Assurance

Concept and need for assurance (Chapter-1)

UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

1. What is assurance engagement? (P-3, section overview) (‘J11, D’13, D’15,

J’17, D’17, D’18
2. What are the key elements of an assurance engagement? (P-3, S-1.1) (,J-12, J-
13, J’17
3. You are an accountant who has been approached by Jamal, who wants to
invest in Company X.
he has asked you for assurance whether the most recent financial
statements of Company X are a reliable basis
for him to make his investment decision. (J-10) (June’17)
 Identify the key elements of an assurance engagement in this
scenario, if you accepted the engagement.
4. b What is the `expectation gap’ in assurance engagement? (Sy-9) (J-12,

D’16,
5. What types of assurance engagement as per framework? (P-4, S-1.2) (D-11, J-
12, D13, J’15, D’15 J’17, J’18, J’19,
6. Give few examples of assurance engagements. (P-6, S-1.3) (
7. Why is assurance important? (P-6, S-2.2) (D’13,D’15, D’16, J’17, D’18
8. Why can assurance never be absolute? (P-7, S-3) (D10, D’13, J’15, J’19,
9. What limitations are includes in assurance services? (P-7, S-3.1) (D’10, D’13,
J’12, D’15, J’19)
10. What are the legal and professional requirements of auditors? (P-9, S-4.2)
11. What are the overall objectives of the Auditor? (P-11, S-4.6) (Dec’18
12. Definition: true and fair (P-9) (J-10,D’13,Dec’15, D’17,
13. professional skepticism (P-12) (Dec’18,
14. professional judgment (P-12), Dec’18
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15. (b) In addition to audit, users want some other assurance services.
Give few examples. (Sy- 5)(J’13, J’15,
16. Which person cannot be eligible for appointment as an auditor as per
Companies Act, 1994?
(Page-10) (J’15
17. ‘Assurance can never be absolute’ (Sy-7). Discuss the limitation of
assurance (Sy-8).
Which three of the following are benefits of assurance work? (Dec’10
7+3
• An independent professional opinion
• Additional confidence given to other related parties
• Testing as a result of sampling is cheaper for the responsible party
• Judgments on estimates can be conclusive
• Assurance may act as a deterrent to error or fraud

18. Assurance service is an independent professional service, typically

provided by Chartered Accountants, with the goal of improving the
information or the context of the information so that decision makers can
make more informed, and presumably better decisions. Assurance services
provide independent and professional opinions that reduce the information
risk (risk that comes from incorrect information)

a. Audit and Assurance are always used together. What is the exact difference between
these? (Dec’11

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 Assurance

Process of assurance: obtaining an engagement (Chapter-2)

UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

Q01. What matters to be considered before accepting an engagement? (P-19, S-

2) (June’17)
Q02. What are the appointment considerations for engagement as per
Schedule C of ICAB Code of Ethics? (P-20, S-2.1), Dec’16
Q03. How you determine the low risk and high risk of an assurance client? (P-
20, S-2.1), June’18
Q04. What procedures should be carried out after accepting an assurance
engagement? (P-23, S-2.1)
Q05. What are the purposes of an engagement letter? (P-24, section overview)
Q06. What are the contents of an engagement letter? (P-24, s-3.1) (June
10,June’17, June, 18)

3. (a) Name five possible of sources of information about the client. (page-21)
Dec’10
2. Which three of the following will normally be contained within a letter of
engagement? (June’11
Responsibilities of the auditors;
Responsibilities of the directors;
The scope of the audit;
The staff assigned to the engagement;
Dec’11
1. What forms and contents will normally be contained in a letter of
engagement? (Sy-6)(June 10, June’13, J’17, J’18
2. You own an accounting firm. XYZ Ltd. is your prospective client. However
it declines permission to contact the previous auditors, what should be your
course of action? (Page-21)(June 10,

May’12
7. The practitioner should comply with the International Framework for Assurance
Engagements (the Framework) and International Standard on Assurance Engagements
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 Assurance

(ISAE) when performing an assurance engagement other than an audit or review of

historical financial information covered by International Standards on Auditing (ISAs)
or International Standards on Review Engagement (ISREs).

a. What are the factors a practitioner must consider before accepting an

assurance engagement and
b. what are low risks and high risks for assurance? (Sy-1 & 3) (J’13, J’18
c. What are the purposes of an engagement letter (Sy-5) ( J’14, D’14 J17
d. Should a practitioner send an engagement letter to existing clients?
(From BSA reference) (Dec’12,

2. The IESBA (International Ethics Standard Board for Accountants) code of

ethics sets out rules as to how a new appointment should be accepted. What
are those procedures that auditors should abide by while accepting new
appointments? (Sy- 1&2) (D’16, J’13, J’17, Dec’18,)

7. a) The root of the growth of business activities in the today’s world lies in
the charismatic use of
advertisement and promotion activities.
What are the provisions cited in IESBA Codes of Ethics and ICAB Bye Laws as
regards marketing
of professional services? (Q-1)(J’19

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 Assurance

Process of assurance: planning and assignment (Chapter-3)

UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

01. What do you know about audit strategy and audit plan? (P-37)
02. Identify the key contents of audit plan and audit strategy. (P-37 & 38)
03. Select appropriate procedures used by the auditor in obtaining an
understanding of the entity. (P-41, How portion)
04. Identify the source of information for analytical procedures are applied
throughout the course of the audit? (P-44, S-2.1)
05. Mention certain ratios as analytical procedures with purpose. (P-45)
06. Interactive question: 3 (P-46)
07. When the auditor should be considered materiality? (P-47 last portion), Dec’17
08. How materiality is used in the course of an assurance engagement? (P-48, S-
3.2), Dec’17
09. Give few examples of issues that might increase inherent risk. (P-50, S-4.1)
10. For each of the following examples, indicate the type of the risk involved:
 The organization has few employees in the account department
 The organization is highly connected with the building trade
 The assurance firm may do insufficient work to detect material errors
 The financial statements contain a number of estimates
11. Which factors indicate the significant risk? (P-53, S-4.4)
12. Definitions: Audit strategy (P-40), audit plan (page-40), analytical procedures
(P-44), materiality (P-47) (Dec’15, 17), audit risk (P-49), inherent risk (P-50), control
risk (P-50), detection risk (P-51)
13. How would you assess risk in an entity? (Jun-19)

May-June’ 2010
1. a. Which of the following procedures might an auditor use in gaining an
understanding of the entity? (Page-
43) (June’ 2010
(i) Inquiry (ii) Recalculation (iii) Analytical procedures (iv) Computation
(v) Re-performance of a control (vi) Observation and inspection
b. The audit team is required to discuss susceptibility of the financial
statements to material statements?
True or False (Self-test-4) (Page-56) (June’ 2010

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 Assurance

6.a. What is Audit Risk? (Q-22) What are the different types of Audit Risk? (Q-
22) For each of the following
examples, indicate the type of risk: (Page-52) (D’11, June’ 2010
i) Vendor’s payments are processed, booked and reconciled in the system by
the same person in the Accounts
Department.
ii) The assurance firm may do insufficient work to defect material errors.
iii) The financial statements contain a number of estimates.
b. If control and internal risk are assessed as sufficiently low, substantive
procedures can be abandoned
completely. True or False (Self-test-7, Page-56)

Nov-Dec’10
Q02. Discuss in brief ‘Audit Strategy’ and ‘Audit Plan’.
Which three of the following would normally be contained in the overall audit
strategy? (Sy-1)(J’14, D’18 7+3
• The contract between the audit firm and the client
• The result of audit risk assessment
• Calculation of preliminary materiality
• Detailed plan of audit procedures to be carried out
• List of staff to be involved with the audit
3.(b) Define ‘Materiality’ in assurance work (Sy-12).(D’12, D’14, D’15
Which factors indicate a risk might be a significant risk (Sy-11)?
2+4

Dec’11 4+5
a) Vendor’s payments are processed, booked and reconciled in the system by
the same person in the Accounts Department.
3
b) The assurance firm may do insufficient work to defect material errors.
4
c) The financial statements contain a number of estimates.
4

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 Assurance

Dec’14/Dec’15
4. a. Explain materiality in the context of an audit, from the point of view of an
Auditor. (Sy-12)5
b. How should auditor determine materiality during a financial audit?
(Dec’14, Dec’15
C. Is there any golden rule to quantify materiality level? (Dec’14, Dec’15

Ans: Audit Risk and assessment of Materiality in course of Audit is difficult

and controversial process. The auditors make a preliminary judgment about
materiality levels. Although this judgment may or may not be quantified.
Several "rules of thumb" have introduced from both practice and academic
research. For instance, all of the following have been suggested as way of
arriving at a preliminary judgment about materiality:
* Percentage of pre-tax income or net income;
* Percentage of gross profit;
* Percentage of total assets;
* Percentage of total revenue;
* Percentage of equity;
c. How does materiality assessment and fixation help to control an audit?
5
Ans: Materiality considerations and fixation during audit period is extremely
important. The assessment of materiality should be based on the recent and
reliable financial information. Materiality assessment and fixation will help the
auditors to decide:
 How many and what items to examine
 Whether to use sampling techniques
 What level of error to be treated as tolerable error
An effective audit procedure helps to reduce audit risk to an acceptable level.
The value of discovered errors should be aggregated at the end of the audit to
ensure the total is still below tolerable error.

June’18
1. ( c) Here are some extracts of financial statements of a recently accepted
audit client;
2017 2016
Tk.'000 Tk.'000
Revenue 1,566,088 950,339
Cost of sales 1,231,231 757,700
Gross profit 328,851 192,637
Salaries and wages 141,984 185,664
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 Assurance

Other administrative costs 10,988 9,939

Audit fee 5,400 5,350
Bank charges 64 33
Other finance costs 32 35
Advertising 276 465
You are required to identify three areas which analytical procedures may
suggest as risky and will require special attention.
6
June-2019
1. b) How would you explain a structured approach to planning an audit?
6

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 Assurance

Process of assurance: evidence and reporting (Chapter-4)

Q01. What is the objective of an assurance engagement? (P-63, S-1.1)
Q02. What are the potentially tests carry out to gather evidence? (P-63)
Q03. What do you know about control test and substantive test? (P-63)
Q04. How can you gather reliable audit evidence? (P-64, S-1.2) (June’17)
Q05. Write seven financial statement assertions. (P-64, S-1.3)
Q06. Give few examples of substantive test procedures. (P-66, S1.4)
Q07. As per Companies Act 1994, certain requirements are reported by the auditor,
what are these? (P-67, S-2.2)
Q08. What are the basic elements contents in an audit report? (P-67, S-2.2), Dec’16
Q09. Write an extract unqualified audit report. (P-69)
Q10. What are the misunderstandings in the following cases? (P-72, S-2.3), (Jun-19)
 The nature of audited financial statement
 Type and extent of work undertaken by the auditors
 Level of assurance provided by the auditors
“Or” Give three examples of misunderstanding which contribute to the
expectation gap. Dec’16
Q11. Definition: Audit evidence (P-63), financial statement assertions (P-64)
012. What do you mean about expectations gap? (P-77) , (Jun-19)

Previous year’s questions:

May-June’ 2010
11 (b) Name six financial statement assertions (Q-11) (June’10, J’12,
J’16, D’18,

Nov-Dec’2010
4. (a) What are the matter with which the auditors imply satisfaction in an
unqualified report under the Companies Act 1994? (Dec’10, D’12
b. What basic elements, according to BSA 700, the audit report should include?
(Sy-7 & 8) ( Dec’10,D’12
(C) Which three of the following are implied opinions given in the audit
report? (Dec’10
3
• All information and explanations required for the audit have been received.
• Proper accounting records have been kept.
• The director’s reports is consistent with the financial statements
• The financial statements have been prepared in accordance with the
Companies Act 1994.
• The preparation of the financial statements is the responsibility of the
company’s management.

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 Assurance

June’12
2. Audit evidence is necessary to support the auditor’s opinion and report. It is
cumulative in nature and is primarily obtained from audit procedures
performed during the course of the audit.
a. Discuss the attributes of evidence as per BSA 500 and list the sources of
audit evidence. (page-64)( June’12 ,D’14, J’19
8

8. An accountant evaluates financial records based on assertions imbedded in

the financial statements.

Dec’12/June’16
2. An auditor's report is considered an essential tool when reporting financial
information to users, particularly in business. Some have even stated that
financial information without an auditor's report is essentially unreliable" for
investment purposes.
a. What is Audit Opinion?
Ans: An audit opinion refers to a certification of a financial statement is
provided by the independent accountants involved in auditing by examining
company’s books and records. The audit opinion is about whether or not the
financial statements present an accurate reflection of the organization’s
financial condition.
b. What two things the auditors are required to state as explicit opinions in
their audit report? (P-67)
d. Who should the auditors address to in their audit report of a company
according to BSA 700?3
Ans: The auditor’s report shall be addressed as required by the circumstances
of the engagement. The auditor’s report is normally addressed to those for
whom the report is prepared, often either to the shareholders or to those
charged with governance of the entity whose financial statements are being
audited.
June’13/June’17
3. (b) The financial statements of A Ltd. were prepared on going concern basis,
although there is a significant doubt about the company’s ability to continue
as a going concern.
What effects will this situation have on your audit report if the uncertainty
over ‘going concern’ is (i) fully disclosed in the financial statements (ii) not
disclosed in the financial statements. 8

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 Assurance

Answer:
Based on the audit evidence obtained and if a material uncertainty exist, the
auditor judgement will be appropriate to disclose the nature & implication of
the uncertainty, the degree of its potential impact and likelihood of occurrence.
If the auditor concludes that the use of the going concern assumption is
appropriate in the circumstances but a material uncertainty exists, the auditor
shall disclose the following:
a) Adequately describe the principal events or conditions that may spread
significant doubt on the entity’s ability to continue as a going concern and
management plans to deal with these events.

b) Disclose clearly that there is a material uncertainty related to events that

may significant doubt on the entity’s ability to continue as a going concern and
therefore it may be unable to realize its assets and discharge its liabilities in the
normal course of business.
Dec’14
1. ISA 500 indicates that the reliability of audit evidence is influenced by its
source and by its nature, and is dependent on the individual circumstances
under which it is obtained. As per ISA 505, depending on the circumstances of
the audit, audit evidence in the form of external confirmation received directly
by the auditor from parties is considered to be more reliable than evidence
generated internally by the entity.
c. Your firm is the auditor of ABC Enterprise, which showed 60% increase in
current year’s sales compared with the previous year. When enquired, you
found that the company has recently introduced credit sales, which instigated
the sharp rise in sales. When you further reviewed sales documents you found
that credit sales are concentrated to a small number of corporate buyers. To
confirm credit sales directly from buyers you arranged to send external
confirmation requests as per ISA 505 but management refused to cooperate.
What will be your alternative audit procedures in the above circumstances?
7
Ans: When the auditor wants to confirm certain balances by external
confirmation and management requests the auditor not to do so, the auditor
should consider whether there are valid grounds for such a request and obtain
audit evidence to support the validity of management’s requests. The auditor
should apply alternative audit procedures to obtain sufficient appropriate
audit evidence.

