for many years, this constitutes a assignment and someone independent should be
familiarity threat as independence may be appointed as partner.
compromised due to fear of loss of personal
relation
20% of last year fee is still outstanding, this New work should not be started until old dues are
constitutes a self interest threat as independence clear or a proper payment schedule has been
may be compromised due to fear of loss of old provided.
dues.
The fee income derived from LV fones now Other services should be reduced to bring
accounts for 16% of firms total fees, this threshold below 15% or firm should consider
constitutes of self interest threat as independence having a joint audit
may be compromised due to fear of loss of client
revenue

The audit senior who was seconded on financial The audit senior should not be sent on audit as
controlled position is being sent on audit, this when he was firm controller he might have
contributes of self review threat as independence prepared FS and if he goes on audit he won’t
may be compromised due to fear of highlighting highlight his own mistakes. Some independent

18
own mistakes since he prepared FS while acting as person should be sent of audit.
firm controlee

Pg 25: CURRANT AND CO.

THREATS SAFEGUARDS
The audit team is being invites to attend a only immaterial gift and hospitalities are allowed,
weekend away at luxury hotel, this constitutes a since luxury hotel stay is likely to be material it
self interest threat as independence may be should be politely refused.
compromised due to fear of loss of luxuries.
A senior member is offered loan at a reduced rate, Loans are only allowed at market rates, since this
this constitutes a self interest threat as offer of loan is at reduced rates it should be
independence may be compromised due to fear of politely refused. If senior member has already
loss of reduced rate loan taken the loan he should be rotated off the
assignment
Orange has asked current co to prepare their FS, Separate audit teams should be used for audit of
this constituted a self review threat as FS and for preparation of FS
independence may be compromised due to fear of
highlighting their own mistakes
Finance director of orange has left the company The finance director should not be sent on audit
and joined current and co as partner and he is and someone independent should be sent in his
being sent on audit this constitutes a familiarity place
threat as independence may be compromised due
to fear of loss of personal relation
Orange has told current and co that they want The engagement partner should politely inform
other assignments, they need to complete audit the client that they will conduct audit in
quickly with minimum questions, this constitutes accordance with ISA’s no matter how long it takes,
an intimidation threat as independence may be consideration should also be given to resigning if
compromised due to fear of loss of potential work issues are not resolved.
and revenue

Pg 27: PIK AND CO.

THREATS SAFEGUARDS
Audit team is offers an evening watching match Only immaterial gifts and hospitality are allowed
together with a luxury mean after audit is since offer of luxury meal is likely to be material it
complete this constitutes a self interest threats should be politely refused
independence may be compromised due to the
fear of loss of luxury
Few members of audit team have significant loans Members who took loans should ideally be rotated
owing to the company, this constitutes of self off from the assignment and some independent
interest threat as it compromises of fear of loss of embers should be appointed
loan

19
The finance director is the sister in law of audit The audit partner should ideally be rotated of the
partner, this constitutes as a familiarity threat as assignment
independent may be compromised due to the loss
of personal relation
Audit team member is being asked to act as a The auditor team member should not be sent as
finance controller for 3 months this constitutes a finance controller and some other member should
self review threat as independence may be be sent
compromised due to the fear of highlight own
mistakes
Pink’s taxation dept wants firm to represent them The audit firm should politely refuse this request
in a dispute with tax authorities this constitutes an and they should either act as an auditor aur an
advocacy threat as independence may be advocate
compromised due to fear of conflict of opinions

Pg 28 STARK

THREATS SAFEGUARDS
Mr STARK IS THE ENGAGEMENT PARTNER for Stark The audit firm should rotate the audit partner for
company for the previous nine years and so has the stark company ideally
excellent knowledge for the client, this constitutes
a familiarity threat as independence may be
compromised due to loss fear of loss of old client
relation
The auditor senior has received investment advice The auditor senior should ideally be rotated and
from stark co and intends to do same the next year someone else should be appointed for this
this constitutes a self interest threat as the assignment
independence is compromised due to the fear of
loss of advice from stark co.
The director of stark co has arranged a balloon Only immaterial gifts or hospitality should be
flight in an attempt to influence the opinion of accepted since offer of balloon flight is material it
audit this constitutes a self interest threat due to should be politely refused.
this independence may be compromised due to
fear of loss of luxury.
The director also states that the fees of this year A fixed fee should be set for services rather than a
taxation services this year should be based on contingent fee
percentage of tax saved this constitutes a self
interest threat as this compromises the
independence due to fear of low fees
The company also expects our firm to represent a The audit firm should politely refuse the advocacy
dispute for them this constitutes an advocacy service and if it does then resign as an auditor
threat as independence may be compromised due
to conflict of opinions

20
 CONFLICT OF INTEREST
There are two types of conflict of interest

Conflict between member (auditor) and Conflict between interest of 2 commercial

clients interest client

When auditor who is auditing a client When an auditor is auditing two or more
also has commercial interest in a clients who are in direct competition with
company who is in direct competition each other and are unhappy that their
with the client auditor is also auditing their competitor
because they fear confidential information
Auditor kef aide aur client k faidou kaconflict
Aysa ke auditor k paas ek company k shares houn aur could passed on to competitor
ussi ke competitor ko audit kr rha hou.
.(auditor audit kr rha hai apple ko aur usky pas shares 2 companies jou ek dsre ki competitor hain auditor un
hain Samsung ke) donou ko audit krega tou dono clients ko insecurity hgi k
Aar aysa hua tou tou chahega k uske jis company me
hmari information leak na hojae (for eg auditing both pepsi
shares hain who company ziada successfulhou lkn who
ussi ke competitor ko audit kr rha hai tou ussy kese aagay and cola company, Samsung or apple)
jaane dega.

SAFEGUARDS

1) Ask auditor to dispose off 1) Take consent from existing

shares clients from becoming auditor
2) Rotate that person from of their competitor
audit team 2) Not accept competing clients
3) Guide members of audit team
that they should not disclose
confidential info of clients to
other party
4) Send separate audit team for
audit of both clients.

21
Pg 29: NAB AND CO.

(a)

This is a conflict between the interest of 2 commercial clients the following safeguards can be
implemented to avoid any issues:

5) Take consent from existing clients from becoming auditor of their competitor
6) Not accept competing clients
7) Guide members of audit team that they should not disclose confidential info of clients to other
party
8) Send separate audit team for audit of both clients.

(b)

THREATS SAFEGUARD
The audit partner for goofy co has been in place Ideally the audit partner for goofy co should be
for approximately six year this constitutes a self rotated
interest threat as the independence may be
compromised due to fear of loss of personal
relation.
The audit manager’s son has accepted a job offer The audit manager should be rotated from the
from goofy co as a sales manager entitling him assignment
shares in goofy co. this indicates self interest
threat as independence may be compromised due
to fear of loss of job
External audit fee should be renegotiated with at The audit fee should be based on a fixed fee rather
least 20% of the fee being based profit after tax of than contingent fee.
the company this indicates self interest threat as
the independence may be compromised due to
fear of reducing revenue

AUDIT ENGAGEMENT LETTER: it is a letter stating terms and conditions of audit in the form of a letter
Agar 2 parties ksi bhi agreement me engage horhi hain (audit) tou ussy srf verbally agree krne se pbhtr hai ek letter me likhlen takay baad me
conflict na hou.

Contents of audit engagement letter:

MUST

 Objectives and scope of audit (maqsd kia hai audit ka;govt ne bola hai, court ne bola hai etc)
 Management responsibilities (management aur auditor ki zimmmedari likhou wrna donou lrte rhengay baad me)
 Auditor responsibilities
 Applicable finance reporting framework (IFRS py hai GAAP me hai)
 Expected from and content of report (report ka FORMAT kia hai, verbal, written, email etc)

CAN (no limit add anything you want)

22
  fees and billing arrangement
 involvement of experts (expert waghera ko bulana hga tou uski fees aur wajah kia hai; expert who jou professionally
ksi cheez ko bataden k agar ksi oil factpry ko audit kr rhe hain tou us oil ko professionally measure krly)
 involvement of internal auditors (unka kia hisaab kitaab hoga)
 timetable

 can AEL be revised?

YES, if

 there is a change in circumstances

 there is misunderstanding of nature of audit (agar humme nature smjh na ayi ke ksi report krna hai, apni
responsibilities smjh na ayi etc kch bhi)

PRECONDITIONS OF AUDIT:
There are 2 preconditions of audit:
(ksi bhi kaam ko shuru krne k liye kch conditions ka hona zaroori hai tbhi who kaam hoga wrna nhi. Circumstances suitable
houn who kaam hone k liye)
 see whether financial reporting framework is acceptable(agar FS ayse financial standard k mutabiq bani hou jou
acceptable hi nai tou kia banegi)
 sincere management acknowledges its responsibility for preparation of FS, implementation of
controls and providing auditor access to all information (agar management yeh cheezein auditor ko nhi degi tou
auditor audit kar hi nhi paegi)
1) if preconditions of audit are present, sign the audit engagement letter
2) if preconditions of audit are not present refuse audit

AGREEMENT PROCESS:
HOW AUDIT FIRMS AND CLIENT ENTER INTO A RELATION?

1. By advertisement: firms advertise themselves that we are offering audit services, interested
company can contact (in today’s era this is not allowed) (kiunke companies apne apko bht acha show krti thi
ayse)
2. By tender: companies give ad in newspaper or other area and mention that we want an auditor
interested firms can contact us.

Factors to consider when setting fees:

 Size of client
 Complexity of activities

These days there is a practice by firms of charging low fees from clients; this practice is called
“low-balling”

REASONS FOR LOW-BALLING:

23
  Technology (bht achi hai ghntou ka kaam mintou me hrha hai)
 Economic conditions (bht low demand chlri hai auditing ki)
 Strong internal audit department (sab kaan co. ne khd kiya hua hai tou humme bht kum kaam krna par rha
hai)

NOTE: Low-balling is allowed provided it does not affect quality.

APPOINTMENT ETHICS:
Steps an audit firm should take before accepting nomination: (koi bhi auditing assignment accept krne se pehley yeh
cheezein check kren. They are not legal requirements they are ethically done)

1. Ensure professionally qualified to act (kia hamare paas professional resources hain; qualification,
technology etc)
2. Ensure adequate resources available
3. Communicate with previous auditors
4. Do client screening
 Check whether management is honest or not i.e. management integrity
 Do engagement economics i.e cost benefit margin
 Check whether cost is low risk or high risk
 Check whether client wants to keep long term relation
 Check whether resources are available

Steps an audit firm should take after accepting nomination

1. Ensure outgoing removal is appropriate (purane auditor ko sahi se nikala hai ya nai)
2. Ensure new auditors appointment is valid (apki appointment sahi hai ya nahi, sahi banda appoint kr rha hai ya nai)
3. Setup & submit engagement letter

Ethical risk: any type of risks!

Ethical threats: self review, self interest etc.

Pg 30 salt and pepper

(a)
(i) Steps prior to accepting the audit of Cinnamon Brothers Co (Cinnamon)
ISA 210 Agreeing the Terms of Audit Engagements provides guidance to Salt & Pepper & Co (Salt
& Pepper) on the steps they should take in accepting the new audit client, Cinnamon. It sets out
a number of processes that the auditor should perform prior to accepting a new engagement, in
addition to considering whether preconditions for the audit are in place.

 Salt & Pepper should consider any issues which might arise which could threaten compliance
with ACCA’s Code of Ethics and Conduct or any local legislation, including conflict of interest
with existing clients. If issues arise, then their significance must be considered.
 In addition, they should consider whether they are competent to perform the work and whether
they would have appropriate resources available, as well as any specialist skills or knowledge
required for the audit of Cinnamon.

24
  Salt & Pepper should consider what they already know about the directors of Cinnamon; they
need to consider the reputation and integrity of the directors. If necessary, the firm may want to
obtain references if they do not formally know the directors.
 Additionally, Salt & Pepper should consider the level of risk attached to the audit of Cinnamon
and whether this is acceptable to the firm. As part of this, they should consider whether the
expected audit fee is adequate in relation to the risk of auditing Cinnamon.
 Salt & Pepper should communicate with the outgoing auditor of Cinnamon to assess if there are
any ethical or professional reasons why they should not accept appointment. They should
obtain permission from Cinnamon’s management to contact the existing auditor; if this is not
given, then the engagement should be refused.
 If given permission to respond, the auditors should reply to Salt & Pepper, who should carefully
review the response for any issues that could affect acceptance.

(ii) Steps to confirm whether the preconditions for audit are in place

 ISA 210 Agreeing the Terms of Audit Engagements requires auditors to only accept a
new audit engagement when it has been confirmed that the preconditions for an audit
are present.
 To assess whether the preconditions for an audit are present, Salt & Pepper must
determine whether the financial reporting framework to be applied in the preparation
of Cinnamon’s financial statements is acceptable. In considering this, the auditor should
assess the nature of the entity, the nature and purpose of the financial statements and
whether law or regulations prescribes the applicable reporting framework.
 In addition, they must obtain the agreement of Cinnamon’s management that it
acknowledges and understands its responsibility for the following:
 – Preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation;
– For such internal control as management determines is necessary to enable the
preparation of financial statements which are free from material misstatement,
whether due to fraud or error; and
– To provide Salt & Pepper with access to all relevant information for the preparation of
the financial statements, any additional information that the auditor may request from
management and unrestricted access to persons within Cinnamon from whom the
auditor determines it necessary to obtain audit evidence.
 If the preconditions for an audit are not present, Salt & Pepper shall discuss the matter
with Cinnamon’s management. Unless required by law or regulation to do so, the
auditor shall not accept the proposed audit engagement:
 – If the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable; or
– If management agreement of their responsibilities has not been obtained.

