Assurance (A Combination Between Manual & Suggested Answers Upto May-June '2019) PDF

ASSURANCE - CA CERTIFICATE LEVEL
A combination of Manual & Suggested Answers up to May-June, 2019

With (ISA)s Reference
Key point to pass: Assurance Manual (Certificate level) contains sixteen (16) chapters.
To read easily, sixteen chapters divided into five (5) groups:
Group Chapter
Chapter Name Related ISA
No. No.
Concept of and need for 200: Overall objectives of the independent Auditor
01
assurance and conduct of an audit accordance with ISA
210.2: Agree the terms in writing
Process of assurance: 210.5: Send letter before first audit
02 obtaining an 210.6-8: Contents of engagement letter
engagement 210.10-11: Recurring audit
01 210.12-19: Change in engagement
200.6: Professional scepticism
300.2: Planning the engagement
Process of assurance:
03 315.15: Understanding the entity
planning and assignment
320: Materiality
520: Analytical procedure
12 Written representations 580: Management representations.
500: Audit evidence
500.3: Type of test
500.19: Sufficient appropriate evidence
Process of assurance:
04 500.2, 7-14: Quality of evidence
evidence and reporting
500.9: Financial statement assertions
330.22-64: Test of control, test of detail
700.5: Content of the audit report
02
230.2-4: Purpose of documentation
230.5-12: Form & content of documentation
230.13: Safe custody and retention of
10 Documentation
documentation.
230.14: Ownership of and right of access to
documentation.
11 Evidence and Sampling 530: Audit sampling and other means of testing.
315.42: Definition of internal control
Introduction to internal
05 315.64-67: Limitation of internal control
03 control
315.67-99: Components of internal control
09 Internal Audit -
06 Revenue system -
07 Purchase system -
08 Employee costs -
04
Substantive procedures 505: Confirmation from third parties. (Customers
13 – Key financial & lenders)
statement figures
Codes of professional ICAB and IFAC Codes.
14
ethics
05 Integrity, Objectivity ICAB and IFAC Codes.
15
and independence
16 Confidentiality ICAB and IFAC Codes.
Professional Education Clinic Care.

(For CA Certificate & Professional Level Students)
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ASSURANCE CERTIFICATE LEVEL
A combination of Manual & Suggested Answers up to May-June 2019 With (ISA)s Reference
CHAPTER-1: CONCEPT AND NEED FOR ASSURANCE

Q-1: What is assurance engagement? (Page-3)
Ans: An assurance engagement is one in which a practitioner expresses a conclusion, designed to enhance the
degree of confidence of the intended users, other than the responsible party, about the outcome of the
evaluation or measurement of a subject matter against criteria.
Q-2: What are the key elements of an assurance engagement? (Page-3)
Ans: The keys elements of an assurance engagement are as follows:
(i) Three people or groups of people involved:
(a) The practitioner (For example, the audit firm)
(b) The intended users (For example, the shareholders)
(c) The responsible party (For example, the board of directors)
(ii) A subject matter:

(a) Data (For example, financial statements or business projections)
(b) Systems or processes (For example, internal control system or computer systems)
(c) Behavior (For example, corporate governance)
(iii) Suitable criteria:

(a) Law and Accounting standards
(b) Code of practice, Code on Corporate governance
(c) ISAs, IFRSs
(iv) Sufficient appropriate evidence to support the assurance opinion: The practitioner must obtain
evidence so that the criteria have been met.
(v) A written report in appropriate form: Lastly, it is required that assurance reports are provided to the
intended users in a written form and contain certain specified information.
Q-3: You are an accountant who has been approached by Jamal, who wants to invest in Company X. he
has asked you for assurance whether the most recent financial statements of Company X are a reliable
basis for him to make his investment decision. (Page-4)
¾ Identify the key elements of an assurance engagement in this scenario, if you accepted the
engagement.
Ans: The keys elements of an assurance engagement are as follows:
(i) Three people or groups of people involved
(a) The practitioner (You)
(b) The intended users (Jamal)
(c) The responsible party (The directors of company X)
(ii) A subject matter
(a) Data (For example, most recent financial statements of company X)
(iii) Suitable criteria

(a) Law and Accounting standards
(b) Code of practice, Code on Corporate governance
(c) ISAs, IFRSs
(iv) Sufficient appropriate evidence to support the assurance opinion: Inspect the books and
documents of company X.
(v) A written report in appropriate form: Opinion on the financial statements of company X.
Chapter – 1(Concept of and need for assurance) Page 1

Q-4: What types of assurance engagement as per framework? (Page-4)

Ans: The framework identifies two types of assurance engagement:
(a) Reasonable assurance engagement.
(b) Limited assurance engagement.
Q-5: What do you mean by reasonable assurance & limited assurance? (Page-5)
Reasonable assurance: A high level of assurance but not absolute level of assurance.
Limited assurance: In a limited assurance engagement, the practitioner gathers sufficient appropriate
evidence but the quality of evidence gathered would be lower as compared to reasonable assurance and
gives a report in the form of a negative assurance.
Q-6: How the level of assurance varies? (Page-5)
Type of agreement Evidence Required Opinion/Conclusion Given

• Reasonable assurance Sufficient and appropriate Positive
• Limited assurance Sufficient and appropriate (lower level) Negative
Q-7: What are key differences between two types of assurance engagement? (Page-5)
Ans: The key differences between two types of assurance engagement are:
¾ The level of evidence obtained
¾ The type of opinion given
Q-8: Give few examples of assurance engagements. (Page-6)
Ans: The key example of an assurance engagement in Bangladesh is a statutory audit (External audit). Other
examples of assurance engagements include other audit. For example:
(1) Insurance company audits (2) Bank audits (3) Branch audit (4) Charity audits (5) Environmental
audits (6) Local authority audits (7) Pension scheme audits (8) Solicitor’s audits
There are also many issues users want assurance on:

(1) Internal audit (2) Internal control reports. (3) Circulation reports (4) Cost/benefit reports (5)
Inventories and receivable reports (6) Reports on business plans or projections (7) Reports on website
security, such as Web Trust (8) Review of specialist business activities. (9) Value for money studies (10)
Due diligence (11) Fraud Investigations.
Q-9: Why is assurance important? (Page-6)
Ans: The key benefit of assurance is the independent, professional verification being given to the users on the
subject matter. In addition, assurance may have subsidiary benefits such as
(1) Users may also benefit from additional confidence in the subject matter given to others.
(2) The existence of an assurance service may prevent errors or frauds occurring in the first
(3) It helps to ensure that high quality, reliable information exists, leading to effective markets that
investors have faith in and trust
(4) It enhances the credibility of information.
Q-10: Why can assurance never be absolute? (Page-7)

Ans: Assurance can never be absolute. Assurance providers will never give a certification of absolute
correctness due to the limitations.

Q-11: What are the limitations of an assurance services? (Page-7)
Ans: The limitations of assurance service include:

(1) The fact that testing is used – the auditors do not oversee the process of building the financial
statements from start to finish.
(2) The fact that the accounting systems have inherent limitations.
(3) The fact that most audit evidence is persuasive rather than conclusive.
(4) The fact that assurance providers would not test every item in the subject matter.
(5) The client’s staff members may collude in fraud that can be deliberately hidden from the auditor.
(6) The fact that Professional judgments have to be made.
(7) The fact that assurance providers rely on the responsible party and its staff to provide correct
information.
(8) The fact that some items in the subject matter may be estimates.
(9) The fact that a sampling approach is used
Q-12: What do you mean about expectations gap? (Page-8)
Expectation gap: Expectations gap meaning that there is a gap between what the assurance providers
understands he is doing and what the user of the information believes he (assurance provider) is doing.
Q-13: How can the assurance provider close expectations gap? (Page-8)
Ans: The assurance provider can close expectations gap by issuing an engagement letter spelling out the work
and by regularly reviewing the format and content of reports issued as a result of assurance of assurance work.
Q-14: Definition: Audit (Page-8), true and fair (Page-9)

(1) Audit: An examination and verification of a company's financial & accounting records and supporting
documents by a professional, such as Chartered Accountant, Certified Public Accountant. Some
examples of auditing service are: Insurance company audits, Bank audits, Branch audit, Charity audits,
Environmental audits, Local authority audits, Local authority audits, Pension scheme audits, Solicitor’s
audits etc.
True: Information is factual and conforms to reality, not false.
Fair: Information is free from discrimination and free from bias in compliance with expected standards
and rules.
Q-15: What are the objectives of an audit? (Page-9)
Ans: The objective of an audit of financial statements is to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects, in accordance with an applicable financial recording
framework.
Q-16: Which person cannot be eligible for appointment as an auditor as per Companies Act, 1994?
(Page-10)
Ans: Companies act 1994 sets out factors which make a person ineligible for being a company auditor, for
example, if he or she is:
(a) An officer or employee of the company.
(b) A partner or employee of such a person.
(c) Any partner in a partnership in which such a person is a partner.
(d) Ineligible by the above for appointment as auditor of any directly connected companies.
Q-17: What standards and guidance are issued by ICAB for auditing? (Page-10)
Ans The followings standards and guidance are issued by ICAB for auditing:
a) Auditing standards
b) Ethical standards for auditors

c) Practice notes
d) Bulletins
e) Standards for reviews of interim financial statements performed by the auditor of the entity.
Q-18: International Standards on Auditing (ISAs) made up by what content? (Page-10)
Ans: International Standards on Auditing (ISAs) made up of:

a) Introductory material and definition
b) Objectives
c) Requirements
d) Application and explanatory material (including appendices)
e) Example of what the auditor must think about (and do) in practice.
Q-19: An audit will comprise several stages along the way to its eventual completion and the issuance of
the auditor’s opinion. What are these stages are? (Page-11)
Ans: An audit will comprise following several stages are mentioned below:
Obtaining the engagement

ź
Planning
ź
Performance procedures
ź
Review and completion
ź
Reporting
Q-20: What are the Overall Objectives of the auditor as per ISA 200? (Page-11)
Ans: ISA 200 states that the overall objectives of the auditor are:
a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud of error, thereby enabling the auditor to express an opinion
on whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
b) To report on the financial statements, and communicate as require by the ISAs, in accordance with the
auditor’s findings.
Q-21: What procedures to be comply by auditor to obtain Overall Objectives as per ISA 200? (Page-12)
Ans: The following procedures to be comply by auditor to obtain Overall Objectives as per ISA 200:
a) Comply the relevant ethical requirements
b) Plan and perform the audit with professional scepticism
c) Exercise professional judgement
d) Obtain audit evidence that is both sufficient and appropriate, from which reasonable conclusions may
be drawn, on which the auditor’s opinion is then based.
Q-22: Define Professional scepticism & Professional judgement? (Page-11)
Professional scepticism: Professional scepticism is an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.
Professional judgement: Professional judgement is the application of relevant training, knowledge and
experience in making informed decisions about the courses of action that are appropriate in the circumstances
of the audit engagement.

Q-23: To plan and perform an audit with an attitude of professional scepticism, auditor requires to be
alert about some facts. What are these? (Page-12)
Ans: To plan and perform an audit with an attitude of professional scepticism, auditor requires being alert
about following facts:
a) Audit evidence that contradict other audit evidence obtained
b) Information that brings into question the reliability of documents and responses to requires to be used
as audit evidence
c) Conditions that may indicate possible fraud
d) Circumstances that suggest the need for audit procedures in addition to those required by IASs.
Q-24: Why Professional scepticism needs to be maintain throughout the audit period? (Page-12)
Ans: Professional scepticism needs to be maintaining throughout the audit period to reduce the risks of
overlooking unusual transactions, over-generalising when drawing conclusions and using inappropriate
assumptions in determining the nature, timing and extent of audit procedures and evaluating the result of them.
It is also necessary to the critical assessment of audit evidence.
Q-25: In which areas professional judgement exercise by auditor when planning and performing an
audit of financial statements? (Page-12)
Ans: In following areas professional judgement requires by auditor when planning and performing an audit of
financial statements:
a) Materiality and audit risk.
b) Nature, timing and extent of audit procedures.
c) Evaluating of whether sufficient appropriate audit evidence has been obtained.
d) Evaluating management’s judgements in applying the applicable financial reporting framework.
e) Drawing conclusions based on the audit evidence obtained.
All Self-test, Interactive Question & Worked Example should be done from the manual.
Previous year’s question:
May-June’ 2010
2. In Bangladesh, the auditor will normally express his audit opinion by reference to the “true and fair view”,
which is an expression of reasonable assurance. Briefly define the terms “true and fair view”. (Q-14)
3. You are an accountant who has been approached by X, who wants to invest in Company ABC. He has asked
you for assurance whether the most recent financial statements of Company ABC are a reliable basis for him to
make his investment decision.
¾ Identify the key elements of an assurance engagement in this scenario, if you accepted the
engagement.(Q-3)
Nov-Dece’ 2010
1. ‘Assurance can never be absolute’ (Q-10). Discuss the limitation of assurance (Q-11). Which three of the
following are benefits of assurance work? (Page-16)
• An independent professional opinion
• Additional confidence given to other related parties
• Testing as a result of sampling is cheaper for the responsible party
• Judgments on estimates can be conclusive
• Assurance may act as a deterrent to error or fraud
May-June’ 2011
1. What is assurance engagement (Q-1)? What are the key elements of an assurance engagement (Q-2)?

Nov-Dece’ 2011
9. Assurance service is an independent professional service, typically provided by Chartered Accountants, with
the goal of improving the information or the context of the information so that decision makers can make more
informed, and presumably better decisions. Assurance services provide independent and professional opinions
that reduce the information risk (risk that comes from incorrect information)
a. Audit and Assurance are always used together. What is the exact difference between these? (Below)
Ans: An audit engagement is an assurance engagement, but not all assurance engagements are audits.
Audit is the general evaluation of an organization, system, process, project or product, and can be performed by
both internal and external auditors. Assurance usually refers to the "external" or attestation function. This is
usually provided by accounting or auditing firms. Assurance provides an independent opinion.
b. Under the “International Framework for Assurance Engagements,” how many types of assurance
engagement a practitioner is permitted to perform? Define all. (Q-4, 5 &6)
May-June’ 2012
1. Briefly explain the key elements of an assurance engagement (Q-2) and what are the types of assurance
engagement as per the International Framework for Assurance engagements? (Q-4, 5 & 6)
5. A key issue for accountants is that there are limitations to assurance services, and therefore there is always a
risk involved that the wrong conclusion will be drawn. What are the limitations of assurance services? (Q-11)
8. b. What is the `expectation gap’ in assurance engagement? (Q-12)
May-June’ 2013
1. (a) List the key elements of an assurance engagement. (Q-2)
(b) In addition to audit, users want some other assurance services. Give few examples. (Q-8)
Nov-Dece’ 2013
2. a. Define assurance engagement? (Q-1)
b. What are the types of engagement as per definition given by IFAC? (Q-4 &5)
What conclusions are given against those engagements? (Q-6)
c. The auditor normally expresses his audit opinion by reference to the “true and fair view”, which is an
expression of reasonable assurance. Define the term “true and fair”. (Q-14)
d. The key benefit of assurance is the independent and professional examination carried out by the auditor
during the course of audit. In addition, assurance gives some subsidiary benefits. List subsidiary benefits
those are provided by the assurance providers. (Q-9)
e. What are the limitations of assurance services for which the auditor cannot give a certificate of absolute
assurance or correctness? (Q-10 & 11)
May-June’ 2015
1. An auditor requires relevant and reliable information from the management in order to satisfy himself that he
has obtained sufficient and appropriate audit evidence on the basis of which he can form his audit/assurance
opinion. a. Define assurance services (Q-1 & 8), attestation services (Below) and auditing services (Q-10) with
examples.
In an attestation engagement, a professional accountant expresses an opinion on the reasonableness of a
particular assertion or set of assertions. Examples of assertions covered by attestation engagements include
financial forecasts and compliance with laws or procedure.
b. What are the factors, which make a person ineligible for being a company auditor as per the companies Act,
1994? (Q-16) What non-audit services are prohibited to be carried out by auditors? (Below)
Ans: As per Bangladesh Security Exchanges and Commission (BSEC) corporate governance guidelines dated
07 August 2012, following non-audit services are prohibited for auditors:
(a) Appraisal or valuation services or fairness opinions, (b) Actuarial services,

(c) Book-keeping or other services related to the accounting records or financial statements,
(d) Broker-dealer services, (e) Internal audit service; and
(f) Financial information systems design and implementation
c. ABC Co. is a private limited company. The company is planning to go for IPO in September 2015. The
Managing Director of the company asked you, as auditor for last 3 years, to give an absolute assurance report
for last 5 years that his company is showing increasing trend in sales and profits. Can you as a practitioner give
absolute assurance? (Q-10) Give reasons for your answer (Q-11)
1. d. (i) For the purpose of giving opinion you have to follow Bangladesh Standards on Auditing
(BSA).Discuss the terms `Reasonable assurance engagement’ and `Limited assurance engagement’ as
mentioned in the BSA. (Q-4, 5, 6 & 8)
Nov-Dece’ 2015
1. a. Define assurance engagement in any audit function? (Q-1)
b. What are the types of engagement as per definition given by IFAC? Explain (Q-4 & 5)
c. What is the meaning of Auditors’ normal expression of “true and fair view” in any audit report? (Q-9)
Which denotes a reasonable assurance? (Q-5, Partly)
d. What are the key benefits of assurance in any audit done by the Auditors? List down the subsidiary benefits
those are provided by the assurance providers. (Q-9)
e. “Certificate of absolute assurance or correctness” cannot be provided due to some limitations. What are
those? (Q-10 & 11)
Nov-Dece’ 2016
1. a. Define ‘expectations gap’ and give three examples of misunderstandings which contribute to the
expectations gap. (Q-12)
b. The key benefit of assurance is the independent professional verification being given to the users. In
addition, assurance gives some subsidiary benefits. What are those subsidiary benefits? (Q-9)
May-June’ 2017
1. a. How many types of assurance engagement are identified in the International Framework for Assurance
Engagement? (Q-4)
b. You being a professional accountant in practice have been approached by Mr. Rahim who want to invest in
Atia Foods Ltd. He asked you for assurance whether the recent financial statement of the company are reliable
basis for him to make his investment decision. As you have accepted the engagement, identify the key elements
of an assurance engagement in this scenario. (Q-3)
c. In an assurance engagement there are several subsidiary benefits available to other parties, although the
assurance report is not addressed to such parties. Briefly describe these subsidiary benefits. (Q- 9)
Nov-Dece’ 2017
1. a. What is the meaning of auditor's normal expression of “true and fair view” in any audit report, which
denotes a reasonable assurance? (Q-14)
b. ‘Certificate of absolute assurance or correctness’ cannot be provided due to some limitations. What are
those limitations? (Q-11)
c. Define assurance engagement in an audit function. (Q-1)
May-June’ 2018
1.(a) The opinion given in an assurance engagement depends on what type of engagement it is. (Q-4 & 5) Give
appropriate examples of opinion given in different types of assurance engagement. (Below)
Ans:
The types of opinion given in each engagement are stated below:
• Positive opinion: A practitioner is seeking evidence to conclude whether the report issued by the
Chairman of a company in the financial statements is reasonable or not, he could seek evidence
conclude that the statement is reasonable and state in a report something like this:

“In my opinion, the statement by the chairman regarding X is responsible”. This is a positive statement
of his conclusion that the statement is reasonable..
• Negative opinion: In the same scenario, the practitioner could alternatively state in a report something
like this:
“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”.
Nov-Dece’ 2018
1. Professional accountants in public practice are entrusted to issue various types of reports and certificates
under different types of engagements. Each one of the engagements has some very specific feature and thus
results in different forms of reports, though users commonly treat them as audit. Here the respective
accountants should take the advantage to educate the users with reference to nature, outcome and use of the
results of an engagement.
(a) How would you define auditing service and assurance service? Give two examples from each of these
services. (Q-1, 8 & 14)
(b) In an audit engagement, what are overall objectives of an auditor as per ISA 200? (Q-20)
2. Write short notes on the following: (Q-22)

(i) Professional scepticism .
(ii) Professional judgement .
May-June’ 2019
1. a) Write short notes on the types of assurance engagements that are covered in the International
Framework for Assurance. (Q-4, 5 & 6)
2. Audit and assurance, like many other services, encounter certain limitations due to perception gaps
in the minds of the seekers of all these services.
a) ‘Auditors cannot issue absolute assurance certificate.’ Describe this statement indicating the
limitations as mentioned above. (Q-11)
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CHAPTER-2: PROCESS OF ASSURANCE: OBTAINING AN ENGAGEMENT
Q-1: What are the provisions cited in IESBA Codes of Ethics and ICAB Bye Laws as regards
marketing of professional services? (Page-19)
Ans: The provisions cited in IESBA Codes of Ethics and ICAB Bye Laws as regards marketing of
professional services are:
• Accountants are permitted to advertise for clients within certain professional guidelines.
• Accountants may sometimes be invited to tender for particular engagements, which mean that they
offer a quote for services, outlining the benefits of their firm and personnel, usually in competition
with other firm which are tendering at the same time.
Q-2: What matters to be considered before accepting an engagement? (Page-19)
Ans: The following matters to be considered before accepting an engagement:

(a) The present and proposed auditor should normally communicate about the client prior to the audit
being accepted.
(b) The client must be asked to give permission for communication to occur. If the client refuses to give
permission, the proposed auditors must consider the reasons for such refusal.
(c) The auditors must ensure that they have sufficient resources to carry out the appointment.
Q-3: What are the appointment considerations for engagement as per Section 210 to 217 of the
Companies Act 1994 and Schedule C of ICAB Code of Ethics? (Page-19)
Ans: As per Section 210 to 217 of the Companies Act 1994 and Schedule C of ICAB Code of ethics as well as
IFAC code of ethics sets out the rules under which accountants should accept new appointments. Before a
new audit client is accepted the auditor must ensure that there is no independence or other ethical issues
likely to cause significant problems with the ethical code. New auditors should ensure that they have been
appointed in a proper and legal manner.
Q-4: The Companies Act 1994 and code of ethics of ICAB and IFAC set out some rules under which
auditors should accept new appointments. What procedures should the new auditors follow to comply
with the above set of rules? (Page-20)
Ans: As per Companies Act 1994 and code of ethics of ICAB and IFAC, the following procedures should
follow in case of new auditors:
(i) Ensure professionally qualified to act.
(ii) Ensure existing resources adequate.
(iii) Communicate with present auditors.
(iv) Obtain references.
Q-5: How you determine the low risk and high risk of an assurance client / what factors do you
consider to ascertain a client whether it is a low or high risky? (Page-20)
Ans: The following factors should be considered to ascertain a client whether it is a low or high risky
Low risk High risk
Good long-term prospects Poor recent or forecast performance
Well financed Likely lack of finance
Strong internal control Significant control weaknesses
Conservative, prudent accounting policies Doubtful accounting policies.
Competent, honest management Lack of finance director
Few unusual transactions Significant unexplained transactions or transactions
with connected companies.
Chapter – 2(Process of assurance: obtaining an engagement) Page 1

Q-6: Why does an audit firm want a long term relationship with a client? (Page-20)
Ans: An audit firm want a long term relationship with a client not only to enjoy receiving fees year after year;
it is also to allow the audit work to be enhanced by better knowledge of the client and thereby offer a better
service.
Q-7: What are the sources of information about a new client? (Page-21)
Ans: The sources of information about a new client are given below:
(1) Enquiries of other sources: Bankers, solicitors.
(2) Review of documents: Most recent annual accounts, credit rating.
(3) Review of rules and standards.
(4) Previous accountants/auditors.
Q-8: If a prospective client decline permission to contact the previous auditors, what should be firm’s
course of action? (Page-21 & 30)
Ans: If a prospective client decline permission to contact the previous auditors, the audit firm should consider
carefully the reasons for such refusal when determining whether or not to accept the appointment.
Q-9: Write a sample of initial communication with the outgoing auditors as new auditors? (Page-21)
Ans: See Assurance Manual Certificate level Page No: 21
Q-10: Describe the appointment decision chart diagrammatically? (Page-22 & 30)
Ans: See Assurance Manual Certificate level Page No: 22 & 30.
Q-11: What procedures should be carried out after accepting an assurance engagement? (Page-23)
Ans: The following procedures should be carried out after accepting nomination.
(a) Ensure that the outgoing auditor’s removal or resignation has been properly conducted in accordance
with national legislation.
(b) Ensure that the new auditor’s appointment is valid.
(c) Set up and submit a letter of engagement to the directors of the company.
Q12: What are the purposes / objectives of an engagement letter? (Page-24)
Ans: The purposes / objectives of an engagement letter is to:

(a) Define clearly the extent of the firm’s responsibilities and so minimize the possibility of any
misunderstanding between the client and the firm.
(b) Provide written confirmation of the firm’s acceptance of the appointment, the scope of the
engagement and the form of their report.
Q13: Should a practitioner send an engagement letter to existing clients? Or discuss the situations
where it is necessary to issue audit engagement letter each year even for repetitive (recurring) audits?
(Page-24)
Ans: On recurring audits, the auditor should consider whether the terms of the engagement to be revised or
need to remind the existing client of the existing terms of engagement.
The auditor may not to send a new engagement letter each period. However, the following may make it
appropriate to send a new letter:
¾ Any misunderstands in respect of object and scope
¾ Any revised or special terms
¾ Legal requirements
¾ Change of senior management
¾ Significant change in ownership

¾ Any change in nature or size of the client’s business

¾ Any change in financial reporting framework
¾ Any change in other reporting framework.
Q-14: What are the contents of an engagement letter? (Page-24)
Ans: The contents of an engagement letter are given below:

(a) The object of audit of financial statements.
(b) The scope of audit of financial statements.
(c) Management’s responsibility for the financial statements.
(d) Describe test nature and inherent limitations.
(e) Unrestricted access is requested in connection with the audit.
(f) The form of any reports of result of engagement.
The auditor may wish to include in the letter the following items
(a) Planning of the audit.
(b) Basis of fees.
(c) Expectation of management written representations.
(d) Request for acknowledging receipt of the engagement letter.
(e) Description of any other letters or reports the auditor expects to issue to the client.
When relevant, the following points could also be made.
(a) Involvement of other auditors.
(b) Involvement of internal auditors and other client staff.
(c) Any restriction of the auditor’s liability.
(d) Any further agreements between the auditor and the client.
(e) Any obligations to provide audit working papers to other parties.

