Notes Compiled - 230218 - 135429

Sequence Plan
1 Basic Concepts
2 NSA 200 and 210
3 Audit Evidences
4 Audit Procedures, Vouching/Verification/Special Sectors
5 Audit Sampling
6 Government Auditing
7 Internal Control System/ CIS Environment
8 Audit Planning/documentation
9 Audit Materiality
10 Audit Reporting
11 Quality Controls
12 Other Aduiting and Assurance standards
13 Code of ethics
14 Questions Discussion
Audit Notes CA. Shashi Kafley
Introduction to Audit and Assurance

Basic Concept
 Book Keeping: Book-keeping is the recording of the financial transactions pertaining to an entity, on a
day-to-day basis.
 In Nepal, Financial Year starts from 1st of Shrawan and ends on 31st of Asar of the following year.
 Financial Statement:
Financial Statement comprises of the following:
1) Balance Sheet
2) Profit and Loss a/c
3) Cash Flow Statement
4) Statement of Change in Equity
5) Comparatives.
6) Notes to Accounts.
According to Sec 109(1) of the Companies Act,2063; the following annual financial
statements shall be prepared by the board of directors of a public company every year at
least thirty days prior to the holding of its annual general meeting and in the case of a
private company, within six months of the expiry of its financial year:
a. Balance Sheet as the last date of the financial year.

b. Profit and loss account of the financial year.
c. Description of cash flow of the financial year.
 Users of Financial Statements

1. Management
2. Shareholders/Owners
3. Employees
4. Government
5. Suppliers
6. Customers
7. Prospective Investors
 Meaning Of Audit
An Audit is an independent examination of financial information of any entity, whether profit oriented or
not, and irrespective of its size or legal form, with a view to express an opinion thereon.
 Meaning Of Assurance
 Opinion provided by an assurance practitioner so as to increase the confidence of users

in a given subject matter. Examples of Assurance Services are:
 An audit of Financial Statements.
 A Limited review of Financial Statements
 Risk Assessment Reports
AUDIT(A)
ASSURANCE(B)
Set B= Assurance
Set A= Audit
Set B – Set A= Assurance but not Audit
Auditor
Practitioner
 Reasonable Assurance
 High level of assurance based on detailed procedures and expressed in positive wordings.
 Limited Assurance
 A moderate level of assurance based on procedures less detailed than that of reasonable assurance
and expressed in negative wordings.
Comparison between Reasonable & Limited Assurance
Basis Reasonable Limited

Assurance Assurance
Assurance High Low
Level
Audit Detailed (includes Less detailed,

Procedures vouching, mainly covering
verification and Analytical
Analytical Procedures and
Procedures) Inquiry
Language Positively Worded Negatively
Worded
Example Audit Limited Review
Elements Of Assurance
Assurance
Report
Sufficient A Three
Appropriate
Evidence Elements Party
Relationship
Of
Assurance
An
Suitable Appropriate
Criteria Subject
Matter
History of Audit in Nepal

 1826 BS– Kumari Chowk Adda Established
 1903 BS– Jung B. Rana mandated offices to submit income and
expenses reports to Kumari Chowk Adda
 2008 BS– Budget System implemented
 2013 BS– Establishment of Accountant General’s Office
 2015 BS– Establishment of Auditor General’s Office

 2018 BS– Enactment of Audit Act, 2018
 2020/2021 BS– Implementation of Double Entry Book-keeping
 2048 BS– Audit Act 2048 enacted
 1997 AD – ICAN establishment
 2053 BS– Companies Act, 2053 mandated audit of all companies
 2063 BS– Companies Act, 2063
 2075 BS– Audit Act, 2075
Objectives of Audit
A. Primary Objective NSA 200
 Primary objective of audit is Expression of Opinion of Financial Statements of the Entity.

 The opinion expressed conveys whether or not the financial statements give a “True and Fair View”.
True and Fair View
The auditor expresses an opinion that Financial Statements give a True and Fair View when:
Financial Statements are prepared according to applicable FRF.
 Financial Statements have complied with all relevant laws and regulations.
 The transactions are supported by sufficient appropriate evidence.
 The Financial Statements are free from misstatements.
B. Secondary Objectives.
 Secondary objectives of audit are to detect and report the misstatement.
 Auditor should always remain alert to the possibility of detection of fraud and error in the
financial statements. Without ensuring that financial statements are free from misstatements,
the auditor cannot give an opinion on “True and Fair” view of the financial statements.
Auditor is a watchdog and not a Bloodhound :- Kingston Cotton Mills, 1896.

The message here is that the auditor should work bearing in mind the basic principles governing an audit, in order
that their work will have a reasonable chance of detecting a material fraud and other errors. Auditor cannot be
held responsible for non-detection if he has conducted audit with due care applying basic principles governing
the audit.
1.9 Inherent Limitation of Audit

Limitations
1. Test Checking  Auditor selects samples of
transactions to check.
 This results in sampling risk.
2. Involvement of Judgment  Financial Statements are
prepared using estimates and
judgements, eg. Provision for
bad debt, life of asset, etc.
 This results in likelihood of
inaccuracy of opinion issued
by auditor
3. Nature of Audit Evidence  The audit evidences are
persuasive rather than
conclusive in nature.
 They can only give a
reasonable assurance about
the validity of transaction but
cannot give absolute
assurance.
 Sometimes the evidence may
be forged by the
management, which auditor
may not detect. Eg. Fake
Invoices and documents.
4. Inherent Limitations of Internal  The design and implementation
Control System of Internal Control System is
ultimate responsibility of
management.
 Internal Control System itself
suffers from certain Limitations.
 Risk of Overreliance in internal
control system is a part of
NSA 500
sampling risk.
Home Assignments
 Relationship between Audit and Other Disciplines:-
1. Accounting
2. Mathematics
3. Statistics
4. Economics
5. Law
6. Computer Information System
7. Business Operations
8. Behavioral Science
9. Financial Management
 Basic Principles governing an Audit
Principles
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behavior
 Differences between Auditing and Accounting

 Types of Audit
 Advantages of Audit.
Modification of Audit Report (Key summary of NSA 705 and NSA 700)
 Auditor Issues clean or unmodified opinion if he obtains sufficient and
appropriate evidences (SAAE) that the transactions are true and fair.
 Auditor issues a qualified opinion if he is unable to obtain SAAE about
material items or if he detects material but not pervasive fraud/error
 Auditor disclaims his opinion if he is unable to obtain SAAE about
material and pervasive items.
 Auditor issues an adverse opinion if he detects material and pervasive
fraud/error.
Equation on Audit Risk
Audit risk is the risk of issuance of incorrect audit opinion by the auditor.
Audit Risk = Inherent Risk*Control Risk*Detection Risk
Risk of Material Misstatement [ROMM] = Inherent Risk*Control Risk
ROMM is the risk that FS are materially misstated prior to the audit. This is client Side Risk.
Detection risk is the auditor side risk

CA.SHASHI.KAFLE@GMAIL.COM
NSA-210 [Agreeing the Terms of Audit Engagement]
Summary of SA-210 (Agreeing Audit

the terms of Audit Engagement) Engagemen
Terms
Audit Engagement letter
includes:
-Objective of the Audit
Scope of Audit
Preconditions for an Audit -Responsibiltyof Mgt. and
Preconditions for an audit: Auidtor
(1) Whether management uses acceptable FRF. -Identification of FRF
(2) Acknowledgement by management of it's responsibilties. -Reference to expected form
& content of reports to be
- responsibilty w.r.t issued by the auditors
- preparation of financial statements as per FRF -If Law/regulation prescribes
-I.C. so that financial statements should be free from terms, then no need for a
fraud/errors seperate written terms, except
-They will provide auditor with: that management
acknowledges the same..
Access to all Additional Unrestricted Access to

Information Information persons if necessary
Should not accept Audit if
Aforesaid precondition Prior to acceptance, management

𝑁𝑜𝑡 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑖𝑚𝑝𝑜𝑠𝑒𝑠 𝑙𝑖𝑚𝑖𝑡𝑎𝑡𝑖𝑜𝑛.
Recurring Audit- Auditor should examine whether it is necessary to revise/ remind the terms
Terms of engagement should be revised in the following situations:-
1. There exist grounds to believe that the entity misunderstands the objective and scope of audit
2. There exist a situation where additional term has to be incorporated
3. There has occurred recent change in senior management/shareholding.
4. Significant changes have occurred in the business model of the organization.
5. Significant changes have occurred in the Legal and regulatory requirements applicable to the
organization.
6. Any other relevant changes in reporting or other requirements.
Before completing audit, if the client requests the auditor to change the terms that conveys lower
assurance:-
Consider whether there exist reasonable justification of change
Yes No
Agree to new terms - Management doesn’t permit

Original Engagement
- Withdraw + communicate (TWCG and regulators)

Withdraw garna nasake,
disclaimer of opinion.
NSA 200 [Overall Objectives of the Independent Auditor and the conduct of an
audit in accordance with standards on auditing]
Definitions 1. Audit Evidence  Information used by the auditor
 In arriving at the conclusions
 On which the auditor’s opinion is
based.
2. Premises on That management & TWCG have
which audit is following responsibilities:
conducted  For preparation and
presentation of financial
statements and
implementation of I.C
 To provide the auditor with
i. All information
ii. Any additional
information that auditor
may request
iii. Unrestricted access to
those within the entity
3. Professional  An attitude
Skeptism  That includes a questioning
mind
 Being alert to conditions
 Indicating possible
misstatement.
Some A. Presentation  Audit is conducted on the

basic of financial premise that management &
points statements TWCG have some fundamental
responsibilities.
 Audit of the financial
statements does not relieve
them of their responsibilities.
B. Scope of Audit  The purpose of audit is to
enhance the confidence of
users on financial statements.
 Thus, his opinion is on whether
the financial statements are
presented fairly or give a true
& fair view as per applicable
F.R.F.
 His opinion does not assure (i)
future viability of entity or (ii)
efficiency or effectiveness,
with which the management
has conducted the affairs of
the entity.
 However, in some cases,
applicable law & regulation
may require auditor to express
opinion on some specific
matters. Then auditor should
undertake further work (As in
the Companies Act 2063, Sec-