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 Assurance

If the auditor does not accept the management’s request and to carry out the
confirmations and there has been a limitation on the scope, the auditor should
consider the possible impact on the auditor’s report.

3. Auditors cannot always predict future events or conditions which may

cause going concern problems. For this reason, the fact that an entity may
cease to exist as a going concern after receiving an audit report that does not
refer to a substantial doubt about going concern even within a year after the
statement date. Similarly, the absence of a reference in an auditor’s report to
substantial doubt is not a guarantee as to the entity’s ability to continue as a
going concern.
a. During the time of economic downturn when investments are very sluggish,
going concern matters become an area of heightened risk. What should
auditors do for assessing going concern of clients?
5
Ans: Going concern matters have become an area of heightened risk in
economic downturn. In this environment related to going concern issue,
auditors should assure that they:
a) Have a clear understanding about clients and its’ going concern matters.
b) Provide sufficient evidence about going concern matters
c) Obtain appropriate management representations
d) Proper documentation

b. How should auditor evaluate whether substantial doubt about going

concern exists or not? Can you identify and list down what are the indicators
of substantial doubt? In such situation what audit evidences should be
collected and preserved in the working file? 4+5+4=13

Ans: Evaluating whether substantial doubt about going concern exists

Auditor should evaluate whether substantial doubt about to continue as a
going concern for a reasonable period of time. The auditor should consider the
following:
a) Identify conditions or events that in aggregate indicate substantial doubt
about the entity’s ability to continue as going concern.
b) To obtain additional information and audit evidence to support information
that mitigate the auditor’s doubt.
Indicators of substantial doubt may include:
a) Negative trends: Working capital deficiency, adverse key ratios
b) Internal matters: Work stoppages, Uneconomical long term commitments
c) External matters: Legal proceedings, loss of license, patent or franchise

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 Assurance

d) Other indications of financial difficulty: Default on loan agreement,

discontinuance of dividends
Audit documentation:
When substantial doubt about going concern exists, the audit documentation
should contain:
a) The events that arise to the substantial doubt
b) The commitments of management plans
c) The audit procedures performed and evidence obtained to evaluate those
elements
d) The auditor’s conclusion:
 If substantial doubt remains, the auditor should adequate disclosure in the
report
c. As per ISA 570, justify whether substantial doubt about going concern
exists in the following cases:
5x2=10
i. An International Oil Company (IOC) has decided to relinquish two deep-
water blocks in Bangladesh after lengthy negotiations with state-owned
Petrobangla failed to yield improved fiscal terms.
Ans: The International Oil Company (IOC) is not a going concern in
Bangladesh, because it has decided to relinquish/turn down.
ii. The XYZ Energy Ltd., a coal mining company operating in the southern part
of Bangladesh is stopped by a court of Bangladesh from carrying out
operations in Bangladesh.
Ans: The XYZ Energy Ltd. is not a going concern in Bangladesh, because it has
to shut down.
iii. A Govt. owned Refinery is in serious cash flow problem but the
government has provided with a sovereign guarantee to the refinery to help it
out with all payments.

Ans: Refinery is in cash flows problems but the government provided a

guarantee to the refinery to help it out with all payments, the refinery is a
going concern despite poor financial position.
iv. The Rupayan Bank is in serious liquidity crisis and the government is not
willing to bail it out. The Board of Directors has passed a resolution to
liquidate the business.

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 Assurance

Ans: The Rupayan Bank is not a going concern because it’s Board of Directors
has passed a resolution for liquidation. It is probable that it will be out of
business after the settled.

v. The Basic Textile Ltd. has a current ratio below 0.5. One of its major
suppliers has demanded a payment of Tk. 100 million, which the company
could not meet. The supplier applied to the court for liquidation of the
business and recovered his debt and the court granted the order.

Ans: The basic Textile Ltd. is not a going concern, because the court granted
for liquidation.

June’15
1.d. (ii) How can you minimize expectation gaps which arise from a
misunderstanding of the role and purpose of an audit/assurance engagement.
3
Ans: The audit expectation gap is defined as the difference between what the
public expects from an audit and what the audit profession to be done.
In the following way we can minimize the expectation gaps:
Education: Education improves the level of understanding of the users of
financial statements in relation to the functions of an audit process.
Expanded/details audit report: Expanded audit report can be used as a way to
reduce the audit expectation gap. This is because it provides a better
understanding of the user.
Expansion of auditors’ responsibilities and enhancement of auditors’
performance
Expansion of the auditors’ duties: The expansion of the auditors’ duties
should include:
Compliance reporting, evaluation of internal control system, direct reporting
by auditors to regulators and fraud detection
4. The Bangladesh Standards on Auditing (BSA) 560 deals with the auditors’
responsibilities relating to subsequent events in an audit of financial
statements. Financial statements may be affected by certain events which
occur after the date of the financial statements.
a. Define the term `Subsequent Events’. (Dec’17)
5

Ans: A subsequent event is an event or transactions occurring after the balance

sheet date, but before the financial statements are either issued or available to
be issued. Subsequent events fall into two categories:
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1. Events or transactions that provide additional evidence about conditions

existed and incorporated into the financial statements.

2. Events that provide evidence about conditions that did not existed and not
incorporated into the financial statements.
b. What are the Auditor’s responsibilities with regard to the “Events-occurring
between the date of the Financial Statements and the date of the Auditor’s
Report.” 8
Ans: The auditor performs audit procedures that are designed to obtain
sufficient appropriate audit evidence to give reasonable assurance up to the
(expected) date of the auditor’s report have been identified, properly
accounted for/or disclosed in the financial statements.
The auditor’s responsibility in relation to ensuring all events occurring
between the reporting date and the (expected) date of the auditor’s report
have been adequately taken into consideration, and sufficient appropriate
audit evidence has been gathered to achieve the objective.

c. What are the Auditor’s responsibilities with regard to the “Facts which
become known to the Auditor after the date of the Auditor’s Report but before
the date of the Financial Statements are issued.” 7
Ans: In such situations, the auditor will consider whether the financial
statements need amending. The auditor is required to discuss with
management how they intend to deal with events that will require the
financial statements to be amended after the auditors have signed their report,
but before the financial statements are issued.
Where the financial statements are amended, the auditor is required to carry
out necessary audit procedures in light of the circumstances giving rise to the
amendment.
b. What are the factors, which make a person ineligible for being a company
auditor as per the Companies Act, 1994? (Sy-7) What non-audit services are
prohibited to be carried out by auditors?
2+2=4
Ans: The issuer company should not engage its external/statutory auditors to
perform the following services of the company; namely:-
(i) Appraisal or valuation services.
(ii) Financial information systems design and implementation.
(iii) Book-keeping or other services related to the accounting records.
(iv) Broker-dealer services.
(v) Actuarial services.
(vi) Internal audit services.
(vii) Any other service that the Audit Committee determines.
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June’16
3. Financial statements can be said as the collection of many assertions of
management. That is why, the auditor attempts to collect evidence as to the
correctness of those assertions. The BSA requires that „the auditor should use
assertions for classes of transactions, account balances, and presentation and
disclosures in sufficient detail to form a basis for the assessment of risks of
material misstatement and the design and performance of further audit
procedures‟
a. In the context as described above, define financial statement assertions. (Sy-
5) 4
b. Suppose, the statement of Financial Position of an entity shows inventories
with carrying amount of Taka 400 million. Mention the relevant assertions that
management made for the inventories.
4

Ans: The assertions made by management about the inventories included in

the Balance sheet are as follows:

1) Existence: The inventory recognized in the balance sheet exist at the period
end
2) Ownership: The entity owns or controls those inventories
3) Accuracy: The inventories are valued accurately

d. Describe four procedures that the auditors of a limited company should

carry out to verify the provision for a pending legal claim against it?
4

Ans: The following procedures that the auditors of a limited company should
carry out to verify the provision for a pending legal claim:
a) Inquire and discuss with management the policies and procedures adopted
for identifying, evaluating, and accounting for litigation & claims.
b) Obtain from management a description and evaluation of litigation, claims,
and assessments that existed at the date of the balance sheet.
c) Examine documents in the client's possession concerning litigation, claims,
and assessments, including correspondence and invoices from lawyers.
d) Obtain assurance from management, in writing, that it has disclosed all
unasserted claims that the lawyer has advised them are probable of assertion
and must be disclosed in accordance with Statement of Financial Accounting
Standards.

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Dec’16
4. As part of the analytical procedures of XYZ Limited, you performed
calculations of the following ratios:
Ratios 2015
2014
Gross profit ratio 25%
29%
EBIT to sales ratio 11%
10.8%
Current ratio 1.55
1.85
Days to collect receivable 108
85
Days to sell Inventory 96
95
Interest coverage ratio 4.2
5.5
Earnings per share Taka 8.5
Taka 8.6
a. Based on the above ratios, which two aspects of the company, you believe,
should receive special attention in the audit.
4
Ans: Based on the ratio, as given in the question, I think following aspects
should get special attention:
 Profitability in terms of gross profit to revenue: In case of gross profit
ratio, it came down to 25% in 2015 from 29% of last year.
 Average accounts receivable collection period: Considering accounts
receivable turnover ratio, it is found that receivable collection period
has been increased compared to last year which has negative impact
in cash flow.

b. State five possible reasons behind decreasing gross profit ratio to 25% in
2015 from 29% in 2014.
4
Ans: The following factors might have contributed to decrease gross profit
ratio to 25% in 2015 from 29% in 2014:
1) The selling price of the products may have been reduced.
2) The company might have offered higher rate of trade discount
3) Raw material price of the products may have increased
4) The overhead cost of the products may have increased
5) the product mix may have been changed this year.

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Dec’17
1. (d) In an audit engagement, the engagement team does so many things
following the defined methodology the Engagement Partner approves. All
these are done and finally a suitable report is issued as per prescription of
International Standards on Auditing. You are required to draft an unqualified
audit report as per ISA 700 applicable for a company. 10

Dec’18
9. What do you understand by Financial Statement Assertions? Give a
description of the assertions applicable to classes of transactions, account
balances and disclosures to provide a basis for designing and performing
further audit procedures. 10

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Introduction to internal control (Chapter-5)

Q01. What is internal control? (P-81, section overview) (Dec’15, June’17)

Q02. What is the company’s objective in respect of internal control? (P-81, S-1.1-
worked example)
Q03. What steps are taken by the management to meet the company’s objective?
(P-81, S-1.1)
Q04. What are the reasons for internal control? (P-82, S-1.2), June’17
Q05. What are the limitations of internal control? (P-82, S-1.3), June-19
Q06. What are the components of internal control? (Page-83), (Dec’15)
 The control environment
 Business risk and the entity’s risk assessment process
 The information system relevant to financial reporting objectives
 Control activities
 Monitoring of controls
Q07. What are the duties and responsibilities of an audit committee? (P-84, S-2.1.1)
Q08. Draw a flow chart of an entity’s risk assessment process. (P-85, S-2.2)
Q09. Give few examples for control activity. (P-86, S-2.4.1)
Q10. What do you know about application control and general control? (P-87, S-
2.4.2)
Q11. Give few examples against general controls and application controls. (P-86-
87) (Dec’15)
Q12. How the auditors will obtain information about internal control? (P-90, S-3.1)
Q13. What types of document the auditor used for recording the understanding of
the business? (P-90, S-3.2)

Previous year’s questions

May-June’ 2010
3. a What is Internal Control? (Q-1) (June’ 10, June’ 11, Dec’13, June’15,
Dec’15, June’17, Dec’17, Dec’18,
b. Name its components (Q-9) (June’ 10, June’ 11, Dec’13, June’14,
June’15, Dec’15, June’17,
c. what are its importance/objectives (Q-3 & 5) (June’ 10, Dec’12, June’14,
June’16, June’17,
d. and limitations? (Q-6) (June’10, June’11, June’14, June’19,
e. Why smaller companies have problems in implementing effective internal
control? (Q-7) (June’ 10

19
 Assurance

June’11
(b) What are IT General and IT Application Controls? List three examples in
each area. (Sy-10 &11) (June’ 11, Dec’13, Dec’15, June’18, Dec’18,
4.(a) Name three broad types of document used in Internal Control Recording.
(Sy-13) 3

Dec’11
4. Define ‘Audit Committee.’ What are likely to include in the terms of reference of
audit committee as required for the companies listed in stock exchange of
Bangladesh. (Sy-7) (Dec’11, June’16, June’17, 3+6
7. The use of an IT system by a client does not change the need to establish
effective internal control; however, it does change the nature of the controls. More
advanced IT features, such as online capabilities, database storage, IT networks,
and end user computing, present special control risks. Therefore, specialized
controls are needed, including passwords, validity tests, and computer logs.
a. How do certain IT areas and IT general controls (ITGC) affect almost all
financial audits? (P-95)6
Ans: There are certain IT areas and IT general controls affect almost all financial
audits by the following:
a) Control computer development
b) Control over input accuracy
c) Manual control exercised
d) Control system output
e) Program control

b. How do IT system of an entity cause risk of material misstatement?

