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Assurance Notes Icab KL PDF Free
Assurance Notes Icab KL PDF Free
2. Who the users are will depend on the nature of the subject matter?
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.”
~ 1 ~
10. What constitutes expectations gap? Explain why?
Ans: Lack of understanding.
Reasons : i. Not aware of limitations.
ii. Considering as guarantee.
11. What purpose is served by spelling out clearly, the scope and limitations of an assurance
engagement in the engagement letter?
14. Which of the following factor make a person ineligible for being a company auditor?
15. Define reasonable and limited assurance. Compare and contrast between reasonable and
limited assurance.
Ans: Reasonable assurance - A very high but not absolute level of assurance.
Limited assurance - Low level assurance.
Chapter-3
Process of assurance: Planning the assignment
~ 2 ~
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 Audit strategy Audit Plan
Nature General Specific
Outcome Audit Plan Audit Procedures
~ 3 ~
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.
~ 4 ~
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
~ 5 ~
→ Due to accounting system
→ Due to internal control system
Difference:
Inherent risk Control risk
1. Due to items nature 1.Due to internal control risk
2. No internal control related 2.Internal control related
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.
~ 6 ~
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 entity’s control in that area.
Chapter-4
Process of Assurance: Evidence and Reporting
Sample basis
Two Types:
~ 7 ~
2. Substance Procedures-To test assertion level
a) Test of details
a. Report Shareholder
ANS: Sufficiency:-Quantity
Appropriateness:-Quantity or Reliability.
Measure Appropriateness-
ASSERTIONS:
a. Class of Transaction
b. Accounting Balances
~ 9 ~
• Occurrence & Rights & Obligations - Disclosed one
Occurred – Pertained to entity.
ANS: Either
a. Inquiry
b. Re performance
c. Inspection.
ANS: Once in every three audits – Incase of significant risk, testing must be
carried out each year.
1. Agreeing FS to records
~ 10 ~
3. Adjustments
10. What are the types of substantive procedure? When these are
appropriate to use?
ANS: 1. Analytical procedure
2. Tests of detail
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
~ 11 ~
• State of Company’s Affairs
• Profit or Loss
14. What are the Implied Opinions? Which matters are related by
exceptions?
15. Why does it need to keep uniformity in the form and content of the
audit report?
ANS: Because:-
a. Readers Understanding.
3. Level of assurance
~ 12 ~
• e.g. Auditor provide absolute assurance
ANS: -
2. Addressee
3. Subject matter
4. Criteria
7. Responsible party
8. ISAE compliance
9. Work summary
10. Conclusion
11. Date
~ 13 ~
Chapter – 5
Introduction to internal control
~ 14 ~
5. What is audit committee? What are the terms of reference of an audit committee?
~ 15 ~
General control Apply to Many applications.
Ensure.
Continued proper operation of system.
Supports application control.
Difference Application control General control
(a) Scope Individual application Many application
(b) Control / Support Transaction input Application control
~ 16 ~
17. Interactive # 1, 2, 3, Page: 99-100
Chapter-6
Revenue System
Ans.
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
Ans.
Sl Risks Controls
No.
1 Orders may be taken from
customers who are Not
able to pay
2 Orders may be taken from
customers who will Not
pay long time
3 Orders may not recorded
properly - not fulfilled-
customers lost
~ 17 ~
4. Fulfilled orders
• Reference check
• Authorize by senior
• Regular review
What controls should MCL put into place to mitigate this risk?
~ 18 ~
Ans.
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.
Ans.
10.What are the key risks associated with dispatch & invoicing?
Ans.
Ans.
3. Error in invoice
Ans.
~ 19 ~
3. Invoice raised relate to supplied goods
13.What are the controls used to mitigate the risks of dispatch &
invoicing?
Ans.
1. Authorisation of despatch
14.What are the tests of control used to mitigate risks of despatch &
invoicing?
Ans.
~ 20 ~
1. Verify details of trade sales or goods dispatch notes with sales
invoices checking
- Quantities
~ 21 ~
15.Interactive:2
Ans. P. 115
Ans. Key risk is failure to record sales so that payment is not prompted.
19.Interactive: 3
Ans. P.117
24.Interactive:4
Ans. P. 121
26.How can you identify the weaknesses associated with ordering system?
27.Interactive: 5
Ans. P. 122
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.
Evidence required of requirements for purchase before purchase authorised ( pre- set re- order
quantities and re- order levels)
~ 22 ~
Order forms prepared only when a pre- numbered purchase requisition has been received
Monitoring of supplier terms and taking advantage of favorable conditions ( bulk order and
prompt payment discounts)
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
Orders will only be raised in respect of purchase requisitions made by Simon Radinski, except in
Periods of Simon’s absence, when requisitions may be his deputy Cathy Lewis.