(b) Matters to included in audit engagement letter:

– The objective and scope of the audit;
– The responsibilities of the auditor;
– The responsibilities of management;
– Identification of the financial reporting framework for the preparation of the financial statements;
– Expected form and content of any reports to be issued;

25
– Elaboration of the scope of the audit with reference to legislation;
– The form of any other communication of results of the audit engagement;
– The fact that some material misstatements may not be detected;
– Arrangements regarding the planning and performance of the audit, including the composition of the
audit team;
– The expectation that management will provide written representations;
– The basis on which fees are computed and any billing arrangements;
– A request for management to acknowledge receipt of the audit engagement letter and to agree to the
terms of the engagement;
– Arrangements concerning the involvement of internal auditors and other staff of the entity;
– Any obligations to provide audit working papers to other parties;
– Any restriction on the auditor’s liability; and
– Arrangements to make available draft financial statements and any other information.
(c)
THREATS SAFEGUARDS
salt and pepper has offered its clients a free Separate audit teams should be used for
accounts preparation a service, this constitutes preparation of accounts and for audit
a self review threat as independence may be
compromise due to auditing own work
One client is offering fee as a % of profit this The audit firm should politely refuse the offer
constitutes a self interest threat as is contingent fees and as for a fixed fee
independence may be compromised die to
fear of less revenue
Salt and pepper intends to use junior staff on A balance of junior and senior staff should be
audit of cinnamon, junior staff are likely to be used to audit risk of incorrect opinion
under skilled and may lead to incorrect
opinion formation
Salt and pepper has not contacted cinnamon’s Salt and pepper should immediately contact
previous auditor, salt and pepper will be cinnamon previous auditors
unable to get proper information about client
Salt and peppers is running an advertising Salt and pepper should immediately ceasethis
strategy , advertising strategy is not allowed advertising strategy.
as per ACCA code of ethics

Chapter 5 INTERNAL AUDIT

INTERNAL AUDIT: ITS AN APPRAISAL/ MONITORING ACTIVITY ESTABLISHED BY THE ENTITY WITHIN THE
ENTITY TO PROVIDE SERVICES TO THAT ENTITY

EXTERNAL AUDIT INTERNAL AUDIT

The objective of external audit is to give opinion The objective of internal audit is to improve
on FS operations
External auditor are not the employees of Internal auditors are employees of the company
company
External auditors are appointed by and reported to Internal auditors are appointed by and reported to
shareholders management
External auditors are paid fees Internal auditors are paid salaries

26
Scope of work of external auditors are defined by Scope of work of internal auditors are defined by
ISA’s management
To be an externa auditor, qualification and To be an internal auditor no qualification or
membering of professional body is necessary membering of professional body is required

What tasks are carried out by internal audit department?

Since internal auditors are employees of a company they can be asked to perform any tasks, however
typically carry out following tasks.

1. VFM (value for money) audit: in VFM, internal audit department evaluates whether company is
achieving SE’s i.e economy (low cost), efficiency (high profit) and effectiveness (objective
effectiveness) on any of its tasks.
Company ki falahna ctivities py nazar daalou aur yeh dekho VFM(economy, effectiveness, efficiency) achieve hri hai ya nai)
2. Compliance audit: compliance means following laws, rules and regulations. In compliance audit
internal audit department is asked to assess what are the laws and rules which company has to
comply and check whether company complies with such laws and regulations. A compliance
report is usually asked. (check krwaya jaata hai ke haamri company py kon kon se rules and laws apply krte hain aur kis kis
ko hum follow kr rhe hain)
3. Best value audit: in best value audit internal audit department is aked to check whether
company is giving best value to its customers or not, this is usually done by comparing our
company’s with others. Hmari company ki prodiucts ki value (quality, quantity, price etc) comparatively dsri companies se
bhtr hai ya nai.
4. Preventing and detecting fraud and error: the ultimate and primary responsibility for
preventing and detecting any fraud and error lies with management and those charged with
governance. It is important that management develops a outline which makes it difficult to do
fraud and people avoid fraud due to unethical thing. Internal audit department can assist
management in identifying areas of fraud, they may recommend controls to reduce chances of
fraud they may carry out fraud investigation however the very existence of internal audit
department acts as a deterrence to fraud. Fraud and error ke zimmedaar asal me management hti hai, unme
aysaculture hona chahye k log fraud krne se dare, lkn internal audot ka kaam yeh hai ke who detect kre fraud, logou py nazar rkhen
aur ayse consequences paida kren k fraud krne walou ko punishment mily.
5. Internal audits
6. Assist in preparation of FS
7. Assists in implementation of controls
8. Risks management etc

Factors to consider by external auditor before placing reliance on work of internal control

1. Independence: since internal auditors are employees of company they are unlikely to be
independent so external auditors’ first check their independence before placing reliance on their
work.
2. Technical competence: since internal auditors are not required to have professional
qualification or membership of professional body, they are likely to be incompetent, so external
auditors check their competence before relying on their work.
3. Scope of work: since it is likely that internal auditor work may not be of two much use for
external auditors, they first check scope of work of internal audit before relying on their work.
Internal auditor ne jo kaam kiya hy who external auditor k kaam ka hai bhi ya hi (eg; compliance with laws EA k ksi kaam ka nhi)

From pg 32

27
ADVANTAGES
1. Apna internal audit department betha hai tou wohi sb investigation krlega aur who fixed salary leta hai islye external dept. hire krne
ki zroort nhi pregi.
2. Yeh wahid dept hai jou har area me supervise krta hai wrna ek dept ka banda dusre dept ke affairs me interfere nhi krskta islye issy
har dept ki knowledge hoti hai.
3. Koi exceptional job ajae jis ko poora krne ki qualification ksi normal bande me nahi hoti hai who kaaam internal department poora
krne ki skills rkhta hai.
4. Org me har cheez/ operation etc smoothly run kr rhi hai
5. Inse itne functions perform karaye jaate hain key eh phr trauiin hojate hain aur baad me senior post py kaam krne ki ability rkhskte
hain

DISADVANTAGES
1. Independence issue: jitna bhi acha internal department hou phr bhi yeh within org ke employees hain tou independence khtm hojati
hai
2. Costly hote hain
3. Dusre departments ko pata hai yeh inpy nazar rkhne k lye hain issy who b issy resist krte hain.
4. External parties don’t rely on their work kiunke they think yeh fraud me mmily hoskte hain
5. Pehle inhy bola gya ke koi task chec krou aur phr inhi se who kaam review karaya gya tou yeh self review hua.
6. Qualification issue: hoskta hai they are not properly qualified for the job

OUTSOURCING: companies k bhi permanent basis py kch dept nhi rkh skte because they can’t affprd it so they outsouce it (so they are
3rd party internal dept)

ADVANTAGES
1. Saara kaam krne k baa dap intrernal dept ko fees dedogy, hire nhi krna parega
2. Jab aap unhy professionally outsource kr rhe hou tou unme tou saare skills houngy.
3. Pese lenbgay aur fauran apka kaam krdengay jbky internal audit dept ke peeche parna parega
4. Internal audit that is outsourced unko bs ek baar permanent fees (acc to agreement) deni hgi, not salaries, bonuses etc
5. Jab apna dept khd run krengay tou periodically rtraining bhi krani hgi (expense)
6. Apna time bhi save hoga.
7. Poora saal employees ko rkh ke salaries nhi deni pregi
8. Khud run krengay tou agar hmare employee se koi mistake hui tou humme nuqsaan hga, ksi outsourse employee se ghlti hui
tou us loss ko humme bear nhi krna parega
9. Outsourcing aysa culture paida krdeta hai k in future kbhi humny within company bhi internal auditing krri tou pehle se policies
set hti hain.

DISADVANTAGES
1. Independence issues ayengay; humne apni internal auditing ussi sy karare jou external kr rha, tou external waly internal ki
ghltiyan highlight nhi krengay.
2. Mehengi hgi kiunke who professional hai unhy unki policies k hisaab se oay krna hga
3. Agar company ke achanak se koi issue hua tou who at the moment available nhi houngay
4. Who jou bhi kaam krke dengay aur jaisa bhi krengay hum us me koi keerhe nhi nikal skte humme accept krna hoga jab ke
within company Internal dept k peeche pr skte
5. They will not follow company culture
6. Outsource krengay tou previous internal staff ko nikalnegy tou who naraz houngay
7. No control
8. Loyalty nhi hou maybe

INTERNAL AUDIT REPORT:

After everything is audited than the auditor prepares a report, it has no fixed pattern like external audit
report but typically it includes weakness, impact, and recommendation. (because it is a INTERNAL report
prepared for management )

ATTRIBUTES OF HIGH QUALITY REPORT:

Accurate

Complete

28
Concise

User friendly

Realistic

Attainable (jou bhi goals likhe hou acheiveable hou)

Time bounded (time py mile aur kaam hoske)

Easiest

Pg 33-35

GOVERNANCE:

(A) B corporate governance is a system by which entities are directed and controlled. CG is
important because lack of such system will mean CEO and chairman will be same, there will be
no committees hence accountability will become difficult
(B) Benefits of internal audit (copied as it is from above)

INTERNAL AUDIT FUNCTION (copied from above)

(a)activities carried out by internal audit dept (b) d/f between objective, scope and work, reporting
responsibility.(c) outsourcing, adv and disadv.

WOOD INDUSTRIES

(a) From chapter 1 (pg 4)

(b) Pg 3 (audit-reasonable and review-limited)

REGULATION

(a) Rights of auditor (pg 6)

(c)Limitations of external auditor (chap 1)

(b) ISA must be applied whenever we are doing audit of FS where ISA’s match with local laws of
countries , auditor can easily ISA’s however if ISA differ from local laws of country than local
laws will prevail

INTERNAL AUDIT RESPONSIBILITIES

(a) The ultimate responsibility for preventing and detecting any fraud and error lies with
management and those charges with governance. It is important that management establishes a
culture of honesty and ethics which minimizes chances of fraud. Internal auditors can assist
management in identifying areas of fraud, they may recommend controls to prevent fraud, they
may carry out fraud investigation however the very existence of internal audit dept acts as a
detterence to fraud. External auditors are only required to make sure FS are free from fraud
(b) Pg 27

29
AVOCADO

(a) Pg 3 (audit-reasonable and review-limited)

(b) Any difference b/w internal and external auditor(pg26)

MONTE HODGE

Is company me internal audit dept kef aide aur nuqsaan likhne hain.

Advantages question se link krte huwe likhne hain lkn disadvantages phr bhi general likhslte

Advantages:

1. since regulation is expected in future, having internal audit department will help the copany in
compliance audit
2. company uses IT system so having an internal audit department will help the company in IT
audit
3. controls of the co are limited so having an internal audit dept will result in better
implementation of controls
4. financial accountant is not qualified so internal audit department will help in preparing FS
5. company offers financial services which is easy for fraud, habving internal audit department will
act as a deterrence o fraud

Disadvantages

1. having an internal audit department will create fixed cost burden on monte hodge
2. having an internal audit department will result in staff demotivation at monte hodge as they will
think they are supervising them
3. having an internal audit department may create independence issues as they are employees of
company
4. external parties like banks external auditors don’t rely on their work
5. work is not up to the mark due to qualification issues.

Classes 14-21

Chapter 6: AUDIT REPORTS (sec c)

Jese FS ko IAS ke mutaabiq banaya jaata hai wese hi FS ko ISA ke mutabiq audit kiya jaata hai (other than local laws) this is a uniform method

Srf 7 -8 definitions yaad krni hain poora poora nhi.

BASIC ELEMENTS OF AUDIT REPORT (only definitions are questionable; given in notes pg 25-28) *atleast learn 8/15

1. title (auditor tou aur bhi kaam kr rhe hote hain islye isme specific krna chahyeke yeh independent audit report hai )
2. addressee (audit report SH ko address ki jaati hai)
3. introductory pattern (isme bataya jaata hai ke FS jou audit ki jaati hai usme hta kiya kiya hai; SOFP etc, and kis saal ki audit
report hai yeh bhi mention krna hota hai)
4. management responsibility (eg; preparation of FS)
5. auditor responsibility (eg; to give opinion of FS)
6. opinion paragraph (isme apni raaye likhega auditor)
7. other reporting responsibilities (mulk ka koi local law kehra hai key eh b report krna hai tou who yahan report hoga)
8. date

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 9. address (auditor ka)
10. signature (Auditor/or its firm)
11. name of partner (auditor ka naam; isme threat hoti hai k kahon auditor ko baad me threat na kren) *optional
purane auditing reports me yeh 11 cheezein chahye hti thi lkn ab new auditing reports me yeh cheezein bhi mention krni hti hain

ADDITIONAL ELEMENTS

1. key audit matter (KAM) paragraph (matters which are very important In the eyes of auditor; could be related ko
company culture, finance anything)
2. material uncertainty w.r.t Going concern paragraph (agar auditor ko lagta tha k ispy koi uncertainity hai tou who
mention krden)
3. other information paragraph (isme shareholder ko communicate krde ke mai srf FS (5 statements) ka zimmedaar hun
other matters ka zimmedaar nai hun)
4. basis for opinion paragraph (opinion ki wajah kia hai wrna har koi auditor ko contact krna shuru krdeta hai)

What is an audit report? An auditor is required to communicate all his findings in the end of audit in the
form of a written document; this written document is called an audit report.

What opinion to give?