115(3)
 The auditor decides the scope
of his audit having regard to:
 The requirement of the
relevant legislation
 The pronouncements of
the institute (ICAN).
 Terms of engagement.
However, the terms of engagement can
not supersede the pronouncement of the
institute or the provisions of relevant
legislation.
C. Reasonable  Auditor is required to obtain
assurance reasonable assurance as to
w.r.t free from whether the financial
misstatements statements are free from
misstatements.
 Thus, auditor obtains sufficient
and appropriate audit evidence
to reduce audit risk to an
acceptable low level.
 However, reasonable
assurance is not absolute
assurance. This is due to
inherent limitations of audit.
D. Inherent  Auditor cannot obtain absolute

limitations of assurance (cannot reduce audit
an audit risk to zero)
 This is due to inherent
limitations of an audit due to
which auditor obtains
persuasive evidence rather
than conclusive.
E. Consideration  Auditor should consider NSA while
of NSA performing audit.
 NSA require the auditor to:
 Maintain Professional
judgment & professional
skepticism.
 Identify and assess risk of
material misstatement.
 Obtain sufficient & appropriate
audit evidences about
misstatements.
 Form an opinion on financial
statements based on
conclusions drawn from
evidences.
Overall  While auditing the financial statements, the auditor has the
objective following objectives:
of the a. To obtain reasonable assurance about whether the

auditor financial statements are free from material
misstatements thereby enabling the auditor to express
an opinion on whether financial statement are prepared
as per applicable F.R.F and
b. To report on financial statements and communicate as
per NSAs.
 If reasonable assurance cannot be obtained and qualified
opinion is insufficient then he should either disclaim the
opinion or withdraw from engagement.
Requirements/ 1. Ethical i. He shall comply with ethical

responsibilities requirements requirements including
of the auditor independence.
ii. He is required to comply with
code of ethics issued by ICAN
a. Integrity
b. Objectivity
c. Professional competence
and due care
d. Confidentiality and
e. Professional behavior
iii. He shall maintenance of mind
as well as independence of
appearance. Thus he can form

an opinion without being
affected by influences.
2. Professional i. He should recognize the

Skepticism conditions indicating possible
misstatements.
ii. It includes being alert to, for
example:
 Contradictory evidences
 Conditions indicating
possible frauds
 Conditions questioning
reliability
iii. Moreover, it requires critical
assessment of audit evidences
gathered.
iv. By maintaining professional
skepticism, overall risk can be
reduced.
3. Professional i. It is necessary to make proper
judgment decisions during audit.
ii. For example decisions about:
 Materiality
 Audit Risk
 NTE of audit Procedure
 Sufficiency &
appropriateness of
evidence etc.
iii. While making professional
judgment he considers level of
consultation, if required
iv. It also needs to be
appropriately documented.
4. Sufficient & i. Sufficiency refers to quantum of
appropriate evidence whereas
audit evidence appropriateness refers to its
and audit risk quality.
ii. It is required to reduce audit
risk to an acceptable low level.
iii. Audit risk is a technical risk. It
does not include Business Risk.
iv. It consists of risk of material
misstatements and detection
risk.
v. However, due to inherent
limitations of audit, audit risk
cannot be reduced to Zero.
5. Conduct of a. Complying -He shall comply with
audit in with NSAs relevant SAs.
accordance relevant to
with NSAs the audit
b. Objectives -NSA is relevant if it is

stated in effective and
individual circumstances stated
NSAs in the NSA exist.
c. Complying
with In case auditor
relevant is unable to
NSA and achieve the
Relevant stated
Requirmen objective, he
ts shall consider
d. Failure to the need to :
achieve the - modify the audit
stated report, or
Objective - Withdraw from
the engagement.
SUMMARY OF NSA-500 Audit Evidence
Definitions:
1. A/C ing records
Record of initial entries and supporting records
2. Appropriateness
Quality of audit evidence
3. Mgmt's expert
Person or firm (other than one with expertise in
Accounting and auditing) used by entity to assist the
entity in preparing the financial statement
4. Sufficiency :- Quantity of audit evidence
Method to obtain evidence {@ ROI-AR}
R O I A
Re calculation observation inquiry & confirmation ARP
R Inspection
Reperformance
Auditor s independent execution of controls that will be
originally performed by entity
Reliability of audit evidence
Internal evidence when I.C effective
Directly obtain than through entity
Documentary than oral
Original copy than photocopy/Fax
Evidence from Independent External Source
Inconsistency or Doubt on Audit Evidence

If evidence obtained from one source is inconsistent with
other source, then the auditors shall determine what
modifications or additions to audit procedure are necessary to
resolve the matter.
Factors to be evaluated about Management Expert
@ WACOC
W – Work Done by Expert (Source Data, Assumptions and
methods applied by management, Suitability of Final
Outcome)
A – Appropriateness of Auditor s work as an audit evidence
C – Capability of Auditor, O- Objectivity of Auditor, C-
Competence of Auditor.
NSA 501 :- Audit Evidence – Specific
Considerations for selected Items
Inventory counting
Management Auditor's
responsibility duty
To count the stock To attend inventory

To adopt appropriate counting on date
procedure specified by mgmt.
Maintain I.C with respect &
to inventory counting observe the same
If auditor is unable to attend inventory count due to
Unforeseen situation Stock under control of

or 3rd Party
Impracticable situation
Request mgmt. to arrange obtain

some inventory counting WR-written representation
on alternative date/procedure 3rd party confirmation
i.e. external confirmation
Document of title
Report of 3 rd party
Auditor
Evidence on
Subsequent recovery of goods
Mgmt. refuses/not possible Mgmt. accept the request
Limitation on scope attend PV on

(Modified Opinion) alternative date & apply
procedure to adjust movement
Litigations and claims
a. Identify litigation and claims
b. Inquiry with mgmt & others in entity and discuss with
in-house legal counsel
c. Review the minutes of meetings of TCWG and
correspondence between entity and external legal
counsel
d. See the legal expenses ledger
The auditor shall seek direct communications with entities

external legal counsel through letter of enquiry requesting the
external legal counsel to communicate directly to auditor.
If mgmt refuses to give permission to communicate (or) external

legal counsel refuses to respond
Apply alternative procedure for suff. & appr. Evidence
If he obtains unable to obtain

OK modify the A.R
The auditor shall obtain WR from mgmt & TCWG that all
known actual or possible cases have been disclosed to auditor.
Segment Information
To check about segmentation: proper or not
Disclosure proper or not
Evaluate the mgmt. methods for segment
reporting and may perform testing &
application of such method
Perform Analytical review
SUMMARY OF NSA-505 external confirmation

Meaning
Obtaining evidence through direct communication from 3rd
party
Process
Selecting Party designing Request Sending Request
obtaining response and evaluating
Example
Fixed Assets, debtors, stock held by 3rd party, bank bal. loan,
creditors, B/P, B/R
Timing: At B/S date, near B/S date
Request a. Positive [reply always] given information
Fills in .
b. Negative [reply only where 3rd party disagree]
Use of Negative Request when

Risk
Balance less
Expected error
Risk of ignorance
Characteristics of respondents
If 3rd party is not independent his response may not be reliable
Management's request not to seek confirmation
Understand the reasons behind refusal from management
Valid reasons No valid reason
OK [Alternative procedure] do not accept

[Limitation on work]
Summary of NSA-580 [Written representation]
Scope
To obtain written representation
Written Representation as an Evidence

Similar to responses to enquiries
WR is only additional evidence
Reliable WR provided by mgmt. does not affect the other audit
evidences
Meaning of WR
Written statement provided by mgmt to auditor to confirm certain
matter OR support other evidence
WR about mgmt. s responsibility

-Preparation and presentation of financial statement
-Information provided to auditor
Other WR
If auditor feels necessary to obtain one or more WR, he shall request
such other WR
Date & period

-Date of WR on near as possible to AR but not after the date of AR
- WR should be obtained for all period as covered in Audit Report.
Form of WR - Representation letter addressed to auditor

Is the Auditor provided with the Requested Written
Representation?
Yes Provided Not provided
(Re-evaluate
Doubtful Reliable reliability of mgmt)
(Extend NTE) (OK) (Consider Modification)

(Consider Modification)
Summary of NSA-620[using the work of

auditor's expert]
Meaning
Special skill in field other than accounting
-auditing
Auditor's responsibilities
- He is solely responsible for expressing his opinion
-Use of expert's work does not reduce the responsibility of auditor
Written agreement with expert

For nature, scope & objectives of expert's work
Responsibility of auditor and experts
Communication between auditor and expert
Confidentiality requirement
Evaluation of expert's work

Refer WACOC from NSA 500
If he determines that auditor's expert's work is not adequate and he
cannot resolve the matter through alternative procedure including
employing another expert, he should modify the opinion
Is Reference of expert necessary in the audit Report?

Not Necessary, normally
Necessary if required under any law
Necessary if report is modified and auditor believes that such
reference is helpful in developing understanding of such
modification among users.
But reference does not reduce the responsibility of auditor.
Im o an E ac of NSA and NSA
Opinion
Unmodified Modified
When A di o concl de ha fin a a e p epa ed on pe

applicable F R F
If he concl de ha fin a a e no Unable o ob ain
f ee f om ma e ial mi a emen ff App
E idence
T pe of modifica ion Q alified
Di claime
Ad e e
If he ob ain e idence ha fin a a e mi a ed in he follo ing manne
Ma e ial Pe a i e Ma e ial b no pe a i e
Q alified
Ad e e
If he i nable o ob ain fficien app op ia e E idence in he follo ing manne
Ma e ial Pe a i e Ma e ial b no pe a i e
Di claime Q alified
If mgm impo e limi a ion af e he accep ance of engagemen
Re e mgm o emo e he limi a ion
If Mgm accep If ef ed
Check if refusal is reasonable or not
if reasonable, apply alt procedure and
if still no saae, follow same as below
Ok comm nica e o TCWG
Pe fo m al e na i e p oced e
S ill nable o ob ain e idence
Ma b no pe a i e ma pe a i e
Q alified
Di claime
Re ign
Di clo e Rea on fo modifica ion in A di o Repo

Audit Procedures
1. Compliance Procedure or Test of Controls
 Auditor tests the following parameters related to Internal Control System in the entity:-
 Existence of Control
 Operating Effectiveness of Control
 Continuous Operation of Controls
 Auditor doesn’t express opinion on the operating effectiveness

of the controls. His opinion is only on the financial statements.
Auditor conducts compliance procedure to ascertain what level
of substantive procedures to be conducted.
2. Substantive Procedure or test of transactions and balances
 Auditor conducts the following as part of Substantive
Procedures:-
 Vouching and Verification (Also Known as Test of Details)
 Analytical Procedures (NSA 520)
Data analyse
NSA 520: Analytical Procedures and compare

garne
procedure
Analytical Procedure is the study of relationship between two or more sets of financial or non-financial data.
eg in a hospital,
Stages of Use of Analytical Procedure:- no. of patients last
year vs this year
 During substantive Procedure/ Substantive Analytical Procedure

Analytical procedure is a part of Substantive
 During Planning stage/Preliminary Analytical Procedure procedure. However, since analytical
 During Review Stage procedure is essentially just comparison of
data, it can be performed in any of these 3
stages as well
Examples of Use of Analytical Procedures:-

