Chapter-1

Concept of and need for assurance.

1. What is assurance?
Assurance is one in which a practitioner expresses a conclusion designed to
enhance the degree of confidence the intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against
criteria.
Key element of assurance engagement:
1. Three people or group of people involve (practitioner, Intended users, Responsible
party.
2. A subject matter (Data, Systems, Behavior, process).
3. Suitable criteria (Standards, code of practice).
4. Sufficient appropriate evidence to support the assurance opinion.
5. A written report in appropriate form.
Interactive Question 1, page no 6.
Type of assurance engagement:
The framework identify two type of assurance engagement-
1. Reasonable level of assurance (high but not absolute level of assurance).
2. Limited level of assurance.
The key difference between the two types of assurance engagement:
 The evidence obtained.
 The type of opinion given.
Summary of type of engagement:

Type Evidence sought Conclusion

given
Reasonable assurance Sufficient appropriate Positive.
Limited assurance Sufficient and appropriate. (lower level ) Negative.
What is audit?
The objective of an audit of financial statements is to enable the auditor to express an opinion
whether the financial statements are prepared in all material respects, in according with an applicable
financial reporting framework.
The key criteria/ element:
1. Three party (The shareholder, Board director, audit firm ).
2. Subject matter (The financial statement ).
3. Relevance criteria (Law and accounting standards).
4. Evidence (Sufficient and appropriate).
5. Written report in suitable form. (audit report)
Describe the terms “True and Fair”.
True: - Information is factual and conforms with reality, not false.
Fair: - information is free from discrimination and bias in compliance with expected standards and
rules.
Company Act 1994
The companies Act 1994 require that auditors must be member of ICAB.
The ICAB is a recognized supervisory Autonomous Body under the Ministry of Commerce the
Government of Bangladesh.
Who are the ineligible for being a company auditor as per Company Act?
As per Company Act the following are ineligible for being a company auditor:
1. An officer or employee of the company.
2. A partner.
3. A person who is indebted to company exceeding Tk. 1000.
4. A person who is a director or member of a private company or a partner of a firm. Which the
managing agent of the company?
5. A person who is a director or holder shares exceeding 5% of the subscribed capital.
6. Limitation of systems.
BSA-200:
Objective and general principles governing an audit financial statements state that auditor should
comply relevant ethical requirements relating to audit engagements.
What is assurance important/ describe the benefit of assurance?
Benefit-
The key benefit of assurance is-
1. Independent.
2. Professional verification.
Subsidiary benefit-
1. Add confident to other users.
2. Deterrent to error/ fraud.
Assurance helps to users that high quality, reliable information exists, leading to effective market
investors have in and trust.
Why can assurance never be absolute?
Assurance can never be absolute because assurance provision has limitation.
Limitation of assurance service include-
1. Subjective (inherent limitation)
2. Sampled (Test basis)
3. Limitation of third parties
4. Limitation of reporting.
5. Include estimate.
6. Limitation of systems.
What matters are include in an audit engagement letter?
OR, Describe the content of audit engagement letter.
Content of audit engagement Letter
 The objective of the audit of financial statements
 Management’s responsibility
 The scope of the audit
 Reporting form
 Test nature and inherent limitation
 Unrestricted access
Auditor may wish to include the following-
 Audit plan
 Fees
 Any restriction of auditor’s liability

Write the communication letter with previous auditor.

We can communicate the previous auditor by the following manner:

To,
Y &Co.
Chartered Accountants
Ref: NDB capital Ltd.

Dear Sir,
We have please in informing you that we have been appointed as auditors of “New Client Co. Ltd” for the
year December 2002. Since you are the previous auditor of the company, we would like to know from you if
there is any professional reason as to why we should not accept the appointment.

Mowla Mohammad & CO.