1. Unmodified or unqualified opinion

2. Modified opinion
 Qualified opinion
 Advance opinion
 Disclaimer of opinion

Misstatement Inability to obtain SAAE

(mistake in evidence) (auditor unable to find the evidence)
 Wrong value Due to;
 Wrong treatment  Management hiding it
 Wrong disclosure  Natural factors
 Wrong accounting policy

1. If there is no misstatement or no inability to obtain SAAE

Unmodified opinion (clean chit)

“Financial statement gives a true and fair value”

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 2. If there is misstatement or inability to obtain SAAE, opinion must be modified.

Misstatement Inability to obtain

SAAE
Immaterial Material but not Material and Immaterial Material but not Material and
persuasive persuasive persuasive persuasive
Unmodified Unmodified
Qualified Adverse Qualified Disclaimer
“Financial “Financial statement
opinion opinion opinion opinion
statement gives a gives a true and fair
true and fair view” view”
“except this financial “Financial statement “except this financial “we do not express
statement gives a do not give a true and statement gives a true an opinion”
Jou evidence nhi milra and fair view”
true and fair view” fair view”
bht immaterial hai
Bht important cheez
Error bohat Baaqi sab milgya bas
Baaqi sab theek hai Bht saari cheezou me ya bht saari cheezoun
immaterial hai tou ek cheez nahi milrhi
lkn srf ek cheez ghlt error hai jiske baghyr b audit ka e vidence nhi
koi changes nai
hai report sahi lagygi milrha
krengay

OR
1. UNMODIFIED: if there is Immaterial: less than 5%
i) No misstatement
ii) No inability to obtain SAAE Material and not persuasive: 5%-20%
iii) Immaterial misstatement
iv) Immaterial inability to obtain SAAE Material and persuasive: 20%+
2. QUALIFIED: If there is
i) Material but not persuasive misstatement
ii) Material but not persuasive inability to obtain SAAE
3. ADVERSE: If there is
i) Material and persuasive misstatement
4. DISCLAMIER: is there is
i) Material and persuasive inability to obtain SAAE
Examples given in notes.

E.O.M paragraph (emphasis of matter paragraph) there are certain items in financial statement
that require disclosure, hence management will disclose it is financial statement. However if auditor
believe the matter is fundamental to user’s understanding of audit report.

32
 He adds another paragraph in audit report called E.O.M paragraph, which makes a reference to that
note in disclosure, thus highlighting that matter in detail.

Contents of E.O.M paragraph;

1. Highlights a matter affecting financial statement.

2. Highlights a matter already disclosed in financial statement
3. The paragraph must make note to the point where matter in explained in detail
4. The para must specifically mention that opinion is not qualified in this report.

OTHER MATTER PARAGRAPH: there are certain items in financial statement that do not require
disclosure hence management will not disclose it in financial statement however if auditor believes the
matter needs to be brought to shareholder attention, he adds another paragraph in audit report called
other matter paragraph that explains that matter in detail.

OTHER INFORMATION: all information other than that in FS is called other information, there are two
issues to consider in other information;

1. Inconsistency between financial statement and other information;

i) Auditor needs to check what is right and what is wrong
 Is Financial statements are correct and other information is wrong, then unmodified opinion
plus other information paragraph.
 If financial statement are wrong and other information is correct take following steps;
a) Discuss with management and ask them to revise FS
b) If they revise the financial statement give unmodified opinion
c) If they refuse to revise financial statement, give modified opinion.
2. Material misstatement of facts in other information;
Auditor should take following steps;
a) Discuss with management
b) Discuss with those charged with governance
c) Take an independent legal advice.

OVERALL REVIEW OF FINANCIAL STATEMENT: after completing the audit but before signing the audit
report, auditor does an overall review of financial statement of financial statement, this is just a quick
check and balance of all work done to ensure overall audit opinion is consistent with findings of audit.

CHAPTER 7: SUBSEQUENT EVENTS (sec E)

Learning from notes/here

EVENTS AFTER THE REPORTING DATE

IAS 10: What are subsequent events/events after reporting date?

Subsequent event are the events that occur after the reporting date. There are two types of subsequent
event;

1. Adjusting event: the event that provide evidence of the condition that why this event occurred
existed before the reporting date within the year. Eg: bad debts, obsolete inventory etc
2. Non adjusting events: the events that provide evidence of the condition of this event did not
existed at the reporting date . eg: fire destroying inventory. Natural disasters etc.

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 AUDIT RESPONSIBILITY IN SUBSEQUENT EVENTS:
Upto the date of sigining the report/ before After signing of the audit report?
signing of audit report?
Auditor has passive responsibility, he is not
Auditor has active responsibility, he must responsible at all, however if auditor becomes
ensure that upto date of signing of report
aware of facts that had been known to him
everything have been identified,adjusted or
disclosed by the company accordingly. while auditing that will cause him to make
amendments in the audit report, he should
discuss it with the management and ask them
to revise FS, if management revise FS, auditor
Jab tak audit repot sign nhi ki hai saara control auditor k
haath me hai tou who management k peeche par ke us should perform new procedures and issue a
subsequent event pr action dilwaskta hai. new audit report but if management refuse to
revise FS, auditor should take all necessary
steps to prevent reliance on old report.

ANSWER PLAN:
1. Write a short intro about case
2. Write “under ias 10 it is an adjusting/unadjusting activity and needs to be adjusted/disclosed in
FS”
3. Write three procedures
i) Discuss with management …..
ii) Inspect supporting documents…
iii) Take expert/legal advice….
4. Find materiality (less than 5%, 5%-20%, above 20%)
5. State impact on FS as per rules learned (ref:31)

HUMPHRIES CO. pg7/22

a) Pg 34 audit resp in subs event

b) Receivable: a customer of Humphries co. who owes $0.3m is facing going concern problems
but company expects they will receive some amount.
Under IAS 10 this is an adjusting event as it provides evidence of conditions that existed at
balance sheet date hence it will be adjusted in FS.
Following audit procedures will be performed:
i) Discuss with management why they think customer will pay some amount.
ii) Inspect supporting documentation like sales invoice, correspondence with receivable etc
iii) The legal advice on how to initiate legal proceedings against receiveables

The balance is immaterial as it represents 4% of profits hence there will be no impact on audit report,an
unmodified opinion will be given.

Lawsuit: a supplier is suing the company for breach of contract, initially they claimed $1m but
are now willing to settle the case for &0.6m.

34
 Under IAS 10 this is an adjusting event as it provides evidence of conditions that existed at
balance sheet date hence they will be adjusted in FS.
Following audit procedures will be performed:
i) Discuss with management why there was a breach of contract.
ii) Inspect supporting documentation like supplier contract, correspondence from supplier
etc.
iii) Take legal advice as to what were the chances of winning the case.

The matter is material but not persuasive as it represents 8% of profit hence a qualified opinion will be
issued.

Warehouse co. has three warehouses and due to excessive rains, flood water entered warehouse
located in Bass and damaged all inventory.

Under IAS 10,this is a non- adjusting as it does not provide evidence of conditions that existed at balance
sheet hence will be disclosed in FS. Following audit procedures will be performed:

i) Discuss with management what their views on insurance claims are.

ii) Inspect supporting documents like inventory records, insurance policy etc.
iii) Take expert advice as to what is the level of damage in monetary terms .

No information is provided to find materiality, it is material but persuasive then a qualified opinion will
be given but if its material and persuasive an adverse opinion will be given.

PANDA CO. pg 8/22

a) CREST (ref:4)
b) Event 1: a batch of chemicals produced in april was detective whose worth was $0.8m but now
has a scrap value of $0.1m
Under IAS 10, this is an adjusting event as it provides avidence of conditions that existed at
balance sheet date hence will be adjusted in FS.
Following audit procedures will be performed:
i) Discuss with management why defect occurred even after quality checks.
ii) Inspect supporting document like inventory records, quality control reports etc.
iii) Take expert advice as to whether there is any alternative use.

The issue is material but not persuasive as it represents 3%((0.85-0.1/5.6)*100) of profits hence a
qualified opinion will be issued.

Event 2: an explosion occurred at smallest of four location resulting in damage to property, plant and
equipment worth $0.9m.

Under IAS 10 this is a non adjusting event as it does not provide evidence of conditions that existed at
balance sheet date hence will be disclosed in FS.

Following audit procedures will be performed:

i) Discuss with management why they think they must be able to claim insurance.
ii) Inspect supporting document like insurance policy, valuation report etc
iii) Take expert advice as to how to claim insurance.

35
The matter is material but not persuasive as it represents 10% of profit hence a qualified opinion will be
issued.
Srf material ka matlab material but not persuasive hota hai

ZEEDIEM co. pg.9/22

Event 1: the springs in a new mattress have been found to be defective and it’s worth $750000 is
affected.

Under IAS 10 this is an adjusting event and provides the evidence that the condition of this event existed
at the date of FS so this should be adjusted in FS.

Following audit procedures will be performed:

i) Discuss with management why they were underinsured.

ii) Inspect supporting documents like inventory records, insurance policy etc.
iii) Take legal advice as to possibility of case against supplier.

The issue is material but not persuasive so a qualified opinion will be given.

event 2 production at sham eve factory got halted fo one day when a truck carrying dye reversed and
dye fell into premises and local river.

Under IAS 10 this is an adjusting event and provides the evidence that the condition of this event existed
at the date of FS so this should be adjusted in FS.

Following audit procedures should be performed:

i) Discuss with management what is their view on whether company has breached
environmental legislation
ii) Inspect supporting document like environmental reports, insurance policy etc.
iii) Take legal advice as to options with companyif case is filed.

The issue is material but not persuasive so a qualified opinion will be given.

GRAINS 4U CO. pg 6/22

Event 1 a fire occurred at largest of distribution depots and resulted in da,age os $650000 vehicles
and $25000 inventory

under IAS 10 this is a non adjusting event as it does not provide evidence of conditions that existed
at balance sheet date hence will be disclosed in FS.

Following are the audit procedures will be performed:

i) Discuss with management what their stance on insurance claims is.

ii) Inspect supporting document like insurance policy, inventory records, asset register etc.
iii) Take legal advice as to options in case insurance company does not give claim.

The issue is material but not persuasive as it represents 8%(675/7900) of profit hence a qualified opinion
will be given

36
Event 2: a large batch of inventory was defective and no sales have been made. Cost of defect is 0.95m.

Under IAS 10 this is an adjusting event as it provides evidence of conditions that existed at balance sheet
date hence will be adjusted in FS.

Following audit procedures will be performed:

i) Discuss with management whether there are any quality controls.

ii) Inspect supporting document like inspection reports, inventory records etc.
iii) Take expert advice on how to maximize benefit from alternative use.

The issue is material but not persuasive as it represents 11% (865/7900) hence a qualified opinion will
be given.

Pg 10/22

PALM CO. INDUSTRIES.

A customer who owed $350000 has not paid anything and disputes quality of goods however finance
director feels confident that the issue will be resolved. there is a doubt that receivable balance is
overstated and a provision maybe required, this provision is 7.3% of profit indication it is material byt
not persuasive.

Discuss with management why they haven’t made any allowance for receivables.

Since issue is material but not persuasive a qualified opinion will be provided.

ASS TRADING

Inventor count was altered by company’s internal audit department and neither chestnut now previous
auditors’ attended the count hence there are doubts a inventory balance as auditors do no observe
counts.

This issue is material and persuasive as it represents 21.4% of profit.

Take expert opinion as to valuation of inventory since issue is material and persuasive, a disclaimer of
opinion will be given.

Chapter 8: GOING CONCERN

POSSIBLE QUESTIONS:

1. What is going concern?

2. Auditor and management responsibilities in going concern?
3. Events that can’t doubt on going concern status or potential indications of going concern
problems?
4. Audit procedures in going concern
5. Reporting issues in going concern.

WHAT IS GOING CONCERN?

37
Going concern is an assumption which states entity will be able to continue operations for the
foreseeable future. Financial statement should be prepared on going concern basis if entity believes it
will be able to continue operations for foreseeable future.

If entity believes it wont to be able to continue operations for the foreseeable future then going concern
assumption is not valid and financial statement should be prepared on a breakup basis.

MANAGEMENT RESPONSIBILITIES IN GOING CONCERN:

1. Management needs to carefully assess that whether entity will be able to continue operation
operations as financial statement will be prepared accordingly.
2. If management becomes aware of any events that cast doubt on going concern status, they
need to disclose it.
3. If going concern assumption is not valid, management must prepare financial statement on
breakup basis.

AUDITOR RESPONSIBILITIES IN GOING CONCERN

1. Auditor needs to remain alert throughout the audit for any events that create doubt on going
concern status.
2. He must cover assessment period of at least 12 months.
3. He must carefully assess assumptions made by management

AUDIT PROCEDURES IN GOING CONCERN

1. Analyze and discuss flow and other forecast with management.

2. Analyze and discuss entities latest available interim financial statement.
3. Review terms of debentures and loan agreement to see whether they have been breached.
4. Enquire from entity’s lawyers regarding litigation and claims.
5. Obtain and review reports of any regulatory actions.
6. Read minutes of board meetings, share holder meeting and director meeting for details of any
financial difficulties.

EVENTS THAT CAST DOUBT ON GOING CONCERN (pg 11/22)

REPORTING ISSUES OF GOING CONCERN

CASE 1: if auditor concludes that going concern assumption is valid but material uncertainty exists

As per standards management is required to disclose this uncertainty if financial statement.

1. If management has adequately disclosed it in financial standards, give unmodified opinion but
mention this uncertainty in material uncertainty with respect to going concern paragraph in
audit report.
2. If management has not adequately disclosed it in financial statement or management has not
disclosed, give modified opinion
i) Material but not persuasive = qualified
ii) Material but persuasive = adverse

38
CASE 2: if auditor concludes that going concern assumption is not valid, as per standard financial
statement must be prepared on a breakup basis.