Assurance
Random, occasional spot checks will be carried out by Linda Fairburn on the level of Drox
when the requisition is raised.
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.
~ 23 ~
Check orders are supported by a purchase requisition
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
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?
Section overview
Risks are of accepting goods not ordered or for accepting invoices for poor quality goods.
When considering goods inward and recording of invoices, a company might recognise all or some
of the following risks:
~ 24 ~
Goods may be misappropriated for private use
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
*All goods and services received are used for the company’s purposes, and not private purposes
*Goods and services are only accepted if they have been ordered, and the order has been authorized
* Liabilities are recognized for all goods and services that have been received
* 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
Controls
The following are types of controls which could be put in place to fulfil the above objectives.
-Quality
-Quantity
-Condition
*Recording arrival and acceptance of goods ( Pre- numbered goods received notes)
~ 25 ~
* Procedures for obtaining credit notes from suppliers
*Prompt recording of purchases and purchases returns in day books and ledgers
Comparison of monthly statements of account balance from suppliers with 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.
Priced correctly by checking to quotations, price lists to see the price is in order
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 entries in purchase day book and verify that they are correctly analysed
Check entries in purchase day book and verify that they are correctly analyzed
~ 26 ~
Check posting to payables ledger
Check for returns that credit notes are duly received from the suppliers
Purchase requisitions
Suppliers’ invoices
Purchase orders
Obtain explanations for items which have been outstanding for a long time:
Unmatched invoices
Verify that invoices and credit notes recorded in the purchase day book are:
Check additions
Payable ledger
Confirm control account reconciliation has been regularly carried out during the year
~ 27 ~
Payment
The key risk is that money might be paid out by the business inappropriately. The
following objectives arise out of the risks:
All expenditure that is made is recorded correctly in the nominal and payables ledgers
Controls
The arrangements for controlling payments will depend to a great extent on the nature of
business transacted, the volume of payments involved and the size of the company.
Cheque and cash payments The cashier generally not be concerned with keeping or
writing- generally up books of account other than those recording
payments, nor
~ 28 ~
Cheque and bank transfer payments- Cheque and bank transfer requisitions
- Number of signatories
- Authorization of expenditure
- Limits on payments
Tests of controls
- 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
~ 29 ~
- 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 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
~ 30 ~
Chapter-7
Purchase system
Ans:
2. What are the control objectives to mitigate the risks of purchase ordering?
Ans.
2. Authorized supplier
3. Competitive price
Ans.
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.
~ 31 ~
3. Check orders are supported by a purchase requisition
5. What are the risks associated with goods inward and recording of
invoices?
Other risks:
4. Company may not take advantage of the full period of credit extended
6. What are the control objectives to mitigate the risks of goods inward and
recording?
Ans.
5. Liabilities are recognized for all goods and services that have been
received
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
7. What are the Controls to mitigate the risks of goods inward and recording?
Ans.
~ 32 ~
1. Examination of goods inwards
- Quality
- Quantity
- Condition
8. What are the tests of Control to mitigate the risks of goods inward and
recording?
Ans.
Sl.
1 Check invoices for 1. Supported by goods received notes
goods are
2. Entered in inventory records
~ 33 ~
4. Properly referenced with a number and supplier
code
~ 34 ~
Ans. Payment might be made to wrong person
Ans.
3. All expenditure that is made is recorded correctly in the nominal and payables ledgers
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.
2 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
~ 35 ~
- 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
3 Cash payment - Authorization of expenditure
- Cancellation of vouchers to
ensure they cannot be paid twice
- Limits on payments
- Rules on cash advances to
employees, IOUs and cheque
cashing.
Ans.
- 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 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
~ 36 ~
Bank reconciliations For a period which includes a reconciliation date
reperform
Ans.
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
2. What are the risks associated with calculating wages and salaries?
1. Too much
~ 37 ~
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
4. What are the tests of controls to mitigate the risks associated with
calculating wages and salaries?
Ans.
3. Authorizations-
- Overtime
- Advances of pay
5. Keeping timesheets
9. Answering queries
5. Interactive:1
6. What are the risks associated with recording of wages and salaries and
deductions?
Ans.
~ 38 ~
1. Various elements of pay might not recorded correctly in payroll
7. What are the controls to mitigate the risks associated with recording of
wages and salaries and deductions?
Ans.
8. What are the controls that should be in place to mitigate the risks
associated with recording of wages and salaries and deductions?
Ans.
6. Reconciling total pay and deductions between one pay day and the
next
9. What are the tests of controls to mitigate the risks associated with
recording of wages and salaries and deductions?
~ 39 ~
1. Previous week’s payroll
2. Timesheets
3. Costing analysis
4. Production budget
2. standard payroll
Ans.
1. Additions of payroll
1. Same as wages.
Ans.
12.Interactive:2
13.What are the risks associated with payment of wages and salaries?
