Questions

Nepal Standards on Auditing

1. Explain dual dating as per NSA 560.
2. Jethalal Gada & Associates has been appointed as the statutory auditor of XYZ Ltd., a
public limited company in FMCG market for F/Y 78/79. During the course of work, the
auditors were unable to obtain sufficient appropriate evidence regarding the Long Term
Investment and Income from Investment as shown in the Financial Statement. Then the
client requests Jethalal to change the nature of engagement, i.e., from audit engagement
to a review engagement.
What sort of changes in terms of engagement is not considered reasonable, answer in the
context of aforementioned information?
What are the steps to be followed by him if the changes are unacceptable?
3. You have been appointed as a statutory auditor of Gada Electronics Pvt. Ltd. for F/Y
78/79. During the audit your team suspects that there is a material breach in legal
provisions related to Valuation of Stock. State the audit procedures to be adopted by the
team when a possible Non-Compliance is Identified or Suspected.
4. Describe the conditions when the audit report is modified without affecting the auditor’s
opinion.
5. What are the points to be considered by the auditor in order to determine whether or not
to accept or continue the engagement as per NSA 600?
Nepal Standard on Review Engagement
6. Explain Interim Financial Information. State the General Principles governing the Review
of Interim Financial Information. Also list the various analytical procedures that the
auditor should consider while performing review of interim financial information.
7. List out the matters to be included in the engagement letter for engagements to perform
agreed upon procedures regarding financial information. Also present a sample of
engagement letter.
General Process of Auditing
8. You are an audit manager of Bhide & Co., the auditor of Gokuldham Co., which operates
an online food delivery portal running along with cloud kitchen 24 hours a day and 7 days
a week. While auditing the Financial Statements of F/Y 78/79, you came across the
process of payroll system.
Gokuldham Co., employs 100 people and approximately 80% of the employees work in
delivery section. There are three shifts every day of 8 hour each. The delivery employees
are paid weekly in cash.
The remaining 20% of employees work at kitchen, order receiving, order packaging, HR,
payroll department and are paid monthly by bank transfer. The HR department is
responsible for setting up all new employees. Pre-printed forms are completed by HR for
all new employees, and a copy is sent to payroll department for the employee to be set up
for payment. This form includes the staff member’s employee number and payroll cannot
set up new joiners without this information.
To encourage staff to attend work on time for all shifts, Gokuldham Co. introduced a
discretionary bonus, paid every three months for delivery staffs. The delivery supervisor
 determines the amount to be paid and notifies the payroll department. This quarterly bonus
is entered into the system by a junior staff and each entry is checked by a senior staff
before final approval. The senior staff signs the bonus amount list as an evidence of
reviewing the data.
Delivery staffs are provided with time card and are required to log their cards at the start
and end of their shift. The process is scrutinized by CCTV camera 24 hours a day. Each
card contains a unique identification number assigned to different individual and links the
hours worked by every staff with the data of payroll system and automatically calculates
the gross and net pay. These calculation are not cross verified by anyone.
In addition to tax deduction wages are reduced for items such as loan EMI of student
working as part time employees, owed to Government of Nepal. All employers have a
legal obligation to remit the EMI on timely basis and to maintain accounting records
which reconcile with annual loan statements sent by the government to employers. At
Gokuldham Co., student loan deduction form are self-filled by respective employees and
paid directly to government unless the employee notifies HR about the full repayment of
loan.
On quarterly basis, exception reports relating to changes to the payroll standing data are
produced and reviewed by the payroll department.
Overtime work is not allowed to anyone in the organization. Employees are entitled to
take an annual leave of 30 days. Holiday request forms are to be self-filled and authorized
by line manager but this does not always occur.
Senior manager from payroll department reviews the monthly records for employees to
be paid by bank transfer, and in case of any discrepancies the manager amends the records.
For delivery employees to be paid in cash, the actual amount of cash to be paid is delivered
on a weekly basis, i.e., Friday of each week, by a cash management company. Four
members of the payroll department produce the pay packets, two are responsible for its
preparation and other two check the finished pay packets. Same staffs are then required
to sign the weekly payroll listing on completion of this task. The pay packets are then
delivered to the delivery department head, who distribute them to employees at the end
of the employee’s shift, as they know each member of delivery department.
Management accounts are produced on monthly basis, which details the variances
between budgeted amounts and actual. Revenue and key production costs are detailed,
but wages and salary are not analyzed.