1) If management have prepared financial statement on a breakup basis then; unmodified opinion
plus other matter para
2) If management have not prepared financial statement on breakup basis then; adverse opinion

CASE 3: if management is unwilling to give or extend its assessment, this created an inability to obtain
SAAE

i) Material but not persuasive = qualified opinion

ii) Material and persusive = disclaimer opinion
Agar sawal me potential indicators pooche hain tou saath me how it affects the company bhi batana hai

MEDIMADE CO.

a) 37 gc assumption
b) .
i) Level of competition has increased, this will reduce demad of product leading to lose
revenue, reduced profits, reduced cash and then ultimately creating cash problems.
ii) Company is unable to recruit suitable staff, this will make it difficult for the company to
manufacture product. This will lead to lose sales, reduced profirs, reduced cash and then
ultimately creating going concern problems.
iii) Company has to use overdraft which carries high interest will reduce profits, reduce pocash
and then ultimately creating going concern problems.
iv) Supplier have withdrawn credit terms and company must pay cash on delivery, this will
create cash flow problem ultimately leading to going concern issues
v) Directors have produced a cash flow forecast which shows worsening position, this indicates
outflow are higher than inflows which will create cash flow ultimately leading to going
concern problem.
c) 38 audit procedures for gc.
d) If auditor believes company is going concern but material uncertainty exists, as per standard
management is required to disclose this uncertainty in FS.

Since directors have agreed to make going concern disclosers, if they are adequate then unmodified
opinion will be given and that uncertainty will be mention in material uncertainty with respect to going
concern para however if disclosures are inadequate auditor will give modified opinion, it provison is
material but not persuasive then qualified opinion and if it is material and persuasive then adverse
opinion.

CLARINET CO

b.

1. a new competitor has entered the market, this can result in loss of customers ehich will lead to
lost revenue, reduced profits, reduced cash ultimately creating going convern problem
2. key employees have keft the company, this will result in productivity issue hence company will
not be able to generate sales leading to lost revenue, reduced profit, reduced cash flow and

39
 ultimately going concern problem.
3. One of key supplier has ceased to trade, this will resul in shortage of supplier affecting
production, this will effect sales, leads to losing revenue, reduce cash flow, ultimately creating
going concern problem.
4. Share holders have decided to invest further for new product development. If no new product is
developed company won’t be able to able to make sales. This will lead to losing revenue,
reduced profits, reduced cash ultimately creating going concern problem.
5. Directors have produced a cash flow forecast which shpws worsening position in coming 12
months, this indicated outflow are higher than inflows leading to cash flow probem ultimately
creating going concern problem.

c. 38 audit procedures in going concern

d. since auditor believes company is going concern but this is subject to a material uncertainty as per
standard management is required to disclose this in financial statement.

Since management have agreed to disclose, if disclosers are adequate then unmodified opinion will be
given and this uncertainty will be mentioned in material uncertainty with respect to going concern
paragraph in audit repost however if disclosures are inadequate then opinion will be modified. If it is
material but not persuasive then a qualified opinion will be given and if it is material and persuasive
then an adverse opinion will be given.

STRAWBERRY CO.

(a)

i. A major customer has ceased trading this will result in loss of future sales leading to reduced
revenue, reduced profits and reduced cash ultimately creating going concern problems.
ii. Sales director has left and is yet to be replaced, there will be no one to sell product leading to
losing revenue, profits and cash flow ultimately creating going concern problems.
iii. Cash flow is forecast as negative, this means outflows are higher than inflows which will create
cash flow problems ultimately leading to going concern issues.
iv. Some suppliers are threatening legal action; this may result in penalties which will create cash
flow problem ultimately leading to going concern issues.
v. The bank has asked to repay the loan; this will result in huge cash outflow leading to cash flow
problems ultimately creating going concern issues.
vi. No dividend will be paid, lack of dividends will encourage shareholder to pull back their
investment leading to cash flow problem ultimately creating going concern issue.

(b) (ref:38) audit procedures in going concern

(c) Auditor responsibility for reporting on going concern (ref:38)

(d) Since there are serious concern on going concern which means going concern assumption in not
valid, as per standard financial statement should be prepared on breakup basis.

Since directors are refusing to amend financial statement, an adverse opinion should be given.

CHAPTER 9: WRITTEN REPRESENTATION

40
What is w.r? jab koi auditor ksi company me audit krne jaega tou management se agar ksi matter py koi sawal poochega lkn agar management
orally jawab de tou who ghlt bhi hoskti hai aur management baad me mukar b skti hai islye wo written form me lega which is called “written
representation, isme five financial statement shamil nhi kiunke who tou hoti hi written form me hain. For eg auditor ne manager ne poocha
apke kon kon se bank me account hain, tou who written form me jawab dega.

What matters in W.R? Wese tou hum kisi bhi matter py w.p maangskte hain lkn 2 matters py compulsory hai el yeh ke management ne
framework k mutabik FS banai hai; iski zimmedaari au dusra ye ke auditor ne saari relevant info auditor ko dedi hai.

Quality/appropriation/reliability of w.p? yeh sab kia hai? Reliability ksi bhi document ki tab hoti hau jab who 3rd paty bana ke de lkn yeh tou
management khd banarhi hai tou yeh zaroori nhi ke reliable hou.

How to obtain w.r? audit krte wqt audit note krta rhega k ussy kis kis cheez ki w.r chaye phr baad me management ko inform krde, phr review k
time management unhy draft bana ke degi and then audit ussy check krke ussy print karwake sign krwa ke legi(takay pakka kaam hojae)/

Reporting issues of w.r?1. audit ko doubt hai w.r py.: agr auditor ko doubt hai tou ussy dsri sources se evidence dhoondna chahye. Phr jab
aapko yaqeen hje k w.r sahi thi to no impact, and agar w.r waqai unreliable hou to take action. 2. Management w.r nai derhi: take steps.

Possible questions:

1. What is/ are written representation?

2. On what matters auditor should take written representation?
3. How to obtain written representation?
4. Reporting issues of written representation?

Written representation:
1. What is written representation?
Written representation are written statement by management to confirm certain matters or to support
other audit evidence. However they do not include financial statement, books, records etc.

2. On what matters audit will take written representation?

The auditor shall asl management to provide written representation on following matter( compulsory
elements)

a. The management has fulfilled its responsibility for preparation of financial statement and
financial statements are prepared in accordance with applicable framework.
b. That management has provided auditor with all relevant information and transactions have
been recorded.

Other written representation (not compulsory, on auditors request)

 All instances of non compliance have been reported to auditor

 Whether assets are leased or bought
 Have subsequent events been adjusted or disclosed etc
3. What is the quality/ reliability/ appropriateness/importanc of written
representation?
For evidence is be reliable it must be in written form, written representation, although in written form
are not a reliable source of audit evidence as they have been generated from internal source i.e.
management. They are considered a weak source of evidence and should be used when no other
evidence is available.

41
 4. How to obtain written representation?
The written representation are usually obtained in the form of a letter addressed to the auditor,

Throughout the audit, auditor will determine those items, on which written representations are requires
and inform management of those areas on which they will be seeking written representation.

At the finalization and review stage auditors will provide management with a draft written
representation, the auditors will then ask management to print the letter on their headed paper, review
the representation and sign it.

5. Reporting issues of written representation?

i. If auditor has doubts on reliability of written report.

If auditor has doubts on reliability of written representation, he should try and gain evidence from other
sources and try to resolve the matter. If he concludes that written representation are reliable then no
impact on audit report however if auditor concludes that written representation are not reliable he may
take some action, including impact on audit report, withdrawing from audit or ignoring its impact if
possible.

ii. If management refuse to give written representation.

If management refuse to give written representation auditor should take following steps:

a. Discuss with management as to why they are refusing.

b. Revaluate integrity and ethical values of management with respect to other representation.
c. Try to obtain SAAE from other resources.
d. Take action including impact on audit report since it creates an inability to obtain SAAE, a
qualified opinion is given if material and not persuasive and disclaimer opinion if material and
persuasive.

Pg 18/22
Hil industries

Importance For evidence is be reliable it must be in written form, written representation, although in
written form are not a reliable source of audit evidence as they have been generated from internal
source i.e. management. They are considered a weak source of evidence and should be used when no
other evidence is available.

Steps to take if management refuse to give w.r

If management refuse to give written representation auditor should take following steps:

a. Discuss with management as to why they are refusing.

b. Revaluate integrity and ethical values of management with respect to other representation.
c. Try to obtain SAAE from other resources.
d. Take action including impact on audit report since it creates an inability to obtain SAAE, a
qualified opinion is given if material and not persuasive and disclaimer opinion if material and
persuasive.

Pg 17/22

42
Greenfield

bi. For evidence is be reliable it must be in written form, written representation, although in written
form are not a reliable source of audit evidence as they have been generated from internal source i.e.
management. They are considered a weak source of evidence and should be used when no other
evidence is available.

c.

If management refuses to give written representation auditor should take following steps:

a. Discuss with management as to why they are refusing.

b. Revaluate integrity and ethical values of management with respect to other representation.
c. Try to obtain SAAE from other resources.
d. Take action including impact on audit report since it creates an inability to obtain SAAE, a
qualified opinion is given if material and not persuasive and disclaimer opinion if material and
persuasive.
Handout pg 22-30

CHAPTER 10: INTERNAL CONTROL (sec c)

Kaplan workbook page 294/594 and 297/594

Theory in handout
Management letter: auditor audit krne k baad SH ko audit report send krtra hai jisme, lkn sth hi ek aur letter banata hai management letter
jisme who management ko weakness baatta hai unky impact batata hai aur recoomend karta hai uska hal. Lkn kbhi kbhi jab audit management
ko recommendation deta hai tou management ghlt smjhti hai islye kch cheezein mention krni hti hai .

Internal control system: har idaare me ek system banana zaroori hota hai takay koi bhi idaara ek tareeke se kaam krske. Ek aysa nizaam jou
management ne banaya hou takay har operatin effectively chalta rhe isky liye 5 cheezein zaroori hai. 1. Mahaul sahi hou. Us maahul kou sab
follow kren. 2. Aysi activities hou jese segregation, camera, biometrics etc 3. Risk door se hi dekh ske management. 4. IT support acha hou. 5.
Controls monitor bhi horhi hou bs laga k chor na den

Limitations: jitna b acha system hou reasonable assurance dega, cost beneficial hou na hou not sure, human error, sab mil k b fraud krskte,
management khd control torde, controls bhi har cheez py nazar nhi rkhskti.

auditor ko opinion dena hai FS py aur us opinion k liye evidence chahye evidence ollect krne k liye kch procedures chhahye aur who procedures
kehlaate hain audit procedures. 1. Test of control:aysa audit procedure jou auditor perform krta hai, auditor yeh ceck krta hai k company k
controls sahi kaam kr rhe hain ya nhi kr rhe(case studies di jaengi 6 systems me se kisi ek ki and phr unme se kisi ek me weaknesses hgi ,
question can be asked on a. weakness b. impact c. recommendation dtest of control.

Management letter/ report to management

A letter sent by auditor at the end of audit to management which states weakness identified during
audit, there possible impacts and recommendation

things to mention in management letter:

1. Following weakness were identified during course of audit which was primarily performed to
express an opinion on FS.
2. Report only states those weaknesses which were identified during audit. Has a more detailed
examination been carried out we would have identified more weaknesses

43
 3. Report is for sole puprpose i.e for the use of management, should not be disclosed to third
parties without auditor’s permission
4. Thanks the manangement for their cooperation.

Internal control system

Internal control system is a process designed by management and those charged with governance to
provide reasonable assurance about achievement of entity’s objectives with regard to reliability of
financial reporting. There are five components of internal control system;

1. Control environment
2. Control activities
3. Entity’s risk assessment process
4. Information system
5. Monitoring of controls

Limitation of internal control systems:

No matter how strong an internal control system is made it only provides reasonable assurance, not
absolute assurance or guarantee, this is due to inherent limitation of internal control system.

1. Costs of control not overweighing benefits

2. Potential for human error
3. Collusion between employees
4. Management override of control
5. Controls cope with routine transactions not with a non routine transaction

Two tyoes of control:

 general control
 application control

how to document internal control system: theory in handout

*an auditor is required to give an opinion of FS, to give opinion he gathers evidence, and to gather
evidence he performs procedures called audit procedures. There are 2 types of audit procedures.

1. TEST OF CONTROL (T.O.C)

A TOC is an audit procedure performed by the auditor to verify whether controls are operating
effectively or not.

2. SUBSTANTIVE PROCEDURE (S.P)

a substantive procedure is an audit performed by auditor to verify values and assertions of FS.