Chartered Accountants

Chapter-3
Process of Assurance: Planning the assignment
What is audit strategy?
Audit Strategy:
The formulation of the general strategy for the audit which sets the scope, timing and direction of the
audit and guides the development of the audit plan.
What is audit plan?
Audit plan.
An audit plan shows how the overall audit strategy will be implemented.
An audit plan is more detailed than the audit strategy and sets out the nature, timing and extent of
audit procedure to be performed by engagement team members in oder to obtain sufficient
appropriate audit evidence.
Describe the structure approached to planning?
A structured approach to planning:
1. Ensuring that ethical requirement continue to be met.
2. Ensuring the terms of the engagement is understood.
3. Establishing the overall audit strategy.
Mention the contents of an audit strategy.
Key contents of an audit strategy.
 Understanding the entity’s environment
 Understanding the accounting and internal control systems
 Risk and materiality
 Consequent nature, timing and extent of procedures
 Co-ordination, direction, supervision and review.
 Other matters
Understanding the entity:
As per BSA-315 the auditor should obtain and understanding of the entity and its environment.
 Why do need an understanding of entity’s environment?
 To identify and assess the risks of material misstatement
 To design and perform further audit procedure
 To provide a frame of reference for exercising audit judgment.
What do you understand of entity?
 Industry, regulatory and other external factors
 Nature of the entity
 Internal control
 Measurement and review of entity’s financial statement.
 Objective and strategies and relating business risk.
How to understand of an entity’s environment?
 Inquiries of management and other within the entity.
 Analytical procedures.
 Observation and inspection.
 Prior period knowledge.
 Discussion of the susceptibility of the f/s.
What matters are including in the client profile?
1. Shareholder-(Information regarding Shareholder)
2. Director-(Name of Director)
3. Operation-(Name of operation)
4. Customer-(Detail of customer)
5. Supplier-(Number and name of supplier)
6. IT-(The accounting system is completely computerized)
7. Financial performance (Company formed 20 years ago and has always been profitable)
8. Future plan (No new plan that we are aware of)
What do you mean by “Professional skepticism”?
Professional skepticism:
An attitude of professional skepticism means the auditor makes a critical assessment, with a
questioning mind, of the validity of audit evidence obtained and is alert to audit that. Professional
skepticism does not mean that auditors should disbelieve everything that they are told, however they
must have a questioning attitude.
2. Analytical procedures:
What is analytical procedure?
Analytical procedures mean evaluation of financial information made by a study of plausible
relationships among both financial and nonfinancial data.
What matters are included in the analytical procedures?
The BSA state that analytical procedures include-
 The consideration of comparisons with-
 Comparable information for prior periods
 Anticipated results of the entity from budgets
 Similar industry information.
 Consideration of relationship between:
 Such as the relationship of gross profit to sales
 Financial information and relevant non-financial information.
(Formula- Page- 50) working example-page 51. Interactive Question-3. Page no-52.
 Materiality:
What do you mean by the terms ‘‘Materiality’’?
As per BAS Framework a matter is material if its omission or misstatement would reasonably
influence the economic decisions of uses taken on the basis of the financial statement.
Describe the benefit of measurement of Materiality.
Materiality assessment will help the auditor to decide
 How many and what items to examine
 Whether to use sampling techniques
 What level of error is likely to lead to an auditor to say the financial
statements do not give a true and fair view.(Measurement true and fair view).
What do you mean by “Tolerable error”?
Tolerable error:
The maximum error that an auditor is prepared to accept in a class of transaction or balances
financial statement.
How can we determine materiality?
Or, Describe the method of assessing of materiality?
Methods of assess of materiality.
Particulars Maturity Level
Profit be fore Tax 5%
Profit after Tax 5-10%
Gross Profit 0.5-1%
Revenue 0.5-1%
Total assets 1-2%
Net assets 2-5%
*Material has qualitative as well as quantitative aspect.
When we should be considered materiality?
As per BSA 320 materiality should be considered when-
 Determining the nature, timing and extent of audit procedure.
 Evaluating the effect of misstatements.
Why do need review of materiality?
The level of materiality must be reviewed because-
 Draft accounts are altered (due to material error and so on).
 External factors may cause changes in risk estimated.
4. Continuous risk assessment:
Describe the element of audit risk.
Element of audit risk:
Audit Risk has two elements-
 The risk that the financial statements contain a material misstatement.
 The risk that auditors will fail to detect any material misstatement.
What is audit Risk?
The risk for which the auditors give an inappropriate opinion on the financial statement,
Audit Risk = Risk of Material Misstatement + Detection Risk.