 To compare Budgeted Data with actual Data
 To compare Current Year Data with that of previous year
 To Compare data of auditee with that of industry
or PROCESS
Factors to be considered by auditor in applying Analytical Procedures:- is the ARP suitable? Maybe for trading firm,
past data can be used for comparison. For
organizations like Nepal Army, past data
1. Determine suitability of ARP Analytical review procedures cannot be suitable since it takes up tasks
2. Evaluate reliability of ARP data spontaneously
3. Develop an expectation
4. Determine the amount of difference between actual value and expected value
5. If the difference is negligible, the possibility of fraud/error is low. Auditor investigates:
6. If the difference is huge, 1. Inquires with mgmt
2. Wherever deviation is huge, vouching and
Factors that determine the reliability of data verification once again
3. If SAAE, conclusion
4. If not SAAE, modification
1. Source of Information
2. Comparability of Information
3. Nature and relevance of information For eg, budgeted data maybe overestimated and unrealistic
4. Internal Controls applied over the preparation of data
Substantive Procedures: - Vouching; Verification and Analytical
Procedures:-
Vouching involves examination of income and expenses through
inspection of documentary evidences. Verification consists of few but material
transactions, so senior level auditor takes
up this task while vouching is done by junior
Verification involves examination of items of assets and liabilities

through inspection of documentary evidences as well as through cross-
verification of actual assets and liabilities. Example can be The ENRON
Scandal, USA
Analytical procedure involves study of relationship between two or

more sets of data.
Homework
- Objectives of Vouching
- Objectives of Verification
- Points to be considered while examining vouchers
- Cut-off procedure
- Difference between Vouching and Verification
testing Internal control,
eg. signature of maker and checker?
Sequential dates of vouchers? Proprietor le gareko bhaye
esari nai garthyo kharcha?
eg. Revenue or capital? bhanera question garne
Key Points for Vouching Direct or Indirect?
Income/Expenses Authori I.C. Proper Effect Support External Perfo Complia Proprie Proper TDS Dedn.
zation Classifica on All ing Confirma rm nce with ty Disclos
Voucher
properly tion of Applica Docume tion ARP NAS/ Concep ure in
signed
chha ki
Transacti ble nts law/ t FS
chaina on Ledgers Reg.
Purchase
Salary and Wages

Bonus
Gratuity
Insurance Prem.
Travelling Exp
R&D Exp
Remuneration to
Directors
Advertisement Exp
Preliminary Exp
Sales Commission
Personal Exp./Directors
Income Tax Paid
Dividend Paid
Interest Paid
Customs and Excise
Advance to Suppliers
Petty Cash Expenses
Other Revenue Expenses
Cash Sales
Credit Sales
Commission Received
Goods sent on
sale/Return Basis
Goods sent on
Consignment
Sales Return
Recovery of Bad Debts
Rent Received
Receipt of Capital Subsy.
Receipt of Subsidy
Sale of Scrap
Royalty Received
Income from Investment
Sale of Investment
Insurance Claims
Packages and Empties
For e.g. the coke bottles in

Capital nature ko purchase garda restaurants is coca cola’s property.
paune subsidy. For eg, subsidy This is like inventory lying with 3rd
receivedwhen buying penstock pipe party. So confirmations etc are
required
Disclosing in
fixed asset
Use of rate
register,
of foreign
charge if fixed
Free from currency,
register, asset is in
collateral/ discount
notes to custody of
Cost and charge or interest
Key Points for Verification accounts 3rd party
revaluation not? rate etc.
etc.
Head Authorization IC Existence Cost Title Charge Valuation Disclosure Compliance External Expert
(P.V.) on with Confirmn. Opinion
asset law/NAS
Land/Bldg
Assets
acquired in
Hire Purchase
Plant and
Machinery
Furniture &
Fixture
Motor Vehicle
Investments
Inventories
Assets Abroad
Capital WIP
Bank Balance
Cash in Hand
Prepaid Exp.
Small Tools
Stock with
third party
Patents
Copyrights
Trademarks
Goodwill
Debtors
Loans and
Borrowings
Contingent
Liability
Creditors
O/S Expenses
Provisions
Self generated goodwill should not

be recorded.
Goodwill arising during purchase
can be recorded and then properly
amortized
Key Points for audit of special sector
 Understanding the entity and planning activities
 Audit of Incomes
 Audit of expenses
 Audit of Assets
 Audit of Liabilities
Sectors Covered
 Educational Institution
 Hotels Room, programs etc
 Hospitals
 Cinema Halls Food, ad, seats
 NGO Corpus fund, Grant sanction letter
 Partnership Partnership deed
 Charitable Institution Social welfare act, Grant sanction letter
 Publishing Company Printing machines, patent, royalty to author, print materials etc
 Club Scout, lions club, Toastmasters
 Small Companies
 Incomplete Records Single entry system, natural disaster, NSA 705 (disclaim or qualify)
 Sole Trader
 Leasing Companies lease ko nfrs compliance,
 Hire Purchase Companies Hire purchase ledgers, title transfer date,
 Joint Ventures limited life, jv agreement, PAN card,, profit sharing ratio, closing date
 Co-operative Societies Cooperative act 2074, eligibility of auditor,
NSA 530 : Audit Sampling
Meaning of Sampling :- Examination of less than 100% items in the population is called sampling.
Sampling Risk:- This is the possibility that auditor would have issued a different opinion if he had applied
audit procedures in 100% items of the population instead of sample items.
Sampling risk is high if the population is heterogeneous. It is low if the population is homogenous.
Components of Sampling Risk:-
1. Risk of Over Reliance

2. Risk of Under Reliance
The above two risks are associated with compliance procedure.
3. Risk of Incorrect Acceptance

4. Risk of Incorrect Rejection
The above two risks are associated with substantive procedure
1. Risk of Over-Reliance
Due to the nature of sample selected, auditor may believe that Internal Controls in the
organization is strong. However, in reality the internal control system may not be as reliable as
believed by the auditor. This possibility is known as risk of over reliance.
This results in examination of smaller sample size and hence increases the possibility of issuance
of incorrect audit opinion. So, it impacts on effectiveness of Audit.
2. Risk of Under-Reliance
Due to the nature of sample selected, auditor may believe that Internal Controls in the
organization is weak. However, in reality the internal control system may be more reliable than
what was believed by the auditor. This possibility is known as risk of under-reliance.
This results in examination of larger sample size and hence the possibility of issuance of
incorrect audit opinion is low when compared to risk of over-reliance. So, it impacts on
Efficiency of Audit.
3. Risk of Incorrect Acceptance
Due to the nature of sample selected, auditor may believe that financial statements are free
from material misstatements. However, in reality the financial statements may contain larger
number of material misstatements than what was believed by auditor. This possibility is known
as risk of incorrect acceptance.
This results in examination of smaller sample size and hence increases the possibility of issuance
of incorrect audit opinion.
4. Risk of Incorrect-Rejection
Due to the nature of sample selected, auditor may believe that financial statements contain
material misstatements. However, in reality the financial statements may not contain material
misstatements. This possibility is known as risk of incorrect rejection.
This results in examination of larger sample size and hence the possibility of issuance of
incorrect audit opinion is low when compared with risk of incorrect acceptance.
Factors Affecting Sample Size
Factor Effect
1. Low Sampling Risk/Homogenous Low Sample size
Population
2. High Sampling Risk/Heterogeneous Larger Sample size
Population
3. Low Level of Expected Error Low Sample size
4. High Level of Expected Error Larger Sample size
5. Low Tolerance towards Errors Larger sample Size
6. High Tolerance towards Errors Smaller Sample Size
Homework
Types of Sampling – Statistical and Non-statistical/Judgmental
Methods of Sampling – Random Sampling (Random Selection, Haphazard and stratified)
Value-weighted
- Systematic Sampling (Cluster, Block and Stratified)
for e.g. January bhanda agadi ko employee

fraud thyo bhane january agadi ko
transaction ko dherai sample liney.
Judgement is used
Organizations dealing with

public wealth like a bank will
have low tolerance towards
error
Government Auditing in Nepal Sarkari lagani bhaeko company
(organization) haru ko audit
Meaning: - Government audit is the systematic and professional examination

of financial, administrative and other operations of a public entity.
The generic definition of audit is applicable
to the organizations of private sector
In Nepal, Office of Auditor General (establishment date: - 15th Asar 2016 ) is

responsible for audit of public sectors. Provisions on appointment,
qualifications and removal of auditor general are provided in the constitution
of Nepal. Generally for private sectors, auditor examines
financial, administrative and other operations,
however, the final opinion is delivered on financial
conditions and performance only.
Whereas, in Government audit, the opinion is given

on financial, administrative and other operations
Provisions on Appointment of Auditor General:- too. (By maha lekha parichhyak, auditor general)
- To be appointed by president on recommendation of constitutional

council.
- Maximum Tenure is 6 years from the date of appointment. He cannot be
reappointed. His tenure will be terminated before 6 years, if he becomes
disqualified within the 6 years period (for eg. If he attains the age of 65
years in his 4th year of service, his position gets vacant in the fourth year
itself)
Vacancy in the office of Auditor General:-

- Upon resignation (letter sent to the President)
- Upon attainment of 65 years of age Maha Abhiyog
- Upon success of impeachment resolution passed in the parliament as per
article 101 of the constitution
- if he or she is removed from office by the President on recommendation
of the Constitutional Council on grounds of his or her inability to hold
office and discharge the functions due to physical or mental illness
- upon death
Qualification of Auditor General
A person shall be eligible to be appointed as the Auditor General if he or she
possesses the following qualification:
(a) having served in the Special Class of the Government of Nepal or having at
least twenty years of experiences in audit related work, after having obtained a
bachelor's degree in management, commerce or accounting from a recognized
university or having passed a chartered accountancy examination
(b) not being a member of any political party at the time of appointment,
(c) having attained the age of forty five years, and
(d) being of high moral character.
Remuneration of Auditor General

As provided for in the Federal law.
Appointment in other government services
A person once appointed as the Auditor General shall not be eligible for
appointment in another government service.
Functions, duties and powers of Auditor-General: Provincial
(1) The accounts of all Federal and State Government Offices including the
Office of the President, Office of the Vice-President, Supreme Court, Federal
Parliament, State Assembly, State Government, Local level, Constitutional
Bodies and Offices thereof, Courts, Office of the Attorney General, Nepal Army,
Nepal Police and Armed Police Force, Nepal shall be audited by the Auditor-
General in 154 accordance with law, having regard to, inter alia, the regularity,
economy, efficiency, effectiveness and the propriety thereof.
(2) The Auditor General shall be consulted in the matter of appointment of an
auditor to carry out the audit of a corporate body of which the Government of
Nepal or State Government owns more than fifty percent of the shares or
assets. The Auditor General may also issue necessary directives setting forth
the principles for carrying out the audit of such corporate body.
(3) The Auditor General shall, at all times, have power to examine any books of
accounts for the purpose of carrying out the functions under clause (1). It shall
be the duty of the concerned chief of office to provide all such documents and
Economy meaning cheap
effective means funds properly
used for the stated objective
effeciency means funds efficiently
used
propriety means done as it is own
property
information as may be demanded by the Auditor General or any of his or her
employees.
(4) The accounts to be audited pursuant to clause (1) shall be maintained in the
form prescribed by the Auditor General, as provided for in the Federal law.
(5) In addition to the accounts of the offices mentioned in clause (1), the
Federal law may also require the accounts of any other offices or bodies to be
audited by the Auditor General.
Objectives of Office of Auditor General

