Chapter – 1

Concept of and need for assurance

1. ICAB is a member of IFAC.

Ans: True False.

2. Who the users are will depend on the nature of the subject matter?

Ans: True False.

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

Ans: True False.

4. What is the definition of assurance engagement according to IFAC?

Ans: Assurance Engagement: An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

5. What is subject matter? What are the categories of it?

Ans: Subject Matter: which is evaluated. Eg: computer system.

6. What are the benefits of an assurance engagement?

Ans: • Independent, Professional opinion.

• Confidence to others.

• Deterrent to fraud.

• Attention to deficiency.

• Investors faith.

7. Which of the following are specialized audit?

Ans: Branch audit Internal audit Fraud investigations Bank audit Pension scheme audit

8. Which level of assurance engagement gives the following opinion: “In the course of my seeking evidence about the statement by the chairman, nothing has come to my attention indicating that the statement is not reasonable.”

Ans: Limited assurance.

9. Define expectations gap. How can you reduce expectations gap?

Ans: Expectations gap : Lack of understanding of users.

Reduce by : Clearly indicating scope & limitations.

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10. What constitutes expectations gap? Explain why?

Ans: Lack of understanding.

Reasons : i. Not aware of limitations.ii. Considering as guarantee.

11. What purpose is served by spelling out clearly, the scope and limitations of an assurance engagement in the engagement letter?

Ans: Expectation gap is reduced.

12. What is the key benefit and limitation of assurance?

Ans: Benefit : Independent, Professional verification.

Limitation : Risk of wrong conclusion.

13. What risk is associated with the limitations of assurance engagement?

Ans: To draw wrong conclusion.

14. Which of the following factor make a person ineligible for being a company auditor?

Ans: An employee of the client company.

A shareholder of 0.05% of the subscribed capital.

A person who is indebted to the company not exceeding Tk. 1000.

Director of X Ltd. which is the managing agent of the client.

15. Define reasonable and limited assurance. Compare and contrast between reasonable and limited assurance.

Ans: Reasonable assurance - A very high but not absolute level of assurance.

Limited assurance - Low level assurance.

Both the assurance engagement and gives a conclusion.

No. Characteristics Reasonable Assurance Limited Assurance

1. Level of assurance High Low

2. Evidence Sufficient & appropriate Limited

3. Opinion Positive Negative

Chapter-3Process of assurance: Planning the assignment

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1. What is audit strategy? What is audit plan? Differentiate.Ans: Audit strategy – Sets the scope, training & direction - Development of audit plan Audit plan - Sets out nature timing & extent

- To obtain sufficient, appropriate evidence

DifferenceCharacteristics Audit strategy Audit PlanNature General SpecificOutcome Audit Plan Audit Procedures

2. What proposes are served by an audit plan?Ans: 1. Attention to important areas 2. Identify potential problems and resolve 3. Ensure properly organized audit 4. Assign work to team members 5. Direction & supervision 6. Review work

3. Mention the structure of planningAns: 1. Ethical requirements continuously met 2. Terms of engagement understood 3. Establish audit strategy 4. Develop audit plan (Including risk assignment procedures)

4. How can you formulate an audit strategy?Ans: 1.Relevant characteristics of engagement (eg. Reporting, framework, entity’s environment) 2. Key dates – Reporting, other communication. 3. Materiality, preliminary risk assessment, testing internal control

5. What are key contents of an overall audit strategy?Ans: 1. Understanding the entity’s environment 2. Understanding the accounting & internal control systems 3. Risk and materiality 4. Conquest, nature, timing and extent of procedures 5. Co-ordination, direction, supervision, and review 6. Other matters.

6. Give some examples of overall audit strategyAns: 1.The terms of engagement 2. Understanding the company and its business 3. Special audit problems (risks) 4. Results of analytical procedures 5. Materiality 6. Risk evaluation and audit approach 7. Other matters 8. Budget and fee 9. Timetable 10. Staffing

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7. Interactive # 1, P.43

8. Under BSA 315, what do you mean by understanding of the entity? Why do we need it?Ans: - to identify risk of material misstatement - to design audit procedures . - to provide framework for audit judgment.

9. What matters are considered in understanding the entity?Ans: 1. Industry- Market competition, technology 2. External factors- recession/growth, interest rate, inflation. 3. Reporting framework- Accounting principles, industry specific practices 4. Nature of the entity- Financing, Financial Reporting, Business operation 5. Selection & application of accounting policies

6. Objectives & strategies – Related risk might cause material misstatement. 7. Review financial performance 8. Internal control

10. How can you achieve an understanding of the entity?Ans: 1. Inquiry management, others 2. Analytical procedure 3. Observation & inspection – Reading manuals, visit premises, meeting staff 4. Prior knowledge – Previous period – Determine changes. 5. Discussion – about susceptibility - about material misstatement - among team members.

11. Worked example: Inquiries of management and others. P.44

12. Interactive # 2, P.47

13. What is professional skepticism?Ans: A critical assessment, with questioning mind, of the validity of the evidence.

Not disbelieve everything Possess a questioning attitude

14. What is analytical procedure?Ans: Consists of

Significant ratios analysis to understanding entity Investigation of fluctuation to identify audit risk

15. According to BSA520 what analytical procedures include?Ans: 1. Comparison with

a) Prior period informationb) Anticipated results – Budgets, expectation of auditorc) Industry information – Ratio of sales to trade receivables.

2. Relationship between:a) FS elements – Relation of gross profit to salesb) Financial information and non-financial information

Payroll cost to no. of employees.16. What is the basis for choosing analytical procedures for audit?

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Ans: Auditors professional judgment.17. At the risk assessment stage, what are the possible sources of information about the client?Ans: 1.Internal financial information 2. Budgets 3. Management accounts 4. Non- financial information 5. Bank and Cash records 6. Vat returns 7. Board minutes 8. Discussion of the correspondents with the client at the year end.18. Interactive # 3. P.5219. What is materiality?Ans: Level of error that affects the decision of the users.20. What does materiality depends on?Ans: Size of the error.21. According to the BSA320, when should an auditor consider materiality?Ans: 1. Determining nature, training & extent of audit procedure. 2. Evaluating effect of misstatement22. How does materiality assessment help the in decision making?Ans: It helps to decide:

1. How many and what items to examine2. Whether to use sampling techniques3. Level of error

Crossing this level will lead to say FS not true and fair23. How risk & materiality are connected?Ans: Materiality is an audit procedure. Result of this reduces the level of risk.24. What is tolerable error? Can it change every year? Why?Ans: The maximum error that an auditor is prepared to accept. Yes because: 1. Related to the size of business.25. Why do you need to review materiality?Ans: Constantly review because of changes. Change in –

1. Draft accounts – Due to material error2. External Factors – It causes change in risk estimates.

26. Interactive # 4: Materiality, P.54.27. What is audit risk: Risk of giving inappropriate opinion.

Elements: 1. Risk of material Misstatement – Depends on entitya) Inherent riskb) Control risk

2.Risk of failing to detect material misstatement Depends on auditor

28. What is internal risk and control risk? Differentiat.Ans: Inherent risk: Possibility of material misstatement

Due to nature of the items No. of related internal control

Control Risk: Possibility of not preventing or correcting a material misstatement.

Due to accounting system Due to internal control system

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Difference: Inherent risk Control risk

1. Due to items nature 1.Due to internal control risk 2. No internal control related 2.Internal control related

29. Give some example that might increase inherent risk.1. Balance includes estimates2. Balance is important3. Financial statements

Company in trouble Company to raise finance Directors’ motive – eg. Profit target bonus

4. FS contains complex accounting5. Industry in which it operates 6. Regulations it falls under.

30. Define detection risk. Which part of audit risk could be controlled by the auditor? How?Ans: Possibility of not detecting a misstatement.

Individually or aggregated It is in the control of auditor

Detection risk could be controlled by the auditorBecause:

Inherent and control risk are integral to client Auditor’s part is detection risk Auditor’s aim is to reduce overall audit risk, not only one part.

31. Could detection risk be entirely eliminated? Why?Ans: No. Due to inherent limitations of audit.32. How can detection be reduced?Ans: By carrying out substantial number of losts.

Include high level of audit work33. If control risk & inherent risk both are high what effect it has on the audit?Ans:

Not rely on the tests of controls. Carry out extended test of details To reduce detection risk

34. Determine the audit risk would you accept the engagement?Inherent risk Control risk Detection risk Audit risk

High High High ?Medium Low Medium ?

Ans: 1. Audit risk = High. Not acceptable

Reduce detection risk to low level2. Audit risk = medium. Acceptable

35. If control risk is low, would you substantive procedure?Ans: No. Because auditor has to reduce detection risk.36. See worked example # 1, 2 P. 57.37. Interactive # 5: Audit risk. P. 5738. What are the steps to identify and assess risk?Ans: Step 1: Identify risk at understanding entity level.

Obsolete inventing

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Step 2: identify risk at assertion level. Eg. Directors asserted, Inventory is xxx.

Step3: Magnitude of misstatement Inventory is material for a mfc

Step4: Likelihood of misstatement Regular review, scrapping, resale of inventory.

39. Interactive # 6. P. 5940. According to BSA 315, which factor indicate a significant risk?Ans: 1.Risk of fraud

2.Recent development Economic, accounting

3.Complexity of transaction4.Significant transaction with a related party5.Degree of subjectivity in the financial information6.Unusual transaction.

41. Why do unusual transaction are more likely to give rise to material misstatement than routine and regular transactions?Ans: Because unusual transaction have more:

1. Management interventions2. Manual interventions3. Complex accounting principles or calculations4. Opportinity for – control procedure not followed.

42. What should an auditor do when found significant risk?Ans: Auditor must evaluate the design & implemention of entity’s control in that area.