May-June’ 2010
4. What forms and contents will normally be contained in a letter of engagement? (Q-14)
5. You own an accounting firm. XYZ Ltd. is your prospective client. However it declines permission to
contact the previous auditors, what should be your course of action? (Q-8)
May-June’ 2011
2. Which three of the following will normally be contained within a letter of engagement? (Page-28)
(i) Responsibilities of the auditors; (ii) Responsibilities of the directors;
(iii) The scope of the audit; (iv) The staff assigned to the engagement;
Nov-Dece’ 2011
1. What forms and contents will normally be contained in a letter of engagement? (Q-14)
2. You own an accounting firm. XYZ Ltd. is your prospective client. However it declines permission to
contact the previous auditors, what should be your course of action? (Q-8)
May-June’ 2012
7. The practitioner should comply with the International Framework for Assurance Engagements (the
Framework) and International Standard on Assurance Engagements (ISAE) when performing an assurance
engagement other than an audit or review of historical financial information covered by International
Standards on Auditing (ISAs) or International Standards on Review Engagement (ISREs).
a. What are the factors a practitioner must consider before accepting an assurance engagement?(Q-2)
b. What are low risks and high risks for assurance? (Q-5)
c. What are the purposes of an engagement letter? (Q-12) Should a practitioner send an engagement
letter to existing clients? (Q-13)

Nov-Dece’ 2012
1. b. Write down the purpose of issuing audit engagement letter? (Q-12) Discuss the situations where it is
necessary to issue audit engagement letter each year even for repetitive audits?(Q-13)
May-June’ 2013
1. d. The audit firm considers whether the client is likely to be high or low risk to the firm in terms of being
able to draw an appropriate assurance conclusion in relation to that client.
Distinguish between two clients considering high and low risk? (Q-5)
1. (c) The code of ethics of ICAB and IFAC sets out some rules under which auditors should accept new
appointments.
What procedures should the new auditors follow to comply with the above set of rules? (Q-4)
3. (a) The form and contents of audit Engagement Letter may vary for each client, but they would generally
include some basic contents.
Write in brief those basic contents of an Engagement Letter. (Q-14)
May-June’ 2014
3. a. What are the objectives of Audit Engagement letter? (Q-12)
Nov-Dece’ 2014
5. Write down short notes on following terminology: c) Audit Engagement letter (Q-12 & 14)
Nov-Dece’ 2016
1. d. ICAB and IFAC code of ethics set out the rules under which auditor should accept new appointment.
What procedures should the new auditors follow to comply with above set of rules? (Q-4)
May-June’ 2017
1. d. Before accepting an engagement an auditor must carry out minimum procedures to make sure that he
would be able to accomplish the whole assignment in a very high quality professional standard. What are
those procedures an auditor must carry out? (Q-2)
4. a. The audit engagement letter is very vital document underlying an audit engagement. As you are required
to have sufficient knowledge about the engagement letter, state;
(i) What are the objectives of Audit Engagement Letter? (Q-12)
(ii) Write in brief the basic contents of an Audit Engagement Letter. (Q-14)
May-June’ 2018
1. (b) Before accepting an engagement, the audit firm will consider whether the client is likely to be high or
low risk to the firm in terms of being able to draw an appropriate assurance opinion. What are the primary
indications of low and high risk clients? (Q-5)
2. An audit engagement starts to gather evidences from issuing an engagement letter and continues to collect
many others during the course of the field work until it reaches to a satisfactory level enabling g an auditor to
issue an opinion based on all such collected evidences.
a) What are the basic components of an audit engagements letter? (Q-14)
Nov-Dece’ 2018
2. The IESBA code of ethics sets out rules as to how a new appointment should be accepted. What are those
procedures that auditors should abide by while accepting new appointments? (Q-4)
May-June’ 2019
7. a) The root of the growth of business activities in the today’s world lies in the charismatic use of
advertisement and promotion activities.
What are the provisions cited in IESBA Codes of Ethics and ICAB Bye Laws as regards marketing
of professional services? (Q-1)

CHAPTER-3: PROCESS OF ASSURANCE: PLANNING AND ASSIGNMENT

Q-1: What is audit strategy and audit plan? (Page-37)
.
Audit Strategy: Audit strategy means the formulation of the general strategy for the audit, which sets the
scope, timing and direction of the audit and guides the development of the audit plan.
Audit Plan: An audit plan is more detailed than the strategy and sets out the nature, timing and extent of audit
procedures
Q-2: What are the contents of an audit plan? Or identify the key contents of audit plan. Or why is the
audit plan made? (Page-37)
Ans: The contents of an audit plan are given below:

1. Ensure appropriate attention is devoted to important areas of the audit.
2. Identify potential problems and resolve them.
3. Ensure that the audit is properly organized.
4. Assign work to engagement team members properly
5. Facilitate direction and supervision of engagement team members.
6. Facilitate review of work
Q-3: Describe the steps included in structured approach of planning? (Page-37)
Ans: A structured approach to planning will include:

Step: 1 Ensuring that ethical requirements continue to be met.
Step: 2 Ensuring the terms of the engagement is understood.
Step: 3 Ensuring the overall audit strategy:
Determining the relevant characteristics of the engagement.
Discovering the key dates for reporting and other communications.
Determining materiality, preliminary risk assessment.
Consideration of when work is to be carried out, for example before or after the year end
Consideration of “team members” available, their skills and how and when they are to be
used.
Step: 4 Developing an audit plan
Q-4: What are the contents of an audit strategy? Identify the key contents of audit strategy. (Page-38)
Ans: The contents of an audit strategy are given below:

1. Understanding the entity’s environment.
2. Understanding the accounting and internal control systems.
3. Risk and materiality calculation.
4. Consequent nature, timing and extent of procedures.
5. Co-ordination, direction, supervision and review of audit.
6. Other matters.
Q-5: Define Understanding the entity as per ISA 315? (Page-40)
Ans: ISA 315 states that “the auditor should obtain an understanding of the entity and its environment,
including its internal control, sufficient to identify and assess the risks of material misstatement of the
financial statements whether due to fraud or error”
Q-6: Why, what & how do you obtain an understanding of the entity and its environment?
(Page-40)
Ans: Summary of obtaining an understanding of the entity and its environment are mentioned below:
Chapter – 3(Process of assurance: planning and assignment) Page 1

Why?
1) To identify and assess the risks of material misstatement in the financial statements.
2) To enable the auditor to design and perform further audit procedures.
3) To provide a frame of reference for exercising audit judgment.
What?
1) Industry, regulatory and other external factors, including the reporting framework.
2) Nature of the entity, including selection and application of accounting policies.
3) Objectives and strategies and relating business risks.
4) Measurement and review of the entity’s financial performance.
5) Internal control.
How?
1) By inquires of management and others within the entity.
2) By analytical procedures.
3) By observation and inspection.
4) Prior period knowledge.
5) Discussion of the susceptibility of the financial statements to material misstatement among the
engagement team.
Q-7: Describe an attitude of professional skepticism as per ISA 200?
Ans: An attitude of “professional skepticism” means the auditor makes a critical assessment, with a
questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that
contradicts, or brings into question.
Q-8: What do you mean by analytical procedure as per ISA 520? (Page-44)
Ans: Analytical procedure means evaluation of financial information made by a study of plausible
relationships among both financial and non-financial data.
Q-9: Why analytical procedure is required? (Page-44)
Ans: ISA 520 Analytical Procedures requires auditors to apply analytical procedures in the overall review at
the end of the audit and as substantive procedures, to obtain audit evidence directly.
Q-10: What does analytical procedure include according to ISA 520? (Page-44)
Ans: According to ISA 520 analytical procedures include:
¾ The consideration of comparisons with:

1) Comparable information for prior periods
2) Anticipated results of the entity
3) Similar industry information
¾ The Consideration of relationships between:

1) Elements of financial information, such as the relationship of gross profit to sales.
2) Financial information and relevant non-financial information, such as relationship of payroll costs
to number of employee.
Q-11: What are the possible sources of information for analytical procedures about client used at risk
assessment stage? (Page-44)
Ans: the possible sources of information for analytical procedures about client used at risk assessment stage
are:
(a) Interim financial information.
(b) Budgets.

(c) Management accounts.

(d) Non-financial information.
(e) Bank and cash records.
(f) VAT returns / Sales tax return.
(g) Board minutes.
(h) Discussions with the client at the year end.
Q-12: What is the accounting ratios used for analytical procedures? Describes with purposes? (Page-
45)
Ans: See page no: 45 of Assurance Manual of Certificate level.
Q-13: What do you mean by materiality according to ISA 320? (Page-47)
Ans: ISA 320 state that “a matter is material if its omission or misstatements would reasonably influence the
economic decisions”.
Q-14: When the auditor should be considered materiality according to ISA 320? (Page-47)
Ans: ISA 320 audit materiality states that’ materiality should be considered by the auditor when:
(a) Identifying and assessing the risks of material misstatement.
(b) Determining the nature, timing and extent of the audit procedures.
(c) Evaluating the effect of misstatements.
Q-15: Show how materiality is used in the course of an assurance engagement? (Page-48)
Ans: Materiality is used in the course of an assurance engagement by following ways:
1. PLANNING MATERILITY
Based on draft financial statements.
2. Apply planning materiality.
3. Test all items of planning materiality ACTUAL ERRORS DETECTED
4. Sample from remaining items. ACTUAL ERRORS DETECTED
5. FINAL MATERIALITY ACTUAL ERRORS PROJECTED TO POPULATION

Based on final financial statements
Q-16: How does materiality assessment and fixation help to control an audit? (Page-48)
Ans: Materiality assessment and fixation will help the auditors to decide:
a) How many and what items to examine.
b) Whether to use sampling techniques.
c) What level of error is likely to lead to an auditor to say the financial statements do not give a true
and fair view?
Q-17: What is tolerable error?

.
Tolerable error: Tolerable error means the maximum error that an auditor is prepared to accept in a class of
transactions or account balances in the financial statements.
Q-18: Give examples of qualitative aspect of materiality?
Ans: Materiality has qualitative aspect as well as quantitative aspects. Example of qualitative aspect is
“Transactions relating to directors” are considered material by nature regardless of their value.

Q-19: How can you set tolerable error?
Ans: Tolerable error may be set at planning materiality, but it is usually reduced to, say 75% or even 50% of
planning materiality so as to take account of the fact that auditors use samples which increase the risk of
auditors giving an inappropriate opinion.
Q-20: Why do you need to review / change the level of materiality constantly? (Page-49)
Ans: The level of materiality must be reviewed constantly as the audit progresses and changed may be
required because:
¾ Draft accounts are altered and therefore overall materiality changes.
¾ External factors may cause changes in risk estimates.
Q-21: What do you mean by risk based approach? (Page-49)
Ans: In the risk based approach, auditors analyses the risks associated with the clients’ business, transactions
and systems which could lead to misstatements in the financial statements, and direct their testing to risky
areas.
Q-22: What is audit risk & consists of what in according to ISA 200? (Page-49, 50)
Audit risk is the risk that the auditors give an inappropriate opinion on the financial statements according to
ISA 200.Audit risk has two elements:
1) The risk that the financial statements contain a material misstatement.
2) The risk that the auditors will fail to detect any material misstatements.
1) The risk that the financial statements contain a material misstatement has two elements: (a) inherent
risk (b) control risk.
(a) Inherent risk: The susceptibility of an account balance or class of transactions to misstatement
that could be material due to lack of related internal control systems.
(b) Control risk: The risk that a material misstatement would not be prevented detected or corrected
by the accounting and internal control systems.
2) The risk that the auditors will fail to detect any material misstatements is as known detection risk.
Q-23: What is inherent risk? Please give few examples of issues that might increase inherent risk.
(Page-50)
Inherent risk: The susceptibility of an account balance or class of transactions to misstatement that could be
material due to lack of related internal control systems.
Examples of issues that might increase inherent risk are:

(a) Balance includes an estimate.
(b) Significant balance is important in the account.
(c) Financial statements are liable to misstatement because:
(1) Company is in trouble.
(2) Company is seeking to raise finance.
(3) Other motivation for directors to misstate the figures.
(d) Highly building trade.
Q-24: What is control risk & detection risk? (Page-50 & 51)
Control risk: The risk that a material misstatement would not be prevented detected or corrected by
the accounting and internal control systems.
Detection risk: The risk that the auditors’ procedures will not detect a misstatement that exists in an
account balance or class of transactions.

Q-25: When the inherent & control risk both is high then what does the auditor do? (Page-51)
Ans: When the inherent & control risk both is high, the following effects on the audit:
1. The auditors are unlikely to rely on tests of control, but will carry out extended tests of details.
2. Detection risk must be rendered low, which will mean carry out extended a substantial number of
details.
Q-26: What steps should be taken by the auditors in case of identify and assessing the risk? (Page-52)
Ans: The following steps should be taken by the auditors in case of identify and assessing the risk:
Step – 1: Identify risk throughout the process of obtaining an understanding of the entity.
Step – 2: Relate the risks to what can go to wrong at the assertion level.
Step – 3: Consider whether the risks are of a magnitude that could result in a material misstatement.
Step – 4: Consider the likelihood of the risks causing a material misstatement.
Q-27: Which factors indicate the significant risk according to ISA 315? (Page-53 & 54)
Ans: The following factors which indicate that a risk might be a significant risk:
(1) Risk of fraud
(2) Recent significant economic, accounting or other development.
(3) Significant transaction with a related party.
(4) Unusual transaction.
(5) Complexity of the transaction.
(6) The degree of subjectivity in the financial information.
Q-28: Why does an unusual transaction or matters of directors’ judgment give rise to significant risk?
(Page-60)
Ans: Unusual transactions or matters of directors’ judgment give rise to significant risk because unusual
transactions are likely to have more:
¾ Management intervention
¾ Manual intervention
¾ Complex accounting principles or calculations.
¾ Control procedures not to be followed.
May-June’ 2010
1. a. Which of the following procedures might an auditor use in gaining an understanding of the entity? (Page-
43) (i) Inquiry (ii) Recalculation (iii) Analytical procedures (iv) Computation
(v) Re-performance of a control (vi) Observation and inspection
b. The audit team is required to discuss susceptibility of the financial statements to material statements?
True or False (Self-test-4) (Page-56)
6.a. What is Audit Risk? (Q-22) What are the different types of Audit Risk? (Q-22) For each of the following
examples, indicate the type of risk: (Page-52)
i) Vendor’s payments are processed, booked and reconciled in the system by the same person in the Accounts
Department.
ii) The assurance firm may do insufficient work to defect material errors.
iii) The financial statements contain a number of estimates.
b. If control and internal risk are assessed as sufficiently low, substantive procedures can be abandoned
completely. True or False (Self-test-7, Page-56)

Nov-Dece’ 2010
2. Discuss in brief ‘Audit Strategy’ and ‘Audit Plan’ (Q-1)
Which three of the following would normally be contained in the overall audit strategy? (Page-40)
• The contract between the audit firm and the client
• The result of audit risk assessment
• Calculation of preliminary materiality
• Detailed plan of audit procedures to be carried out
• List of staff to be involved with the audit
3. (a) Name five possible of sources of information about the client. (Q-11)
(b) Define ‘Materiality’ in assurance work (Q-13 & 14). Which factors indicate a risk might be a significant
risk? (Q-27)
Nov-Dece’ 2011
3. What is Audit Risk? (Q-22) What are the different types of Audit Risk? (Q-22) For each of the following
examples, indicate the type of risk: (Page-53)
a) Vendor’s payments are processed, booked and reconciled in the system by the same person in the Accounts
Department.
b) The assurance firm may do insufficient work to defect material errors.
c) The financial statements contain a number of estimates.
Nov-Dece’ 2012
1. c. (i) ISA-320 ‘Audit materiality’ provides guidance on the concept of materiality in planning and
performing an audit. Define materiality (Q-13 & 14).
c. (ii) Describe the relationship between materiality and audit risk (Below)
Ans: There is an opposite relationship between materiality and the level of audit risk. Where the materiality
level is higher, the audit risk is lower level and vice versa. The auditor considers this opposite relationship
between materiality and audit risk when he determines the nature, timing and extent of audit procedures.
c. (iii) How audit risk can be reduced to an acceptable level? (Q-25)
May-June’ 2014
3.b. Distinguish between Audit Strategy and Audit Plan. (Q-1)
c. Budget and actual financial information of PQR ltd for the year 2013 are prescribed below: (Page-46)
Budget (TK.) Actual (TK.)
Sales 1,200,000 1,222,578
Cost of Sales 850,000 972,563
Gross profit 350,000 250,015
Salaries 275,000 276,000
Travelling 100,000 172,453
Advertisement 75,000 43,000
Which three areas would you investigate further as a result of carrying out analytical procedures on the above?
Nov-Dece’ 2014
4. Materiality – the acceptable error level below which the understanding and interpretation of the financial
statements will not be significantly affected, and, on the other hand, the admissible error level that is accepted
in order to decide whether the accounts are correct or not.
a. Explain materiality in the context of an audit, from the point of view of an Auditor. (Q-13 & 14)
b. (i) How should auditor determine materiality during a financial audit? (Q-15)
b. (ii) Is there any golden rule to quantify materiality level? (Below)

Ans: There is no universally agreed golden rule to quantify materiality level. Several "rules of thumb" have
introduced from both practice and academic research. For instance, all of the following have been suggested
as way of arriving at a preliminary judgment about materiality:

Based Used Possible Range

Percentage of profit before tax (5-10)%
Percentage of total revenue (½-1)%
Percentage of total assets (1-2)%
c. How does materiality assessment and fixation help to control an audit? (Q-16)
Nov-Dece’ 2015
4. Materiality – the acceptable error level below which the understanding and interpretation of the financial
statements will not be significantly affected, and, on the other hand, the admissible error level that is accepted
in order to decide whether the accounts are correct or not.
a. Explain materiality in the context of an audit, from the point of view of an Auditor. (Q-13 & 14)
b. (i) How should auditor determine materiality during a financial audit? (Q-15)
b. (ii) Is there any golden rule to quantify materiality level? (Below)

Ans: There is no universally agreed golden rule to quantify materiality level. Several "rules of thumb" have
introduced from both practice and academic research. For instance, all of the following have been suggested
as way of arriving at a preliminary judgment about materiality:
Based Used Possible Range
Percentage of profit before tax (5-10)%
Percentage of total revenue (½-1)%
Percentage of total assets (1-2)%
c. How does materiality assessment and fixation help to control an audit? (Q-16)
Nov-Dece’ 2016
4. As part of the analytical procedures of XYZ Limited, you performed calculations of the following ratios:
Ratios 2015 2014
Gross profit ratio 25% 29%
EBIT to sales ratio 11% 10.8%
Current ratio 1.55 1.85
Days to collect receivable 108 85
Days to sell Inventory 96 95
Interest coverage ratio 402 5.5
Earnings per share Taka 8.5 Taka 8.5
a. Based on the above ratios, which two aspects of the company, you believe, should receive special
attention in the audit.(Below)
b. State five possible reasons behind decreasing gross profit ratio to 25% in 2015 from 29% in 2014.
(Below)
Answer to the question no-4(a): Based on the ratios, as given in the question, I think following aspects
should get special attention:
• Profitability in terms gross profit lo revenue.
• Liquidity condition of the company.
• Average Accounts Receivable collection period.
In case of gross profit ratio, it came down to 25% in 2015 from 29% of last year. This is a huge fluctuation
and therefore the reasons behind such movement should be investigated to gather sufficient and appropriate
evidence.
On the other hand, in 2015 compared to 2014, the liquidity position of the company has deteriorated in several
considerations which include lower current ratio, higher days sales outstanding and higher bank borrowing as
reflected through lower interest coverage ratio over the last year. All ratios relating to tightening liquidity
condition need to be examined in detail to understand associated root causes and related risks.
Considering Accounts Receivable Turnover ratio, it is found that Days to collect Receivable has been
increased compared to last year which has negative impact in cash flow from operating activities. Moreover,
funds remained block in receivable for more days compared to year 2014. The reason for increased Day to
collect Receivable has to be checked to ensure the actual reason as well as the impact in working capital
management.
Answer to the question no-4(b):
Five possible reasons behind decreasing gross profit ratio to 25% in 2015 from 29% in 2014 are:
• The selling price of the products may have been reduced as part of business strategy.
• The product mix may have been changed this year.
• The company might have offered higher rate of trade discount compared to last year.
• Raw material price of the products may have increased.
• The overhead cost of the products may have increased.
Nov-Dece’ 2017
4.a) Explain materiality in the context of an audit, from the point of view of an auditor. (Q-13 & 14 )
b) How does materiality assessment and fixation help to control an audit? (Q- 16)
May-June’ 2018
1. (c) Here is some extracts of financial statements of a recently accepted audit client;
2017 2016
Tk ‘000 Tk ‘000
Revenue 1,566,088 950,339
Cost of sales 1,237,231 757,700
Gross Profit 328,857 192,637
Salaries and Wages 141,984 185,664
Other administrative costs 10,988 9,939
Audit fee 5,400 5,350
Bank Charges 64 33
Other Finance costs 32 35
Advertising 276 465
You are required to identify three which analytical procedures may suggest as risky and will require special
attention. (Below) 6
Ans: Analytical procedures: (any three of the below shall carry full marks)
Revenue: Revenue has risen substantially
Salaries and wages: Salaries have fallen despite rise in revenue. If rise is due to increased output, why has
related labor cost fallen?
Bank Charges: Bank charges have nearly doubled-indicating large loan taken out? Why? Potential finance
problem
Advertising: Seems odd that sales appear to have increased when advertising costs have been slashed?
Nov-Dece’ 2018
1. Write short notes on the following: (Q-1)
(iii) Audit strategy
(iv) Audit plan
May-June’ 2019
1. b) How would you explain a structured approach to planning an audit? (Q-3)


CHAPTER- 04: PROCESS OF ASSURANCE: EVIDENCE AND REPORTING

Q-1: What is the objective of an assurance engagement? (Page-63) & (Chapter – One, Q-15)
Ans: The objective of an assurance engagement is to enable practitioners to express an opinion whether the
subject of the assurance engagement is in all material respect in accordance with the identified criteria.
Q-2: What is audit evidence? (Page-70) & (Chapter – 11, Q-1)
Audit evidence: Audit evidence means all the information used by the auditor in arriving at the conclusions
on which the audit opinion is based.
Q-3: What are the types of potentially tests by auditors carry out to gather evidence? (Page-63)
Ans: There are two types of potential test which will carry out by auditors:
(1) Tests of controls
(2) Substantive procedures.
Q-4: What do you know about control test and substantive test? (Page-63)
Test of controls: Audit procedures performed to obtain audit evidence about the effectiveness of controls in
preventing, or detecting and correcting material misstatements at the assertion level.
Substantive procedures: Audit procedures performed to detect material misstatements at the assertion level.
Q-5: What are the types of substantive test? (Page-63)
Ans: There are two types of substantive test:

(a) Tests of detail of classes of transactions, account balances and disclosures.
(b) Substantive analytical procedures.
Q-6: What are the logics for test of control? (Page-63 & 64)
Ans: The following logics used for test of control:

a. The directors set up systems of internal controls to ensure they report correctly to the shareholders.
b. The auditors are required to conclude whether the financial statements give a true and fair view.
c. The auditors evaluate the control system.
d. The auditors test the control system.
Q-7: Discuss the attributes of evidence as per ISA 500 or what is sufficiency and appropriateness?
(Page-64 & 165)
Ans: ISA 500 states that audit evidence must be sufficient and appropriate. Sufficiency and appropriateness
are interrelated and apply to both tests of controls and substantive procedures.
Sufficiency is the measure of the quantity of audit evidence.

Appropriateness is the measure of the qualitative or reliability of audit evidence.
Q-8: What things affect the quality of audit evidence required? (Page-64)
Ans: The quantity of audit evidence required is affected by the level of risk in the area being audited. It is also
affected the quality of evidence obtained. If the evidence is high quality the auditors may need less than, if it
were poor quality.
Chapter – 4(Process of assurance: evidence and reporting) Page 1

Q-9: List the sources of audit evidence? / How can you gather reliable audit evidence? / What are the
generalized indicators that may help auditors to assess the quality of audit evidence? (Page-64& 165)
Ans: We can gather reliable audit evidence by following ways:

(i) External: Audit evidence from external sources is more reliable than that obtained from the entity’s
records.
(ii) Entity: Evidence obtained from the entity’s records is more reliable when related control systems
operate effectively.
(iii) Auditor: Evidence obtained directly by auditors is more reliable than that obtained indirectly or by
inference.
(iv) Written: Evidence in the form of documents or written representations is more reliable than oral
representations.
(v) Originals: Original documents are more reliable than photocopies or facsimiles.
Q-10: Definition: Financial statement assertions (Page-64)
Financial statement assertions: The representations by management, explicit or otherwise, that are
embodied in the financial statements.
Q-11: Write management assertions under different categories? (Page-65)
Ans: The assertions used by the auditor under different categories are mentioned below:
(1) Assertions about classes of transactions and events for the period under audit:
(a) Occurrence: All transactions and events that should have been recorded have occurred and
pertain to the entity.
(b) Completeness: All transactions and events that should have been recorded have been
recorded.
(c) Accuracy: All transactions and events relating to amount and other data should have been
recorded appropriately.
(d) Cut-off: All transactions and events should have been recorded in the correct accounting
period.
(e) Classification: All transaction and events should have been recorded in the proper accounts.
(2) Assertions about account balances at the period end:

(a) Existence: Assets, liabilities and equity interests exist.
(b) Completeness: All assets, liabilities and equity interests that should have been recorded have
been recorded.
(c) Rights and obligations: The entity holds or controls the rights to assets and liabilities are the
obligations of the entity.
(d) Valuation and allocation: All assets, liabilities and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
(3) Assertions about presentation and disclosure:

(a) Occurrence and rights and obligations: All disclosed events, transactions and other matters
should have occurred and pertain to the entity.
(b) Completeness: All disclosures that should have been included in the financial statements
have been included.
(c) Accuracy and valuation: Financial and other information are disclosed fairly and
appropriate amounts.
(d) Classification and understandability: Financial information is appropriately presented and
described, and disclosures are clearly expressed.

Q-12: Give few examples of substantive test procedures. (Page-66)
Ans: The auditor must always carry out substantive procedures on material items. The following substantive
procedures:
(a) Agreeing the financial statements to the underlying accounting records.
(b) Examining material journal entries.
(c) Examining other adjustments made in preparing the financial statements.
Q-13: When analytical procedures & test of details are appropriate to be used? (Page-66)
Ans: Substantive procedures fall into two categories:
(1) Analytical procedures: Analytical procedures tend to be appropriate for large volumes of predictable
transactions (for example, wages and salaries).
(2) Test of detail: Test of detail may be appropriate to gain information about account balance (for
example, inventories or trade receivables) particularly verifying the assertions of existence and
valuation.
Q-14: When test of details rather than analytical procedures are more appropriate? (Page-66)
Ans: Test of details rather than analytical procedures are more appropriate with regard to matters which have
been identified as significant risks.
Q-15: Recite the opinion paragraph of audit opinion? (Page-69)

Ans: See Assurance Manual, Certificate level, page No: 69
Q-16: What two things the auditors are required to state as explicit opinions in their audit report?
(Page-67)
Ans: The following two things are required to state as explicit opinion in the audit report:
1. In respect of the state of the company’s affairs at the end of the financial year.
2. In respect of the company’s profit or loss for the financial year.
Q-17: What are the matters with which the auditors imply satisfaction in an unqualified report under
the Companies Act 1994? (Page-68)
Ans: The following are matters with which the auditors imply satisfaction in an unqualified report under the
companies’ Act 1994. The company has kept proper books of account with respect to:
(1) Adequate accounting records have been kept.

(2) Returns adequate for the audit have been received from branches not visited.
(3) The financial statements are in agreement with the accounting records and returns.
(4) All information and explanations have been received as the auditors think necessary and they have
had access at all times to the company’s books, accounts and vouchers.
(5) Details of directors’ emoluments and other benefits have been correctly disclosed in the financial
statements.
(6) Particulars of loan and other transactions in favour of directors and others have been correctly
disclosed in the financial statements.
Q-18: What basic elements, according to ISA 700, the audit report for single financial statement should
include? (Page-68)
Ans: According to ISA 700, the audit report for single financial statement should include the following basic
elements, usually in the following layout.
(a) Title
(b) Addressee
(c) Opinion Paragraph
(d) Basis for opinion

(e) Other Information (if any)

(f) Key audit matters (if any)
(g) Emphasis of matter (if any)
(h) Other matter (if any)
(i) Management responsibility
(j) Auditors’ responsibility
(k) Other reporting responsibilities (Legal and regulatory requirements)
(l) Name of the engagement partner
(m) Signature of the auditor
(n) Auditor’s address
(o) Date of the report
Q-19: Write a draft auditor’s report as per ISA 700? (Page-69, 70 & 71)
Ans: See Assurance Manual Certificate level Page-69, 70 & 71
Q-20: What is expectation gap? (Page-72)
Expectation gap: Expectations gap meaning that there is a gap between what the assurance providers
understands he is doing and what the user of the information believes he (assurance provider) is doing.
Q-21: Discuss the issue based on which expectation gap take place? Or Give three examples of
misunderstanding which contribute to the expectation gap. Or what are the misunderstandings in the
following cases? (Page-72)
• The nature of audited financial statement
• Type and extent of work undertaken by the auditors
• Level of assurance provided by the auditors
Ans: The issue based on which expectation gap take place are given below:
(1) Misunderstanding of the nature of audited financial statements, for example that:
(a) The balance sheet provides a fair valuation of the reporting entity.
(b) The amounts in the financial statements are stated accordingly.
(c) The audited financial statements will guarantee that the entity concerned will continue to exist.
(2) Misunderstanding as to the type and extent of work undertaken by auditors, for example that:
(a) All items in financial statements are tested.
(b) Auditors will uncover all errors.
(c) Auditors should detect all fraud.
(3) Misunderstanding about the level of assurance provided by auditors, for example that:
(a) The auditors provide absolute assurance that the figures in the financial statements are correct
Q-22: What components must have in an assurance report according to ISAE (International Standards
on Assurance Engagements)? (Page-72)
Ans: The following components must have in an assurance report according to ISAE:
¾ A title that clearly indicates the report is in an independent assurance report.
¾ An addressee.
¾ An identification and description of the subject matter.
¾ Identification of the criteria.
¾ A statement to identify the responsible party.
¾ A statement that the engagement was performed on accordance with International Standards on
Assurance Engagements (ISAEs)
¾ A summary of work perform.
¾ The practitioner’s conclusion.
¾ The assurance report date.
¾ The name of the firm or practitioner.

Q-23: What is the by-product of an audit? What does it cover? (Page-73)
Ans: The assurance provider also may sometimes issue reports to the party that has engaged them as well as
the main report to users of the assurance material. So for example, in an audit, the auditors will sometimes
issue a report to the directors or management as a by-product of the audit. One major issue that such a report
might cover is internal control weaknesses.
May-June’ 2010
11 (b) Name six financial statement assertions (Q-11)
Nov-Dec’ 2010
4. (a) What are the matters with which the auditors imply satisfaction in an unqualified report under the
Companies Act 1994? (Q-17) What basic elements, according to ISA 700, the audit report should include?
(Q-18)
(b) Which three of the following are implied opinions given in the audit report? (Page- 73)
• All information and explanations required for the audit have been received.
• Proper accounting records have been kept.
• The director’s reports is consistent with the financial statements
• The financial statements have been prepared in accordance with the Companies Act 1994.
• The preparation of the financial statements is the responsibility of the company’s management.
May-June’ 2012
2. Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is
primarily obtained from audit procedures performed during the course of the audit.
a. Discuss the attributes of evidence as per ISA 500 (Q-7) and list the sources of audit evidence. (Q-9)
8. An accountant evaluates financial records based on assertions imbedded in the financial statements.
a. What are the management assertions under different categories? (Q-10 & 11)
Nov-Dece’ 2012
1. a. What do you mean by the term ‘Sufficient and Appropriate audit evidence’? State various factors that
help the auditor to ascertain as to what is sufficient and appropriate audit evidence. (Q-7)
2. An auditor's report is considered an essential tool when reporting financial information to users, particularly
in business. Some have even stated that financial information without an auditor's report is essentially
unreliable" for investment purposes.
a. What is Audit Opinion? (Below) How is an unqualified opinion written in an audit report? (Q-18)
Ans: An audit opinion refers to a certification of a financial statement is provided by the independent
accountants involved in auditing by examining company’s books and records. The audit opinion is about
whether or not the financial statements present an accurate reflection of the organization’s financial condition.
b. What two things the auditors are required to state as explicit opinions in their audit report? (Q-16)
c. What matters the auditors are required to state by exception as implied opinions in their audit report? (Q-
17)
d. Who should the auditors address to in their audit report of a company according to ISA 700? (Below)
Ans: The auditor’s report shall be addressed as required by the circumstances of the engagement. The
auditor’s report is normally addressed to those for whom the report is prepared, often either to the
shareholders or to those charged with governance of the entity whose financial statements are being audited.

