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Chapter 1

Concept of and need for assurance


1. Ans: 2. Ans: 3. Ans: 4. Ans: ICAB is a member of IFAC. True False.

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

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

What is the definition of assurance engagement according to IFAC? 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. What is subject matter? What are the categories of it? Subject Matter: which is evaluated. Eg: computer system. What are the benefits of an assurance engagement? Independent, Professional opinion. Confidence to others. Deterrent to fraud. Attention to deficiency. Investors faith.

5. Ans: 6. Ans:

7. Ans:

Which of the following are specialized audit? Branch audit Fraud investigations Pension scheme audit Internal audit Bank 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. Limited assurance. Define expectations gap. How can you reduce expectations gap? Expectations gap : Lack of understanding of users. Reduce by : Clearly indicating scope & limitations.

Ans: 9. Ans:

10. Ans:

What constitutes expectations gap? Explain why? Lack of understanding. Reasons : i. ii. Not aware of limitations. Considering as guarantee.

11. Ans: 12. Ans:

What purpose is served by spelling out clearly, the scope and limitations of an assurance engagement in the engagement letter? Expectation gap is reduced. What is the key benefit and limitation of assurance? Benefit : Limitation : Independent, Professional verification. Risk of wrong conclusion.

13. Ans: 14. Ans:

What risk is associated with the limitations of assurance engagement? To draw wrong conclusion. Which of the following factor make a person ineligible for being a company auditor? 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. Define reasonable and limited assurance. Compare and contrast between reasonable and limited assurance. Reasonable assurance Limited assurance A very high but not absolute level of assurance. Low level assurance.

15.

Ans:

Both the assurance engagement and gives a conclusion. No. Characteristics Level of assurance Evidence Opinion Reasonable Assurance Limited Assurance

1. 2. 3.

High Sufficient & appropriate Positive

Low Limited Negative

Chapter-3 Process of assurance: Planning the assignment

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 Difference Characteristics Nature Outcome Audit strategy General Audit Plan Audit Plan Specific 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 planning Ans: 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, entitys 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 entitys 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 strategy Ans: 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

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 information b) Anticipated results Budgets, expectation of auditor c) Industry information Ratio of sales to trade receivables. 2. Relationship between: a) FS elements Relation of gross profit to sales b) Financial information and non-financial information Payroll cost to no. of employees.

16. What is the basis for choosing analytical procedures for audit? 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.52 19. 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 misstatement 22. How does materiality assessment help the in decision making? Ans: It helps to decide: 1. How many and what items to examine 2. Whether to use sampling techniques 3. Level of error Crossing this level will lead to say FS not true and fair 23. 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 error 2. 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 entity a) Inherent risk b) 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 Difference: Inherent risk 1. Due to items nature 2. No internal control related Control risk 1.Due to internal control risk 2.Internal control related

29. Give some example that might increase inherent risk. 1. Balance includes estimates 2. Balance is important 3. Financial statements Company in trouble Company to raise finance Directors motive eg. Profit target bonus 4. FS contains complex accounting 5. 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 auditor Because: Inherent and control risk are integral to client Auditors part is detection risk Auditors 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 work 33. 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 level 2. 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. 57 38. What are the steps to identify and assess risk? Ans: Step 1: Identify risk at understanding entity level. Obsolete inventing 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. 59 40. According to BSA 315, which factor indicate a significant risk? Ans: 1.Risk of fraud 2.Recent development Economic, accounting 3.Complexity of transaction 4.Significant transaction with a related party 5.Degree of subjectivity in the financial information 6.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 interventions 2. Manual interventions 3. Complex accounting principles or calculations 4. Opportinity for control procedure not followed. 42. What should an auditor do when found significant risk? Ans: Auditor must evaluate the design & implemention of entitys 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. ~


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2. Substance Procedures-To test assertion level

Test specific balances a) Test of details b) Substantive analytical procedures. 2. Why do Auditors Carry out test of control & substantive procedures?
ANS:

Test of controls: to test internal control toa. Report Shareholder b. Conclude true and fair view c. Test capability to procedure correct information d. Match result with intended result. Substantive Procedures: to test balance or transaction toa. 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 entitys record. Auditor Directly by auditor than indirectly. Entity When control system ok. ~
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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. 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 System b. 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. Inquiry b. Re performance
c.

Inspection.

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 records 2. Examine material journal entries ~
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3. 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?