6
Ans: The following may cause the risk of material misstatement of an entity:
a) Lacking of development of computer applications
b) Unauthorized access
c) Lack of prevention on detection of program change
d) Lack of continuity of operation
e) Using unauthorized files
f) Lack of control over accuracy, completeness and authorization

Dec’12
3. Internal control is most effective when controls are built into the entity’s
infrastructure and properly monitored to assess the quality of the system’s
performance over the time.
a. What type of assurance is internal control expected to provide?
5
20
 Assurance

Ans: Internal control is a process, affected by an entity's board of directors,

management and other personnel. The following types of assurance are
expected from introducing the internal control system:
Effectiveness and efficiency of operations.
Reliability of financial reporting.
Compliance with applicable laws and regulations.

b. What is the risk of material misstatement occurring within the entity and its
environment? Give two examples.
5
Ans: The risk of material misstatement occurring within the entity and its
environment such as:
a) Changes in supply chain
b) Changes in IT environment
c) Significant unusual transactions
d) Contingent liabilities
e) Going concern problem

4. Most IT controlled weaknesses are rooted in poor management rather than the
technology itself. The general controls are those that equally affect the whole
system within an installation whereas application controls must be designed to
address the specific issues in each separate application or program.
The objectives of IT application controls are to ensure all processing is
complete, accurate and valid.
June’14
5. Internal control is a process affected by an entity’s structure, environment work,
authority flows, people and management information systems. Internal Control
System is designed to help the organization accomplish specific goals or objectives.
By ensuring effective and efficient Internal Control System an organization's
resources are directed, monitored and measured which eventually plays an
important role in preventing and detecting fraud and error.
a) (i) What is business risk? P-85 (Jun-19)
2
(ii) What is entity’s risk assessment process? (Sy-14) (Jun-19)
2

June’15
2. A sound system of internal control is of great importance for a business
enterprise of any size. In the absence of a satisfactory internal control system
the owners and management of the business will always find it very difficult
to run the company properly and achieve the desired operational result.
21
 Assurance

b. Define with examples the terms `preventive controls’ and `detective

controls. Preventive controls are better than detective controls- do you agree?
Answer the question with logic. 4+2=6

Ans: Preventive control: Steps taken before an emergency, loss, or problem

occurs. These include use of alarms and locks, segregation of duties and
specific authorization policies.

Detective control: Detective controls are designed to detect errors and

irregularities, which have already occurred and to assure their prompt
correction. Detective controls include to correct data errors, modify controls or
recover missing assets.
c. Define with examples what manual controls and automated or IT controls
are. Why is segregation of duties important to ensure effective internal control
system (Manual P-87)? Is segregation of duties preventive control or detective
control? 4+3+1=8
Ans: Manual control: Controlled by a human operator (not automatically, such
as by a computer) or powered by human or animal muscle power is called
manual control. Example- Handbook.
Automated control: Automatic control is the application of processes without
direct human intervention. Such as- a machine or an industrial process.
Segregation of duties is preventive control.

June’16
1.a. One of the terms of references of an audit committee may be to monitor
the independence of the external auditor‟ - in light with this write at least one
way and means which the audit committee of a listed company can apply to
ensure the independence of external auditor in the area of service with an
assurance client.

Ans: An Audit committee of a listed company is likely to monitor the

independence of external auditor. If the team of external auditors cannot work
independently, the quality of audit report will not be up to the standard mark.
The audit committee of a listed company may ensure the independence of
external auditor.
The key issue for the audit committee is the review of financial statements
which can be seen as a control in relation to the information system. The audit
committee of the company can control the procedures of financial statements.
The committee also has responsibilities with regard to supervising the
identification of risks and monitoring control.

22
 Assurance

4. b. It is found quite common that two types of control activities are

established by the organizations. They are preventive and detective controls.
Both types of controls are essential to an effective internal control system.
From the quality perspective, preventive controls are better because they are
proactive. However, detective controls play a critical role by providing
evidence as to whether the preventive controls are functioning at desired level.
Below is a list of some controls the organizations usually apply to achieve the
goal of the Internal Control system.

i. Physical inventories ii. Segregation of duties iii. Internal Audit iv. Approvals
and authorizations v. Variance analysis vi. Reconciliation.

In light of detective controls and preventive controls, identify the above

measures with brief reasoning.
8
i. Physical inventories: It is a detective measure as this is done periodically.
ii. Segregation of duties: Duties are segregated among the people to reduce
the risks of error or appropriate action. Normally recording transaction and
authorization transaction are divided into different person. So this is a
preventive measure.

iii. Internal Audit: It is a detective measure control as internal audit mainly

works often after transactions took place.
iv. Approvals and authorizations: Approval and authorization imply that
transaction are verified before their execution. So they are preventive measure.
v. Variance analysis: Variance analysis implies that actual results are
compared with standard results. As such it is a detective measure.
vi. Reconciliation: Reconciliation is the process relating to different set of data
for identifying investigations to take corrective action. Thus it is a detective
measure.

Dec’16
2. a. What is the difference between policies and procedures?
4
Ans: Policies refer to the principles that guide the actions and decisions in an
organization. Policies do not tell “how” to do something but bring out what is
acceptable level. Policies are rules established to reduce risk.
Procedures refer to the established or prescribed methods to be followed to do
something. They describe “how” something should be done. Procedures are a
serious to ensure the internal control system.
23
 Assurance

b. Define the term control activities. Briefly discuss the types of control
activities that are introduced by the organizations in designing a good internal
control system. Dec’17, (P-86)2+6
c. Suppose proper segregation of duties is not possible due to the limited
number of staff. In this case, what should management do to enhance control?
3
Ans: Segregation of duties is a very fundamental control activity for each and
every organization. As a financial advisor, I would suggest the following
activities that should be allocated over different staff of the organizations:
* Recording: The process of creating and maintaining records of transactions.
*Authorization: Authorization of transactions should be assigned to separate
staff.
* Asset custody: The access or control over physical assets like cash,
inventories, etc. should have in the hand of separate individual.
Reconciliation: Separate person should be assigned to carry out reconciliation.

5. How will an auditor test the application controls under an automated

internal control system? P-89) ( June’19
12
Dec’18
4 Organizations having strict adherence to its standard policies and
procedures under strong surveillance of internal audit or specific monitoring
team are believed to be well controlled and low risk client from the
perspective of the external audits.
(a) What do we mean by internal controls (Sy-1)? Explain two types of controls
in a computerized environment (P-87).
5

June-19
4. a) For each of the following controls, state whether they are general or
application control; Segregation of duties, Review of master files, Back-up
copies, Virus checks, Passwords, Record counts, Hash totals, Program
libraries, Controls over account deletions and Back-up power source.

24
 Assurance

Revenue (Chapter-6)

Q01. What matters relating to risk may be considered by the company at the
time of sales order? (P-99, S-1.1)
Q02. What controls objectives should be taken to mitigate risk in the situation
of question-1? (P-99, S-1.1)
Q03. How controls can be used to mitigate the risk for ordering? (P-99, S-1.2)
Q04. Which two of the following internal controls will mitigate the risk of bad
debts arising from new customers?
 Obtaining a credit reference for new customers
 Matching of customer orders with dispatch notes
 Quoting the correct prices to customers making orders
 Authorization of new customers by a senior staff member
 Authorization for changes in customer data
Q05. List four tests of controls relating to the ordering. (P-100, S-1.3)
Q06. When considering dispatch and invoicing, what risks might recognize by
a company? (June’16) (P-101, S-2.1)
Q07. What are the control procedures to mitigate the dispatch and invoicing
risk? (P-101, S-2.2)
Q08. What are the test of controls for the dispatch and invoicing risk? (P-102,
S-2.3)
Q09. When considering recording, what risks might recognize by a company?
(P-104, S-3.1) (Dec’15)
Q10. What are the control procedures to mitigate the recording risk? (P-104, S-
3.2)
Q11. What risk might be happened for collection? (P-106, S-4.1)
Q12. What are the control procedures to mitigate the cash collection risk? (P-
106, S-4.2)
Previous year’s questions:
Nov-Dec’10
8. As an assurance provider, how will you perform test of controls in relation
to Sales? Give five examples of tests to be performed on the cash payment
book. (Page-105 & page-122 -3.3)
June’11
9. (a) Which three of the following functions should ideally be segregated: (Sy-
13) 3
- Authorization of orders
- Invoicing
- Recording cash receipts on receivables ledger
- Reconciliation of receivables ledger with receivables ledger control account
25
 Assurance

- Credit Control
June’12
3. What tests of control might be appropriate for Sales day book and
Receivables ledger (P-105, S-3.3) 10
4. Sales invoices are source documents that provide a record for each sale. For
control purposes, sales invoices are sequentially pre-numbered.
a. What are the control objectives to mitigate risk of not receiving payments
from a sales invoice? (P-116) 3
b. Which tests of control do you think appropriate for sales day book (P-105, S-
3.3) and suggest some controls to safeguard cash in hand and at bank? (Page-
107) 7

June’15
3. Private limited companies are generally blamed for understating revenue
and consequently showing a lower profit to avoid corporate taxes and on the
other hand overstating revenue and profit for seeking external financing and
attracting investors through IPO.
a. Being an Auditor of a Private Limited Company engaged in Fast Moving
Consumer Goods (FMCG) business, how do you satisfy yourself as to the
accuracy of Revenue as reported by the management?
8
Ans: The revenue account is one of the most influential items in the financial
statements. Revenue audit procedures are important portion of the audit. As
such, understanding the revenue process of the client will better support of the
audit as efficiently as possible. To satisfy the accuracy of Revenue the
following procedure may be followed:
 The first step in performing an audit of revenue is to understand internal
controls and transaction cycles related to sales.
 Once the auditor has an understanding of the company's sales process and
the expected level of internal control then the auditor assesses the risk of
internal controls that will not detect an error in the sales process.

 Once control risk has been assessed, the auditor determines the amount of
testing to complete. This includes both control testing and substantive
testing.
 Lastly, auditors will perform control and substantive testing. The testing
for this account is often completed by the more senior members of the
audit staff or audit senior accountant.

26
 Assurance

b. Credit Notes become an integral part of Revenue reporting. During your

course of Audit what do you check in terms of Credit Notes? (P-102)
4
c. During your Audit you observed that the Company had a substantial
amount of Cash Sales. What is the controls client should have in place in terms
of recording of Cash Sales and Collections Accounting? (Sy-12)
5

June’16
1.c. XYZ Company Limited (XYZ) is a large manufacturing company selling a
unique product. It has an established customer base, but as its product is
unique, it also receives regular inquiries from potential customers that have
not bought products from XYZ before. In respect of such new customers, XYZ
has a significant risk of taking orders from customers who might not be able to
pay. What are the internal controls XYZ should set to mitigate this Risk? (P-99,
S-1.2) 7

4. c. Your management asked you to develop a policy for managing petty cash
fund appropriately. State five control points that you should incorporate in the
policy to establish proper control over the petty cash fund.
4

Ans: There are following five control points that we may incorporate in the
policy to establish proper control over the petty cash fund.
a) Limitations on petty cash floats held
b) Surprise petty cash count
c) Custody of petty cash outside office hour
d) Safeguard of IOU slip and petty cash in transit
e) Restrictions on access to petty cash register
Dec’18
6. Healthy Pharmaceuticals Ltd. (HPL) has recently undergone an
investigation of the VAT Commissioner with respect to errors in their
invoicing system that impacts on VAT declaration. HPL appoints you being an
assurance provider to conduct a review on the controls in place over invoicing
to explore the areas of implement with system. (P-103)
5

27
 Assurance

Purchase system (Chapter-7)

Q01. What matters relating to risk may be recognized by the company at the time
of purchase orders? (P-115, S-1.1)
Q02. What controls objectives should be taken in the situation of question-1? (P-
115, S-1.1)
Q03. How controls can be used to mitigate the risk for ordering? (P-115, S-1.2)
Q04. What are the tests of controls for the ordering? (P-116, S-1.3)
Q05. What matters relating to risk may be recognized by the company at the time
of goods inward & recording invoices? (P-117, S-2.1)
Q06. How controls can be used to mitigate the risk for goods inward & recording
invoices? (P-117, S-2.2)
Q07. What are the tests of controls for the goods inward & recording invoices? (P-
118, S-2.3)
Q08. What matters relating to risk may be recognized by the company at the time
of payment? (June’16) (P-120, S-3.1)
Q09. How controls can be used to mitigate the risk for payment? (P-121, S-3.2)
Q10. What are the tests of controls used for the cash payment system? (P-122, S-
3.3)
Q11. List four examples of purchase documentation on which numerical sequence
should be checked. (P-124), Q.02
Q12. Why in numerical sequence on GRNs checked? (P-124), Q-3
Q13. Give five examples of tests to be performed on the cash payments book. (P-
124), Q-4
Previous year’s questions:
June’11
9 (b) List four examples of purchase documentation on which numerical
sequence should be checked. (Sy-11)
(c) Which two control activities are most likely to reduce the risk of payments
being made twice for the same liability? (P-123, IQ-4)
Dec’13

28
 Assurance

3. Write corresponding controls to address the risk mentioned in the following

table: 5
Risks Controls
Employee may order too much or not enough raw All purchase requests must be a
materials authority. May be used approved
ordering.
Employee may try to misappropriate goods Procurement department wil
approved purchase requisition
goods inward, it’s quality, quant
per order.
Procurement Department may not use approved Goods can only be purchased
vendor (gaining the benefit of negotiated volume have been pre-approved.
discounts).
Payment sent to wrong address, wrong payee on Financial controller reviews all
cheque or cheque may not be signed. favoring right payee having v
payee address is correct on the en

Dec’18
4. (b) Describe an effective design of control mechanism applicable for
payment system. (P-121) 5

29
 Assurance

Employee costs (Chapter-8)

Q01. When calculating wages and salaries, what risks might be recognized? (P-129,
S-1.1)
Q02. What controls may be put into to mitigate the risks of Q. no.1? (P-129, S-1.2)
Q03. What risks might be recognized when recording wages and salaries? (P-131,
S-2.1)
Q04. What controls may be carried on for recording wages and salaries? (P-131, S-
2.2)
Q05. List six tests of control for recording wages and salaries? (P-132, S-2.3), Dec’17
Q06. List six procedures assurance providers should carry out if wages are paid in
cash. (P-134, S-3.3)
Q07. What are the most important authorization controls over amounts to be paid
to employees?
Answer:
 Engagement and discharge of employees
 Changes in pay rates
 Overtime
 Non-statutory deductions
 Advances of pay
Q08. How should assurance providers confirm that wages have been paid at the
correct rate to the individual employees?
Answer:
 Authorized rates of pay
 Production records
 Clock cards, time sheets or other evidence of time worked
Q09. The following describes the payroll system in operation at ABC Co. Ltd. for
each process indicate whether the process a strength or a weakness in the system.
1) Employees each have an electronic card to swipe in order to enter and leave Streng
the factory premises. This ‘swipe’ system automatically updates time records in

30
 Assurance

the payroll system

2) There is no personnel department. Employees are engaged by department Streng

heads with the verbal consent of a director.