Inherent Risk Control Risk

 What is Inherent Risk?
The susceptibility of an account balance or class of transactions to misstatement that could be
material individually or when aggregated with misstatements in other balance or classes, assuming
there were no related internal controls.
What is Control Risk?
The Risk that material would not be detected prevented or corrected by the accounting and internal
control systems.
What is detection Risk?
The Risk that the auditor’s procedures will not detect a misstatement that exists in an account
balance or class of transaction that could be material, either individually or when aggregated with
misstatements in other balances or classes.
BSA-200: Objective of an audit:
BSA 200 state that the auditor to reduce audit risk to an acceptable low level that is cancer with the
objective of the audit; that is giving reasonable assurance on the truth and fairness of the financial
statements.
What are significant risks as per BSA 315, Mention some significant risk?
Significant risks are complex of unusual transaction, i.e. those that may indicate fraud of other
special risks.
BSA 315 sets out those following factors which indicate that a risk might be a significant risk:
 Risk of fraud.
 The complexity of the transaction.
 IT is an unusual transaction.
Page- 58: 4.3 Identifying and assessing the risk.

Chapter-4
Process of Assurance:
Evidence and Reporting.

1. Audit Evidence:
What is audit evidence?
All of information used by the auditor in arriving at the conclusions on which the audit opinion
based. Auditor must obtain sufficient and appropriate audit evidence.
How can we collection audit evidence? Describe the types of collection of audit evidence.
There are two types-
1. Test of Control:
Performed to obtain audit evidence about the effectiveness of controls in preventing or
Detecting and correcting material misstatements at the assertion level.
2. Substantive procedure:
Audit procedures performed to detect material misstatements at the assertion level. They
include-
 Test of detail of classes of transaction, account balance and disclosures.
 Substantive analytical procedures.
Why do you collect sufficient appropriate audit evidence?
As per BSA 500 audit evidence require, auditors to obtain sufficient appropriate audit evidence able
to draw reasonable conclusions.
What do you mean by the terms “Sufficiency” & “Appropriateness”?
Sufficiency- is the measure of the quantity of audit evidence.
Appropriateness- is the measure of the quality or reliability of audit evidence.
Describe the Quality of audit evidence.
Quality of evidence:
1. External- Audit evidence from external sources is more reliable that obtained from the
entity’s records.
2. Auditor- Evidence obtained directly by auditors is more reliable that obtained indirectly or
by assumption.
3. Entity- Evidence obtained from the entity’s records is more reliable when related control
systems operate effectively.
4. Written- Evidence in the form of documents (paper or electronic) or written representation
are more reliable than oral representation.
5. Original- Original documents are more reliable than photocopies or facsimiles.
What do you mean by Financial Statement Assertion?
Financial Statement Assertion:
The representations by management, explicit or otherwise, that are embodied in the financial
statement.
What Assertion used by the auditors?
Assertion used by the auditors:
1. Assertion about class of transactions and events for the period under audit: (Occurrence,
Completeness, Accuracy, Cut of, Classification).
2. Assertion about account balance at the period end: (Existence, Right and Obligation,
Completeness, Valuation and Allocation)
3. Assertion about presentation and disclosure: (Occurrence, Right and Obligation,
Completeness, Classification and Understandability, Accuracy and Valuation).
When you use test of control?
We use test of control when-
 The auditor believes controls are operating effectively.
 It is not possible to obtain sufficient appropriate audit evidence from substantive procedure.
How do you perform test of control?
We may use the following procedures to perform test of control;
1. Inquiry
2. Inspection
3. Re-performance.
When substantive procedures are performed must?
The auditor must always carry out substantive procedures on all material items, on-addition-
 Agreeing the financial statement to the underling accounting record.
 Examining material journal;
 Examining other adjustments made in preparing the financial statements.
What is the different between the Review report and the Audit opinion?
Review report opinion gives limited assurance at moderate level with a negative language. While
audit report opinion givens reasonable assurance at high level with positive language.
 Unqualified Review Report Opinion:
Based on our review nothing has come to our attention that causes us to believe that accompanying
financial statements do not give a true and fair view (or are not presented fairly, in all material
respects) in accordance with international accounting standards.
Reasonable assurance opinion:
In our opinion, the financial statements presents fairly in all material respects the financial position
of ABC Co. as at December31, 2009 and its financial performance and its cash flows for the year
then ended in accordance with BFRSs.
Element of audit report as per BSA 700:
1. Title
2. Addressee
3. Introductory paragraph
4. A statement of management’s responsibility for the financial statement.
5. A statement of auditor’s responsibility.
6. Scope paragraph.
7. Opinion paragraph.
8. Date of the report.
9. Auditor’s address.
10. Auditor’s signature.