Example in handout 14-21 (pg 19,20)

Handout 22-30 (pg 4/22)

General weakness of purchase order pg 5/22
Impact. Recommendation.TOC

44
1. Missing order trace krna mushkil. Controls should be numbered. Samples check kren numbered hain ya nai,
2. Authorize nai hore tou bande apni marzi se order place krengay. Authorize kren. Purchase order mangen aur dekhen authorization
sign hui wi hai ya nai.
Ek level k baad ($1000+ purchases) authorization shuru horhe hain tou fraud krne wala chote chote krke fraud krega. Authorization har
level k purchase order oy honi chahye. Auditor har level chote baray py authorization check kren
3. Wrong quality ajaegi ksi se b khareddlia. Approved supplier se khareedou. Invoice check krega k supplier kon hai.
4. Reputation kharab hogi. Payment time oy kro. Invoice date aur billing date check kro
5. Individual errors miss hoiungay. Sab dekhna chahye. Sample dekho k total/individual dono lists py sign hai ke nai,
6. Errors timely basis py discover nai horhi. Should be done regularly. Sample check kre reconciliation ki timely basis py bnri hai ya nai.
7. Errors hoskte manually. Computirised banae. Sample dekhen.
8. Maybe purchase order py kch likha hou humne kch lelia, production delay. Check instantly. Physically visit kre and check when
receiving orderchecking hri hai ya nai.
9. Production issues. Dono check kren. Physically check kre jakay on time of receiving orders/ look for quality report.
10. Customer naraz. Facilitate hone chahye. Check for customer facilitate centre.
11. Buying low/more stock, wrong stock etc. before purchasing always consult and authorize. Check for purchase order and loom for
senior’s sign
12. Fraud. Segregation and also difeerent authorization. Look for sample
13. Inv. Not updated so we won’t know kitni inv hai kitni nai, miscoomunication to customer/production. System should be perpetual.
Check system
14. Human error and inexperience. Should be made by senior. Should be signed by senior.
Sales system general weakness
Impact.recommendation.TOC(by auditor).
1. Fraud. Segregation.visit
2. Errors.computerised. check samples
3. Credit limit vary acc to customer’s wealth. Credit limit should be frequently updated. Sample of credit limit authorization form.
4. May be set wrong. Should be set by c redit controller. Check sign on credit limit form.
5. Documents if missed cannot be missed. Should be sequentially numbered. Check sample.
6. Customer dissatisfactoo. Invoice after goods dispatched. Check goods dispatched and invoice date.
7. Error. Should be done by senior. Check senior sign.
8. Late payment. Send bills every month. Check few samples of bills.
9. Errors not spotted on time. Should be done frequently. Ask for reconciliation records.
10. Customer mukar sakta hai. Take orders in written form. Ask for written order form/ auditor may make fake call to place order.
11. Bad debt. Credit limit should not be exceeded without senior approval. Check credit limit form and look for senior approval
12. May confirm order but have no stock, customer dissatisfaction.website should be intrigted, keep check on inventory. Auditor enter
dummy order or stock not in stock if system accepts then control fails.
13. Juniors may give unnecessaary discount. Senior give discounts. Invoices should be signed by senior,
14. Wrong order delivered. Always check order dispatched with orde placed. Check physically(onsite)
15. Transfer plain paper to order form me krte huwe mistake hoskti. Directly note in order form (integrated pre printed sheet). Auditor
order form ki book mangega dekhega pre printed hai ya plain paper hai.
16. Customer dissatisfaction(late delivery, goods damaged). Use good companies. Check contract.
17. No evidence, may forget. Make GDM. Ask for sample of GDN
18. Difficult to fix accountability. Should be signed. Check sample.
Pg 6/22
Hummingbird co.

Weakness (identification and explanation) Recommendation/control

Hummingbird has one sale clerk Brenda who Brenda should not maintain all aspects of revenue
maintains all aspects of revenue stream. stream, further people should be appointed and
This can create increased chanced of fraud as one tasks should be split between them and Brenda.
person has all powers and she can misuse powers.
Brenda manually edits invoices prior to dispatch, Manual editing should not be allowed if it is
this can create error leading to wrong invoices allowed then it must be approved and authorized
being sent to customers creating dissatisfaction. by a responsible official.
Good dispatched notes are not sequentially Good dispatched notes chould be sequentially
numbers, it will be very difficult to trace any numbered, a sequence check should be performed
missing GDNs. in the end to identify any missing GDNs and they
should be reported.
Company has shifted to a local courier company Company should shift back to reliable courier
which is making late deliveries, this can create company to avoid customer classification

45
customer dissatisfaction leadind to loss of sales in
future
Master file data is being amended by clerk, master Access to master file should be restricted to
file is a very confidential document and allowing senior’s to avoid confidentiality breaches.
clerk to access it may result in confidentiality
breaches.
Reconciliation is only done once a year any errors Reconciliation should be done on a regular basis to
wont be spotted and resolved on a timely basis. ensure errors are spotted and resolved timely.
Monthly statements are not send to trade Like hotel customers statement should also be
customer, this can create disputes in bills and can sent to trade customers regularly to avoid
lead to customer dissatisfaction. disputes.
if same case study but we are required to make managamenet cover letter then we are supposed to do
the same work. BUT

before this chart we write

following weakbesses were identified during course pf normal audit work which was primiraly
conducted to express an opinion on FS.

and after this chart we write

this report only states those weaknesses whoch we identified during audit, if we had carried out a more
detailed examination,we would have identified more weaknesses.

This report is for sole use of management, it must not be disclosed to third parties, without our consent.

We thank management for their cooperation and support.

OREGANO CO.

Pg 5/22

(a)methods of documenting sales and dispatch system

i. flowcharts: flowcharts are a graphic illustration of the internal control system for the system. Lines
usually demonstrate the sequence of events and standard symbols are used to signify controls or
documents.

Advantage It is easy to view the system in its entirely as it is all

presented together in one diagram.
disadvantage They can sometimes be difficukt to amend, as any
amendments may require the whole flowchart to
be redrawn.
ii.. narrative notes: narrative consists of a written descriptiom of the system, they would detail what
occurs in the system at each stage and would include any controls which operate at each stage.

Advantage They are simple to record, after discussion with

staff members.
Disadvantage Narrative notes may prove to br too cumbersome,
especially if the system is too complex.

46
(b)Control objectives of sales and dispatch system

i. To ensure transactions are recorded in correct accounting period.

ii. Tp ensure transactions are recorded in correct ccounting system.
(c) .

Deficiencies Recommendation
Some orders are taken by telephone. The person All orders should be taken in writing to avoid issue
taking the order may hear wrong or customer of wrong order being declined
giving order may back off from his statement
leading to wrong order being delivered creating
customer dissatisfaction
The order forms are not sequentially numbered, it Order forms should be sequentially number,
will be very difficult to trace any order forms sequence check should be performed in the end to
identify any missing GDNs and they should be
reported.
Clerks notes doen details on plain paper and latyer Order details should directly be written on 3 part
complete 3 part pre printed form. The plain paper pre printed to avoid errors
may be lost or clerk may transfer incorrect details
from plain paper on order form leading to
incorrect order delivered
Customers can exceed credit limit by 10%. This can Any credit limit increases should be authorized by
create increased chances of bad debts. senior official to minimize risk of bad debts.
Discount is manually entered by sales clerk on Manual editing should not be allowed on invoice, if
invoice, since clerk is inexperienced, he may make it is allowed it must be authorized by a responsible
errors leading to wrong invoice sent to customer official.
creating customer dissatisfaction
Only two clerks produce invoices. They may collide There should be segregation of duties and more
with each other to do fraud people should be hired or more staff should be
hired to prevent overloading of staff.

Fox industries pg 8/22

Cover letter: following weakness were identified during course of normal audit work which was
primarily conducted to express an opinion on FS.

Identify and explain weakness Recommendation

Purchase order is not sequentially numbers. If any Purchase orders should be sequentially numbers
purchase orders get missed, it will be hard to trace at regular intervals, a sequence check shall be
it. performed with any missing orders being
identified and reported
Savings account is reconciled every two months. Like current account, saving’s account should also
Any errors will not be reported and resolved on be reconciled regularly to ensure errors arespotted
timely basis due to lact of reconciliation. and resolved timely
Fox has a policy of delaying payments to suppliers. The policy of delaying payment should be resolved
This can result in loss of supplier and goodwill and and supplier should be paid timely to avid loss of
company may also miss on early settlement supllier’s goodwill
discounts.

47
Only orders above $5000 requires authorization. A All purchase order regardless od limits shall be
person who wants to do fraud and make authorized to resolve chances of fraud
unnecessary purchases will order in small pieces
i.e. below $5000 to avoid authorisation
Company is choosing thpse suppliers who are Ap approved supplier list shoule be created
delivering goos first. This can result in company considering speed, price,quality etc and all
getting low quality goods. High prices become purchases must be made from qpproved supplier.
onky factor considered was speed of delivery

This report only states those weakness which came to our attention during audit, had a more detailed
examination been carried out, we would have identified more weaknesses.

This report is for sole purpose of management, it must not be disclosed to third parties.

We thank management for their cooperation and support.

Cherry blossom co.

Pg9/22

Identify and explain weakness Recommendation

Requisition form donot require authorization. This No authorized requisition should be allowed, all
can result in goods being purchased which are not requisition should be authorized be a responsible
required, leading to loss for the company. official.
Current inventory levels are not checked at the When placing orders, current inventory levels
time of placing order . this may result in company should always be checked to ensure proper
ordering less goods tha requiredleading to stock quantity is ordered.
out
An approved supplier lost is maintained but this Approved supplier list should be regularly updated
was lat updated 2 years ago. to ensur company is getting best rates
New suppliers may have entered the market
offering better price and quantity. If company is
not using updated supplier list, it may be buying at
higher rates.
Payment is made after 60 days,this can result in The policy pf making payment after 60 days should
company missing out on early settlement be reviewed, suppliers should be paid timely to
discounts avoid loss of early discount
When goods are received, quantity is checked When goods are received the quantity should be
againt=st supplier dispatched noterather than checked against purchase ordr to ensure correct
against purchase order. This can result in company quantity of goods is received what we ordered
receiving goods which supplier send rather than
what they have ordered

Pear international pg7/22

weakness Recommendation TOC

Currently website is not Website should be integrated Enter a dummy order of goods
integrated into inventory system into inventory system and only which are not in stock system

48
and inventory levels are not accept orders of those goods should reject order
checked when placingorders. which are stocked
This can result in company
accepting orders of those goods
which are not in stock and this
will result in loss of customer
goodwill
Goods are despatced via a local Couriers should be instructed to Ask for a sample of delivery
courier who do not take take sign from customer as proof notes and ensure customer sign
signatures as proof of delivery. of delivery and no ayment shall has been taken on it
Customer can claim that he did be made to couriers if they
not receive goods. Company has donot take signs
to send him again, leading to loss
Credit limits are set by sales Cedit limits should be set by a Ask for a sample of credit limit
ledger clerks as clerk is responsible official like credit authorization and ensure it has
inexperiences he may set high controller and shall be regularly been signed by credit controller
credit limits leading to increased updated
chances of bad debts
Sales team decides on sales Discount should be authorized Ask for a sample of discount
discount level, sales team has a and approved bya responsible reports and ensureit is signed by
primary objective to boost sales, official like sales manager to sales manager
they may offer high avoid unnecessary discutn being
discountsleading to loss of offered
revenue
Supplier statement Supplier statement reconciliation Ask for a sample of reconciliation
reconciliationare no longer should be performed on a performed and ensure they are
performed. Any errors will not regular basis and reviewed by a reviewed by a responsible
be spotted and resolved in a responsible officer official
timely manner
Changes to master fil can be Access to master file should be Ask any junior member to gain
done by clerks allowing clerk to restricted to seniors access to master file, should
ave access to master file may shoulf reject access.
result in confidentiality breaced
and increase chances of fraud

CASH SYSTEM WEAKNESS Pg 18/22

1. easily stolen. Keep in locker/vault. Physically check cash in locker or vault.

2. Will be stolen/burned and not returned. Should be insured. Ask fot insurance policy.
3. Will be stolen from site. Should be banked. Check log entry and bank slip.
4. No accountability. Should be banked by one authorized person. Chck for sign of authorized person
5. Errors not spotted on timely basis. Reconciliation should be made on a timely basis. Check for reconciliation slip.
6. Apni marzi se kharcha. Should be approved. Ask for a sample of petty cash voucher and look for approval sign.
7. Pata hi nai chlega ke kitna kharcha hua kitna maangre hain. Should have a supporting document. Ask for a sample.
8. Expenses increase. Limit should be set. Check limit and expenses.
9. Idaaray ko nuqsaaan hoga. Expense limit se kum hiona chahye. Keep check.
10. Log apni marzi se kharch krenga. Surprise checkhone chahye. Cash count kren.
11. Fraud. Segregation. Physically check.
12. Double kaam/ no kaam. Update frequently. Check when payment is done/received.
13. Fraud. Should be authorized. Look for sign.
14. Trace krna mushkil. Should be numbered. Ask for sample.

49
 15. Fraud. Should be approved. Look for sign

Pg 19/22

SHINY HAPPY WINDOWS CO.

impact Recommendation TOC

Bvank reconciliation are not Bank reconciliation should be Ask for a sample of reconciliation
performed regularly. Any errors performed every month to made and ensure they are
may not be spotted and resolved ensure errors are spotted and reviewed by a responsible
on a timely basis resolved timely. official.
Cash is banked every few days. Cash should be banked on a Ask for a sample of deposit slips
This can result in increased timely basis, ideally as soon as it and compare date with entry in
chances of theft as cash can be is received cash reviewed log
stolen
Cash is placed in a small box. It is Cash shuld be kept in a secured Physically visit and inspect
very easy to steal the small box locker or vault to avoid chances whether cash is being kept in
hence all cash will be lost of cash being stolen locker/vault.
Cash is banked by whichever An authorized person should be Ask for a sample of deposit slips
member of dinance team is made responsible for depositing and see the sign to ensure cash
available. It will be difficult to fix cash is banked by authorized person
accountability in cash of loss of
cash

PAYROLL WEAKNESS. Pg9/22

1. Fraud. Segregated. Check physically.

2. Unable to trace employee. Keep personnel files. Ask for personnel file.
3. Unnecesasary/fake overtime. Keep check. Check overtime sheet,
4. Might backoff later/ biased promotion. Make formal records. Check board meeting reports.
5. Fake attendants. Supervision. Physicallt check.
6. Errors by system. Approved result. Check sample.
7. Favourism. Should be taken by board. Check board approval.
8. Error. Should be computerized. See payslips.
9. Pay packets(cash envelope me): supervisore may steal. Give directly to labour. Check physically.
10. Payroll will keep on giving them salaries. Inform immediately. Check termination date and salary given date.
11. Errors. Done by supervisor. Check for signs.
12. Idaaray ko nuqsaan. Should be signed. Check approval.
13. Overtime ek certain limit k baad authorize hrhe hain ya nhi horhe, tou supervisor total overtime ko tor kr bhi note kr skta hai takay
authorize na krna par. Overtimee kum ho ya ziada authorize hoga. Check records.
14. Mistakes/ errors. Total/individual dono check hone chahye. Look for sign on both,
15. See n. 9
16. Chori hojaegi. Give to senior. Cash received log check
17. Errors.computerized. check sample.