Nov-Dece’ 2014
1. ISA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is
dependent on the individual circumstances under which it is obtained. As per ISA 505, depending on the
circumstances of the audit, audit evidence in the form of external confirmation received directly by the auditor
from parties is considered to be more reliable than evidence generated internally by the entity.
a. What are the generalized principles mentioned in the International Standards of Auditing (ISA) as regards
to greater reliability of audit evidence? (Q-9)
3. b. How should auditor evaluate whether substantial doubt about going concern exists or not? (Below) Can
you identify and list down what are the indicators of substantial doubt? (Below)In such situation what audit
evidences should be collected and preserved in the working file? (Below)
Ans: Auditor should evaluate whether substantial doubt about going concern exists or not for a reasonable
period of time by following ways:
a) Identify conditions or events that in aggregate indicate substantial doubt about the entity’s ability to
continue as going concern.
b) To obtain additional information and audit evidence to support information that mitigates the auditor’s
doubt.
Indicators of substantial doubt may include:

a) Negative trends: Working capital deficiency, adverse key ratios
b) Internal matters: Work stoppages, Uneconomical long term commitments
c) External matters: Legal proceedings, loss of license, patent or franchise
d) Other indications of financial difficulty: Default on loan agreement, discontinuance of dividends
Audit documentation:
When substantial doubt about going concern exists, the audit documentation should contain:
a) The events that arise to the substantial doubt
b) The commitments of management plans
c) The audit procedures performed and evidence obtained to evaluate those elements
d) The auditor’s conclusion:
If substantial doubt remains, the auditor should adequate disclosure in the report
May - June’ 2016
3. Financial statement can be said as the collection of the collection of many assertions of management. That
is way, the auditor attempts to collect evidence as to the correctness of the assertions. The ISA require that the
auditor should use assertions for classes of transactions, account balance, and presentation and disclosures in
sufficient details to from a basis for the assessment of risk of material misstatement and the design and further
audit procedures.
a. In the context as described above, define financial statement assertion. (Q-10)
Nov-Dec’ 2016
1. c. The content of the audit report is regulated by ISA 700 and also by relevant Bangladeshi law. In this
context, what are the basic elements of an audit report? Write sequentially. (Q-22)
Nov-Dece’ 2017
1. d. In an audit engagement, the engagement team does so many things following the defined methodology
the Engagement Partner approves. All these are done and finally a suitable report is issued as per prescription
of International Standards on Auditing. You are required to draft an unqualified audit report as per ISA 700
applicable for a company. (Q-19)

Nov-Dec’ 2017
2.b) What will be the tests of Controls in recording wages and salaries and any deductions thereof. (Q-13)
Nov-Dec’ 2018
8. Auditors, while performing an audit engagement, would collect as much as possible quality audit evidences
to be able to draw appropriate opinion. To that end, ISA 500 prescribes for auditors to collect sufficient
appropriate audit evidence.
(a) Appropriateness is the indicator of quality and reliability of the audit evidence. What are the
generalized indicators that may help auditors to assess the quality of audit evidence? (Q-9)
9. What do you understand by Financial Statement Assertions? Give a description of the assertions applicable
to classes of transactions, account balances and disclosures to provide a basis for designing and performing
further audit procedures. (Q-10 & 11)
May-June’ 2019
2. b) What is expectation gap? Identify and discuss briefly three indicators that create expectation
gap in the minds of the assurance users. (Q-20 & 21)


CHAPTER- 05: INTRODUCTION TO INTERNAL CONTROL

Q-1: What is internal control? (Page-81)
Ans: Internal control is the process designed to mitigate risks to the business and ensure that the business
operates efficiently and effectively.
Q-2: What do you mean by “those charged with governance”? (Page-81)
Ans: “Those charged with governance” are the people who direct the operations of the company. In
Bangladesh “those charged with governance and management” are often one and the same things – the
directors of the company.
Q-3: What is the company’s objective? (Page-81)
Ans: A company has various objectives:
(a) To ensure it reports its financial position correctly to shareholders
(b) To ensure that it operates effectively and efficiently
(c) To ensure that it complies with relevant laws and regulations.
Q-4: What steps are taken by the management to meet the company’s objective? (Page-81)
Ans: The following steps are taken by the management to meet the company’s objective:
(1) Identify risks why business objectives not being fulfilled.
(2) Implement internal controls to mitigate the risk.
Q-5: What are the reasons for internal control? (Page-82)
Ans: The reasons for internal controls are:
(a) Minimizing the company’s business risks.
(b) Ensuring the continuing effective functioning of the company.
(c) Ensuring the company complies with relevant laws and regulations.
Q-6: What are the limitations of internal control? (Page-82)
Ans: Internal controls have some limitations. In other words, the risk to the business of operating cannot be
eliminated entirely.
(a) Human element: Another important limitation of controls is the human element. If a human being
makes a mistake implementing a control, than that control might be ineffective.
(b) Collusion: Staff members may want to override or avoid controls in order to defraud the company.
(c) Unusual transactions: It may be the case that an unusual transaction may occur which does not fit
into the normal routines.
Q-7: Why smaller companies have problems in implementing effective internal control? (Page-82)
Ans: Smaller companies may have particular problems in implementing effective internal control systems
because there are fewer people to involve in the internal control system than larger companies.
Q-8: How does the internal control protect or minimize risks of human element? (Page-82)
Ans: By involving a large number of people in internal control systems helps to limit the risk of the human
element in internal control systems.
Q-9: What are the components of internal control & explain briefly? (Page-83)
Ans: There are five components of internal control. They are:

(i) Business risk and the entity’s risk assessment process: Business risk and the entity’s risk
assessment process is a process by which management in a business identifies business risks and
decides what actions to take to address those risks.
Chapter – 5(Introduction to internal control) Page 1

(ii) The information system relevant to financial reporting purposes: The information system relevant
to financial reporting purposes is the system which captures information about transaction and events
for financial reporting.
(iii) The control environment: The control environment is the context / element of the internal control
system, influenced by management.
(iv) Control activities: Control activities are the heart of internal control system, comprising policies and
procedures, which may prevent, or detect and correct errors.
(v) Monitoring of controls: All control system should be monitored.
Q-10: Define Audit committee what types of directors are the members of audit committee? (Page-84)
Ans: Audit committee is a subsection of the board of directors which has a particular interest in the finance
and accounting activities of the company.
The audit committee is comprised of non-executive directors.
Q-11: What are likely to include in the terms of reference of the audit committee as required for the
companies listed in the Bangladesh stock exchanges? / What are the duties and responsibilities of an
audit committee? (Page-84)
Ans: The audit committee is terms of reference which are likely to include the following:
(1) To review the integrity of the financial statements of the company.
(2) To review the company’s internal financial controls and the company’s risk management systems.
(3) To monitor and review the effectiveness of the company’s internal audit function.
(4) To make recommendations to the board in relation to the external auditor.
(5) To monitor the independence of the external auditor.
(6) To implement policy on the provision of non-audit services by the external auditor.
Q-12: What is the key issue of audit committee? (Page-84)
Ans: The key issue for the audit committee is the financial statements.
Q-13: What do you means by the entity’s risk assessment process and Business risk? (Page-85)
(1) Entity’s risk assessment process: Business risk and the entity’s risk assessment process is a process
by which management in a business identifies business risks relevant to financial reporting objectives
and decides what actions to take to address those risks.
(2) Business risk: The risk inherent to the company in its operations. It is risks at all levels of the
business.
Q-14: Draw a flow chart of an entity’s risk assessment process. (Page-85)
Ans: A flow chart of an entity’s risk assessment process given below:

Identify relevant Estimate the Assess the likelihood
business risks. impact of risks. of occurrence
Decide upon actions (internal controls, insurance, changes in operation) to manage them
Q-15: What does information system consist of? (Page-85)
Ans: An information system consists of infrastructure (Physical and hardware components), software, people,
procedure and data.

Q-16: What areas are interested in by auditors in the information system relevant to financial reporting
purposes? (Page-86)
Ans: The following areas are interested in by auditors in the information system relevant to financial reporting
purposes:
¾ The classes of transactions those are significant to the entity.
¾ The procedures by which these transactions are recorded and reported.
¾ The related accounting records and supporting information.
¾ The process of preparing the financial statements.
Q-17: Give few examples for control activity. (Page-86 & 87)
Ans: Few examples for control activity are:
Type of control activity Examples
Authorization Approval and control of documents
Performance review Reconciliations
Comparing internal data with external sources of information
Maintaining and reviewing control accounts and trial balances
Information processing Checking the arithmetical accuracy of records
Physical control Comparing the results of cash, security and inventory counts
with accounting records
Limiting physical access to assets and records.
Segregation of Duties Assigning different individuals the responsibilities of
authorizing transactions, recording transactions and
maintaining custody of assets.
Q-18: What do you mean by segregation of duties? (Page-87)

Ans: Segregation basically means that the stages in the processing of a transaction are split between different
people. It reduces the likelihood of errors and irregularities. (From IT Manual – Knowledge level)
Q-19: What do you know about general control and application control? (Page-87)
General controls: General controls are policies and procedures that relate to many applications and support
the effective function of application controls.
Application controls: Application controls are manual or automated procedures that apply to the processing
of individual applications to ensure that transactions occurred, are authorized and are completely and
accurately recorded and processed.
Q-20: Give few examples against general controls. (Page-87 & 88)
Ans: Examples of general controls:
(i) Controls to prevent wrong programs or files being used:
(a) Operation controls over programs.
(b) Libraries of programs.
(c) Proper job scheduling.
(ii) Controls to prevent unauthorized amendments to data files:
(a) Such as passwords to prevent unauthorized entry.
(iii) Control to Prevent or detect of unauthorized changes to programs.
(a) Segregation of duties.
(b) Full records of program changes.
(c) Password protection.
(d) Restricted access to central computer.
(e) Maintenance of program logs.
(f) Virus checks on software.
(g) Back-up copies stored in other locations.
(h) Stricter controls over certain programs by use of read only memory.

(iv) Development of computer applications:

(a) Approval by computer users and management.
(b) Segregation of duties.
(c) Installation procedures so that data is not corrupted in transition.
(d) Training of staff in new procedures.
(v) Testing and documentation of program changes:
(a) Approval of changes by computer.
(b) Training of staff using programs.
(vi) Controls to ensure continuity of operations:
(a) Storing extra copies.
(b) Protection of equipment.
(c) Back-up power sources.
(d) Disaster recovery procedures.
An application controls may useless when general controls are ineffective.
Q-21: Give few examples against application controls. (Page-88 & 89)
Ans: Examples of application controls:

(i) Controls over input: Completeness
(a) Document counts.
(b) One- for- one checking.
(ii)Controls over input: Accuracy
(a) Digit verification
(b) Existence checks.
(c) Necessary information.
(iii) Controls over input: Authorization
(a) Authorized.
(b) Input by authorized personnel
(iii) Controls over processing:
(a) Reconciliations.
(b) Screen warnings can prevent people logging out before processing is complete.
(v) Controls over master files and standing data:
(a) One to one checking.
(b) Record counts.
Q-22: What are the different applications controls that auditors may test and how? (Page-89)
Ans: Testing of application control:

Manual controls If manual controls exercised by the user of the application system are
exercised by the user capable of providing reasonable assurance that the system’s output is
complete, accurate and authorized, the auditor may decide to limit tests of
controls to these manual controls.
Controls over system In addition to the manual controls exercised by the user, the controls to
output be tested using information produced by the computer or are contained
within computer programs, such controls may be tested by examining the
system’s output using either manual procedures or computer aided audit
techniques (CAAT). Such outputs may be in the form of magnetic media,
microfilm, or printouts. Alternately, the auditor may test the control by
performing it with the use of CAATs.
Programmed control In the case of certain computer systems, the auditor may find that it is not
procedures possible or, in some cases, not practical to test by examining only user
controls or the system’s output. The auditor may consider performing
tests of control by using CAATs, such as test data, reprocessing
transaction data or, in unusual situations, examining the coding of the
application.

General IT controls may have pervasive effect on the processing of transactions in application
systems. If these general controls are not effective, there may be a risk that misstatement occur and
go undetected in the application systems. Although weaknesses in general IT controls may preclude
testing certain IT application controls, it is possible that manual procedures exercised by users may
provide effective control at the application level.
Q-23: How the auditors will obtain information about internal control? / What are the sources of
information about internal control gathered by the auditor? (Page-90)
Ans: Auditors will obtain information about internal controls from a variety of sources:
(1) Talking to the people involved with internal control.
(2) Manuals of internal controls.
(3) Copies of internal controls policies.
(4) New policies in the current year
(5) Minutes of meetings of the risk assessment group
(6) Auditors have a record of what the controls were last year / Prior period knowledge.
Q-24: Name three broad types of document used in Internal Control Recording? Or what types of
document the auditor used for recording the understanding of the business? (Page-90 & 91)
Ans: There are broadly three types of documents which are used for recording the understanding of the
business:
Narrative notes:
(a) Short notes on simple systems.
(b) Background information.
Questionnaires and checklists:

(a) The boxes often get ticked whether the brain is engaged or not.
Diagrams:
(a) Flowcharts
(b) Organization charts
(c) Family trees
(d) Records of related parties.

May-June’ 2010
3. What is Internal Control? (Q-1) Name its components (Q-9) what are its importance (Q-3 & 5) and
limitations? (Q-6)Why smaller companies have problems in implementing effective internal control? (Q-7)
Nov-Dece’ 2010
5. Define “Audit committee”. (Q-10) What are likely to include in the terms of reference of the audit
committee as required for the companies listed in the Bangladesh stock exchanges? (Q-11)
May-June’ 2011
3. What is Internal Control? (Q-1) Name its components (Q-9) what are its importance (Q-3 & 5) and
limitations? (Q-6)
4. (a) Name three broad types of document used in Internal Control Recording. (Q-24)
(b) What are IT General and IT Application Controls? (Q-19) List three examples in each area (Q-20 & 21)
Nov-Dece’ 2011
4. Define ‘Audit Committee.’(Q-10) What are likely to include in the terms of reference of audit committee as
required for the companies listed in stock exchange of Bangladesh. (Q-11)

7. The use of an IT system by a client does not change the need to establish effective internal control;
however, it does change the nature of the controls. More advanced IT features, such as online capabilities,
database storage, IT networks, and end user computing, present special control risks. Therefore, specialized
controls are needed, including passwords, validity tests, and computer logs.
a. How do certain IT areas and IT general controls (ITGC) affect almost all financial audits? (Below)
Ans: There are certain IT areas and IT general controls affect almost all financial audits by the following:
a) Control over computer development
b) Control over input accuracy, completeness and authorization
c) Control over program processing.
d) Control over system output
e) Manual control exercised
b. How do IT system of an entity cause risk of material misstatement? (Below)

Ans: The following may cause the risk of material misstatement of an entity:
a) Lacking of development of computer applications
b) Lack of control over accuracy, completeness and authorization
c) Lack of prevent wrong programs or files being used.
d) Lack of prevent unauthorized amendments to data files.
e) Lack of Prevent or detect of unauthorized changes to programs.
f) Lack of Development of computer applications.
g) Lack of Testing and documentation of program changes.
h) Lack of ensure continuity of operations:
Nov-Dece’ 2012
3. Internal control is most effective when controls are built into the entity’s infrastructure and properly
monitored to assess the quality of the system’s performance over the time.
a. What type of assurance is internal control expected to provide? (Below)

Ans: Internal control is a process, affected by an entity's board of directors, management and other personnel.
The following types of assurance are expected from introducing the internal control system:
¾ Effectiveness and efficiency of operations.
¾ Reliability of financial reporting.
¾ Compliance with applicable laws and regulations.
b. What is the risk of material misstatement occurring within the entity and its environment? Give two
examples. (Below)
Ans: The risk of material misstatement occurring within the entity and its environment is business risk.
Such as:
i) Changes in supply chain
ii) Changes in IT environment
iii) Significant unusual transactions
iv) Contingent liabilities
v) Going concern
c. Why should management establish effective internal control? (Q-5)
4. Most IT controlled weaknesses are rooted in poor management rather than the technology itself. The
general controls are those that equally affect the whole system within an installation whereas application
controls must be designed to address the specific issues in each separate application or program.
a. What are the objectives of general controls and application controls? (Below)
Ans: The objectives of IT general controls are to ensure the proper development and implementation of
applications, as well as the integrity of program, data files and computer operation.
The objectives of IT application controls are to ensure all processing is complete, accurate and valid.

Nov-Dece’ 2013
3. a. What do you understand by internal controls? (Q-1)
b. ISA 315 sets out 5 (five) components of internal control each of which may have impact on the audit
process differently. Write at list 3 (three) components of internal control. (Q-9, partly)
c. The internal control in a computerized environment includes both manual procedures and procedures
designed by computer programs. Such manual and computer controlled procedures comprise two type of
control. Write down 2 (two) above two type controls. (Q-19)
5. Information System aims to support operation’s management and decision making process. In a broad
sense, the term is used to refer not only to the information and communication technology (ICT) that an
organization uses, but also to the way in which people interact with this technology to support the business
processes.
a. What are the risks that an entity is exposed to, if general controls are not effective? (Below)
Ans: IT general controls may have a pervasive effect on the processing of transactions in application systems.
If general controls are not effective, there may be a risk that misstatement occur and go undetected in the
application system.
b. How will you test general controls and application controls of an entity’s information system? (Q-20&21)
c. Can you test automated controls even though you are non-IT person? (Below)
Ans: Yes, I can test automated controls with a little help from my IT knowledgeable friends (Say IT
Administrators) without knowing too much technicality of information systems processes.
May-June’ 2014
5. Internal control is a process affected by an entity’s structure, environment work, authority flows, people and
management information systems. Internal Control System is designed to help the organization accomplish
specific goals or objectives. By ensuring effective and efficient Internal Control System an organization's
resources are directed, monitored and measured which eventually plays an important role in preventing and
detecting fraud and error.
a) (i) What is business risk? (Q-13)

(ii) What is entity’s risk assessment process? (Q-13)
b) (i) What are the objectives of implementing Internal Controls System (ICS)? (Q-5)
(ii) Name three limitations of Internal Control. (Q-6)
c) What are the five components of Internal Control? Briefly explain. (Q-9)
May-June’ 2015
2. A sound system of internal control is of great importance for a business enterprise of any size. In the
absence of a satisfactory internal control system the owners and management of the business will always find
it very difficult to run the company properly and achieve the desired operational result.
a. What is internal control as per ISA 315? What are the five interrelated components of internal control?
Explain. (Q-1 & 9)
b. Define with examples the terms `preventive controls’ and `detective controls’. Preventive controls are better
than detective controls- do you agree? Answer the question with logic. (Below)
Preventive control: Prevention controls means steps are taken before an emergency, loss, or problem occurs.
These include use of alarms and locks, segregation of duties and specific authorizationpolicies.
Detective control: Detective controls are designed to detect errors and irregularities, which have already
occurred and to assure their prompt correction. Detective controls include correcting data errors, modifying
controls or recovering missing assets.

Preventive controls are better than detective controls: I agree to some extent as preventive controls are
better than detective controls because in preventive control steps are taken before an emergency, loss, or
problem occurs. On the other hand, in detective control errors and irregularities are detected which already
occurred.
c. Define with examples what manual controls and automated or IT controls are. Why is segregation of duties
important to ensure effective internal control system? Is segregation of duties preventive control or detective
control? (Below)
Manual control: Controlled by a human operator (not automatically, such as by a computer) or powered by
human or animal muscle power is called manual control. Example- Handbook.
Automated control: Automatic control is the application of processes without direct human intervention such
as a machine or an industrial process.
Segregation of duties: Segregation basically means that the stages in the processing of a transaction are split
between different people. It is very important because it reduces the likelihood of errors and irregularities. It is
an inherent part of the internal control structure and it is in nature preventive controls.
Nov-Dece’ 2015
2. a. What do you understand by internal controls? (Q-1)
b. AS per relevant ISA on internal controls, what are the components of internal control which has an impact
on audit process? (Q-9)
c. What are the two types of controls in any computerized environment? Give example. (Q-19, 20 & 21)
May - June’ 2016
1. a. What are the objectives of internal control system? (Q-5)
1. b. (i) Define Audit Committee. (Q-10)
1. b. (ii) “One of the terms of an audit of references of an audit committee may be to monitor the
independence of the external auditor”-in light with this write at least one way and means which the audit
committee of a listed company can apply to ensure the in the independence of external auditor in the area of
service with an assurance client. (Below)
Ans: One of the terms of reference of an audit committee of a listed company is likely to monitor the
independence of the external auditor. If the team of external auditors cannot work independently, the quality
of the auditor’s report and audited financial statements will not be up to the mark. The audit committee of a
listed company may ensure the independence of the external auditor in case of service with an assurance client
through discussion with the auditor that any individual who has been a director or officer of the audited or an
employee in a position to exert direct and significant influence over the subject matter information of the
assurance engagement in the period under review or in recent years are not assigned to the audit team.
The key issue for the audit committee is the financial statements, so the audit committee itself can be seen as a
control in relation of the information system and the way in which the company produces its financial
statements. The committee also has responsibilities with regard to supervising the identification of risks and
monitoring controls.
May - June’ 2016
4. a. (i) Define the term control environment. (Page-90) (Below)
Ans: The Control environment is the framework within which controls of an organization operate. The control
environment includes the governance and management functions and the attitudes, awareness and actions of
those charged with governance and management concerning the entity’s internal control and its importance in
the entity. The control environment has an effect on the effectiveness of the specific control procedures. A
strong control environment is for example one with tight budgetary control procedures.
4. a. (ii) Why is control an overarching element to institute an effective internal control system? (Below)
Ans: The Control environment, a key element of Internal Control system, plays a very critical role in
establishing a strong Internal Control system within an organization. It is the foundation on which other

elements function effectively. It sets the tone, attitude and commitment of management towards the controls.
Where top management feels that internal controls are very important, staff members are likely to be better
trained about what the controls are and why they are important. As a result, the human element risk associated
with internal controls will be reduced. When the top management takes the internal controls seriously and
apply them rigorously, all staff members will be encouraged to do the same. Ultimately, all other elements of
Internal Control will be positively influenced and directed by the strong control environment.
b. It is found quite common that two types of control activities are established by the organizations. They are
preventive and detective controls .Both types of controls are essential to an effective internal control system.
From the quality perspective, preventative controls are better because they are proactive. However, detective
control plays a critical role by providing evidence as to whether the preventive controls are functioning at
desire level. Below is a list of some controls the organizations usually applied to achieve the goal of the
internal control system?
1. Physical inventories 2. Segregation of duties 3. Internal Audit
4. Approvals and authorizations. 5. Variance analysis 6. Reconciliation
In light of detective controls and preventive controls, identify the above measures with brief reasoning.
(Below)
Ans: Preventive control: Prevention controls means steps are taken before an emergency, loss, or problem
occurs. These include use of alarms and locks, segregation of duties and specific authorizationpolicies.
Detective control: Detective controls are designed to detect errors and irregularities, which have already
occurred and to assure their prompt correction. Detective controls include correcting data errors, modifying
controls or recovering missing assets.
Identification of controls measure with brief reasoning:

i. Physical inventories: It is a detective measure as this is done periodically to find whether books’
stocks exist physically.
ii. Segregation of duties: Segregation basically means that the stages in the processing of a transaction
are split between different people. It is very important because it reduces the likelihood of errors and
irregularities. It is an inherent part of the internal control structure and it is in nature preventive
controls.
iii. Internal Audit: It is a detective measure as internal audit mainly works for checking compliance after
the transactions took place.
iv. Approvals and authorizations: Approvals and authorization imply that transactions are verified and
validated before or at the time of their occurrences by the respective employees. Thus, they are
preventive measures.
v. Variance Analysis: Variance analysis implies that actual results are compared with standard or
budgeted results and then finding out the causes of gap between them. This measure is, therefore, a
detective measure.
vi. Reconciliation: Reconciliation is the process to relate different sets of data to one another, identifies
and investigates differences, and takes corrective action, when necessary. Thus, it is a detective
measure.
c. Your management asked you to develop a policy for managing petty cash fund appropriately. State five
control points that you should incorporate in the policy to establish proper control over the petty cash fund.
(Below)
Ans: Five control points that you should incorporate in the policy to establish proper control over the petty
cash fund are given below:
(1) Cash petty cash.
(2) Check the payments with the voucher.
(3) Check the receipt from the cash book.
(4) Check that all the vouchers are authorized before payment by an authorized person other than Petty
cashier.
(5) Note the advances and the circumstances this has been made.
(6) Ascertain who is responsible for the analysis of P.C for posting to Ledger.

(7) List all petty cash floats and ascertain:

(a) Custodian.
(b) Amount of float.
(c) Purpose.
(d) Method of reimbursement (e. g imprest of round sum.)
Nov-Dece’ 2016
2. Internal control is the collection of policies and procedures that are followed by the organizations while
performing the activities required attaining their goals. It facilitates the organizations to stay in the right path
and to mitigate the risks they face on a day to day basis. A good internal control system enhances the
efficiency and effectiveness of the organizations as well. It provides signals about the deviations of operations
and thus organizations can take appropriate measures to overcome those situations.
a. What is the difference between policies and procedures? (Below)
Answer to the question no-2(a):
Policies refer to the principles that guide the actions and decisions in an organization. In other word we can
say “Policy is the list of rules or the framework for the task. Policies do not tell “how” to do something. But
spell out what is acceptable and what is not. Indeed, policies are rules established to reduce risk.
Procedures refer to the established or prescribed method to be followed to do something. They describe “how”
something should be done. Indeed, procedures outline a series of steps taken to ensure that an internal control
is followed. Example: the procedure is the list of exact instructions for every turn the driver needs to take to
arrive at the destination.
b. Define the term control activities. (Q-9 Partly) Briefly discuss the types of control activities that are
introduced by the organizations in designing a good internal control system. (Below)
Ans: There are many control activities that are introduced by the organizations in designing a good internal
control system. Without instituting adequate control activities, organizations are exposed to huge risks.
Indeed. Control activities mitigate or eliminate certain risks or threats. Whatever the control activities
organization follow they generally fall under the following types of specific control activities.
Authorization: The essence of this control is that all transactions and activities must be properly authorized
to make the system satisfactory. This is very much fundamental to prevent unwanted and unauthorized
transactions. Authorization may be either general or specific based on the nature of transactions.
Segregation of duties: This implies that a number of people should be engaged to perform the different parts
of a process. Involvement of several people, makes fraudulent transactions difficult. It also reduces errors as
more people implies more checking.
Physical control over assets and liabilities: To ensure robust internal control, physical or logical security
needs to be established and maintained over asset records. Physical control is very much essential to protect
assets and documents,
Performance review: Performance review includes reconciliation between two sets of data, comparing
internal data with external information, variance analysis, trend analysis etc. Through performance review
organization can create visibility of its activities and pay attention to those areas where it requires.
Independent check: It implies the careful and continuous review of the above four types of activities This
helps to verify and review the execution of all other control by raising flags.
c. ABC Limited is a newly established private limited company where you work as a financial advisor.
The company is in the process of allocating duties and responsibilities among their staff in such a
manner that will help them to mitigate the risks of fraud and error. As a financial advisor develop a

list of activities that should be assigned to different employees for the sake of adequate separation of
duties. (Q-18)
d. Suppose proper segregation of duties is not possible due to the limited number of staff. In this case,
what should management do to enhance control? (Below)
Answer to the question no-2(d):

Small organizations may not be able to obtain the ideal system of separate employees each performing one of
the four different duties. In this case, mitigating controls can be used to decrease risk. That is, additional
control procedures can be placed in a system to help to reduce the risks associated with lack of segregation of
duties. Additional controls may include frequent job rotation, frequent reporting of transactions, establish
independent check etc.
e. Briefly explain three methods of documenting the understanding of internal control by external
auditors.(Q-18)
Nov-Dece’ 2016
5. An increasing number of business enterprises have automated their internal control system with
advancement in the use of technology. An auditor needs to test the controls contained within the computer
programs.
How will an auditor test the application controls under an automated internal control system? (Q-21)
May - June’ 2017
1. Define “Internal Control” (Q-1). What are the objectives of internal control system? (Q-5)
2. Define and brief about: (i) Control Environment, (Q-9) (ii) Audit Committee, (Q-10) (iii) Entity Risk
assessment process. (Q-13)
Nov-Dece’ 2017
2.a) Define control activities. (Q-1) Explain the types of control activities with examples. (Q-17)
May - June’ 2018

4. (a) What are the different applications controls that auditors may test and how? (Q-22)
Nov-Dece’ 2018
4. Organizations having strict adherence to its standard policies and procedures under strong surveillance of
internal audit or specific monitoring team are believed to be well controlled and low risk client from the
perspective of the external audits.
(a) What do we mean by internal controls? (Q-1) Explain two types of controls in a computerized
environment. (Q-19)
5. Information system is a critical component of internal control. Define information system that is relevant to
financial reporting. What are the areas of financial reporting; the auditor should be interested in? (Q-16)
May - June’ 2019

3. Business risk and underlying mitigations are very commonly talked about phrases. In an audit
engagement, an audit team is expected to assess the business risk applicable to the audit entity and
the measures built therein in terms of internal control system to mitigate/control those risk.
How do you define business risk? How would you assess risk in an entity? {Q-13 (2) & 14}
4. a) For each of the following controls, state whether they are general or application control;
Segregation of duties, Review of master files, Back-up copies, Virus checks, Passwords, Record
counts, Hash totals, Program libraries, Controls over account deletions and Back-up power source.
(Q-20 & 21)
4. b) Briefly discuss about the limitations of internal control. (Q-6)

8. Write short notes on the following:

(i) Internal control. (Q-1)
(ii) Control environment. {Q-9 (iii)}
(iii) Application controls. {Q-19-(Partly)}
(iv) Audit committee. (Q-10)



CHAPTER- 06: REVENUE SYSTEM
Q-1: Why the revenue (sales) system is most important?
Ans: The revenue (sales) system is usually the most important system in a business. Most companies operate
on a credit basis, that is, they invoice for goods when dispatched to customers and then collect the cash at a
later date. Obviously it is important for companies to ensure that they invoice promptly and collect cash
promptly.
Q-2: What are the control objectives to mitigate risk of not receiving payments from a sales invoice?
(Page-99)
Ans: The control objectives to mitigate risk of not receiving payments from a sales invoice are as follows:
• All sales that have been invoiced are recorded in the nominal and general ledgers.
• All credit notes that have been issued are recorded in the nominal and receivables ledgers.
• All entries in the receivables ledger are made to the correct receivables ledger accounts.
• Cut-off is applied correctly to the receivable ledger.
• Potential bad debts are identified.
Q-3: What matters relating to risk may be considered by the company at the time of sales order?
(Page-99)
Ans: When considering sales orders, a company might recognize all or some of the following risks:
(1) Orders may be taken from customers who are not able to pay.
(2) Orders may be taken from customers who are unlikely to pay for a long time.
(3) Orders may not be recorded properly.
Q-4: What controls should be taken to mitigate risk in the situation of question-2? (Page-99)
Ans: The following controls should be taken to mitigate risk in the situation of question-2:
(a) Goods and services are only supplied to customers with good credit ratings.
(b) Customers are encouraged to pay promptly by discount and free sample.
(c) Orders are recorded correctly.
(d) Orders are fulfilled.
Q-5: How controls can be used to mitigate the risk for revenue? (Page-99)
Ans: Following controls can be used of how ordering risks can be mitigated:
(a) Segregation of duties: credit control, invoicing and inventory dispatch.
(b) Authorization of credit terms to customers.
(c) Authorization for changes in other customer data
(d) Orders only accepted from customers who have no credit problems.
(e) Sequential numbering of blank pre- printed order documents.
(f) Correct prices quoted to customers.
(g) Matching of customer orders with production orders and dispatch notes.
(h) Dealing with customer queries.
Q-6: List four test of controls relating to the ordering. (Page-100)
Ans: List four test of controls relating to the ordering are:

(a) Check that references are being obtained for all new customers.
(b) Check that all new accounts on the receivables ledger have been authorized by senior staff.
(c) Check that orders are only accepted from customers who are within their credit terms and credit
limits.
(d) Check that customer orders are being matched with production orders and dispatch notes.
Chapter – 6(Revenue system) Page 1


Q-7: When considering dispatch and invoicing, what risks might recognize by a company? (Page-101)
Ans: The following risks might recognize by a company, when considering dispatch and invoicing:
(1) Goods may be dispatched but not recorded
(2) Goods may be dispatched but not invoiced for
(3) Invoices may be raised in error.
(4) Invoices may be wrongly cancelled by credit notes.
Q-8: What are the control procedures to mitigate the dispatch and invoicing risk? (Page-101 & 102)
Ans: The control procedures to mitigate the dispatch and invoicing risk are:
(a) Authorization of dispatch of goods.
(1) Dispatch only on sales order.
(2) Dispatch only to authorized customers.
(3) Special authorization of dispatches of goods free of charge or on special terms.
(b) Examination of goods outwards as to quantity, quality and condition.
(c) Recording of all goods outwards on a dispatch note.
(d) Agreement of dispatch notes to the customer orders and invoices
(e) Pre- numbering of dispatch notes and regular checks on sequence.
(f) Condition of returns checked.
(g) Recording of goods returned on goods returned notes.
(h) Signature of dispatch notes by customers.
(i) Inventory records updated.
(j) Matching of sales invoices with dispatch notes and sales orders.
Q-9: What are the test of controls for the dispatch and invoicing risk? (Page-102 & 103)
Ans: The following tests could be used in relation to the controls for the dispatch and invoicing risk:
(a) Verify details of trade sales or goods dispatch notes with sales invoices checking,
(1) Quantities
(2) Prices charged with official price lists
(3) Trade discounts
(4) Calculations and additions
(5) Entries in sales day book
(6) VAT, where chargeable
(7) Postings to receivables ledger.
(b) Verify details of trade sales with entries in inventory records.
(c) Verify non-routine sales. (scrap, non-current assets etc) with:
(1) Appropriate supporting evidence
(2) Approval by authorized officials
(3) Entries in plant register.
(d) Verify credit notes with:
(1) Correspondence or other supporting evidence.
(2) Approval by authorized officials.
(3) Entries in inventory records.
(4) Entries in goods returned records.
(5) Calculations and additions.
(6) Entries in day book.
(7) Posting to receivables ledger.
(e) Test numerical sequence of dispatch notes and enquire into missing numbers.
(f) Test numerical sequence of invoices and credit notes, enquire into missing numbers and inspect
copies of those cancelled.
(g) Test numerical sequence of order forms and enquire into missing numbers.
(h) Check that dispatches of goods free of charge or on special terms have been authorized by
management.