Chapter-5
Introduction to internal control

1. What is internal control?

Internal control is the process design to mitigate risks to the business and ensure that the business
Operates effectively and efficiently.
What are the Objectives of a company?
Company’s Objective:
A company has various objectives-
 To ensure its financial position reported correctly to shareholder
 To ensure that it operates effectively and efficiently
 To ensure that it complies with relevant law and regulations
What do a company’s directors do to meet company’s object?
 Identify risks to those objectives not being fulfilled
 Implement internal control to mitigate this risk
Why need internal control?
Reason for internal controls
 Minimizing the company’s business risks.
 Ensuring the continuing effective functioning f the company
 Ensuring the Company compiles with relevant laws and regulations.
What is the Limitations of internal controls?
Internal controls have some limitation-
 Expense
 Human element
 Unusual transaction
2. Describe the components of internal control.
Describe the components of internal control.
Internal control comprises five components
 The control environment
 Business risk and the entity’s risk assessment process
 The information system relevant to financial reporting objective.
 Control activities
 Monitoring of controls.
What is control environment?
The control environment:
The control environment is the component of the internal control system, influenced by manager.
What is audit committee?
Audit committee
A subsection of the board of directors, which has a particular interest in the finance, and accounting activities
of the company.
*The audit committee is comprised of non-executive directors.
What is Business risk?
Business risk’s the risk inherent to the company in its operation .It is risks at all levels of the business.
Describe the Entity’s risk assessment process.
The risk assessment process is the process by which the company determines what control policies and
procedure to implement.

Identify Estimate the Assess the Decide upon actions,(Internal

Relevant impact of likelihood of control, insurances, and changes
Business the risk occurrence. in operation) to manage them.
Risk
What are Control activities?
Control activities are the heart of the internal control systems comprising policies and procedures which may
prevent or correct errors,
Describe the type of control activities.
Type of control activities:
Type Example
Authorization Approval and control of documents
Performance review  Reconciliation
 Comparing internal data with eternal source of
information.
Information processing Checking the arithmetical accuracy of records
Physical control Comparing the results of cash security and inventory
Counts with Accounting record.
Segregation of duties  Segregation of function
 The various steps in caring out the transaction.
 The caring out of various accounting operations
What is Application Controls?
Application controls are manual or automated procedures that apply to the processing of individual
application to ensure that transactions occurred are authorized and are completely and accurately.
Example of application controls:
 Controls over input,(Completeness
 Controls over input,(accuracy)
  Controls over input, (Authorization)
 Controls over (Processing)
 Controls over master files and standing data.
What is General Control?
General controls are polices and procedures that relate to many applications and support the effective function
of application control by the helping to ensure the continued proper operation of information systems.
Example of general controls:
 Development of computer applications
 Prevention or detection of unauthorized changes to programs
 Testing and documentation or program changes
 Controls to prevent wrong programs
 Controls to prevent unauthorized amendments to data files.
 Controls to ensure continuity of operations.
Why do need monitoring of control?
An entity should review its overall control system to ensure that it still meets its objectives. It still operates
effectively and efficiently and that necessary corrections to the system are made on a timely basis.
3. Information about controls:
What are the sources of obtaining regarding internal control?
Auditors will obtain information about internal controls from a verity of source, including-
 Company internal control manuals.
 Observing controls in operations.
Describe the procedure of recording internal control.
Record of internal control:
 Auditor’s will record information about internal control in a variety of ways in the file including.
 Narrative notes (Short note on simple systems, Background information).
 Questionnaires Cheek lists.
 Diagrams. (Flowcharts, Organization chart, Family trees).
(Self Test-03, Page-102)
 Chapter- 06
Revenue System
Key Risk and key control:

Step Key Risk Key Control

Ordering Key risks include accepting
Customers who are a poor credit risk
and not fulfilling orders.
Dispatch and Invoicing. Key Risk is dispatching goods to
customer but not invoicing for them.
Recording A key risk is failure to record sale so
that payment is not prompted.
Cash Collection. A risk is that cash is misappropriated
before recording and/or banking.
Key controls include authorization
credit terms to customers and
ensuring orders are matched with
production orders and dispatch
notes.
A control to mitigate that risk is
matching dispatch notes to
invoices.
Controls include carious methods
of prompting payment, such as
statements sent out to customers.
Key control is segregation of
duties.

