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Icaew Assurance Notes Icab KL
Icaew Assurance Notes Icab KL
False.
Who the users are will depend on the nature of the subject matter?
True
False.
False.
4.
Ans:
5.
Ans:
6.
Ans:
7.
Ans:
Internal audit
Bank audit
8.
Which level of assurance engagement gives the following opinion: In the course of my
seeking evidence about the statement by the chairman, nothing has come to my attention
indicating that the statement is not reasonable.
Ans:
Limited assurance.
9.
Ans:
10.
Ans:
Lack of understanding.
Reasons :
i.
ii.
11.
What purpose is served by spelling out clearly, the scope and limitations of an assurance
engagement in the engagement letter?
Ans:
12.
Ans:
Benefit :
Limitation :
13.
Ans:
14.
Which of the following factor make a person ineligible for being a company auditor?
Ans:
15.
Define reasonable and limited assurance. Compare and contrast between reasonable and
limited assurance.
Ans:
Reasonable assurance -
Limited assurance -
Characteristics
Reasonable Assurance
Limited Assurance
1.
Level of assurance
High
Low
2.
Evidence
Limited
3.
Opinion
Positive
Negative
Chapter-3
Process of assurance: Planning the assignment
Audit strategy
General
Audit Plan
Audit Plan
Specific
Audit Procedures
7. Interactive # 1, P.43
8. Under BSA 315, what do you mean by understanding of the entity? Why do we need
it?
Ans: - to identify risk of material misstatement
- to design audit procedures .
- to provide framework for audit judgment.
9. What matters are considered in understanding the entity?
Ans: 1. Industry- Market competition, technology
2. External factors- recession/growth, interest rate, inflation.
3. Reporting framework- Accounting principles, industry specific practices
4. Nature of the entity- Financing, Financial Reporting, Business operation
5. Selection & application of accounting policies
6. Objectives & strategies Related risk might cause material misstatement.
7. Review financial performance
8. Internal control
10. How can you achieve an understanding of the entity?
Ans: 1. Inquiry management, others
2. Analytical procedure
3. Observation & inspection Reading manuals, visit premises, meeting staff
4. Prior knowledge Previous period Determine changes.
5. Discussion about susceptibility
- about material misstatement
- among team members.
11. Worked example: Inquiries of management and others. P.44
12. Interactive # 2, P.47
13. What is professional skepticism?
Ans: A critical assessment, with questioning mind, of the validity of the evidence.
Not disbelieve everything
Possess a questioning attitude
14. What is analytical procedure?
Ans: Consists of
Significant ratios analysis to understanding entity
Investigation of fluctuation to identify audit risk
15. According to BSA520 what analytical procedures include?
Ans: 1. Comparison with
a) Prior period information
b) Anticipated results Budgets, expectation of auditor
c) Industry information Ratio of sales to trade receivables.
2. Relationship between:
a) FS elements Relation of gross profit to sales
b) Financial information and non-financial information
Payroll cost to no. of employees.
16. What is the basis for choosing analytical procedures for audit?
Ans: Auditors professional judgment.
17. At the risk assessment stage, what are the possible sources of information about the
client?
Ans: 1.Internal financial information
2. Budgets
3. Management accounts
4. Non- financial information
5. Bank and Cash records
6. Vat returns
7. Board minutes
8. Discussion of the correspondents with the client at the year end.
18. Interactive # 3. P.52
19. What is materiality?
Ans: Level of error that affects the decision of the users.
20. What does materiality depends on?
Ans: Size of the error.
21. According to the BSA320, when should an auditor consider materiality?
Ans: 1. Determining nature, training & extent of audit procedure.
2. Evaluating effect of misstatement
22. How does materiality assessment help the in decision making?
Ans: It helps to decide:
1. How many and what items to examine
2. Whether to use sampling techniques
3. Level of error
Crossing this level will lead to say FS not true and fair
23. How risk & materiality are connected?
Ans: Materiality is an audit procedure. Result of this reduces the level of risk.
24. What is tolerable error? Can it change every year? Why?
Ans: The maximum error that an auditor is prepared to accept.
Yes because: 1. Related to the size of business.