 To promote Accountability and Transparency
 To enhance effectiveness of operations
 To promote legal and regulatory compliance within the organization
 To encourage abandonment of discretionary work-style Mannpari
 To encourage economy in conduct of operations, etc.
Cheap way
Audit Guides published by OAGN
 Administrative Expenditure Audit Guide
 Operational Guideline
 Government Auditing Standards
 Performance Audit Guide
 Procurement Audit Guide
 Revenue Audit Guideline
 Policy Guideline
 Guidelines for the audit of public sector enterprises.
Types of Public sector Auditing
1. Financial Audit
Examination of financial statements with the objective of issuing opinion
as to whether the financial statements are free from material
misstatements.
2. Performance Audit (Efficiency Audit, Economy Audit and Effectiveness
Audit)
Efficiency Audit
Efficiency Audit involves examining as to whether the project/ program
is carried out in efficient manner, with optimum utilization of different
resources.
Economy Audit
Economy Audit involves examining as to whether the project/ program is
carried out at the lowest possible cost.
Effectiveness Audit
It involves examining whether project/program is directed towards the
set objectives and goals. Something is said to be effective when the stated objective is achieved
3. Compliance Audit
It involves examining whether the project/program complies with all
applicable laws, rules and regulations.
Concept of Propriety in Government Auditing
Propriety is the characteristic of a proprietor. Normally, it is expected that the
owner or proprietor of any organization is more concerned about the
possibilities of mis-utilization of the fund of the organization than any
employee of the organization. Propriety involves examination of transactions
with this perspective, i.e. whether or not the funds are utilized in the best
interests of the organization.
Key Concept in Government Auditing
1. Concept of INTOSAI ( International Organization of Supreme Audit
Institutions)
INTOSAI is a body formed by combination of Supreme Audit Institutions
across the world. The members of INTOSAI are supreme audit institutions
of different countries. For eg. Office of Auditor General of Nepal is the
supreme audit institution of Nepal.
2. Concept of ISSAI (International Standard of Supreme Audit Institution)
Level ISSAI Number Purpose
1 1 to 9 Fundamental
principles of
Govt. Auditing
2 10 to 99 Prerequisites for
auditing
3 100 to 999 Elaboration on
Level 1 and Level
2
4 1000 and Above Specific Auditing
guidelines
3. General Principles of Public Sector Audit under ISSAI

 Ethics
 Independence
 Professional Judgement, due care and skepticism
 Quality Control
 Team Management Skills
 Audit Risk
 Materiality
 Documentation
 Communication
4. Preconditions for Auditing

 Similar to NSA 210, INTOSAI also require the existence of
preconditions for government auditing. They include:-
 Acknowledgement by Management of their duty to prepare
Financial Statements as per Acceptable FRF
 Acknowledgement by Management of their duty for internal
control system
 Following Requirement by auditors to be fulfilled management
- To provide all information
- To provide additional information
- To provide unrestricted access to people in the
organization
Relevant Provisions from Audit Act 2075
Parameters Section 10 : Fully owned by GON Section 11 :- Substantially owned by
GON
Applicablility Body Corporate wholly owned by Body Corporate Partially owned by
[GON/Prov. Govt./Local [GON/Prov. Govt./Local Govt./another
Govt./another Body corporate Body corporate owned by GON] alone or
owned by GON] alone or in in combination public sector company means a company in which
51% or more of the subscribed and paid-up equity
is owned and controlled by the Central or a State
combination Government, jointly or severally
Who is the Office of Auditor General; he can Member of ICAN

auditor take help from other auditors (i.e.
members of ICAN)
Role of AG  To prescribe the duties,  To provide advice for
functions, powers, appointment of auditor in the
responsibilities and organization
audit-procedures to be  To offer recommendations to
followed by the auditor the organization regarding any
assisting the audit observations in the audit
report prepared by the auditor
 To direct, control and
supervise the auditor
 To decide the
remuneration
Special Note The remuneration of the second  Auditor General should be consulted
auditor (member of ICAN) is borne in appointment of such organization
by the concerned organization.  The remuneration of auditor is borne
by the concerned organization
eg. Nepal oil corporation ko audit garna
appoint gareko auditor (firm) ko
remuneration is paid by nepal oil corp.
Sample Question and Answer
The directors of XYX Ltd have approached your CA Firm A & Associates
for their audit of financial statements for the year 2076-77. Please
respond on this request considering the following shareholding pattern
of XYZ Ltd:-
Federal Government Rs. 8 crores
Province 1 Govt. Rs. 5 Crores
P Ltd (Co. with 100% shareholding of federal Govt.) Rs. 2 crores
Total Capital Rs. 15 crores.
Answer
Introduction:
The given question is relatable to the provisions contained in section 10
of Audit Act 2075.
Legal Provision:
According to section 10 of the Audit Act 2075, the audit of corporate
bodies fully owned by the Government of Nepal or provincial
government or local government or another corporate body wholly
owned by either of the governments, singly or in combination, is
conducted by the Office of Auditor General.
Auditor General may appoint license holder auditor as an assistant for
the audit of aforesaid corporate bodies.
The Given Case
In the given case, A & Associates has been approached for auditing of their
financial statements for the year 2076-77 by XYZ Limited, which is a corporate
body fully owned by the Government of Nepal.
Analysis of the Case

Applying the legal provisions discussed above, in the given situation, we can agree
on the following points:-
1. 100% of the shares of the company is held by Governments or by company
fully owned by government. Hence, this is a body corporate fully owned by
Government of Nepal, for the purpose of section 10 of Audit Act 2075.
2. Audit of such entities has to be conducted by Office of Auditor General of
Nepal applying the provisions of section 10.
Conclusion
In conclusion, audit of entities wholly owned by government of Nepal should be
conducted by the office of Auditor General, in line with the provisions contained
in Audit Act, 2075. Therefore A & Associates should not accept the request from
XYZ Ltd.
Internal Control System
Meaning:-
The rules, regulations and procedures developed by those
charged with governance, Management, etc. for the efficient
and effective conduct of the business, reliability of financial
reporting and to ensure compliance with applicable laws and
regulations.
Objectives of ICS:-
 To ensure effective and efficient conduct of businesses
 To ensure correct recording of transactions
 To prevent and detect fraud and errors
 To safeguard the assets of the business
 To ensure timely preparation of financial statements
Inherent Limitations of ICS:-

1. Cost ineffectiveness Benefit should be higher than the cost
2. Dynamic environment resulting in outdated ICS
3. Collusion among employees
4. Complicated ICS
5. Communication GAP
6. Possibilities of Human Error
7. Manipulation by senior authorities
General Requirements in an Internal Control System
 Well Defined Responsibility and schedule of
Authority eg. separate procurement component,
separate store management
 Segregation of Authority eutai manchhe lai dherai powerful nabanaune

 Customization of ICS Should be customized as per requirement of
organization, season, surrounding etc
 Other Controls such as:-

 Periodic Physical Verification of Fixed Assets
 Budgetary Controls Standard costing
 Internal Check Record ko maker ko kaam check garne
Tools to Review ICS Narrative record simply means to write line by line in
paragraphs and explain the ICS, just like you are narrating a
1. Narrative Records story.
2. Checklist (prepared by Audit Firm, used by Audit

Staff) Checklist is in a pre-made standard form of objective questions,
Questionnaires are generally prepared during audit
3. Internal Control Questionnaires (Prepared by

auditor, not in the form of pre-decided checklist)
4. Flow Chart Narrative records is a form of writing in paragraphs, flow chart
is the form of explaining the same thing in flow diagram
Surprise Check: - Examination by auditor without prior notice.

Eg. Physical Verification of Cash
Walk Through or Examination in Depth: - Process of checking

of transactions from starting to end through entire flow of
transactions. Eg. Auditor’s examination of the process of
Procurement to Payment
Internal Check: - Also known as Maker Checker Controls: -

Transactions prepared by one person should be checked by
another person. This concept is known as internal check.
Unlike External audit, Internal audit

Internal Audit: - Independent Management function is a consulting activity and
independence is not required.
Users of internal audit report are
responsible for examination of activities inside the BOD and MGMT. Internal auditors
must be independent to operation
organization. heads
Scope of Internal Audit Function

 Examination of Accounting System and related controls
 Examination of financial and operating information
 Examination of Efficiency/Effectiveness/Economic
aspects of operations of entity Internal auditors go beyond traditional financial reporting.
They focus on a company’s internal controls, accounting
 Physical Verification of Assets processes and ability to mitigate risk. Internal auditors also
evaluate whether the company’s activities comply with its
strategy, and they may consult on a variety of financial
Objectives of Internal Audit issues as they arise within the company.
In contrast, external auditors focus solely on the financial
statements.
 To examine arithmetical Accuracy
 To ensure compliance with laws, regulations, etc.
 To establish suitable criteria for examination of
records
 To ensure existence of assets and liabilities
 To facilitate prevention, detection and correction of
misstatements
 To report misstatements
Qualities in an Internal Audit Report

 Objectivity
 Clarity
 Accuracy
 Brevity
 Timeliness
Standard Components of Internal Audit Report
 Executive Summary
 Specific Issues identified (including current condition,
criteria applied to check, root cause of issue,
consequences and corrective action needed)
 Summary of Recommendations
NSA 610 :- Using the work of Internal Auditors
NSA not applicable when

for eg. the internal audit
was appointed for
examinations of sales
and marketing only.
Activities of Int. Auditor not relevant Auditor believes that the work of Internal Auditor is not
to auditor. suitable for the auditor
Key Points to understand
Internal Auditors's objectives are determined by mgmt.