ANS: Explicit opinions are stated as below-

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State of Companys 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 ~
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e.g. Auditor provide absolute assurance We can reduce those by removing the misunderstandings. 17. What are the contents of an assurance report? ANS: 1. Title Clearly indicating its independence 2. Addressee 3. Subject matter 4. Criteria 5. Significant inherent limitation 6. Restricting use of report When criteria made available to specific users. 7. Responsible party Party and practitioners responsibility 8. ISAE compliance Engagement performed accordingly 9. Work summary In case of negative conclusion 10. 11. 12. Conclusion Date 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 ~
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Chapter 5
Introduction to internal control

1. Ans:

What is internal control? Why does an organization need IC? Internal control: The process designed to achieve entitys objectives. Reasons : 1. Minimize business risk
Main Reason

2. Ensure effective functioning 3. Ensure compliance with laws & regulations. Continue operation.

2. Ans:

What are the limitations of internal controls ? 1. 2. Expensive May not be worth Controls implemented by human Can make mistakes Bad intention Leak password Ic is for routine transactions Standards not fit to unusual transactions.

Human element

3. 3. Ans:

Unusual transactions

Why small companies lack effective internal controls? 1. 2. 3. Human element Fewer employees Lot of people make large control chain. Fraud caught by next person. Segregation of duties Lack

4. Ans:

What are the components of internal control system? 1. 2. Control environment Management functions

3. 4. 5.

Business risk and entitys risk assessment process Business risk inherent to operations Risk assessment process identifying business risk to FS Implement IC Information system relevant to financial reporting objectives. Recording procedures. Control Activities Policies ensuring compliance of management directives. Monitoring Controls Review & Corrective actions.

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5. Ans:

What is audit committee? What are the terms of reference of an audit committee? Subsection of BOD deals with finance and accounts. Terms of reference: 1. 2. 3. 4. 5. 6. Review the integrity of FS Review internal financial controls & risk management systems. Monitor internal audit Recommend about external auditor Monitor independence of external auditor Implement policy on non audit services by the external auditor.

* Key issue 6. Ans: 1. 2.

Financial statements. Preventive Detective

What are the types of control activities? All control activities fall under these two.

Types : 1. 2. Authorization Eg. Approval of documents , overtime Eg. Reconciliations. Comparing internal data with external source. Goods dispatched. Maintain control accounts and TB. TB brings all data together. Arithmetical accuracy. Check sum of invoices. Compare cash inventory with accounting records. Cash count. Limit physical access to assets. Inventory store. Number of people involved in accounting process. Difficult to occur fraud. & accidents. More Checking

Performance review

3. 4.

Information Processing Physical control

5.

Segregation of duties

7. Ans:

In what ways segregation of duties could take place? 1. Segregation of function Transaction carries out. Recording. Maintaining. Segregation of Carry out transaction Steps in transaction. Segregation of accounting operation Some staff should not operate.

2. 3. 8. Ans: 9. Ans:

What are that types IT control Procedure? 1. 2. Application controls. General controls.

What is application control and general control? Differential. Application control Apply to individual application. Ensure. Transaction occurred, authorized, complete, and accurate.

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General control

Apply to Many applications. Ensure. Continued proper operation of system. Supports application control. Application control Individual application Transaction input General control Many application Application control

Difference (a) Scope (b) Control / Support 10. Ans:

Give some examples of general controls. 1. 2. 3. 4. 5. 6. Development of computer applications. Prevention or detection of unauthorized Changes to programs. Testing and documentation of programs changes. Controls to prevent wrong programs or files being used. Control to prevent unauthorized amendments to data files. Control to ensure continuity of operations.

11. Ans: 12. Ans:

In what situation, application control becomes useless? When general control is ineffective. So, review general control first. Give some example of application control. 1. 2. 3. 4. 5. 1. 2. 3. Control over input: Completeness. Control over input: Accuracy Control over input: Authorization Control over processing. Control over mater files and standing data. Manual controls manual input is complete, accurate. Control over output System output using CA manual. Programmed control procedure Using CAAT.

13. Ans:

What controls should an auditor test about application controls?

14. Ans: 15. Ans:

Identify application control & General control. See page no: 95-97 What are the sauces of information about internal controls ? 1. 2. 3. 4. 5. 6. Manuals Policies Minutes of meetings Prior year Interview/Staffs Observation important

16. Ans:

What are the documents used to record understanding of entity? 1. 2. Narrative notes Good for short notes. Aid memories Tick boxes Never asked

Questionnaires/Checklist

3.

Diagrams

Best for recording relationships, reporting lines Time consuming

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17.

Interactive # 1, 2, 3, Page: 99-100 Chapter-6 Revenue 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 are1. Not able to pay 2. Not pay long time 3. 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 pay 2. Orders may be taken from customers who will Not pay long time 3. Orders may not recorded properly Ans. Sl No. 1 2 3 Risks Orders may be taken from customers who are Not able to pay Orders may be taken from customers who will Not pay long time Orders may not recorded properly - not fulfilledcustomers lost 4. What are the control objectives? 1. Get customers with good credit risk 2. Encourage prompt pay 3. Record orders correctly Controls

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4. Fulfilled orders 5. What controls can mitigate the risks of ordering? 1. Segregation of duties Credit control, invoicing, dispatch 2. 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 problems 5. Sequential numbering order documents Checking with numbers

6. Correct price quoted 7. Matching: Customer order production order despatch notes Query orders not matched

8. Deal customer queries 6. What are the tests of control over ordering? Ans. Check that1. Reference obtained for all new customers 2. New accounts authorized by senior 3. Orders accepted from customer within specified credit terms and limits 4. 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?