Q-10: When considering recording, what risks might recognize by a company? (Page-104)
Ans: The following risks arise at this stage.

(a) Invoiced sales might not be properly recorded.
(b) Credit note might not be properly recorded.
(c) Sales might be recorded in the wrong customer accounts.
(d) Debts might be included on the receivables ledgers that are not collectable.
Q-11: What are the control procedures to mitigate the recording risk? (Page-104)
Ans: The control procedures to mitigate the recording risk are:

(a) Segregation of duties: recording sales, maintaining customer accounts and preparing statements.
(b) Recording of sales invoices sequence and control over spoilt invoices.
(c) Matching of cash receipts with invoices.
(d) Retention of customer remittance advices.
(e) Separate recording of sales returns, price adjustment etc.
(f) Cut-off procedures.
(g) Regular preparation of trade receivables statements.
(h) Checking of trade receivables statements.
(i) Safeguarding of trade receivable statements.
(j) Review and follow-up of overdue accounts.
(k) Authorization of writing off for bad debts.
(l) Reconciliation of receivables ledger control account
(m) Analytical review for receivables ledger and profit margins.
Q-12: What are the test of controls of sales day book and receivable ledger? (Page-105)
Ans: The tests of controls of sales day book and receivable ledger are:
Sales day book
(a) Check entries with invoices and credit notes respectively.
(b) Check additions and cross casts.
(c) Check postings to receivables ledger control account
(d) Check postings to receivable ledger.
Receivables ledger
(a) Check entries in a sample of accounts to sales day book.
(b) Check additions and balances carried down.
(c) Note and enquire into contra entries.
(d) Check that control accounts have been regularly reconciled.
(e) Scrutinize accounts to see if credit limits have been observed.
(f) Check that trade receivables statements are prepared and sent out regularly.
(g) Check that overdue accounts have been followed up.
(h) Check that all bad debts written off have been authorized by management.
Q-13: What risk might be happened for collection? (Page-106)
Ans: The key risks are that money might be received at the business premises but not be recorded or banked.
Q-14: What are the control procedures to mitigate the cash collection risk? (Page-106 & 107)
Ans: The control procedures to mitigate the cash collection risk are:
(1) Recording of receipts received by post:
(a) Appointment of responsible person to supervise mail.
(b) Protection of cash and cheques.
(c) Post stamped with date of receipt.
(2) Recording of cash sales and collections:
(a) Restrictions on receipt of cash (by cashiers only, or by sales representatives)


(b) Agreement of cash collections with banking and cash and sales records.
(c) Investigation of cash shortages and surpluses.
(3) General controls over recording:
(a) Prompt maintenance of records
(b) Limitation of duties of receiving cashers
(c) Ensuring that the person who records cash takes holidays and controls are continued in their
absence.
(d) Custody of receipt books.
(e) Comparisons with cash records and bank paying in slips.
(4) Banking:
(a) Daily banking.
(b) Banking control of payments.
(5) Safeguarding of cash and bank accounts:
(a) Restrictions on opening new bank accounts.
(b) Restrictions on payments out of cash received.
(c) Restrictions on access to cash registers and offices.
(d) Restrictions on issue of bank or bearer cheques.
(e) Custody of outside office hours.
(f) Custody of supply and issue of cheques.
(g) Safeguarding of IOUs, cash in transit.
(h) Safeguards over mechanically signed cheques / cheques carrying printed signature.
(i) Preparation of cheques restricted.
(j) Limitations on cash floats held.
(k) Independent checks on cash floats.
(l) Insurance arrangements.
(m) Surprise cash counts.
(n) Bank reconciliations.
Q-15: What are the tests of controls in respect of cash collection risk? (Page -107 & 108)
Ans: The tests of in respect of controls of cash collection risk are:

(1) Receipts received by post:
(a) Observe procedures for post opening are being followed.
(b) Observe that cheques received by post are immediately crossed in the company’s favor.
(c) For items entered in the rough cash book trace entries to:
Cash book
Paying-in book
Counter foil or carbon copy receipts.
(2) Cash sales, branch takings: For a sample of cash sales summaries/ branch summaries from different
locations:
(a) Verify with till rolls or copy cash sale notes.
(b) Check to paying-in-slip date stamped and initialed by the bank.
(c) Verify that takings are banked intact daily.
(d) Vouch expenditure out of takings.
(3) Collections: For a sample of items from the original collection records:
(a) Trace amount to cash book via collectors cash sheets
(b) Check entries on cash sheet
(c) Verify that goods delivered to travelers/ salesmen have been regularly reconciled with sales and
inventories on hand.
(d) Check numerical sequence of collection records.
(4) Cash receipts cash book: For cash receipts for several days throughout the period.
(a) Check to entries in rough cash book, receipts, branch returns or other records
(b) Check to paying-in slips obtained direct from the bank.
(c) Check additions of paying-in slips


(d) Check additions of cash book.
(e) Check postings to the receivables ledger.
(f) Check posting to the general ledger.
(g) Scrutinize the cash book and investigate items of a special or unusual nature.

Nov-Dece’ 2010
8. As an assurance provider, how will you perform test of controls in relation to Sales? (Q-9)
May-June’ 2011
9. (a) Which three of the following functions should ideally be segregated: (Page-108)
- Authorization of orders
- Invoicing
- Recording cash receipts on receivables ledger
- Reconciliation of receivables ledger with receivables ledger control account
- Credit Control
May-June’ 2012
3. What tests of control might be appropriate for Sales day book and Receivables ledger (Q-12)
4. Sales invoices are source documents that provide a record for each sale. For control purposes, sales invoices
are sequentially pre-numbered.
a. What are the control objectives to mitigate risk of not receiving payments from a sales invoice? (Q-2)
b. Which tests of control do you think appropriate for sales day book (Q-12, partly)
b. Suggest some controls to safeguard cash in hand and at bank? (Q-14, partly)
May-June’ 2015
3. Private limited companies are generally blamed for understating revenue and consequently showing a lower
profit to avoid corporate taxes and on the other hand overstating revenue and profit for seeking external
financing and attracting investors through IPO.
a. Being an Auditor of a Private Limited Company engaged in Fast Moving Consumer Goods (FMCG)
business, how do you satisfy yourself as to the accuracy of Revenue as reported by the management? (Below)
Ans: To satisfy ourselves as to the accuracy of revenue as reported by management the following needs to be
checked primarily:
• Company’s Revenue recognition policy
• Inventory valuation policy
• Credit Note policy
• Discounting policy
• Bad debts policy
• Authority guideline for Credit Note, Discounting & Bad Debt
• Internal control system for invoicing, collection of sales proceeds & recording of cash.
In addition, auditor should also undertake a routing checking of the following:

Receiving sales order and documenting of those.
Raising dispatch note and Order.
Accounts receivable.
Collection process and recording.
Trend analysis.
VAT returns, any report issued by the VAT / Tax authority.


b. Credit Notes become an integral part of Revenue reporting. During your course of Audit what do you check
in terms of Credit Notes? (Below)
Ans: The following should be checked in terms of Credit Note:

Credit Note policy
Authority guideline for issuance of credit Note,
Trend analysis.
Prime reasons of issuance of credit Note, client view on how to minimize the occurrence.
Credit Note issued during the post balance sheet period in relation to earlier year’s sale.
c. During your Audit you observed that the Company had a substantial amount of Cash Sales. What is the
controls client should have in place in terms of recording of Cash Sales and Collections Accounting? (Below)
Ans: The client should have following control in place in terms of recording of cash sales and collection:
¾ Restriction on receipt of cash (by cashiers / sales representative only)
¾ Evidencing of receipt of cash.
¾ Chronologically pre-numbered receipt forms
¾ Cash registers incorporating sealed till rolls.
¾ Emptying of cash offices and registers
¾ Agreement of cash collections with banking amounts and cash and sales records.
¾ Agreement of cash collections with till the rolls.
¾ Investigation of cash shortages and surpluses.
¾ Check the subsequent position of the Cash in transit.
May - June’ 2016
1.c. XYZ Company Ltd (XYZ) is a large manufacturing company selling a unique product. It has an
established customer base, but as its product is unique, it also receives regular inquiries from potential
customers that have not bought products from customers who might not be able to pay. What are the internal
controls XYZ should set to mitigate this risk? (Below)
Ans: In order to mitigate this risk, XYZ should put the following controls into place:
XYZ should have a policy of obtaining credit checks on all new customers from a reputable credit
agency.
XYZ should ensure that it sets limited credit terms for new customers, such as a low credit limit or a
short credit period, although these terms could be reviewed once the relationship is established.
A senior member of staff should sign off on all new customers before orders are accepted. This
member of staff should check that appropriate credit references have been obtained and that the
commercial terms and conditions extended to new customers are reasonable and viable.
New customer accounts should be reviewed and followed up for prompt payment until a relationship
is established.
2.a. What are the risks a company may recognize in your views in the following areas?
i) Dispatch & Invoicing (Q-7)



CHAPTER- 07: PURCHASE SYSTEM
Q-1: What matters relating to risk may be recognized by the company to the time of purchase order?
(Page-115)
Ans: When considering purchase orders, a company might recognize one or both of the following risks:
(a) Unauthorized purchases may be made for personal use.
(b) Goods and services might not be obtained on the most advantageous terms.
Q-2: What control object should be taken in relating to risk may be recognized by the company at the
time of purchase order? (Page-115)
Ans: The following control object should be taken in relating to risk may be recognized by the company at the
time of purchase order:
(1) All orders for goods and services are properly authorized and duly processed.
(2) Orders are only made with authorized suppliers
(3) Orders are made at competitive prices.
Q-3: How controls can be used to mitigate the risk for (internal control/ by company) ordering? (Page-
115)
Ans: The following controls can be used to mitigate the risk for (internal control/ by company) ordering:
(a) Segregation of duties, requisition and ordering
(b) Central policy for choice of suppliers
(c) Evidence required of requirements for purchase before purchase authorized.
(d) Order forms prepared only when a pre-numbered purchase requisition has been received.
(e) Authorization of order forms.
(f) Pre-numbered order forms.
(g) Safeguarding of blank order forms.
(h) Review for outstanding orders.
(i) Monitoring of supplier terms.
Q-4: What are the tests of controls by auditors for ordering? (Page-116)
Ans: The tests of controls for ordering are mentioned hereunder:

(1) Review list of suppliers and cheek a sample to orders made.
(2) Cheek sequence of pre-numbered order forms.
(3) Cheek orders are supported by a purchase requisition.
(4) Review security arrangements over blank orders.
Q-5: What matters relating to risk may be recognized by the company at the time of goods inwards
recording invoices? (Page-117)
Ans: The following matters relating to risk may be recognized by the company at the time of goods inwards
recording invoices:
(a) Goods may be misappropriated for private use
(b) Goods may be accepted that have not been ordered
(c) Invoice may not be recorded resulting in non-payment
(d) The company may not take advantage of the full period of credit extended
(e) The company may not record credit notes resulting in paying invoices unnecessarily
Q-6: What controls can be used to mitigate the risk for inward and recording invoice? (Page-117 & 118)
Ans: The following controls can be used to mitigate the risk for inward and recording invoice:
(a) Examination of goods inwards (Quality, Quantity, Condition).
(b) Recording arrival and acceptance of goods.
(c) Comparison of goods received notes with purchase orders.
Chapter – 7(Purchase system) Page 1


(d) Referencing of supplier invoice, numerical sequence and supplier reference.
(e) Checking of supplier’s invoices (Prices, quantities, accuracy of calculation).
(f) Recording return of goods.
(g) Procedures for obtaining credit notes from suppliers.
(h) Segregation of duties: accounting and checking functions.
(i) Prompt recording of purchases and purchase returns in day books and ledgers.
(j) Regular maintenance of payables ledger.
(k) Comparison of monthly statements of account balance from suppliers with payables ledger balances.
(l) Review of classification of expenditure.
(m) Reconciliation of payables ledger control account to total of payables ledger balances
(n) Create a cut-off accrual of goods received notes.
Q-7: What are the tests of controls for the goods inward and recording invoices? (Page-118 & 119)
Ans: The tests of controls for the goods inward and recording invoices are mentioned below:
(1) Check invoices for goods:
(a) Supported by goods received notes.
(b) Entered in inventory records.
(c) Priced correctly by checking to quotations, price lists to see the price is in order.
(d) Properly referenced with a number and supplier code.
(e) Correctly coded by type of expenditure.
(f) Trace entry in record of goods returned etc and see credit note duly received from the supplier, for
invoices not passed due to defects or discrepancy.
(2) Check invoices of all types:

(a) Check calculations and additions.
(b) Check entries in purchase day book and verify that they are correctly analyzed.
(c) Check posting to payables ledger.
(3) Check credit notes:

(a) Verify the correctness of credit received with correspondence.
(b) Check entries in inventory records.
(c) Check entries in record of return.
(d) Check entries in purchase day book and verify that they are correctly analyzed.
(e) Check posting to payables ledger.
(f) Check for returns that credit notes are duly received from the suppliers.
(4) Test numerical sequence and enquire into missing numbers:

(a) Purchase requisitions.
(b) Purchase orders.
(c) Goods received notes.
(d) Goods returned notes.
(e) Suppliers invoices.
(5) Obtain explanations for items which have been outstanding for a long time:
(a) Unmatched purchase requisitions.
(b) Unmatched purchase orders.
(c) Unmatched goods received notes.
(d) Uncovered invoices.
(6) Verify that invoices and credit notes in the purchase day book:
(a) Initialed for prices, calculations and extensions
(b) Cross-referenced to purchase orders, goods received notes etc
(c) Authorized for payment,
(7) Check additions
(8) Check postings to nominal ledger accounts and control account:
(9) Check postings of entries to payables ledger


Q-8: What matters relating to risk may be recognized by the company at the time of payment? (Page-
120)
Ans: The following matters relating to risk may be recognized by the company at the time of payment:
(a) False invoices are paid in error
(b) Invoices are paid too soon
(c) Payment is not correctly recorded
(d) Credits are not correctly recorded
(e) Payments are not recorded in the right.
Q-9: How controls can be used to mitigate the risk for payment? (Page-121)
Ans: The following controls can be used to mitigate the risk for payment:
A. Cheque and cash payments generally:
(1) The cashier should generally not be concerned with keeping or writing-up books
(2) The person responsible for preparing cheques should not himself be a cheque signatory.
B. Cheque and bank transfer payments.

(1) Appropriate supporting documentation
(2) Approval by appropriate staff.
(3) Instigation of bank transfer by appropriate staff.
C. Authority to sign cheques

(1) Signatories should not also approve cheque requisitions.
(2) Prompt dispatch of signed cheques
(3) Obtaining of bank statements
(4) Payments recorded promptly in cash book and nominal and payables ledgers
D. Cash payments
(1) Authorization of expenditure
(2) Cancellation of vouchers to ensure they cannot be paid twice
(3) Limits on payments
(4) Rules on cash advances to employees
Q-10: What are the tests of controls used for the cash payment system? (Page-122)
Ans: The following the tests of controls used for the cash payment system:
(1) Payments cash book (authorization) : For a sample of payments:
(a) Compare with paid cheques to ensure payee agrees.
(b) Check that bank transfer was authorized and initiated by appropriate person.
(c) Check to suppliers invoice for goods and services.
(d) Check to suppliers statements.
(e) Check to order documentary evidence.
(2) Payments cash book (recording): For a sample of weeks:

(a) Check the sequence of cheque numbers and enquire into missing numbers.
(b) Trace transfers to other bank accounts.
(c) Check additions.
(d) Check postings to the payables ledger.
(e) Check postings to the nominal ledger, including the control accounts.
Q-11: Why in numerical sequence on GRNs checked? (Page-126)

Ans: Sequence provides a control that purchases are completely recorded. Missing documents should be
explained, or cancelled copies available otherwise the implication could be that goods have been received but
not matched with an invoice and the liability in respect of that invoice is being omitted.


Q-12: List five examples of purchase documentation on which numerical sequence should be checked?
(Page-126)
Ans: Five examples of purchase documentation on which numerical sequence should be checked are:
(a) Purchase requisitions
(b) Purchase orders
(c) Goods received notes
(d) Goods returned notes
(e) Suppliers invoices.
Nov-Dece’ 2010
8. As an assurance provider, give five examples of tests to be performed on the cash payment book. (Q-10)
May-June’ 2011
9. (b) List four examples of purchase documentation on which numerical sequence should be checked. (Q-12)
(c) Which two control activities are most likely to reduce the risk of payments being made twice for the same
liability? (Page-108)
Nov-Dece’ 2013
3.d. What controls will be put into place in the purchases system depend on the nature of the company and the
specific risks associated with the way it operates, but there are some general controls which can be used to
mitigate the risks. What are the general controls which can be used to mitigate the risks? (Q-3)
e. A company might recognize some risks when considering goods inward and recording of invoices.
What risks are associated with goods inward and recording of invoices? (Q-5)
5. d. Write corresponding controls to address the risk mentioned in the following table: (Below)
Risks Controls
Employee may order too much or not • All purchase requests must be approved by proper
enough raw materials authority.
• May be used approved “record levels” for ordering.
Employee may try to misappropriate • Procurement department will purchase only

goods approved purchase requisition items.
• Examine the goods inwards as to : quantity, quality
and condition as per condition.
• Ensure recording with GRN and issue goods against
only valid and approved requisition.
Procurement Department may not use • Goods can only be purchased from vendors who
approved vendor (gaining the benefit of have been pre-approved (i.e. enlisted)
negotiated volume discounts).
Payment sent to wrong address, wrong • Financial controller or treasury manager reviews all
payee on cheque or cheque may not be cheques are issued favoring right payee having valid
signed. signature(s) on the cheque and payee address is
correct on envelop.


Nov-Dece’ 2015
2.d. What are the general controls which can be used to mitigate the risks in any system like purchase system
of an organization? Give example (Q-3)
e. A company might recognize some risks when considering goods inward and recording of invoices.
What risks are associated with goods inward and recording of invoices? (Q-5)
May - June’ 2016
Question: 2
a. What are the risks a company may recognize in your views in the following areas?
ii) Payment for Goods (Q-8)
Nov-Dece’ 2018
4. Organizations having strict adherence to its standard policies and procedures under strong surveillance of
internal audit or specific monitoring team are believed to be well controlled and low risk client from the
perspective of the external audits.
(b) Describe an effective design of control mechanism applicable for payment system. (Q-9)



CHAPTER-8: EMPLOYEE COSTS
Q-1: When calculating wages and salaries, what risks might be recognized? (Page-129)
Ans: When calculating wages and salaries, a company might recognize the following risks:
(1) The company may pay employees too much money or too little money.
(2) The company may pay employees who have not been at work.
(3) The company may pay employees who have left.
Q-2: What controls may be put into to mitigate the risk might recognize when calculating wages and
salaries? (Page-129)
Ans: The following controls may be put into place to mitigate the risks when calculating wages and salaries:
(a) Staffing and segregation of duties.
(b) Maintenance of personnel records and regular checking of wages and salaries.
(c) Authorization for:
(1) Engagement and discharge of employees.
(2) Changes in pay rates
(3) Overtime
(4) Non-statutory deductions.
(5) Advances of pay.
(d) Recording of changes in personnel and pay rates.
(e) Recording of hours worked by timesheets.
(f) Review of hours worked.
(g) Recording of advances of pay.
(h) Holiday pay arrangements.
(i) Answering queries.
(j) Review of wages against budget.
Q-3: What test of controls may be put into mitigate the risk, recognized when calculating wages and
salaries? (Page-130)
Ans: The following test of controls may be put into mitigate the risk, recognized when calculating wages and
salaries:
(1) Check that the wages and salary summary is approved for payment
(2) Confirm that procedures are operating for authorizing changes in rates of pay, overtime and holiday
pay.
(3) Obtain evidence that staff only start being paid when they join the company, and are removed from
the payroll when they leave the company.
(4) Check that the engagements of new employees and discharges have been confirmed in writing.
(5) Check calculations of wages and salaries are being checked.
(6) For wages, check calculation of gross pay with:
(a) Authorized rates of pay
(b) Production records, production bonuses have been authorized and properly calculated
(c) Clock cards, time sheets.
(d) Verify that overtime has been authorized.
(7) For salaries, verify that gross salaries and bonuses have been properly authorized.
Q-4: What risk might be recognized when recording wages and salaries? (Page-131)
Ans: When considering recording wages and salaries, the company might recognize the following risks:
(a) The various elements of pay might not be recorded correctly in the payroll
(b) Amounts paid to employees might not be reflected in the cash books
(c) Pay might not be recorded correctly in the nominal ledger.
Chapter – 8(Employee costs) Page 1


Q-5: What controls may be carrying on for recording wages and salaries? (Page-131 & 132)
Ans: The following controls may be carrying on for recording wages and salaries:
(1) Bases for compilation of payroll
(2) Arrangements for the preparation, checking and approval of payroll
(3) Procedures for dealing with non-routine matters.
(4) Maintenance of separate employees previous records
(5) One for one checking of payroll details
(6) Reconciliation of total pay and deductions between one pay day and the next pay day.
(7) Comparison of actual pay totals with budget estimates
(8) Agreement of gross earnings and total tax deducted with taxation returns.
Q-6: List test of controls for recording wages and salaries? (Page-132)
Ans: A key control assurance providers will be concerned with will be the reconciliation of wages and
salaries.
For wages, there should have been reconciliations with:
(a) The previous week’s payroll
(b) Clock cards / time sheets / job cards
(c) Costing analyses, production budgets
The total salaries should be reconciled with the previous week/ month or the standard payroll. Check that:
(1) Additions of payroll
(2) Totals of payroll detail selected to summary of payroll
(3) Additions and cross-casts of summary
(4) Posting of summary to nominal ledger
(5) Net cash column to cash book
Auditor should cheek the calculations of taxation and non-statutory deductions.
(a) Scrutinize the control accounts maintained to see appropriate deductions have been made
(b) Check that the payment of govt. treasury are correct
Q-7: What risk might be recognized when payment of wages and salaries? (Page-133)
Ans: When considering payment of wages and salaries, the company might recognize key risk that the people
who are not employees are paid and those that are employees are not paid.
Q-8: What risk might be recognized when recording wages and salaries? (Page-134)
Ans: The following controls may be put into place to mitigate the risks when payment made of wages and
salaries:
(1) Payment of Cash wages:
¾ Segregation of duties:
• Preparing the payroll net pay summary.
• Filling of pay packets.
• Distribution of wages.
¾ Authorization of wages cheque cashed.
¾ Custody of cash
• When the wages cheque is cashed.
• Security of pay packets
• Security of transit
• Security and prompt banking of unclaimed wages.
¾ Verification of identity.
¾ Recording of distribution.
(2) Payment of Salaries:
¾ Preparation and authorization of cheques and bank transfer lists.
¾ Comparison of cheques and bank transfer list with payroll.
¾ Maintenance and reconciliation of wages and salaries control account.

Q-9: What are the test of control used for payment wages and salaries in cash or bank? (Page-134)
Ans: The following test of control used for payment wages and salaries in cash or bank:
(1) Arrange to attend the pay-out of wages to confirm that the official procedures are being followed
(2) To compare amount received as wages as per wages sheet.
(3) Check unclaimed wages are recorded in unclaimed wages book.
(4) Check that no employee receives more than one times.
(5) Check entries in the unclaimed wages book with the entries on the payroll.
(6) Check that unclaimed wages are banked regularly.
(7) Check that unclaimed wages books show reasons why wages are unclaimed
(8) Check pattern of unclaimed wages in unclaimed wages book, variations may indicate failure to
record.
(9) For salaries, check that comparisons are being made between each month’s payroll net pay summary
and examine paid cheques or a certified copy of the bank list for employees paid by cheque or bank
transfer.
Q-10: What are the most important authorization controls over amounts to be paid to employees?
(Page-138)
Ans: The most important authorization controls over amounts to be paid to employees are:
(1) Engagement and discharge of employees (2) Changes in pay rates
(3) Overtime (4) Non-statutory deductions. (5) Advances of pay.
Q-11: How should assurance providers confirm that wages have been paid at the correct rate to
individual employees? (Page-138)
Ans: Assurance providers should confirm that wages have been paid at the correct rate by checking
calculation of gross pay to:
(a) Authorized rates of pay
(b) Production records
(c) Clock cards, time sheets or other evidence of time worked.

May-June’ 2011
6. (a) List six procedures (test of control) assurance providers should carry out if wages are paid in cash. (Q-9)
(b) How should assurance providers confirm that wages have been paid at the correct rate to individual
employees? (Q-11)
May-June’ 2018
4. (b) What are the objectives of establishing control over recording of wages and salaries and
deductions? (Below)
Ans: Followings are the objectives of control over recording of wages and salaries and deductions:
¾ Gross and net pay and deductions are accurately recorded on the payroll
¾ Wages and salaries paid are recorded correctly in the bank and cash records
¾ Wages and salaries are recorded correctly in the nominal ledger
¾ All deductions have been calculated correctly and are authorized
¾ The correct amounts are paid to NBR.