Analyze the above information and:
a)
(i) Identify and explain five direct controls which the auditor may seek to place
reliance on,
(ii) Describe a test of control the auditor should perform to assess if each of these
direct controls is operating effectively,
b) Identify and explain two deficiencies in Gokuldham Co’s payroll system and provide
a control recommendation to address each of these deficiencies.
9. You have been freshly appointed as auditor of Saman.com, an online portal which
purchases consumer good and re-sells these through its website to wholesalers. As this is
a new client to your firm, the audit manager has attended an entry meeting with the finance
 officer and CEO and has provided you with financial statement extracts. Some other
points regarding the ongoing process inside the company has also been provided.
These points state that:
 The company does not take a full year-end inventory count, rather than that it
undertakes a monthly inventory count (perpetual), covering one-twelfth of all lines
monthly. As a part of interim audit which was completed just a month back, an
articled assistant attended the counting in Jestha 2079 and noticed that there were
huge discrepancies between the physical inventory count and inventory records (i.e.,
inventory records were higher than actual physical inventory count). When discussing
these exceptions with finance director, the assistant was informed that it was a
standard issue all the year. Additionally it was also noticed that some lines of
inventories were at least 90 days old.
 Saman.com has offices all around Nepal, where accounting records are maintained to
some extent. But these sites were not visited during the interim audit.
 One of the customer has filed a case in court against loss of profit claims stating that
Saman.com has consistently failed to deliver goods in saleable condition. But same
has not been adjusted in Financials.
 The finance officer of Saman.com informed you that one of the reasons you were
being appointed as auditor was because of your knowledge of the industry. Your audit
firm handles number of other similar companies, including Saman.com’s main
business competitor. The CEO has enquired about the approach of your firm to keep
information obtained during audit confidential.
a) With the help of aforementioned information mention at least five audit risk and also
explain auditor’s response to each risk in planning the audit.
b) Explain the safeguards which your audit firm should implement to ensure that this
conflict of interest if minimized/mitigated.
10. Popatlal Umbrella Pvt. Ltd is a Narayangadh based business which manufactures umbrella,
raincoat and other products. For F/Y 78/79 Champaklal & Associates have been appointed
as the statutory auditor of Popatlal Umbrella Pvt. Ltd. Draft Financial Statements have been
prepared.
The balance of year-end trade receivables are NRs.3.85 million (Last F/Y NRs. 2.45
million) and revenue for the year has slightly increased compared to previous year. Popatlal
has a large number of receivables ranging from NRs.5,000 to NRs.45,000. A positive
receivable circularization has been initiated to validate the year end balances. Majority of
response from debtors agreed to the balances as per Popatlal’s internal records but some
exceptions were noted as follows:
Party Name Balance as per Popatlal Response from Debtors
Jetha Pvt Ltd. 36,558 No response
Babita & Co 24,115 18,265
Iyer Khudra Pasal 5,360 (credit) 3,450
Due to increase in receivable balances, Popatlal has recently hired additional credit
controller to follow up and collect outstanding receivables, due to which the finance
director believes that it is not crucial to continue to maintain a significant provision towards
 the credit losses or receivables provision and has reduced the provision amount from
125,000 to 5,000.
a) Note down the procedures Champaklal & Associates should adopt in order to resolve
the exceptions noted for each customer during the positive receivable circularization of
Popatlal.
b) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidenced in relation to the allowance for credit losses or receivables
provision in the current year.
11. Dhapashi Glass House, a customized glass trading company, is currently being audited by
XYZ & Associates, for F/Y 78/79. During the year under audit, it was observed that
Dhapashi Glass House has consistently paid a number of its supplier significantly late than
usual and only after multiple reminders. Due to this most of its suppliers have withdrawn
credit terms meaning that it must pay Cash on Delivery.
Among its suppliers Kaji Glass House supplies around 80% of its highly customized glass.
Recently an update has been received that Kaji Glass House has ceased to trade.
Furthermore, the overdraft has increased significantly over the year and the directors have
informed that the overdraft facility is due for renewal next month, and are fairly confident
regarding the renewal. In order to conserve cash, the directors have decided to not pay any
dividend for the F/Y 78/79.
a) Identify and explain any three potential indicators that Dhapashi Glass House isn’t a
going concern.
b) Also describe the audit procedures the auditor should perform in assessing whether or
not Dhapashi Glass House is a going concern.
Code of Ethics & other guidelines by ICAN
12. Mr. Hansraj, a well experienced Chartered Accountant, currently accepted the assurance
engagement of Hamro Bank Ltd., a commercial bank, having branches throughout Nepal.