25. Why do you need to review materiality?
Ans: Constantly review because of changes. Change in
1. Draft accounts Due to material error
2. External Factors It causes change in risk estimates.
26. Interactive # 4: Materiality, P.54.
27. What is audit risk: Risk of giving inappropriate opinion.
Elements: 1. Risk of material Misstatement Depends on entity
a) Inherent risk
b) Control risk
2.Risk of failing to detect material misstatement
Depends on auditor
28. What is internal risk and control risk? Differentiat.
Ans: Inherent risk: Possibility of material misstatement
Due to nature of the items
No. of related internal control
Control Risk: Possibility of not preventing or correcting a material
misstatement.
Control risk
1.Due to internal control risk
2.Internal control related
Chapter-4
Process of Assurance: Evidence and Reporting
1. What is Audit Evidence? What are the types of Audit Evidence?
ANS:
Sample basis
Two Types:
1. Test of Controls-To test effectiveness of controls.
~
Appropriateness:-Quantity or Reliability.
Measure Appropriateness External More reliable than entitys record.
Auditor Directly by auditor than indirectly.
Entity When control system ok.
~
ASSERTIONS:
a. Class of Transaction
Occurrence - Recorded one occurred and pertains to
entity.
Completeness All transactions recorded.
Accuracy Recorded appropriately.
Cut-Off Correct Accounting Period.
Classification Recorded in Paper Accounts.
b. Accounting Balances
Existence e.g. Asset, Liabilities exist.
Rights and Obligations Rights & Obligations actually
pertain to the entity.
Completeness All assets, Liabilities, equity recorded.
Valuation & Allocation Assets, Liabilities included in
FS & Valuation, Allocation recorded.
a. Inquiry
b. Re performance
c.
Inspection.
10
3. Adjustments
10. What are the types of substantive procedure? When these are
appropriate to use?
ANS: 1. Analytical procedure
These are
TITLE
ADDRESSEE
INTRODUCTORY PARAGRAPH
MANAGEMENT RESPONSIBILITY
SCOPE-WORK PERFORMED
OPINION
DATE
AUDITORS ADDRESS
AUDITORS SIGNATURE
11
14. What are the Implied Opinions? Which matters are related by
exceptions?
ANS:
15. Why does it need to keep uniformity in the form and content of the
audit report?
ANS: Because:a. Readers Understanding.
b. Identify unusual circumstances.
16. What are the specific issues related to expectation gap?
How can we reduce these issues?
ANS: Misunderstanding about:
1. Nature of the audited financial statements
e.g. Balance Sheet is the fair valuation of entity
2. Type & extent of work
e.g. All items in the financial statements are tested
3. Level of assurance
~
12
Conclusion
11.
Date
12.
13
Chapter 5
Introduction to internal control
1.
Ans:
2.
Ans:
1.
3.
Ans:
Expensive
2.
Human element
3.
Unusual transactions
Human element
Fewer employees
2.
3.
4.
Ans:
Control environment
2.
4.
5.
Monitoring Controls
3.
Management functions
14
5.
What is audit committee? What are the terms of reference of an audit committee?
Ans:
* Key issue
6.
Financial statements.
Ans:
1.
2.
Preventive
Detective
Types :
1.
Authorization
2.
Performance review
3.
Information Processing
4.
Physical control
5.
Segregation of duties
Eg. Reconciliations.
Comparing internal data with external source.
Goods dispatched.
Maintain control accounts and TB.
TB brings all data together.
Arithmetical accuracy.
Check sum of invoices.
Compare cash inventory with accounting records.
Cash count.
Limit physical access to assets.
Inventory store.
Number of people involved in accounting process.
Difficult to occur fraud. & accidents.
More Checking
7.
Ans:
1.
2.
3.
Segregation of function
8.
Ans:
1.
2.
9.
Ans:
Application control
Application controls.
General controls.
15
General control
Difference
Application control
General control
(a) Scope
(b) Control / Support
Individual application
Transaction input
Many application
Application control
10.
Ans:
1.
2.
3.
4.
5.
6.
11.
Ans:
12.
Ans:
1.
2.
3.
4.
5.
13.
Ans:
1.
2.
3.
14.
Ans:
15.
Ans:
1.
2.
3.
4.
5.
6.
16.
Ans:
1.
Narrative notes
2.
Questionnaires/Checklist
3.
Diagrams
Manuals
Policies
Minutes of meetings
Prior year
Interview/Staffs
Observation important
16
17.
Risks
Controls
17
4. Fulfilled orders
5. What controls can mitigate the risks of ordering?
1. Segregation of duties Credit control, invoicing, dispatch
2. Authorisation of credit terms
Reference check
Authorize by senior
Regular review
18
Ans.