Weakness in inventory system. Pg 10/22

1. fraud/abuse of power. Segregated. Check physically.

2. Might leave warehouse, inventory maybe stolen. Only should be appointed to warehouse. Check physically/check job description.
3. Double counting/no counting. No counting during movement of goods. Physically check/check count reports.
4. Damaged goods Mixed with normal. Put damaged goods separately. Physically check.
5. Tracebility issue. Should be numbered. Sample check.
6. No accountability. Should be signed. Ask for a sample.
7. No flagging/marking after counting… double counting. Should be flagged after count. Physically check.
8. Supervispor can’t check due to no accountability. Internal audit should not be included in inventory count. Check physically

50
 9. Will not check their own work. Warehourse manager should not supervise count. Check physically.
10. If amendments are made then there might be an error. No amendments of count sheet. Check sample.
11. Cover their own fraud. Stores personnel should not be included in inventory count. Check physically/check sign
12. Jisne jahan fraud kiya hga who wahi area count krne kik duty lelega. Counting areas should be assigned and decide by senior
manager. Timetable sample py sign check kren.

Pg 13/22

Lily windows glass co.

Error Recommendation
The warehouse manager is supervising the count. An alternate supervisor who is not involved with
Since he is not independent any fraud and inventory should supervise the count. No member
inefficiencies of his department count won’t be of warehouse team should be involved in the
disclosed by him count
The teams are not flagging areas once completed. The teams should be instructed to flag areas after
Xince no one knows which area has been counted, counting to prevent risk of double counting
they can be counted twice leading to overstated
inventory balance
The separate sheet provided is not sequentially All sheets should be sequentially numbered at
numbered. If any sheets gets misused it will not be regular intervals, a sequence check should be
possible to trace them. performed with any missing sheets being
interrogated
Damaged goods are to be left where they are, the Damaged goods should be clearly identified and
goods can be mistakenly sold to customer moved in a separate location via machinery to
resulting in loss of goodwill avoid risk of them being sold
There will be continuous movement of goods in Movements of goods should be stopped during
and out of the warehouse during the count. Spme the count. If it is not possible to stop atleast it
items may be missed or some may be double should be brough to minimum level.
counted leading to misstatement of inventory
Internal audit dept is undertaking inventory count. The internal audit department should sample
Their role is to onfirm accuracy of inventory count check count undertaken by count teams to provide
procedures and if they get involved in counts no an extra control over accuracy of count.
one will verify accuracy.

Pg 22/22

Hessonite co.

Errors Recommendation TOC

The count will be undertaken by Members from alternative Physically attend the year
teams f warehouse staff. Since departments should under take end inventory count and ask
they are not independent any count and no member of warehouse teams which department
errors or frauds committed by staff should be involved in count they belong to
them won’t be highlighted
Third party owned inventory is All inventory owned by third party Physically visit the location to
also being counted and later should be stored a separate location verify whether third party
adjustment are made. The and encluded from counting process inventory is kept in a
counter may forget to make separate location

51
adjusted leading to
overstatement of inventory
High value inventory stored in a Only senior members should be Ask any junior members to
separate location will be given access codes where high value access the area system
accessible by all members as inventory is stored to reduce chances should reject access
they will given codes to access of theft.
the area such high access
increases risk of theft
Each bay is counted only once After counting once sample should Physically attend the count
this can result in errors leading be undertaken with any difference and observe whether sample
to over/under statement of promptly notified checks are perofomed after 1
inventory st check[

The inventory count cheets Inventory counts sheets should Ask for a sample of count
contains quantities as per contain product codes and sheets verify whether
inventory records staff may not description bt not quantities quantity is present or not.
count, they may simply agree
and state that quantity written
is crrect leading to errors
The count teams are not Count teams should be instructed to Physically visit warehouse
flagging items as complete. No flag ite,s as complete to avoid after the count to ensure
one will know which itesm have overstatement counted areas are flagged or
been counted, they may be not
counted twice leading to
overstatement of inventory

Capital expenditure system (CAPEX SYSTEM) refers to the purchase of asset (close to purchase system)
Weakness pg 19/22

1. Apni marzi ki purchases, idaare ko nuqsaan. Should be approved by board. Check approval of purchases.
2. Pata nhi kisne khareeda hai kisne nai. Should be signed by authorized person. Check sample.
3. Quotation k bghyr khareedari.. pata nhi chlega kitna mehenga tha kitna nahi. Ask for quatotation when purchasing. Ask for a sample
of quotation.
4. Verbal purchases may be retracted. purchase order should be made. Ask for sample.
5. No GRN made tou companies ko oata nhi chlega good ara hai ya nai. GRN should be made. Sample
6. Assets misstated. Assets register should be updated. Check asset purchase date and register.
7. May take defected piece. Should be inspected when asset received. Check physically.
8. Dep may be misstate. Policy should be acc to IAS. Ask management
9. Errors not spotted on timely basis. Controls reconciliation. Sample of reconciliation
10. Asset maybe stolen. Physical control should be implemented. Check physically.

BONSAI TRADING CO. pg 13/22

(a) Components of company’s internal control : handout 22-31; pg1/22

(b) Test of control
i. Ask for a sample of purcjase order to verify whether capital expenditure committee has
authorized them or not.
ii. Physically visit the site to verify whether serial number is recorded on asset and compare by
viewing asset register whether same serial number is in register.
iii. Ask for a sample of goods received note and ensure it details, nature of expenditure and is
signed by responsible official.

52
 iv. Ask for a sample of internal audit reports.
v. Ask any unauthorized member to access the register, system should rject access.

SCARLET AND CO. pg 17/22

(a) Strengths:
i) 80% employees are paid by bank transfer. This will significantly reduce chances of theft
or misappropriation.
ii) Clock cards are sequentially numbers. Any missing cards will now be easily highlighted.
iii) System generated calculations are checked by supervisor. This will reduce risk of
incorrect salaries being paid.
iv) Bonus is communicated in writing. This reduces risk of forgetting resulting in correct
bonus being paid.
v) Company has HR department. This will ensure merit based hiring.
(b)
Weakness Recommendation
The process of clocking in card is not Process of clocking in card should be
supervised. A person who is absent can hand supervised by a responsible official to prevent
his card to his friend who is present to mark employees from swiping multiple cards.
him present, resulting in increased payroll
cost.
Employees donot need to clock out to access Employees shuld be given fired time breaks or
dining area during 30 mins break. Employees they should be required to clock out during
can take longer breaks leading to reduced break.
productivity.
Appointment of temporary staff is done by All appointment whether temporaryor
production supervisor, he may not have permanent should be done by HR department.
expertise in hiring, he may hire incorrect
employee leading to loss for the company
Production supervisor determining amount of A responsible official like production manager
bonus. They may give high bonus to their should determine bonus to prevent
friends leadint to employee demotivation demotivation
Clerk distributes pay packets without seeing Clerk should be instructed to distribute pay
proof of identity. She may distribute pay packets after seeing proof of identity like clock
packet to wrong employee leading to loss for card
theft
Bonus is input by clerk in system. Clerk in Once clerk has input the bonus, a senior
inexperienced he may make input leading to member should double check his entries prior
wrong bonus payments. to making final payment.

TINKERBELL TOYS. Pg15/22

a.b.
objective likhne k liye weakness sochen, uska imoact sochen and then usko theek krne ka maqsad.

TOC OBJECTIVE

53
Ask for a sample of sales orders to ensure they are To ensure there are no errors in sales order
in writing
Enter a dummy order for goods not in stock, To ensure there is no customer dissatisfaction
system should reject order regarding orders availability
Enter a dummy order for customer above credit To ensure there are reduced chances of bad debts.
limit system should reject the order
Ask for a sample of invoices to ensure discount is To ensure there are no unnecessary discounts and
authorized by sales manager loss of revenue
Ask for a sample of credit limit uthorisation forms To ensure there are reduced chances of bad debts
to ensure credit limit is authorized by credit
controller
Ask for a sample of GDN to ensure they are To ensure there are no traceability issues in
sequentially numbered missing GDN
Physically visit warehouse during dispatch to To ensure there are no incorrect deliveries.
ensure goods are double checked before despatch

BRENAN AND CO. pg 16/22

TOC Objective
Physically visit seely’s warehouse and verify to ensure goods are not sold to unauthorized
whether customers are showing ID card when customers
taking goods
Ask for a saple of GDN to ensure it is sequentially To ensure there are no traceability issues in case
numbers and signed by customer and staff of missing GDN
member
Ask for a sample of paper copies of receiveable To ensure there are reduced chances of bad debts
ledger control account and list of aged receiveable
Ask for a sample of error reports having break in To ensure any breaks in sequence is immediately
sequence identified
Ask for a sample of GDN to ensure it is signed by To ensure accours staff can make proper invoice
accounts staff
Ask from customer whether thet receive invoices To ensure timely payments are received from
via post customers.

Handout 31-32

CHAPTER 11: SUBSTANTIVE PROCEDURES.

The auditor gives opinion on financial statement, to giveopinion he gathers evidence. The evidence has
to be sufficient and appropriate called sufficient appropriate audit evidence (SAAE).

Sufficient: this refers to quantity audit evidence must be of sufficient quantity.

Appropriate: appropriate refers to quality and reliability evidence must be reliable and of good quality.

54
Factors influencing sufficiency: following are the factors which influence/affect sufficiency i.e quantity
of evidence i.e because of these factors quantity of evidence is effected (increased/decreased);

1. The materiality of item i.e more quantity of evidence is required on material item and less
evidence is required on immaterial items.
2. Risk level i.e more quantity evidence is required if items are risky and less quantity evidence is
required if items aee not risky.
3. The nature of accounting and internal control system i.e more quantity of evidence is required if
control system is weak and less quantity of evidence is required if control system are strong.
4. The auditors know-how of management i.e more quantity of evidence is required if auditor does
not know management and has no trust on them and less quantity of evidence is required if
auditor knows and trusts staff.

Factors influencing reliability: following are the factors that influence i.e effect reliability/quality of
evidence, because of these factors reliability increases or decreases.

1. Audit evidence is more reliable if it is in original form rather than physical form.
2. Audit evidence is more reliable if it is in written form than oral form.
3. Audit evidence is more reliable if it is externally generated rather than internally generated.
4. Audit evidence is more reliable if it is directly generated by the auditor compared to indirectly
generated.

Methods of sampling:

1. Random sampling: a method in which sample is selected in such a way that every item of
population has an equal chance of getting selected
2. Stratified random sampling: a method in which population is first broken into strata or
categories. Random sample is then selected from each category
3. Systematic sampling: this method of sampling works by selecting every nth item after a random
start
4. Block sampling: a block of population is selected as a sample and is believed to be a
representative of whole population.

Interim and final audit: auditors usually carry out their work in one or more sittings. This is referred to
as interim and final auit. Main audit Is final audit because at that time report will be issued, but if all ork
is kept for end, auditor may fall short of time.therefore some work is done earlier (interim stage) and
some at the end (final stage).

Work at interim stagerisk assessment example:

 Risk assessment
 Obtaining understanding of entity
 Carrying out TOC etc

Work at final audit example:

 Obtaining third party confirmations

 Subsequent events
 Going concern etc

55
Impact of interim audit on final audit

 Shareholder get accounts sooner.

 Reduce time for auditors

Understanding the entuty and its environment:

The auditor is required to obtain detailed understanding of entity and its environment so as to perform
audit in an effective manner.. handout pg 3/3

CHAPTER 12: SUBSTANTIVE PROCEDURES (sec d)

Read chapter 10 kaplan

FINANCIAL STATEMENT ASSERTION: assertion means claims (dawah) whenever management prepares
financial statement and writes values in it, they are silently making some claims. These financial claims
are called financial statement assertion. Following aee the financial statement ASSERTIONS;

ACCURACY: In this assertion, management claims that transactions have been recorded at correct
amounts i.e total is correct.

COMPLETENESS: in this assertion management claims that whatever should have been recorded has
been recorded i.e nothing is misssed

CUTOFF: in this assertion management claims that transactions has been recorded in correct accounting
period.

ALLOCATION AND CLASSIFICATION:in this assertion management claims that transactions has been
recorded in correct head.

OCCURRENCE: in this assertion management claims that whatever is recorded actually occurred, there
is no creative accounting.

VALUATION: in this assertion management claims that items are recorded at reasonable fair values.
EXISTENCE: in this assertion management claims that whatever is recorded actually exists.
RIGHTS AND OBLIGATION: in this maganent claims that we have rights on our assets and liability are our
obligation.

Some assertions are specified to P&L only and some to SOFP only.
P&L assertions. SOFP assertions

 Accuracy  completeness
 Completeness  valuation
 Cutoff  existence
 Occurrence  rights and obligation
 Allocation and  allocation and
classification classification
 Existence  accuracy
 Valuation  cutoff
 Rights and obligation  occurence
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Possible questions: assertions in FS? Assertions of classes of transactions (P&L)? assertions of account
balance? Sales? Receiveables? Etc.

