Chapter – 1

Concept of and need for assurance

1. ICAB is a member of IFAC.

Ans: True False.

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

Ans: True False.

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

Ans: True False.

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

Ans: Assurance Engagement: An assurance engagement is one in which a practitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a subject matter against
criteria.

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

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

6. What are the benefits of an assurance engagement?

Ans: • Independent, Professional opinion.

• Confidence to others.
• Deterrent to fraud.
• Attention to deficiency.
• Investors faith.

7. Which of the following are specialized audit?

Ans: Branch audit Internal audit

Fraud investigations Bank audit
Pension scheme audit

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

Ans: Limited assurance.

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

Ans: Expectations gap : Lack of understanding of users.

Reduce by : Clearly indicating scope & limitations.

~ 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?

Ans: Expectation gap is reduced.

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

Ans: Benefit : Independent, Professional verification.

Limitation : Risk of wrong conclusion.

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

Ans: To draw wrong conclusion.

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

Ans: An employee of the client company.

A shareholder of 0.05% of the subscribed capital.
A person who is indebted to the company not exceeding Tk. 1000.
Director of X Ltd. which is the managing agent of the client.

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

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

Both the assurance engagement and gives a conclusion.

No. Characteristics Reasonable Assurance Limited Assurance

1. Level of assurance High Low

2. Evidence Sufficient & appropriate Limited

3. Opinion Positive Negative

Chapter-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

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, entity’s
environment)
2. Key dates – Reporting, other communication.
3. Materiality, preliminary risk assessment, testing internal control

5. What are key contents of an overall audit strategy?

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

6. Give some examples of overall audit 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

~ 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.

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.

~ 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

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.

~ 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

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
→ Auditor’s part is detection risk
→ Auditor’s aim is to reduce overall audit risk, not only one part.
31. Could detection risk be entirely eliminated? Why?
Ans: No. Due to inherent limitations of audit.
32. How can detection be reduced?
Ans: By carrying out substantial number of losts.
→ Include high level of audit 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.

~ 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

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.

~ 7 ~
 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 to-

a. 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 to-

a. Test its correctness.

b. It must always carry out.

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

the appropriateness of Audit evidence?

ANS: Sufficiency:-Quantity

Appropriateness:-Quantity or Reliability.

Measure Appropriateness-

• External – More reliable than entity’s record.

• Auditor – Directly by auditor than indirectly.

• Entity – When control system ok.

~ 8 ~
 • 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

~ 9 ~
 • 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

~ 10 ~
 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-

~ 11 ~
 • State of Company’s Affairs

• Profit or Loss

• Directors report consistent with FS.

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

ANS: Proper books of Accounts in report of

a. Money received and expanded – With related matters.

b. Sales and particulars.

c. Particulars of Manufacturing Co. – e.g. Production,

Distribution, Marketing, Utilization of material, Labor.

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

ANS: Because:-

a. Readers Understanding.

b. Identify unusual circumstances.

16. What are the specific issues related to expectation gap?

How can we reduce these issues?
ANS: Misunderstanding about:

1. Nature of the audited financial statements

• e.g. Balance Sheet is the fair valuation of entity

2. Type & extent of work

• e.g. All items in the financial statements are tested

3. Level of assurance

~ 12 ~
 • 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 practitioner’s responsibility

8. ISAE compliance

• Engagement performed accordingly

9. Work summary

• In case of negative conclusion

10. Conclusion

11. Date

12. 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

~ 13 ~
 Chapter – 5
Introduction to internal control

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

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

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

3. Ensure compliance with laws & regulations.

Continue operation.

2. What are the limitations of internal controls ?

Ans: 1. Expensive May not be worth

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

3. Unusual transactions Ic is for routine transactions

Standards not fit to unusual transactions.

3. Why small companies lack effective internal controls?

Ans: 1. Human element
Fewer employees Lot of people make large control chain.
2. Fraud caught by next person.
3. Segregation of duties Lack
4. What are the components of internal control system?
Ans: 1. Control environment Management functions
2. Business risk and entity’s risk assessment process
Business risk inherent to operations
Risk assessment process identifying business risk to FS
Implement IC
3. Information system relevant to financial reporting objectives.
Recording procedures.
4. Control Activities Policies ensuring compliance of management directives.
5. Monitoring Controls Review & Corrective actions.

~ 14 ~
5. What is audit committee? What are the terms of reference of an audit committee?

Ans: Subsection of BOD deals with finance and accounts.