CHAPTER-9: INTERNAL AUDIT
Q-1: What is internal audit? (Page-141)
Ans: Internal audit is an appraisal or monitoring activity established within an entity as a service to the entity.
Its functions included examining, evaluating, and reporting to management about effectiveness of the
accounting and internal control systems.
Q-2: How the internal audit function can assist the board? (Page-141)
Ans: The internal audit function can assist the board in other ways as well:
(1) By acting as auditors for board, reports not audited by the external auditors.
(2) By assisting in implementation of new standards.
(3) By liaising with external auditors, internal auditors can check that external auditors are reporting back
to the board everything they are required to under auditing standards.
Q-3: What is External audit? And what are the objectives of external audit? (Page-141)
Ans: External audit means an audit carried out by an external auditor as opposed to an internal auditor.
Objectives: The objective of an external audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial recording framework.
Q-4: Distinguish between internal auditor and external auditor? (Page-141 & 142)
Ans: Distinguish between internal auditor and external auditors are mentioned below: (Four R)
Point of view Internal audit External audit

Reason Internal audit is an activity designed to An exercise to enable auditors to express an
add value and improve an opinion on the financial statements
organization’s operations.
Reporting to Internal audit report to the board of The external auditors report to the shareholders
directors, or the audit committee of a company
Relating to An internal audit’s work relates to the External auditor’s work relates to the financial
operations of the organization statements
Relationship Internal auditors are very often External auditors are independent of the
with the employees of the organization company and its management. They are
company appointed by the shareholders.
Q-5: What does internal audit do? / Define the activities of inter audit? (Page-142)
Ans: Internal audit activities usually involve:

(a) Monitoring internal controls
(b) Examining financial and operating information.
(c) Review of the economy, efficiency and effectiveness of operations.
(d) Review of compliance with laws, regulations and other external requirements.
(e) Special investigations, for instance suspected fraud
Q-6: What are roles of the internal audit department in relation to risk management? (Page-143)
Ans: The internal audit department has a two-fold role in relation to risk management.
(1) Monitoring the company’s overall risk management policy to ensure it operates effectively.
(2) Monitoring the strategies implemented to ensure that they continue to operate effectively.
Chapter – 9(Internal Audit) Page 1


Q-7: Identify the role of internal auditor as part of internal control. (Page-143)
Ans: The roles of internal auditor as part of internal control are mentioned below:
(a) Development of internal control systems
(b) Monitoring the overall internal control process
(c) Meet objectives effectively.
(d) Focused on all the operations of the company.
(e) Testing will be far greater than the external auditor.
Q-8: What do you mean operational / management / efficiency audit? (Page-143)
Ans: Operational audit is audits of the operational processes of the organization. They are also known as
management or efficiency audits. Their prime objective is the monitoring of management’s performance.
Q-9: What are the objectives of an operational assignment? (Page-143)
Ans: There are two aspects of an operational assignment:

(1) Ensure policies are adequate
(2) Ensure policies work effectively.
In term of adequacy, the internal auditor will have to review the policies of a particular department by:
(a) Reading them
(b) Discussion with members of the department.
Q-10: What are the other functions of an internal auditor in addition to regular function? (Page-143)
Ans: Internal audit may also carry out other functions for the directors in a company. For instance, they might
undertake special investigations in respect of a suspected fraud, or they might carry traditional financial
audits. Internal auditor will not become involved in the operational activities of the company.

May-June’ 2010
8. What are the key differences between external and internal audit? (Q-4) As objectivity is a key issue for
internal auditors, they are likely to routinely be involved in operational activities, do you agree? Explain (Self-
test-4, Page-147)
May-June’ 2011
8. What does internal audit do? (Q-5) What are the key differences between external and internal audit? (Q-4)
May-June’ 2013
3.(c) List the activities usually undertaken in an internal audit. (Q-5)
Nov - Dec’ 2014

5. Write down short notes on following terminology: a) Operational Audit (Q-8)
May-June’ 2017
2.c What are the usual activities an internal audit function accomplishes? (Q-2) Briefly explain the difference
between internal and external audit. (Q-4)


May-June’ 2018
4. (c) NHN Hotels Ltd. (hereafter referred to as NHN) is listed company which owns a number of hotels in
Bangladesh. Each hotel is a subsidiary company of NHN, for example, NHN Dhaka Ltd is a hotel in
Dhaka.NHN charges each hotel a management charge, which is determined on a fixed calculation depending
on the number of rooms at the hotel. One of the things this management charge covers is the internal audit
department which is managed centrally. The internal audit department is required to carry out critical
operational audits at all hotels. The Chittagong hotel, which comprises 20% of group income, is audited
annually. Other hotels are audited on a rotational basis, with each hotel being audited at least once in three
years. You are required to mention the common audit activities that should be performed by the internal audit
department. (Page-143 & 144) (Below)
Ans: Common audit activities should be performed by the internal audit department as follows
‘An Audit’ comprises a number of elements, all of which have to have been carried out (although not all at the
same time) for the full cyclical audit to have been completed. These are;
¾ Surprise cash counts in key cash transactions areas (reception, bar, restaurant)
¾ Asset inspections, particularly linens and leisure facilities
¾ Inventory count for certain assets, particularly the ladder and bar
¾ Test of controls in key systems; sales, purchases, payroll
¾ Health and safety control systems testing
¾ Review actual results against budget for the year
¾ In addition, if any area shows indication of irregularities, for example, VAT and revenue recognition;
that area should be audited in detail.



CHAPTER-10: DOCUMENTATION
Q-1: What is audit documentation (Working papers)? (Page-151)
Ans: Audit documentation (working papers) is the record of procedures performed, relevant evidence obtain
and conclusions reached.
Q-2: What should provide in Audit documentation or working papers? (Page-151)
Ans: Audit documentation or working paper should provide:

(1) A sufficient and appropriate record of the basis for the assurance provider’s report; and
(2) Evidence that the engagement was performed in accordance with standards and applicable law and
regulatory requirements.
Q-3: Why an assurance providers record their work (documentation)? Or what are the purposes of
documentation? (Page-151)
Ans: An assurance provider’s record documentation due to

(a) Assist the audit team to plan and perform the audit
(b) Assist the team manager to supervise the work.
(c) Enable the audit team to be accountable for its work.
(d) Retain a record of matters of continuing significance for future audits.
(e) Enable an experienced auditor to carry out quality control reviews.
(f) Enable an experienced auditor to conduct external inspections.
(g) To carry out any additional reviews if necessary.
Q-4: “The form and content of working papers are affected by various matters”-Explain / What are the
(matters affecting) the form and content of working papers (Page-152)
Ans: The form and content of working papers are affected by matters such as:
(a) The nature of the audit procedures to be performed.
(b) The identified risks of material misstatements.
(c) The extent of judgment required in performing the work.
(d) The significance of the audit evidence obtained.
(e) The nature and extent of problems
(f) The need of document a conclusion.
(g) The audit methodology and tools used.
Q-5: What working papers are contained in an audit file? (Page-152 & 153)
Ans: An audit file will normally contain the following working papers:
(a) Information obtained in understanding the entity and its environment, including its internal control,
such as the following:
(1) Information concerning legal documents, agreements and minutes.
(2) Extracts from, or copies of, important legal documents, agreements and minutes.
(3) Information concerning the industry, economic and legislative environment.
(4) Extracts from the entity’s internal control manual.
(b) Evidence of the planning process including audit plans
(c) Evidence of the auditor’s consideration of the work of internal audit and conclusions reached.
(d) Analyses of transactions and balances.
(e) Analyses of significant ratios and trends
(f) The identified and assessed risks of material misstatements.
(g) A record of the nature, timing, extent and results of audit procedures.
(h) Evidence that the work performed by assistants was supervised and reviewed.
(i) An indication as to who performed the audit procedures and when they were performed.
(j) Details of audit procedures applied regarding components of financial statements are audited by
another auditor.
Chapter – 10 (Documentation) Page 1


(k) Copies of communications with other auditors, experts and other third parties.
(l) Copies of letters or notes concerning audit matters communicated.
(m) Letters of representation received from the entity.
(n) Conclusions reached by the auditor concerning significant aspects.
(o) Copies of financial statements and auditor’s reports.
(p) Notes of discussions about significant matters with management and others.
Q-6: What matters should show in working papers? (Page-153)
Ans: The following matters should show in working papers:

(a) The name of the client
(a) The name of the preparer
(b) The name of the reviewer
(c) The date of preparation
(d) The date of the review
(e) The date of balance sheet
(f) The work done
(g) The object of the work done
(h) The subject of the working paper
(i) The source of information
(j) The sample size determined
(k) How any sample was selected
(l) Appropriate cross-referencing
(m) Analysis of errors
(n) The key points highlighted
(o) Other significant observations
(p) The results obtained
(q) The conclusions drawn
(r) The file reference of the working paper.
Q-7. What do you mean about automated working papers? (Page-154)
Ans: Automated working paper packages have been developed which can make the documenting of audit
work much easier. Such programs aid preparation of working papers, lead schedules, trail balance and the
financial statements themselves. There are automatically cross referenced, adjusted and balanced by the
computer.
Q-8. What are the advantages of automated working papers? (Page-154)
Ans: The advantages of automated working papers are as follows.

(1) The risk of errors is reduced.
(2) The working papers will be neater and easier to review.
(3) The time saved
(4) Standard forms do not have to be carried to audit locations.
(5) Audit working papers can be emailed or faxed for review.
Q-9. What types of working papers? (Page-154)
Ans: For recurring audits, working papers may be split between permanent and current audit files.
Q-10.Describe / point out the contents of permanent audit files and current audit files? (Page-154 &
155)
Ans: Permanent audit files: It contains any information of continuing importance to the audit. These may
contain:
(a) New client questionnaire.
(b) Other legal documents such as prospectuses, leases & sales agreements.


(c) The memorandum and articles of association.
(d) Board minutes of continuing relevance.
(e) Accounting systems notes, previous years control questionnaires.
(f) Details of history of client business
(g) Previous years signed accounts, analytical procedures and management letters.
(h) Engagement letters.
Current audit files: Contain any information of relevance to the current year’s audit.
(a) Accounts checklist
(b) Audit planning memorandum.
(c) A summary of unadjusted errors.
(d) Review notes.
(e) Report to partner including details of significant events and errors.
(f) Reconciliations of management accounts and financial statements.
(g) Management accounts details
(h) Management letter.
(i) Letter of representation.
(j) Financial statements
(k) Time budgets and summaries.
(l) Notes of board minutes
(m) Communications with third parties such as experts or other auditor.
Q-11. There is any necessity for safe custody and retention of documentation of firms? (Page-155)
Ans: All firms should have a document retention policy and auditing standards require auditors to keep all
audit working papers for a reasonable period of time (no shorter than 5 years) from the end of the
accounting period to which they relate.
Q-12. How many years the books of accounts to be retained as per Companies Act, 1994? (Page-155)
Ans: According to the companies Act 1994, section 181(5) “ The books of accounts of every company
relating to a period of not less than twelve years immediately preceding the current year together with
vouchers relevant to any entry in such books of account shall be preserved in good order”
Q-13. What matters to be in mind in case of ownership and right of access to documentation? (Page-
156)
Ans: The following matters to be in mind in case of ownership and right of access to documentation:
(1) Working papers belong to the assurance providers.
(2) The report, once issued, belongs to the client.
(3) Assurance providers must keep working papers confidently.
(4) They may show working papers to the client at their discretion.
(5) They should obtain client permission before showing working papers to third parties.
Q-14.Classify the following working papers into Current Audit File and Permanent Audit File. (Page-
169)
(a) Engagement letters, (b) New client questionnaires, (c) Audit planning memo,
(d) Financial Statements relating to year under review, (e) Management letter, (f) Accounts
checklist, (g) Accounting system notes. (h) Board minutes of continuing relevance.
Ans:
Current audit file Permanent audit file
(c) Audit planning memo, (a) Engagement letters
(d) Financial Statements relating to year under review (b) New client questionnaires
(e) Management letter (g) Accounting system notes
(f) Accounts checklist (h) Board minutes of continuing relevance



May-June’ 2010
9. Classify the following working papers into Current Audit File and Permanent Audit File: (Q-14)
Nov-Dece’ 2010
6. ISA 230 Audit Documentation establishes standard and provide guidance regarding documentation in the
context of audit of financial statements.
Required: List the purposes of audit working papers. (Q-3 & 4)
Nov-Dece’ 2011
5. Classify the following working papers into Current Audit File and Permanent Audit File: (Q-14)
Nov-Dece’ 2013
1. a) What purpose does audit documentation serve? (Q-2) What are the additional purposes of working
paper? (Q-3)
b) What factors auditor must consider in determining the nature and extent of documentations for particular
audit? (Q-5)
c) What are the contents of a permanent and current audit file? (Q-10)
d) What are the issue that auditor should take into considerations for retention of audit documentations? (Q-
11 &12)
Nov-Dece’ 2015
1. a) Define audit documentation. (Q-1) What purpose does audit documentation serve? (Q-2 & 3)
b) Briefly discuss about the advantages of automated working papers? (Q-8)
c) Explain the contents of a permanent and current audit file? (Q-10)
May-June’ 2017
3.d What do you mean audit documentation? (Q-1) What purpose does audit documentation serve. (Q-2 & 3)
May-June’ 2018
2. (c) How do automated working papers offer additional comfort over manual work papers? (Q-8)
3. (a) Define audit documentation. Who is the owner of audit documentation and who have the right of
access to those documents? (Q-1 & 13)
Nov-Dece’ 2018
7. Auditor forms an opinion based on merits derived from various tests and examinations on the financial
statements prepared by the management. In order to support the opinion, auditor collects/prepares sufficient
appropriate audit evidences. Safe and systematic retention of such evidences to facilitate future references is
critical for the auditor.
(a) What purpose does audit documentation serve? (Q-2 & 3)
(b) What are the key matters that affect the form and content of documentation? (Q-4)


May-June’ 2019
5. What purpose does working paper serve in an assurance engagement? What are the contents of
Permanent Audit File and Current Audit File? (Q-2, 3 & 10)
7. b) Discuss about the provisions as regards ‘Custody of Clients’ Assets’ as per IESBA Codes of
Ethics. (Q-11)



CHAPTER- 11: EVIDENCE AND SAMPLING
Q-01: What things included in the evidence? (Page-165)
Ans: Evidence includes all the information contained within the accounting records underlying the financial
statements, and other information gathered by the assurance providers, such as confirmations from third
parties.
Q-2: Discuss the attributes of evidence as per ISA 500 or what is sufficiency and appropriateness?
(Page-64 & 165)
Ans: ISA 500 states that audit evidence must be sufficient and appropriate. Sufficiency and appropriateness
are interrelated and apply to both tests of controls and substantive procedures.
Sufficiency is the measure of the quantity of audit evidence.

Appropriateness is the measure of the quality or reliability of audit evidence.
Q-3: List the sources of audit evidence? / How can you gather reliable audit evidence? (Page-64 & 165)
Ans: We can gather reliable audit evidence by following ways:

(i) External: Audit evidence from external sources is more reliable than that obtained from the entity’s
records.
(ii) Entity: Evidence obtained from the entity’s records is more reliable when related control systems
operate effectively.
(iii) Auditor: Evidence obtained directly by auditors is more reliable than that obtained indirectly or by
inference.
(iv) Written: Evidence in the form of documents or written representations is more reliable than oral
representations.
(v) Originals: Original documents are more reliable than photocopies or facsimiles.
Q-04: What are the procedures used by the auditors to obtain evidence? (Page-166 & 167)
Ans: Assurance providers obtain evidence by one or more of the following procedures outlined in ISA 500.
1) By inspection of tangible assets: Inspection (Physical examination) of tangible assets that are
recorded in the accounting records confirms existence
2) By inspection of documentation: Inspection of documents involves examining records or
documents, a share certificate.
3) By inquiry: This involves seeking information from client management or staff.
4) By recalculation: Checking mathematical accuracy of client’s records.
5) By re-performance: Independently executing procedures or controls.
6) By observation: This involves watching a procedure being performed.
7) By confirmation: This involves seeking confirmation from a third party,
8) By analytical procedures: Evaluating and comparing financial or non-financial data.
Q-05: What is Computer assisted audit technique (CAAT)? What are the systems are used in
Computer assisted audit techniques (CAAT)? (Page-167)
Ans: Computer-assisted Audit Techniques (CAATs) are computer programs that allow auditors to test
computer files and databases during an audit. CAATs are a growing field within the audit profession. CAATs
are the practice of using computers to automate the audit processes.
There are two types of Computer assisted audit techniques (CAAT) that can be used:
a) Test data
b) Audit software
Chapter – 11 (Evidence and Sampling) Page 1


Q-06: What do you know about test data and audit software under CAAT? (Page-167 & 168)
Ans: Test data: Under the test of control, the assurance provider supervises the process of running data
through the client’s system. The stages in the use of test data are as follows:
1) Note controls in client’s system
2) Run the test data
Ɣ Dummy data
Ɣ Real data
Ɣ Dummy data against a verified copy of the client’s system.
3) Compare result with those expected
4) Conclude on whether controls are operating properly.
Audit software: Audit software makes use of the assurance provider’s own specialized software.
Examples of what audit software can do include:
1) Extract a sample according to specified criteria:
Ɣ Random
Ɣ Over a certain amount
Ɣ Below a certain amount
Ɣ At certain dates.
2) Calculate ratios.
3) Cheek calculations.
4) Prepare reports.
5) Follow items through a system and flag where they are posted.
Q-07: Why an assurance provider need to analytical procedure? (Page-168)
Ans: The ISA 520 states that auditors must decide whether using available analytical procedures as
substantive procedures will be effective and efficient in reducing detection risk for specific financial statement
assertions.
Q-08: What factor should be considered by auditors when using analytical procedure as substantive
procedure? (Page- 168 & 169)
Ans: There are a number of factors that the auditors should consider when using analytical procedures as
substantive procedures are summarized below:
*Objective of analytical procedures
*Suitability of analytical procedures
*Reliability of analytical procedures.
Q-09: What are the suitability factors? (Page-169)
Ans: The suitability factors are mentioned hereunder:

a) Materiality of the items involved and assessment of inherent & control risk.
b) Other audit procedures directed towards the same financial assertions.
Q-10: What are the reliability factors? (Page-169)
Ans: The reliability factors are mentioned hereunder:

a) The degree to which information can be analyzed.
b) The availability of information.
c) The frequency with which a relationship is observed.
d) The relevance of the information available.
e) The source of information available.
f) The comparability of the information available.
g) The reliability of the information available.
h) The knowledge gained during previous audits.


Q-11: What sources of information about client are used at risk assessment stage? (Page-170)
Ans: At risk assessment stage, the followings possible sources of information about the client be used:
1) Interim financial information
2) Bank and cash records
3) Management accounts
4) Non-financial information
5) Vat return / Sales tax returns.
6) Budgets
7) Board minutes
8) Discussions or correspondence with the client at the year end
Q-12: How many categories of substantive procedures? (Page-170)
Ans: Substantive procedures can be said to fall into two categories;

*Test or discover errors (resulting in over or understatement)
* Test or discover omissions (resulting in understatement)
Q-13: What the concept of directional testing derives from? (Page-171)
Ans: The concept of directional testing derives from the principle of double-entry bookkeeping, in that for
every debit has a corresponding credit. Therefore, any misstatement of a debit entry will result in either a
corresponding misstatement of a credit entry or a misstatement in the opposite direction, of another debit
entry.
Q-14: Describe the pattern of overstatement and understatement testing?
Ans: Assurance Manual Certificate level Page No: 170 & 171.
Q-15: What is accounting estimate as per BAS 8 with examples? Give some example of accounting
estimates? Why audit of accounting estimates are important? (Page-172)
Ans: “Accounting estimate” means an approximation of the amount of an item in the absence of a precise
means of measurement.
Or
Accounting estimates involve management’s judgment of expected future benefits and obligations relating to
assets and liabilities and associated expense and income based on information that best reflect the conditions
and circumstances that exist at the reporting date.
Example: Provisions to meet warranty claims, Deprecation, Inventories or Receivables provisions, Accrued
revenue, Deferred tax, Provision for a loss from a law suit & Costs arising from litigation settlement and
judgments.
Important: The auditor often has to audit estimated figures, where the values included in the financial
statements are not the result of transactions with third parties but result from judgments made by management.
Yet these figures can have a very significant effect on reported profit. So it is very important.
Q-16: What are methods used by the auditor in regard to audit at accounting estimates? (ISA 540)
(Page-172)
Ans: The followings methods are used by the auditor in regard to audit at accounting estimates:
1) Test the process that management used to estimate the figure
Ɣ Looking at past experience.
Ɣ Checking the calculation.
2) Use an independent estimate: The auditor can use evidence from the company’s legal advisors.
3) Review subsequent events: A claim against the company which requires a provision, the auditor
can use the evidence for the agreement to establish the correct figure for the financial statements.


4) Test the operating effectiveness of controls: Over how management made the accounting
estimate, with associated substantive procedures.
Q-17: What do you know about audit sampling? (Page-173)
Ans: Audit sampling involves the application of audit procedures too less than 100% of the items within an
account balance or class of transactions such that all sampling units have a chance of selection.
Q-18: What do you know about population? (Page-173)
Ans: Population is the entire set of data from which a sample is selected.
Q-19: What are the testing procedures do not involve sampling (testing 100%)? (Page-173)
Ans: Some testing procedures do not involve sampling, such as

*Testing 100% of items in a population.
*Testing all items with a certain characteristic, as selection is not representative.
If the population is made up of a small number of high value items and there is a high risk of material
misstatement then 100% examination may be appropriate.
Q-20: Is 100% examination likely in the case of test of controls? Give examples when 100%
examination may be appropriate? ? (Page-173)
Ans: The auditor may decide that it will be the most appropriate to examine the entire population of items that
make up a class of transactions or account balance. 100% examination is unlikely in the case of tests of
controls; however, it is more common for tests of details. 100% examination is more appropriate when, for
example:
¾ The population constitutes a small number of large value items.
¾ There is a significant risk and other means do not provide sufficient appropriate audit evidence.
¾ The repetitive nature of a calculation or other process performed automatically by an information
system makes a 100% examination cost effective.
Q-21: What do you know about statistical sampling and non-statistical sampling? (Page-173)
(a) Statistical sampling: Statistical sampling is any approach to sampling that involves random
selection of sample.
(b) Non-statistical sampling: Non-statistical sampling is a subjective approach to inference, in that
mathematical techniques are not used consistently in determining sample size, selecting the
sample, or evaluating sample results.
Q-22: What does ISA require, when auditor designing the sample? (Page-174)
Ans: When designing the sampling, the ISA requires the auditor to consider:
(1) The objective of the audit procedure and attributes of the population.
(2) The nature and characteristics of the evidence.
(3) Selecting the sampling.
Q-23: What do you know about Error, Expected error, Tolerable error, Tolerable misstatement,
Tolerable rate of deviation, Anomalous error, Sampling units (with example), Sampling risk & Non-
sampling risk? (Page-174, 175,176 & 178)
(a) Error: Error means either control deviations, when performing tests of control, or misstatements,
when performing substantive procedures.
(b) Expected error: Expected error is the error that the auditor expects to be present in the
population.


(c) Tolerable error: Tolerable error is the maximum error in the population that the auditor would be
willing to accept.
(d) Tolerable Misstatement: It is a monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the
auditor is not exceeded by the actual misstatement in the population.
(e) Tolerable rate of deviation: It is a rate of deviation from prescribed internal control procedures
set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance
that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the
population.
(f) Anomalous error: Anomalous error means an error that arises from an isolated event that has
been recurred other than on specifically identifiable and is therefore not representative of errors in
the population.
(g) Sampling units: Sampling units are the individual items constituting a population.
Example: (1) Cheques listed on deposit slips
(2) Credit entries on bank statements.
(3) Sales invoices
(4) Receivable balance
(5) A monetary unit.
(h) Sampling risk: Sampling risk arises from the possibility that the auditor’s conclusion based on a
sample of a certain size.
(i) Non-sampling risk: Non-sampling arises from factors that cause the auditor to reach an
erroneous conclusion for any reason not related to the size of the sample.
Q-24: Discuss tolerable error in test of control & in substantive procedures? (Page-176)
Ans: In test of control, the tolerable error is the maximum rate of deviation from a prescribed control
procedure that assurance providers are willing to accept in the population.
For test of details, the auditor makes as assessment of the expected misstatement in the population. If the
expected misstatement is high, 100% examination or use of a large sample size may be appropriate when
performing test of details.
Q-25: What things must be considered by auditors when considering expected error?
Ans: The following things must be considered by auditors when considering expected error:
(a) Errors identified in previous audits.
(b) Changes in the entity’s procedures.
(c) Evidence available from other procedures.
Q-26: What are the selecting methods of sampling? (Page-176 & 177)
Ans: The selecting methods of sampling are mentioned hereunder:

(a) Random selection: Random selection ensures that all items in the population have an equal chance of
selection.
(b) Systematic selection: Systematic selection involves selecting items using a constant interval between
selections, the first interval having a random start.
(c) Haphazard selection: Haphazard selection may be an alternative of random selection provided
assurance providers are satisfied that the sample is representative of the entire population.
(d) Sequence or block selection: Sequence sampling may be used to cheek whether certain items have
particular characteristics.
(e) Monetary Unit Sampling (MUS): This is a selection method that ensures that every CUI in a
population has an equal chance of being selected for testing.


May-June’ 2010
10. What includes audit evidence? (Q-1) Briefly explain the procedures to obtain audit evidence? (Q-4)
Nov-Dece’ 2010
10. What is accounting estimate (Q-15)? What will be auditor’s approach to audit of accounting estimates (Q-
16)?
May-June’ 2012
2. b. Is 100% examination likely in the case of test of controls? Give examples when 100% examination may
be appropriate (Q-20)?
c. There will be an impact on sample size when there is an increase in the auditor’s assessment of the risk of
material misstatement. Explain. (Below)
Ans: The higher the auditor’s assessment of the risk of material misstatement, the larger the sample size needs
to be. The auditor’s assessment of the risk of material misstatement is affected by inherent and control risk.
For example, if the auditor does not perform test of controls, the auditor’s risk assessment con not be reduced
for the effective operation of internal controls with respect to the particular assertion, therefore, in order to
reduce audit risk to an acceptably low level, the auditor needs a low detection risk and will rely more on
substantive procedures. The more audit evidence that is obtained from tests of control details (that is, the
lower the detection risk), the larger the sample size will need to be.
Nov-Dece’ 2012
4. Most IT controlled weaknesses are rooted in poor management rather than the technology itself. The
general controls are those that equally affect the whole system within an installation whereas application
controls must be designed to address the specific issues in each separate application or program.
b. What is CAAT? What are the stages in the use of test data? (Q-5 & 6)
c. What is audit software? Give examples of what audit software can do? (Q-6, Partly)
May-June’ 2014
1. Accounting estimates are of particular concern to the auditor as, by their nature, there may not be any
physical evidence to support them and they are prone to inaccuracy. They are also subjective and therefore
prone to management bias. If the directors wished to manipulate the accounts in any way, accounting
estimates are an easy way for them to do this. The auditor must take care when auditing these estimates, to
ensure that these have not been the cases.
a. What are accounting estimates as per BAS 8? Give 5 (five) examples. (Q-15)
b. What are the three methods for auditors as per ISA 540 to carry out audit of accounting estimates? Give
examples of audit steps for each method. (Q-16)
c. What are the areas that auditor should consider in evaluating the assumptions on which the estimates are
based in the preparation and presentation of financial statements by the management? (Below)
Ans: In evaluating the assumptions on which the estimate is based, the auditor ordinarily considers, among
other things, whether they are:
¾ Reasonable in light of actual results in prior periods;
¾ Consistent with other accounting estimates; and
¾ Consistent with management’s plans which appear appropriate.
The auditor ordinarily pays particular attention to assumptions, which are sensitive to variation, subjective or
susceptible with management’s plans which appear appropriate.

2. a. Define population as regards to Audit Sampling. (Q-18)
Nov-Dece’ 2014
2. With the advancement in the field of technology, many easy to use and more efficient CAATs tools are
available. Accountants of the present business world have found these tools very much convenient to use as
the new upcoming tools come with the guide book.
a. What are the advantages and disadvantages of using CAAT by auditors? (Below)
Ans:Advantages of CAATs are given below:
(1) Independently access the data stored on a computer system without dependence on the client;
(2) Test the reliability of client software;
(3) Increase the accuracy of audit tests; and
(4) Perform audit tests more efficiently.
Disadvantages of CAATs are given below:

(1) CAATs can be expensive and time consuming to set up;
(2) Client permission and co-operation may be difficult to obtain;
(3) Potential incompatibility with the client’s computer system;
(4) Need sufficient IT skill and knowledge;
(5) Data may be corrupted or lost during the application of CAATs.
b. What is Test Data? Explain how Test Data are used for assurance. (Q-6, Partly)
c. What is audit software? Give 5 (five) examples of support that audit software can extend to the auditor? (Q-
6, Partly)
May - June’ 2016
Question: 2
b. (i) BAS 500 states that evidence must be sufficient and appropriate. What do you understands by the term
“sufficient and appropriate”. (Q-2)
b. (ii) Explain the procedures outlined in the ISA 500 to obtain evidence. (Q-4)
c) ISA 530 Audit sampling provides guidance on methods for selecting a sample of items for testing
Describe in brief FIVE methods of selecting a sample. (Q-26)
Question: 3
Financial statement can be said as the collection of the collection of many assertions of management. That is
way, the auditor attempts to collect evidence as to the correctness of the assertions. The ISA require that the
audit procedures.
c. List out and describe the procedures that an auditor might use to obtain audit evidence. (Q-4)
Nov-Dece’ 2016
3. a. ISA 530 “Audit Sampling” states that ‘when designing audit procedures , the auditor should determine
appropriate means for selecting items for testing so as to gather sufficient appropriate audit evidence to meet
the objectives of the audit procedures’.
In this context what do you understand by “Audit Sampling”? (Q-17) Some testing procedures do not involve
sampling. Explain. (Q-19)
May-June’ 2017
3.a What are the procedure out lined in ISA 500 to obtain evidence? Explain. (Q-2)
Nov-Dece’ 2017
2.c) Define CAAT. What are the main types of CAAT / tools which are being used while conducting an audit?
(Q-5)

May-June’ 2018
b) Write short notes on the following: (Q-26)
i) Systematic selection.
ii) Sequence or block selection.
iii) Monetary Unit sampling.
3. (b) Critically assess the procedures of obtaining evidence. How are these methods used by the auditors to
obtain evidence/s? (Q-4)
Nov-Dec’ 2018
8. (b) Define following terminologies commonly used in audit engagement: (Q-23)
1. Misstatement.
2. Error.
3. Tolerable misstatement.
4. Tolerable rate of deviation.