3) On leaving, employees are required to return their swipe cards. Streng

4) The payroll has a variance function which reports items within the payroll Streng
falling outside the expected conventions which must be resolved by an
authorized member of staff before the payroll can be finalized. The ability to
resolve this report is controlled by a secret password.

Previous year’s questions:

June’11
6. (a) List six procedures assurance providers should carry out if wages are
paid in cash.(Sy-6) 6
(b) How should assurance providers confirm that wages have been paid at the
correct rate to individual employees? (Sy-8)
June’18
4. (b) What are the objectives of establishing control over recording of wages
and salaries and deductions?
5

31
 Assurance

Documentation (Chapter-10)

1. What is audit documentation? (P-151, S-1) (Dec’15, June’17, June’18)

2. What are the purposes of documentation? (P-151, Section overview) (June’17)
3. What should provide in Audit documentation? (P-151, S-1)
4. Why an assurance providers record documentation? (P-151, S-1)
5. “The form and content of working papers are affected by various matters”-
Explain (P-152, S-2)
6. What do you mean about automated working papers? (P-154, S-2.1)
7. What are the advantages of automated working papers? (P-154, S-2.1) (Dec’15),
June’18
8. What types of working papers? (P-154, S-2.2)
9. What are the contents of permanent audit files and current audit files? (P-154, S-
2.2) (Dec’15), (Jun-19)
10. There is any necessity for safe custody and retention of documentation? (P-155,
S-3)
11. What matters to be in mind in case of ownership and right of access to
documentation? (P-156, S-4), June’18
12. Which three of the following are true?
a) Working papers belong to the auditor b) The issued audit report belongs to
the auditor c) Auditors should retain working papers securely because of the duty
of confidentiality d) Auditors need client permission to share working papers with
third parties
13. Indicating in which file the working papers given below should be included.
a) Engagement letter b) New client questionnaire c) Financial statements d)
Management letter e) Accounts checklists f) Audit planning memo g) Board
minutes of continuing relevance h) Accounting systems notes
Reference to BSA
Purpose of documentation (BSA 230-2)
The auditor should document matters, which are important in providing evidence
to support the audit opinion, and evidence that the audit was carried out in
accordance with BASs.
Form and contents of documentation (BSA 230-5-12)
The auditor should prepare working papers, which are sufficiently complete and
detailed to provide an overall understanding of the audit.
The auditor should record in the working papers information on planning the
audit work; the nature, timing and extent of the audit procedures performed, the
results thereof, and the conclusions drawn from the audit evidence obtained.
Working papers ordinarily include the following:
 The legal and organization structure of the entity
 Legal documents, agreements and minutes
 Information concerning the industry, economic environment and
legislative environment
 Evidence of planning process
32
 Assurance

 Evidence of the accounting and internal control systems

 Evidence of inherent and control risk assessment
 Analyses of transactions and balances
 Analyses of significant ratios and trends
 A record of the nature, timing and extent of audit procedures
 Evidence that the work performed by assistants
 Copies of communications with other auditors
 Copies of letters or notes concerning audit matters communicated or
discussed with the entity
 Letters of representation
 Copies of the financial statements
Previous year’s question:
Nov-Dec’10/June-19
6. BSA 230 Audit Documentation establishes standard and provides guidance
regarding documentation in the context of audit of financial statements.
Required: List the purposes of audit working papers (Sy-2)
Dec’11
5. Classify the following working papers into Current Audit file and Permanent
Audit file: 12
Engagement letters, New client questionnaire, Financial statements relating to year
under review, Management letter, Accounts checklist, Audit planning memo,
Board minutes of continuing relevance, and Accounting system notes.
Dec’16
3(e). Briefly explain three methods of documenting the understanding of
internal control by external auditors. (P-152-Example-audit file-1st bullet)
6

Dec’18
7. (a) What purpose does audit documentation serve? (Sy-2)
5
(b) What are the key matters that affect the form and content of
documentation? (Sy-5) 5

33
 Assurance

Evidence and sampling (Chapter-11)

Q01. How can you obtain quality audit evidence? (P-165, S-1.1)
Q02. What are the procedures to obtain evidence? (P-166, S-1.2) (June-16, June’18)
Q03. There are two main types of CAAT, what are these? (P-167, S-1.3) (Dec’15)
Q04. What do you know about test data and audit software under CAAT? (P-167
& 168, S-1.3.1 & 1.3.2)
Q05. What factors should be considered when using analytical procedure as
substantive procedures? (P-168, S-1.4)
Q07. What sources of information about the client be used at the risk assessment
stage? (P-170)
Q07. Why audit of accounting estimates are important? (P-172, S-1.6)
Q08. What are the methods used by the auditor in regard to audit of accounting
estimates? (P-172, S-1.6)
Q09. What do you know about audit sampling? (P-173, S-2.1), Dec’16
Q10. What do you know about statistical sampling and non-statistical sampling?
(P-173, S-2.1)
Q11. What are the selection methods of sampling? (June’16) (P-176, S-2.3)
Reference to BSA
Audit procedures for obtaining Audit Evidence (BSA-500.19-38)
 Inspection
 Observation
 Inquiry
 Confirmation
 Recalculation
 Re-performance
 Analytical procedure
Analytical procedures (BSA 520.10-18)
Analytical procedures as substantive procedures, the auditor will need to consider
a number of factors such as the following:
 Objectives of the analytical procedures
 Nature of the entity
 Availability of the information
 Reliability of the information
 Relevance of the information
 Source of the information available
34
 Assurance

 Comparability of the information available

 Knowledge gained during previous audits
The auditor should apply analytical procedures at or near the end of the audit
when forming an overall conclusion as to whether the financial statements as a
whole are consistent with the auditor’s knowledge of the business.
Design of the sample (BSA 530.31)
When designing an audit sample, the auditor should consider the objectives of the
test and the attributes of the population from which the sample will be drawn.
Selection the sample (BSA 530.42)
The auditor should select items for the sample with the expectations that all
sampling units of the population have a chance of selection.

Previous year’s questions:

Nov-Dec’10
10. What is accounting estimate (Sy-8)? What will be auditor’s approach to audit of
accounting estimates (Sy-8)?

June’12
2. b. Is 100% examination likely in the case of test of controls? Give examples
when 100% examination may be appropriate? (P-173)
4

c. There will be an impact on sample size when there is an increase in the

auditor’s assessment of the risk of material misstatement. Explain. (P-174)
3
Dec’12
4. Most IT controlled weaknesses are rooted in poor management rather than the
technology itself. The general controls are those that equally affect the whole
system within an installation whereas application controls must be designed to
address the specific issues in each separate application or program.

b. What is CAAT (Dec’12)? What are the stages in the use of test data? (Sy-4),
Dec’17 3+4
Ans: CAAT: Computer-assisted Audit Techniques (CAATs) are computer
programs that allow auditors to test computer files and databases during an
audit. CAATs is a growing field within the audit profession. CAATs is the
practice of using computers to automate the audit processes.

c. What is audit software (Sy-4)? Give examples of what audit software can do.
(Dec’12) 3+4

35
 Assurance

Ans: Example of Audit software what can do?

 Calculation ratios
 Check calculation and cast performed by the system
 Prepare reports
 Follow items through a system and flag where they are reported
 Chose a sample according to specific criteria, such as:
-Random, over a certain amount, below a certain amount or a certain
date

Dec’13
5. Information System aims to support operation’s management and decision
making process. In a broad sense, the term is used to refer not only to the
information and communication technology (ICT) that an organization uses,
but also to the way in which people interact with this technology to support
the business processes.
a. What are the risks that an entity is exposed to, if general controls are not
effective? 4
Ans: IT general controls may have a constant effect on the processing of
transactions in application systems. If general controls are not effective, there
may be a risk of misstatement in which the major risks are not detected at
application system.

b. How will you test general controls and application controls of an entity’s
information syste.5?
Ans: General controls may be tested in the following ways:
a) Understand the process
b) Perform a walkthrough test-through review of the evidence and
confirm your understanding of the process being audited
c) Perform testing
d) Report against findings
Application controls may be tested in the following way:
a) Test input controls to ensure transactions are added into and
accepted by the application only one time and have not duplicated.
b) Test processing controls to ensure transactions are accepted by the
application with valid logic and updated to the correct data files.

c. Can you test automated controls even though you are non-IT person?
4
Ans: I can test automated controls with the help from my IT knowledge
friends (It expert) without knowing too much technically of information
systems processes.
36
 Assurance

June’14
1. Accounting estimates are of particular concern to the auditor as, by their nature,
there may not be any physical evidence to support them and they are prone to
inaccuracy. They are also subjective and therefore prone to management bias. If
the directors wished to manipulate the accounts in any way, accounting estimates
are an easy way for them to do this. The auditor must take care when auditing
these estimates, to ensure that these have not been the cases.
a. What are accounting estimates as per BAS 8? Give 5 (five) examples.
3+3=6
Answer: An approximation in a financial statement of the amount to be
credited or debited on items for which there is no precise means of
measurement, such as depreciable assets or provisions for a loss from a
lawsuit. Estimates are based on the judgment and specialized knowledge
derived from past experience.
Examples:
 inventory valuations
 depreciation method and useful life
 all provisions and contingent liabilities
 irrecoverable debts and allowances for receivables
 tangible asset valuations where revaluations have occurred

b. What are the four methods for auditors as per BSA 540 to carry out audit of
accounting estimates? Give examples of audit steps for each method. (Sy-10)
3+3=6
c. What are the areas that auditor should consider in evaluating the assumptions
on which the estimates are based in the preparation and presentation of financial
statements by the management? (Sy-9)
3
Ans: The following areas that auditor should consider in evaluating the
assumptions on which the estimates are based in the preparation and presentation
of financial statements by the management:
a) Reasonable in light of actual results in prior periods;
b) Consistent with those used for other accounting estimates
c) Consistent with management’s plans which appear appropriate

2. a. Define population as regards to Audit Sampling.

6
Ans: Audit sampling involves the applications of audit procedures to less than
100% of the items and all sampling units have a chance of selection. The entire set
of data from which a sample is selected and about which an auditor wishes to
draw conclusion is known as population.

Dec’14
37
 Assurance

2. With the advancement in the field of technology, many easy to use and
more efficient CAATs tools are available. Accountants of the present business
world have found these tools very much convenient to use as the new
upcoming tools come with the guide book.
a. What is CAAT? What are the advantages and disadvantages of using CAAT
by auditors?3+5=8
Ans: CAATs are the application of auditing procedures using the computer as
an audit tool. The overall objectives and scope of an audit do not change when
an audit is conducted in a computerized environment. The use of the
computer for audit work is known as CAATs. There are two types of CAATS
are used in audit work such as audit software and test data.

Advantages of using CAAT:

 Easy access the data on a computer system without help of the client
 Test the reliability of client software
 Increase the accuracy of audit tests
 Perform audit test more efficiently

Disadvantages of using CAAT

 CAATS can be expensive and time consuming
 Client permission and co-operation may be difficult
 The audit team may not have sufficient IT skills
 Data may be corrupted during the application of CAATs
 The audit team may not knowledge about CAAT

b. What is Test Data (Sy-4)? Explain how Test Data are used for assurance.
3+3=6
Ans: How Test Data are used for assurance:
The stages in the use of test data are as follows:
 Note control in the client system
 Decide upon test data, the option include dummy data & real data
 Run the test data
 Compare result with those expected
 Conclude whether controls are operating properly
Dec’18
(a) Appropriateness is the indicator of quality and reliability of the audit
evidence. What are the generalized indicators that may help auditors to assess
the quality of audit evidence?(Sy-1)4
(b) Define following terminologies commonly used in audit engagement: i)
Misstatement. ii) Error. iii) Tolerable misstatement. iv) Tolerable rate of
deviation. (P-174 & 176) 6
38
 Assurance

Management representations (Chapter-12)

Q01. Who are the management? (P-189, S-1)

Q02. Identify the purposes of management representation letter.
Representations may also be required for:
General matters:
o Auditors to confirm in writing that management has fulfilled its
responsibility for the preparation of the financial statements in
accordance with the applicable financial reporting framework,
including where relevant their fair presentation, as set out in the terms
of the audit engagement

o Auditors to confirm in writing that management has provided the

auditor with all relevant information and access as agreed in the terms
of the audit engagement

o Auditors to confirm in writing that management has recorded and

reflected all transactions in the financial statements

o Audit evidence: Representations relating to responsibility for the

financial statements, the auditors may wish to relay on management
representations as audit evidence.
Q03. When management representations are required?
 When the facts are a matter of management intention
 When the matter is judgmental
Q04. When the auditors receive the other written representation letter what
matters to be considered? (P-190, S-2) or, Which matters to be included in other
written representations?
Q05. When the representations received do not agree with other audit
evidence obtained, in this case what should be done by the auditors? (P-190, S-
2)
Q06. Management representations are the statements made by the
management to the auditors during the course of the audit. Whether it is true
or false?
Q07. All management representations should be recorded in writing. Whether
it is true or false?
Q08. Which two of the following are purposes of a management
representation letter?
 Confirmation that management has received the signed audit report
 Confirmation that management acknowledges its responsibility for
the system of internal control in operation at the company.

39
 Assurance

 Confirmation of all representations made by management in the

course of the audit
 Confirmation that management has approved the financial statements
 Confirmation that management understands the terms of the
engagement

Reference to BSA
The purpose of this Bangladesh Standard on Auditing (BSA) is to establish
standards and provide guidance on the use of management representations as
audit evidence.
General matters (BSA 580.3)
The auditor should obtain evidence that management acknowledges its
responsibility for the fair presentation of the financial statements in
accordance with the relevant financial reporting framework, and has approved
the financial statements.