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Ans. 1. Credit check from Credit Rating Agency 2. Limit credit terms 3. Senior member sign off orders 4. New customer accounts review for prompt payment. Weak companies will do 1 & 3 only. 8. Interactive:1, p.113 9. 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 year 2. Check the customers file for credit check 3. 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 business 2. Despatched but not invoiced 3. Error in invoice 4. Invoice cancelled by wrong credit notes. 12.What are the control objectives to mitigate the following risks? Ans. 1. Despatched goods recorded 2. Correctly invoice sold goods

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3. Invoice raised relate to supplied goods 4. 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

2. Examine goods outwards- quantity, quality, condition 3. Record outwards on a despatch note 4. Matching: despatch notes customer orders invoices 5. Pre-numbering despatch notes 6. Check sequence of despatch notes 7. Check condition of returns 8. Record returns on goods returned notes 9. 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 record 12.Matching- invoice- despatch notes- sales orders 13.Regular review- despatch notes not matched by invoices 14.What are the tests of control used to mitigate risks of despatch & invoicing? Ans.

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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 records 3. 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 numbers 6. 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 numbers 8. Check that dispatch of goods free of charge or on special terms have been authorized by management.

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15.Interactive:2 Ans. 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.117 20.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. 121 25.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. 122 28.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)

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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)

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 Simons 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

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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: 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:

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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: *All goods and services received are used for the companys 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)

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* 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 ledgers Regular maintenance of payables ledger Comparison of monthly statements of account balance from suppliers with payables ledger balances Review of classification of expenditure Reconciliation of payables ledger control account to total of payables ledger balances Create a cut-off accrual of goods received notes not matched by invoices at year-end

Tests of controls The following tests could be used in relation to the controls noted above. Check invoices for goods are: Supported by goods received notes Entered in inventory records Priced correctly by checking to quotations, price lists to see the price is in order Properly referenced with a number and supplier code Correctly coded by type of expenditure 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 For invoices of all types: Check calculations and additions Check entries in purchase day book and verify that they are correctly analysed Check posting to payables ledger For credit notes: Verify the correctness of credit received with correspondence Check entries in inventory records Check entries in record of returns Check entries in purchase day book and verify that they are correctly analyzed

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Check posting to payables ledger Check for returns that credit notes are duly received from the suppliers Test numerical sequence and enquire into missing numbers of : Purchase requisitions Goods received notes Suppliers invoices Purchase orders Goods returned notes Obtain explanations for items which have been outstanding for a long time: Unmatched purchase requisitions Unmatched Purchase orders Unmatched goods received notes Unmatched 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 etc Authorized for payment Check additions Check postings to nominal ledger accounts and control account Check postings of entries to payables ledger Payable ledger For a sample of accounts recorded in the payables ledger: Test check entries back into books of prime entry Test check additions and carried forward balances Note and enquire into all contra entries Confirm control account reconciliation has been regularly carried out during the year Examine control account for unusual entries

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Payment
Risks and control objectives The following risks arise at this stage of proceedings: False invoices are paid in error Invoices are paid too soon Payment is not correctly recorded Credits are not correctly recorded Payments are not recorded in the right period 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 received All expenditure is authorized All expenditure that is made is recorded correctly in the nominal and payables ledgers Payments 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 writing- generally payments, nor of,

The cashier generally not be concerned with keeping or up books of account other than those recording Should he have access to, or be responsible for the custody 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.

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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 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 controls The 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

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- 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 For a period which includes a reconciliation date reconciliation( see Chapter 13) Verify that reconciliations have been prepared at regular Intervals throughout the year Scrutinize reconciliations for unusual items

Bank reconciliations reperform

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- Authorisation 1. Orders are authorized and actually required by the company 2. Authorized supplier 3. Competitive price 3. What are the controls to mitigate the risk of purchase ordering? Ans. 1. Segregation of duties- requisition and ordering 2. Policy for choice of suppliers 3. Evidence for purchase requirement- eg. pre-set re-order quantities, re-order levels 4. Prepare order forms after receiving pre-numbered purchase requisition 5. Authorized order forms 6. Pre-numbered order forms 7. Safeguarding of blank order forms 8. Review from outstanding orders 9. Monitoring of supplier terms and conditions- eg. bulk order and prompt payment discounts 4. 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 made 2. Check sequence of pre- numbered order forms

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3.