SUBSEQUENT PROCEDURES
ek tou procedures hoe hain TOC (joke controls check krne ke hote hain usky liye pphysically check krne/n krna dono hoskta hai) lkn ek hota hai
usme assertions check krne hote hain jisme FS ki values confirm krne k liye physically check krna prta hai (eg: agar inventory $3000 likhi hai tou
jaake dekhna hga k waqai itni hai ya nai) dono kaam auditor k hi hote hain. TOC is not related to FS, SP is.

Subsequent procedures question:

1. Dicuss 5 s.p for sales

2. Exl=plain sp for bank
3. Discuss sp for wages exp… etc.

3 ways to prepare;

1. Learn all (but very lenthy and might mix)

2. Own wording (but we can’t)
3. Right way is to do both learn few and try to write ourself.

To write in own wordings 3 steps:

Step 1: analyse if item is P&L/balance sheet

Step 2: find its assertions

Step 3: perform procedure to verify each assertion

Example 1: SUBSEQUENT PROCEDURE FOR SALES

Step 1: sales belongs to P&L

Step 2: assertions..

i) Occurrence
ii) Completeness
iii) Cut off
iv) Accuracy

Step 3: verification for assertion:

i) Ask or a sample of invoices to ensure sales actually occurred

ii) Compare invoices to corresponding bank transfers to verify completeness
iii) Ask for a sample of invoices and see the date to ensure recorded in correct accounting
period,
iv) Recalculate all the sales to ensure the total sales is arithmetically correct.

Example 2: SUBSEQUENT PROCEDURES FOR MOTOR VEHICLE

Step 1: motor vehicle belongs to balance sheet

57
Step 2: assertions:

i) Completeness
ii) Existence
iii) rights and obligation
iv) valuation

step 3: verification for assertion:

i) complete motor vehicles shown in balance sheet with those in present on site to verify
completeness.
ii) Physically visit the site and ensure motor vehicles are present or not
iii) Ask for registration document to verify ownership.
iv) Hire the services of an expert to verify valuation.

Example 3: SUBSEQUENT PROCEDURE FOR INVENTORY:

Step 1: inventory belongs to SOFP

Step 2: assertions:

i) existence
ii) valuation
iii) completenesss
iv) rights and obligation

step 3: verification for assertion:

i) physically check the inventory and compare with p&l to verify existence.
ii) Hire an expert or ensure inventory is recorded as per IAS 2
iii) Compare inventory present on floor to inventory recorded in p&l to verify completeness
iv) Ask for a sample of purchase invoice to verify ownership of inventory.

Example 4: SUBSEQUENT PROCEDURE OF PAYROLL EXPENSE

Step 1: payroll expense belongs to p&l

Step 2: assertion

i) Accuracy
ii) Completeness
iii) Cut off
iv) occurence

step 3: verification for assertion:

i) Recalculate the total payroll expense with payslips to verify the accuracy arthimatically.
ii) Compare payslips with payroll expense given in p&l to verify completeness.
iii) Ask for a sample of payslips and check dates to verify that thae expnse belongs to the same
period.
iv) Check the payments made, / check bank transfers/ payslips check etc

58
Example 5: SUBSEQUENT PROCEDURE FOR RECEIVEABLE

Step 1: receiveable belongs to balance sheet

Step 2: assertions:

i) Completeness
ii) Existence
iii) Valuation
iv) Rights and obligation.

Step 3: verification of assertions:

i) Compare all the invoices of sales with its receiveable to verify completeness.
ii) Send a confirmation to receiveables to verify if sales exists or not.
iii) Ask for sample of invoices
iv) Confirm post year end payments
v) Send a confirmation to receiveables to verify if sales exists or not,

Example 6: SUBSEQUENT PROCEDURE FOR BANK BALANCE

step 1: bank balance belongs to balance sheet

step 2: assertions:

i) Existence
ii) Rights and obligation
iii) Valuation
iv) Completeness.

Step 3: verification of assertion

i) Ask bank for confirmation

ii) Check bank statement
iii) Compare value with bank statement/ write a bank confirmation letter.
iv) Compare bank accounts with bank balance sheet,

Example 7: SUBSEQUENT PROCEDURE FOR ELECTRICITY BILL EXPENSE

Step 1: electricity bill expense belong to p&l

Step 2: assertions:

i) Occurrence
ii) Accuracy
iii) Completeness
iv) Cutoff

Step 3: verification of assertion:

i) Check bills / bank transfers

ii) Recalculate totals

59
 iii) Compare all the bills with electricity expense on bank transfers
iv) Check the date on bills to verify it belongs to this period

Example 8: SUBSEQUENT PROCEDURE FOR BANK LOAN

Step 1: bank loan belongs to balance sheet

Step 2: assertions:

i) Rights and obligation

ii) Completeness
iii) Existence
iv) Valuation

Step 3: verification of assertion:

i) Send a confirmation letter to bank to verify loan taken or not

ii) Compare the bank loans in balance sheet with bank transfers/same as i.
iii) Ask the lenders (bank) to verify existence/ verify with checking corresponding interest
payment
iv) Compare the value on bank transfer with that give in balnce sheet

Procedures in detail are written in handout 33-35 learn 3-4 each

Circulisation: sendinf a confirmation letter

Two types of circulisation:

1. Positive circulisation/positive confirmation: customer/supplie ko kaha jaata hai ke reply kren in both cases whether you agree or disagree
with balance.
2. Negative circukization/negative confirmation: customer /supplier is only asked to reply only if they disagree with balance.

Beter is positive.

Emolument: any payment mad to director is called director’s emolument; bonus, salary,medical, travel
allowance

Provision for warranty, provision for receiveable or doubtful debt, provision for lawsuit or court case or
damages, provision for redundancy or reorganization or reconstruction..

1. Ensure adequate disclosures are made in accordance with IAS 37.

2. Recalculate the provision to ensure arithmetic accuracy
3. Review board minutes for evience of any discussion on provision
4. Obtain written representation from management to ensure reasonable of provision.

Handout 22-30

Pg 8/22 Pear international co. (addition and disposal sp from handout/self)

1. Review board minutes to verify any additions/disposals have been authorized by board.
2. Verify asset register to confirm addition/disposal has been included in asset register.

60
Pg 8/22 fox industries.

i) Why it is important that auditors communicate throughout the audit with those charged
with governance?

Ans. Management and those charged with governance have a complete idea of company’s operations,
records, documents etc. it is important that auditors communicate throughout the audit with those
charged with governance is ensyure audit is completed smoothly and in an efficient and effective
manner.

ii) Describe three examples of matters that the auditors may communicate to those charged
with governance.

Ans.

1. Any internal control weakness in the company.

2. Any risky areas.
3. Any fraud areas etc

(d).

1. send a confirmation letter to bank to verify balance belongs to company.

2. see bank statement for revenue of bank balance

3.compare balance as per babook to bank statement to verify completeness

4.Count cash balances physically to verify cash balance.

3-4 more from handout

Pg 11/22 chuck industries

(b).

1. recalculate the total of payroll to confirm accuracy

2. compare a sample of payslips with corresponding bank transfers to verify completeness.
3. Ask for a sample of payslips and verify date to ensure recorded in correct accounting period
4. For a sample of payroll ensure cash or bank transfer has taken place to verify occurrence

3-4 from handouts

Pg 15/22 tinkerbell

(b).

 send a confirmation letter to receiveables to verify receiveable balance

 calculate receiveable days and compare with last year, investigate difference.
 Comare sales invoices with GDN to ensure completeness.
 Verify whether past year end payments are received.

3-4 from handout

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Pg. 15/22 trombone co. (c))

Pg 14/22 lily window. (During inv. Count)

And more in the handout/past papers (jesa parha hai wesa hi ayega)

CHAPTER 13: AUDIT PLANNING AND

DOCUMENTATION/materiality/ audit risk (sec B)
(all are learning material)

handut 36-38 learn all!!

AUDIT PLANNING

1. When planning starts

2. Advantages/importance of audit planning
3. 2 parts of audit planning
4. Contents of audit strategy
5. Contents of audit plan.

AUDIT DOCUMENTATION

1. What Is working paper?

2. Advantages/importance of working paper?
3. Contents of working paper?
4. Two types of working paper
5. How long to retain working papers?
6. Standardized and automated working papers?

MATERIALITY, performance materiality.

Short areas

 FRAUD AND ERROR:

1. What is fraud?
2. Management fraud and employee fraud difference?
3. 2 types of fraud (misappropriation of assets & fraudulent financial reporting)
4. Responsibility of management & auditor in fraud
5. Obtaining written representations in fraud
6. Communucationg fraud to those charged with governance.
 NON COMPLIANCE:
1. DIFFERENCE BETWEEN COMPLIANCE AND NON COMPLIANCE
2. Indicators of non compliance (4-5)
3. Audit procedures in case of non compliance (4-5)
4. Reporting non compliance
 NOT FOR PROFIT ORGANISATION
1. What is it?
2. Inherent and control risk in NFPO?
3. Audit report In NFPO?

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  ANALYTICAL PROCEDURES:
 SERVICE ORGANIZATION:
USER ENTITY: entitywhose financial statement are being audited 1.Unilever ke financial statement PWC audit
kar rha hai.
USER AUDITOR: auditor of user entity 2. unilever payroll services XYC co. se lerhi hai.
3. XYZ co. ko KPMG audit kar rha hai.
Ek company to apne FS audit karwarhi hai wo user entity hai aur usko audit krne wala user auditor hai 4. PWC, unilever ko audit krte huw sb ka
responsible hoga except its payroll kiunke uski
services koi aur derha.
SERVICE ORGANISATION: any organization which provides services to user entity
5. lkn end me koi ek hi entity unilever ko
represent krskti tou PWC, XYZ ke auditor se
SERVICE AUDITOR: auditor of service organization uski audit report leke khd ko satisfy kregy.
And then overall unilever ke FS ke responsible
Ek co. jou ksi dsri company ko services derhi hai (eg:taxation services/law services) wo service org. hai aur us srf PWC hi houngay.
service org. ko audit krne wala service auditor hai.

 USING THE WORK OF AN EXPERT: auditing/accounts me expert tou auditor khd hoga lkn usky
ilawa ksi bhi field ka expert hota hai “expert” jiski management ya auditor ko zaroort prskti hai.
Agar management ko zaroort parti hai tou management expert aur agar auditor ko zaroort prti
hai tou audit expert.
 USING THE WORK OF INTERNAL AUDITOR: external auditor internal auditor ke kaam py srf kch
factors consider krne k baad hi rely krta hai, aur jab who inky kaam py rely krta hai tou who yeh
baat management ko communicate krta hai kiunke yeh internal auditor management k under
hain (independtly).. rest in handout.. direct assistance: agar external auditor co. k audit k liye
apni team lekr nahi jarha aur co. ki internal audit team use kr rha hai tou this is “direct
assistance”
 ACCOUNTING ESTIMATES:
 COMPUTER ASSISSTED AUDIT TECHNIQUES (CAAT’s):

CAAT: using computer system for audit work.

Two types pf CAAT:

1. Test data: computer system used to perform TOC

Eg: 1. Enter dummy order for goods not in stock, system should reject.

2. Enter order exceeding limit, system should reject.

2.AUDIT SOFTWARE: computer system used to perform subsequent procedure.

Eg: 1. Recalculate the total to ensure accuracy

2.Compare x with x to ensure …

Handout 39-43
AUDIT RISK
(learn all these risks)
audit risk is the risk that auditor may express an inappropriate opinion on financial statement.
There are three components of audit risk.(aysa risk k auditor apna opinion dene me koi ghlti na krde)
i) Inherent risk: inherent risk is te suspectiility of an assertion aout P&L, balance sheets
that could be material before consideration of any related controls.
(kuch mislay ayse hote hain k usme aap jitni bhi koshish krlou usme built-in masly hote hain jese ke estimates)

63
 e.g:

 Events/transaction that involve estimate

 Expanding into new territories.
 Developing new products
ii) Control risk: control risk is the risk that a misstement that could occur in an assertion
about P&L and balance sheet will not be prevented,d detected or corrected by entity’s
internal control system.
(although auditor controls check krta ha lkn kch controls aditor k control k bahar the hain eg; new control, corrupted control.. isme auditor ki koi ghlti nhi)

e.g:

 Changes in key personnel

 Installation of new I.T system

iii) Detection risk: detection risk is the risk procedure performed by the auditor to reduce
risk to an acceptabily low level will not prevent or detect material misstatement.
Auditor ne audit krte wqt sample ghlt uthalia, calculate ghlt krdia etc etc.. auditor ki ghlti.

e.g:
 Poor planning
 Incorrect sample size
Audit risk examples (handout): in risks se auditor ko khatra hta hai k unka opinion py impact parega