Audit evidence (BSA 580.4)

The auditor should obtain written representations from management on
matters material to the financial statements when other sufficient appropriate
audit evidence cannot reasonably be expected to exit.
(BSA 580.11)
A written representation is better audit evidence than an oral representation
and can take the form of:
 A representation letter from management
 A letter from the auditor outlining the auditor’s understanding of
management’s representations, duly acknowledged and confirmed by
management
 Relevant minutes of meetings of the board of directors or similar body
or a signed copy of the financial statements.

Previous year’s questions:

June’11
5. What are management representations (Reference to BSA)? How does a
management representation work as audit evidence (Sy-2), Dec’17? When
management representations are required (Sy-3)?

June’13/Dec’17
5. The auditor should obtain written representations from management on
matters material to the financial statements when other sufficient appropriate
audit evidence cannot reasonably be expected to exist.
40
 Assurance

a. What does a Letter of Representation provide as audit evidence?

5
Ans: Management representations provide evidence of management’s
acceptance of responsibility and accountability for the preparation of the
financial statements and implementation of internal controls. The reliable
management representation provides as suitable evidence. The reliability of
management representation depends on management competence, integrity &
due care.

b. What actions should the auditor take when no other evidence is available
and internal confirmations form significant basis of the opinion? (page-213),
Dec’17 5

c. What actions should the auditor take when management refuses to provide
internal confirmations (representations)?
5
Ans: ISA 580 states that when management refuses to provide necessary
representations or internal confirmation, the auditor should qualify or
disclaim his or her opinion. In such circumstances, the auditor’s confidence in
management may be undermined and the auditor may not issue a qualified
opinion. Alternatively, to be issued a disclaimer opinion or withdrawal from
the engagement when management refuses to provide internal confirmation.

d. What should auditors do when they receive management representations?

(Sy-4) 5

June’14
2. b. Peter is working on the audit of Alpha Ltd. In the prior year, there had been a
large amount of obsolete inventory at the year-end due to a decision by the
management to amend the design of their major product to improve safety aspect.
Peter wants to ensure that management has no intention of making any similar
amendment to their products this year.

(i) What type of audit evidence peter should collect to ensure the
management’s intention and why?
6
Answer: In this scenario, the auditor, Peter wants to know the future intension
of the management. Management can express their intension by letter of
representation. There is no other source of evidence to know the management
intension. So, the auditor should obtain written representation mentioning

41
 Assurance

that the management has no intension of making any amendments to the

products that would impact on existing inventory.
Dec’16

3.b. What are the general matters that BSA 580 requires auditors to confirm in
writing? What are the auditors’ duties if management does not provide one or
more of the requested written representations?
4+4

42
 Assurance

Versatile Educare Academy

Assurance
Professional stage: Knowledge Level
Substantive procedures-key financial statement figures (Chapter-13)
UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

Q01. What are the key areas for testing tangible non-current assets? (P-199, section
overview)
Q02. What are the key areas for testing intangible non-current assets? (P-199,
section overview)
Q03. What are the key areas for testing investments? (P-199, section overview)
Q04. What are the reasons of tangible non-current assets in the financial statements
being misstated? (P-199, S-1.1)
Q05. What are the objectives of audit tests in respect of non-current assets? (P-199,
S-1.1)
Q06. What are the sources of information for testing tangible non-current assets?
(P-199, S-1.1)

Q07. What are the reasons of intangible non-current assets in the financial
statements being misstated? (P-202, S-1.2)
Q08. What are the sources of information for testing intangible non-current assets?
(P-202, S-1.2)
Q09. What are the reasons of inventory in the financial statements being
misstated? (P-202, S-2)
Q10. What are the sources of information for testing inventory? (P-202, S-2)
Q11. When net realizable value is likely to be less than cost? (P-204, S-2.2)
Q12. Which one of the following procedures should be undertaken to the existence
of inventory?
 Follow up of inventory count sheets
 Cast the final inventory sheets
 Attendance at inventory count
 Trace items of inventory to purchase invoices
Q13. What are the reasons of receivables in the financial statements being
misstated? (P-206, S-3)
Q14. What are the sources of information for testing receivables? (P-206, S-3)
Q15. What are the methods of confirmation from customers and what are these?
(P-207, S-3.1)
Q16. Which one of the following procedures should be undertaken to confirm the
rights and obligations of trade receivables?
a) Review of cash received after date b) Tests of controls over ordering c)
Receivables direct confirmation d) Recalculation of specific allowance for doubtful
debts
43
 Assurance

Q17. What are the reasons of cash and bank balances in the financial statements
being misstated? (P-212, S-4)
Q18. What are the sources of information for testing cash and bank balances? (P-
212, S-4)
Q19. What are the reasons of payables in the financial statements being misstated?
(P-215, S-5)
Q20. What are the sources of information for testing payables? (P-215, S-5)
Q21. What are the reasons of long-term liabilities in the financial statements being
misstated? (P-216, S-6)
Q22. What are the sources of information for testing long-term liabilities? (P-216, S-
6)

Previous year’s questions:

Nov-Dec’2010
7. A Ltd has a number of long and short terms payables, accruals and
provisions in its Balance Sheet. 7
Required:
Describe the audit procedures you would apply to the following item
including those relating to disclosures.
A 10-years bank loan with a variables interest rate and an overdraft (a bank
statement with a debit balance on the bank statement) both from the same
bank.
Ans: Audit procedure of 10-year bank loan and bank overdraft:
1. Authorization for the loan and overdraft should be checked.
2. The details of contracts with the bank and any relevant correspondence
should be examined.
3. Bank confirmation should be examined
4. Analytical procedures should be applied for interest charged.
5. The bank reconciliation should be checked.
6. Check cut off procedure.
7. The auditors should ensure that appropriate disclosures are made in the
notes to the accounts.

Nov-Dec’10
9. What does assurance provider check if perpetual inventory counting is
used? What will be the Audit plan for perpetual inventory count (page-204)?
In what circumstances is net realizable value likely to be less than cost? (Sy-11)

44
 Assurance

Dec’11
8. Complete the table, showing which tests on tangible non-current assets is
designed to provide evidence about which financial statement assertion:
Completeness, Existence, Valuation Rights and obligations
(a) Inspect assets (b) Verify the valuation certificate (c) Refer to the title deeds
(d) Compare assets in ledger to non-current asset register (e) Review
depreciation rates (f) Verify material on self constructed assets to invoices (g)
Examine invoices after the year end (h) Review repairs in nominal ledger.
10
June’11
7. Describe the audit procedures you should apply to the following items in
the balance sheet of a limited company:
16
Stock of finished goods, Accounts receivables, Bank Balances, Fixed deposits
May’13
4. Inventory is often the largest item in the current assets category, and must
be accurately counted and valued at the end of each accounting period to
determine a company’s profit or loss. Entities whose inventory items have a
large unit cost, generally keep a day to day record of changes in inventory
(perpetual inventory method) to ensure accurate and on-going control. Entities
with inventory items of small unit cost generally update their inventory
records at the end of an accounting period or when financial statements are
prepared (periodic inventory method). The value of an inventory depends on
the valuation method such as First-In, First-Out (FIFO) or Last-In, First-Out
(LIFO) method.
a. What are the major risks of misstatement of the inventory value in the
financial statements? (Sy-10)
5
b. What are the principal reasons for auditors’ attendance at annual physical
inventory (stocktaking)?
5
Ans: The principal reasons for auditors’ attendance at annual physical
inventory to obtain evidence about existence of the stocks. Attendance also
provides evidence in relation to:
a) Completeness and valuation of stocks
b) ‘Cut-off’ for recording stock
c) Design and operation of entity’s internal control relating to stocks.
c. Which of the following analytical procedures is most applicable to
inventory; comparison of sales of current and prior years or comparison of

45
 Assurance

gross profit ratios of current and prior years? Why?

5

Ans: Analytical procedures for comparison of gross profit ratios of current

and prior years is most applicable to inventory because the amount shown for
inventory affects cost of sale and the gross profit ratio. If significant
fluctuations are incurred in this ratio a detailed investigation to be done in
connection with the audit of inventory.
d. Why do auditors normally record result of their test counts to compare with
the final inventory listing during an inventory observation?
5
Ans: The auditors normally recorded result of their test counts to compare
with the final inventory listing during an inventory observation to provide
assurance that client’s counts (inventory balance) were not changed between
the time they were made and the time the final inventory listing was prepared.
Dec’14
1. b. What is the objective of external confirmation? What do you understand
by the term external confirmation? Describe negative confirmation and
positive confirmation. Does verbal response constitute an external
confirmation? Justify. 8
Ans: External confirmation: External confirmation means audit evidence
obtained by a direct written response to the auditor from a third party in
paper form or by electronic or other medium.
Objective of external confirmation: The objective of external confirmation is
to design and perform to obtain relevant and reliable audit evidence. As per
the International Standard on Auditing (ISA) the auditor’s use the external
confirmation as audit evidence.

Negative confirmation: Negative confirmation means a response is required

only if there is a discrepancy with the auditor’s record.
Positive confirmation: Positive confirmation means that the customers are
required to respond to the auditor against an auditing inquiry whether the
customer's records do or do not similar with the auditor's records.
June’14
(ii) As auditor of ABC Ltd, what are the key issues to be considered during
verification of inventory? (Sy-10)
7
June’16
4. c. Your management asked you to develop a policy for managing petty cash fund
appropriately. State five control points that you should incorporate in the policy to

46
 Assurance

establish proper control over the petty cash fund. (P-121)

4
June’17
3 (b) Describe substantive procedures you should perform in an assurance
engagement at the year end to confirm each of the following for plant and
equipment: (Page-200)
i. Additions ii. Disposals

June’18
3. (c) Hassan is working on the audit of Hussein Ltd, a large supermarket
chain. He has been allocated the audit of non-current assets. One aspect of this
audit is the fact that the company has built four new super stores during the
year, which have been capitalized into non-current assets. The key objectives
he is working on are that all the relevant costs have been capitalized
(completeness) and that the self-buil1 stores are valued correctly at cost
(valuation). How will Hassan confirm these two assertions? (P-201)
5

June-19
9. a) While checking cash and bank balances, care must be taken to ensure that
there is no window dressing, by checking cut-off carefully.
How companies may attempt to overstate the liquidity position and what
should the auditors do in this regard?
5
b) Poly is carrying out a non-current asset assurance engagement at Mahmud
Company Limited (MCL). MCL owns the property from which it operates and
has a number of non-current assets comprising Plant and Machinery (replaced
3 years ago), industrial vehicles for moving inventory between locations at it's
premises, cars (used by staff as company cars), office furniture & finings and
computers.
How will Poly conclude that the non-current assets declared in the financial
statements are owned by the company and are valued properly?
10

10. Long-term liabilities comprising debentures, loan stock and other loans
repayable at a date more than one-year after the yearend may constitute
substantial amount in the financial statements and thus are required to be
tested carefully. What are the different possible ways to confirm that long-
term liabilities are reported properly? 10

47
 Assurance

Versatile Educare Academy

Assurance
Professional stage: Knowledge Level
Codes of professional ethics (Chapter-14)
UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

Q01. Why the accountants require ethical codes? (P-227, section overview)
Q02. What are the advantages of principles-based guidance? (P-227, S-1.3)
Q03. What contains in the IFAC code? (P-228, S-2) (Dec’15)
Q04. What are the fundamental principles of IFAC code, explain? (P-228, S-2.1) (Dec’15)
Q05. Where no safeguard is available of the assurance provider, in such situation what
will be appropriate decision? (P-229, S-2.2)
Q06. What do you know about independence of mind and independence in
appearance? (P-229)
Q07. How many threats are available as per code of ethics? (P-229, S-2.3)
Q08. What ate the safeguard behind the threats as per code of ethics? (P-229, S-2.3)
Q9. Give some examples of safeguards created by the profession, legislation or
regulation. (P-230)
Q10. Give some examples of safeguards created by the work environment. (P-230)
Q11. Which two of the following statements are correct?
 Accountants must have ethical codes because people relay on accountants.
 A set of ethical principles gives protection to accountants as it means they are
all working to the same guidelines.
 Rules based codes provides better protection to users of accountancy services
because every potential situation arising is covered by them
Previous year’s question:
Dec’11
6. The Code of Ethics for Professional Accountants (IESBA Code) establishes
ethical requirements for professional accountants. The fundamental principles for
professional ethics for professional accountants provides a conceptual framework
that professional accountants shall apply to identify threats to compliance with the
fundamental principles; evaluate the significance of the threats identified; and
apply safeguards, when necessary, to eliminate the threats or reduce them to an
acceptable level.
a) What are the fundamental principles a Chartered Accountant shall comply
with? (Sy-5) 5

48
 Assurance

b) What are the threats that relationships or circumstances could compromise a

member’s compliance with the rules? (Sy-7)
5
c) What are the actions or others measures to be taken to eliminate threats or reduce
them to acceptable levels? (Sy-8)
5
May’12
9. What are the general sources of threat identified by the IFAC Code? Give one
example against each source? (Sy-8)
10
Dec’12
5. ABC & Co., is a Chartered Accountancy firm and its engagement partner for
XYZ Company has been in place for approximately eighteen years and his son has
just accepted a job offer from XYZ Company as Chief Financial Officer. If ABC &
Co. is appointed as internal and external auditors, then XYZ Company has
suggested that the external audit fee should be renegotiated with at least 20% of
the fee being based on the profit after tax of the company as they feel that this will
align the interests of ABC & Co. and XYZ Company. From the given information,
mention the ethical threats which may affect the independence of ABC & Co. in
respect of the audit of XYZ Company, and for each threat explain how it may be
reduced. 15

Ans: In the following table mention the ethical threats which may affect the
independence of ABC & Co. in respect of the audit of XYZ Company, and some
mitigation points which may be reduced the threat.
SL # Threat Mitigation
01. Familiarity threat (Due to long The engagement partner & audit team
time engagement with the XYZ should be rotated from one period to
Co. for eighteen years) another.
02. Self-interest threat (The audit The CFO can influence the financial
partner’s son got a managerial statements and should engage another
offer for the position of CFO independent partner who are not
relation with the CFO
03. Self-review threat (Due to act an The engagement partner of external
internal auditor as well as external audit and internal audit should be
auditor) separate.
04. Another self-interest threat (Due The assurance firm should not be able
to contingency fees) to accept contingent fees
May’14/June’17
4. b) What do you understand by independence of mind, independence in fact and
independence in appearance? (Sy-7) Differentiate these three terminologies used in
assurance engagement. 6

49
 Assurance

Ans: Independence in fact: Independence in fact exists when the auditor is

actually able to maintain an unbiased attitude throughout the audit.
June’15
5. a. What are the Code of Ethics for Chartered Accountants? Write the
fundamental principles pursued by Chartered Accountants in the context of
ICAB Code of Ethics. (Sy-4) 3+4=7
Ans: The code recognizes that the objectives of the accountancy profession are
to work the highest standard of professionalism, to attain the highest level of
performance. These objectives require four basic needs to be meet:
a) Credibility: In the whole of society there is a need for credibility in
information system.
b) Professionalism: There is a need for individuals, who can be clearly
identified by clients, employees, and other related parties as professional
person.
c) Quality of services: There is a need for assurance that all services obtained
from a professional accountant are carried out to the highest standards of
performance.
d) Confidence: users of services of professional accountants should be able to
feel confident that there exists a framework of professional ethics.
b. What are the threats, as regards independence, encountered by Chartered
Accountants? What are the safeguards to minimize those threats? (Sy-7 & 8)
4+4=8
Dec’15
5. (a) What are the key ethical codes which ICAB members are bound to
follow? 7
Ans: Accountants require an ethical code because they hold position of trust
and people rely on them. Professional Accountant also works in the public
interest. ICAB members are subject to ICAB guidelines which are influenced
by IFAC. The key ethical code is independence in all respect. Independence
means independence of mind and independence in appearance. The degree of
independence required is the highest for an audit engagement. The
professional accountant should not engage in any non-audit activities.