/TCWG
Objectives of Internal & External auditors are different. Internal ko objective giving advice while
external ko giving opinion
Some work may be common
However Internal Auditor (IA) is less independent than External Audiotr (EA)
EA is solely responsible for expressing his opinion on fin .stat. Even if the external auditor uses the
work of internal auditor, he will be solely
responsible for the final opinion and its
repercussions
Reliance / use of IA's work does not reduce responsibility of EA
Objective of NSA 1. Whether EA can use the work done by IA

2. To what extant to use work of IA
IsEA shallofdetermine
the work IA adequate?
1. 2.
NTE of procedures to be performed by EA to be
Factors considered for deciding adequacy of IA’s Work
determined by considering:-
O- His (objectivity) 1. NTE of work by IA
T- (Technical) competence 2. Assessed Level of ROMM
P- (Professional) care
e- (Effective) communication between IA & EA
Using specific work of IA
EA should test the work of IA to determine whether it is adequate, by considering

(1) Competence, capability and Objectivity of IA
(2) Supervision & documentation of IA

The above points complement these points.
Merge to write answer
(3) Adequacy of evidences obtained by IA
(4) Appropriateness of conclusions by IA
(5) Assessed risk of Material Misstatements
Recent ammendment
EA can take direct assistance of IA if:-
1. IA can be believed to be independent.
2. IA is Competent for the work
For this, EA should enter into a contract with the Management regarding use of
IA. Similarly EA should monitor the work performed by IA. He should also enter
into a written agreement with IA with terms on confidentiality, objectivity and
independence during the audit-procedures.
NSA-265 Communicating deficiencies in I.C. to TCWG &

Management Auditor should check the IC for his opinion but
it is not his responsibility to give opinion on the
IC. He should communicate the deficiency
Scope
 Auditor’s responsibility communicate deficiency in I.C to TCWG & mgmt.
 For this he should understand the I.C & identify risk associated with internal control
 He is not responsible for expressing opinion on I.C
Definitions
I) Deficiency in I.C :- A control is designed, but unable to prevent, defect & correct mis.
II) Significant deficiency in I.C
A deficiency or combination of deficiencies of sufficient importance to merit the
attention of TCWG
While performing Risk Assessment Procedures, he obtains understanding of I.C[As per NSA-
315] But does not express opinion on I.C
If he identifies some deficiency in I.C
Are these deficiencies significant?
Yes No
Communicate to TCWG Communicate them to mgmt., if relevant as per his professional
Judgement
To mgmt. also
Include in his written communication
 Description of deficiencies & their effect

 Purpose of audit is to express his opinion on fin. stat. not on I.C
 Communication is limited to those deficiencies which are considered as significant by auditor
The deficiency is communicated through a letter and this letter is called

“LETTER OF WEAKNESS’ OR “MANAGEMENT LETTER” (NOT
MGMT REPRESENTATION LETTER)
Homework
Q.No. 1 Components of ICS
Hint:-
1. Control Environment
2. Control Activities
3. Risk Assessment Procedures
4. Monitoring of Controls
5. Information system and communication
Q.No. 2. State whether the following statement is

correct. Provide reasons.
“An Auditor provides opinion on the ICS of the

organization”
EDP is related to accounting, CAAT is
related to audit.
Auditor uses CAAT to audit EDP used in
accounting
EDP Audit
any type of financial data processing
CIS Environment Computer information system wholly or partially, big or small
Meaning :- CIS Environment is where a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit; whether that computer is operated
by the entity or by a third party. In-house or outsource eg.
payroll agency
Electronic Data processing audit refers to an evaluation of the accuracy and proper functioning of
an organization’s data processing. The purpose of this audit is to check whether or not data
processing is accurate.
Features of Audit in CIS Environment

1. Faster Processing
2. Arithmetical Accuracy
3. Timely Suggestions
4. Potential for use of CAAT Computer Aided audit technique
It cannot be objectively stated whether the risk will be higher on
manual system or computer system. It depends on the nature of
organization and case-to-case basis
Auditing in CIS Environment
The overall objective of audit in CIS environment does not change. However, following changes can
be noted in EDP Auditing:-
1. Differences in Risk Assessment Procedures
2. Difference in ROMM due to different nature of controls implemented
3. Difference in Compliance and Substantive Procedures
Steps in EDP Auditing Manual entries ma change garna
Terms of Engagement first kaatnu parchha but it is easier in
1. Planning excel.
2. Knowledge of Business } Planning

manual ma signature le maker
checker thaha hunthyo, CIS ma
3. Identification of Controls } Compliance procedure login id ra Digital journal entry
ma “made by” “checked by” bata
4. Testing of Controls thaha huncha
5. Substantive Procedure
6. SAAE Manually calculator use
7. Reporting garinthyo, CIS ma programs like
excel use garincha
Approaches to EDP Audit
1. Black Box Approach
In Black box Approach, auditor reconciles the input data with the result data without actually
checking the Processing done by computerized system. Here, Auditor ignores how inputs are
converted to outputs.
This is suitable if the auditor lacks sufficient skills to examine the computerized system.
2. White Box Approach

In white Box Approach, auditor examines the processing of data by the computer system.
This requires technical competence in the expert.
This is specifically necessary in cases where audit trail is not visible, i.e., it is embedded within
the computer system.
Auditor takes help of Computer Assisted Audit Techniques (CAAT) in this approach.
goods required - enter in software
- store dept. checks and enters message in software to purchase
dept
- purchase dept messages thorugh the software to supplier
- supplier writes to procurement in sw
- procurement writes to purchase dept through sw
Concept of Audit Trail
It involves tracing transactions from the beginning to the end so that transactions can be
traced from initiation to end (i.e. input-processing-output).
In computerized system, audit trail may not visible, i.e., it may be embedded within the
computer system. This can be checked in White box approach through CCAT or in Black Box
Approach through clerical Recreation process. CAAT
Processing System in EDP
1. Batch Processing System

This concept is also known as deferred processing or offline processing since transactions
are processed in bunch and not individually or online-real time basis. Processing
transactions in one lot saves time and cost.
Eg. Batch processing of cheques by banks.

When cheques are deposited, the cheques are accumulated
till 12 noon. After that, the cheques are processed
2. OLRT (Online Real Time System)
In this concept, input data is processed instantly, without waiting for accumulation of
bunch of inputs.Eg. Real time settlement of accounts while withdrawing money from ATM
machine.
Concept of Service Bureau NSA 402 - Audit of Service Bureau (not in syllabus)
Sometimes, organizations may obtain specialized service outsourced from external firms. Eg.
Payroll processing.
In this case, the outsourcing firm, also called as service bureau, maintains data of client in digital
format. External auditor
In such case, EDP auditor should examine the internal controls as well as correctness of data
maintained by service bureau.
Homework – Overall Objectives of Auditor Does not Change in EDP Environment. Comment.
Nature of Risks in Computer Information System:-
1. Lack of Transaction Log :- Can be embedded The logs may not be visible and the codes should be assessed
2. Lack of Segregation of Authorities due to faster speed of work in CIS environment
3. RISK of GIGO (Garbage In Garbage Out) due to uniform processing of transactions
4. Higher Inherent Risk The tasks become Fast and efficient so the number of workers is
reduced. Due to this no segregation of authority (affects internal control)
Features of CIS Environment If a fraudster has high level of computer knowledge, there will be higher
risk
1. Potential for use of CAAT eg. Excel

mgmt saves time in clerical work. That time can
2. Potential for use of increased management supervision be used in supervisory work
3. Potential For automated transactions. Eg in case of safety stock maintained in CIS
environment.
Internal Controls in EDP Environment
1. General EDP Controls
Is there an IT department? does it have structure? Access of
a. Organization and Management Controls different people to usage of softwares etc.
- Procedures relating to Overall control functions and segregation of duties
b. System Software Controls
Who has the authority over the OS
- Controls related to System Software
c. Application System Controls In general, excel will be used for data and
- Controls related to application software tally will be used for accounting
d. Operational Controls
- Timely data backup
- Safe location of computers
e. Data Entry and Program Controls
- Control over input and processing, in general
Eg. In general, every input should pass through maker-checker control
2. Specific Control over specific applications
a. Control over input
In specific, for particular application
b. Control over Processing software
c. Control over outputs

Computer Assisted Audit Techniques (CAAT)
CAAT refers to the computer programs that allow auditors to test computer files and databases
during an audit. These are usually utilized in white box approach of auditing.
Types of CAAT
1. Software
a. Package Program or General Audit Software
These software are not customized or tailor made to fit the audit of any particular nature
of business.
These software extract key information about key audit areas and provide the information
to Auditor.
For eg. Auditor uses software to select sample items by using Random Sampling.
b. Purpose Written Program/ Customized Program

These software are not customized or tailor made to fit the audit of any particular nature
of business. eg if auditor is conducting audit of bank, the custom audit
program will not be applicable in audit of other sectors
c. Utility Software
These software are used for performing common data processing functions during audit.
Eg. Excel
2. Test Data
There are two methods of testing data.
a. Test Pack : Fake data are entered for test purpose
In this method, a set of data, referred as test data, which comprises of both valid and
invalid transactions, is used to test the operating effectiveness of the computer system.
These transactions are passed separately from the normal processing cycle, just to
understand the operational procedure of the system.
Fake data are entered for test purpose along with genuine
b. Integrated Test Facility transactions
Test transactions are passed simultaneously with the normal processing cycle.
Erroneous transactions are tagged and traced using snapshot techniques and they are
reversed subsequently.
Tracing and Tagging

This is the technique used to compensate the loss of audit trail. It involves tagging the test
data in such a way that relevant information is displayed at key points. This enables auditor
to examine transactions at intermediate steps in processing. This is used in integrated test
facility. Using snapshot technique, photos of key changes to transactions are captured and
displayed to the auditor. Audit trails may not be visible because it may either be
embedded into software or they may be deleted since a large
server is required which is costly. In order to test the system in
such circumstance, auditor tags a fake transaction and passes it.
Homework: Advantages and disadvantages of CAAT He traces the transaction by printing out the transaction in
different stages of its processing and examines them. For eg, if a
requirement of copier is passed, it will go through various
departments like prcurement, purchase, store etc.
NSA 300: Planning an Audit of Financial Statements
Audit planning
Recurring audit Initial Audit
1. Preliminary Engagement Continuance AS per NSA- 220 As per NSA-220

Activities Acceptance
Ethics
Term As per NSA-210

Communication with previous Auditor
2. Planning Activities
Term As per NSA - 210
Strategy based and action based

Strategy decided based on:-
Plan based on
Risk assessment procedures
EDP ki manual
Characteristics of audit (315), SP and CP (330) are not
Type of report
315 undertaken under NSA 330 and
315, they are ,planned under
Knowledge obtained from previous engagement them
330
NTE of procedure
Other Procedure
Documentation Timing &nature of communication
Overall Audit strategy
Audit plan
Changes to plan &their reason
If company is public,
NTE should be greater
[Summary of NSA-315] Identifying &assessing the risk of
material is Mis-statement
 Objective Understand Entity &its Environment and I.C.
Identify Risk of mat mis-statement Client side risk (Inherent

and control risk)
 Risk assessment procedure :

Discussion with in team member
Inquiry with mgmt +ARP+ Inspection + observation
Consider Knowledge obtain from other engagement
Previous Audit
But this procedure is not sufficient. There are further audit procedures.
1. UNDERSTAND
Internal control
Entity & its Environment
Industry, Regulation, other factor Risk Assess process of entity [yes/No]

risk assessment by the entity itself?
Nature of entity is the IC checked, updated,

Monitoring of I.C rectified in a timely basis?
A/cing policy System Information
Strategies &related Business Control Environment (Culture &

risk Ethics)
Financial performance
Related parties information

2. Identify & Assess the Risk
Significant Risk An identified and assessed risk of material misstatement that,

in the auditor's judgment, requires special audit procedures.
for e.g., Alcohol inventory in restaurant.
IT related Risk teeming and lading fraud by cashier
Revision of Risk Timely risk ko level update garirakhne
 Mat. Weakness in I.C Communicate with mgmt &TCWG. As per NSA-265
 Documentation :
Discussion with team member
Key Element of understanding obtained from entity &its environment and I.C
Identified and Assessed Risk w.r.t Assertion level
Risk Identified & related control
[Summary of NSA-320] Materiality in planning &

performing an Audit
Scope Auditor's Responsibility to apply the concept of materiality.
Meaning Mis -statements including omission, are material if they, individually or in the aggregate
influence the economic decisions of users.
If may be affected by size and Nature.
Auditor's Duty
(1) The Auditor will assume that users:

Have a reasonable knowledge of business and willingness to study the fin stat with reasonable
diligence
Understand that fin. stats are prepared & Audited to level of materiality.
Make Reasonable economic decision based on F.S.
(2) The concept of materiality is applied by the Auditor in two stages By using benchmarks
In planning & performing the Audit
In evaluating the effect of identified & uncorrected mis- stat in the fin. stat.
NSA 450
(3) In planning the Audit, the Auditor makes judgement for
Materiality level is set while planning
Risk Assessment procedure and only transaction above such level
are audited
Identify & Assess the Risk
if any misstatement exceeds this level,
Responses to those Risk (NSA-315) auditor should assess its affect again
as it can be the affect of aggregation of
(NSA-330) immaterial misstatements
Performance materiality
If refers to the amount or amount's set by the Auditor at less than the materiality level for particular
class of transaction, account balance or disclosure.
Profit 10,00,00,000. Materiality–> 5% of profits = 5% x
10,00,000 = 50,000. Performance Materiality–> 60% of
Materiality Level = 50,000 x 60% = 30,000. While “performing”
The Auditor shall determine. risk assesment, response to risk and evidence collection team
Mat . level will use 30,000 as materiality level.
Overall materiality level
Mat .level for particulars class of transaction,
Performance Materiality
SUMMARY:
Revision The materiality levels should be flexible. - There are 2 types of materiality,
overall and performance materiality
- The ROMM determines the level of
materiality and level should be revised
Documentation
The Audit document shall include the following
All materiality levels
Any revision of all mat. levels.
Lower the audit risk, higher the materiality level

Summary of NSA-230 Audit Documentation
aka Audit Working Papers
Meaning It is record of planning, Procedure Performed,
Evidence Obtained and conclusion taken
Nature of documentation
Documentation provides
Evidence of auditor's Report Evidence that Audit was conducted as

per SA & law
Purposes Planning Accountability Direction significant to future Audit
Review Q.C .Review (internal)
Peer Review Text

(external)
Every audit practitioner/firm

Experienced Auditor An individual who has reasonable understanding of should maintain audit
working paper as maintained
by and experienced auditor
Audit process NSA (s) & Law Business environment Reporting

issues
Form & Content

Such that it enables users to Understand
NTE of Procedure Evidence Conclusion Doubtful Situation &

response thereof
Document Also
Who Performed
Who Reviewed
Special characteristics manual audit ki edp ki aru special?
eg. lockdown huda physical verificaation

Departure from NSA garna sakiyena wrt NSA 501
When /why/ By whom / Reasons /effect on A.R.

Change
Changes in the audit Only Addition [Cannot delete]

working papers
Before the end of retention Period
[i.e. .5 yrs from the date of signing of Audit Report, to be assessembled within 60 days of signing ]
Audit working paper is auditor’s properties. He does not have to share it with the auditee. Old auditor does not
need to share to new auditor unless he has valid reason and permission of client or required by law
Note : Confidential other than as required under law/court or after permission from client.
[Summary of NSA-330] [Responses to Assessed Risk]

Closely related to NSA 315
 Definition
(1) SP An Audit procedure designed to detect mat mis-stat at assertion level
Representations by mgmt, explicit or not, in

the FS which helps auditor to consider
potential misstatements that may occur
Test of Detail ARP
Vouching and verification
(2) C.P An Audit procedure designed to cheek I.C. applied at Assertion level.
Apply procedures to examine fin-stat and their compliance with

 Overall Responses
financial reporting framework
NOTE: Increasing NTE means reducing Checking in overall level. eg, relation
detection risk between purchases and inventory etc.
Audit procedure responsive to Assessed Risk at Assertion level
Test of control Compliance

procedure
Substantive procedure
Test of control Perform if need is there
T or
Timing
He expects that I.C are good
Timing of TOC Particular period If done at interim period then cover remaining
period
or
Throughout the period
I Interim period
Consider changes
P Previous Audit
S Significant Risk Cheek Internal controls over significant risk
Controls are effective or not

E Effectiveness
eg, if auditor does interim audit upto baisakh, the remaining 3

months should be audited too during final audit
Practically speaking, Auditor need not do CP but SP is

mandatory. If he does not think that the ICS is reliable, he will
not do CP, instead, he will rely less on the ICS.
Thus, CP basically helps in judging the reliability of ICS when
the auditor feels that it is reliable
 Presentation & Disclosure Adequate or not
 Audit Evidence Sufficient & Appropriate
If not obtained
Try to obtain further evidence
If unable
 Documentation Q/D
Overall Responses at the level of financial statement
Responses to Assertion level
Result of Audit procedure
If uses previous experience then how he reached about relying on such document
NSA-450
Evaluation of mis-statement identified during the Audit
can be an Extension of NSA 320
 Scope To evaluate the effect of Identified and uncorrected mis -stat, during Audit, on the fin. Stat.
Auditor identified the misstatement but the

mgmt did not correct
Definitions

(1) Mis-statement A difference between the reported Fin-stat. items and required
for the item to be in accordance with F.R.F.
It may be arise due to Fraud &Error.
(2) Uncorrected mis-statement
Mis-statement that the auditor has accumulated during Audit and that have not been corrected .
 Accumulation of Identified mis-statement
He shall accumulate mis-statement identified during Audit, other than those clearly trivial.
He shall consider whether uncorrected mis-statement is material by considering
Their size & nature
Effect of uncorrected mis-statement of prior period.
If he considers them to be material, may consider Revision of Audit planning including per forming additional procedures.
Communicate them at appropriate level of mgmt. With request to correct them.
If mgmt
Refuses to correct Correct them
ok
Consider their reasons
But perform Additional procedure to determine whether some

Effect on A.R.
other mis-stat remains.
S mma of NSA Rela ed Pa ie
Objec i e To obtain understanding of related party relationships and transactions
To conclude whether Fin stat affected by those relationship and transactions
Fin stat T&F
Not Misleading
Re on ibili of MGT Identification , Accounting & Disclosure of Related party .
Meaning of Rela ed a
. A defined b FRF
. Control
(a) Person or Entity having Over client
(b) Significant influence
Another entity over client's
Control
Significant influence
(c) Another Entity Under Common control with client through :-
Common controlling owners
Owners who are close family members
Common Key management

Ri k A e men En i e i h Mgm Abo he follo ing
P oced e
Related party & changes since previous year
Nature of Relationship and Transaction with them
Understand the I.C. on Related party Transaction
Maintaining alertness for related party information
Sharing information on Related party with engagement Team
Identify significant risk if any.
Through this he may identity some undisclosed R.P.
Re on e o Ri k
a. If he identify previously undisclosed related party

Communicate within term;
Adopt more substantive procedure
Re-consider risk of other related party
Re-consider reliability of written representation
b R P an ac ion no a e no mal b ine con ide a ion
Inspect contract or agreement, if any

Consider it’s a/cing & disclosure in fin. Stat.
c R P an ac ion being a m leng h an ac ion
Obtain sufficient & appropriate evidence w.r.t such transaction

W.R
Obtain WR & communication with TCWG
Conclusion & reporting
Whether R.P & transaction whether due to R.P & their

properly disclosure; the fin.
Stat. are misleading
Accountedted for & disclosed Q/A
In fin. Stat.
Yes No
Ok Q/A
Documentation
As per NSA and other NSA(s)
Names and nature of R.P transaction

S mma of NSA Going Conce n
Going Conce n
Continuing for foreseeable future
Mgm e on ibili
To assess entity’s liability to continue as a going concern on the basis of information

available
If the organization is not a going concern di clo e
A di o d
Obtain suff. & approx. evidence regarding appropriateness of G.C

Material uncertainty indicators extend audit Procedure
However, he doe no g a an ee en i f e iabili [NSA- ]
Ri k A e men P oced e whether mgm e a e a e men on G C

If such assessment not prepared, discuss the assumptions for going concern
Doubtful situation [indicators]
Indica o fo nd hen
Request mgmt to assess the situation

Obtain WR
Consider forecast
Evaluate mgmt’s plan
Comm nica ion i h TCWG
Uncertainty
Appropriateness of going concern
Adequacy of disclosure
Dela in a o ing fin a If it appears that is due to G.C. problem, apply extended
procedure
Re o ing
Report
G.C is appropriate but if mgmt. unwilling to G.C is inappropriate but

mat. Uncertainty to make assessment F.S. prepared as per GC
Exist Ad e e O inion
Whether properly consider effect on A.R

disclosed in fin. stat
Yes No
G C Pa a Q A
NSA
Ini ial a di engagemen o ening balance
IAE
Financial statement of prior period not audited or
Financial statement of prior period by previous auditor
O ening balance
Balance existed at starting of period, they reflect effect of
transaction/events/accounting policy of prior period
P edece o a di o
The auditor from a different audit firm, who audited the financial
statement of an entity in the prior period and who has been replaced
by the current auditor.
A di o objec i e
To obtain sufficient and appropriate evidence whether
Opening balance contains mis-stat affecting current period

financial statement &
a/cing policy consistently applied or changes the proper reflected
as per FRF
Auditor’s procedure
Op. balance mis-stat consistency of a/c predecessor’s A.R

Read prior yrs fin. Stat whether consistent if modification in
& A.R or in case of changes predecessor A.R
Whether correctly compliance with then evaluate the
brought forward FRF effect of matter
adjustment on C.Y. fin. stat.
eg, misstatement in Closing
disclosed on prior balances of real and
personal accounts in the
period items previous year affects current
year’s report auditor should
evaluate it
Obtain copies of
AR, if any
Correlate op. bal.
with procedure
performed in c.y
Perform additional
procedure for op.bal.
If doubt as to mis-stat
in op.bal. communicate
with mgmt. & TCWG
Op. balance consistency of a/cing policy
Unable to obtain SAAE contains mis-stat not consistent Nt Disclosd
Modification in predecessors A.R
That modification remains relevant & material to c.y. fin. stat. then
Modify c.y. A.R
S mma of NSA Acco n ing e ima e

Objec i e of a di o
To check valuation & disclosure of estimates including fair value
Op. balance consistency of a/cing policy
Unable to obtain SAAE contains mis-stat not consistent Nt Disclosd
Modification in predecessors A.R
That modification remains relevant & material to c.y. fin. stat. then
Modify c.y. A.R
S mma of NSA Acco n ing e ima e