CHAPTER-12: WRITTEN REPRESENTATIONS
Q-01: What is management? (Page-189)
Ans: Management is the person(s) with executive responsibility for the conduct of the entity’s operations..
Q-02: What are written representations? (Page-189)
Ans: ISA 580 Written Representations deals with the auditor’s responsibility to obtain written representation
from the management and, where appropriate, those charged with governance in the audit of financial
statements.
Or
The written representation is a letter which is provided by management to auditors for the acceptance of
responsibility for the preparation and fair presentation of financial statements and implements of its internal
control systems.
Q-03: What are the elements / purpose / general matters of written representations that ISA 580
requires auditors to confirm by management? (Page-189)
Ans: The elements / purpose / general matters of written representations that ISA 580 requires auditors to
confirm by management are mentioned hereunder:
(i) Fulfilled its responsibility for the preparation and fair presentation of the financial statements in
accordance with the applicable financial reporting framework.
(ii) Provided the auditor with all relevant information and access as agreed in the terms of audit
engagement.
(iii) Recorded and reflected all transactions in the financial statements.
Q-04: When written representation not is used as audit evidence? (Page-190)
Ans: The auditors may wish to rely on written representations as audit evidence relating to responsibility &
fair presentation for the financial statements. But in case of material matters written representations letter
cannot be used instead of other better (sufficient, appropriate) audit evidence which the auditors expect to
exist.
Q-05: When written representations are required and used as only audit evidence?
Ans: Written representations are required and used as audit evidence when,
(a) the facts are a matter of management intention.
(b) the matter is judgmental or an opinion, for example: trading position, particular customer etc.
Q-06: When the auditors receive the representation letter, what matters should be considered?
Ans: When the auditors receive representations they should:

(i) Seek corroborative audit evidence from sources inside or outside the entity.
(ii) Evaluate whether the representations made by management appear reasonable which are
consistent with other audit evidence.
(iii) Consider whether the individuals making the representations can be expected to be well-informed
on particular matters.
Q-07: When the representation received does not agree with other audit evidence obtained in that case
what should be done by the auditors?
Ans: When the representations received do not agree with other audit evidence obtained, in that case the
auditors should:
(a) Investigate the circumstances of the disagreement by making further inquiries.
(b) Carry out alternative audit procedures to try & confirm the real position.
(c) Consider whether the disagreement casts doubt on other representations made by management.
Chapter – 12 (Management representations) Page 1


Q-08: What matters to be included in the other written representation? (Page-190)
Ans: Other written representations may include the following matters:

• Whether the selections and application of accounting policies are appropriate.
• Whether matters such as the following, where relevant under the applicable financial reporting
framework, have recognized, measured, presented or disclosed in accordance with that framework
¾ Plans or intentions that may affect the carrying value or classification of assets or liabilities
¾ Liabilities, both actual and contingent
¾ Title of assets, the liens of assets, and assets pledged as collateral
¾ Aspects of laws, regulations and contractual agreements that may affect the financial
statements, including non-compliance
• Whether all deficiencies in internal control of which management is aware have been communicated
to auditors
• Specific written representations required by other ISAs
• Support for management’s judgement or intent in relation to specific assertion
Q-09: Keira is working on the audit of Alpha Ltd. In the prior year, there had been a large amount of obsolete
inventory at the year-end due to a decision by the management to amend the design of their major product to
improve safety aspect. Keira wants to ensure that management has no intention of making any similar
amendment to their products this year. (i) What type of audit evidence peter should collect to ensure the
management’s intention and why? (Page-190, Worked example) (Below)
Ans: Here the auditor wants to know the future intention of the management. Only through letter of
representation the management can express their intention. There is no other source of evidence to know the
management intention. So, the auditor should obtain written representation mentioning that the management
has no intention of making any amendments to the products that would impact on existing inventory.
Q-10: Write a draft written representation as per ISA 580? (Page-191 & 192)
Ans: See Assurance Manual Certificate level Page-191 & 192
May-June’ 2010
When Management Representation is required? (Q-5) What do auditors do when receive such representation
(Q-6) and in occasions when such evidence does not agree with other evidences? (Q-7)
May-June’ 2011
5. What are management representations? (Q-2)
How does a management representation work as audit evidence? (Below)
Ans: Auditor believes that the effect of the uncorrected misstatements aggregated by the auditors during the
audit is immaterial. In addition to representations relating to responsibility for the Financial Statement, the
auditor’s may wish to rely on management representation as audit evidence. When management
representations are required? (Q-5)
May-June’ 2013
5. The auditor should obtain written representations from management on matters material to the financial
statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist.


a. What does a Letter of Representation provide as audit evidence? (Below)
Ans: Auditor believes that the effect of the uncorrected misstatements aggregated by the auditors
during the audit is immaterial. In addition to representations relating to responsibility for the
Financial Statement, the auditor’s may wish to rely on management representation as audit evidence.
b. What actions should the auditor take when no other evidence is available and internal confirmations form
significant basis of the opinion? (Page-190) (Below)
Ans: ISA 580 state that when no other evidence is available and internal confirmations form significant basis
of the opinion, Management representations cannot be used as audit evidence instead of other (better)
evidence which the auditor expect to exist.
c. What actions should the auditor take when management refuses to provide internal confirmations
(representations)? (Below)
Ans: ISA 580 states that when management refuses to provide necessary representations (internal
confirmations), the auditor should qualify or disclaims his or her opinion.
d. What should auditors do when they receive management representations? (Q-6)
May-June’ 2014
2. b. Peter is working on the audit of Alpha Ltd. In the prior year, there had been a large amount of obsolete
improve safety aspect. Peter wants to ensure that management has no intention of making any similar
amendment to their products this year.
(i) What type of audit evidence peter should collect to ensure the management’s intention and why? (Page-
190, Worked example) (Q-09)
Nov-Dece’ 2016
3. b. What are the general matters that ISA 580 requires auditors to confirm in writing? (Q-3)
What are the auditors’ duties if management does not provide one or more of the requested written
representations? (Below)
Ans: ISA 580 states that when management refuses to provide necessary representations (internal
confirmations), the auditor should qualify or disclaims his or her opinion.
Nov-Dece’ 2017
The auditor should obtain written representations from management on matters relating to the financial
statements when other appropriate audit evidences collected may not be felt to be sufficient,
a. How does Letter of Representation support as audit evidence? (Q-5)
b. What actions should the auditor take when no other evidence is available and only internal confirmations
form significant basis for opinion? (May- June 13)
c. What actions should the auditor take when management is reluctant to provide representations/internal
confirmations? (May- June 13)
d. What should the auditors do when they receive management representations? (Q-6)



CHAPTER-13: SUBSTANTIVE PROCEDURES- KEY FINANCIAL STATEMENT FIGURES
Q-01: What are the key areas for testing tangible non-current assets? (Page-199)
Ans: Key areas when testing tangible non-current assets are:

(a) Confirmation of ownership (rights and obligations)
(b) Inspection of non-current assets (existence and valuation)
(c) Valuation, preferably by third parties (valuation)
(d) Adequacy of depreciation rates (valuation)
Q-02: What are the keys areas for testing intangible non-current assets? (Page-199)
Ans: The keys areas for testing intangible non-current assets are:
(i) Confirmation that ‘assets’ exist
(ii) Confirmation of appropriate valuation.
Q-03: What are the key areas for testing investments? (Page-199)
Ans: The keys areas for testing investments are:

(i) Confirmation of existence.
(ii) Confirmation of ownership.
Q-04: What are the reasons of tangible non-current assets in the financial statements being misstated?
(Page-199)
Ans: The major risks of the tangible non-current asset balances in the financial statements being misstated are
due to:
(a) The company not actually owning the assets.
(b) The assets not actually existing or sold by the company.
(c) Omission of assets owned by the company.
(d) The asset being overvalued or undervalued.
(e) The assets being incorrectly presented in the financial statements.
Q-05: What are the objectives of audit in respect of non-current assets? (Page-199)
Ans: The objective of audit tests in respect of non-current assets is to prove the assertions about the assets are
correct.
Q-06: What are the sources of information for testing tangible non-current assets? (Page-199)
Ans: The sources of information for testing tangible non-current assets are:
(i) The non-current asset registers.
(ii) Purchase invoices for assets purchased within the year.
(iii) Leases or hire purchase documentation.
(iv) Registration documents such as title deeds for property.
(v) Sales invoices for assets sold within the year.
(vi) Valuations carried out employees or third party values.
(vii) Physical inspection of the assets by the auditor.
(viii) Deprecation records or calculations.
Q-07: Give few examples of intangible non-current assets? (Page-202)
Ans: Few examples of intangible non-current assets are:

(i) Licenses (ii) Development Cost (iii) Purchased brands (iv) Goodwill (v) Patent (vi) Trade mark
(vii) Preliminary expenses (viii) Registration documents such as title deeds for property.
Chapter – 13 (Substantive procedures – Key financial statement figures) Page 1


Q-08: What are the reasons of intangible non-current assets in financial statement being misstated?
(Page-202)
Ans: The major risks of misstatement of the intangible non-current asset balances in the financial statements
are due to:
1) Expenses being capitalized as non-current assets inappropriately.
2) Intangible assets being carried at the wrong cost or valuation.
3) Charging inappropriate amortization.
4) Impairment reviews not being carried out appropriately.
Q-09: What are the sources of information for testing intangible non-current assets? (Page-202)
Ans: The sources of information for testing intangible non-current assets are:
(a) Accounting standards/auditor’s knowledge of accounting standards for what constitutes an intangible
asset.
(b) Purchase invoices or documentation.
(c) Client calculations and schedules.
(d) Specialist valuations.
(e) Auditor understanding of the entry.
Q-10: What are the key areas for testing inventory? (Page-202)
Ans: The keys areas for testing inventory are:

(i) Confirmation of existence.
(ii) Confirmation of ownership.
Q-11: What are the reasons of inventory in the financial statement being misstated? (Page-202)
Ans: The major risks of misstatement of the inventory balance in the financial statements are due to:
(i) Inventory that does not exist being included in the financial statement.
(ii) All inventories that exists not being included in the financial statement.
(iii) Inventory being included in the financial statements at full value when it is obsolete or damaged.
(iv) Inventory being included in the financial statements at wrong value.
(v) Inventory that actually belongs to third parties being included in the financial statements.
(vi) Inventory which has been actually sold is included in the financial statements.
Q-12: What are the sources of information for testing inventory? (Page-203)
Ans: The sources of information for testing inventory are:

a) The company’s controls over inventory counting.
b) The auditor’s attendance at the annual inventory count.
c) Confirmations with third parties holding inventory.
d) Purchase invoices for inventory.
e) Work-in-progress records for inventory.
f) Post-year-end sales invoices for inventory.
g) Post-year- end price lists of inventory.
h) Post-year-end sales orders.
Q-13: What sorts of controls are looked for by auditors in terms of inventory counts? (Page-203)
Ans: In terms of inventory counts, the assurance providers will be looking for the following sorts of controls:
1) Organization of count:
a) Supervision of senior staff.
b) Tidying and marking inventory to help counting.
c) Identification of damaged, obsolete, slow-moving and returnable inventory.


2) Counting:
a) Systematic counting to ensure all inventories is counted.
b) One team counting, other team checking.
3) Recording:
a) Serial numbering of all inventory sheets.
b) Inventory sheets being completed in ink and singed.
c) Information to be recorded on the count records.
d) Recording of quantity, condition and stage of production of work-in-progress.
e) Recording of last numbers of goods inwards & outwards.
f) Reconciliation with inventory records and investigation and made correction of any
differences.
Q-14: What does assurance provider cheek if perpetual inventory counting is used? (Page-204)
Ans: If perpetual inventory counting is used, assurance providers will cheek that management:
• Ensures that all inventory lines are counted at least once a year
• Maintains adequate inventory records that are kept up-to-date.
• Has a satisfactory procedure for inventory counting and test-counting.
• Investigates and corrects all material differences.
Q-15: What will be audit plan for perpetual inventory count? (Page-204)
Ans: Audit plan for perpetual inventory count will be:

(i) Attend one of the inventory counts (past experience).
(ii) Follow up the inventory counts attended to compare quantities counted by the assurance providers
with the inventory records.
(iii) Review the year’s counts to confirm the extent of counting the overall accuracy of records.
(iv) Assuming a full count is not necessary at the year end, compare the listing of inventory with the
detailed inventory records and carry out other procedures.
Q-16: When net realizable value is likely to be less than cost? (Page-204)
Ans: Net realizable value is likely to be less than cost when there has been:
(a) An increase in costs or a fall in selling price.
(b) Physical deterioration.
(c) Obsolescence of products.
(d) A marketing decision to manufacture and sell products at a loss
(e) Errors in production or purchasing
Q-17: What are the key areas for testing receivable? (Page-206)
Ans: The keys areas for testing receivable are:

a) Confirming debt owed by customers with customers (existence, rights and obligations, valuation)
b) Confirming debt is still likely to be collected (Valuation)
Q-18: What are the reasons of receivables in the financial statements being misstated? (Page-206)
Ans: The major risks of misstatement of the receivables balance in the financial statements are due to:
(1) Debts beings uncollectible.
(2) Debts being contested by customers.
Q-19: What are the sources of information for testing receivables? (Page-206 & 207)
Ans: The sources of information for testing tangible receivable are:

(a) Receivable control ledger.
(b) Party ledger


(c) Sales day book
(d) Sales return day book
(e) Goods dispatch notes
(f) Receivable ledger information
(g) Confirmations from customers
(h) Cash received after the year end.
Q-20: What are the methods of confirmation from customers? (Page-207)
Ans: There are two methods of confirmation from customers:
• Positive method: Under the positive method the customer is requested to give the balance or to
confirm the accuracy.
• Negative method: Under the negative method the customer is requested to reply only if the amount
stated is disputed.
Q-21: When negative method should only be used? (Page-207)
Ans: The negative method should only be used when:

a) Assessed risk of material misstatement is low
b) A large number of small balances are involved.
c) A substantial number of errors are not expected.
d) The auditor has no reason to believe that customers will disregard the request.
Q-22: What are the problems with negative method? (Page-207)
Ans: The problems with negative method are:

a) The negative method provides less reliable audit evidence than the positive method.
b) Lack of response, it could mean that the customer does not dispute the balance, or
c) It could mean that the customer did not receive the confirmation request, or ignored it.
Q-23: Give an example of positive request? (Page-208)
Ans: See the assurance manual, certificate level, page no. 208
Q-24: What are the Classes of accounts should receive special attention in respect of receivable? (Page-
208)
Ans: The following classes of accounts should receive special attention:

1) Old unpaid accounts
2) Accounts written off during the period under review.
3) Accounts with credit balances.
4) Accounts settled by round sum payments.
Q-25: What type of receivable in relation to ISA 505 the auditor should carry out further audit work?
(Page-208)
Ans: In relation to ISA 505, the auditor should carry out further audit work to those receivable who:
1) Disagree with the balance stated (positive and negative confirmation)
2) Do not respond (positive confirmation only)
Q-26: What are the reasons for disagreements with third parties confirmation? (Page-209)
Ans: The reasons for disagreements with third parties confirmation are mentioned hereunder:
(a) There is a dispute between the client and the customer.
(b) Cut-off problems exist.


(c) The customer may have sent the monies before the year-end, but the monies were recorded by the
client after the year-end.
(d) Monies received may have been posted to the wrong account.
(e) Customers who are also suppliers may net off balances owed and owing.
(f) Teeming and lading.
Q-27: What are the alternative procedures to get confirmation from individual customers if impossible
to get confirmation? (Page-209)
Ans: The alternative procedures to get confirmation from individual customers, if impossible to get
confirmation, are given bellow:
(a) Check receipt of cash after date.
(b) Verify valid purchase orders.
(c) Examine the account to see if the balance outstanding represents specific invoices and confirm their
validity to dispatch notes.
(d) Obtain explanations for invoices remaining unpaid.
(e) Check if the balance on the account is growing.
(f) Test company’s control over the issue of credit notes and the write-off of bad debts.
Q-28: What are the key areas when testing balance sheet bank figure? (Page212)
Ans: The key areas when testing balance sheet bank figure are:
1) Confirming bank balances directly with the bank (right and obligation / existence)
2) Confirming reconciling differences between bank balance and cash book balance being misstated
(valuation)
3) Confirming any material cash balances held at the client are correctly stated (valuation)
Q-29: What are the reasons of cash and bank balances in financial statement being misstated? (Page-
212)
Ans: The major risks of misstatement of the bank and cash balance in the financial statements are due to:
(i) All bank balances owned by the client not being disclosed.
(j) Reconciliation differences between bank balance and cash book balance being misstated.
(k) Material cash floats being omitted or misstated.
Q-30: What are the possible sources of information in respect of bank balances? (Page-212)
Ans: The sources of information in respect of bank balances are:

a) Cash book
b) Confirmation from the bank
c) Bank statements
d) Bank reconciliation carried out by the client.
Q-31: How can you confirm that there is no window dressing? (Page-213)
Ans: We can confirm that there is no window dressing by checking cut-off carefully.
Q-32: How does through window dressing, overstate liquidity of the company? (Page-213)
Ans: Window dressing overstates liquidity of the company by:

1) Keeping the cash book open to take credit for remittances actually received after the year end.
2) Recording cheques paid in the period under review which are not actually dispatched until after the
year end.
Q-33: What things included in cash balance at the time of cash-counting? (Page-213)
Ans: The things included in cash balance at the time of cash-counting:


a) Unbanked cheques receipts.
b) IOUs
c) Credit card slips
d) Notes and coins
Q-34: What planning decisions will need to be recorded on the current audit file for cash? (Page-213)
Ans: The following planning decisions will need to be recorded on the current audit file for cash:
a) The price time of the count(s) and location(s)
b) The name of the audit staff conducting the counts.
c) The names of the client staff intending to be present at each location.
Q-35: What should the auditor do where a location is not visited for cash counting?(Page-213)
Ans: Where a location is not visited for cash counting, it may be expedient a letter from the client confirming
the balance.
Q-36: What matters should apply to cash count? (Page-213)
Ans:The following matters should apply to cash count:

a) All cash / petty books should be written up to date in link at the time of the count.
b) All balances must be counted at the same times.
c) At no time should the assurance providers be left alone with the cash and negotiable securities.
d) All cash counted must be recorded on working papers subsequently filed on the current audit file.
Q-37: What are the key areas when testing payable? (Page-215)
Ans: The key areas when testing payable:

1) Ensuring that all liabilities are included (completeness)
2) Confirming that all liabilities are bona fide owed by the company (rights and obligations)
Q-38: What are the major risks of misstatement of payable in the financial statements? (Page-215)
Ans: The major risks of misstatements of payables in the financial statements are due to:
1) The entity understating its liabilities in the financial statements.
2) Cut-off between goods inward and liability recording being incorrect.
3) Non-existent liabilities being declared.
Q-39: What are the possible sources of information in respect of payables? (Page-215)
Ans: The sources of information for testing tangible payable are:

(a) Purchase invoice
(b) Purchase daybook
(c) Purchase return book
(d) Payable Control ledger.
(e) Party ledger.
(f) Party Nominal ledger
(g) Confirmations from suppliers
(h) GRN
Q-40: When will positive replies be required for payable balances? (Page-215)
Ans: Positive replies will be required for payable balances where:

(a) Supplier’s statements are unavailable or incomplete.
(b) Weaknesses in internal control
(c) Client is deliberately trying to understate payables.
(d) The accounts appear to be irregular.


Q-41: What are the major risks of misstatement of long term liabilities in the financial statements?
(Page-217)
Ans: The major risks of the long term liabilities in the financial statements being misstated are due to:
• All long-term liabilities have been not disclosed.
• That interest payable has not been calculated correctly and included in the correct accounting period
• That disclosure is incorrect
Q-42: What are the possible sources of information in respect of long term liabilities? (Page-217)
Ans: The sources of information in respect of long term liabilities are:

(a) Schedule of loan
(b) Statutory books, such as register of debentures
(c) Loan agreements
(d) Bank letter and direct confirmations from other lenders
(e) Cash book
(f) Board minutes
(g) Client schedule and calculations
(h) Accounting policies in the financial statements.
Q-43: Describe the audit plan in respect of long term liabilities? (Page-217)
Ans: The audit plans in respect of long term liabilities are focus below:
a) Authorization for the loan and should be checked to the minutes of a board or other relevant meeting.
b) Obtain / prepare schedule of loans outstanding balance showing (for each loan) : name of lender, date
of loan, maturity date, interest date, interest rate, balance at the end of the period and security.
c) Obtain direct confirmation from lenders.
d) Compare balances to the nominal ledger.
e) Compare opening balance with previous year.
f) Verify the borrowing limits.
g) Verify interest calculation & Charged during the year.
h) Analytical procedures should be checked.
i) Bank reconciliation should be checked.
j) Confirm repayments are in accordance with loan agreement.
k) Examine signed Board minutes relating to new customer.
l) Test the clerical accuracy of the analysis.
m) Trace addition and repayments to entries in the cash book.
Q-44: What is the key area when testing income statement items? (Page-218)
Ans: A key area when testing income statement items is completeness.

May-June’ 2010
12. What could be possible reasons for disagreements of Accounts Receivable balances between the client and
customer? (Q-26) Balance confirmation from individual customers is the ideal substantive procedure, what
are the alternative procedures to verify existence / rights of Accounts Receivable? (Q-27)
13. Complete the table, showing which tests on tangible non-current assets are designed to provide evidence
about which financial statement assertion: (Page-245) Self-test - 01
Completeness Existence Valuation Rights and obligations


(a) Inspect assets (b) Verify the valuation certificate (c) Refer to the title deeds (d) Compare assets in ledger to
non-current asset register (e) Review depreciation rates (f) Verify material on self-constructed assets to
invoices (g) Examine invoices after the year end (h) Review repairs in nominal ledger.
Nov-Dec’ 2010
7. A Ltd has a number of long and short terms payables, accruals and provisions in its Balance Sheet.
Required: Describe the audit procedures you would apply to the following item including those relating to
disclosures.
A 10-years bank loan with a variables interest rate and an overdraft (a bank statement with a debit balance on
the bank statement) both from the same bank. (Q-43)
9. What does assurance provider check if perpetual inventory counting is used? (Q-14) What will be the Audit
plan for perpetual inventory count? (Q-15) In what circumstances is net realizable value likely to be less than
cost? (Q-16)
May-June’ 2011
7. Describe the audit procedures you should apply to the following items in the balance sheet of a limited
company:
Stock of finished goods (Below), Accounts receivables (Q-19), Bank Balances (Q-30), Fixed deposits
(Below)
Stock of finished goods:

(1) Obtain the statement of stock of finished good
(2) Compare the quantities with stock records and bin cards.
(3) Check the reconciliation between production, sales / issues and stocks
(4) Check the basis of valuation of stocks
(5) Check the valuation of stocks with company’s accounting policies.
Fixed deposits:
(1) Obtain a statement of fixed deposits maintained with banks including location of the branch, account
number and closing balances
(2) Check physically the fixed deposit receipts
(3) Check the calculation of interest on fixed deposits
(4) Request for direct confirmation of balances
(5) Prepare a comparative statement balances reflected in the cash book and the balances confirmed by
the bank and differences noted.
Nov-Dec’ 2011
8. Complete the table, showing which tests on tangible non-current assets are designed to provide evidence
about which financial statement assertion: (Page-220) Self-test– 01
Completeness Existence Valuation Rights and obligations

(a) Inspect assets (b) Verify the valuation certificate (c) Refer to the title deeds (d) Compare assets in ledger to
non-current asset register (e) Review depreciation rates (f) Verify material on self-constructed assets to
invoices (g) Examine invoices after the year end (h) Review repairs in nominal ledger.
May-June’ 2013
4. Inventory is often the largest item in the current assets category, and must be accurately counted and valued
at the end of each accounting period to determine a company’s profit or loss. Entities whose inventory items
have a large unit cost, generally keep a day to day record of changes in inventory (perpetual inventory
method) to ensure accurate and on-going control. Entities with inventory items of small unit cost generally
update their inventory records at the end of an accounting period or when financial statements are prepared
(periodic inventory method). The value of an inventory depends on the valuation method such as First-In,
First-Out (FIFO) or Last-In, First-Out (LIFO) method.


a. What are the major risks of misstatement of the inventory value in the financial statements? (Q-11)
b. What are the principal reasons for auditors’ attendance at annual physical inventory (stocktaking)? (Below)
Ans: The principal reasons for auditors’ attendance at annual physical inventory (stocktaking) to obtain
evidence about the existence of the stock. Attendance also provides evidence in relation to:
i) Completeness and valuation of stocks.
ii) Cut-off for recording stock.
iii) Design and operation of entity’s internal control relating to stocks.
c. Which of the following analytical procedures is most applicable to inventory; and Why? (Below)
i) Comparison of sales of current and prior years? Or
ii) Comparison of gross profit ratios of current and prior years?
Ans: Analytical procedure for comparison of gross profit ratio of current and prior years is most applicable to
inventory because the amount shown for inventory affects cost of goods sale and gross profit ratio. If
significant fluctuations are incurred in this ratio a detailed investigation to be done by the auditor’s in
connection with the audit of inventory.
d. Why do auditors normally record result of their test counts to compare with the final inventory listing
during an inventory observation? (Below)
Ans: The auditor normally recorded result of their test counts to compare with the final inventory listing
during an inventory observation to provide that client’s counts (inventory balance) were not changed between
the time they were made and time the final inventory listing was prepared.
May-June’ 2014
2. b. Peter is working on the audit of Alpha Ltd. In the prior year, there had been a large amount of obsolete
improve safety aspect. Peter wants to ensure that management has no intention of making any similar
amendment to their products this year.
(ii) As a auditor of ABC ltd, what are the key issues / areas to be considered during the verification of
inventory? (Q-11)
Nov-Dec’ 2014
1. ISA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is
dependent on the individual circumstances under which it is obtained. As per ISA 505, depending on the
circumstances of the audit, audit evidence in the form of external confirmation received directly by the auditor
from parties is considered to be more reliable than evidence generated internally by the entity.
b. What is the objective of external confirmation? (Below) What do you understand by the term
external confirmation? (Below) Describe negative confirmation and positive confirmation. (Q-20)
Does verbal response constitute an external confirmation? Justify. (Below)
Ans: External confirmation: External confirmation means audit evidence obtained by a direct written
response to the auditor from a third party in paper form or by electronic or other medium.
Objective of external confirmation: The objective of external confirmation is to design and perform to
obtain relevant and reliable audit evidence. As per the International Standard on Auditing (ISA) the auditor’s
use the external confirmation as audit evidence.
Oral response: A verbal response does not constitute an external confirmation because it is not a direct
written response.


c. Your firm is the auditor of ABC Enterprise, which showed 60% increase in current year’s sales compared
with the previous year. When enquired, you found that the company has recently introduced credit sales,
which instigated the sharp rise in sales. When you further reviewed sales documents you found that credit
sales are concentrated to a small number of corporate buyers. To confirm credit sales directly from buyers you
arranged to send external confirmation requests as per ISA 505 but management refused to cooperate.
Ques: What will be your alternative audit procedures in the above circumstances? (Q-27)
May - June’ 2016

Question: 3
Financial statement can be said as the collection of the collection of many assertions of management. That is
way, the auditor attempts to collect evidence as to the correctness of the assertions. The ISA require that the
audit procedures.
b. Suppose, the statement of financial position of an entity show inventories with carrying amount of Taka 400
million. Mention the relevant assertions that management made for the inventories. (Below)
Ans: The assertions made by management about the inventories included in the Balance sheet are as follows:
The inventories recognized in the balance sheet exist at the period end;
The entity owns or controls those inventories;
All inventories owned and controlled by the entity are included within the carrying amount of Taka
400 million.
The inventories are valued accurately in accordance with BAS 2 Inventories.
d. Describe four procedures that the auditors of a limited company should carry out to verify the provision for
a pending legal claim against it? (Below)
Ans: The assertions ‘occurrence’ states that the transactions and events that have been recorded have occurred
and pertain to the entity. Conversely, the assertion ‘completeness’ states that all transactions that should have
been recorded. The purpose of occurrence test is to identify whether the financial statements are overstated
and the purpose of completeness test is to identify whether the financial statements are understated.
May - June’ 2018

(c) Hassan is working on the audit of Hussain Ltd, a large supermarket chain. He has been allocated the audit
of non-current assets. One aspect of this audit is the fact that the company has built four new superstores
during the year, which have been capitalized into non-current assets. The key objectives he is working on are
that all the relevant costs have been capitalized (completeness) and that the self-built stores are valued
correctly at cost (valuation). How will Hassan confirm these two assertions? (Below)
Answer:
Completeness:
Hassan will:
¾ Obtain architect’s certificates for the stores, certifying that the work is complete.
¾ Obtain a schedule of all the costs capitalized into the stores; this is likely to have been
verified by the contractor, giving comfort that the costs are complete.