June’16
5. a. What are the advantages of principles based framework over a system of
ethical rules? (P-227) (Sy-2)
6

b. There are two main approaches to a code of professional ethics: a rule based
ethical code and a code based on a set of principles. Indicate whether the

50
 Assurance

following statements are “true” or “false”.

(Page-258) 6
i. ICAB's Code of Ethics is principles based.
ii. A code based on a set of rules requires accountants to evaluate and address
threats to independence.
iii. A code based on a set of principles rather than rules is more flexible in a
rapidly changing environment.

5. c. The ICAB Code sets out a framework for professional accountants to

follow when faced with an ethical conflict. Explain.
8
Ans: The ICAB Code sets out a framework that professional accountants can
follow to resolve ethical conflict problems. It states that the professional
accountant should consider:

 The relevant facts

 The relevant parties
 The ethical issues involved
 The fundamental principles related to the matter in question
 Established internal procedures
 Alternative courses of action

The accountant should consider which is the course of action that most
appropriate in line with the principles.
Dec’17
5. b) Give an account of the available threats as identified in the IESBA
(International Ethics Standards Board for Accountants) Code of Ethics that
accountants should bear in their minds while at work. (Sy-7)
7

c) Write briefly about the fundamental principles as per IESBA (International

Ethics Standards Board for Accountants) Code of Ethics. (Sy-4)
7

Dec’18
10. Like other professional group, professional accountants are also expected
to be guided by some ethical codes in their respective work fields. IESBA, a
unit of IFAC, has promulgated a set of codes applicable for the professional
accountants. ICAB, as a member of the IFAC, has adopted the unedited
version of the IES codes and has circulated for its member to follow in their
respective field of work.

51
 Assurance

a) Brave & Co. Chartered Accountants, a partnership firm, has been appointed
auditor of Glittering Paints Bangladesh ltd. (GBPL) in its recently held AGM
against fees of BDT2.5 million. GBPL is one of the highly acclaimed listed
companies in the country with shares being traded through Stock Exchanges.
Mr. Brave, the Engagement Partner to the subject audit is a member to the City
Golf Club (CGC) where among others the CEO of GBPL is a member too.
Incidentally, both Mr. Brave and the said CEO are members of the CGC
Development Committee for many years. As, a result, apart from their
auditor-client relationship, they have many other common social interactions
together.
How would you evaluate this situation keeping in view the ethical codes
applicable to professional accountants in practice?
6
(b)

11. a) In the recent promulgation of the Code of Ethics applicable for

professional accountants, Independence has been taken out of the list of
fundamental principles. But it remains at its own merit as an ethical code for
the professional accountants.

What is your comment about its position beyond the list of fundamental
principles? 5

b) Explain in brief, whether Chartered Accountants can accept contingent fees

and referral fees, with reference to ethical codes applicable for members of the
ICAB. 5

June-19
7. a) The root of the growth of business activities in the today's world lies in
the charismatic use of advertisement and promotion activities.
What are the provisions cited in IESBA Codes of Ethics and ICAB Bye Laws as
regards marketing of professional services?
5

52
 Assurance

Versatile Educare Academy

Assurance
Professional stage: Knowledge Level
Integrity, Objectivity and independence (Chapter-15)
UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

Q01. What do you know about integrity, objectivity and independence? (P-
237, S-1)
Q02. Why do independence and objectivity matter so important? (P-237, S-1.1)
(June’17)
Q03. What can the auditor do to safeguard objectivity? (P-237, S-1.1)
Q04. A self-interest threat might arise a great number of areas, which are
these? (P-238, S-2.1)
Q05. Definitions: Financial interest, direct financial interest, indirect financial
interest, immediate family, assurance team. (P-238, S-2.1.1)
Q06. Which parties are not allowed to own direct or indirect financial interest
in a client? (P-238, S-2.1.1)
Q07. What are the safeguards beyond the self-interest threat? (P-238, S-2.1.1)
(June’17)
Q08. Give few examples of close business relationship. (P-239, S-2.1.2)
Q09. What safeguard might be taken in case of dual employment? (P-240, S-
2.1.3)
Q10. What are the safeguards of an assurance team in respect of loans and
guarantees? (P-241, S-2.1.7)
Q11. What are the key areas/situations of self-review threat? (P-243, S-2.2)
Q12. What are the safeguards should be taken against the following threats:
a) Service with assurance client
b) Preparing accounting records and financial statements
c) Valuation services
d) Taxation services
e) Information technology services
Q13. When an advocacy threat arises and what is it’s safeguard? (P-247, S-2.3)
Q14. When familiarity threat arises? (P-247, S-2.4)
Q15. When intimidation threat arises? (P-249, S-2.5)
Q16. In each of the following cases, indicate the principal threat that the
assurance firm is facing:
a) Mr. Z recently resigned as finance director of A Ltd. Mr. Z joined the
assurance firm after his notice period of six months.

53
 Assurance

b) A Ltd. has suggested to the engagement partner that a qualified audit

report would be unacceptable in the current year because the company is
considering floating.
c) A Ltd. has requested that the audit team should not be changed from the
previous year as they got on well client staff.
Q17. The ICAB code sets out a framework that professional accountants can
follow when seeking to resolve ethical conflicts. What are these? (P-250, S-3)
Q18. Match the ethical principle with the following description.
a) Integrity b) Objectivity
i) Not allow bias, conflicts of interest or undue influence of others to override
professional or business judgments.
ii) Be straightforward and honest in all business and professional
relationships.
Q19. Which of the following services would it be least appropriate for a firm to
carry out for an audit client?
a) Preparation of tax computation
b) Provision of tax advice
c) Provision of internal audit services
d) Preparation of the financial statements for a listed company.

Previous exam questions:

May’14
4. Assurance engagements are designed to enhance intended users’ degree of
confidence about the outcome of the evaluation or measurement of a subject
matter against criteria. Auditors shall conduct the audit of the financial
statements of an entity with integrity, objectivity and independence.
Engagement personnel shall promptly notify the team leader of circumstances
and relationships that create threats to relevant ethical requirements. The
engagement leader then in consultation with the engagement partner will
propose a resolution by applying the framework for resolving threats to their
assurance engagement.
a) What do you mean by integrity, objectivity and independence in assurance
engagement? (Sy-1)6
c) The ABC & Co., an audit firm, is currently in the process of accepting a new
client. A review team is considering a number of ethical issues that might hinder
acceptance. Write down the meaning, threat type and applicable safeguards for the
following threats as per following format: 3x6= 18
Threat Meaning Threat Type Applicable Safe

Some firms tendered Firm quotes lower fees Self-interest ** Comply with all applica
low Billing for an assurance service guidelines.
** Maintaining record tha
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 Assurance

area covered at the time of

Assurer provides Assurance firm Self review ** Second partner review
valuation service to performs valuation & it ** Ensure that client
same client will be included in the responsibility for valuation
FS ** Using separate partner.
Assurer recruits senior Recruiting senior Familiarity ** Assurance provider m
management for the management for client and self- management decision for t
client that creates threat to interest ** Assurance provider ma
independence list candidate but not selec
The client is proposing Fees calculated on a Self-interest ** Firm should not ente
for a contingent fee outcome result basis arrangement which fees ar
Clients threaten to sue When the clients Intimidation ** Disclose the matter
the assurance firm threaten, the assurance Committee
firm falls in threat to ** Involve additiona
independence. accountant.
** Removing specific affe
from the engagement.
Assurer accepts gifts If assurance provider Self-interest ** Unless the value of a
and accepts gifts and insignificant, a firm or a
hospitality from the hospitality from the assurance team should not
client client, it creates threat
to independence
Dec’14
5. Write down short notes on following terminology:
b) Advocacy Threat.
5
June’15
5. c. Can a Chartered Accountant accept contingent fee, referral fee or
commission? Explain in brief with reason. (P-242)
3
Dec’16

6. a. Why is independence so important to the external auditor (Sy-2)? Why

does lack of independence in appearance jeopardize auditor’s independence in
fact? 3+3
Ans: Auditor must be independent in fact as well as in appearance. It is
essential for auditor to maintain independent during at the time of fulfilling
his responsibilities. Independence exists when auditor actually maintains an
unbiased attitude throughout the audit. If auditor is not really independent in
his action, the value of the audit function will be lost. So, it is obvious that a
lack of independence in appearance takes away the credit of independence in
fact.
55
 Assurance

b. Explain the terms “Threats” and “Safeguards” with reference to maintaining

professional Objectivity and Independence. What is acceptable threat?
4+2
Ans: While the assurance provider conducting audit and other assurance
services may encounter certain circumstances could prevent from complying
with fundamental principles. Such circumstances are called threat.

When an assurance provider faces any threat he needs to eliminate the treat or
reduce to an acceptable level. Such procedures are called safeguards.

A threat is acceptable when a reasonable compliance with the fundamental

principles was compromised. When any threat appears to the assurance
provider, it is his responsibility to eliminate or reduce to an acceptable level.
On the other hand, he will be professionally liable for non-compliance.

c. Under each of the following circumstances what kind of threats auditor may
encounter and what should be the safeguards to maintain professional
objectivity and independence? 2x4
i. Mr. Zaman, an audit staff of Zara & Co, Chartered Accountants, is working
in a client as audit supervisor. On the occasion of Eidul-Fitr, the client sent him
a gift box of their products valuing Taka 10,000.

Ans: Threat type: Offering gift to Mr. Zaman, a staff of the audit firm, falls
under self-interest threat.
Safeguard: Since the amount of gift is significance, it can influence not to be
independence in performing audit. In this case, the best safeguard for Mr.
Zaman is not to accept the gift.

ii. Lara & Co, Chartered Accountants, is the external auditor of PK Limited.
Mrs. Kelly, a senior audit staff of Lara & Co, is a daughter of Marketing
Director of PK Limited. The engagement partner of the audit firm is planning
to depute Mrs. Kelly to PK Limited to lead the field work of the audit.

Ans: Threat type: If Mrs. Kelly, daughter of Marketing Department of PK

limited and a senior audit staff of Lara & Co, is lead to the audit team and be
engaged to perform the audit of PK Limited, the familiarity threat may arise.
Safeguard: Mrs. Kelly may not be able to apply professional skepticism to
perform her duties. Therefore, the best safeguard to reduce the threat of this
instance would be not to engage her to carry out the audit work of PK Limited.

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 Assurance

iii. Farah & Co, Chartered Accountants, is the auditor of KYC Limited. The
company has decided to go for IPO next year to raise money from public to
finance their future expansions. Recently they asked Farah & Co to prepare
their financial statements along with continuing to act in the capacity as
external auditor.

Ans: Threat type: If auditor undertakes the service of preparation of financial

statements in addition to his current role, there is possibility to create self-
review threat.
Safeguard: Auditor needs to take steps to eliminate or reduce the risk to the
acceptable level. The following measures should be taken to reduce the treat:
a) Using separate staff members
b) Implementing polices and procedure to prohibit such services.
c) Accounting entries should be done by the client.

iv. Sara & Co, Chartered Accountants has received an offer from MM Limited
to conduct their audit on the fees which is 12% of profit before tax.

Ans: Threat type: Engagement fee based on the amount of profit before tax
falls under the category of self-interest threat.
Safeguard: A firm should not enter into any fee arrangement for audit under
which the amount of fee is contingent. Sara & Co should ask the client to fix
up the fees based on the work volume of the audit.
June’17
5. (d) Accountants in business may face more pressure to behave unethically. Cite two
such examples which accountants usually face while carrying out their duties.
5
Ans: It is important to remember that accountants in business have to
maintain same fundamental principles as accountants in practice. However an
accountant in business may faces more pressure from the management to act
unethically often accountant in business guided by the management as to the
treatment of certain accounts in transactions in the interest of a group of
people. Examples are which accountants usually face while carrying out their duties:
1) Mislead the auditors or regulators
2) Issue or be associated with published report that materially represents the
fact. Such as statement of tax computation.