Chapter-4

Process of Assurance: Evidence and Reporting

1. What is Audit Evidence? What are the types of Audit Evidence?

ANS: Information, on which audit opinion is based.

Sample basis

Two Types: 1. Test of Controls-To test effectiveness of controls.2. Substance Procedures-To test assertion level

Test specific balancesa) Test of detailsb) Substantive analytical procedures.

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2. Why do Auditors Carry out test of control & substantive procedures?

ANS:

Test of controls: to test internal control to-

a. Report Shareholderb. Conclude true and fair viewc. Test capability to procedure correct informationd. Match result with intended result.

Substantive Procedures: to test balance or transaction to-

a. Test its correctness.b. It must always carry out.

3. What is Sufficiency and appropriateness of evidence? How to measure the appropriateness of Audit evidence?

ANS: Sufficiency:-Quantity

Appropriateness:-Quantity or Reliability.

Measure Appropriateness-

External – More reliable than entity’s record. Auditor – Directly by auditor than indirectly. Entity – When control system ok. Written – Documents than Oral. Originals – Original than facsimiles.

4. What is Financial Statement Assertions? Mentioned the assertions Used by the Auditor?

ANS: Anything presented by management in the Financial Statement.

ASSERTIONS:

a. Class of Transaction Occurrence - Recorded one occurred and pertains to

entity. Completeness – All transactions recorded.

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Accuracy – Recorded appropriately. Cut-Off – Correct Accounting Period. Classification – Recorded in Paper Accounts.

b. Accounting Balances Existence – e.g. Asset, Liabilities exist. Rights and Obligations – Rights & Obligations actually

pertain to the entity. Completeness – All assets, Liabilities, equity recorded. Valuation & Allocation – Assets, Liabilities included in

FS & Valuation, Allocation recorded.

c. Presentation & Disclosure Occurrence & Rights & Obligations - Disclosed one

Occurred – Pertained to entity. Completeness – All Disclosures included. Classification & Understandability – Appropriately

presented – clearly expressed. Accuracy & Valuation – Disclosed fairly – Appropriate

accounts.

5. Which test shall an Auditor perform to collect audit evidence?

ANS: Either

a. Test of Control – To test control system. E.g. Revenue Systemb. Test of Detail – Substantive Procedure. E.g. Purchase documents,

Surveyors report.

6. When Substantive procedure is not sufficient?

ANS: Business conduct with IT system.

7. in carrying out test of control, what else could be helpful?

ANS:

a. Inquiryb. Re performancec. Inspection.

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8. How often controls must be tested?

ANS: Once in every three audits – Incase of significant risk, testing must be carried out each year.

9. What type of testing do material items require?

ANS: Substantive procedure. These are:

1. Agreeing FS to records2. Examine material journal entries3. Adjustments

10. What are the types of substantive procedure? When these are appropriate to use?

ANS: 1. Analytical procedure

Large volume of transactions Predictable transactions. e.g. wages and salaries

2. Tests of detail

Information of account balances Verify assertions. e.g. Inventories, trade receivables.

11. Interactive # 1, P.74

12. According to BSA 700, What are the contents of an Audit Report?

ANS: There are several particulars, those are significant to prepare an audit report. These are-

TITLE ADDRESSEE INTRODUCTORY PARAGRAPH MANAGEMENT RESPONSIBILITY SCOPE-WORK PERFORMED OPINION DATE AUDITORS ADDRESS AUDITORS SIGNATURE

13. What are the Explicit Opinions?

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ANS: Explicit opinions are stated as below-

State of Company’s Affairs Profit or Loss Directors report consistent with FS.

14. What are the Implied Opinions? Which matters are related by exceptions?

ANS: Proper books of Accounts in report of

a. Money received and expanded – With related matters.b. Sales and particulars.c. Particulars of Manufacturing Co. – e.g. Production,

Distribution, Marketing, Utilization of material, Labor.

15. Why does it need to keep uniformity in the form and content of the audit report?

ANS: Because:-

a. Readers Understanding. b. Identify unusual circumstances.

16. What are the specific issues related to expectation gap? How can we reduce these issues?ANS: Misunderstanding about:

1. Nature of the audited financial statements e.g. Balance Sheet is the fair valuation of entity

2. Type & extent of work e.g. All items in the financial statements are tested

3. Level of assurance e.g. Auditor provide absolute assurance

We can reduce those by removing the misunderstandings.

17. What are the contents of an assurance report?

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ANS: -

1. Title – Clearly indicating its independence2. Addressee3. Subject matter4. Criteria5. Significant inherent limitation6. Restricting use of report

When criteria made available to specific users.7. Responsible party

Party and practitioner’s responsibility8. ISAE compliance

Engagement performed accordingly9. Work summary

In case of negative conclusion10.Conclusion11.Date12.Name & address

18. Which issue is normally covered in the report to the management of the client?

ANS: Internal control weaknesses.

19. Interactive # 2, P.79

Chapter – 5

Introduction to internal control

1. What is internal control? Why does an organization need IC?

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Ans: Internal control: The process designed to achieve entity’s objectives.

Reasons : 1. Minimize business risk 2. Ensure effective functioning

3. Ensure compliance with laws & regulations.

2. What are the limitations of internal controls ?

Ans: 1. Expensive May not be worth

2. Human element Controls implemented by human Can make mistakes Bad intention Leak password

3. Unusual transactions Ic is for routine transactions Standards not fit to unusual transactions.

3. Why small companies lack effective internal controls?

Ans: 1. Human element

2. Fewer employees Lot of people make large control chain. Fraud caught by next person.

3. Segregation of duties Lack

4. What are the components of internal control system?

Ans: 1. Control environment Management functions

2. Business risk and entity’s risk assessment process Business risk inherent to operationsRisk assessment process identifying business risk to FS Implement IC

3. Information system relevant to financial reporting objectives. Recording procedures.

4. Control Activities Policies ensuring compliance of management directives.

5. Monitoring Controls Review & Corrective actions.

5. What is audit committee? What are the terms of reference of an audit committee?

Ans: Subsection of BOD deals with finance and accounts.

Terms of reference:1. Review the integrity of FS2. Review internal financial controls & risk management systems.3. Monitor internal audit4. Recommend about external auditor5. Monitor independence of external auditor6. Implement policy on non – audit services by the external auditor.

* Key issue Financial statements.

6. What are the types of control activities?

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Main Reason

Continue operation.

Ans: 1.2.

PreventiveDetective

Types :

1. Authorization Eg. Approval of documents , overtime

2. Performance review Eg. Reconciliations. Comparing internal data with external source. Goods dispatched. Maintain control accounts and TB. TB brings all data together.

3. Information Processing Arithmetical accuracy. Check sum of invoices.

4. Physical control Compare cash inventory with accounting records. Cash count. Limit physical access to assets. Inventory store.

5. Segregation of duties Number of people involved in accounting process. Difficult to occur fraud. & accidents. More Checking

7. In what ways segregation of duties could take place?

Ans: 1. Segregation of function Transaction carries out. Recording. Maintaining.

2. Segregation of Carry out transaction Steps in transaction.

3. Segregation of accounting operation Some staff should not operate.

8. What are that types IT control Procedure?

Ans: 1. Application controls.2. General controls.

9. What is application control and general control? Differential.

Ans: Application control Apply to individual application. Ensure. Transaction occurred, authorized, complete, and accurate.

General control Apply to Many applications. Ensure. Continued proper operation of system. Supports application control.

Difference Application control General control

(a) Scope Individual application Many application(b) Control / Support Transaction input Application control

10. Give some examples of general controls.

Ans: 1. Development of computer applications.2. Prevention or detection of unauthorized Changes to programs.3. Testing and documentation of programs changes.4. Controls to prevent wrong programs or files being used.

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All control activities fall under these two.

5. Control to prevent unauthorized amendments to data files.6. Control to ensure continuity of operations.

11. In what situation, application control becomes useless?

Ans: When general control is ineffective. So, review general control first.

12. Give some example of application control.

Ans: 1. Control over input: Completeness.2. Control over input: Accuracy3. Control over input: Authorization 4. Control over processing.5. Control over mater files and standing data.

13. What controls should an auditor test about application controls?

Ans: 1. Manual controls manual input is complete, accurate.2. Control over output System output using CA manual.3. Programmed control procedure Using CAAT.

14. Identify application control & General control.

Ans: See page no: 95-97

15. What are the sauces of information about internal controls ?

Ans: 1. Manuals2. Policies3. Minutes of meetings4. Prior year5. Interview/Staffs6. Observation important

16. What are the documents used to record understanding of entity?

Ans: 1. Narrative notes Good for short notes.

2. Questionnaires/Checklist Aid memories Tick boxes Never asked

3. Diagrams Best for recording relationships, reporting lines Time consuming

17. Interactive # 1, 2, 3, Page: 99-100

Chapter-6Revenue System

1. What are the key risks associated with ordering?Ans.

Accepting customers with poor credit risk Not fulfilling orders.

2. What are the risks associated with ordering?Ans. Orders may be taken from customers who are-1. Not able to pay

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2. Not pay long time3. Orders may not recorded properly - not fulfilled- customers lost

3. Which internal controls will mitigate the following risks?1. Orders may be taken from customers who are Not able to pay2. Orders may be taken from customers who will Not pay long time 3. Orders may not recorded properly

Ans.

Sl No.