1. Credit check from Credit Rating Agency
2. Limit credit terms
3. Senior member sign off orders
4. New customer accounts review for prompt payment.
Weak companies will do 1 & 3 only.
8. Interactive:1, p.113
9. The audit senior at MCL has been asked to test controls over sales,
particularly with reference to new customers. There are three controls
in particular that he should check obtaining credit references, setting
credit terms and authorisation.
What tests of control should the auditor make over sales?
Ans.
1. Select sample of new customers by comparing current to previous
year
2. Check the customers file for credit check
3. Check terms and evidence that senior staff authorised
10.What are the key risks associated with dispatch & invoicing?
Ans.
Despatched but not invoiced
11.What risks a company might face relating to despatch & invoicing?
Ans.
1. Despatched but not recorded- goods lost to the business
2. Despatched but not invoiced
3. Error in invoice
4. Invoice cancelled by wrong credit notes.
12.What are the control objectives to mitigate the following risks?
Ans.
1. Despatched goods recorded
2. Correctly invoice sold goods
19
20
Quantities
21
15.Interactive:2
Ans. P. 115
16.What are the risks associated with recording?
Ans. Key risk is failure to record sales so that payment is not prompted.
17.What are the controls to mitigate the risks of recording?
18.What are the tests of control of recording?
19.Interactive: 3
Ans. P.117
20.What risk might arise from the following situation?
21.What are the risks associated with cash collection?
22.What are the controls to mitigate risk related to cash collection?
23.What are the tests of control for cash collection?
24.Interactive:4
Ans. P. 121
25.Indentify the weakness of the .system of ABC Ltd.?
26.How can you identify the weaknesses associated with ordering system?
27.Interactive: 5
Ans. P. 122
28.As an assurance provider how will you perform test of controls in
relation to sales?-Term Question
Chapter7
Contorls
Once the company has identified the risks which exist in the purchases system, it will try and create
controls which mitigate those risks ( that is, meet the control objectives outlines above). What
controls will be put into place depend on the nature of the company and the specific risks associated
with the way it operates, but the following controls can be used as examples of how the above risks
can be mitigated.
Segregation of duties; requisition and ordering
Central policy for choice of suppliers
Evidence required of requirements for purchase before purchase authorised ( pre- set re- order
quantities and re- order levels)
22
Order forms prepared only when a pre- numbered purchase requisition has been received
Authorisation of order forms
Pre- numbered order forms
Safeguarding of blank order forms
Review from outstanding orders
Monitoring of supplier terms and taking advantage of favorable conditions ( bulk order and
prompt payment discounts)
Assurance
Orders will be authorized by Linda Fairburn, the purchases director.
Random, occasional spot checks will be carried out by Linda Fairburn on the level of Drox
when the requisition is raised.
Purchase orders will be kept in a locked office in the purchase department.
In addition, in order to control inventories, Drox will only be kept in a locked cupboard in the
warehouse.
Tests of controls
The tests that the assurance providers carry out over such controls will obviously also depend on the
exact nature of the control and business. However, again, some general ideas can be generated.
Review list of suppliers and check a sample to orders made
Check sequence of pre- numbered order forms
23
24
Controls
The following are types of controls which could be put in place to fulfil the above objectives.
Examination of goods inwards
-Quality
-Quantity
-Condition
*Recording arrival and acceptance of goods ( Pre- numbered goods received notes)
* Comparison of goods received notes with purchase orders
* Referencing of supplier invoices; numerical sequence and supplier reference
*Checking of suppliers invoices
- prices, quantities, accuracy of calculation
- Comparison with order and goods received note
*Recording return of goods( pre- numbered goods returned notes)
25
Tests of controls
The following tests could be used in relation to the controls noted above.