Check orders are supported by a purchase requisition

4. 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 ordered 2. Accepting invoice for poor quality goods Other risks: 1. Misappropriation for private use 2. Accepting unordered goods 3. Invoices may not be recorded- resulting in non- payment 4. Company may not take advantage of the full period of credit extended 5. 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 company 2. Only ordered goods are accepted 3. Order has been authorized 4. Accurately recording goods 5. 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 recorded 7. All credit notes that are received are recorded in the nominal and payables ledgers 8. All entries in the payable ledger are made to the correct payables ledger accounts 9. Cut- off applied correctly to the payables ledger 7. What are the Controls to mitigate the risks of goods inward and recording? Ans.

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1. Examination of goods inwards Quality Quantity Condition

2. Recording arrival and acceptance- Pre-numbered goods received notes 3. Compare goods received notes with purchase orders 4. Referencing of supplier invoices- eg. numerical sequence and supplier reference 5. Checking suppliers invoices 6. prices, quantities, accuracy of calculation 7. Compare with order and goods received note 8. Recording return of goods- pre-numbered goods returned notes 9. Procedures for obtaining credit notes from suppliers 10.Segregation of duties- accounting and checking functions 11.Prompt recording of purchases and purchases returns 12.Regular maintenance of payables ledger 13.Comparison of monthly statements of account balance from suppliers with payables ledger balances 14.Review of classification of expenditure 15.Reconciliation of payables ledger control account to total of payables ledger balances 16.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 records 3. Priced correctly by checking to quotations, price lists to see the price is in order

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4. Properly referenced with a number and supplier code 5. Correctly coded by type of expenditure 6. 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 Check calculations and additions Check entries in purchase day book and verify that they are correctly analysed Check posting to payables ledger Verify the correctness of credit received with correspondence Check entries in inventory records Check entries in record of returns Check entries in purchase day book and verify that they are correctly analyzed Check posting to payables ledger

For invoices of all types

For credit notes

4 5

Check for returns that credit notes are duly received from the suppliers Test numerical sequence and enquire into missing numbers of Obtain explanations for items which have been outstanding for a long time Verify that invoices and credit notes recorded in the purchase day book are Check additions Check postings to nominal ledger accounts and control account Check postings of entries to payables ledger Payable ledger

Purchase requisitions Goods received notes Suppliers invoices Purchase orders Goods returned notes Unmatched purchase requisitions Unmatched Purchase orders Unmatched goods received notes Unmatched invoices Initialed for prices, calculations and extensions Cross-referenced to purchase orders, goods received notes etc Authorized for payment

8 9 10 11

Test check entries back into books of prime entry Test check additions and carried forward balances Note and enquire into all contra entries Confirm control account reconciliation has been regularly carried out during the year Examine control account for unusual entries

9. What are the key risks associated with Payment?

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Ans. Payment might be made to wrong person 1. False invoices are paid in error 2. Invoices are paid too soon 3. Payment is not correctly recorded 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 The cashier generally not be concerned with generally 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. Cheque and bank transfer Cheque and bank transfer requisitions payments- 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

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Cash payment

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

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

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Bank reconciliations reperform

For a period which includes a reconciliation date 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


13.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 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 employees1. Too much 2. Who have not been at work

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3. 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 done 2. Gross pay has been calculated correctly and authorized 3. 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 duties 2. Maintenance of personnel records & regular checking 3. AuthorizationsEngagement 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 rates 5. Keeping timesheets 6. Review hours worked 7. Record advance pay 8. Holiday pay arrangements 9. Answering queries 10.Review wages against budget 5. Interactive:1 6. What are the risks associated with recording of wages and salaries and deductions? Ans.

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1. Various elements of pay might not recorded correctly in payroll 2. Amount paid might not agree with cash books 3. Pay might not be recorded correctly in the nominal ledger 4. 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 accurately 2. Paid amounts recorded correctly in the bank and cashbooks 3. Wages and salaries correctly recorded in the nominal ledger 4. All deductions have been calculated correctly and authorized 5. 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 cards 2. Reconciling to payroll information and approval 3. Procedures for dealing with non-routine matters 4. Maintenance of employees previous records 5. Checking payroll to individual personnel file 6. Reconciling total pay and deductions between one pay day and the next 7. Compare actual pay with budget 8. Investigate any difference 9. 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-

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1. Previous weeks payroll 2. Timesheets 3. Costing analysis 4. Production budget For salaries reconcile with1. previous months 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 payroll 2. Totals of payroll detail 3. Additions and cross casts of summary 4. Posting of summary to nominal ledger 5. Net cash column to cash book 6. For voluntary deductions, authorization needed. Salaries (a number of weeks)1. Same as wages. 11.How to check calculation of taxation and non-statutory deductions? Ans. 1. Scrutinize the control accounts to see appropriate deductions made 2. Check payment to govt. treasury are correct. 3. For voluntary deductions, authorization needed. 12.Interactive:2 13.What are the risks associated with payment of wages and salaries? Ans. Key risk is, payment made incorrectly. 1. Employee not paid 2. Non-employee paid