Risks Controls

1 Orders may be taken from customers who are Not able to pay

2 Orders may be taken from customers who will Not pay long time

3 Orders may not recorded properly - not fulfilled- customers lost

4. What are the control objectives?1. Get customers with good credit risk2. Encourage prompt pay3. Record orders correctly4. Fulfilled orders

5. What controls can mitigate the risks of ordering?1. Segregation of duties – Credit control, invoicing, dispatch2. Authorisation of credit terms –

Reference check Authorize by senior Regular review

3. Authorise change in customer data – Address change with letterhead Deletion request supported by evidence of balance cleared

4. Accept orders with no credit problems5. Sequential numbering order documents–

Checking with numbers6. Correct price quoted7. Matching: Customer order – production order – despatch notes

Query orders not matched8. Deal customer queries

6. What are the tests of control over ordering?Ans.Check that-

1. Reference obtained for all new customers2. New accounts authorized by senior

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3. Orders accepted from customer within specified credit terms and limits4. Matching order documents

7. Manufacturing company ltd. 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 MCL before. In respect of such new customers, MCL has a significant risk of taking orders from customer who might not be able to pay.What controls should MCL put into place to mitigate this risk?Ans.1. Credit check from Credit Rating Agency2. Limit credit terms3. Senior member sign off orders4. New customer accounts review for prompt payment.

Weak companies will do 1 & 3 only.

8. Interactive:1, p.1139. The audit senior at MCL has been asked to test controls over sales, particularly with

reference to new customers. There are three controls in particular that he should check – obtaining credit references, setting credit terms and authorisation.What tests of control should the auditor make over sales?Ans.1. Select sample of new customers by comparing current to previous year2. Check the customers file for credit check3. Check terms and evidence that senior staff authorised

10. What are the key risks associated with dispatch & invoicing?Ans. Despatched but not invoiced

11. What risks a company might face relating to despatch & invoicing?Ans. 1. Despatched but not recorded- goods lost to the business2. Despatched but not invoiced3. Error in invoice4. Invoice cancelled by wrong credit notes.

12. What are the control objectives to mitigate the following risks?Ans.1. Despatched goods recorded2. Correctly invoice sold goods3. Invoice raised relate to supplied goods4. Credit notes for valid reason

13. What are the controls used to mitigate the risks of dispatch & invoicing?Ans. 1. Authorisation of despatch

Despatch only sales orders Only to authorised customers Special authorisation- free of charge goods

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2. Examine goods outwards- quantity, quality, condition3. Record outwards on a despatch note4. Matching: despatch notes – customer orders – invoices5. Pre-numbering despatch notes6. Check sequence of despatch notes7. Check condition of returns8. Record returns on goods returned notes9. Despatch note signed by customer 10. Preparation of invoices and credit notes

Use authorised price list Authorisation of credit notes Check invoice and credit note- price, quantities, extensions Sequential numbering of invoice and credit notes

11. Updated inventory record12. Matching- invoice- despatch notes- sales orders13. Regular review- despatch notes not matched by invoices

14. What are the tests of control used to mitigate risks of despatch & invoicing?Ans.1. Verify details of trade sales or goods dispatch notes with sales invoices checking

- Quantities- Prices charged with official price lists- Trade discounts have been properly dealt with- Calxulations and additions- Entries in sales day book are correctly analysed- VAT, where chargeable, has been properly dealt with- Postings to receivables ledger

2. Verify details of trade sales with entries in inventory records3. Verify non-routine sales (scrap, non-current assets etc) with:

- Appropriate supporting evidence- Approval by authorized officials- Entries in plant register

4. Verify credit notes with:- Correspondence or other supporting evidence- Approval by authorized officials- Entries in inventory records- Entires in goods returned records- Calculations and additions- Entries in day book, checking these are correctly analysed- Postings to receivables ledger

5. Test numerical sequence of dispatch notes and enquire into missing numbers6. Test numerical sequence of invoices and credit notes, enquire into missing numbers

and inspect copies.7. Test numerical sequence of order forms and enquire into missing numbers8. Check that dispatch of goods free of charge or on special terms have been

authorized by management.

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15. Interactive:2Ans. P. 115

16. What are the risks associated with recording?Ans. Key risk is failure to record sales so that payment is not prompted.

17. What are the controls to mitigate the risks of recording? 18. What are the tests of control of recording?19. Interactive: 3

Ans. P.11720. What risk might arise from the following situation?21. What are the risks associated with cash collection?22. What are the controls to mitigate risk related to cash collection?23. What are the tests of control for cash collection?24. Interactive:4

Ans. P. 12125. Indentify the weakness of the ….system of ABC Ltd.?26. How can you identify the weaknesses associated with ordering system?27. Interactive: 5

Ans. P. 12228. As an assurance provider how will you perform test of controls in relation to sales?-Term

Question

Chapter7

Contorls

Once the company has identified the risks which exist in the purchases system, it will try and create controls which mitigate those risks ( that is, meet the control objectives outlines above). What controls will be put into place depend on the nature of the company and the specific risks associated with the way it operates, but the following controls can be used as examples of how the above risks can be mitigated.

Segregation of duties; requisition and ordering

Central policy for choice of suppliers

Evidence required of requirements for purchase before purchase authorised ( pre- set re- order quantities and re- order levels)

Order forms prepared only when a pre- numbered purchase requisition has been received

Authorisation of order forms

Pre- numbered order forms

Safeguarding of blank order forms

Review from outstanding orders

Monitoring of supplier terms and taking advantage of favorable conditions ( bulk order and prompt payment discounts)

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Worked example: controls over ordering

Truman Limited buys ‘ Drox’ frequently. Drox is highly marketable and easily portable and the company has a history of theft of inventories of Drox. In order to make sure that only Drox required for business use is purchased in the first place, the directors have decided to put the following controls into operation:

Simon Radinski, the stores manager, will be in charge of purchase requisitions, which will be made

When inventories of Drox have fallen to a pre- set level.

Orders will only be raised in respect of purchase requisitions made by Simon Radinski, except in

Periods of Simon’s absence, when requisitions may be his deputy Cathy Lewis.

Assurance

Orders will be authorized by Linda Fairburn, the purchases director.

Random, occasional spot checks will be carried out by Linda Fairburn on the level of Drox when the requisition is raised.

Purchase orders will be kept in a locked office in the purchase department.

In addition, in order to control inventories, Drox will only be kept in a locked cupboard in the warehouse.

Tests of controls

The tests that the assurance providers carry out over such controls will obviously also depend on the exact nature of the control and business. However, again, some general ideas can be generated.

Review list of suppliers and check a sample to orders made

Check sequence of pre- numbered order forms

Check orders are supported by a purchase requisition

Review security arrangements over blank orders

Worked example: Tests of controls over orders

The directors of Truman Limited have requested that the auditors review that new controls over the purchase of Drox are operating effectively. The audit senior has therefore drafted the following plain:

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Request Linda Fairburn notifies the audit team of requisitions for Drox during the audit and attend spot check on re- order level

Observation of premises for evidence of Drox being stored elsewhere than the locked cupboard

Review of sample of orders for Drox to ensure that purchase requisition exists and orders were made only by Simon Ridinski and were authorized by Linda Fairburn

If sampled requisitions were made by Cathy Lewis, check absence records for Simon Radinski

Interactive question 1: Ordering

The directors of Lyton Limited (LL) have just uncovered a fraud being perpetrated by the stores manager. He was in charge of ordering, had raised a number of false orders to non- existent suppliers, raised goods received notes in respect of non- deliveries and forwarded an invoice to the accounts department which was then paid.

Which two of the following controls could have prevented this fraud?

Approved list of suppliers

Check of goods inward by person other than orderer

Pre- numbered order forms

Blank order forms locked in a safe

See Answer at the end of this chapter.

Goods inward and recording of invoices

Section overview

Risks are of accepting goods not ordered or for accepting invoices for poor quality goods.

Controls include matching goods received with orders.

Risks and Control objectives

When considering goods inward and recording of invoices, a company might recognise all or some of the following risks:

Goods may be misappropriated for private use

Goods may be accepted that have not been ordered

Invoices may not be recorded resulting in non- payment

The company may not take advantage of the full period of credit extended

The company may not record credit notes resulting in paying invoices unnecessarily

These risks lead to the following control objectives:

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*All goods and services received are used for the company’s purposes, and not private purposes

*Goods and services are only accepted if they have been ordered, and the order has been authorized

* All goods and services received are accurately recorded

* Liabilities are recognized for all goods and services that have been received

* Receipt of goods and services is necessary for a liability to be recorded

* All credit notes that are received are recorded in the nominal and payables ledgers

* All entries in the payable ledger are made to the correct payables ledger accounts

* Cut- off applied correctly to the payables ledger

Controls

The following are types of controls which could be put in place to fulfil the above objectives.

Examination of goods inwards

-Quality-Quantity-Condition*Recording arrival and acceptance of goods ( Pre- numbered goods received notes)* Comparison of goods received notes with purchase orders* Referencing of supplier invoices; numerical sequence and supplier reference*Checking of suppliers’ invoices - prices, quantities, accuracy of calculation- Comparison with order and goods received note*Recording return of goods( pre- numbered goods returned notes)* Procedures for obtaining credit notes from suppliers* Segregation of duties: accounting and checking functions*Prompt recording of purchases and purchases returns in day books and ledgersRegular maintenance of payables ledgerComparison of monthly statements of account balance from suppliers with payables ledger balancesReview of classification of expenditure

Reconciliation of payables ledger control account to total of payables ledger balancesCreate a cut-off accrual of goods received notes not matched by invoices at year-end

Tests of controlsThe following tests could be used in relation to the controls noted above.