Valuation:
Hassan will:
¾ Vouch a sample of costs to appropriate sources of evidence, for example, labor costs to
payroll records of contractor bills, materials costs to purchase invoices or contractor bills,
finance costs to statements from lenders (for example, bank statements)
¾ In respect of finance costs, Hassan will review bank statements to ensure that all relevant
finance costs have been included.
May - June’ 2019
9. a) While checking cash and bank balances, care must be taken to ensure that there is no window
dressing, by checking cut-off carefully.
How companies may attempt to overstate the liquidity position and what should the auditors do in
this regard? (Q-32)
b) Poly is carrying out a non-current asset assurance engagement at Mahmud Company Limited
(MCL). MCL owns the property from which it operates and has a number of non-current assets
comprising Plant and Machinery (replaced 3 years ago), industrial vehicles for moving inventory
between locations at its premises, cars (used by staff as company cars), office furniture & fittings and
computers.
How will Poly conclude that the non-current assets declared in the financial statements are owned by
the company and are valued properly? (Q-6)
10. Long-term liabilities comprising debentures, loan stock and other loans repayable at a date more
than one-year after the yearend may constitute substantial amount in the financial statements and
thus are required to be tested carefully.
What are the different possible ways to confirm that long-term liabilities are reported properly?
(Q-43)



CHAPTER-14: CODES OF PROFESSIONAL ETHICS
Q-1: Why the accountants require ethical code? / Why are the codes of ethics for professionals
necessary (Page-227)
Ans: The key reason accountants need to have an ethical code is that they hold positions of trust; people rely
on them & their expertise. It is important to note that this reliance extends beyond clients to the general
community.
Q-2: What are the sources of ethical guidance? (Page-227)
Ans: The sources of ethical guidance are ICAB (The Institute of Chartered Accountants of Bangladesh) and
IFAC (The International Federation of Accountants).
Q-3: What are the advantages of principles-based guidance? / What are the advantages of a framework
of principles over a system of ethical rules? (Page-227 & 228)
Ans: The advantages of principles-based guidance are:

(a) Active consideration and demonstration of conclusions.
(b) Broad interpretation of ethical situations
(c) Individual situations covered
(d) Flexible to changing situation
(e) Can incorporate prohibitions.
Q-4: What contains in the IFAC code? (Page-228)
Ans: The IFAC code contains a number of fundamental principles.
Q-5: What are the fundamental principles of IFAC code, explain? (Page-228)
Ans: The fundamental principles are:

(1) Integrity: A professional accountant should be straightforward and honest in all professional and
business relationships.
(2) Objectivity: A professional accountant should not allow bias, conflict of interest or undue influence
of others to override professional or business judgments.
(3) Confidentiality: A professional accountant should respect the confidentiality of information unless
there is a legal or professional right or duty to disclose.
(4) Professional behavior: A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
(5) Professional competence and due care: A professional accountant has a continuing duty to maintain
professional knowledge and skill at the level required to ensure that a client or employer receives
competent professional service.
Q-6: Where no safeguard against independence is available of the assurance provider in such situation
what will be appropriate decision? (Page-229)
Ans: If the threats are not insignificant, identify and apply safeguards to eliminate risk, or reduce it to an
acceptable level. But where no safeguard is available, in such a situation, it is only appropriate to:
(1) Eliminate the interest or activities causing the threat.
(2) Decline the engagement, or discontinue it.
Q-7: What do you know about independence of minds & independence in appearance? (Page-229)
(a) Independence of mind: The state of mind which is free from influences that compromise
professional judgment.
(b) Independence in appearance: The avoidance of facts and circumstances that is so significant
including safeguards applied and without compromise professional judgment.
Chapter – 14(Codes of professional ethics) Page 1


Q-8: How many threats are available as per code of ethics? (Page-256)
Ans: There are five general sources of threat identified by the code:
(a) Self-interest threat (for example, having a financial interest in a client)
(b) Self-review threat (for example, auditing financial statements prepared by the firm)
(c) Advocacy threat (for example, promoting the client’s position by dealing in its shares)
(d) Familiarity threat (for example, an audit team member having family at the client)
(e) Intimidation threat (for example, threats of replacement due to disagreement )
Q-9: What are the safeguard behind the threats as per code of ethics? (Page-229)
Ans: There are two general categories of safeguard identified by the code:
(1) Safeguards created by the profession, legislation or regulation.
(2) Safeguards within the work environment.
Q-10: Give some examples of safeguards created by the profession, legislation or regulation? (Page-229
& 230)
Ans: Some examples of safeguards created by the profession, legislation or regulation are mention below:
(1) Professional standards
(2) Continuing professional development requirements
(3) Professional or regulatory monitoring
(4) Corporate governance regulations
(5) Educational training and experience
(6) External review by a legally empowered third party.
Q-11: Give few examples of safeguards created by the work environment? (Page – 230)
Ans: Few examples of safeguards created by the work environment are mention below
(a) Involving an additional professional accountant to review the work done or otherwise advise as
necessary
(b) Involving another firm to perform or re-perform part of the engagement
(c) Consulting with an independent third party
(d) Discussing ethical issues with those in charge of client governance
(e) Rotating senior personnel
May-June’ 2010
14. What are “independence of mind” & “independence in appearance”? (Q-7) Name different categories of
threats to independence? (Q-8)
Nov-Dece’ 2011
6. The Code of Ethics for Professional Accountants (IESBA Code) establishes ethical requirements for
professional accountants. The fundamental principles for professional ethics for professional accountants
provides a conceptual framework that professional accountants shall apply to identify threats to compliance
with the fundamental principles; evaluate the significance of the threats identified; and apply safeguards, when
necessary, to eliminate the threats or reduce them to an acceptable level.
a) What are the fundamental principles a Chartered Accountant shall comply with? (Q-5)
b) What are the threats that relationships or circumstances could compromise a member’s compliance with the
rules? (Q-8)


c) What are the actions or others measures to be taken to eliminate threats or reduce them to acceptable levels?
(Q-9)
May-June’ 2012
9. What are the general sources of threat identified by the IFAC Code? Give one example against each source?
(Q-8)
Nov-Dece’ 2012
5. ABC & Co., is a Chartered Accountancy firm and its engagement partner for XYZ Company has been in
place for approximately eighteen years and his son has just accepted a job offer from XYZ Company as Chief
Financial Officer. If ABC & Co. is appointed as internal and external auditors, then XYZ Company has
suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the
profit after tax of the company as they feel that this will align the interests of ABC & Co. and XYZ Company.
From the given information, mention the ethical threats which may affect the independence of ABC & Co. in
respect of the audit of XYZ Company, and for each threat explain how it may be reduced.
Ans: The Threat, Meaning of Threat, Type of Threat and applicable Safeguards against the Threat are
mentioned hereunder:
Particular Threat Type Applicable Safeguards

The engagement partner has Familiarity Threat • The engagement partner should be rotated from
been involved with the being engagement partner.
client for the last eighteen
years.
The engagement partner’s Self-interest Threat • Additional safeguards such as partner’s
son has accepted a job as a Familiarity Threat rotation would be necessary.
CFO at XYZ Company. • To inform the audit committee.
Audit firm engaged both in Self-review Threat • Internal and External audit team should be
internal and external audit separated.
service. • To inform the audit committee.
• The audit findings and recommendation are
reported to the audit committee appropriately.
• To ensure quality control policies and
procedures.
• Review by second partner.
XYZ Company offered that Self-interest Threat • A firm should not enter into any fee
20% of the external audit advocacy Threat arrangement for an assurance engagement
fee is based on profit after under which the amount of the fee is
tax would represent a contingent on the result of the assurance work
contingent fee.
May-June’ 2014
4. b) What do you understand by independence of mind, independence in fact and independence in
appearance? Differentiate these three terminologies used in assurance engagement. (Q-7)
Ans: Independence in fact: Independence in fact exists when the auditor is actually able to maintain an
unbiased attitude throughout the audit.
May-June’ 2015
5. a. What is the Code of Ethics for Chartered Accountants? (Below) Write the fundamental principles
pursued by Chartered Accountants in the context of ICAB Code of Ethics. (Q-5)


Ans: The Code of Ethics for Chartered Accountants is given below:
a) Credibility: There is a need for credibility in information and information systems in the whole of
society.
b) Professionalism: There is a need for individuals as professional persons in the accountancy field.
c) Quality of services: There is a need for assurance that all services obtained from professional
accountant are carried out to the highest standards of performance.
d) Confidence: Users of the services of professional accountants should be able to feel confident that
there exists a framework of professional ethics.
b. What are the threats, as regards independence, encountered by Chartered Accountants? What are the
safeguards to minimize those threats? (Q-8 & 9)
Nov-Dec’ 2015
5. Professional Ethics is of critical importance for accounting professionals. Understanding of those and
following are some kind of mandatory ethical code for the member of ICAB. Based on this;
a. What are the key ethical Codes which ICAB members are bound to follow?
Answer: Accountants require an ethical code because they hold position of trust and works in the public
interest, which extend beyond clients to people associated with those clients and general community. ICAB
members are subject to ICAB guidelines which are influenced by IFAC.
The key ethical code is independence in all respect. Independence here means independence of mind and
independence in appearance. Independence of mind means the state of mind which is free from influences that
compromise professional judgment. The avoidance of facts and circumstances that is so significant including
safeguards applied and without compromise professional judgments called Independence in appearance.
Particularly, the degree of independence required is highest for an audit engagement, with less stringent
requirements for non-audit engagements at an audit client, engagements at non audit clients.
b. What are the key features of IFAC and ICAB Codes?

Answer: The key features of IFAC and ICAB codes are same as ICAB adopts full compliance of IFAC codes
of ethics but also contains additional rules deemed appropriate by the ICAB. Key features of IFAC codes are
enumerated below in brief:
¾ Codes must not be rule based avoid set rules to follow. This will restrict flexibility based on situation.
¾ Code should be principle based this is suggested and will help to have flexible rules. This is seen as
being framework of principle rather than a set of rules to follow.
¾ Identify a number of general threats to independence and categories of safeguards.
IFAC suggested “principle based framework “for maintaining ethical standards have advantages in the areas
of individual situation, flexible changing situation, incorporating prohibition and also in demonstration.
In addition, the IFAC codes also features 5 general sources of threats (Self-interest, Self-review, advocacy,
familiarity, intimidation) and safeguards.
c. Write the fundamental principles of IFAC and ICAB Code? (Q-5)

May - June’ 2016
Question: 5
a. What are the advantages of principals based framework over a system of ethical rules? (Q-3)
b. There are two main approaches to a code of professional ethical code and a code based on a set of
principles. Indicate whether the following statements are “true” or “false”. (Below)
1. ICAB’s Code of Ethics is principles based. Answer: true.


2. A code based on a set of rules requires accountants to evaluate and address threats to independence.
Answer: false. Correct answer: A rules based system tends to remove the need to evaluate, as accountants
can just check whether certain rules are being met or not, rather than applying the principles to given
situations.
3. A code based on a set of principles rather than rules is more flexible in a rapidly changing environment.
Answer: true.
Nov-Dece’ 2016
6. a. Why is independence so important to the external auditor? Why does lack of independence in appearance
jeopardize auditor’s independence in fact?
Answer the question no-6 (a):

Independence is the freedom from conditions that threaten the ability of the auditor to carry out his
responsibilities in an unbiased manner. Independence is one of the worthiest characteristics of external auditor
and it is very much fundamental to the principles of integrity and objectivity. It allows auditor to be freedom
from any business. A lack of independence may lead to a failure to fulfill professional requirements to obtain
enough evidence to form the basis of an audit opinion and therefore it can undermine the purpose of
independent audit. Therefore, auditor has no alternative but to be independent to ensure acceptability of his or
her delivery.
Auditor must be independent in fact as well as in appearance. That is, real independence and perceived
independence are equally important to the auditor. It is essential for auditor to maintain independent attitude in
fulfilling his responsibilities, side by side, it is also important that the users of financial statements have
confidence in that independence. If auditor is really independent in his actions but users believe him as not to
be independent, most of the value of the audit function will be lost. So it is obvious that a lack of
independence in appearance takes away the credit of independence in fact.
b. Explain the terms “Threats” and “Safeguards” with reference to maintaining professional Objectivity and
Independence. What is acceptable threat?
Answer to the question no-6(b):
While conducting the required procedures for audit and other assurance services, an assurance provider may
encounter certain circumstances that could prevent him from complying with Fundamental Principles
associated with professional ethics. Such circumstances are called threats. The quality of service may be
impaired if these threats prevail.
When an assurance provider faces any threat he needs to assess it and then must apply certain procedures
either to eliminate the threat or reduce it to an acceptable level. Such procedures are called safeguards. If the
threat is insignificant, the assurance provider can ignore it otherwise he has to take actions for safeguard.
A threat is acceptable when a reasonable and informed third party would probably not conclude that the
assurance provider's compliance with the Fundamental Principles was compromised. When any threat appears
to the assurance provider, it is his responsibility to eliminate it or reduce it to an acceptable level; otherwise he
will be professionally liable for non-compliance of prescribe ethics.
Nov-Dece’ 2017
Like all other professional accountants are also expected to work under certain ethical codes. In the light of
such expectation, please write your understanding on the followings:
a. ABC & Co, Chartered Accountants has accepted the appointment as auditor of Petro Chemical Ltd.(PCL), a
listed company whose shares are traded through both Stock Exchanges. The PCL being a good company, the


related shares enjoy very high demand in the market. The younger brother of ABC's Engagement Manager on
this engagement is regular trader of shares in the secondary market.
Please write about the firm's expected standpoint in such an engagement.
b. Give an account of the available threats as identified in the IESBA Code of Ethics that accountants should
bear minds while at work. (Q-8)
c. Write briefly about the fundamental principle as per IESBA code of ethics. (Q-6)
May - June’ 2018

5. (a) Why ethical guidelines are required for the professional accountants? (Q-1)
Nov-Dece’ 2018
11. (a) In the recent promulgation of the Code of Ethics applicable for professional accountants, Independence
has been taken out of the list of fundamental principles. But it remains at its own merit as an ethical code for
the professional accountants.
What is your comment about its position beyond the list of fundamental principles? (See Nov-Dec-2016),
Question – 06(a)



CHAPTER-15: INTEGRITY, OBJECTIVITY AND INDEPENDENCE
Overall summary of this chapter: Write down the meaning, threat type and applicable safeguards for the
following threats as per following format:
Threat Meaning Threat Type Applicable Safeguards
Financial Financial interest Self-interest • Disposing of the interest
interests exists where an • Removing the individual from the team if
assurance firm has required
a financial interest • Keeping the client’s audit committee informed
in a client’s affairs. of the situation
• Using an independent partner to review work
(Second partner review).
Commission Auditor pays Self-interest • A member shall not pay a commission to
money to obtain obtain a client, nor shall s/he accept a
audit. commission for a referral to a client of
products or services of others.
Lowballing / Firm quotes lower Self-interest • Maintaining records such that the firm is able
low fees fees for an to demonstrate that appropriate staff and time
assurance service are spent on the engagement.
• Complying with all applicable assurance
standards, guidelines and quality control
procedures.
High Clients agree to Self-interest • Discussing the issues with the audit committee.
percentage of give higher fees for • Taking steps to reduce the dependency on the
fees an assurance client
service • Obtaining external/internal quality control
reviews.
• Consulting a third party such as ICAB
Percentage or Fees calculated on Self-interest • A firm should not enter into any fee
contingent an outcome result advocacy arrangement for an assurance engagement
fees basis under which the amount of the fee is
contingent on the result of the assurance work
Overdue fees Audit fee Self-interest • Firms should safeguard against fees building
accumulated year up and being significant by discussing the
after year, but issues with those charged with governance
client does not (audit committee), and if necessary the
agree to pay. possibility of resigning if overdue fees are not
paid.
Gifts and If assurance Self-interest • Unless the value of a gift is clearly
hospitality provider accepts insignificant, a firm or a member of an
gifts and hospitality assurance team should not accept them.
from the client, it
creates threat to
independence
Loans and To arrange loans Self-interest • An assurance firm or member of the assurance
guarantees and guarantees team should not enter into any loan or
from bank or other guarantee arrangement with a client that is not
similar institution a bank or similar institution.
or other situations
for client by firm.
Recruitment Recruiting senior Familiarity • Assurance provider must not make
management for an self-interest management decision for the client
assurance client. intimidation • Assurance provider may provide short list
candidate but not select candidate
Chapter – 15(Integrity, Objectivity and independence) Page 1


Family and Family or close Self-interest • When an immediate family member of a member
personal personal familiarity of the assurance team is a director, an officer or
relationships relationships intimidation an employee of the assurance client in a position
between to exert direct and significant influence over the
assurance firm subject matter information of the assurance
and client staff engagement, the individual should be removed
could seriously from the assurance team.
threaten to
independence
Partner on Any partner Self-interest • A partner or employee of an assurance firm
client board exists in client’s Self-review should not serve on the board of an assurance
board of client. It may be acceptable for a partner or an
directors. employee of an assurance firm to perform the
role of company secretary for an assurance client,
if the role is essentially administrative.
Employment The same person Self-interest • Modifying the assurance strategy
with assurance being employed Self-review • Ensuring the assurance engagement is assigned
client by both an Intimidation to someone of sufficient experience as compared
assurance firm familiarity with the individual who has left.
and a client. • Involving an additional professional accountant
to review the work done
• Carrying out a quality control review of the
engagement.
Close business An assurance Self-interest • If an individual member of an assurance team
relationships. firm and client Intimidation had such an interest, he should be removed from
will involve a the assurance team.
commercial
common
financial interest.
Preparing A firm prepares Self-review • Using staff members other than assurance team
accounting accounting members to carry out work
records and records and • Implementing policies and procedures to prohibit
financial financial the individual providing such services from
statements statements and making any managerial decisions on behalf of
then audits or the assurance client
reviews them. • Requiring the source data for the accounting
entries to be originated by the assurance client
• Requiring the underlying assumptions to be
originated and approved by the assurance client.
Internal audit Performs both Self-review • The safeguards of an assurance team in respect of
services external and internal audit service such as ensuring that an
internal audit by employee of the client is designated responsible
same assurance for internal audit activities and the client
provider. approves all the work that internal audit does.
Valuation Assurance firm Self-review, • Second partner review
services performs • Confirming that the client understands the
valuation& it will valuation and the assumptions used
be included in the • Ensuring the client acknowledges responsibility
Financial for the valuation
Statements. • Using separate personnel for the valuation and
audit.


Tax services Assurance firm Self-interest • Tax services being provided by partners and staff
performs audit Self-review with no involvement in the audit of financial
and also with Advocacy statements
taxation service • Tax services being reviewed by an independent
at a time. tax partner or senior tax employee
• Obtaining external independent advice on tax
work
• Tax computations prepared by audit staff
members being reviewed by a partner/ staff
member of appropriate experience who is not a
member of the audit team.
Information To provide IT Self-review • The audit client acknowledges its responsibility
Technology services, such as for establishing and monitoring a system of
service designing and internal controls
implementing a • The audit client designates a competent
new IT system. employee, preferably within senior management,
with the responsibility to make all management
decisions
• The audit client makes all management decisions
with respect to the design and implementation
process.
Litigation / When the clients Advocacy • Disclose the matter to the Audit Committee
Legal services threaten to sue, or self-review • Involve additional professional accountant.
indeed sues, the Intimidation • Removing specific affected individuals from the
assurance firm engagement.
falls in threat to
independence.
Corporate To arrange Advocacy • The safeguards of an assurance team in respect of
finance finance for client self-review corporate finance such as assurance firms are not
and also to allowed to promote, deal in or underwrite an
promote, deal in assurance client’s shares. They are also not
or underwrite an allowed to commit an assurance client to the
assurance client’s terms of transaction or consummate a transaction
shares. on the client’s behalf.
Clients When the clients Intimidation • Disclose the matter to the Audit Committee
threaten to sue threaten, the • Involve additional professional accountant.
the assurance assurance firm • Removing specific affected individuals from the
firm falls in threat to engagement.
independence.
Long Senior members Familiarity • Rotating senior staff off the assurance team.
association of staff at an • Involving second partners to carry out reviews.
with assurance audit firm have a • Obtaining a quality control review of the
clients long associated individual’s work on the assignment
with a client. • Discussing the issue with the audit committee.
• Where appropriate safeguards are not applied,
the firm should resign.
Q-1: What do you know about integrity, objectivity and independence? (Page- 237)
(a) Integrity: A professional accountant should be straightforward and honest in all professional and
business relationships.


(b) Objectivity: A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments.
(c) Independence: Independence is related to and free from objectivity- it is freedom from situations
and relationships.
Q-2: Why do independence and objectivity matter so important? (Page-237)
Ans: Independence and objectivity matter so much important because of:

• The expectation of those directly affected, particularly the members of the company.
• The public interest.
Q-3: What can the auditor do to safeguard / preserve objectivity & its disadvantages? (Page-237)
Ans: The auditors do to safeguard / preserve objectivity by withdrawing from any engagement where there is
the slightest threat to objectivity.
Disadvantages:
Ź Clients may lose an auditor who knows their business.
Ź It denies clients the freedom to be advised by the accountant of their choice.
Q-4: A self- interest threat might arise a great number of areas, which are these? (Page-238)
Ans: A great number of areas in which a self-interest threat might arise:
(a) Financial interests
(b) Lowballing / low fees
(c) High percentage of fees
(d) Percentage or contingent fees (also advocacy threat)
(e) Overdue fees
(f) Gifts and hospitality
(g) Loans and guarantees
(h) Family and personal relationships ( also familiarity threat & intimidation threat)
(i) Partner on client board (also Self-review threat)
(j) Employment with assurance client (also Self-review, Intimidation & familiarity threat)
(k) Close business relationships. (also Intimidation threat)
Q-5: Definitions the Financial interest, Direct financial interest, Indirect financial interest, Immediate
family, Assurance team? (Page-238)
(1) Financial interest: Financial interest exists where an assurance firm has a financial interest in a
client’s affairs. Example: An assurance firm own share in the client.
(2) Direct financial interest: One which is owned directly by and under the control of an individual or
entity. Example: A collective investment.
(3) Indirect financial interest: One beneficially owned through intermediaries. Example: Pension
Scheme.
(4) Immediate family: Immediate family means a spouse (equivalent) or dependent.
(5) Assurance team: Assurance team means all members of the engagement team for the assurance
engagement.
Q-6: Which parties are not allowed to own direct or indirect financial interest in a client? (Page-239)
Ans: The following parties are not allowed to own direct or indirect financial interest in a client:
(a) The assurance firm.
(b) Any partner in the assurance firm.
(c) Any member of the assurance team.
(d) An immediate family member of such a person.


Q-7: What are the safeguards against finance-interest threat? (Page-239)
Ans: The safeguards against finance-interest threat are:

(1) Disposing of the interest
(2) Removing the individual from the team if required
(3) Keeping the client’s audit committee informed of the situation
(4) Using an independent partner to review work.
Q-8: What do you mean by close business relationship? Give few example of close business
relationship? (Page-239) What are the safeguards might be taken in case of close business relationship?
(Page-239)
Ans: Close business relationship: A close business relationship will involve a commercial common finance
interest.
Few example of close business relationship are:
(a) Operating a joint venture between the firm and the client.
(b) Arrangements to combine one or more services or products of the firm.
(c) Distribution or marketing arrangements under which the firm acts as distributor or marketer of the
assurance client’s products or services or vice versa.
(d) Audit firm leasing its office space from the assurance client.
The following safeguards might be taken in case of close business relationship:
If an individual member of an assurance team had such an interest, he should be removed from the assurance
team.
Q-9: What do you mean by dual employment? What are the safeguards might be taken in case of dual
employment? (Page-239 & 240)
Ans: Dual employment: (The same person being employed by both an assurance firm and a client) is not
permitted.
The following safeguards might be taken in case of dual employment:
(1) Modifying the assurance strategy
(2) Ensuring the assurance engagement is assigned to someone of sufficient experience as compared with
the individual who has left.
(3) Involving an additional professional accountant to review the work done
(4) Carrying out a quality control review of the engagement.
Q-10: Does an assurance provider serve on client board (partner on client board)? When it is
permitted? (Page-240)
Ans: A partner or employee of an assurance firm should not serve on the board of an assurance client. It may
be acceptable for a partner or an employee of an assurance firm to perform the role of company secretary for
an assurance client, if the role is essentially administrative.
Q-11: What do you mean by Close family (family and personal relationships)? What factors should be
considers in respect of family and personal relationships? What are the safeguards might be taken in
case of family and personal relationships? (Page-240 & 241)
Ans: Close family is a parent, child or sibling who is not an immediate family member.
The following factors should be considers:

a) The individual’s responsibilities on assurance engagement.
b) The closeness of the relationship.
c) The role of the other party at the assurance client.


The following safeguards are taken in case of Close family (family and personal relationships):
When an immediate family member of a member of the assurance team is a director, an officer or an
employee of the assurance client in a position to exert direct and significant influence over the subject matter
information of the assurance engagement, the individual should be removed from the assurance team.
Q-12 When a firm or an assurance team should not accept gifts and hospitality? (Page-241)
Ans: Unless the value of gift is clearly insignificant, or hospitality, is reasonable in the terms of its frequency,
nature and cost, a firm or a member of an assurance team should not accept them.
Q-13: How many categories loan and guarantees falls into? What are the safeguards of an assurance
team in respect of loan and guarantees? (Page-241)
Ans: The advice on loans and guarantees falls into two categories:
(a) The client is a bank or other similar institution.
(b) Other situations.
Safeguards: An assurance firm or member of the assurance team should not enter into any loan or guarantee
arrangement with a client that is not a bank or similar institution.
Q-14: What are the safeguards might be taken in case of overdue fees, Percentage or contingent fees,
High percentages of fees and Lowballing? (Page-242 &243)
Ans: The followings safeguards might be taken for following threats:

(1) Overdue fees: Firms should safeguard against fees building up and being significant by discussing
the issues with those charged with governance (audit committee), and if necessary the possibility of
resigning if overdue fees are not paid.
(2) Percentage or contingent fees: A firm should not enter into any fee arrangement for an assurance
engagement under which the amount of the fee is contingent on the result of the assurance work or on
items that are the subject matter of the assurance engagement.
(3) High percentages of fees: Safeguards against high percentages of fees are given below:
(a) Discussing the issues with the audit committee.
(b) Taking steps to reduce the dependency on the client
(c) Obtaining external/internal quality control reviews.
(d) Consulting a third party such as ICAB
(4) Lowballing: Safeguards against lowballing are given below:

(a) Maintaining records such that the firm is able to demonstrate that appropriate staff and
time are spent on the engagement.
(b) Complying with all applicable assurance standards, guidelines and quality control
procedures
Q-15: A self-review threat might arise a great number of areas, which are these? What are key areas /
situations of self-review threat? (Page-243)
Ans: A great number of areas in which a self-review threat might arise

(a) Preparing accounting records and financial statements
(b) Valuation services
(c) Tax services (also Self-interest & advocacy threat)
(d) Internal audit services
(e) Corporate finance (also advocacy threat)
(f) Other services.


Q-16: What are the safeguards of an assurance team in respect of service with assurance client? (Page-
243)
Ans: The safeguards in respect of service with assurance client are:
• Obtaining a quality control review of the individual’s work on the assignment
• Discussing the issue with the audit committee.
Q-17: What are the safeguards of an assurance team in respect of preparing accounting records and
financial statements? (Page-244)
Ans: The safeguards of an assurance team in respect of preparing accounting records and financial statements
are:
(a) Using staff members other than assurance team members to carry out work
(b) Implementing policies and procedures to prohibit the individual providing such services from making
any managerial decisions on behalf of the assurance client
(c) Requiring the source data for the accounting entries to be originated by the assurance client
(d) Requiring the underlying assumptions to be originated and approved by the assurance client.
Q-18: What are the safeguards of an assurance team in respect of valuation services? (Page-244)
Ans: The safeguards of an assurance team in respect of valuation services are:

(1) Second partner review
(2) Confirming that the client understands the valuation and the assumptions used
(3) Ensuring the client acknowledges responsibility for the valuation
(4) Using separate personnel for the valuation and audit.
Q-19: What are the safeguards of an assurance team in respect of taxation services? (Page-244)
Ans: The safeguards of an assurance team in respect of taxation services are:

(a) Tax services being provided by partners and staff with no involvement in the audit of financial
statements
(b) Tax services being reviewed by an independent tax partner or senior tax employee
(c) Obtaining external independent advice on tax work
(d) Tax computations prepared by audit staff members being reviewed by a partner/ staff member of
appropriate experience who is not a member of the audit team.
Q-20: What are the safeguards of an assurance team in respect of internal audit service? (Page-245)
Ans: The safeguards of an assurance team in respect of internal audit service such as ensuring that an
employee of the client is designated responsible for internal audit activities and the client approves all the
work that internal audit does.
Q-21: What are the safeguards of an assurance team in respect of corporate finance services? (Page-
246)
Ans: The safeguards of an assurance team in respect of corporate finance such as assurance firms are not
allowed to promote, deal in or underwrite an assurance client’s shares. They are also not allowed to commit an
assurance client to the terms of transaction or consummate a transaction on the client’s behalf.
Q-22: What are the safeguards of an assurance team in respect of information technology services?
(Page-246)
Ans: The safeguards of an assurance team in respect of information technology services:

(a) The audit client acknowledges its responsibility for establishing and monitoring a system of internal
controls
(b) The audit client designates a competent employee, preferably within senior management, with the
responsibility to make all management decisions


(c) The audit client makes all management decisions with respect to the design and implementation
process.
Q-23: What are the safeguards of an assurance team in respect of litigation support services? (Page-
246)
Ans: The safeguards of an assurance team in respect of litigation support services such as litigation support
services that do not involve such subject estimations are not prohibited, provided that appropriate safeguards
have been established.
Q-24: Advocacy threat might arise a great number of areas, which are these? (Page-247)
Ans: A great number of areas in which an advocacy threat might arise:

(a) Litigation / Legal services (also self-review & Intimidation threat)
(b) Contingent fees
(c) Corporate finance (also self-review threat)
Q-25: What are the safeguards of an assurance team in respect of advocacy threat? (Page-247)
Ans: The safeguards of an assurance team in respect of advocacy threat are given below:
(1) Disclosures to the audit committee
(2) Withdraw from an engagement if the risk to independence is too high.
Q-26: Familiarity threat might arise a great number of areas, which are these? (Page-247)
Ans: A great number of areas in which a familiarity threat might arise:

(a) Where there are family and personal relationships between client/firm (also self-interest &
intimidation threat)
(b) Employment with assurance client (also self-review & self-interest threat)
(c) Recent service with assurance client
(d) Long association with assurance clients
(e) Recruitment (also self-interest & intimidation threat)
Q-27: Intimidation threat might arise a great number of areas, which are these? (Page-249)
Ans: A great number of areas in which an intimidation threat might arise:

(1) Litigation.
(2) Close business relationships
(3) Family and personal relationships.
(4) Assurance staff members move to employment with client.
Q-28: The ICAB code sets out a framework that professional accountant can follow when seeking to
resolve ethical conflicts. What are these? (Page-250 & 251)
Ans: The ICAB code sets out a framework that professional accountant can follow when seeking to resolve
ethical conflicts. These are:
(a) The relevant facts
(b) The relevant parties
(c) The ethical issues involved
(d) The fundamental principles related to the matter in question
(e) Established internal procedures
(f) Alternative courses of action, Such as ICAB.
Q-29: Accountants in a non-practice environment may face more pressure to behave unethically. Cite
some examples of pressure the accountants (non-practice) may face in carrying out their duties or List
the different situations of conflict of interest those an accountant in business might face. (Page-251 &
252)


Ans: An accountant in business (as opposed to practice) may find that he is faced with implicit or explicit
pressure to:
¾ Act contrary to law or regulation.
¾ Act contrary to professional standards.
¾ Facilitate unethical or illegal earnings management strategies.
¾ Lie to or mislead auditors or regulators.
¾ Issue or be associated with published reports (for example, financial statements, and tax statements)
that materially misrepresent the facts.