Dec’17
5. Like all other professionals, accountants are also expected to work under
certain ethical codes. In the light of such expectation, please write your
understanding on the followings:
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 Assurance

ABC & Co. Chartered Accountants has accepted the appointment as auditor of
Petro Chemical s. Ltd. (PCL), a listed company whose shares are traded
through both Stock Exchanges. The PCL being a good company, the related
shares enjoy very high demand in the market. The younger brother of ABC's
Engagement Manager on this engagement is a regular trader of shares in the
secondary market.
Please write about the firm's expected standpoint in such an engagement.
5

Ans: Under the given circumstances, it appears that the engagement manager
being brother of a regular trader of shares in the capital market which may
encounter a conflict of interest. Being engagement manager of the audit team,
it is natural that all financial sensitive information come into his possession
and he may likely to be used such information and make earn unusual gain
from trading shares. This situation is a substantial threat of self- interest.
In the given situation it may not be easy to identify the threat. With a view to
maintain fundamental principles it is imperative that firm’s build a process for
checking prior to involving a team to a particular engagement.
June’18
5. (b) Describe in brief the following terminologies along with related threats
and safeguards as they are used in discussing about ethics in accountants'
business: 9
i) Conflict of interest. (P-261) ii) Second opinion. iii) Gift and hospitalities. (P-
241)

Ans: Second opinion: Situations where a professional a accountant in public

practice is asked to provide a second opinion on the application of accounting,
auditing, reporting or other standards or principles to specific circumstances
or transactions on behalf of an entity that is not existing client may create
threats to compliance with the fundamental principles.
For example, there may be threat to professional competence and due care in
circumstances where the second opinion is not based on the same set of facts
that were made available to the existing accountant or is based on inadequate
evidence.

5. (c) Sayema is a qualified accountant. She has recently moved out of practice
and taken up the position of financial controller of a small, non-listed
company, Lavender Lane Ltd. The company has a short-term cash flow
problem. Sayema was recently called into the board meeting and asked if she
could defer some income from the previous financial year so as to influence
when the tax (both VAT and corporation tax) would be due on those sales. The

58
 Assurance

directors were insistent that such deferral was necessary and that she should
consider this request more in the nature of an order. Comment on the
following options available to Sayema: (P-252) 6
(i) Report her concerns to the audit committee of the board of directors.
(ii) Take advice from ICAB.
(iii) Take advice from legal advisor's

6. Strong & Partners, Chartered Accountants has very good reputation in the
market for their good quality professional services on various matters. Over
the years, they were a regular advisor to Rupali Fibres Ltd. to provide
consultation on their investment and various financial matters. On a specific
engagement in 2016, they had developed Standard Operating Procedures
(SOP) on financial management and financial reporting matters for Rupali
Fibres Ltd. The company management on the ground of their long-standing
relationship appointed Strong & Partners as its auditor in the respective AGM
for the year ending 31 December 2018.
Evaluate this situation with respect to applicable code of ethics, as adopted by
1CAB, which Strong & Partners should take into consideration.
8

59
 Assurance

Versatile Educare Academy

Assurance
Professional stage: Knowledge Level
Confidentiality (Chapter-16)
UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838
Q01. Why confidentiality is so important? (P-259, S-1)
Q02. What are the safeguards to be taken for confidentiality? (P-259, S-2)
Q03. When confidential information be disclosed? (P-260, S-3)
Q04. What are the safeguards against conflicts of interest? (P-261, S-3.1)
Q05. The principle of confidentiality is the duty to keep client affairs secret in
all circumstances. Whether it is true or false?
Q06. If an ICAB trainee is asked for information about a client by the police,
which four of the following actions would be appropriate?
a) Asking his engagement partner for advice.
b) Seeking legal advice.
e) Asking the police what authority they have to ask him.
d) Asking the client if he may talk to the police
e) Ringing the ICAB ethics line for advice
f) Answering the police without taking further action
Previous year’s questions:
Nov-Dec’10
11. Why is confidentially important (Sy-1)? Discuss the security procedures
which might be wise to prevent accidental disclosure of information? (Sy-2)
May’12
6. Section 220 of Code of Ethics says that the principles of objectivity impose
an obligation on all professional accountants not to compromise their
professional or business judgment because of biasness, conflict of interest or
the undue influence of others.
a. What should a professional accountant do where there is a conflict of
interest and what safeguards are available for a professional accountant in
different circumstances? 7
b. What should the professional accountant do if his request for consent to act
for another party having conflict of interest is refused by the client?
3
Ans: Where a professional accountant in public practice has requested consent
from a client to act for another party in respect of a matter where the
respective interests are in conflict and that consent has been refused by the
client, then the professional accountant in public practice must not continue to
act for one of the parties in the matter giving rise to the conflict of interest.
May’13
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 Assurance

2. Confidentiality is an assurance that information is shared only among

authorized persons or entities. Breaches of confidentiality can occur when data
is not handled in a manner adequate to safeguard the confidentiality of the
information concerned. Such disclosure can take place by word of mouth, by
printing, copying, e-mailing or creating documents etc. The classification of
the information should determine their confidentiality for determination of the
appropriate safeguards.
a. What is the importance of confidentiality (Sy-1)? What are the safeguards to
confidentiality? (Sy-2) 3+3=6
b. What should be your actions if you are compelled by the law that you have
to disclose confidential information of your client in the public interest? (Sy-3)
5
c. How will you manage conflict of interest in accepting an assurance client?
(Sy-4) 5
d. How an auditor can maintain ‘Chinese Walls’ to safeguard clients’
confidentiality? 4
Ans: The term 'Chinese wall' is a reference to the confidentially procedures
taken by a firm to prevent information obtained in the course of audit. Chinese
wall is a business term describing an information barrier within an
organization that prevented conflicts of interest. Firms are generally required
by law to safeguard client’s information to ensure that improper trading does
not occur. In the following ways the auditor may maintain ‘Chinese Walls’ to
safeguard clients’ confidentiality:
 Physical separation of teams
 Ensuring that there is no overlap between different teams
 Maintaining proper records and information disclosure barrier.
June-19
7. b) Discuss about the provisions as regards 'Custody of Clients' Assets' as per
IESBA Codes of Ethics.
5

61
 Assurance

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Assurance
Professional stage: Knowledge Level
ICAB Code of conduct
UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel, Dhaka.
Contact: 01726-891838

Chartered Accountants in Practice: (Schedule C, Part-I)

A Chartered Accountant in practice shall be guilty of professional misconduct
in the following cases: -
 If he places his professional service at the disposal of or enters into
partnership with an unqualified person or persons in a position to obtain
business of the nature in which chartered accountants engage by means
which are not open to a chartered accountant:

 If he allows any person to practice in his name as a chartered accountant

unless such person is also a chartered accountant and is in partnership
with or employed by him;
 If he pays or allows or agrees to pay or allow, directly or indirectly, any
share, commission or brokerage in the fees or profits of his professional
business, to any other person than a member of the Institute or a partner
or a retired partner or the legal representative or widow of a deceased
partner;
 If he accepts or agrees to accept any part of the profits of the professional
work of a lawyer, income-tax practitioner, auctioneer, broker or other
agent or any other person who is not a member of the Institute;
accepts a position as auditor previously held by another chartered
accountant without first communicating with him in writing;
 If he accepts an appointment as auditor of a company without first
ascertaining from it whether the requirements of section 144(6) of the
Companies Act, 1913 (VII of 1913), in respect of such appointment, have
been duly complied with;
accepts a position as auditor previously held by some other chartered
accountant in such conditions as to constitute under cutting;

62
 Assurance

 If he publishes or sanctions the publication of expressions of thanks or

appreciation by clients or promotes in any way laudatory notices with
regard to professional matters;
 If he solicits clients or professional work either directly or indirectly by
circular, advertisement, personal communication or interview or by any
other means;
advertises his professional attainments or services or uses any designation
or expressions other than chartered accountants on professional
documents, visiting cards, letter-heads or sign boards unless it be a degree
of a University established by law in Bangladesh or recognized by the
Government of Bangladesh or a title indicating membership of the
Institute of Chartered Accountants or any other Institution that has been
recognized by the Council;
 If he allows his name to be inserted in any directory, either in the main
section or in classified list whether printed or not so as to appear in a
leaded type or in any manner, which could be regarded as of an
advertising character;
 If he certifies any documents, exhibits, statements, schedules or other
forms of accountancy work which have not been verified entirely under
the personal supervision of himself, a member of his staff, another
member of the Institute or his partner;
 If he gives estimates of future profits for publication in a prospectus or
otherwise, or certifies for publication statements of average profits over a
period of two or more years without at the same time stating the profits or
losses for each year separately;
 If he charges or offers to charge, accepts or offers to accept in respect of
any professional employment, fees which are based on a percentage of
profits or which are contingent upon the findings or result of such
employment except in cases which are permitted under any regulations of
Government or requirements of law;
 If he engages in any business or occupation other than the profession of
chartered accountants unless permitted by the Council so to engage;
 If he allows a person not being a member of the Institute or a member not
being his partner to sign on his behalf or on behalf of his firm, any balance
sheet, profit and loss account, report or financial statements or any other
document required by his client;
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 Assurance

 If he discloses information acquired in the course of his professional

engagement to any person other than his client, without the consent of his
client or otherwise than as required by any law for the time being in force;
 If he expresses his opinion on financial statements of any business or any
enterprise in which he his firm or a partner of his firm has a substantial
interest, unless he discloses the interest also in his report;
 If he fails to disclose a material fact known to him which is not disclosed
in a financial statement, but disclosure of which is necessary to make the
financial statement not misleading;
 If he fails to report a material misstatement known to him to appear in a
financial statement with which he is concerned in a professional capacity;
 If he is grossly negligent in the conduct of his professional duties;
 If he fails to obtain sufficient information to warrant the expression of an
opinion or his qualifications are sufficiently material to negate the
expression of an opinion;
 If he fails to keep moneys of his client in a separate banking account or to
use such moneys for purposes for which they are intended;
 He has been guilty of any act or default discreditable to a chartered
accountant or a member of he Insatiate;

(i) contravenes any of the provisions of the Order or the bye-laws made
there under;
(ii)is guilty of such other act or omission as may be specified by the
Council in this behalf, by notification in the Gazette of Bangladesh;
 If he not being a fellow styles himself as a fellow;
 If he does not supply the information called for or does not comply with
the requirements asked for by the Council or any of its Committees;
 If he fails to invite attention to any material departure from the generally
accepted procedure of audit applicable to the circumstances;
 If he fails includes in any statement return or form to be submitted to the
Council any particulars knowing them to be false;
 If he permits his name or the name of his firm to be used in connection
with an estimate of earnings contingent upon future transactions in a
manner which may lead to the belief that he vouches for the accuracy of
the forecast;

64
 Assurance

 If he without first obtaining the permission of the Council associates

himself with or promotes any body of accountancy association or institute
of accountancy, etc., in Bangladesh

Members of the Institute in Service :(Schedule C, Part-II)

A member of the Institute (other than a member in practice) shall be deemed
to be guilty of professional misconduct in the following cases:
 If he pays or allows or agrees to pay directly or indirectly to any person
any share in he emoluments of the employment undertaken by the
member;
accepts or agrees to accept any part of fees, profits or gains from a lawyer,
a chartered accountant or broker engaged by such company, firm or
person or agent or customer of such company, firm or person by way of
concession or gratification;
 If he discloses confidential information acquired in the course of his
employment except as and when required by law or except as permitted
by the employee;
 If he includes in any statement, return or form to be submitted to the
Council any particulars knowing them to be false;
 If he not being a fellow styles himself as a fellow;
 If he does not supply the information called for, or does not comply with
the requirements asked for, by the Council or any of its Committees;

(i) contravenes any of the provisions of the Order or the Bye-laws made
there under;
(ii) is guilty of such other act or omission as may be specified by the
Council in this behalf, by notification in the Gazette of Bangladesh.
 If he has been guilty of any act or default discreditable to a chartered
accountant or a member of the Institute;
 If he without first obtaining the permission of the Council associates
himself with or promotes any body of accountancy, association or
institution of accountancy, etc. in Bangladesh;

65
 Assurance

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Assurance
Professional stage: Knowledge Level
Case Study
Address: UAC, 6/1 Arambagh, Engineers Building (Dalas Goli), Motijheel,
Dhaka. Contact: 01726-891838

Q01. Discuss the following situations in the context of the independence of the
auditor, showing clearly the principles involved:
(i) The audit manager in charge of the audit assignment of Andrew Co holds
1,000 $1 ordinary shares in the company (total shares in issue – 100,000). The
audit partner holds no shares.
(ii) The audit fee receivable from Janet Co, a private company is $100,000. The
total fee income of the audit firm is $700,000.
(iii) The audit senior in charge of the audit of Margot Bank Co has a personal
loan from the bank of $2,000 on which she is currently paying 13% interest.
(iv) The audit partner is responsible for two audit assignments, Harry Co and
Jean Co. Harry Co has recently tendered for a contract with Jean Co for the
supply of material quantities of goods over a number of years. Jean Co has
asked the audit partner to advice on the matter.

Answer 01:
(i) The audit partner has no shareholdings in the client company and so, all
other things being equal, he could be seen as giving an objective audit opinion.
However, the audit manager does have a shareholding in the client company
which, whilst not material to the company (at 1% of issued share capital),
could be material to the audit manager and certainly might be seen to
influence his ability to give an impartial opinion in relation to the company's
affairs. As the partner will inevitably have to rely upon the work completed
and controlled by the audit manager it is clearly undesirable for the manager
to have such a financial involvement in the client’s affairs.

(ii) The code suggests that under normal circumstances no more that 15% of
the gross fee income of a practice should come from any one client source. The
reason for this is that the fear of losing a major client, and thus a substantial
proportion of fee income, could prejudice the auditor’s objectivity and make
him more likely to bow to pressures from the client.
The audit fee from Janet Co contributes some 14.3% of the total fees income of
the practice and so is within the 15% recommended limit. It would be
necessary to consider whether any other fee income was received from this
66
 Assurance

client, as this could result in the 15% limit being exceeded. However, perhaps
the most important point to note is that the 15% is merely a guide. If the figure
is slightly exceeded it does not automatically mean that independence is
impaired and it must also be appreciated that even if the level of fee income is
below 15% the auditor’s independence could still be seen as being prejudiced.
The firm would need to keep this situation under constant review.

(iii) As another instance of where financial involvement in a client’s affairs

could be seen to impair an auditor’s objectivity, the code recommends that
between an auditor and a client, there should be no loans or guarantees in
respect of loans either way. Any such financial involvement could be seen to
impair the auditor's judgement either because of a client putting pressure on
the auditor or because of the auditor's own fear of suffering some financial
loss.
However, the code does allow for one exception in making the above
recommendation and that is where the loan is in the normal course of business
and on normal commercial terms', providing it is not to the engagement
partner (i.e. allowed for other audit staff members and practice partners). It is
part of a bank's normal business to make personal loans and if the rate of
interest being paid by the audit senior is the normal commercial rate of
interest, this transaction is unlikely to be seen as impairing the auditor's
independence.