Check invoices for goods are:
Supported by goods received notes
Entered in inventory records
Priced correctly by checking to quotations, price lists to see the price is in order
Properly referenced with a number and supplier code
Correctly coded by type of expenditure
Trace entry in record of goods returned etc and see credit note duly received from
the supplier, for invoices not passed due to defects or discrepancy
For invoices of all types:
Check calculations and additions
Check entries in purchase day book and verify that they are correctly analysed
Check posting to payables ledger
For credit notes:
Verify the correctness of credit received with correspondence
Check entries in inventory records
Check entries in record of returns
Check entries in purchase day book and verify that they are correctly analyzed
26
27
Payment
Risks and control objectives
The following risks arise at this stage of proceedings:
False invoices are paid in error
Invoices are paid too soon
Payment is not correctly recorded
Credits are not correctly recorded
Payments are not recorded in the right period
The key risk is that money might be paid out by the business inappropriately. The
following objectives arise out of the risks:
All expenditure is goods that are received
All expenditure is authorized
All expenditure that is made is recorded correctly in the nominal and payables ledgers
Payments are not made twice for the same liability
Controls
The arrangements for controlling payments will depend to a great extent on the nature of
business transacted, the volume of payments involved and the size of the company.
of,
Securities or title deeds belonging to the company.
The person responsible for preparing cheques should not
Himself be a cheque signatory. Cheque signatories in turn
Should not be responsible for recording payments.
28
Cheque and bank transfer payments- Cheque and bank transfer requisitions
-
Cash payment-
Number of signatories
Authorization of expenditure
Limits on payments
Tests of controls
The following controls may be used:
Payments cash book(authorization) For a sample of payments:
- Compare with paid cheques to ensure payee agrees
- Check that cheques are signed by the persons authorized to do so within their authority
limits
-Check that bank transfer was authorized and initiated by appropriate person
29
- Check to suppliers invoices for goods and services. Verify that supporting documents
are signed as having been checked and passed for payment and have been stamped
paid
- Check to suppliers statements
- Check to other documentary evidence, as appropriate (agreements, authorized expense
vouchers, petty cash books etc)
Payments cash book( recording)
Check the sequence of cheque numbers and enquire into missing numbers
Trace transfers to other bank accounts, petty cash books or other records, as
appropriate
Check additions, including extensions, and balances forward at the beginning and
end of the months covering the periods chosen
Bank reconciliations
reperform
the
Cashier to prevent their re- use
30
Chapter-7
Purchase system
1. What are the key risks associated with purchase ordering?
Ans:
1. Purchase for personal use
2. Not made on most advantageous terms
2. What are the control objectives to mitigate the risks of purchase ordering?
Ans.
Most important control- Authorisation
1. Orders are authorized and actually required by the company
2. Authorized supplier
3. Competitive price
3. What are the controls to mitigate the risk of purchase ordering?
Ans.
1. Segregation of duties- requisition and ordering
2. Policy for choice of suppliers
3. Evidence for purchase requirement- eg. pre-set re-order quantities,
re-order levels
4. Prepare order forms after receiving pre-numbered purchase requisition
5. Authorized order forms
6. Pre-numbered order forms
7. Safeguarding of blank order forms
8. Review from outstanding orders
9. Monitoring of supplier terms and conditions- eg. bulk order and prompt
payment discounts
4. What are the tests of Control to mitigate the risks of purchase ordering?
Ans.
1. Review list of suppliers and check a sample to orders made
2.
31
3.
32
Quality
Quantity
Condition
33
8
9
Check additions
Check postings to nominal
ledger accounts and control
account
Check postings of entries to
payables ledger
Payable ledger
10
11
Purchase requisitions
Goods received notes
Suppliers invoices
Purchase orders
Goods returned notes
Unmatched purchase requisitions
Unmatched Purchase orders
Unmatched goods received notes
Unmatched invoices
Initialed for prices, calculations and
extensions
Cross-referenced to purchase
orders, goods received notes etc
Authorized for payment
34
Cheque and cash payments The cashier generally not be concerned with
generally
keeping or writing- up books of account other than
those recording payments, nor
Should he have access to, or be responsible for the
custody of, Securities or title deeds belonging to
the company.
The person responsible for preparing cheques
should not
Himself be a cheque signatory. Cheque signatories
in turn
Should not be responsible for recording payments.
Cheque and bank transfer Cheque and bank transfer requisitions
payments- Appropriate supporting
documentation(for example,
invoices)
- Approval by appropriate staff
- Presentation to cheque
signatories(in case of cheques)
Instigation of bank transfer by appropriate staff.
35
Cash payment
Check the sequence of cheque numbers and enquire into missing numbers
Trace transfers to other bank accounts, petty cash books or other records, as
appropriate
Check additions, including extensions, and balances forward at the beginning and
end of the months covering the periods chosen
36
Bank reconciliations
reperform
the
Cashier to prevent their re- use
13.What are the weaknesses in a purchase system?
Ans.
No procedure to track purchase invoice due dates.