May-June’ 2010
14. Why do independence and objectivity matter so much? (Q-2) What can the auditor do to preserve
objectivity? (Q-3)
15. a. The IFAC Code of Ethics applies only to statutory audit. True or False (Self-test-2, Page-254)
b. As per IFAC Code of Ethics, audit engagement partners of listed companies should be rotated away
from the engagement after how many year(s)? (Self-test-5, Page-254)
16. List the different situations of conflict of interest those an accountant in business might face. (Q-29) Imo
is a qualified accountant. He has recently moved out of practice and taken up the position of financial
controller of a small company, XYZ ltd. The company has a short-term cash-flow problem. Imo was recently
called into the board meeting and asked if he could defer some income from the previous financial year so as
to influence when the tax (both VAT and corporate tax) would be due to those sales. The directors were
insistent that such deferral was necessary and that he should consider this request more in the nature of an
order. What should be Imo’s course of action? (Interactive question-4, page - 252)
Nov-Dece’ 2013
4. a. Why do independence and objectivity matter so much? (Q-2) and what can do to maintain objectivity?
(Below)
Ans: The auditor should avoid such relationship with the client who may impair the objectivity, should not
take any gift or entertainment from the client and avoid financial interest with the client, and remain free from
all conflicts of interest with the client to maintain objectivity and independence. The auditor is to withdraw
from the engagement where there is slightest threat to objectivity.
b. A financial interest in a client constitutes a substantial self-interest threat. What are the safeguards to avoid
the above threat? (Q-7)
c. Accountants in a non-practice environment may face more pressure to behave unethically. Cite some
examples of pressure the accountants (non-practice) may face in carrying out their duties. (Q-29)
May-June’ 2014
4. Assurance engagements are designed to enhance intended users’ degree of confidence about the outcome of
the evaluation or measurement of a subject matter against criteria. Auditors shall conduct the audit of the
financial statements of an entity with integrity, objectivity and independence.
Engagement personnel shall promptly notify the team leader of circumstances and relationships that create
threats to relevant ethical requirements. The engagement leader then in consultation with the engagement
partner will propose a resolution by applying the framework for resolving threats to their assurance
engagement.
a) What do you mean by integrity, objectivity and independence in assurance engagement? (Q-1)


c) The ABC & Co., an audit firm, is currently in the process of accepting a new client. A review team is
considering a number of ethical issues that might hinder acceptance. Write down the meaning, threat type and
applicable safeguards for the following threats as per following format:
Some firms Firm quotes lower fees Self-interest • Maintaining records such that the firm
tendered low for an assurance is able to demonstrate that appropriate
Billing service staff and time are spent on the
engagement.
• Complying with all applicable
assurance standards, guidelines and
quality control procedures.
Assurer provides Assurance firm Self-review • Second partner review
valuation service performs valuation & • Confirming that the client understands
to same client it will be included in the valuation and the assumptions used
the FS • Ensuring the client acknowledges
responsibility for the valuation
• Using separate personnel for the
valuation and audit.
Assurer recruits Recruiting senior Familiarity • Assurance provider must not make
senior management for an self-interest management decision for the client
management for assurance client. Intimidation • Assurance provider may provide short
the client list candidate but not select candidate
The client is Fees calculated on an Self-interest • A firm should not into any fee
proposing for a outcome result basis arrangement for an assurance
contingent fee engagement under which the amount of
the fee is contingent on the result of the
assurance work
Clients threaten When the clients Intimidation • Disclose the matter to the Audit
to sue the threaten, the assurance Committee
assurance firm firm falls in threat to • Involve additional professional
independence. accountant.
• Removing specific affected individuals
from the engagement.
Assurer accepts If assurance provider Self-interest • Unless the value of a gift is clearly
gifts and accepts gifts and insignificant, a firm or a member of an
hospitality from hospitality from the assurance team should not accept them.
the client client, it creates threat
to independence
Nov-Dece’ 2014
5. Write down short notes on following terminology: b) Advocacy Threat (Q-24 & 25)
May-June’ 2015
5. (c) Can a Chartered Accountant accepts contingent fee, referral fee or commission? Explain in brief with
reason.
Ans: A Chartered Accountant can’t accept contingent fee, referral fee or commission due to self-interest
threat. Reasons and applicable safeguards are described broadly in below:


Contingent fee Fees calculated on an Self-interest • A firm should not enter into any fee
outcome result basis arrangement for an assurance
engagement under which the amount of
assurance work
Commission Auditor pays money to Self-interest • A member shall not pay a commission
obtain audit. to obtain a client, nor shall s/he accept
a commission for a referral to a client
of products or services of others.
Referral fee The payments service Self-interest • Disclosing to the client any
providers make to arrangements to pay a referral fee for
third parties in return referring to another professional
for recommending accountant for the worked referred.
their services or • Disclosing to the client any
sending customers to arrangements to receive a referral fee
them. for referring the client to another
professional accountant in public
practice.
• Obtaining advance agreement from the
client for commission arrangements in
connection with the sale by a third
party of goods or services to the client.
May - June’ 2016
5. c. The ICAB Code sets out a framework for professional accountants to follow when faced with an ethical
conflict. Explain. (Q-28)
Nov-Dece’ 2016
c. Under each of the following circumstances what kind of threats auditor may encounter and what should be
the safeguards to maintain professional objectivity and independence?
i. Mr. Zaman, an audit staff of Zara & Co, Chartered Accountants, is working in a client as audit
supervisor. On the occasion of Eidul-Fitr, the client sent him a gift box of their products valuing Taka
10,000.
ii. Lara & Co, Chartered Accountants, is the external auditor of PK Limited. Mrs. Kelly, a senior
audit staff of Lara & Co, is a daughter of marketing director of PK Limited. The engagement partner
of the audit firm is planning to depute Mrs. Kelly to PK Limited to lead the field work of the audit.
iii. Farah & Co., Chartered Accountants, is the auditor of KYC Limited. The company has decided to go
for IPO next year to raise money for public to finance their future expansions. Recently they asked
Farah & Co. to prepare their financial statements along with continuing to act in the capacity as
external auditor.
iv. Sara & Co., Chartered Accountants has received an offer from MM Limited to conduct their audit on
the fees which is 12% of profit before tax.
Ans:
i) Gifts and If assurance provider • Unless the value of a gift is clearly

hospitality accepts gifts and insignificant, a firm or a member of an
hospitality from the Self-interest assurance team should not accept them.
client, it creates threat
to independence


ii) Family and Family or close Self-interest • When an immediate family member of
personal personal relationships familiarity a member of the assurance team is a
relationships between assurance intimidation director, an officer or an employee of
firm and client staff the assurance client in a position to
could seriously exert direct and significant influence
threaten to over the subject matter information of
independence the assurance engagement, the
individual should be removed from the
assurance team.
iii) Preparing A firm prepares Self-review • Using staff members other than
accounting accounting records assurance team members to carry out
records and and financial work
financial statements and then • Implementing policies and procedures
statements audits or reviews to prohibit the individual providing
them. such services from making any
managerial decisions on behalf of the
assurance client
• Requiring the source data for the
accounting entries to be originated by
the assurance client
• Requiring the underlying assumptions
to be originated and approved by the
assurance client.
iv) Contingent Fees calculated on an Self-interest • A firm should not enter into any fee
fee outcome result basis arrangement for an assurance
engagement under which the amount of
assurance work
May - June’ 2017

5 . Ethics in the business is considered as the most expected core vale which individual should follow and
demonstrate in their respective field of activities. International Ethics Standards Board for Accountants
(IESBA) has issued a set of Code of Ethics which ICAB being a member of IFAC has adopted word by word
for its members to follow in their respective fields of work.
(a). Why independence and objectivity matter so much (Q-1) and what can the auditors do to maintain
objectivity? (Q-2)
(b). A financial interest in a client constitutes a substantial self interest threat. What are the available
safeguards to avoid such threat? (Q-7)
May - June’ 2018
5. (b) Describe in brief the following terminologies along with related threats and safeguards as they
are used in discussing about ethics in accountants’ business:
iii) Gifts and hospitalities. (Below)
If assurance provider
Gifts and accepts gifts and Unless the value of a gift is clearly
hospitality hospitality from the Self-interest insignificant, a firm or a member of an
client, it creates threat assurance team should not accept them.
to independence


5.(c) Sayema is a qualified accountant. She has recently moved out of practice and taken up the position of
financial controller of a small, non-listed company, Lavender Lane Ltd. The company has a short-term cash
flow problem. Sayema was recently called into the board meeting and asked if she could defer some income
from the previous financial year so as to influence when the tax (both VAT and corporation tax) would be due
on those sales. The directors were insistent that such deferral was necessary and that she should consider this
request more in the nature of an order. Comment on the following options available to Sayema: (Below)
i) Report her concerns to the audit committee of the board of directors.
ii) Take Advice from ICAB.
ii) Take advice from legal advisor/s.
Ans: It is unlikely to be appropriate to make disclosure to the audit committee in this case, as Lavender Lane
Limited, a small, unlisted company, is unlikely to have one. Given the instructions have come from the board
of directors, it will be fruitless to take steps in line with the company’s formal process. Thus, resolving the
situation internally is not possible in this situation.
Sayema should seek advice from ICAB and then take advice from her legal advisors.
Nov-Dece’ 2018
10. Like other professional group, professional accountants are also expected to be guided by some ethical
codes in their respective work fields. IESBA, a unit of IFAC, has promulgated a set of codes applicable for the
professional accountants. ICAB, as a member of the IFAC, has adopted the unedited version of the IESBA
codes and has circulated for its member to follow in their respective field of work.
(a) Brave & Co. Chartered Accountants, a partnership firm, has been appointed auditor of Glittering Paints
Bangladesh ltd. (GBPL) in its recently held AGM against fees of BDT2.5 million. GBPL is one of the highly
acclaimed listed companies in the country with shares being traded through Stock Exchanges. Mr. Brave, the
Engagement Partner to the subject audit is a member to the City Golf Club (CGC) where among others the
CEO of GBPL is a member too. Incidentally, both Mr. Brave and the said CEO are members of the CGC
Development Committee for many years. As a result, apart from their auditor-client relationship, they have
many other common social interactions together.
How would you evaluate this situation keeping in view the ethical codes applicable to professional
accountants in practice?
Ans: “As per Suggested answer”: In the given case, appointment has been made properly and the firm has
apparently no problem to deal with such audit, provided they have adequate appropriate resource with due
professional competence. However, we see that the partner engaged to deal with this audit is very well known
to the CEO of the company over many years, being member to a Golf Club. Moreover, both the CEO and the
proposed engagement partner have been working together for the development work of Golf Club. So, it is
natural that some level of reciprocal respect and friendship has been built over time. Under this circumstance,
there is an apparent threat to objectivity being a fundamental principle with few others threats such as
familiarity threats, threat to independence etc. When there are situations that pose threat to objectivity as
well as other principles, necessary measure must be taken to avoid that threat or reduce respective threats to an
acceptable level. In view thereof, the firm may change the engagement part keeping Mr. Brave completely
away from the activity relating to the said audit. In case the proposed engagement partner cannot be replaced,
there must be a second partner as an independent reviewer. Care must be taken that this audit must pass
through the designated review partner’s clearance. Additionally, the matter of Golf Club membership may be
disclosed to those charged with governance.
You can write answer the above question alternatively given next page:


Family and Family or close Self-interest • When an immediate family member
personal personal relationships familiarity of a member of the assurance team is
relationships between assurance intimidation a director, an officer or an employee
firm and client staff of the assurance client in a position
could seriously to exert direct and significant
threaten to influence over the subject matter
independence information of the assurance
engagement, the individual should be
removed from the assurance team.
(b) A financial interest in a client constitutes a substantial self-interest threat. What are available safeguards to
avoid such threat? (Q-7)
11. (b) Explain in brief, whether Chartered Accountants can accept contingent fees and referral fees, with
reference to ethical codes applicable for members of the ICAB. {From May-June’ 2015; Q – 5(c)}

Percentage or Fees calculated Self-interest • A firm should not enter into any fee arrangement
contingent on an outcome for an assurance engagement under which the
fees result basis amount of the fee is contingent on the result of
the assurance work
Referral fees The payments Self-interest • Disclosing to the client any arrangements to pay
service providers a referral fee for referring to another professional
make to third accountant for the worked referred.
parties in return • Disclosing to the client any arrangements to
for receive a referral fee for referring the client to
recommending another professional accountant in public
their services or practice.
sending • Obtaining advance agreement from the client for
customers to commission arrangements in connection with the
them. sale by a third party of goods or services to the
client.
May - June’ 2019

6. Strong & Partners, Chartered Accountants has very good reputation in the market for their good
quality professional services on various matters. Over the years, they were a regular advisor to
Rupali Fibres Ltd. to provide consultation on their investment and various financial matters. On a
specific engagement in 2016, they had developed Standard Operating Procedures (SOP) on financial
management and financial reporting matters for Rupali Fibres Ltd. The company management on the
ground of their long-standing relationship appointed Strong & Partners as its auditor in the respective
AGM for the year ending 31 December 2018.
Evaluate this situation with respect to applicable code of ethics, as adopted by ICAB, which
Strong & Partners should take into consideration.
Ans: Answer will attest after publishing Suggested Answer.


CHAPTER-16: CONFIDENTIALITY
Q-1: Why confidentiality is so important? (Page-259)
Ans: A professional accountant should respect the confidentiality of information unless there is a legal or
professional right or duty to disclose. It is so important because it is a key factor in the trust between client
and accountant.
Q-2: What are the safeguards to be taken for confidentiality to prevent accidental disclosures of
information? (Page-259 & 260)
Ans: The safeguards to be taken for confidentiality to prevent accidental disclosures of information are:
(a) Do not discuss client matters with any party outside of the accountancy firm (for example, friends and
family, even in a general way)
(b) Do not discuss client matters with colleagues in a public place
(c) Do not leave audit files unattended (at a client’s premises or anywhere)
(d) Do not leave audit files in cars or in unsecured private residences
(e) Do not remove working papers from the office unless strictly necessary
(f) Do not work on electronic working papers on systems that do not have the requisite protection.
Q-3: What are the safeguards to be taken for confidentiality to prevent unauthorized deliberate
disclosures of information? (Page-260)
Ans: The safeguards to be taken for confidentiality to prevent unauthorized deliberate disclosures of
information are:
(a) Discuss with more senior staff in the firm.
(b) Take legal advice before making any disclosure of potentially confidential information.
Q-4: When confidential information to be disclosed in the course of professional work? (Page-260)
Ans: Information acquired in the course of professional work should only be disclosed where
(1) Consent has been obtained from the client
(2) This is a public duty to disclose, or
(3) There is a legal or professional right or duty to disclose.
Q-5: When confidential information to be disclosed as per Code of ethics? (Page-260 & 261)
Ans: The Code of ethics identifies three circumstances where the professional accountant is or may require
disclosing confidential information:
(1) Where disclosed is permitted by law.
(2) Where disclose is required by law; and
(3) Where there is a legal or professional right or duty to disclose.
Q-6: What should a professional accountant do where there is a conflict of interest? Or how will you
manage conflict of interest in accepting an assurance client? (Page-261)
Ans: A professional accountant should take reasonable steps to identify circumstances that could pose a
conflict of interest. If there is no conflict of interest, professional accountant may accept the assignment. If
there is a conflict of interest, the significance of any threat to compliance with the fundamental principles
should be evaluated. If any threats are other than clearly insignificant, the safeguards must be applied to
eliminate the threat or to reduce it to an acceptable lower level. But remember, where a conflict cannot be
managed even with safeguards, and then the professional accountant should not act.
Q-7: What are the safeguards against conflicts of interest? (Page-261 & 262)
Ans: The safeguards against conflicts of interest are:
(a) Disclosure of the circumstances of the conflict
Chapter – 16(Confidentiality) Page 1

(b) Obtaining the informed consent of the client to act

(c) The use of confidentiality agreements signed by employees
(d) Establishing information barriers (Chinese walls)
(e) Regular review of the application of safeguards by a senior individual not involved with the relevant
client engagement (Second partner review).
(f) Ceasing to act
Q-8: How an auditor can maintain ‘Chinese Walls’ to safeguard clients’ confidentiality (Page-262)
Ans: The term 'Chinese wall' is a reference to the confidentially procedures taken by a firm to prevent
information obtained in the course of audit. Chinese wall is a business term describing an information barrier
within an organization that prevented conflicts of interest. In the following ways the auditor may maintain
‘Chinese Walls’ to safeguard clients’ confidentiality:
Physical separation of teams
Ensuring that there is no overlap between different teams
Maintaining proper records and information disclosure barrier.
Nov-Dece’ 2010
11. Why is confidentially important (Q-1)? Discuss the security procedures which might be wise to prevent
accidental disclosure of information? (Q-2)
May-June’ 2012
6. Section 220 of Code of Ethics says that the principles of objectivity impose an obligation on all professional
accountants not to compromise their professional or business judgment because of biasness, conflict of
interest or the undue influence of others.
a. What should a professional accountant do where there is a conflict of interest (Q-6) and what safeguards are
available for a professional accountant in different circumstances? (Q-7)
b. What should the professional accountant do if his request for consent to act for another party having
conflict of interest is refused by the client? (Below)
Ans: Where a professional accountant in public practice has requested consent from a client to act for another
party in respect of a matter where the respective interests are in conflict and that consent has been refused by
the client, then the professional accountant in public practice must not continue to act for one of the parties in
the matter giving rise to the conflict of interest.
May-June’ 2013
2. Confidentiality is an assurance that information is shared only among authorized persons or entities.
Breaches of confidentiality can occur when data is not handled in a manner adequate to safeguard the
confidentiality of the information concerned. Such disclosure can take place by word of mouth, by printing,
copying, e-mailing or creating documents etc. The classification of the information should determine their
confidentiality for determination of the appropriate safeguards.
a. What is the importance of confidentiality (Q-1)? What are the safeguards to confidentiality? (Q-2)
b. What should be your actions if you are compelled by the law that you have to disclose confidential
information of your client in the public interest? (Q-3 & 4)
c. How will you manage conflict of interest in accepting an assurance client? (Q-6)
d. How an auditor can maintain ‘Chinese Walls’ to safeguard clients’ confidentiality? (Q-8)

May-June’ 2018
(b) Describe in brief the following terminologies along with related threats and safeguards as they
I. Conflict of interest. (Below & Q-6 & 7)
Ans: A conflict of interest is a situation in which a person or organization is involved in multiple

interests (financial, emotional or otherwise) one of which could possibly corrupt the motivation of
the individual or organization.


OUT OF ASSURANCE MANUAL – KNOWLEDGE LEVEL

May - June’ 2010
17. Explain “walk-through” test with suitable examples.
Answer: Walk-through tests are defined as tracing one or more transaction through the accounting system and
observing the application of relevant aspects of the internal control system. For example, the auditor might
look at the sales system in a wholesaler and trace sales from its initiation through to the sale figure in the
profit and loss account.
May - June’ 2013

3. (b) The financial statements of A Ltd. were prepared on going concern basis, although there is a significant
doubt about the company’s ability to continue as a going concern.
What effects will this situation have on your audit report if the uncertainty over ‘going concern’ is
(i) fully disclosed in the financial statements
(ii) not disclosed in the financial statements
Answer: Based on the audit evidence obtained and if a material uncertainty exist, the auditor judgment will be
appropriate to disclose the nature & implication of the uncertainty, the degree of its potential impact and
likelihood of occurrence.
If the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a
material uncertainty exists, the auditor shall disclose the following:
a) Adequately describe the principal events or conditions that may spread significant doubt on the
entity’s ability to continue as a going concern and management plans to deal with these events.
b) Disclose clearly that there is a material uncertainty related to events that may significant doubt on
the entity’s ability to continue as a going concern and therefore it may be unable to realize its assets and
discharge its liabilities in the normal course of business.
Nov - Dece’ 2014

3. Auditors cannot always predict future events or conditions which may cause going concern problems. For
this reason, the fact that an entity may cease to exist as a going concern after receiving an audit report that
does not refer to a substantial doubt about going concern even within a year after the statement date.
Similarly, the absence of a reference in an auditor’s report to substantial doubt is not a guarantee as to the
entity’s ability to continue as a going concern.
a. During the time of economic downturn when investments are very sluggish, going concern matters
become an area of heightened risk. What should auditors do for assessing going concern of clients?
Answer: Going concern matters have become an area of heightened risk in economic downturn. In this
environment related to going concern issue, auditors should assure that they:
a) Have a clear understanding about clients and its’ going concern matters.
b) Provide sufficient evidence about going concern matters
c) Obtain appropriate management representations
d) Proper documentation
c. As per ISA 570, justify whether substantial doubt about going concern exists in the following cases:
i. An International Oil Company (IOC) has decided to relinquish two deep-water blocks in Bangladesh after
lengthy negotiations with state-owned Petrobangla failed to yield improved fiscal terms.
Ans: The International Oil Company (IOC) is not a going concern in Bangladesh, because it has decided to
relinquish/turn down.
Out of Assurance Manual – Knowledge level Page 1

ii. The XYZ Energy Ltd., a coal mining company operating in the southern part of Bangladesh is stopped by a
court of Bangladesh from carrying out operations in Bangladesh.
Ans: The XYZ Energy Ltd. is not a going concern in Bangladesh, because it has to shut down.
iii. A Govt. owned Refinery is in serious cash flow problem but the government has provided with a sovereign
guarantee to the refinery to help it out with all payments.
Ans: Refinery is in cash flows problems but the government provided a guarantee to the refinery to help it out
with all payments, the refinery is a going concern despite poor financial position.
iv. The Rupayan Bank is in serious liquidity crisis and the government is not willing to bail it out. The Board
of Directors has passed a resolution to liquidate the business.
Ans: The Rupayan Bank is not a going concern because it’s Board of Directors has passed a resolution for
liquidation. It is probable that it will be out of business after the settled.
v. The Basic Textile Ltd. has a current ratio below 0.5. One of its major suppliers has demanded a payment of
Tk. 100 million, which the company could not meet. The supplier applied to the court for liquidation of the
business and recovered his debt and the court granted the order.
Ans: The basic Textile Ltd. is not a going concern, because the court granted for liquidation.
May-June’ 2015
4. The Bangladesh Standards on Auditing (ISA) 560 deals with the auditors’ responsibilities relating to
subsequent events in an audit of financial statements. Financial statements may be affected by certain events
which occur after the date of the financial statements.
a. Define the term `Subsequent Events’.
Ans: A subsequent event is an event or transactions occurring after the balance sheet date, but before the
financial statements are either issued or available to be issued. Subsequent events fall into two categories:
1. Events or transactions that provide additional evidence about conditions existed and incorporated
into the financial statements.
2. Events that provide evidence about conditions that did not existed and not incorporated into the
financial statements.
b. What are the Auditor’s responsibilities with regard to the “Events-occurring between the date of the
Financial Statements and the date of the Auditor’s Report?”
Ans: The auditor performs audit procedures that are designed to obtain sufficient appropriate audit evidence
to give reasonable assurance up to the (expected) date of the auditor’s report have been identified, properly
accounted for/or disclosed in the financial statements.
The auditor’s responsibility in relation to ensuring all events occurring between the reporting date and the
(expected) date of the auditor’s report have been adequately taken into consideration and sufficient
appropriate audit evidence has been gathered to achieve the objective.
c. What are the Auditor’s responsibilities with regard to the “Facts which become known to the Auditor after
the date of the Auditor’s Report but before the date of the Financial Statements are issued?”
Ans: In such situations, the auditor will consider whether the financial statements need amending. The auditor
is required to discuss with management how they intend to deal with events that will require the financial

statements to be amended after the auditors have signed their report, but before the financial statements are
issued.
Where the financial statements are amended, the auditor is required to carry out necessary audit procedures in
light of the circumstances giving rise to the amendment.
Nov-Dec’ 2017
4. c) What does the term 'Subsequent Events’?

Subsequent Events are those events occurring between the date of the financial statements and the date of the
auditor’s report, and the facts that become unknown to the auditor after the date of the auditor’s report.
A review of events after the balance sheet date is both a sensible thing to do and according to ISA 560,
compulsory. ISA 560 recognizes the two different types of subsequent event according to IAS 10:
• Adjusting events; and
• Non Adjusting events
May-June’ 2018
5. (b) Describe in brief the following terminologies along with related threats and safeguards as they
ii) Second Opinion.
Ans: Second Opinion means: If an auditor is asked to comment on an issue such as an accounting
treatment, or a proposed audit opinion by someone who is not a client, then it is being asked for a
second opinion.
How to response to the request: The auditor should ask why the opinion has been sought. He
should then contract the person’s existing auditor to obtain any relevant facts relating to the situation.
He should then ensure that a copy of his (the second opinion) opinion is sent to the first / Existing
auditor, although he will need permission from the entity to do this.
Why such care should be taken: The auditor is at risk of giving an inappropriate opinion if he gives
opinion without being aware of all the relevant facts. Therefore, an auditor should always decline to
give a second opinion if the client refuses permission for him to contact the company’s auditor.


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ASSURANCE - CA CERTIFICATE LEVEL

A combination of Manual & Suggested Answers up to May-June, 2019

Professional Education Clinic Care.

CHAPTER-1: CONCEPT AND NEED FOR ASSURANCE

(ii) A subject matter:

(iii) Suitable criteria:

(iii) Suitable criteria

Chapter – 1(Concept of and need for assurance) Page 1

Q-4: What types of assurance engagement as per framework? (Page-4)

Q-6: How the level of assurance varies? (Page-5)

Type of agreement Evidence Required Opinion/Conclusion Given

Q-8: Give few examples of assurance engagements. (Page-6)

There are also many issues users want assurance on:

Q-9: Why is assurance important? (Page-6)

Q-10: Why can assurance never be absolute? (Page-7)

Chapter – 1(Concept of and need for assurance) Page 2

Q-11: What are the limitations of an assurance services? (Page-7)

Ans: The limitations of assurance service include:

Q-12: What do you mean about expectations gap? (Page-8)

Q-14: Definition: Audit (Page-8), true and fair (Page-9)

Q-15: What are the objectives of an audit? (Page-9)

Chapter – 1(Concept of and need for assurance) Page 3

Q-18: International Standards on Auditing (ISAs) made up by what content? (Page-10)

Ans: International Standards on Auditing (ISAs) made up of:

Obtaining the engagement

Q-22: Define Professional scepticism & Professional judgement? (Page-11)

Chapter – 1(Concept of and need for assurance) Page 4

Previous year’s question:

Chapter – 1(Concept of and need for assurance) Page 5

Chapter – 1(Concept of and need for assurance) Page 6

Chapter – 1(Concept of and need for assurance) Page 7

2. Write short notes on the following: (Q-22)

To collect update soft copy – email: mnkhan22501@gmail.com

Chapter – 1(Concept of and need for assurance) Page 8

CHAPTER-2: PROCESS OF ASSURANCE: OBTAINING AN ENGAGEMENT

Q-2: What matters to be considered before accepting an engagement? (Page-19)

Ans: The following matters to be considered before accepting an engagement:

Chapter – 2(Process of assurance: obtaining an engagement) Page 1

Ans: See Assurance Manual Certificate level Page No: 21

Q12: What are the purposes / objectives of an engagement letter? (Page-24)

Ans: The purposes / objectives of an engagement letter is to:

Chapter – 2(Process of assurance: obtaining an engagement) Page 2

¾ Any change in nature or size of the client’s business

Q-14: What are the contents of an engagement letter? (Page-24)

Ans: The contents of an engagement letter are given below:

Previous year’s question:

Chapter – 2(Process of assurance: obtaining an engagement) Page 3

Chapter – 2(Process of assurance: obtaining an engagement) Page 4

CHAPTER-3: PROCESS OF ASSURANCE: PLANNING AND ASSIGNMENT

Ans: The contents of an audit plan are given below:

Q-3: Describe the steps included in structured approach of planning? (Page-37)

Ans: A structured approach to planning will include:

Ans: The contents of an audit strategy are given below:

Q-5: Define Understanding the entity as per ISA 315? (Page-40)

Chapter – 3(Process of assurance: planning and assignment) Page 1

Q-7: Describe an attitude of professional skepticism as per ISA 200?

Q-9: Why analytical procedure is required? (Page-44)

Ans: According to ISA 520 analytical procedures include:

¾ The consideration of comparisons with:

¾ The Consideration of relationships between:

Chapter – 3(Process of assurance: planning and assignment) Page 2

(c) Management accounts.