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14.What are the controls to mitigate the risks associated with payment of wages? Ans. Payment of cash wages1. Segregation of dutiesPrepare net pay summary Filling pay packets Distribution of wages

2. Authorizations of wage cheque cashed 3. Custody of cash When cheque cashed Security of pay packets Security of transit Security and prompt banking of unclaimed wages

4. Verification of identity 5. 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 list 3. Compare cheques and bank transfer list with payroll 4. 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 cash1. Attend the pay-out to ensure procedures are followed 2. Compare payroll with packets 3. Examine receipts given by employees

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4. Check unclaimed are recorded in unclaimed wages book 5. Check none receive more than 1 packet 6. Check entries in unclaimed book with entries in payroll 7. Check unclaimed wages are banked regularly 8. Check unclaimed wage book shows reason for not claiming 9. Check pattern of unclaimed wages variation indicate failure to record For salaries1. Check comparison made between each months payroll 2. Examine paid cheques 3. Check certified copy of the bank list

17.Interactive: 3 18. 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 rates 19.Interactive:4 20.List six procedures assurance providers should carry out if wages are paid in cash? Term Questions 21.How should assurance providers confirm that wages have been paid at the correct rate to individual employees? Term Questions Ans. By reconciling pay rates with employment contract or appointment letter Chapter-9

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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. 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: 1 12.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

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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 ofProcedures Evidence Conclusions

Purposes: 1. plan and perform audit 2. direct and supervise 3. to be accountable for work 4. record matters with continuing significance in future 5. carry out quality control reviews 6. 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 procedures 2. Identified risks of material misstatements 3. Extent of judgment 4. Significance of evidence 5. Nature and extent of problems 6. Need to document of conclusion 7. Audit methodology

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4. What working papers does an audit file normally contain? Ans. 1. Information to understand entitys environment and IC - Information of Legal documents - Copies of legal documents - industry, economic environment - extract form IC manual 2. Evidence of audit plan and any changes 3. Internal audit and conclusion 4. Analysis of transactions and balances 5. Analysis of ratios and trends 6. Assessed risk of material misstatements 7. Nature, timing and extent and results of audit procedure 8. Evidence of work review of assistants 9. Who and when performed audit procedures 10.Details of audit procedures performed by another auditor 11.Copies of communication with other auditors, experts and third parties 12.Copies of communication with management- terms of engagement, material weakness in IC 13.Letters of representation 14.Conclusion reached about unusual matters 15. Copies of the financial statements and auditors reports 16.Notes of discussions about significant matters with management 17.Exceptional circumstances reason for departing principle 5. What matters should a working paper show? Ans. 1. Client name 2. BS date 3. File reference

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4. Preparer name 5. Date of preparation 6. Subject 7. Reviewer name 8. Date of review 9. Objective of work 10.Source of information 11.How many sample selected 12.Sample size determined 13.The work done 14.A key to any audit ticks or symbols 15.Appropriate cross-referencing 16.Results obtained 17.Analysis of errors 18.Other significant observations 19.Conclusion drawn 20.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? Ans. Advantages 1. Low risk of errors 2. Neater working paper 3. Easy to review 4. Time saving

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5. Forms need not carrying to locations 6. Flexible to email and fax for review Disadvantages 1. Lose confidentiality 2. Loss of data 3. 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 Letters 2. New client questionnaire 3. Memorandum and articles of association 4. Other legal documents prospectus, lease, sales agreements 5. Detail history of client business 6. Board minutes of continuing relevance 7. Previous years signed accounts, analytical procedures and management letters 8. 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 years audit

1. Financial statements 2. Accounts checklists 3. Management accounts details 4. Reconciliations of management accounts and financial statements 5. A summary of unadjusted errors 6. Report to partner including details of significant events and errors

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7. Review notes 8. Audit planning memorandum 9. Time budgets and summaries 10. 11. 12. Letter of representation Management letter Notes of board minutes

13. 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 2. Problems encountered and conclusions drawn 3. Audit plans 4. Risk assessments 5. Sampling plans 6. Analytical procedures 7. 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 requirements According to companies act 1994, section 181 (5), time period is 12 years 13.How to keep secure audit documents? Ans. Paper documents in locked premises Electronic documents protect by electronic controls. 14.Who do the audit working papers belong to? Ans. Assurance provider.

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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 letters b. New client questionnaire c. Financial statements relating to year under review d. Management letter e. Accounts checklist f. Audit planning memo g. Board minutes of continuing relevance h. Accounting system notes

Chapter-11 Evidence and Sampling 1. What are the types of evidence? Ans. a. Tests of controls b. 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? 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?