14.Give 5 examples of tests to be performed on the cash payment book?
Term Question
15.List four examples of purchase documentation on which numerical
sequence should be checked? Term Question
16.Which two control activities are most likely to reduce the risk of payments
being made twice for the same liability? Term Question
Chapter-8
Employee Costs
1. What is the key risk related to calculating wages and salaries?
Ans. paying too much
2. What are the risks associated with calculating wages and salaries?
Ans. Company might pay employees1. Too much
2. Who have not been at work
37
Overtime
Advances of pay
38
39
40
14.What are the controls to mitigate the risks associated with payment of
wages?
Ans.
Payment of cash wages1. Segregation of duties-
Distribution of wages
Security of transit
4. Verification of identity
5. Recording distributions
15.What are the controls to mitigate the risks associated with payment of
salaries?
Ans.
1. Preparation and authorization of cheques
2. Prepare bank transfer list
3. Compare cheques and bank transfer list with payroll
4. Maintain and reconcile salaries and wages control account
16.What are the tests of controls to mitigate the risks associated with
payment of wages and salaries?
If wages are paid in cash1. Attend the pay-out to ensure procedures are followed
2. Compare payroll with packets
3. Examine receipts given by employees
41
17.Interactive: 3
18.
What can be the weaknesses in a payroll system? What are
the possible risks in the system?
Ans.
1. No personnel department.
2. Employees are engaged by department heads with the verbal consent
of a director
Risks
1. No personnel department- so, there is no personnel record. Employee
could continue to receive salary through bank transfer even after
leaving the company
2. No written document could lead to errors in pay rates
19.Interactive:4
20.List six procedures assurance providers should carry out if wages are paid
in cash? Term Questions
21.How should assurance providers confirm that wages have been paid at the
correct rate to individual employees? Term Questions
Ans. By reconciling pay rates with employment contract or appointment
letter
Chapter-9
42
Internal Audit
1. What is internal audit?
Ans.
2. In what ways does internal audit assist the board?
Ans.
1.
3. What is the difference between internal audit and external audit?
Ans.
4. What are the roles of internal audit?
Ans.
5. What activities are normally involved in internal audit?
Ans.
6. What are the roles of internal audit in relation to risk management?
Ans.
7. What are the roles of internal audit in relation to internal control? What is
the scope of work of internal auditor in the internal control area?
Ans.
8. What is operational audit? What are the aspects of operational
engagement?
Ans.
9. What other function does an internal audit do?
Ans.
10.What are the elements of an internal audit that have to have completed
cyclically?
Ans.
11.Interactive: 1
12.What does internal audit do? What are the key differences between
external and internal audit? -Term Question.
13.Whay are the key differences between external and internal audit? As
objectivity is a key issue for internal auditors, they are likely to routinely
43
Chapter-10
Documentation
1. What is audit documentation? What are the purposes of documentation?
Ans. Or Working paper is the record of-
Procedures
Evidence
Conclusions
Purposes:
1. plan and perform audit
2. direct and supervise
3. to be accountable for work
4. record matters with continuing significance in future
5. carry out quality control reviews
6. external inspections
2. What are the reasons for maintaining audit working papers?
Ans.
3. What are the factors that affect the form and content of audit working
papers?
Ans.
1. Nature of the audit procedures
2. Identified risks of material misstatements
3. Extent of judgment
4. Significance of evidence
5. Nature and extent of problems
6. Need to document of conclusion
7. Audit methodology
44
45
4. Preparer name
5. Date of preparation
6. Subject
7. Reviewer name
8. Date of review
9. Objective of work
10.Source of information
11.How many sample selected
12.Sample size determined
13.The work done
14.A key to any audit ticks or symbols
15.Appropriate cross-referencing
16.Results obtained
17.Analysis of errors
18.Other significant observations
19.Conclusion drawn
20.Key points highlighted
6. What is automated working paper?
Ans.
Are packages that aid preparation of working papers , lead schedules, trial
balances and the financial statements themselves. These are
automatically cross referenced, adjusted and balanced by the computer.
7. What are the advantages and disadvantages of automated working paper?
Ans.
Advantages
1. Low risk of errors
2. Neater working paper
3. Easy to review
4. Time saving
46
1. Financial statements
2. Accounts checklists
3. Management accounts details
4. Reconciliations of management accounts and financial
statements
5. A summary of unadjusted errors
6. Report to partner including details of significant events and
errors
47
7. Review notes
8. Audit planning memorandum
9. Time budgets and summaries
10.