Terms of reference:
1. Review the integrity of FS
2. Review internal financial controls & risk management systems.
3. Monitor internal audit
4. Recommend about external auditor
5. Monitor independence of external auditor
6. Implement policy on non – audit services by the external auditor.
* Key issue Financial statements.
6. What are the types of control activities?
Ans: 1. Preventive All control activities fall under these
2. Detective two.
Types :

1. Authorization Eg. Approval of documents , overtime

2. Performance review Eg. Reconciliations.
Comparing internal data with external source.
Goods dispatched.
Maintain control accounts and TB.
TB brings all data together.
3. Information Processing Arithmetical accuracy.
Check sum of invoices.
4. Physical control Compare cash inventory with accounting records.
Cash count.
Limit physical access to assets.
Inventory store.
5. Segregation of duties Number of people involved in accounting process.
Difficult to occur fraud. & accidents.
More Checking

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

Ans: 1. Segregation of function Transaction carries out.
Recording.
Maintaining.
2. Segregation of Carry out transaction Steps in transaction.
3. Segregation of accounting operation Some staff should not operate.
8. What are that types IT control Procedure?
Ans: 1. Application controls.
2. General controls.

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

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

~ 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

10. Give some examples of general controls.

Ans: 1. Development of computer applications.
2. Prevention or detection of unauthorized Changes to programs.
3. Testing and documentation of programs changes.
4. Controls to prevent wrong programs or files being used.
5. Control to prevent unauthorized amendments to data files.
6. Control to ensure continuity of operations.
11. In what situation, application control becomes useless?
Ans: When general control is ineffective. So, review general control first.
12. Give some example of application control.
Ans: 1. Control over input: Completeness.
2. Control over input: Accuracy
3. Control over input: Authorization
4. Control over processing.
5. Control over mater files and standing data.
13. What controls should an auditor test about application controls?
Ans: 1. Manual controls manual input is complete, accurate.
2. Control over output System output using CA manual.
3. Programmed control procedure Using CAAT.

14. Identify application control & General control.

Ans: See page no: 95-97

15. What are the sauces of information about internal controls ?
Ans: 1. Manuals
2. Policies
3. Minutes of meetings
4. Prior year
5. Interview/Staffs
6. Observation important
16. What are the documents used to record understanding of entity?
Ans: 1. Narrative notes Good for short notes.
2. Questionnaires/Checklist Aid memories
Tick boxes
Never asked
3. Diagrams Best for recording relationships, reporting lines
Time consuming

~ 16 ~
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 are-

1. 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 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

4. What are the control objectives?

1. Get customers with good credit risk

2. Encourage prompt pay

3. Record orders correctly

~ 17 ~
 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 that-
1. 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?

~ 18 ~
 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

~ 19 ~
 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.

~ 20 ~
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.

~ 21 ~
 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)

~ 22 ~
 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 Simon’s absence, when requisitions may be his deputy Cathy Lewis.

Assurance

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

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

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

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

Tests of controls

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

Review list of suppliers and check a sample to orders made

Check sequence of pre- numbered order forms

~ 23 ~
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:

~ 24 ~
 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 company’s purposes, and not private purposes

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

* All goods and services received are accurately recorded

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

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

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

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

* Cut- off applied correctly to the payables ledger

Controls

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

Examination of goods inwards

-Quality

-Quantity

-Condition

*Recording arrival and acceptance of goods ( Pre- numbered goods received notes)

* Comparison of goods received notes with purchase orders

* Referencing of supplier invoices; numerical sequence and supplier reference

*Checking of suppliers’ invoices

- prices, quantities, accuracy of calculation

- Comparison with order and goods received note

*Recording return of goods( pre- numbered goods returned notes)

~ 25 ~
 * 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

~ 26 ~
 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

~ 27 ~
 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 The cashier generally not be concerned with keeping or
writing- generally up books of account other than those recording
payments, nor

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

of,

Securities or title deeds belonging to the company.

The person responsible for preparing cheques should not

Himself be a cheque signatory. Cheque signatories in turn

Should not be responsible for recording payments.

~ 28 ~
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

~ 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 to suppliers’ statements

- Check to other documentary evidence, as appropriate (agreements, authorized expense

vouchers, petty cash books etc)

Payments cash book( recording) For a sample of weeks:

- Check the sequence of cheque numbers and enquire into missing numbers

- Trace transfers to other bank accounts, petty cash books or other records, as
appropriate

- Check additions, including extensions, and balances forward at the beginning and
end of the months covering the periods chosen

- Check postings to the payables ledger

- Check postings to the nominal ledger, including the control accounts

Bank reconciliations For a period which includes a reconciliation date

reperform

reconciliation( see Chapter 13)

Verify that reconciliations have been prepared at regular

Intervals throughout the year

Scrutinize reconciliations for unusual items

Petty cash payments For a sample of payments:

- Check to supporting vouchers

- Check whether they are properly approved

-See that vouchers have been marked and initialed by

the

Cashier to prevent their re- use

~ 30 ~
 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

~ 31 ~
 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.