Risk and Test of Control By Auditor

Step Risk Test of Control by Auditor.

Ordering  Customers cannot pay.  Check that reference are being
 Orders may not be fulfilled. obtained for all new customer
 The receivable ledgers have
been authorized by senior staff.
 Check that orders are only
accepted from customers who
are within their credit terms
and credit limit.
Dispatched &  Goods are dispatched but not  Verify detail of trade sales of
Invoicing invoiced. goods dispatch notes with sales
 Goods are dispatched but not invoices checking
recorded.  Verify details of trade sales
with in inventory records
 Verify non routine sales
 Verify credit note
Recording  Invoice are not recorded  Check entries with invoices
 Invoices are processed to wrong  Check additions and cross
account casts
 Check posting to receivable
ledger & control account
 Check posting to R/A ledger
Cash receipts  Money received but not recorded  Check collection
 Money received but not banked  Cash receipts cash book
 Cash, Sales, Branch taking
Control and Objective of Control:
Step Control
Ordering  Segregation of duties
 Authorization of credit term to
customer who have no credit problems.
 Current prices quoted to customer
Dispatched  Authorization of dispatch of goods
and  Recording of all goods outwards on a
invoicing dispatch note
 Agreement of dispatch note to
customer orders and invoice.
Recording  Segregation of duties
 Matching of cash receipts with invoice
 Preparation of trade receivable
statement
 Reconciliation of receivable ledger &
control account.
Cash  Segregation of duties
collection  Recording of receipts
 Banking
 Safeguarding of cash and bank account
Control Objective
 Encouraged to pay promptly
 Recorded correctly.
 All dispatches of goods ate
recorded
 Correctly invoiced
 Credit notes are given for valid
reasons.
 All invoiced are recorded
correctly in nominal ledger.
 Invoice shall be recorded in
correct account.
 All monies received are
receded.
 All monies received are bank.
 Chapter-7
Purchases system
Key risk and key control:

Step Key Risk Key Control

Ordering Ley risk that purchases might be A key control is authorization.
made for personal use or not made on
the most advantageous.
Goods inward and recoding Risks are, of accepting goods not Controls include matching goods
invoice recorded or for accepting invoices for received with order.
poor quality goods.
Payment Payment might be made to the wrong Payment should be authorized.
person.

Weakness:
Identify weakness in a system is a key exam technique.

Risk and Test of Control by Auditor:

Step Risks Test of control by auditor

Ordering  Purchase may be made for
personal use
 Goods and service might not
be obtained on the most
advantageous terms
Goods in  Goods may be accepted that
ward and have not been ordered
recoding  Invoice may not be recorded
invoice  May not record credit notes
Payment  False invoices are paid in error
 Payment is not correctly
recorded
 Payments are not recorded in
the right period
 Invoices are paid to soon
 Review list of suppliers
 Check sequence of renumbered order
forms
 Check orders are supported by a
purchase requisition
 Check invoices for goods
 Match received goods with order
 Examination control account for
unusual entries
 Check postings of entries to payable
ledger
 Check payment cash book.
(Authorization)
 Check payment cash book(Recording)
 Check bank reconciliation.
Control and control objective:
Step control
Ordering  Segregation of duties
 Central policy to choice of
suppliers
 Authorization of order form
 Monitoring of supplier terms
Goods inward and  Examination of goods
recorded of invoice  Recording arrival and acceptance of
goods
 Comparison of goods received note
with purchase order
 Segregation of duties
Payment  Cheque and bank transfer
Requisitions
 Authority to sign cheque
 Limit of payment
 Authorization of expenditure
Control objective
 Actual authorization
 Goods and service
actually required by the
company
 Orders are made at
competition price.
 Accurately recorded
 All credit notes are
recorded in payable ledger
&control ledger.
 All entries in the payable
ledger are made to the
control payable ledger
account.
 Liabilities are recognized
all goods and services that
have been reserved.
 All expenditure is
authorized
 Payment are not made
twice for the same
liability
 Al expenditure is for
good that are received