Check invoices for goods are:Supported by goods received notesEntered in inventory recordsPriced correctly by checking to quotations, price lists to see the price is in orderProperly referenced with a number and supplier code

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Correctly coded by type of expenditureTrace entry in record of goods returned etc and see credit note duly received from

the supplier, for invoices not passed due to defects or discrepancyFor invoices of all types:

Check calculations and additionsCheck entries in purchase day book and verify that they are correctly analysedCheck posting to payables ledger

For credit notes:Verify the correctness of credit received with correspondenceCheck entries in inventory recordsCheck entries in record of returnsCheck entries in purchase day book and verify that they are correctly analyzedCheck posting to payables ledger

Check for returns that credit notes are duly received from the suppliersTest numerical sequence and enquire into missing numbers of :

Purchase requisitionsGoods received notes Suppliers’ invoicesPurchase ordersGoods returned notes

Obtain explanations for items which have been outstanding for a long time:Unmatched purchase requisitionsUnmatched Purchase ordersUnmatched goods received notesUnmatched invoices

Verify that invoices and credit notes recorded in the purchase day book are:Initialed for prices, calculations and extensions Cross-referenced to purchase orders, goods received notes etcAuthorized for payment

Check additionsCheck postings to nominal ledger accounts and control accountCheck postings of entries to payables ledger

Payable ledgerFor a sample of accounts recorded in the payables ledger:

Test check entries back into books of prime entryTest check additions and carried forward balancesNote and enquire into all contra entries

Confirm control account reconciliation has been regularly carried out during the yearExamine control account for unusual entries

PaymentRisks and control objectives

The following risks arise at this stage of proceedings:False invoices are paid in errorInvoices are paid too soonPayment is not correctly recordedCredits are not correctly recorded Payments are not recorded in the right period

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The key risk is that money might be paid out by the business inappropriately. The following objectives arise out of the risks:

All expenditure is goods that are receivedAll expenditure is authorizedAll expenditure that is made is recorded correctly in the nominal and payables ledgersPayments are not made twice for the same liability

Controls

The arrangements for controlling payments will depend to a great extent on the nature of business transacted, the volume of payments involved and the size of the company.

Cheque and cash payments The cashier generally not be concerned with keeping or writing- generally up books of account other than those recording payments, nor

Should he have access to, or be responsible for the custody of,

Securities or title deeds belonging to the company.

The person responsible for preparing cheques should not

Himself be a cheque signatory. Cheque signatories in turn

Should not be responsible for recording payments.

Cheque and bank transfer payments- Cheque and bank transfer requisitions

- Appropriate supporting documentation(for example, invoices)

- Approval by appropriate staff

- Presentation to cheque signatories(in case of cheques)

- Instigation of bank transfer by appropriate staff.

Cash payment- -Authority to sign cheques - Signatories should not also approve cheque requisitions- Limitations on authority to specific amounts- Number of signatories- Prohibitions over signing of blank cheques- Prompt dispatch of signed cheques- Prompt dispatch of singned cheques- Obtaining of paid cheques from banks- Payments recorded promptly in cash book and nominal and payables

ledgers- Authorization of expenditure

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- Cancellation of vouchers to ensure they cannot be paid twice - Limits on payments- Rules on cash advances to employees, IOUs and cheque cashing.

Tests of controlsThe following controls may be used:Payments cash book(authorization) For a sample of payments:- Compare with paid cheques to ensure payee agrees- Check that cheques are signed by the persons authorized to do so within their authority limits-Check that bank transfer was authorized and initiated by appropriate person- Check to suppliers’ invoices for goods and services. Verify that supporting documents are signed as having been checked and passed for payment and have been stamped ‘ paid’- Check to suppliers’ statements- Check to other documentary evidence, as appropriate (agreements, authorized expense vouchers, petty cash books etc)

Payments cash book( recording) For a sample of weeks:- Check the sequence of cheque numbers and enquire into missing numbers- Trace transfers to other bank accounts, petty cash books or other records, as

appropriate- Check additions, including extensions, and balances forward at the beginning and

end of the months covering the periods chosen- Check postings to the payables ledger- Check postings to the nominal ledger, including the control accounts

Bank reconciliations For a period which includes a reconciliation date reperform

reconciliation( see Chapter 13)

Verify that reconciliations have been prepared at regular

Intervals throughout the year

Scrutinize reconciliations for unusual items

Petty cash payments For a sample of payments:

- Check to supporting vouchers

- Check whether they are properly approved

-See that vouchers have been marked and initialed by the

Cashier to prevent their re- use

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Chapter-7

Purchase system

1. What are the key risks associated with purchase ordering?

Ans:

1. Purchase for personal use

2. Not made on most advantageous terms

2. What are the control objectives to mitigate the risks of purchase ordering?Ans. Most important control- Authorisation1. Orders are authorized and actually required by the company2. Authorized supplier3. Competitive price

3. What are the controls to mitigate the risk of purchase ordering?Ans. 1. Segregation of duties- requisition and ordering2. Policy for choice of suppliers3. Evidence for purchase requirement- eg. pre-set re-order quantities, re-order levels4. Prepare order forms after receiving pre-numbered purchase requisition5. Authorized order forms6. Pre-numbered order forms7. Safeguarding of blank order forms8. Review from outstanding orders9. Monitoring of supplier terms and conditions- eg. bulk order and prompt payment

discounts4. What are the tests of Control to mitigate the risks of purchase ordering?

Ans. 1. Review list of suppliers and check a sample to orders made2. Check sequence of pre- numbered order forms3. Check orders are supported by a purchase requisition4. Review security arrangements over blank orders

5. What are the risks associated with goods inward and recording of invoices?Ans. Key risks are:1. Accepting goods not ordered2. Accepting invoice for poor quality goodsOther risks:1. Misappropriation for private use2. Accepting unordered goods

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3. Invoices may not be recorded- resulting in non- payment4. Company may not take advantage of the full period of credit extended5. Company may not record credit notes- resulting in paying invoices unnecessarily

6. What are the control objectives to mitigate the risks of goods inward and recording?Ans. 1. Goods received used for company2. Only ordered goods are accepted3. Order has been authorized4. Accurately recording goods5. Liabilities are recognized for all goods and services that have been received 6. Receipt of goods and services is necessary for a liability to be recorded7. All credit notes that are received are recorded in the nominal and payables ledgers8. All entries in the payable ledger are made to the correct payables ledger accounts9. Cut- off applied correctly to the payables ledger

7. What are the Controls to mitigate the risks of goods inward and recording?Ans.1. Examination of goods inwards

- Quality- Quantity- Condition

2. Recording arrival and acceptance- Pre-numbered goods received notes3. Compare goods received notes with purchase orders4. Referencing of supplier invoices- eg. numerical sequence and supplier reference5. Checking suppliers’ invoices6. prices, quantities, accuracy of calculation7. Compare with order and goods received note8. Recording return of goods- pre-numbered goods returned notes9. Procedures for obtaining credit notes from suppliers10. Segregation of duties- accounting and checking functions11. Prompt recording of purchases and purchases returns12. Regular maintenance of payables ledger13. Comparison of monthly statements of account balance from suppliers with payables

ledger balances14. Review of classification of expenditure15. Reconciliation of payables ledger control account to total of payables ledger balances16. Create a cut-off accrual of goods received notes not matched by invoices at year-end

8. What are the tests of Control to mitigate the risks of goods inward and recording?Ans.

Sl.1 Check invoices for goods are 1. Supported by goods received notes

2. Entered in inventory records3. Priced correctly by checking to quotations, price

lists to see the price is in order4. Properly referenced with a number and supplier

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code5. Correctly coded by type of expenditure6. Trace entry in record of goods returned etc and see

credit note duly received from the supplier, for invoices not passed due to defects or discrepancy

2 For invoices of all types Check calculations and additionsCheck entries in purchase day book

and verify that they are correctly analysedCheck posting to payables ledger

3 For credit notes Verify the correctness of credit received with correspondence

Check entries in inventory recordsCheck entries in record of returnsCheck entries in purchase day book

and verify that they are correctly analyzedCheck posting to payables ledger

4 Check for returns that credit notes are duly received from the suppliers

5 Test numerical sequence and enquire into missing numbers of

Purchase requisitionsGoods received notes Suppliers’ invoicesPurchase ordersGoods returned notes

6 Obtain explanations for items which have been outstanding for a long time

Unmatched purchase requisitionsUnmatched Purchase ordersUnmatched goods received notesUnmatched invoices

7 Verify that invoices and credit notes recorded in the purchase day book are

Initialed for prices, calculations and extensions

Cross-referenced to purchase orders, goods received notes etc

Authorized for payment8 Check additions9 Check postings to nominal

ledger accounts and control account

10 Check postings of entries to payables ledger

11 Payable ledger Test check entries back into books of prime entryTest check additions and carried forward balancesNote and enquire into all contra entriesConfirm control account reconciliation has been regularly carried out during the yearExamine control account for unusual entries

9. What are the key risks associated with Payment?Ans. Payment might be made to wrong person

1. False invoices are paid in error2. Invoices are paid too soon3. Payment is not correctly recorded

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4. Credits are not correctly recorded 5. Payments are not recorded in the right period

10. What are the control objectives to mitigate the risks of Payment?Ans. 1. All expenditure made for received goods.2. All expenditure is authorized 3. All expenditure that is made is recorded correctly in the nominal and payables ledgers 4. Payments are not made twice for the same liability

11. What are the Controls to mitigate the risks of Payment?Ans.

1 Cheque and cash payments generally

The cashier generally not be concerned with keeping or writing- up books of account other than those recording payments, nor Should he have access to, or be responsible for the custody of, Securities or title deeds belonging to the company. The person responsible for preparing cheques should not Himself be a cheque signatory. Cheque signatories in turn Should not be responsible for recording payments.

2 Cheque and bank transfer

payments- Cheque and bank transfer requisitions

- Appropriate supporting documentation(for example, invoices)

- Approval by appropriate staff- Presentation to cheque

signatories(in case of cheques)Instigation of bank transfer by appropriate staff.Authority to sign cheques

- Signatories should not also approve cheque requisitions

- Limitations on authority to specific amounts

- Number of signatories- Prohibitions over signing of

blank chequesPrompt dispatch of signed chequesPrompt dispatch of singned chequesObtaining of paid cheques from banksPayments recorded promptly in cash book and nominal and payables ledgers

3 Cash payment - Authorization of expenditure- Cancellation of vouchers to

ensure they cannot be paid twice - Limits on payments- Rules on cash advances to

employees, IOUs and cheque cashing.