~ 32 ~
 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 1. Supported by goods received notes
goods are
2. Entered in inventory records

3. Priced correctly by checking to quotations, price

lists to see the price is in order

~ 33 ~
 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
2 For invoices of all types
3 For credit notes
4 Check for returns that credit
notes are duly received from
the suppliers
5 Test numerical sequence and
enquire into missing numbers
of
6 Obtain explanations for items
which have been outstanding
for a long time
7 Verify that invoices and credit
notes recorded in the purchase
day book are
8 Check additions
9 Check postings to nominal
ledger accounts and control
account
10 Check postings of entries to
payables ledger
11 Payable ledger
9. What are the key risks associated with Payment?
~ 34
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
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
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
~
 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.
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.

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

~ 36 ~
Bank reconciliations For a period which includes a reconciliation date
reperform

reconciliation( see Chapter 13)

Verify that reconciliations have been prepared at regular

Intervals throughout the year

Scrutinize reconciliations for unusual items

Petty cash payments For a sample of payments:

- Check to supporting vouchers

- Check whether they are properly approved

-See that vouchers have been marked and initialed by

the

Cashier to prevent their re- use

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 employees-

1. Too much

2. Who have not been at work

~ 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

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. Authorizations-

- Engagement and discharge of employees

- Changes in pay rates

- Overtime

- Non-statutory deductions –e.g. Pension

- Advances of pay

4. Recording changes in personnel and pay 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.

~ 38 ~
 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-

~ 39 ~
 1. Previous week’s payroll

2. Timesheets

3. Costing analysis

4. Production budget

For salaries reconcile with-

1. previous month’s salary or,

2. standard payroll

10.How to check important calculations and re-perform calculations of

salaries and wages?

Ans.

Wages (a number of weeks)-

1. Additions of 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

~ 40 ~
14.What are the controls to mitigate the risks associated with payment of
wages?

Ans.

Payment of cash wages-

1. Segregation of duties-

- Prepare net pay summary

- Filling pay packets

- Distribution of wages

2. Authorizations of wage cheque 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 cash-

1. Attend the pay-out –to ensure procedures are followed

2. Compare payroll with packets

3. Examine receipts given by employees

~ 41 ~
 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 salaries-

1. Check comparison made between each month’s 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

~ 42 ~
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

~ 43 ~
 be involved in operational activities’ do you agree? Explain. -Term
Question

Chapter-10

Documentation

1. What is audit documentation? What are the purposes of documentation?

Ans. Or Working paper is the record of-

- Procedures

- Evidence

- 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

~ 44 ~
4. What working papers does an audit file normally contain?

Ans.

1. Information to understand entity’s environment and IC

- Information of Legal documents

- Copies of legal documents

- industry, economic environment

- extract form IC manual

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

~ 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

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

~ 46 ~
 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 year’s 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

~ 47 ~
 7. Review notes

8. Audit planning memorandum

9. Time budgets and summaries

10. Letter of representation

11. Management letter

12. 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.

~ 48 ~
 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?

~ 49 ~
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

~ 50 ~
 • Rights and obligations

• Valuation

17.How the tests are designed in directional testing?

Test Item Check Example

Debit items – • Overstatement • Non-current asset of
Expense/Asset • From nominal ledger TK.9,000 recorded as
s • Value and existence TK.10,000
• Asset sold TK.10,000 not
recorded
Credit items – • Understatement • Revenue in despatch note
Income/Liabiliti • From independent not recorded in revenue
es source account.
• 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 management’s judgment.

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

21.Auditors use sampling approach for testing. When a 100% sampling is

preferable?

Ans. For certain substantive procedures.

22.What is the extent of sampling used in tests of control?

Ans. Less than 100%

23.What are the means of selecting samples?

Ans.

1. Statistical sampling

2. Non-statistical sampling

24.Define statistical sampling and non-statistical sampling. What is the

difference between these?

~ 51 ~
 Ans. Statistical Sampling – an approach to sampling in random basis.

Non-Statistical sampling – subjective approach

Difference:

Sl Characteristics Statistical Non-statistical

No. Sampling sampling
1 Approach Random Subjective
2 Use of Mathematical Consistently Not consistently
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.

~ 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.

37.Auditor should consider the qualitative aspects of an error. True/ False?

38.What is anomalous error?

Ans. – Arises from isolated event.

- Occurred for specifically identifiable occasions

- Not representative of error in the population.

- Extra work needed to identify.

- Auditor must be certain that it is anomalous.

39.What factors to consider when drawing conclusion from sampling?

Ans. – consider the effect of projected error on other areas of the audit

- Estimate probable error by extrapolating the errors.

- If error exceeds tolerable error, reassess sampling risk.

40.Interactive 3, p.203

Chapter-12

Management Representations

1. What is management representations?

Ans. Statement confirming certain representations in writing.

2. When management representations are required?

Ans. When it is the only audit evidence available. Situations are-

1. When the facts are management 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?

~ 53 ~
 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.