2. Non-employee paid
~ 40 ~
14.What are the controls to mitigate the risks associated with payment of
wages?
Ans.
1. Segregation of duties-
- Distribution of wages
3. Custody of cash
- Security of transit
4. Verification of identity
5. Recording distributions
15.What are the controls to mitigate the risks associated with payment of
salaries?
Ans.
16.What are the tests of controls to mitigate the risks associated with
payment of wages and salaries?
~ 41 ~
4. Check unclaimed are recorded in unclaimed wages book
For salaries-
17.Interactive: 3
Ans.
1. No personnel department.
Risks
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
Chapter-9
~ 42 ~
Internal Audit
Ans.
Ans.
1.
Ans.
Ans.
Ans.
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.
Ans.
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
~ 43 ~
be involved in operational activities’ do you agree? Explain. -Term
Question
Chapter-10
Documentation
- Procedures
- Evidence
- Conclusions
Purposes:
6. external inspections
Ans.
3. What are the factors that affect the form and content of audit working
papers?
Ans.
3. Extent of judgment
4. Significance of evidence
7. Audit methodology
~ 44 ~
4. What working papers does an audit file normally contain?
Ans.
13.Letters of representation
Ans.
1. Client name
2. BS date
3. File reference
~ 45 ~
4. Preparer name
5. Date of preparation
6. Subject
7. Reviewer name
8. Date of review
9. Objective of work
10.Source of information
15.Appropriate cross-referencing
16.Results obtained
17.Analysis of errors
19.Conclusion drawn
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.
Ans.
Advantages
3. Easy to review
4. Time saving
~ 46 ~
5. Forms need not carrying to locations
Disadvantages
1. Lose confidentiality
2. Loss of data
Ans.
1. Engagement Letters
1. Financial statements
2. Accounts checklists
~ 47 ~
7. Review notes
Ans.
3. Audit plans
4. Risk assessments
5. Sampling plans
6. Analytical procedures
12.What is the need to keep documents secured? What is the time period to
retain these documents?
According to companies act 1994, section 181 (5), time period is 12 years
Ans.
~ 48 ~
15.Whom do the audit report belong to?
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
d. Management letter
e. Accounts checklist
Chapter-11
Ans.
a. Tests of controls
b. Substantive procedures
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?
~ 49 ~
8. What are the factors to consider when using analytical procedures?
13.If management responses are not available, what should an auditor do?
14. What are the possible sources of information for analytical procedure?
Ans.
• Existence
• Completeness
~ 50 ~
• Rights and obligations
• Valuation
18.Interactive: 1, p.195
20.Define Audit sampling and Population? What are the testing procedures
that do not involve sampling?
Ans.
1. Statistical sampling
2. Non-statistical sampling
~ 51 ~
Ans. Statistical Sampling – an approach to sampling in random basis.
Difference:
Ans.
Ans.
1. Objectives of audit
2. Attributes of population
31.“The smaller the tolerable error, the greater the sample size will need to
be”-Do you agree? Explain.
34.Interactive 2, p.201
~ 52 ~
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.
Ans. – consider the effect of projected error on other areas of the audit
40.Interactive 3, p.203
Chapter-12
Management Representations
3. Define management.
~ 53 ~
Ans. It avoids confusion and disagreement
Ans. management
~ 54 ~
12.Interactive 1, p.215
Chapter-13
1. What are the reasons for which tangible non-current assets are misstated?
Ans.
2. What are the financial statement assertions for the assessment of risk of
material misstatement of non-current assets?
Ans.
1. Existence
3. Completeness
Ans.
2. Purchase invoice
5. Valuations
~ 55 ~
6. Lease or hire purchase documentation
To give the assurance on the assets Peter will test the following:
Completeness Valuation
• Obtain a schedule of non-current • Confirm sample asset’s cost to
assets. invoice or valuation to valuation
• Agree figures- schedule- FS- nominal certificates
ledger • Compare sample asset’s brought
• Compare schedule to asset register to forward depreciation file to previous
check all the assets in the schedule are audit file
owned by the company • Review brought forward asset
• Select some physically present asset register files.
and ensure they are in the register • Confirm accounting policy for
• Confirm additions in the schedule are depreciation is correctly applied
correct • Review calculation and ecalculate
o depreciation
o disposed asset
o profit/loss on disposal
Existence Rights and obligations
• Select sample from register and ensure • Select sample from register and
those are physically present on site. vouch for registration documents-
o 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
Presentation and disclosure Other matters
• Ensure disclosure requirements • Focus on asset additions.
regarding non-current assets have -these are large portion of assets
been met. and least depreciated.
• Check property documents- 100%,
other assets-sampling basis.
~ 56 ~
5. Worked example: self-constructed assets.
-capitalised
Audit objective-
Check-
Completeness
• Obtain schedule of all the costs capitalized- ensure costs are complete
Valuation
Ans.