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12. What are the tests of Control to mitigate the risks of Payment?Ans.

Payments cash book(authorization) For a sample of payments:- Compare with paid cheques to ensure payee agrees- Check that cheques are signed by the persons authorized to do so within their authority limits-Check that bank transfer was authorized and initiated by appropriate person- Check to suppliers’ invoices for goods and services. Verify that supporting documents are signed as having been checked and passed for payment and have been stamped ‘ paid’- Check to suppliers’ statements- Check to other documentary evidence, as appropriate (agreements, authorized expense vouchers, petty cash books etc)

Payments cash book( recording) For a sample of weeks:- Check the sequence of cheque numbers and enquire into missing numbers- Trace transfers to other bank accounts, petty cash books or other records, as

appropriate- Check additions, including extensions, and balances forward at the beginning and

end of the months covering the periods chosen- Check postings to the payables ledger- Check postings to the nominal ledger, including the control accounts

Bank reconciliations For a period which includes a reconciliation date reperform

reconciliation( see Chapter 13)

Verify that reconciliations have been prepared at regular

Intervals throughout the year

Scrutinize reconciliations for unusual items

Petty cash payments For a sample of payments:

- Check to supporting vouchers

- Check whether they are properly approved

-See that vouchers have been marked and initialed by the

Cashier to prevent their re- use13. What are the weaknesses in a purchase system?

Ans.No procedure to track purchase invoice due dates.

14. Give 5 examples of tests to be performed on the cash payment book? –Term Question

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15. List four examples of purchase documentation on which numerical sequence should be checked? –Term Question

16. Which two control activities are most likely to reduce the risk of payments being made twice for the same liability? –Term Question

Chapter-8

Employee Costs

1. What is the key risk related to calculating wages and salaries?Ans. paying too much

2. What are the risks associated with calculating wages and salaries?Ans. Company might pay employees-1. Too much2. Who have not been at work3. Who have left

3. What are the controls to mitigate the risks associated with calculating wages and salaries?Ans. 1. Employees are only paid for work that they have done2. Gross pay has been calculated correctly and authorized3. Net pay has been calculated correctly

4. What are the tests of controls to mitigate the risks associated with calculating wages and salaries?Ans. 1. Staffing and segregation of duties2. Maintenance of personnel records & regular checking3. Authorizations-

- Engagement and discharge of employees- Changes in pay rates- Overtime- Non-statutory deductions –e.g. Pension- Advances of pay

4. Recording changes in personnel and pay rates5. Keeping timesheets6. Review hours worked7. Record advance pay8. Holiday pay arrangements9. Answering queries10. Review wages against budget

5. Interactive:16. What are the risks associated with recording of wages and salaries and deductions?

Ans. 1. Various elements of pay might not recorded correctly in payroll2. Amount paid might not agree with cash books

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3. Pay might not be recorded correctly in the nominal ledger4. Tax might not calculated correctly

7. What are the controls to mitigate the risks associated with recording of wages and salaries and deductions?Ans. 1. Gross, net pay, deductions – recorded accurately2. Paid amounts recorded correctly in the bank and cashbooks3. Wages and salaries correctly recorded in the nominal ledger4. All deductions have been calculated correctly and authorized5. Correct amount paid to NBR

8. What are the controls that should be in place to mitigate the risks associated with recording of wages and salaries and deductions?Ans. 1. Bases for compilation of payroll –e.g. Clock cards2. Reconciling to payroll information and approval3. Procedures for dealing with non-routine matters4. Maintenance of employees’ previous records5. Checking payroll to individual personnel file6. Reconciling total pay and deductions between one pay day and the next7. Compare actual pay with budget8. Investigate any difference9. Agreement of gross earnings and total tax deducted with taxation returns.

9. What are the tests of controls to mitigate the risks associated with recording of wages and salaries and deductions?Ans. Key control is Reconciliation of wages and salaries.

For wages reconcile with-1. Previous week’s payroll2. Timesheets3. Costing analysis4. Production budget

For salaries reconcile with-

1. previous month’s salary or,2. standard payroll

10. How to check important calculations and re-perform calculations of salaries and wages?Ans. Wages (a number of weeks)-1. Additions of payroll2. Totals of payroll detail3. Additions and cross casts of summary4. Posting of summary to nominal ledger5. Net cash column to cash book6. For voluntary deductions, authorization needed.Salaries (a number of weeks)-1. Same as wages.

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11. How to check calculation of taxation and non-statutory deductions?Ans.1. Scrutinize the control accounts to see appropriate deductions made2. Check payment to govt. treasury are correct.3. For voluntary deductions, authorization needed.

12. Interactive:213. What are the risks associated with payment of wages and salaries?

Ans. Key risk is, payment made incorrectly.1. Employee not paid2. Non-employee paid

14. What are the controls to mitigate the risks associated with payment of wages?Ans. Payment of cash wages-1. Segregation of duties-

- Prepare net pay summary- Filling pay packets- Distribution of wages

2. Authorizations of wage cheque cashed3. Custody of cash

- When cheque cashed- Security of pay packets- Security of transit- Security and prompt banking of unclaimed wages

4. Verification of identity5. Recording distributions

15. What are the controls to mitigate the risks associated with payment of salaries?Ans. 1. Preparation and authorization of cheques 2. Prepare bank transfer list3. Compare cheques and bank transfer list with payroll4. Maintain and reconcile salaries and wages control account

16. What are the tests of controls to mitigate the risks associated with payment of wages and salaries?If wages are paid in cash-1. Attend the pay-out –to ensure procedures are followed2. Compare payroll with packets3. Examine receipts given by employees4. Check unclaimed are recorded in unclaimed wages book5. Check none receive more than 1 packet6. Check entries in unclaimed book with entries in payroll7. Check unclaimed wages are banked regularly8. Check unclaimed wage book shows reason for not claiming9. Check pattern of unclaimed wages –variation indicate failure to record

For salaries-

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1. Check comparison made between each month’s payroll2. Examine paid cheques3. Check certified copy of the bank list

17. Interactive: 318. What can be the weaknesses in a payroll system? What are the possible risks in the

system?Ans. 1. No personnel department. 2. Employees are engaged by department heads with the verbal consent of a director

Risks

1. No personnel department- so, there is no personnel record. Employee could continue to receive salary through bank transfer even after leaving the company

2. No written document –could lead to errors in pay rates19. Interactive:420. List six procedures assurance providers should carry out if wages are paid in cash? –Term

Questions21. How should assurance providers confirm that wages have been paid at the correct rate to

individual employees? –Term QuestionsAns. By reconciling pay rates with employment contract or appointment letter

Chapter-9

Internal Audit

1. What is internal audit?Ans.

2. In what ways does internal audit assist the board?Ans.1.

3. What is the difference between internal audit and external audit?Ans.

4. What are the roles of internal audit?Ans.

5. What activities are normally involved in internal audit?Ans.

6. What are the roles of internal audit in relation to risk management?Ans.

7. What are the roles of internal audit in relation to internal control? What is the scope of work of internal auditor in the internal control area?Ans.

8. What is operational audit? What are the aspects of operational engagement?Ans.

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9. What other function does an internal audit do?Ans.

10. What are the elements of an internal audit that have to have completed cyclically?Ans.

11. Interactive: 112. What does internal audit do? What are the key differences between external and internal

audit? -Term Question.13. Whay are the key differences between external and internal audit? ‘As objectivity is a key

issue for internal auditors, they are likely to routinely be involved in operational activities’ do you agree? Explain. -Term Question

Chapter-10

Documentation

1. What is audit documentation? What are the purposes of documentation?Ans. Or Working paper is the record of- - Procedures- Evidence- ConclusionsPurposes:1. plan and perform audit2. direct and supervise3. to be accountable for work4. record matters with continuing significance in future5. carry out quality control reviews6. external inspections

2. What are the reasons for maintaining audit working papers?Ans.

3. What are the factors that affect the form and content of audit working papers?Ans. 1. Nature of the audit procedures2. Identified risks of material misstatements3. Extent of judgment 4. Significance of evidence5. Nature and extent of problems 6. Need to document of conclusion7. Audit methodology

4. What working papers does an audit file normally contain?Ans. 1. Information to understand entity’s environment and IC

- Information of Legal documents- Copies of legal documents- industry, economic environment- extract form IC manual

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2. Evidence of audit plan and any changes3. Internal audit and conclusion4. Analysis of transactions and balances5. Analysis of ratios and trends6. Assessed risk of material misstatements7. Nature, timing and extent and results of audit procedure8. Evidence of work review of assistants9. Who and when performed audit procedures10. Details of audit procedures performed by another auditor11. Copies of communication with other auditors, experts and third parties12. Copies of communication with management- terms of engagement, material weakness

in IC13. Letters of representation14. Conclusion reached about unusual matters 15. Copies of the financial statements and auditors reports16. Notes of discussions about significant matters with management17. Exceptional circumstances –reason for departing principle

5. What matters should a working paper show?Ans. 1. Client name2. BS date3. File reference4. Preparer name5. Date of preparation6. Subject7. Reviewer name8. Date of review9. Objective of work10. Source of information11. How many sample selected12. Sample size determined13. The work done14. A key to any audit ticks or symbols15. Appropriate cross-referencing16. Results obtained17. Analysis of errors18. Other significant observations19. Conclusion drawn20. Key points highlighted

6. What is automated working paper?Ans. Are packages that aid preparation of working papers , lead schedules, trial balances and the financial statements themselves. These are automatically cross referenced, adjusted and balanced by the computer.