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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

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Rights and obligations Valuation

17.How the tests are designed in directional testing? Test Item Debit items Expense/Asset s Check Overstatement From nominal ledger Value and existence Example Non-current asset of TK.9,000 recorded as TK.10,000 Asset sold TK.10,000 not recorded Revenue in despatch note not recorded in revenue account.

Credit items Understatement Income/Liabiliti From independent es source Posted in correct nominal ledger 18.Interactive: 1, p.195

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 managements 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 sampling

2. Non-statistical sampling 24.Define statistical sampling and non-statistical sampling. What is the difference between these?

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Ans. Statistical Sampling an approach to sampling in random basis. Non-Statistical sampling subjective approach Difference: Sl No. 1 2 Characteristics Statistical Sampling Random Consistently Non-statistical sampling Subjective Not consistently

Approach Use of Mathematical techniques 3 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 amount 3. Items to obtain information about client 4. Items to test procedures whether particular procedures are performed. 26.What matters to consider when designing the sample? Ans. 1. Objectives of audit 2. 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.201 35.What is the purpose of sampling? Ans. To project the conclusion to the whole population.

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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 are1. When the facts are management intention 2. When the matter is judgmental or opinion eg. Trading position of a particular customer

3. Define management. Ans. Management- officers who perform senior managerial functions 4. What is the benefit of written confirmation of oral representation?

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Ans. It avoids confusion and disagreement 5. Who gives management representation? Senior management usually directors in BD

6. What elements in a management representation is required by BSA 580 to confirm in writing? Ans. management 1. Acknowledges its responsibility for preparation of FS 2. Acknowledges its responsibility for design and implementation of IC 3. 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. 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 evidence 2. Evaluate whether representations appear reasonable and are consistent with other evidences 3. 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 should 1. Investigate the circumstances of the disagreement 2. If further inquiries produce insufficient answers, carry out alternative procedures 3. Consider whether disagreement cast doubt on other representations. 11.Write a management representation letter.

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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 doesnt actually exist or sold 3. Owned asset omitted 4. Asset overvalued- by inflating cost or undercharging depreciation. 5. Asset undervalued-by not including revaluation or overcharging depreciation 6. 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. Existence 2. Rights and obligations 3. Completeness 4. Valuation and allocation 5. Presentation and disclosure 3. What are the sources of information for non-current assets? Ans. 1. Non-current asset register 2. Purchase invoice 3. Sales invoice for asset sold 4. Registration documents- e.g. title deeds for property 5. Valuations

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6. Lease or hire purchase documentation 7. Physical inspection by auditor 8. Depreciation record or calculations- asset register. 4. Worked example: non-current asset assurance engagement Peter 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 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 Valuation Confirm sample assets cost to invoice or valuation to valuation certificates Compare sample assets 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 asset o profit/loss on disposal Rights and obligations Select sample from register and vouch for registration documentso Vehicles- although indicates the registered keeper, not owner. o Building- title deeds o Plant and Fixtures- Purchase invoice, ensure its not lease. Review sales invoice for sold assets Other matters Focus on asset additions. -these are large portion of assets and least depreciated. Check property documents- 100%, other assets-sampling basis.

Existence Select sample from register and ensure those are physically present on site.

Presentation and disclosure Ensure disclosure requirements regarding non-current assets have been met.

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5. Worked example: self-constructed assets. Katie auditing non-currents assets of super market chain Quickshop Ltd. -company built 4 new stores this year. -capitalised Audit objective- Completeness -Relevant costs have been capitalised - Valuation -stores valued correctly CheckCompleteness Obtain architects 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 assets 2. 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. Valuation 1. Inappropriate charging of amortization 2. Inflated cost or valuation 3. Impairment review not carried out properly 8. What are the sources of information for intangible non-current asset? Ans. Existence 1. Expense being capitalised as noncurrent assets

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1. Accounting standards on what constitutes an intangible asset 2. Purchase invoice 3. Client calculation or schedules 4. Specialist valuations 5. Auditors understanding of the entity for signs of impairment factors 9. What are the key areas for testing inventories? Ans. 1. Attend inventory count 2. Valuation at lower of cost and NRV 3. Confirmation of ownership 10.Give some examples of financial statement assertions on inventory. Ans. Existence Attend inventory count Inventory doesnt exist but included in FS Valuation Valuation at lower of cost and NRV Obsolete or damaged inventory stated in full value Wrong inventory value due to miscalculation Inventory stated at cost, at the mean time NRV decreased Rights and obligations Confirmation of ownership