Letter of representation
11.
Management letter
12.
48
Chapter-11
Evidence and Sampling
1. What are the types of evidence?
Ans.
a. Tests of controls
b. Substantive procedures
2. What are the procedures to obtain evidences?
3. What is CAAT? What are the types of CAAT? Why do auditors need CAAT?
4. What is test data? What are the stages in the use of test data in CAAT?
5. What is Audit software? What is the basis of work of audit software?
6. Give some examples of what audit software can do.
7. What is analytical procedure? How can an auditor use analytical procedure
to obtain evidences?
49
Existence
Completeness
50
Valuation
Check
Overstatement
From nominal ledger
Value and existence
Credit items
Understatement
Income/Liabiliti From independent
es
source
Posted in correct
nominal ledger
Example
Non-current asset of
TK.9,000 recorded as
TK.10,000
Asset sold TK.10,000 not
recorded
Revenue in despatch note
not recorded in revenue
account.
18.Interactive: 1, p.195
19.Why audit of accounting estimates are so important? What are the
methods used by an auditor to audit accounting estimates?
Ans. Because these are
20.Define Audit sampling and Population? What are the testing procedures
that do not involve sampling?
21.Auditors use sampling approach for testing. When a 100% sampling is
preferable?
Ans. For certain substantive procedures.
22.What is the extent of sampling used in tests of control?
Ans. Less than 100%
23.What are the means of selecting samples?
Ans.
1.
Statistical sampling
2. Non-statistical sampling
24.Define statistical sampling and non-statistical sampling. What is the
difference between these?
51
Characteristics
Statistical
Sampling
Random
Consistently
Non-statistical
sampling
Subjective
Not consistently
Approach
Use of Mathematical
techniques
3
Evaluation of result
Mathematically
Subjectively
25.How can samples be collected in non-statistical sampling?
Ans.
1. High value or key item
2. All items over a certain amount
3. Items to obtain information about client
4. Items to test procedures whether particular procedures are
performed.
26.What matters to consider when designing the sample?
Ans.
1. Objectives of audit
2. Attributes of population
52
36.If the projected error exceeds tolerable error then what should be the
course of action of an auditor?
Ans. Sampling risk must be reassessed & further audit procedure required.
37.Auditor should consider the qualitative aspects of an error. True/ False?
38.What is anomalous error?
Ans. Arises from isolated event.
-
40.Interactive 3, p.203
Chapter-12
Management Representations
1. What is management representations?
Ans. Statement confirming certain representations in writing.
2. When management representations are required?
Ans. When it is the only audit evidence available. Situations are1. When the facts are management intention
2.
3. Define management.
Ans. Management- officers who perform senior managerial functions
4. What is the benefit of written confirmation of oral representation?
53
54
12.Interactive 1, p.215
Chapter-13
Substantive Procedures - Key Financial Statement Figures
1. What are the reasons for which tangible non-current assets are misstated?
Ans.
1. Company not actually own the asset.
2. Asset doesnt actually exist or sold
3. Owned asset omitted
4. Asset overvalued- by inflating cost or undercharging depreciation.
5. Asset undervalued-by not including revaluation or overcharging
depreciation
6. Asset incorrectly presented in FS
2. What are the financial statement assertions for the assessment of risk of
material misstatement of non-current assets?
Ans.
1. Existence
2. Rights and obligations
3. Completeness
4. Valuation and allocation
5. Presentation and disclosure
3. What are the sources of information for non-current assets?
Ans.
1. Non-current asset register
2. Purchase invoice
3. Sales invoice for asset sold
4. Registration documents- e.g. title deeds for property
5. Valuations
55
Completeness
Obtain a schedule of non-current
assets.
Agree figures- schedule- FS- nominal
ledger
Compare schedule to asset register to
check all the assets in the schedule are
owned by the company
Select some physically present asset
and ensure they are in the register
Confirm additions in the schedule are
correct
Existence
Select sample from register and ensure
those are physically present on site.
56
Valuation
Confirm sample assets cost to
invoice or valuation to valuation
certificates
Compare sample assets brought
forward depreciation file to previous
audit file
Review brought forward asset
register files.