7. What are the advantages and disadvantages of automated working paper?

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Ans.Advantages1. Low risk of errors2. Neater working paper3. Easy to review4. Time saving5. Forms need not carrying to locations6. Flexible to email and fax for reviewDisadvantages1. Lose confidentiality2. Loss of data3. Data can be manipulated

8. Why do auditors need to file working papers?Ans. To facilitate review.

9. What documents are contained in permanent audit files?Ans. 1. Engagement Letters2. New client questionnaire3. Memorandum and articles of association4. Other legal documents –prospectus, lease, sales agreements5. Detail history of client business6. Board minutes of continuing relevance7. Previous years signed accounts, analytical procedures and management letters8. Accounting systems notes, previous years control questionnaires

10. What documents are contained in current audit files?Ans. contain any information of relevance to the current year’s audit1. Financial statements 2. Accounts checklists 3. Management accounts details 4. Reconciliations of management accounts and financial statements5. A summary of unadjusted errors6. Report to partner including details of significant events and errors7. Review notes8. Audit planning memorandum9. Time budgets and summaries10. Letter of representation 11. Management letter12. Notes of board minutes13. Communications with third parties such experts or other auditors.

11. What documents are contained in current audit files covering each working area?Ans.

1. A lead schedule including details of the figures to be included in the accounts

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2. Problems encountered and conclusions drawn3. Audit plans 4. Risk assessments5. Sampling plans6. Analytical procedures7. Details of tests of detail and tests of control

12. What is the need to keep documents secured? What is the time period to retain these documents?Ans. Due to confidentiality requirementsAccording to companies act 1994, section 181 (5), time period is 12 years

13. How to keep secure audit documents?Ans. Paper documents –in locked premisesElectronic documents –protect by electronic controls.

14. Who do the audit working papers belong to?Ans. Assurance provider.

15. Whom do the audit report belong to?Ans. The client, after issued.

16. In what condition the confidentiality of working papers may be breached? What are the procedures?Ans. Working paper may be shown to third party, when there is permission of the client.

17. Classify the following working papers into current Audit files and permanent audit file: -Term Question (2 times)

a. Engagement lettersb. New client questionnairec. Financial statements relating to year under reviewd. Management lettere. Accounts checklistf. Audit planning memog. Board minutes of continuing relevanceh. Accounting system notes

Chapter-11

Evidence and Sampling

1. What are the types of evidence?Ans.

a. Tests of controlsb. Substantive procedures

2. What are the procedures to obtain evidences?3. What is CAAT? What are the types of CAAT? Why do auditors need CAAT?4. What is test data? What are the stages in the use of test data in CAAT? 5. What is Audit software? What is the basis of work of audit software?

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6. Give some examples of what audit software can do.7. What is analytical procedure? How can an auditor use analytical procedure to obtain

evidences?8. What are the factors to consider when using analytical procedures?9. What are the suitability factors of analytical procedures? Mention with examples.10. What are the reliability factors of analytical procedures? Mention with examples.11. In your opinion, what should an auditor do when analytical procedures indentify significant

fluctuations?Ans. Investigate further.

12. What should an auditor do when indentified inconsistency or unexpected result?Ans. Make inquiries of management and corroborate with other evidence.

13. If management responses are not available, what should an auditor do?Ans. Extend the audit testing.

14. What are the possible sources of information for analytical procedure?15. What is directional testing? What are the types of directional testing?

Ans. Derived from the principle of double entry system. Any misstatement in one side will result in a corresponding misstatement in the

opposite direction.Types:

Test to discover Errors- over or understatement-e.g. To ensure that sales picked correctly-start with sales invoice.

Test to discover Omissions – understatement-e.g. To discover whether all raw materials purchased properly processed.-start with goods received notes.

16. When directional testing is normally used?Ans. When testing financial statement assertions of-

Existence Completeness Rights and obligations Valuation

17. How the tests are designed in directional testing?

Test Item Check ExampleDebit items –Expense/Assets

Overstatement From nominal ledger Value and existence

Non-current asset of TK.9,000 recorded as TK.10,000

Asset sold TK.10,000 not recorded

Credit items – Income/Liabilities

Understatement From independent source Posted in correct nominal

ledger

Revenue in despatch note not recorded in revenue account.

18. Interactive: 1, p.195

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19. Why audit of accounting estimates are so important? What are the methods used by an auditor to audit accounting estimates?Ans. Because these are-

Not third party transactions Result of management’s judgment.

20. Define Audit sampling and Population? What are the testing procedures that do not involve sampling?

21. Auditors use sampling approach for testing. When a 100% sampling is preferable?Ans. For certain substantive procedures.

22. What is the extent of sampling used in tests of control?Ans. Less than 100%

23. What are the means of selecting samples? Ans. 1. Statistical sampling2. Non-statistical sampling

24. Define statistical sampling and non-statistical sampling. What is the difference between these?Ans. Statistical Sampling – an approach to sampling in random basis.Non-Statistical sampling – subjective approachDifference:

Sl No. Characteristics Statistical Sampling Non-statistical sampling

1 Approach Random Subjective2 Use of Mathematical techniques Consistently Not consistently3 Evaluation of result Mathematically Subjectively

25. How can samples be collected in non-statistical sampling?Ans. 1. High value or key item 2. All items over a certain amount3. Items to obtain information – about client4. Items to test procedures – whether particular procedures are performed.

26. What matters to consider when designing the sample?Ans. 1. Objectives of audit2. Attributes of population

27. Define with example: 1. Error, 2. Expected error, 3. Sampling Units, 4. Tolerable error.28. Define Sampling risk and Non-Sampling risk.29. What could be the reasons for arising non-sampling risk?30. Give some examples which influence sample size.31. “The smaller the tolerable error, the greater the sample size will need to be”-Do you agree?

Explain.32. What should an auditor consider when considering expected error?33. What are the methods for selecting samples?34. Interactive 2, p.20135. What is the purpose of sampling?

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Ans. To project the conclusion to the whole population.36. If the projected error exceeds tolerable error then what should be the course of action of an

auditor?Ans. Sampling risk must be reassessed & further audit procedure required.

37. Auditor should consider the qualitative aspects of an error. True/ False?38. What is anomalous error?

Ans. – Arises from isolated event.- Occurred for specifically identifiable occasions- Not representative of error in the population.- Extra work needed to identify.- Auditor must be certain that it is anomalous.

39. What factors to consider when drawing conclusion from sampling?Ans. – consider the effect of projected error on other areas of the audit- Estimate probable error by extrapolating the errors.- If error exceeds tolerable error, reassess sampling risk.

40. Interactive 3, p.203

Chapter-12

Management Representations

1. What is management representations?Ans. Statement confirming certain representations in writing.

2. When management representations are required?Ans. When it is the only audit evidence available. Situations are-1. When the facts are management intention2. When the matter is judgmental or opinion – eg. Trading position of a particular

customer3. Define management.

Ans. Management- officers who perform senior managerial functions4. What is the benefit of written confirmation of oral representation?

Ans. It avoids confusion and disagreement5. Who gives management representation?

Senior management – usually directors in BD6. What elements in a management representation is required by BSA 580 to confirm in

writing?Ans. management 1. Acknowledges its responsibility for preparation of FS2. Acknowledges its responsibility for design and implementation of IC3. Believes that, uncorrected misstatement aggregated by the auditors are immaterial

7. When a management representation can be used as an audit evidence?1. Material matters in respect of which other sufficient , appropriate audit evidence cannot

reasonably be expected to exist.

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8. In what condition management representation cannot be used though other evidence is not available?Ans. When other evidence expected to be available but lost, destroyed or not available, then management representation can not be used

9. What is the auditors course of action after receiving management representation?1. Seek corroborative audit evidence2. Evaluate whether representations appear reasonable and are consistent with other

evidences3. Consider whether the individuals making representations can be expected to be well-

informed on the particular matters.10. What should be the course of actions when management representations do not agree with

other evidences?Ans. The auditors should1. Investigate the circumstances of the disagreement 2. If further inquiries produce insufficient answers, carry out alternative procedures3. Consider whether disagreement cast doubt on other representations.

11. Write a management representation letter.

12. Interactive 1, p.215

Chapter-13

Substantive Procedures - Key Financial Statement Figures

1. What are the reasons for which tangible non-current assets are misstated?Ans. 1. Company not actually own the asset.2. Asset doesn’t actually exist or sold3. Owned asset omitted 4. Asset overvalued- by inflating cost or undercharging depreciation.5. Asset undervalued-by not including revaluation or overcharging depreciation6. Asset incorrectly presented in FS

2. What are the financial statement assertions for the assessment of risk of material misstatement of non-current assets?Ans. 1. Existence2. Rights and obligations3. Completeness4. Valuation and allocation5. Presentation and disclosure

3. What are the sources of information for non-current assets?Ans. 1. Non-current asset register2. Purchase invoice 3. Sales invoice for asset sold

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4. Registration documents- e.g. title deeds for property5. Valuations6. Lease or hire purchase documentation7. Physical inspection by auditor8. Depreciation record or calculations- asset register.