Rights and obligations Cut-off Inventory belongs to Inventory actually sold third party included in included in FS FS 11.What are the major risks of misstatement of the inventory balance in the financial statement? Ans. 1. Inventory doesnt exist but included in FS 2. All inventory not included in FS 3. Obsolete or damaged inventory stated in full value 4. Wrong inventory value due to miscalculation 5. Inventory stated at cost, at the mean time NRV decreased

Completeness All inventory not included in FS

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6. Inventory belongs to third party included in FS 7. Inventory actually sold included in FS 12.What are the sources of information for testing the assertions related to inventory? Ans. 1. Companys control over inventory counting 2. Attending inventory count 3. Confirmation with third party- holding inventory at client premises. 4. Purchase invoices 5. WIP records 6. Post-year-end sales invoices 7. Post-year-end price list 8. 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 staff 2. Marking inventory 3. Restriction of inventory movement during count 4. Identify damage/obsolete/third party inventory 2. Counting 1. Systematic counting 2. Two counters or two independent count 3. Recording 1. Serial numbering 2. Sheets are complete and signed in ink 3. Information recorded in count records 4. Record quantity, conditions, WIP 5. Last numbers of inwards and outwards, internal transfers

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6. 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? Ans. Check that management 1. Ensures all inventory lines counted at least once a year 2. Maintains up-to-date inventory records 3. Has satisfactory inventory count procedures 4. Concerned with cut-off 5. Investigates and corrects all material differences. 16.What should be the audit plan for perpetual inventory count? Ans. 1. Attend one of the inventory counts 2. Follow up the inventory count attended 3. Review the years count 4. 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 cost 2. Fall in selling price 3. Physical deterioration 4. obsolescence 5. marketing decision to sell product at loss 6. errors in production or purchasing 18.Worked example: Audit of inventory.

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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 Ickets premises. What are the key issues when auditing inventory? Ans. 1. Ensure obsolete inventories not included in full cost 2. Inventory in FS really exist. 3. All inventory included including retail outlets 4. Argus inventory not in FS 5. Inventory valued appropriately in FS

Test the following assertionsExistence 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 Rights and obligations Obtain confirmation from Argus about level of inventory. Compare reply to Ickets records Completeness 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.

Valuation 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

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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 productsvalue Zero, price from managers list. 19.What are the key areas when testing Receivables? Ans. 1. Confirm debt owned by customers- existence, rights, obligations, valuation 2. 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 information 2. Confirmations from customer 3. 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 regarding1. Existence 2. Rights and obligations 24.What should the auditors do when client refuses to communicate with the customers? Ans. Should consider it as a limitation.

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25.What are the methods of confirmation from customers? Describe each. Ans. 1. Positive method requested to give the balance, confirm accuracy preferable encourages definite reply can lead to lower response rate

2. 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 misstatement 2. Large number of small balances 3. Error expectation is low 4. Auditor has no reason to believe that customers will disregard the request. 27.Where should the undelivered items return? Ans. To the auditors firm, not clients 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 accounts 2. Accounts written off 3. Accounts with credit balances 4. Accounts settled by round sum payments 5. Accounts with nil balances

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6. Accounts that have been paid by the date of the examination 30.Which receivables need further work to carry out? Ans. which 1. Disagree with balance stated 2. Do not respond 31.What are the reasons for disagreements in the receivables balances? Ans. 1. Dispute between client and customer 2. Cut off problems

3. Money sent before year end but recoded after year-end 4. Money received may be posted to wrong account. 5. Customers who are suppliers may net off balances 6. Teeming and lading- stealing money and incorrectly posting 7. Confirmation by customer not received 8. Confirmation received just before the year-end 9. 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 confirmation 1. Check cash receipt after date 2. Verify valid purchase order 3. Examine the account for validity 4. Explanation about invoices remaining unpaid 5. Check- if balance of the account growing 6. 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.

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34.Worked example: Audit of receivables Ans. 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/Existence 2. Bank reconciliation differences misstated- valuation 3. 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 book 2. Confirmation from the bank 3. Bank statements 4. Bank reconciliation by client 37.What are the most commonly requested information about bank balances from the bank? Ans. 1. Current 2. Deposit 3. Loan 4. Other accounts 38.What are the additional information requested about bank account from bank? Ans. 1. Nil balances 2. Closed accounts within 12 months prior to confirmation date. 3. Maturity and interest terms 4. Unused facilities,

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5. Lines of credit/standby facilities 6. Any offset or other rights or encumbrances 7. Details of collateral given or received 8. Safe custody 39.What should the request letter contain? Ans. 1. Account number 2. 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 providers request must refer clients letter of authority and date 3. Or countersigned by client 4. Or accompanied by letter of authority. 5. Joint account- signed by all parties 6. Time period of disclosure- specific period or indefinite time 7. Request should reach bank branch manager two week before clients year end 8. Auditors should check bank response cover all the information 41.What is window dressing? Ans. An attempt to overstate the liquidity of the company by1. 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 count 2. Name of audit stuff conducting count

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3. 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 ink 2. Up to date 3. Count all balances at the same time 4. 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 bank Ans. P.239 46.What are the key areas when testing payables? Ans. 1. Ensuring that all liabilities are included 2. 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 ledger

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2. Supplier confirmation 50.When analytical procedure could help? Ans. When balance of payables is inexplicably reduced from previous year. 51.What is the most important test when considering trade payables? Ans. Comparison of suppliers 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. Clients 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?