1. Jab bhi capital ya revenue exp kr rhi hoti hai tou auditor ko darr lagta hai k kahin co ne exp ko idhr udhr mix na krdia hou. Opinion
khrb hga wrna
2. R&D cost ziada tou yeh khatra k pata nhi IAS38 sahi apply kiya ya nai kiya
3. Provision bht barh rhe hain tou yeh khatra k yeh tou estimate py based hota hai tou isme unsy khatra hskta
4. Jab business py khatra ayega tou going concern py khatra ayega phr auditor sochega k aagay pata nhi mai audit krpaunga ya nahi
5. Agar company bank loans bht leri hai, tou kahin high gearing ki wajah se going concern k issues na ajaen. Aur dsr yeh k itne loans
lerhe hain tou pata nhi inhone current/non current me split sahi tarah kiya hai ya nai
6. Employees ko nikalre hain tou pata hai IIAS k mutabiq redundancy provision banaya tha k nahi.
7. Koi asset year end sy pehle order ki lkn pata nhi k year end se pehle ayegi ya nahi tou yeh khatra k kahin asset over/understate na
hjae
8. Agar company ne itni jagahoun py maal rkha hua hai tou auditor sb jgah tou jaake check nai krskta na
9. Agar co. ki kch sites owned hai aur kuch rented tou kahin uski treatment me koi ghlti na krdi hu
10. Company ne saal k dauran koi naya acc system install krra aur usme saara data transfer kara tou yeh dar k kahin kch reh na gya hou,
baar baar na dalgya hou
11. Revaluation me koi ghlti na krdi hou
12. Aysa product banari hai jou legally unsure hou tou phr bhi khatra hai kiunke phr auditor ko pakregi govt k aapne verify kiya tha.
13. Year end k kareeb kayi seniors chor k chlengay kiunke juniors itne experienced nhi
14. Major customers not/struggling to pay tou auditor ko yeh dar lagta hai k kahin me issy bad debt kehdu aur yeh pay krde tou masla,
or vice versa
15. Sale/purchase system me errors, over/under hoskta ha tou auditor k ooper kaam ziada ayega
16. Ksi party k sth out of court settlement, darr yeh k kahin pichla provision sahi tha ya nhi
17. WIP ko 100% measure karna mushkil hai
18. Bht ziada inventory/fixed asset pari hui hai. Chori ka dar
19. First time audit in a company, company ko jaante nhi hain
20. Pressurize kr rhi hai co k jldi audit kro, jaldi me mistakes
21. Sales % ki basis py audit fees, co. might overstate.
22. Disposal of fixed assets hua hai tou yeh dar k pata nahi company ne sahi se dispose off kiya hai ye nahi kiya hai
23. Co. IAS k mutabiz inventory ko count nhi kr rhi, over/under state
24. Inventory damage hrhi hai tou co adjust nhi kr rhi, inv overstate hoskti hai

Pg 5/11 SUNFLOWER STORES CO.

64
 Risk Responses
This is the first year of audit. There is a risk that Obtain detailed understanding of entity through
auditor will not be able to detect errors due to lack discussion witn management, inquiries of staff
of understanding of entity member etc
Company has spent $1.6m on refurbishment. Review breakdown of invoices to assess nature of
There is a risk that this expenditure is incorrectly expenditure. If capital ensure it is capitalized and if
split between capital and expenditure revenue, ensure it is expensed to p&l
A smaller warehouse is disposed off at profit. Review NCA register to ensure disposed
There is a risk that warehouse is not removed from warehouse has been removed. In addition
NCA register. In addition gain/loss on disposal may recalculate gain or loss on disposal
be incorrectly recorded
Company borrowed $1.5m from bank. There is a Auditor should confirm that $1.5m loan
risk that this loan is incorrectly split beteen current wasreceived. In addition the split between current
and non current liability and non current should be reviewedand it must be
ensured that all disclosures of loan are in
compliance with relevant accounting standads
There are 25 locations for storage of inventory. The auditor should attend those warehouses
There is a risk that 100% verification of inventoryis where major inventory is held or where there is
not possible as auditor cannot attend all places history of errors
Inventory is valued at S.p less profit margin. There Detailed cost and NRV testing should be
is a risk that inventory may be over or under undertaken to ensure goods are valued correctly
valued as IAS2 required inventory to be valued at
lower of cost or NRV
At the beginning of the year, opening balances of Discuss with management the process data
supermarket were transferred to head office. transfer and perform sample testin to ensure data
There is a risk that the data transfer is not transfer is complete and accurate
complete and accurate hence opening balance are
incorrect
Financial controller left the company close to year The audit team should remain alert throughout
end. There is a risk of increase errors in finance the audit for any errors in finance department.
department due to increased workload on
remaining members of finance department.

pg 6/11 MINTY COLA CO.

RISK RECOMMENDATION
Company has spent $5m on updating and repairing Review breakdown of invoices to assess nature of
machinery. There is a risk that this expenditure is expenditure. If capital ensure it is capitalized and if
incorrectly classified between capital and revenue revenue exp ensure it s expensed
expenditure hence PPE could be over/under stated
Inventory is held at 15 locations. There is a risk The auditor should attend those warehouses
that 100% verification is not possible as it is where major inventory is held or where there is
practically impossible for auditor to attend all history of errors
locations
Some warehouses are rented and some are For warehouses included in PPE, review supporting
rented. There is a risk that rented warehouses are documents to confirm ownership so that PPE is
shown as owned hence PPE will be overstated and not overstated

65
rented expenditure understated or vice versa.
A new accounting general ledger was introduced. Discuss with management complete process of
There is a risk that data transfer is not complete data transfer and perform calculations on a sample
and accurate from old system leading to error basis to ensure data transfer is complete and
accurate
Management is being paid bonus on assets. There The audit team shall remain alert throughout the
is a risk that management may overstate assets to audit to this risk. They should also compare
earn more bonus treatment with prior years
No adjustment have been made for damaged Detailed cost and NRV testing should be
inventory. There is a risk that inventory is undertaken to ensure inventory is correctly valued
overstated as IAS 2 required inv to be valued at
lower cost or NRV
Company spent $4.5m on development of new Obtain breakdown of expenditure and ensure only
brand of frizzy drinks. There is a risk that this expenditure that meets development criteria is
expenditure is not correctly classified as per IAS 38 capitalized and balance is expensed
Finance director has released allowance for do testing of post year end and review aged
receiveable. There is a risk that receiveable are debtor ledger to assess valuation of receiveable
overstated as some debtors are irrecoverable

Pg 3/11 ABRAHAM CO.

Risks Responses
The company has spent $2.2m on development. Review breakdown of expenditure to ensure only
There is a risk that this expenditure is not properly products that meet development criteria are
recorded as per IAS 38. capitalized, and balance is expensed
The co. uses standard costing to value inventory. Detailed cost and NRV testing should be
There is a risk that inventory is over/under stated undertaken to ensure inventory is correctly valued
as IAS 2 requires inventory to be valued at lower of
cost or NRV
Some warehouses are rented there is a risk that For warehouses included in PPE review supporting
rented warehouses are included in PPE, hence PPE documents to confirm ownership so that PPE is
will be overstated not overstated
The company introduced a new accounting Discuss with management comlete access of data
system. There is a risk that data transfer may not transfer and perform calculation on a sample basis
be complete and accurate leading to errors to ensure there is no error
The company borrowed a long term loan of $2.5m. Confirm whether loan was actually received. In
there is a risk that this loan is ncorrectly split addition the spkit between current and non
between current and non current liability current should be reviewed and it must be
ensured that all disclosures are in assordance with
relevant standard
Company has significant levels of WIP. There is a Consideration should be given to hire an
risk that audit team may not be sufficiently independent expert to value WIP. If so this will
qualified to assess WIP hence WIP will be need to be arramged with management consent
misstated
The land and buildings are to be revalued at year Review reasonableness of revaluation and
end. There is a risk that tis revaluationis not in recalculate revaluation surplus/deficiet to ensure
accordance with IAS 16, hence NCA will be NCA is correctly valued

66
misstated
The reportin timetable for audit completion is Consideration should be given to performing an
quite short. There is a risk of high detection risk interim audit to reduce pressure on final audit.
due to pressure on audit team

Pg 10/11 MAPLE CO.

RISK RESPONSE
Company as spent $1.8m on developing A review should be done of development expence
newproducts. There is a risk this developments to ensure only projects which meet development
exp is not correctly recorded as per IAS 38 hence criteria are included as asset and balabce is
asstes and profits may be misstated expensed
Company has borrowed $2m from bank. There is a Confirm that $2m loan was actually received. In
risk that this loan is incorrectly split between addition split between current and non current
current and non current liability should be reviewed and it must be ensured that all
disclosures of loan are in accordance with the
standard
There have been increased number of sales return. Review a sample of post year end sales returns
There Is a risk that these returns are not removed and confirm revenue has been reversed and
from sales hence sales will be overstated inventory adjusted
There was continuous movement of goods in and Review GDN and GRN and follow through
out of ware house during count. There is a risk that inventory count to ensure they are correctly
some items may be missed or counted twice recorded
hence inventory will be misstated
The loan has covenants attached related to The audit team should remain alert throughout
minimum profits. There is a risk that profits may the audit to assess the risk that profits are
be manipulated to achieve covenant manipulated
Surplus plant was sold there is a risk that this has Review assets register to ensure disposal plant has
not been removed from assets , also gain on been removed. In addition recalculate any
disposal may be incorrectly calculated proceedings on disposal

Pg 8/11 RHINO AND CO.

2013 2015
Receiveable days (Receiveable/sales)*365 (3.1/12.5)*365= 90 (2/15)*365=48 days
days
Payable days (inventory/costofgoodsold)*365 (1.9/7)*365= 99 days (1.4/8)*365= 64 days
Inventory days (payable/cost of goodsold)*365 (1.6/7)*365= 83 days (1.2/8)*365= 55 days
Current ratio Current asset/ current liabilities 5.8/2.6=2.25:1 5.3/1.2= 4.41:1
Quick ratio (Currentasset-cl. (5.8-1.9)/2.6= 1.5:1 (5.3-1.4)/1.2= 3.25:1
Inv)/currentliability

risk responses
The company borrowed $1m from bank. There is a Confirm that loan was actually received. In
risk that this loan is incorrectly split between addition split between current and non current

67
current and non current liability should be reviewed and it must be ensured that all
disclosure of loan are in accordance with standard
The disrectors ned to meet a target to earn bonus. The audit team should remain alert throughout
There is a risk that they may manipukate profits to the audit to assess the risk of profit being
earn bonus manipulated
The current ratio and quick ratio have decreased Detiled going concern testing should be performed
from last year. There is a risk that liquidity crisi and didcussed with directors to ensure going
may arise leading to going concern problems concern bases is reasonable
Receiveable days have increased from last Do testing of post year end cash receipts and
year.there is a risk of recoverability of these review aged debtor analysis to assess valuation of
receiveables hence receiveable may be overvalued receiveable
Inventory days have increased from last year. Do testing of cost and NFV and review aged
There is a risk that inventory is overvalued inventory report to assess valuation of inventory

Pg 7/11 WHITE AND CO.

2009 2010
Receiveable days (Receiveable/sales)*365 (3/18)*365)= 61 days (4.5/2.3)*365= 71 days
Payable days (inventory/costofgoodsold)*365 (1.2/10)*365=44 days (1.6/11)*365= 44 days
Inventory days (payable/cost of goodsold)*365 (1.6/10)*365= 36 days (2.1/11)*365= 70 days
Current ratio Current asset/ current liabilities 6.9/1.2=5.75:1 6.6/2.5= 2.64:1
Quick ratio (Currentasset-cl. (6.9-1.6)/1.2= 4.41:1 (6.6-2.1)/2.5= 1.8:1
Inv)/currentliability

RISK RESPONSES
Current ratio and quick ratio have decreased from Detailed going concern testing needs to be
last year. There is a risk of liquidity crisis which performed and discussed with management to
may lead to going concern problems ensure going concern bases is reasonable
Receiveable days have increased from last year. Dp testing of post year end cash receipts and
There is a increased risk of recoverability of these review aged debtor analysis to assess valuation of
rceiveables hence receiveable may be overvalued receiveables
Inventory days have increased from lsr year. There So testing of cost and NRV and review aged
is a risk that inventory id overvalued inventory report to assess valuation of inventory
A geberous sales related bonus scheme has been The audit team should thoroughly assess and
introduced. There is a risk that sales may be remain alert through our the audit that sales might
manipulated by employees to earn bonus be overdtated
The xompany has made changes to inventory Do detailed testing of cost and NRE and review
policy and included overheads in inventory aged inventory report to assess valuation of
valuation, there is a risk that inventory might be inventory
overtated as this is not according to IAS 2

5 COMPONENTS OF CAIRO
1. Confirmation : a confirmation represents audit evidence obtained by an auditor as a direct
response from third party in paper form, electronic form or any other form

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 2. Analytical procedures: consists of evaluation of financial information through analysis of
plausible rekation between financial and non-finncial data
3. Inquiry: consists of seeking information for knowledgeable person both within and outside the
entity
4. Recalculation : consusts of checking mathematical accuracy of records both manually or
electronically
5. Observation: consists of looking at a process performed by others

How to write answer of each procedure?

1. Confirmation: obtain confirmation from … to verify …

2. Analytical procedures: compare … with last year, investigate difference
3. Inquiry: inquiry from management as to whether …
4. Recalculation: recalculate the total of … to ensure arithmetic accuracy.
5. Observation: observe the process of… and … to ensure segration of duties

Example: poori statement likhni hgi wese

a) Bank balance.
1. Bank, bank balance
2. Bank balance
3. Any new account have been opened
4. Bank receipts and payments/bank balance
5. Inflow and outflow of cash
b) Receiveable
1. Receiveable, receiveable balance
2. Receiveable balance
3. Any more invoices have been sent out/ cash have been received/ provisions have been
made(sir)
4. Receiveable balance
5. Invoices given and payments received
c) Property plant and equipment (PPE)
1. expert, PPE balance
2. PPE balance
3. Any disposals/additions are made
4. PPE depreciation exp
5. Disposal/additions and payments given/received
d) Bank loan
1. Bank, loan amount
2. Loan amount
3. How they plan to repay loan
4. Interest expense
5. Receiving loan documentation and paying interest

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