Confirm accounting policy for
depreciation is correctly applied
Review calculation and ecalculate
o depreciation
o disposed asset
o profit/loss on disposal
Rights and obligations
Select sample from register and
vouch for registration documentso Vehicles- although indicates
the registered keeper, not
owner.
o Building- title deeds
o Plant and Fixtures- Purchase
invoice, ensure its not lease.
Review sales invoice for sold assets
Other matters
Focus on asset additions.
-these are large portion of assets
and least depreciated.
Check property documents- 100%,
other assets-sampling basis.
Obtain schedule of all the costs capitalized- ensure costs are complete
Valuation
Valuation
1. Inappropriate charging of
amortization
2. Inflated cost or valuation
3. Impairment review not
carried out properly
8. What are the sources of information for intangible non-current asset?
Ans.
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Valuation
Valuation at lower of
cost and NRV
Obsolete or damaged
inventory stated in full
value
Wrong inventory value
due to miscalculation
Inventory stated at
cost, at the mean time
NRV decreased
Completeness
All inventory not
included in FS
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Completeness
Follow up whether sampled
items took to final sheet
Follow up Argus inventory
not included to final sheet
Cut-off test year-end
inventory not double
counted.
Valuation
Calculation of valuation
made correctly
Select sample from- Raw materials
- WIP
- FG
Identify accounting policy
and check appropriateness
Trace cost to purchase
invoice
Trace appropriate production
level- WIP or FG?
Check production record and
payroll- whether labor cost
allocated to WIP
Overhead allocation- eg. Idle
time not included, compare
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preferable
2. Negative method
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2. Supplier confirmation
50.When analytical procedure could help?
Ans. When balance of payables is inexplicably reduced from previous year.
51.What is the most important test when considering trade payables?
Ans. Comparison of suppliers statement with payables ledger balances.
52.What kind of payable account balance have the possibility to error of
understatement?
Ans. It could occur in payables with low and nil balances as with high.
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Ans.
1. Debentures and loan agreements frequently contain conditions
company must comply
2. Restrictions on total borrowing
3. Adherence to specific borrowing ratios.
59.What are the sources of information for long-term liabilities?
Ans.
1. Schedule of loan/prior audit file
2. Statutory books- eg. Register of debentures, Articles of Association
3. Loan agreements
4. Bank letter and direct confirmation from lenders
5. Cash book
6. Board minutes
7. Client schedules and calculations
8. Accounting policies in the FS.
60.What are the items include in the plan of long-term liabilities?
Ans.
1. Obtain schedule of loans
2. Compare opening balance with previous working paper
3. Test clerical accuracy
4. Compare balances to the nominal ledger
5. Check name of lender to register of debenture holders
6. Trace additions and repayments to cash book
7. Confirm repayments agree with loan agreement
8. Examine cancelled cheques and memoranda of satisfaction for loans
repaid
9. Verify borrowing limits not exceeded
10.Examine signed board minutes relating to new borrowings/repayments
11.Obtain direct confirmation from lenders
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Chapter-14
Codes of Professional Ethics
1.
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1.
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Ans.
Independence of mind state of mind to conclude without being
affected by influences that compromise professional judgment
Independence in appearance avoidance of facts which create doubt
that auditors integrity, objectivity or professional skepticism has been
compromised.
8. What are the sources of threats identified by the IFAC code?
Ans.
1. Self-interest eg. Having a financial interest in a client
2. Self-review eg. Auditing FS prepared by the firm
3. Advocacy eg. Promoting clients position by dealing in its share
4. Familiarity- eg. Auditor have family member at client
5. Intimidation eg. Threaten to replace the auditor
6. Management eg. Doing managements job, design or implement IT
system
9. What are the general safeguards to the threats identified by IFAC code?
Ans.
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the work environment
10.Give some examples of safeguards created by the profession.
Ans.
1. Educational training and experience requirement to entry in profession
2. CPD
3. Corporate Governance
4. Professional standards
5. Professional monitoring / disciplinary procedures
1. External review by legal third party
11.Give some examples of safeguards in the work environment.
Ans.
1. Involving an additional professional account for review or advice
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Chapter-15
Integrity, Objectivity and Independence
1. Define Integrity, Objectivity, and Independence.
2. Why do independence and objectivity matter so much?
3. What are the threats to independence? Describe.
Ans.
1. Self- interest threat
2. Self- review threat
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat
4. What actions of the client pose threat to the firms integrity or professional
behavior?
Ans. Arise from1. Illegal activities of the client
2. Apparent dishonesty of the client
3. Questionable accounting practices of the client.
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