Objec i e of a di o
To check valuation & disclosure of estimates including fair value
Defini ion
Refer to book
Ri k a e men oced e
Understand
Requirement of fin. Reporting framework
Management procedure
Outcome of estimates of last year’s a/c
Re on e o a e ed i k
Examine
Compliance with fin. Reporting methods applied by mgmt

framework
(detailed checking of FRF requirement and
mgmt procedure) Appropriate & consistent
Re on e o ignifican i k
Examine alternative assumption
Examine reasonableness of assumption adopted by them
Develop a range on the basis of audit evidence
Check whether uncertainty has been disclosed by mgmt.
Check management bias
WR
Assumption by management are reasonableness in their opinion
WP
Basis of conclusion whether [estimate is right/wrong]
Indicators of mgmt.’s bias
Diffe ence o ange e ima e b mgm
Ask mgmt. to adjust
Adjust adjust
Ok Q/A
(Summar of NSA-250)
Effect of la &Regulation
Direct effect on
DD Do not direct effect on Heavily regulated Non –Compliance
Financial statement Financial statement industries e.g. Banks
C nce f D al Da ing
A e i ed de hi NSA hile e a i i g b e e e e fac ab
hich beca e k a di af e he da e f a di e a di ca
e i da e i he a e a di e The i i ial da e eflec he da e
hich i i ial da e a c le ed The ec da da e i ided i h a
addi i al e i e i i g ha hi ec d da e i he da e hich
a di i g f b e e e e a c le ed
(S a f NSA-250)
E ec a &Re a
Ha i g di ec DD
effec D ha e di ec Hea il eg la ed N C lia ce
Fi a cial effec Fi a cial i d ie e g Ba k
ae e ae e
Fi e Li iga i G i g
Re ibili
C ce
Ma age e With oversight of TCWG A di
C lia ce i h La Ide if i a d e
Reg la i N C lia ce
Ob ai de ailed A di Ca b ai c a a i el le
E ide ce ega di g de ailed E ide ce ega di g la
c lia ce i h la ha d n di ec l effec Fi
ha i g di ec effec Fi S
ae e
A l A di ced e
hel ide i N
C lia ce
I i f g I ec i g Check c e de ce
Wi h A h i ie
Also request for written representations
Mea i g f N c lia ce
D e i i c i i
Ei he i e i al i e i al
A di C n ide a i n f C m liance
Ob ai de a di g f in nsa 315
Legal a d eg la fa e k H he e i C l Wi h i
I ca e he e a di de ec c lia ce i h la a d eg la i he ha
c ica e he a e he f ll i g
1 Ma age e i h e e f c ec i
2 Th e Cha ged G e a ce i h e e f c ec i
Reg la I hi j dge e Audit report in itself is a public
document. Technically, the audit
I A di Re A e i ed Unde NSA report will anyway reach the
regulators like IRD, NRB etc
If non compliance has material

effect, Q/A
If TCWG or mgmt do not provide

SAAE, consider the need to
obtain legal advice + other matter
paragraph + Q/D
If obtaining evidence is not

possible due to other reasons,
affect in the auditor’s report
Comm nica ion i h TCWG NSA
Contents: -
.Specific matters . Additional matter . Other matter
identified during audit as required by NSA
or other NSA’S May be required by

law & regulation
Definition:
i. TCWG
Person/ organization having responsibility of
Strategic direction & accountability of entity

ii. Management
Persons with executive responsibility of operations
Matters to be communicated: - [@ IFRS]
I F R S
Independence Findings Responsibility Scope

in respect of
Qualitative As per
aspects (A/cing financial stat.
For listed entity practices/policies/ Law
estimates/etc.) NS.A
Ethical /
requirements Difficulties felt in mgmt. auditor
Safeguards audit execution
against Weakness in I.C (terms of
threats to [S.A ]
engagement)
independence
It is mandatory in case of listed Other matters ICAN
company to communicate the
above things Guidelines
Comm nica ion oce
Form Timing expected general content
[timely basis] of communication
Written oral
Significant matter independence
Oral communication
Documentation
Copy of written communication
Note: the audit of F.S does not relieve the management of its
responsibility
NSA S be en E en
Ke S mma
S b e en E en E e cc i g af e he da e f bala ce
hee b bef e he da e f a di e a d hich a e e i ed
be adj ed di cl ed i he fi a cial a e e a e i ed
de ele a Fi a cial Re i gF a e k
A di Re n ibili f S b e en E en
A di h ld c d c i i i h he a age e
de a d hei e h d f ide ifica i a d ec di g f
be e e e
A di h ld de a d he e i e e f ele a
Fi a cial Re i gF a e k ega di g ide ifica i a d
di cl e f b e e e e
Ca e n b e en e en
E en Occ ing bef e Fac hich became Fac hich became Fac hich became
he da e f A di kn n he a di kn n he a di kn n he a di
Re and kn n af e he da e f a di af e he bmi i n f af e he i ance f
he a di bef e e b bef e a di e b A di Re P blic
i ance f A di bmi i n bef e i ance
Re Managemen P blic
A di R le A di R le A di R le A di R le
T Remind he T Remind he T Remind he T Remind he

managemen f managemen f managemen f managemen f
C m liance i h FRF C m liance i h FRF C m liance i h FRF C m liance i h FRF
If Managemen ag ee If Managemen ag ee If Managemen ag ee If Managemen ag ee

c m l i h FRF c m l i h FRF c m l i h FRF c m l i h FRF
Clean O ini n F e h O ini n i h and e i e FS F e h e i e FS and n if
ne Da e D al O ini n i h ne he blic F e h
O he i e M dified Da ed Re Da e D al Da ed O ini n i h ne
O ini n Re Da e D al Da ed
If managemen d e If managemen d e Re
n ag ee M dified n ag ee A di If managemen d e
O ini n ill n if he blic f n ag ee A di
mi a emen ill n if he blic f
mi a emen
C nce f D al Da ing
A e i ed de hi NSA hile e a i i g b e e e e fac ab
hich beca e k a di af e he da e f a di e a di ca
e i da e i he a e a di e The i i ial da e eflec he da e
hich i i ial da e a c le ed The ec da da e i ided i h a
addi i al e i e i i g ha hi ec d da e i he da e hich
a di i g f b e e e e a c le ed Second date lekhera “I audited
subsequent events on this date”
bhanera matra lekhne ho
(S a f NSA-250)
E ec a &Re a
Ha i g di ec DD
effec D ha e di ec Hea il eg la ed N C lia ce
Fi a cial effec Fi a cial i d ie e g Ba k
ae e ae e
Fi e Li iga i G i g
Re ibili
C ce
Ma age e A di
C lia ce i h La Ide if i a d e
Reg la i N C lia ce
Ob ai de ailed A di Ca b ai c a a i el le
E ide ce ega di g de ailed E ide ce ega di g la
c lia ce i h la ha d n di ec l effec Fi
ha i g di ec effec Fi S
ae e
A l A di ced e
hel ide i N
C lia ce
I i f g I ec i g Check c e de ce
Wi h A h i ie
NSA-240 :-A di Re ibi i ie eai g f a d i a a di f fi . S
1. Ge e a 2. RAP & 3.E a a i 4. C ica i 5. ab e
e e f e ide ce &d c e ai c i e
-Ob a E i -I e d . -I a d d ca -if a a e ia
ea ab e 1. Wi h g . S a ., e d a d e f a d f d
a a ce a -M a e e c de e e he , c ide
. a a e ee R a d C ca e a a . he he
a d -M ced e - a d, Le e e ba c i e
-B e ca de a d e I c d
de ec a d e -M c de c ca I ca e
ee c ca e ab TCWG e e a dec
a TCWG & e ee WR & -d c e a c
-Ri f - 2. Wi h TCWG NSA 315,330 e
Re e
de ec i f - e b e H
f a d i high - e ed e e e a d ,
c ca
(d e a d ee de
c cea e ) A a ica a d ad e e
He S d Re ie a a e e .
c
- ai ai f. P ced e a d TCWG
e ici Ide a d S ca I ca e
-d c a e a d dec
ea c d d c e,
- b a WR . . ca a d
1. M . d
e b De e e D c
2. M e e TCWG a d
a e e C ca e e
c d ea
3. de a ed e da a
C ca c -a
a d a d A
c a - c a d
e -e a
a ec a
S b a e
ced e
S mma f NSA Q ali C n l
Re n ibili f A di ega ding Q C ced e and
Sc e
Re n ibili f Q C Re ie e
S e f Q C a d R le f E gage e Tea
QC e licie a d Re ibili f A di i
ced e a e he i le e he Q C ced e
e ibili f A di Fi a d i de e de ce
Objec i e T Check
A di C lie i h NSA a d
La a d
AR i ed i a ia e i ci c a ce
Elemen f he em f Q ali C n l
Leade hi Re n ibili E gage e Pa e

f Q C
Rele an E hical Re i emen The e gage e a e hall e ai ale f e ide ce

incl ding main enance f f c lia ce i h e hical Re i e e
inde endence If he ide ifie C lia ce he
c lai i h fi de e i e he
a ia e ac i
The e gage e Pa e hall f aC cl i C lia ce i h

I de e de ce e i e e
Acce ance c n in ance f Te C lia ce i h e hical e i e e

clien ela i g Acce a ce c i a ce
If E g Pa e ide ifie C lia ce

i edia el C ica i i h he fi
Engagemen e f mance and A e Skill C e e ce

affing
M ni ing Q ali C n l licie h ld be e i dicall e ie ed m ni ed
C nce f Engagemen Q ali C n l Re ie

E gage e ali c l e ie h ld be a da il e f ed i
a a di f li ed c a The Q ali C l Re ie e e a i e
c lia ce f ali c l a d ig ifica j dge e ade
b he e gage e ea I ca e f diffe e ce i i i be ee he
Q ali C l Re ie e a d he a di i h ld be e l ed ba ed
fi le a d ced e
D c e ai
A di Re ie e
C lia ce i h e hical Re ie e C lia ce i h Q C
Da e f c le i f Q C Re ie
I de e de ce Re ie e
Acce a ce c i a ce f clie
C cl i f C lai
conclusion from consultation among

members (professionals) of audit team.
NSA F ming an O ini n and e ing n Financial S a emen
A di O ini n
U dified M dified
Whe A di c c de ha fi a ae e a ed e
a icab e F R F
U ab e b ai
If he c c de ha fi a ae
ff A
f ee f a e ia i ae e
E ide ce
A di Re Re ha be i ii g
C e f A di Re
Ti e
Add e ee
O i i
Ba i f O i i
Re i g U de NSA if a icab e
Ke A di Ma e NSA i ed e i ie a da
O he I f ai NSA Ma da f i ed e i ie
Re ibi i ie f Fi a cia S a e e g Re ibi i
Re ibi i ie f Fi a cia S a e e A di Re ibi i
O he Re i g Re ibi i
Na e f Sig i g Pa e
Sig Add e Da e
Re ibi i
Mg
Pe aai f fi a a e FRF
IC f e aai f fi a
A di
T e e i i
E eC ia ce f NSA Re e a e hica Re ie e
P ide Rea ab e A a ce
Ob ai SAAE
T a j dge e i c di g RAP Ri a e e ced e
C ide I C b d e e i i IC
T e a ae A Ci g ic
A ci g e i a e
O ea ee ai
S mma f NSA
M difica i i he I de e de A di Re
M dified
If A di c c de ha fi a ae f ee f U ab e b ai fficie a ach e ide ce