(iv)The code also considers the problems that can be created when conflicts of
interest arise between different clients and between clients and the auditor's
own business interests. It concludes that every effort should be made to avoid
conflicts of interest arising and that it would be highly unethical for an
accountant to act in a situation where he knew that a conflict of interest
existed.
The situation described in the question is a good example of the type of
conflict of interest with which the code is concerned. The audit partner should
not advise Jean Co with regard to the contract tender received from Harry Co.
The auditor should explain the professional reasons why he is unable to act on
this occasion and suggest that Jean Co seek advice from another firm of
accountants.

Q02. You are the auditor of Elsams Co which operates a chain of retail shops
throughout the country selling a wide range of electrical goods. Each branch
has computerized cash registers linked into the central computerized sales,
receivables and inventory records. At the point of sale, the information keyed

67
 Assurance

in includes the following: branch reference, product number, inventory

location, unit selling price, date of Sale.
The file of inventory records is updated daily for sales and receipts. It contains
both cost (on a FIFO basis) and selling price information. The only regular
printed output is sales summaries analyzed by value, product and branch.

Required
Explain the ways in which you, as the auditor of Elsams Co, could use
computer programs to assist in the verification of inventory at the year-end,
and indicate their limitations.

Answer 02:
If physical inventory counting takes place at the year-end, it may be assumed
that the results of the physical inventory count are entered into, and valued
by, the computer. If so, then it is important to compare the results of the
physical count with the book quantities. The client may have a computer
program to make this comparison. It would be possible for the auditor to
check this comparison by re-performance using his own specially written
computer audit program or a computer audit package. The auditor’s computer
audit program or package, when run against the file of book inventory, might
also be used to carry out the following tasks.

 Select a monetary unit or random sample of book inventory items for

the auditor to check the physical count quantities.
 Select items with specific characteristics, e.g. no sale since a specific
date, unit selling price over a specified figure for further testing (test
counts or obsolescence enquiries).
 Prepare an aged analysis of inventory items.
 Re-perform calculation of the FIFO cost of each inventory item,
compare with the book inventory figure and print details if there is a
discrepancy.
 Cast the file of book inventory and print the total.
 Print details (product number, supplier, quantity, cost, date of supply)
for a sample of recent inventory receipts contained on the file of book
inventory for substantiation against suppliers’ invoices.
 Prepare summaries of inventory by branch, product number and
location to assist in analytical procedures on the inventory figure,
especially when comparing with previous years.
 Compare the unit FIFO cost of each inventory item with the unit
selling price and print details of all inventory items where unit selling
price is the lower to assist in evaluating net realizable value.
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Q03. Our firm is the auditor of Wandsworth Wholesalers Co, and you have
been asked to carry out audit checks on cut-off and verifying inventory
quantities at the year-end.
The company maintains details of inventory quantities on its computer. These
inventory quantities are updated from goods received notes, and sales
invoices. The company carries out inventory counts each month, when all the
fast moving and high value inventory is counted, and a third of the remaining
inventory is counted in rotation so that all items are counted at least four times
a year.
You attend the inventory count on Sunday 13 October, and a further inventory
count was carried out on
Sunday 10 November. The company's year-end was Thursday 31 October
20X1, and the inventory quantities at that date, as shown by the computer,
have been used in the valuation of the inventory. No inventory was counted at
the year-end.

Required: List and describe:

(a) The principal matters you should have checked and the matters you should
have recorded when you attended the company's inventory count on Sunday
13 October
(b) The tests you will perform in ensuring that sales and purchases cut-off has
been correctly carried out:
(i) At the date of inventory count on 13 October 20X1
(ii) At the year-end

Answer 03:
(a) I would have checked the following matters at the pre-yearend inventory
count.
(i) Counting staff, although not the usual custodians of the inventory were
competent. They were briefed before the count and given sufficiently detailed
written instructions. They were assigned marked areas to count.

(ii) No inventory was moved during the count. If inventory had to be moved,
then the count supervisor would make a detailed note of quantities, inventory
numbers and goods dispatched notes.

(iii) The inventory was clearly identified and well laid out. The counters
should work in an organized way, with one counting and one checking. Each
inventory line or area should be marked or tagged when counted to avoid any
double counting.

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(iv)Count sheets should be pre-numbered if possible, to ensure that they are

all returned. Numbers should be in ink, not pencil.

(v) Management (or internal audit) should perform test counts throughout the
inventory count. Any discrepancies should be investigated and resolved,
usually by a recount.

(vi) Slow moving, obsolete and damaged inventory should be marked as such
on the inventory count sheets in as much detail as possible to highlight
inventory which possibly should be valued at net realizable value.

I should record the following matters during my attendance at the inventory

count.
(i) Perform test counts, selecting items from the floor to check to the sheets and
vice versa. I would record all these tests (including inventory numbers,
inventory sheets and so on) and any discrepancies I find should be
investigated by the count staff and management present at the time.
(ii) Record all the inventory sheet numbers used in the count.
(iii) Record the last goods received note number received and the last goods
dispatched note number issued prior to the inventory count.
(iv) Complete an inventory count checklist.

b) (i) To test cut-off at the inventory count on 13 October I would perform the
following checks.

(1) Sales cut-off: Select a few goods dispatched notes from immediately both
before and after the inventory count. Check that they have been recorded in
the book inventory records in the appropriate period as being dispatched
before or after the inventory count date.
(2) Purchases cut-off: Select a few goods received notes from immediately both
before and after the inventory count. Check that they have been recorded as
received in the appropriate period, either before or after the inventory count
date.

(ii) At the year end it will be necessary to perform full cut-off tests, rather than
just a check on the computerized book records as in (b)(i) above. After
performing these tests for transactions about the year-end, the following
additional tests will be carried out.

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(1) Sales cut-off: Trace the goods from the GDNs to the relevant sales invoices
and check that those invoices were posted to the sales ledger either before or
after the year-end, as appropriate.
(2) Purchases cut-off: Trace the goods from the GRNs to the relevant purchase
invoices and check that the invoices have been recorded in the purchase ledger
in the correct period, as appropriate. Invoices which relate to the period prior
to the year-end may not have been received in time to be posted in the ledger.
In these cases such invoices should be included in the purchase accruals at the
year-end.

Q04. Your firm acts as auditor of Wiseguys National Bakeries Co. The finance
director has prepared financial statements of the company for year to 31
December 20X9 which show a pre-tax profit of $450,000. You have been
advised that the board of directors has approved the financial statements and
decided that no amendments should be made thereto. As partner responsible
for the audit you have noted the following matters during your review of the
financial statements and the audit working papers:
(a) The freehold property which was included at cost in previous years'
statement of financial position has now been restated at a professional
valuation of $1,250,000 carried out during the year. You are satisfied with the
valuation, the relevant figures have been correctly adjusted and the necessary
information disclosed in the notes to the financial statements.
(b) An amount of $45,000 due from a customer in respect of sales during the
year is included in receivables but, from information made available to you,
you conclude that no part of this debt will be recovered. No allowance has
been made against this amount.
(c) The financial statements do not disclose the fact that a director was
indebted to the company for an amount of $22,000 during a period of six
weeks commencing 1 February 20X9.

Required
Explain how each of the above will impact on the auditor’s report.
Answer Q 04.
(a) Freehold property
In past years this property has been shown in the statement at its original cost,
whereas it is now restated at $1,250,000 as professionally valued during the
year. The auditor is satisfied as to the basis of the revaluation, adjustment to
and disclosure made in the financial statements. As a result of the audit
evidence obtained no further reference to the property revaluation will be
required in the auditor’s report.
(b) Allowance for doubtful debts

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No part of the debt of $45,000 due from XYZ Co will be recovered by the
company. Since the financial statements which the directors have approved
include no allowance for this debt, it will be necessary for the auditor’s report
to state that:
(i) No allowance has been made against an amount of $45,000 owing by the
customer.
(ii) They believe such amount to be irrecoverable.
(iii) In their opinion, except for the failure to make such allowance, a true and
fair view of the state of the company's affairs and its results is given by the
financial statements.
(c) Loan to a director
Since the director's indebtedness of $22,000 which subsisted during a six week
period, has not been disclosed in the financial statements in accordance with
IAS 24 Related party disclosures, the auditors are obliged to include in their
report an explanatory paragraph giving the required disclosure.
The particulars include:
(i) The amount of the loan and any interest
(ii) The zero outstanding balance at the year-end
(iii) Terms and conditions
The auditor’s report will conclude with the statement of their opinion that the
financial statements, except for the information specified above, give a true
and fair view.

Q05. A high profile charity hospital is an existing client of your three partner
firm. The charity’s accounts are widely circulated in the local area. One of the
partners in your firm used to be a trustee of this charity.
State the procedures to be carried out in order to ensure that your firm’s
independence is not impaired.

Answer Q05: a) Document consideration in continuing to act reappointment

consideration
b) Apply safeguards to mitigate familiarity/self-interest threat
c) Former trustee should not be individual responsible for
audit
d) Second partner review
e) Ensure fees do not exceed as recommended

Q06. Your firm is statutory auditor of AB Ltd. which is suffering cash flow
difficulties. As a result AB Ltd has not paid any of your firm’s fees which have
been submitted in the last 12 months.

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State the threat to objectivity that this matter represents and how the threat
could influence objectivity.

Answer Q06: Threat: Self-interest threat

Influence:
Convinced to issue an unqualified report to enhance the audit
firm’s prospectus of securing payment of overdue fees.

Q07. Under one terms of the borrowing agreement with its bank AB Ltd. is
obliged to provide a copy of its financial forecasts for the year ending
December 31, 20x2 by the end of December 31, 20X1. The forecast of the
company prepared by the finance director and approved by the Board.
The Board engaged the company’s auditor to review the forecasts and report
their conclusion. What benefits would expect from this report?

Answer Q07: a) Independent opinion from external source

b) Enhanced credibility of compilation of forecasts
c) Confirmation that data subjected to review and
examination
d) Comfort to Bank that risk of management bias reduced

Q08. Your client, Keltner plc owns a chain of 50 UK based high street outlets
selling musical instruments to customer who primarily pay using cash or
credit cards. Keltner also owns four regional warehouses. The company has an
internal audit team whose members make regular visits to the retail outlets
and warehouses.
Describe four procedures in respect of inventory and cash that you would
expect the internal auditors to carry out during their visits to the retail outlets
and warehouses.

Answer Q08: a) To ensure adherence to company’s own

procedures/internal control tested
b) To carry out test counts on a sample basis
c) Inspect inventory for obsolete item
d) Review of physical controls over inventory
e) Review of inventory exception reports
f) Counting of petty cash floats
Q09. You are responsible for the audit of Rajib Ltd for the year ended
September 30, 20X3. On October 12, 20X3, an administrator was appointed at
Raising Ltd, a major customer. The balance due from Raising Ltd. as at
September 30, 20X3 was Tk.1,37,000. The directors have not provided for this

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debt as the administrator was appointed after that balance sheet date. The pre-
tax profit for the year ended September 30, 20X3 is Tk.8,98,000.
Set out the matters to be considered, and the implications for your audit
report, in respect of this situation.

Answer Q09: Receiver appointed after balance sheet date:

a) After date/sales receipts
b) Payout from the receiver
c) Quality on grounds of disagreement
d) Unless going concern implications arising from loss of
major customer

Example 1: Qualified opinion due to material misstatement of inventories

Basis for qualified opinion
The company’s inventories are carried in the balance sheet at xxx.
Management has not stated inventories at the lower of cost and net realizable
value but has stated them solely at cost, which constitutes a departure from
International Financial Reporting Standards. The company’s records indicate
that had management stated the inventories at the lower of cost and net
realizable value, an amount of xxx would have been required to write the
inventories down to their net realizable value. Accordingly, cost of sales
would have been increased by xxx, and income tax, net income and
shareholders’ equity would have been reduced by xxx, xxx and xxx,
respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of ABC
Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial
Reporting Standards.

Example 2: Adverse opinion due to material misstatement because of non-

consolidation of a subsidiary
Basis for adverse opinion
As explained in Note X, the company has not consolidated the financial
statements of subsidiary XYZ Company it acquired during 20X1 because it has
not yet been able to ascertain the fair values of certain of the subsidiary’s
material assets and liabilities at the acquisition date. This investment is
therefore accounted for on a cost basis. Under International Financial
Reporting Standards, the subsidiary should have been consolidated because it
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is controlled by the company. Had XYZ been consolidated, many elements in

the accompanying financial statements would have been materially affected.
The effects on the consolidated financial statements of the failure to
consolidate have not been determined.
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis
for Adverse Opinion paragraph, the consolidated financial statements do not
present fairly (or do not give a true and fair view of) the financial position of ABC
Company and its subsidiaries as at December 31, 20X1, and (of) their financial
performance and their cash flows for the year then ended in accordance with
International Financial Reporting Standards.

Example 4: Disclaimer of opinion due to inability to obtain sufficient

appropriate audit evidence about a single element of the financial
statements (financial information of a joint venture investment representing
over 90% of company’s net assets – material and pervasive)

Basis for disclaimer of opinion

The company’s investment in its joint venture XYZ (Country X) Company is
carried at xxx on the company’s balance sheet, which represents over 90% of
the company’s net assets as at December 31, 20X1. We were not allowed access
to the management and the auditors of XYZ, including XYZ’s auditors’ audit
documentation. As a result, we were unable to determine whether any
adjustments were necessary in respect of the company’s proportional share of
XYZ’s assets that it controls jointly, its proportional share of XYZ’s liabilities
for which it is jointly responsible, its proportional share of XYZ’s income and
expenses for the year, and the elements making up the statement of changes in
equity and cash flow statement.

Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer
of Opinion paragraph, we have not been able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion. Accordingly, we do not
express an opinion on the financial statements.

Related party transaction:

The schedule below illustrates the documentation requirements in respect of

related parties included in ISA 550 and relates to a family-owned/managed
business consisting of a hotel and leisure centre.

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 Assurance

Name of
Nature of Likely value of
related Types of transactions
relationship transactions
party
Tk. 3,000 per
annum through
Uses the restaurant on a the DLA
regular basis

Some large functions

Non-executive
Toby held at hotel in the past
director and 20%
Hamilton at reduced rates
shareholder

Dividend
Tk.20,000 per
annum

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