Existence Valuation
1. Expense being 1. Inappropriate charging of
capitalised as non- amortization
current assets 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.
~ 57 ~
1. Accounting standards on what constitutes an intangible asset
2. Purchase invoice
4. Specialist valuations
Ans.
3. Confirmation of ownership
Ans.
Ans.
~ 58 ~
6. Inventory belongs to third party included in FS
12.What are the sources of information for testing the assertions related to
inventory?
Ans.
4. Purchase invoices
5. WIP records
13.What are the controls that should be in place when counting inventory?
Ans.
1. Organization of count
2. Marking inventory
2. Counting
1. Systematic counting
3. Recording
1. Serial numbering
~ 59 ~
6. Reconcile inventory records and investigation
Ans. Year-end count not necessary. The control system should be tested.
Ans.
Ans.
1. Increase in cost
3. Physical deterioration
4. obsolescence
~ 60 ~
Rajeev is auditing inventory at Icket Ltd a tableware producer. Produces
10% more than ordered. This 10% is obsolete. One store Argus maintains
inventory at Icket’s premises. What are the key issues when auditing
inventory?
Ans.
Existence Completeness
• Obtain and review count • Follow up whether sampled
instructions items took to final sheet
• Identify key issues in • Follow up Argus inventory
counting- eg. Anything that not included to final sheet
make counting complex. • Cut-off test – year-end
• Plan count attendance inventory not double
• Attend inventory count- counted.
- Sample count
- Follow procedure for
damaged ones.
- Separate Argus inventory
• Select sample on final sheets
and trace back to original
Rights and obligations Valuation
• Obtain confirmation from • Calculation of valuation
Argus about level of made correctly
inventory. • Select sample from-
• Compare reply to Icket’s - Raw materials
records - 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
~ 61 ~
with previous year.
• Lower of cost or NRV?- check
year-end FG valuation to
post-year-end sales.
• Obsolete items included in
valuation at lower of NRV or
cost.
• Excess branded products-
value Zero, price from
managers list.
19.What are the key areas when testing Receivables?
Ans.
Ans.
22.What are the sources of information that can be used to test assertions
about receivables?
1. Existence
24.What should the auditors do when client refuses to communicate with the
customers?
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25.What are the methods of confirmation from customers? Describe each.
Ans.
1. Positive method
- preferable
2. Negative method
Ans.
Ans. P.233
Ans.
~ 63 ~
6. Accounts that have been paid by the date of the examination
Ans. which
2. Do not respond
Ans.
6. Test control on- issue of credit notes and write off of bad debts
~ 64 ~
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
36.What are the sources of information that can be used to test the assertion
about bank balance is correct?
Ans.
1. Cash book
3. Bank statements
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
4. Unused facilities,
~ 65 ~
5. Lines of credit/standby facilities
8. Safe custody
Ans.
1. Account number
Ans.
3. Or countersigned by client
7. Request should reach bank branch manager two week before client’s
year end
Ans.
~ 66 ~
3. Name of client staff attending count
43.Where location visit for cash count could not be attended what should be
done?
Ans.
2. Up to date
4. Auditor should not leave alone the cash and negotiable securities.
Ans. P.239
Ans.
Ans.
Ans.
1. Payables ledger
~ 67 ~
2. Supplier confirmation
Ans. It could occur in payables with low and nil balances as with high.
Ans. No
Ans.
Ans.
~ 68 ~
Ans.
Ans.
3. Loan agreements
5. Cash book
6. Board minutes
Ans.
~ 69 ~
12.Verify interest charged entered in the register and notified to the
registrar
Ans. Completeness
Ans. Select items from nominal ledger, trace back to source documents-
eg. Sales invoice, dispatch notes
Ans.
3. Payroll costs- number of staff, pay rates, overall costs, Tax/NI rates and
pay.
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?
~ 70 ~
3. Employees are being paid at correct rate - from contracts/personnel
records
Ans.
Ans.
1. Analytical procedures
Chapter-14
Ans.
Because-
Ans.
1. ICAB
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.
Ans.
3. Professional competence and due care – CPD is required all time. Work
diligently
5. What are the steps of guidance for the firms and members of IFAC?
Ans.
Ans.
~ 72 ~
Ans.
Ans.
9. What are the general safeguards to the threats identified by IFAC code?
Ans.
Ans.
2. CPD
3. Corporate Governance
4. Professional standards
Ans.
~ 73 ~
2. Consulting an independent third party- eg. Professional regulatory body
Ans. From the commencement of work until the final report being
produced.
Chapter-15
Ans.
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat
4. What actions of the client pose threat to the firm’s integrity or professional
behavior?
~ 74 ~
5. What should an auditor do when client pose threats to firm’s integrity?
Ans.
Ans.
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:
~ 75 ~
~ 76 ~