4. Worked example: non-current asset assurance engagementPeter auditing Non-current asset assurance engagement at Manufacturing Company Limited (MCL). Related matters are-

MCL has lots of fixed plants- replaced 3 years ago. Several industrial vehicles- distributes inventory Few cars- staffs use Office furniture, fittings, computers

To give the assurance on the assets Peter will test the following:

Completeness Valuation Obtain a schedule of non-current assets. Agree figures- schedule- FS- nominal ledger Compare schedule to asset register to check all

the assets in the schedule are owned by the company

Select some physically present asset and ensure they are in the register

Confirm additions in the schedule are correct

Confirm sample asset’s cost to invoice or valuation to valuation certificates

Compare sample asset’s brought forward depreciation file to previous audit file

Review brought forward asset register files. Confirm accounting policy for depreciation

is correctly applied Review calculation and ecalculate

o depreciation o disposed asseto profit/loss on disposal

Existence Rights and obligations Select sample from register and ensure those

are physically present on site. Select sample from register and vouch for

registration documents-o Vehicles- although indicates the

registered keeper, not owner.o Building- title deedso Plant and Fixtures- Purchase invoice,

ensure its not lease.Review sales invoice for sold assets

Presentation and disclosure Other matters Ensure disclosure requirements regarding non-

current assets have been met. Focus on asset additions.

-these are large portion of assets and least depreciated.

Check property documents- 100%, other assets-sampling basis.

5. Worked example: self-constructed assets.Katie auditing non-currents assets of super market chain Quickshop Ltd. -company built 4 new stores this year.-capitalisedAudit objective-- Completeness -Relevant costs have been capitalised- Valuation -stores valued correctly

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Check-Completeness

Obtain architect’s certificate- ensure work is complete Obtain schedule of all the costs capitalized- ensure costs are complete

Valuation Vouch a sample cost to –appropriate source of evidence

o E.g. labor cost to payroll records Ensure all finance cost included- check bank statement)

6. What are the major risks of misstatement of the intangible non-current asset balances in the financial statement?Ans. 1. Expense being capitalised as non-current assets2. Inappropriate charging of amortization 3. Inflated cost or valuation 4. Impairment review not carried out properly

7. Give some examples of intangible non-current asset assertions.

Existence Valuation1. Expense being capitalised as

non-current assets1. Inappropriate charging of

amortization 2. Inflated cost or valuation 3. Impairment review not carried

out properly8. What are the sources of information for intangible non-current asset?

Ans. 1. Accounting standards on what constitutes an intangible asset2. Purchase invoice 3. Client calculation or schedules4. Specialist valuations5. Auditors understanding of the entity for signs of impairment factors

9. What are the key areas for testing inventories?Ans. 1. Attend inventory count2. Valuation at lower of cost and NRV3. Confirmation of ownership

10. Give some examples of financial statement assertions on inventory.Ans.

Existence Valuation Rights and obligationsAttend inventory countInventory doesn’t exist but included in FS

Valuation at lower of cost and NRVObsolete or damaged inventory stated in full valueWrong inventory value due to miscalculationInventory stated at cost, at the mean time NRV

Confirmation of ownership

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decreased

Completeness Rights and obligations Cut-offAll inventory not included in FS

Inventory belongs to third party included in FS

Inventory actually sold included in FS

11. What are the major risks of misstatement of the inventory balance in the financial statement?Ans. 1. Inventory doesn’t exist but included in FS2. All inventory not included in FS 3. Obsolete or damaged inventory stated in full value4. Wrong inventory value due to miscalculation5. Inventory stated at cost, at the mean time NRV decreased6. Inventory belongs to third party included in FS7. Inventory actually sold included in FS

12. What are the sources of information for testing the assertions related to inventory?Ans. 1. Company’s control over inventory counting2. Attending inventory count3. Confirmation with third party- holding inventory at client premises.4. Purchase invoices5. WIP records 6. Post-year-end sales invoices 7. Post-year-end price list8. Post-year-end sales order

13. What are the controls that should be in place when counting inventory?Ans. 1. Organization of count

1. Supervision – by senior staff2. Marking inventory3. Restriction of inventory movement during count4. Identify damage/obsolete/third party inventory

2. Counting1. Systematic counting2. Two counters or two independent count

3. Recording1. Serial numbering2. Sheets are complete and signed in ink3. Information recorded in count records4. Record quantity, conditions, WIP5. Last numbers of inwards and outwards, internal transfers6. Reconcile inventory records and investigation

14. What control should be present in counting inventory under perpetual system?Ans. Year-end count not necessary. The control system should be tested.

15. What matters should be checked by auditor when perpetual inventory count is used?

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Ans. Check that management1. Ensures all inventory lines counted at least once a year2. Maintains up-to-date inventory records3. Has satisfactory inventory count procedures4. Concerned with cut-off5. Investigates and corrects all material differences.

16. What should be the audit plan for perpetual inventory count?Ans. 1. Attend one of the inventory counts2. Follow up the inventory count attended3. Review the year’s count4. Compare the listing of inventory with the detailed inventory records

17. When NRV is likely to be less than cost?Ans. When there has been:1. Increase in cost2. Fall in selling price3. Physical deterioration4. obsolescence 5. marketing decision to sell product at loss6. errors in production or purchasing

18. Worked example: Audit of inventory.Rajeev is auditing inventory at Icket Ltd a tableware producer. Produces 10% more than ordered. This 10% is obsolete. One store Argus maintains inventory at Icket’s premises. What are the key issues when auditing inventory? Ans. 1. Ensure obsolete inventories not included in full cost2. Inventory in FS really exist.3. All inventory included including retail outlets4. Argus inventory not in FS5. Inventory valued appropriately in FS

Test the following assertions-

Existence Completeness Obtain and review count instructions Identify key issues in counting- eg.

Anything that make counting complex.

Plan count attendance Attend inventory count-

- Sample count- Follow procedure for damaged

ones.- Separate Argus inventory

Select sample on final sheets and trace back to original

Follow up whether sampled items took to final sheet

Follow up Argus inventory not included to final sheet

Cut-off test – year-end inventory not double counted.

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Rights and obligations Valuation Obtain confirmation from Argus

about level of inventory. Compare reply to Icket’s records

Calculation of valuation made correctly

Select sample from-- Raw materials- WIP- FG

Identify accounting policy and check appropriateness

Trace cost to purchase invoice Trace appropriate production level-

WIP or FG? Check production record and

payroll- whether labor cost allocated to WIP

Overhead allocation- eg. Idle time not included, compare with previous year.

Lower of cost or NRV?- check year-end FG valuation to post-year-end sales.

Obsolete items included in valuation at lower of NRV or cost.

Excess branded products- value Zero, price from managers list.

19. What are the key areas when testing Receivables?Ans. 1. Confirm debt owned by customers- existence, rights, obligations, valuation2. Confirm debt still likely to be collected – valuation

20. What are reasons of the major risks of misstatement of the receivables balance?Ans. 1. Debts being uncollectible (valuation)2. Debt being contested by customers – existence, rights and obligations

21. What is the objectives of audit tests in respect of receivables?Ans. To prove that assertions about the receivables balance is correct.

22. What are the sources of information that can be used to test assertions about receivables?1. Receivables ledger information2. Confirmations from customer3. Cash payments received after year-end.

23. What purposes are achieved by verification by direct communication with the customers?Ans. Financial statement assertion are tested regarding-1. Existence2. Rights and obligations

24. What should the auditors do when client refuses to communicate with the customers?Ans. Should consider it as a limitation.

25. What are the methods of confirmation from customers? Describe each.Ans. 1. Positive method

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- requested to give the balance, confirm accuracy- preferable- encourages definite reply- can lead to lower response rate2. Negative method- requested to reply only if stated amount is disputed.

26. When the negative method of obtaining confirmation from customers should be used?Ans. 1. Low risk of material misstatement2. Large number of small balances3. Error expectation is low4. Auditor has no reason to believe that customers will disregard the request.

27. Where should the undelivered items return?Ans. To the auditor’s firm, not client’s office.

28. Write a positive request for confirmation with balance provided as a client.Ans. P.233

29. What classes of account should receive special attention when constructing the sample customers to contact?Ans. 1. Old unpaid accounts2. Accounts written off 3. Accounts with credit balances4. Accounts settled by round sum payments5. Accounts with nil balances6. Accounts that have been paid by the date of the examination

30. Which receivables need further work to carry out?Ans. which1. Disagree with balance stated2. Do not respond

31. What are the reasons for disagreements in the receivables balances?Ans.1. Dispute between client and customer2. Cut off problems3. Money sent before year end but recoded after year-end4. Money received may be posted to wrong account.5. Customers who are suppliers may net off balances6. Teeming and lading- stealing money and incorrectly posting7. Confirmation by customer not received8. Confirmation received just before the year-end9. Differences arising in invoice and cash in transit-do not require adjustments, but dispute

and error by client need further substantive work.32. What are the alternative procedures to verify existence/rights and obligations?

Ans. When impossible to get confirmation1. Check cash receipt after date2. Verify valid purchase order

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3. Examine the account for validity4. Explanation about invoices remaining unpaid5. Check- if balance of the account growing6. Test control on- issue of credit notes and write off of bad debts

33. What should be the test of bad debts?Ans. Reviewing the cash received after date.

34. Worked example: Audit of receivablesAns. P.235

35. What are the major risks of misstatement of the bank and cash balances in the FS?Ans. 1. Not all bank balances owned by the client being disclosed- Rights &

obligations/Existence2. Bank reconciliation differences misstated- valuation3. Material cash floats misstated or omitted- Completeness/Existence

36. What are the sources of information that can be used to test the assertion about bank balance is correct?Ans. 1. Cash book2. Confirmation from the bank3. Bank statements4. Bank reconciliation by client

37. What are the most commonly requested information about bank balances from the bank?Ans. 1. Current 2. Deposit3. Loan4. Other accounts

38. What are the additional information requested about bank account from bank?Ans. 1. Nil balances2. Closed accounts within 12 months prior to confirmation date.3. Maturity and interest terms4. Unused facilities,5. Lines of credit/standby facilities6. Any offset or other rights or encumbrances7. Details of collateral given or received8. Safe custody

39. What should the request letter contain?Ans. 1. Account number2. Type of currency for the account

40. What are the procedures for direct confirmation with bank?Ans. 1. Bank require explicit written authority to disclose information.2. Assurance provider’s request must refer client’s letter of authority and date

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3. Or countersigned by client4. Or accompanied by letter of authority.5. Joint account- signed by all parties6. Time period of disclosure- specific period or indefinite time7. Request should reach bank branch manager two week before client’s year end8. Auditors should check bank response cover all the information

41. What is window dressing?Ans. An attempt to overstate the liquidity of the company by-1. Taking remittance received after year end- increasing balance at bank and reducing

receivables (cash is more liquid)2. Recording cheques paid not actually despatched before year end (healthy looking

current ratio)42. What matters should be included in planning cash count?