a e ia i a
T e f difica i Q a ified
Di c ai e
Ad e e
If he b ai e ide ce ha fi a a e mi a ed
Ma e ia Pe a i e Ma e ia b e ai e
Q a ified
Ad e e
If he i ab e b ai fficie a ia e E ide ce
Ma e ia Pe a i e Ma e ia b e ai e
Di c ai e Q a ified
If g i e i iai af e he acce a ce f e gage e
Re e g e e he i i a i
If g acce If g ef e
O c ica e TCWG
Pe f a e ai e ced e
Si ab e b ai e ide ce
Ma B e ai e a e ai e
Q a ified Di c ai e
Re ig
Di c e Rea n f m difica i n i A di Re
Headi g f i i a ag a h Q a ified i i
Di c ai e i i
Ad e e i i
S mma f NSA
C m a a i e Inf ma i n C e nding Fig e and
C m a a i e Financial S a emen
Sc e
A di Re ibi i ega di g c a a i eI f ai he he F S f i e i d ha e bee
a di ed b e i A di ee a di ed
Objec i e
T b ai S fficie A ia e e ide ce ab he he he c a a i ei f ai ha bee

e e ed e FRF
C a a i ei f ai
C e di g Fig e C a a i e fi ae e
P ced e Chec he c ec e f O e i g Ba a ce a e NSA
Chec he he Aci g icie a e c i e if cha ge he a e i ed b FRF
If a di bec e a a e ab i ae e i c a a i ei f ai hi e
ef i g he a di f C Y A di ha ef e e ded ced e
Pi e i d fi a A di ed b a edece A di
The A di ha a ei he a e a ag a h
Fi a f P Y a di ed b edece A di
T e f i i
Da e f Re
If a di c ncl de ha ma e ial mi a e i in P Y Fin a n hich
he edece A di had e ed nm dified hen A di hall
c mm nica e i mgm TCWG and e e ha he e i A di be
inf med If mgm e i A di ag ee amend he fin a Re
a l ing he c nce f NSA he A di hall e nl n c en
e i d If ch ma e ial mi a emen hich i ele an in he c en ea ha
n been c ec ed e a ed in he c en ea a di ill m dif hi
ini n
Pi e i d fi a A di ed
The A di ha a e ha c a a i ei f ai ae A di ed
H e e ch a e e d e e ie e he A di f b ai i g fficie a ia e
e ide ce ega di g e i g ba a ce
NSA COMMUNICATING KEY AUDIT MATTERS KAM IN THE

INDEPENDENT AUDITOR S REPORT
The e fc ica i g e a di a e i e ha ce he
c ica i e a e f he a di e b idi g g ea e a ae c
ab he a di ha a e f ed
Thi NSA i a da a di f i ed e i ie
H e e hen he a di di claim an ini n n he financial a emen he
i e i ed ide KAM Pa ag a h
Mea i g f Ke a di a e h e a e ha i he a di fe i a
j dg e ee f ig ifica ce i he a di f he fi a cia ae e f he
c e ei d
T
In making his de ermina ion he a di or shall

ake in o acco n he follo ing
Areas of higher assessed risk of ma erial miss a emen or significan risks
iden ified in accordance i h NSA
Significan a di or j dgmen s rela ing o areas in he financial s a emen s ha
in ol ed significan managemen j dgmen incl ding acco n ing es ima es ha
ha e been iden ified as ha ing high es ima ion ncer ain
The effec of significan e en s or ransac ions ha occ rred d ring he period
The a di or shall describe each ke a di ma er sing an appropria e
s bheading in a separa e sec ion of he a di or s repor nder he heading Ke
A di Ma ers
Ke A di Ma ers canno be considered as a s bs i e for e pressing a Modified
Opinion
C A F R
H F R Re ie Cond c ed before he iss ance of a di repor
C F R Re ie Cond c ed before he iss ance of a di repor
P R Re ie here peer re ie er as appoin ed b Peer Re ie
Board of ICAN re ie s he s s ems and proced res implemen ed b he
a di acco n ing firm o ens re ha a es a ion f nc ion is performed i h
q ali
R S a da d a d
N a S a da d R E a E a R F a ca
Sa
N a S a da d R E a R I F a ca
I a db d d a d
I a ca a db ac
a a d NSRE a cab a a d
a d a d NSRE a cab
T c a d a da d a a cab
a S d a ad d d d c a b a
d a a a dd ca
N a S a da d R a dS c NSRS a d
NSRS E a a d c d ad
a ca a
S c a a a d a ac d a
NSRS C a E a
T c a d a da d a a cab acc a d
a d a S d a ad d d d c a
b a d a a a dd ca
The points below give Code of ethics is an internationally
situations where threats arise. applicable concept however some
Threats like self interest, self differences may arise in not only code of
r e v i e w, f a m i l i a r i t y t h r e a t , ethics but general rules and regulations of
intimidation threat etc. Code of two nations. In instances where a member
ethics formulate safeguards if ICAN is giving service in foreign land,
Code of Ethics:- against these threats.
Safeguards are formed by
Those rules, regulations, charges, codes
and principles are applicable which is
accountant, client or by comparatively more profound. (MORE
regulators STRICT)
Part 1:- Fundamental Principles:-

For everyone
a. Integrity
b. Objectivity
c. Professional Competence and Due care
d. Confidentiality
e. Professional Behavior
Part 2:- Professional Accountants in Business

 Conflicts of Interest. Accountants in accounting job
and entrepreneurship
 Preparation and Presentation of Information
 Acting with Sufficient Expertise
 Financial Interests, Compensation and Incentives Linked to
Financial Reporting and Decision Making.
 Inducements, Including Gifts and Hospitality
 Responding to Non-compliance with Laws and Regulations
 Pressure to Breach the Fundamental Principles.
An internal whistleblowing
system is an early-warning
system for identifying and
combating maladministration and
Part 3 PROFESSIONAL ACCOUNTANTS IN
PUBLIC PRACTICE Accountants in practice with COP
forms the basis for successful
risk management.
 Conflicts of Interest.
 Professional Appointments
 Second Opinions
 Fees and Other Types of Remuneration
 Inducements, Including Gifts and Hospitality
 Custody of Client Assets
 Responding to Non-compliance with Laws and Regulations
Part 4A INDEPENDENCE FOR AUDIT AND

REVIEW ENGAGEMENTS
 Fees Compensation and Evaluation Policies
 Gifts and Hospitality
 Actual or Threatened Litigation
 Financial Interests
 Loans and Guarantees.
 Business Relationships
 Family and Personal Relationships
 Recent Service with an Audit Client
 Serving as a Director or Officer of an Audit Client.
 Employment with an Audit Client
 Temporary Personnel Assignments
 Long Association of Personnel (Including Partner Rotation) with an
Audit Client.
 Provision of Non-Assurance Services to an Audit Client.
 Accounting and Book keeping Services
 Administrative Services
 Valuation Services
 Tax Services
 Internal Audit Services.
 Information Technology Systems Services.
 Litigation Support Services.
 Legal Services
 Recruiting Services
 Corporate Finance Services
 Reports on Special Purpose Financial Statements that Include a
Restriction on Use and Distribution (Audit and Review
Engagements).
PART 4B – INDEPENDENCE FOR
ASSURANCE ENGAGEMENTS OTHER
THAN AUDIT AND REVIEW
ENGAGEMENTS eg. Prospective FS review
 Fees
 Gifts and Hospitality
 Actual or Threatened Litigation
 Financial Interests
 Loans and Guarantees
 Business Relationships
 Family and Personal Relationships
 Recent Service with an Assurance Client
 Serving as a Director or Officer of an Assurance Client
 Employment With an Assurance Client
 Long Association of Personnel with an Assurance Client
 Provision of Non-assurance Services to Assurance Clients Other
than Audit and Review Engagement Clients.
 Reports that Include a Restriction on Use and Distribution
(Assurance Engagements Other than Audit and Review
Engagements)
Also Refer sections 34, 35 and 14 from the Nepal Chartered Accountants Act,
1997.

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Sequence Plan

Introduction to Audit and Assurance

a. Balance Sheet as the last date of the financial year.

 Users of Financial Statements

 Opinion provided by an assurance practitioner so as to increase the confidence of users

Comparison between Reasonable & Limited Assurance

Basis Reasonable Limited

Audit Detailed (includes Less detailed,

History of Audit in Nepal

 2015 BS– Establishment of Auditor General’s Office

A. Primary Objective NSA 200

 Primary objective of audit is Expression of Opinion of Financial Statements of the Entity.

True and Fair View

Financial Statements are prepared according to applicable FRF.

Auditor is a watchdog and not a Bloodhound :- Kingston Cotton Mills, 1896.

1.9 Inherent Limitation of Audit

 Basic Principles governing an Audit

 Differences between Auditing and Accounting

Audit Risk = Inherent Risk*Control Risk*Detection Risk

Risk of Material Misstatement [ROMM] = Inherent Risk*Control Risk

Detection risk is the auditor side risk

NSA-210 [Agreeing the Terms of Audit Engagement]

Summary of SA-210 (Agreeing Audit

Access to all Additional Unrestricted Access to

Should not accept Audit if

Aforesaid precondition Prior to acceptance, management

Consider whether there exist reasonable justification of change

Agree to new terms - Management doesn’t permit

- Withdraw + communicate (TWCG and regulators)

Some A. Presentation  Audit is conducted on the

the Companies Act 2063, Sec-

D. Inherent  Auditor cannot obtain absolute

of the a. To obtain reasonable assurance about whether the

Requirements/ 1. Ethical i. He shall comply with ethical

appearance. Thus he can form

2. Professional i. He should recognize the

b. Objectives -NSA is relevant if it is

Inconsistency or Doubt on Audit Evidence

To count the stock To attend inventory

Unforeseen situation Stock under control of

Request mgmt. to arrange obtain

Mgmt. refuses/not possible Mgmt. accept the request

Limitation on scope attend PV on

The auditor shall seek direct communications with entities

If mgmt refuses to give permission to communicate (or) external

Apply alternative procedure for suff. & appr. Evidence

If he obtains unable to obtain

SUMMARY OF NSA-505 external confirmation

Use of Negative Request when

Valid reasons No valid reason

OK [Alternative procedure] do not accept

Written Representation as an Evidence

WR about mgmt. s responsibility

Date & period

Form of WR - Representation letter addressed to auditor

Yes Provided Not provided

(Extend NTE) (OK) (Consider Modification)

Summary of NSA-620[using the work of

Written agreement with expert

Evaluation of expert's work

Is Reference of expert necessary in the audit Report?

Im o an E ac of NSA and NSA

When A di o concl de ha fin a a e p epa ed on pe

Audit Risk = Inherent RiskControl RiskDetection Risk