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Ans. 1. Debentures and loan agreements frequently contain conditions company must comply 2. 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 file 2. Statutory books- eg. Register of debentures, Articles of Association 3. Loan agreements 4. Bank letter and direct confirmation from lenders 5. Cash book 6. Board minutes 7. Client schedules and calculations 8. Accounting policies in the FS. 60.What are the items include in the plan of long-term liabilities? Ans. 1. Obtain schedule of loans 2. Compare opening balance with previous working paper 3. Test clerical accuracy 4. Compare balances to the nominal ledger 5. Check name of lender to register of debenture holders 6. Trace additions and repayments to cash book 7. Confirm repayments agree with loan agreement 8. Examine cancelled cheques and memoranda of satisfaction for loans repaid 9. Verify borrowing limits not exceeded 10.Examine signed board minutes relating to new borrowings/repayments 11.Obtain direct confirmation from lenders

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12.Verify interest charged entered in the register and notified to the registrar 13.Review restrictive covenants relating to default: Review any correspondence Review confirmation replies for non-compliance If a default appears to exist, determine its effect

14.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 documentseg. 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 payables 2. Revenue has strong relationship with receivables 3. 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 for 1. Time worked correctly recorded to clock cards

2. Employees exist from personal records

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3. Employees are being paid at correct rate - from contracts/personnel records 4. Payroll is calculated correctly reperform the calculations. 5. Payment to staffs and tax authorities - ensure by bank statement 6. Check posting from payroll to nominal ledger 68.How can interest paid/received be tested? Ans. 1. By inspecting bank statement 2. Confirmation from other lender 69.How can expenses be tested? Ans. 1. Analytical procedures 2. Vouching transactions to purchase invoice.

Chapter-14 Codes of Professional Ethics 1. What is the need for ethics in CA profession? Ans. Because1. People rely on the accountants 2. Accountants hold position of trust 2. What is the source of ethical guidance? Ans. 1. ICAB 2. ISA issued by IFAC 3. What are the advantages of principles based guidance? Ans.

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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 deception 3. Individual situations covered it allows variations that are found in individual situations 4. Flexible to changing situation it can accommodate a rapidly changing environment 5. Can incorporate prohibitions contain certain prohibitions

4. What are the fundamental principles of IFAC? Ans. 1. Integrity should be straight forward and honest 2. Objectivity should not allow bias, conflict of interest, undue influence over professional judgments 3. Professional competence and due care CPD is required all time. Work diligently 4. Confidentiality not disclose information to third party without consent 5. Professional behavior comply with laws and regulations. Avoid any behavior that discredits the profession 5. What are the steps of guidance for the firms and members of IFAC? Ans. 1. Identify threats to independence 2. Evaluate whether the threats are insignificant 3. 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 threat 2. Decline the engagement. 7. Define independence of mind and Independence in appearance.

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Ans. 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 client 2. Self-review eg. Auditing FS prepared by the firm 3. Advocacy eg. Promoting clients position by dealing in its share 4. Familiarity- eg. Auditor have family member at client 5. Intimidation eg. Threaten to replace the auditor 6. 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 regulation 2. 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 profession 2. CPD 3. Corporate Governance 4. Professional standards 5. Professional monitoring / disciplinary procedures 1. 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 advice

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2. Consulting an independent third party- eg. Professional regulatory body 3. Rotating senior personnel 4. Discussing ethical issues with those charged with governance in client 5. Disclosing nature of services provided and extent of fees charged to those charged with governance 6. 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? 3. What are the threats to independence? Describe. Ans. 1. Self- interest threat 2. Self- review threat 3. Advocacy threat 4. Familiarity threat 5. Intimidation threat 4. What actions of the client pose threat to the firms integrity or professional behavior? Ans. Arise from1. Illegal activities of the client 2. Apparent dishonesty of the client 3. Questionable accounting practices of the client.

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5. What should an auditor do when client pose threats to firms 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 consider1. The relevant facts 2. The relevant parties 3. The ethical issues involved 4. The fundamental principles related to the matter in question 5. Established internal procedures 6. Alternative courses of action. 7. How should an auditor approach to a ethical conflict? Ans. 1. Consider which action most aligns with the fundamental principles 2. If cannot determine best course of action, refer it to the relevant department of his firm for advice 3. 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 organization 3. Seek legal advice.

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