~ 54 ~
 12.Interactive 1, p.215

Chapter-13

Substantive Procedures - Key Financial Statement Figures

1. What are the reasons for which tangible non-current assets are misstated?

Ans.

1. Company not actually own the asset.

2. Asset doesn’t actually exist or 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

~ 55 ~
 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
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.
Valuation
• Confirm sample asset’s cost to
invoice or valuation to valuation
certificates
• Compare sample asset’s brought
forward depreciation file to previous
audit file
• Review brought forward asset
register files.
• Confirm accounting policy for
depreciation is correctly applied
• Review calculation and ecalculate
o depreciation
o disposed asset
o profit/loss on disposal
Rights and obligations
• Select sample from register and
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
Other matters
• Focus on asset additions.
-these are large portion of assets
and least depreciated.
• Check property documents- 100%,
other assets-sampling basis.

~ 56 ~
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

Check-

Completeness

• Obtain architect’s certificate- ensure work is complete

• Obtain schedule of all the costs capitalized- ensure costs are complete

Valuation

• Vouch a sample cost to –appropriate source of evidence

o E.g. labor cost to payroll records

• Ensure all finance cost included- check bank statement)

6. What are the major risks of misstatement of the intangible non-current

asset balances in the financial statement?

Ans.

1. Expense being capitalised as non-current 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.

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

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 Valuation Rights and obligations

Attend inventory count Valuation at lower of Confirmation of
Inventory doesn’t exist cost and NRV ownership
but included in FS Obsolete or damaged
inventory stated in full
value
Wrong inventory value
due to miscalculation
Inventory stated at
cost, at the mean time
NRV decreased

Completeness Rights and obligations Cut-off

All inventory not Inventory belongs to Inventory actually sold
included in FS 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 doesn’t 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

~ 58 ~
 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. Company’s 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

~ 59 ~
 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 year’s 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.

~ 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.

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 assertions-

Existence
• 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 Icket’s
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

~ 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.

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 regarding-

1. 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.

~ 62 ~
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 auditor’s firm, not client’s office.

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

Ans. P.233

29.What classes of account should receive special attention when

constructing the sample customers to contact?

Ans.

1. Old unpaid accounts

2. Accounts written off

3. Accounts with credit balances

4. Accounts settled by round sum payments

5. Accounts with nil balances

~ 63 ~
 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.

~ 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

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,

~ 65 ~
 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 provider’s request must refer client’s 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 client’s
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 by-

1. Taking remittance received after year end- increasing balance at bank

and reducing receivables (cash is more liquid)

2. Recording cheques paid not actually despatched before year end

(healthy looking current ratio)

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

Ans.

1. Time and location of cash count

2. Name of audit stuff conducting count

~ 66 ~
 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

~ 67 ~
 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 supplier’s statement with payables ledger balances.

52.What kind of payable account balance have the possibility to error of

understatement?

Ans. It could occur in payables with low and nil balances as with high.

- Low balance with major supplier.

53.Where should the sample be collected from?

Ans. Client’s list of suppliers, not payables ledger.

54.Is confirmation from suppliers needed?

Ans. No

55.What are the circumstances when confirmation from supplier is needed?

Ans.

1. Suppliers’ statement is unavailable or incomplete.

2. Weakness in internal control

3. Nature of business make it possible to a material misstatement of

liabilities.

4. Client is deliberately trying to understate payables.

5. Accounts appear to be irregular or abnormal.

56.Third party evidence is important. Because testing for understatement.

57.What are the major risks of misstatement of long-term liabilities?

Ans.

1. Not all long-term liabilities disclosed (completeness)

2. Interest payables not calculated correctly (accuracy)

3. Interest payables not included in the correct accounting period (cut-off)

4. Disclosure is incorrect (presentation and disclosure)

58.What are the complications an auditor may face in case of debentures?

~ 68 ~
 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

~ 69 ~
 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 it’s 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 documents-
eg. Sales invoice, dispatch notes

65.With what items do purchase, revenue, payroll costs have strong

relationships?

Ans.

1. Purchase has strong relationship with inventories and 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

~ 70 ~
 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.

Because-

1. 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.

~ 71 ~
 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.

~ 72 ~
 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 client’s 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

~ 73 ~
 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 firm’s integrity or professional
behavior?

Ans. Arise from-

1. Illegal activities of the client

2. Apparent dishonesty of the client

3. Questionable accounting practices of the client.

~ 74 ~
5. What should an auditor do when client pose threats to firm’s integrity?

Ans.

1. Should be declined. Or,

2. Accept- with commitment from those charged with governance to

improve corporate governance.

6. What are the ICAB code for resolving ethical conflicts?

Ans. Auditor should consider-

1. The relevant 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.

~ 75 ~
~ 76 ~