Ans. 1. Time and location of cash count2. Name of audit stuff conducting count3. Name of client staff attending count

43. Where location visit for cash count could not be attended what should be done?Ans. Obtain a letter from client confirming the balance

44. What matters apply to the count?Ans. 1. All cash book written in ink2. Up to date3. Count all balances at the same time4. Auditor should not leave alone the cash and negotiable securities.5. Record cash count on working paper on current audit file.

45. Worked example: audit of bankAns. P.239

46. What are the key areas when testing payables?Ans. 1. Ensuring that all liabilities are included2. All liabilities are bona fide owned by the company

47. What are the major risks of misstatements of payables in the financial statements ?Ans. 1. Entity understating its liabilities in the FS (Completeness)2. Cut-off between goods inward and liabilitiy recording being incorrect (Cut-off)3. Non-existent liability being declared (rights and obligation)

48. What are the objectives of test is respect of payables?Ans. To prove that assertions about the liabilities are correct.

49. What are the sources of information?Ans. 1. Payables ledger2. Supplier confirmation

50. When analytical procedure could help?Ans. When balance of payables is inexplicably reduced from previous year.

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51. What is the most important test when considering trade payables?Ans. Comparison of supplier’s statement with payables ledger balances.

52. What kind of payable account balance have the possibility to error of understatement?Ans. It could occur in payables with low and nil balances as with high.- Low balance with major supplier.

53. Where should the sample be collected from?Ans. Client’s list of suppliers, not payables ledger.

54. Is confirmation from suppliers needed?Ans. No

55. What are the circumstances when confirmation from supplier is needed?Ans. 1. Suppliers’ statement is unavailable or incomplete.2. Weakness in internal control 3. Nature of business make it possible to a material misstatement of liabilities.4. Client is deliberately trying to understate payables.5. Accounts appear to be irregular or abnormal.

56. Third party evidence is important. Because testing for understatement. 57. What are the major risks of misstatement of long-term liabilities?

Ans.1. Not all long-term liabilities disclosed (completeness)2. Interest payables not calculated correctly (accuracy)3. Interest payables not included in the correct accounting period (cut-off)4. Disclosure is incorrect (presentation and disclosure)

58. What are the complications an auditor may face in case of debentures?Ans.1. Debentures and loan agreements frequently contain conditions company must comply2. Restrictions on total borrowing 3. Adherence to specific borrowing ratios.

59. What are the sources of information for long-term liabilities?Ans. 1. Schedule of loan/prior audit file2. Statutory books- eg. Register of debentures, Articles of Association3. Loan agreements4. Bank letter and direct confirmation from lenders5. Cash book6. Board minutes7. Client schedules and calculations8. Accounting policies in the FS.

60. What are the items include in the plan of long-term liabilities?Ans. 1. Obtain schedule of loans2. Compare opening balance with previous working paper3. Test clerical accuracy 4. Compare balances to the nominal ledger5. Check name of lender to register of debenture holders

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6. Trace additions and repayments to cash book7. Confirm repayments agree with loan agreement8. Examine cancelled cheques and memoranda of satisfaction for loans repaid9. Verify borrowing limits not exceeded10. Examine signed board minutes relating to new borrowings/repayments11. Obtain direct confirmation from lenders12. Verify interest charged entered in the register and notified to the registrar13. Review restrictive covenants relating to default:- Review any correspondence- Review confirmation replies for non-compliance - If a default appears to exist, determine it’s effect14. Review minutes, cash book to check all loans recorded.

61. What is the key area when testing income statement items?Ans. Completeness

62. What is the type of testing used for revenues and purchase?Ans. Testing of controls

63. What is the major risk associated with revenue?Ans. Being overstated

64. How can revenue be tested?Ans. Select items from nominal ledger, trace back to source documents- eg. Sales invoice, dispatch notes

65. With what items do purchase, revenue, payroll costs have strong relationships?Ans. 1. Purchase has strong relationship with inventories and payables2. Revenue has strong relationship with receivables3. Payroll costs- number of staff, pay rates, overall costs, Tax/NI rates and pay.

66. How can purchase be tested?Ans. Select sample transactions. Start with goods received notes, trace transactions through out to ensure completeness.

67. What are the test of details carried out for payroll costs?Ans. Check a sample payroll record for1. Time worked correctly recorded to clock cards2. Employees exist – from personal records3. Employees are being paid at correct rate - from contracts/personnel records4. Payroll is calculated correctly – reperform the calculations.5. Payment to staffs and tax authorities - ensure by bank statement6. Check posting from payroll to nominal ledger

68. How can interest paid/received be tested?Ans. 1. By inspecting bank statement2. Confirmation from other lender

69. How can expenses be tested?Ans. 1. Analytical procedures2. Vouching transactions to purchase invoice.

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Chapter-14

Codes of Professional Ethics

1. What is the need for ethics in CA profession?Ans.Because- 1. People rely on the accountants 2. Accountants hold position of trust

2. What is the source of ethical guidance?Ans. 1. ICAB2. ISA issued by IFAC

3. What are the advantages of principles based guidance?Ans. 1. Active consideration and demonstration of conclusion- independence for every given

situation rather than agreeing a checklist of forbidden items.2. Broad interpretation of ethical situations – principles encourage compliance and rules

engender deception3. Individual situations covered – it allows variations that are found in individual situations4. Flexible to changing situation – it can accommodate a rapidly changing environment5. Can incorporate prohibitions – contain certain prohibitions

4. What are the fundamental principles of IFAC?Ans.1. Integrity – should be straight forward and honest2. Objectivity – should not allow bias, conflict of interest, undue influence over

professional judgments3. Professional competence and due care – CPD is required all time. Work diligently4. Confidentiality – not disclose information to third party without consent5. Professional behavior – comply with laws and regulations. Avoid any behavior that

discredits the profession5. What are the steps of guidance for the firms and members of IFAC?

Ans.1. Identify threats to independence2. Evaluate whether the threats are insignificant3. If not insignificant, identify and apply safeguards – eliminate or reduce

6. Where no safeguard is available what should an auditor do?Ans.1. Eliminate the interest causing the threat2. Decline the engagement.

7. Define independence of mind and Independence in appearance.Ans.

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Independence of mind – state of mind to conclude without being affected by influences that compromise professional judgment Independence in appearance – avoidance of facts which create doubt that auditors’ integrity, objectivity or professional skepticism has been compromised.

8. What are the sources of threats identified by the IFAC code?Ans.1. Self-interest –eg. Having a financial interest in a client2. Self-review –eg. Auditing FS prepared by the firm 3. Advocacy –eg. Promoting client’s position by dealing in its share4. Familiarity- eg. Auditor have family member at client5. Intimidation –eg. Threaten to replace the auditor6. Management –eg. Doing managements’ job, design or implement IT system

9. What are the general safeguards to the threats identified by IFAC code?Ans.1. Safeguards created by the profession, legislation or regulation2. Safeguards within the work environment

10. Give some examples of safeguards created by the profession.Ans.1. Educational training and experience requirement to entry in profession2. CPD3. Corporate Governance4. Professional standards5. Professional monitoring / disciplinary procedures1. External review by legal third party

11. Give some examples of safeguards in the work environment.Ans.1. Involving an additional professional account for review or advice2. Consulting an independent third party- eg. Professional regulatory body3. Rotating senior personnel4. Discussing ethical issues with those charged with governance in client5. Disclosing nature of services provided and extent of fees charged to those charged with

governance6. Involving other firm to reperform the engagement.

12. What is the period of engagement?Ans. From the commencement of work until the final report being produced.

13. What is the key guidline of ICAB code?Ans. Professional accountants should follow the code in all their professional and business activities.

Chapter-15

Integrity, Objectivity and Independence

1. Define Integrity, Objectivity, and Independence.2. Why do independence and objectivity matter so much?

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3. What are the threats to independence? Describe.Ans. 1. Self- interest threat2. Self- review threat3. Advocacy threat4. Familiarity threat5. Intimidation threat

4. What actions of the client pose threat to the firm’s integrity or professional behavior?Ans. Arise from-1. Illegal activities of the client2. Apparent dishonesty of the client3. Questionable accounting practices of the client.

5. What should an auditor do when client pose threats to firm’s integrity?Ans. 1. Should be declined. Or, 2. Accept- with commitment from those charged with governance to improve corporate governance.

6. What are the ICAB code for resolving ethical conflicts?Ans. Auditor should consider-1. The relevant facts2. The relevant parties3. The ethical issues involved4. The fundamental principles related to the matter in question5. Established internal procedures6. Alternative courses of action.

7. How should an auditor approach to a ethical conflict?Ans. 1. Consider which action most aligns with the fundamental principles2. If cannot determine best course of action, refer it to the relevant department of his firm

for advice3. Firms come to conclusion ‘in-house’4. Further advice from ICAB.

8. As a trainee, how should you resolve ethical conflicts?Ans. Refer to senior member of the firm.

9. What advice does the code of ethics give for the conflicts of interest for the accountant?Ans. Should evaluate the threats that such situations bring and apply safeguards. Includes:1. Obtain advice from within the employer or and independent professional advisor or the

ICAB 2. Use a formal dispute resolution process of the organization3. Seek legal advice.

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