The Bank charges an interest of 20% to normal credit card holders. Before issuing the credit
card the bank collects salary certificate, pay slips and bank statement from applicant to
assess their credit card limit. But during the entry meeting, CEO offered Mr. Hansraj a
platinum credit card targeted to elite customers. The platinum card normally has a limit of
NRs.20 lakhs and interest of 15% p.a. Further it requires the about one month time to fully
process the application. As Mr. Hansraj is the auditor of Hamro Bank Ltd. CEO decided to
waive off the screening process, increased the limit to NRs.50 lakhs and decreased interest
to 6%p.a. Mr. Hansraj gracefully accepted the credit card and went through the
engagement.
In context of Code of Ethics has Mr. Hansraj done anything wrong?
13. Define Network Firm. Also mention conditions and circumstances enabling the formation
of network firm.
14. Mr. Gautam, CA is currently statutory auditor of Mitho Chowchow Udhyog (MCU) Pvt.
Ltd. It’s 19th August, 2022, Friday. Around 1:45 PM, Mr. Rakesh, Managing Director of
MCU came into the audit room and asked Mr. Gautam for a favor. He said that, he was
travelling to Thailand for about a month and asked Mr. Gautam to take possession of his
cash stored in his table locker and his wife’s jewelry. Mr. Gautam without even thinking
for a minute agreed to the request so Mr. Rakesh handed cash NRs.10 lakhs and jewelry
worth NRs.30 lakhs. When Mr. Gautam arrived at his office next Monday the CBI handed
 over a letter stating that the cash was all black money and the jewelry was also imported
through under invoicing the actual value. Now CBI assumes that Mr. Gautam is also
involved in this transaction but towards the defense of Gautam, he didn’t know about the
reality of cash and jewelry. State the provision mentioned by Code of Ethics regarding the
steps to be taken before accepting the custody of client’s asset.
Other Services & EDP Audit
15. Define Due Diligence Audit. Also state the differences between the scopes of a Due
Diligence Investigation and an audit of financial statements.
16. Define EDP Audit. Also explain the approaches to EDP Audit.
17. Define Risk Based Internal Audit (RBIA). Also compare the focus area of traditional
approach of audit and RBIA.
Audit of specialized enterprises
18. Describe Excess of Loss (XOL) Treaties. Also state the types of XOL Treaties.
General process of Auditing
19. What are the matters to be considered by the service auditor in determining the suitability
of the criteria to evaluate the design of controls?
General concept of Audit
20. List down the different types of threats to independence of auditor and elaborate them with
suitable examples.
Answers
1. When, in the circumstances described in paragraph 12(a) of NSA 560 the auditor amends
the auditor’s report to include an additional date restricted to that amendment, the date of
the auditor’s report on the financial statements prior to their subsequent amendment by
management remains unchanged because this date informs the reader as to when the audit
work on those financial statements was completed. However, an additional date is included
in the auditor’s report to inform users that the auditor’s procedures subsequent to that date
were restricted to the subsequent amendment of the financial statements.
2. As per NSA 210, Agreeing the Terms of Audit Engagements, the auditor shall not agree to
a change in terms of the audit engagement where there is no reasonable justification for
such change.
If the terms of the audit engagement are changed due to justified circumstances both parties
shall record the new terms of the engagement in an engagement letter or any other
agreement.
If any change in terms of engagement relates to information that is incorrect, incomplete or
unsatisfactory such change is not considered to be reasonable. In context of this situation
as the auditors are unable to obtain sufficient appropriate evidence regarding the Long Term
Investment and Income from Investment as shown in the Financial Statement, the entity
has requested to change the nature of engagement to avoid a possible qualified opinion or
a disclaimer of opinion which does not seem to be reasonable. The only intention of the
company to change the terms of engagement is to avoid a qualified or disclaimer of opinion
which makes the proposed change unreasonable.
If the auditor is unable to agree to a change of the terms of engagement and is not permitted
by the management to continue the original engagement, then the auditor shall:
 Withdraw from the audit engagement where possible under applicable law or regulation
and,
 Determine whether there is any obligation, either contractual or otherwise to report the
circumstances to other parties, such as those charged with governance, owners or
regulators.
3. As per NSA 250, Consideration of Laws and Regulations in an Audit of Financial
Statements, if an auditor becomes aware of information concerning an instance of non-
compliance or suspected non-compliance with laws and regulations, the auditor shall
obtain:
 Understanding of the nature of act and the circumstances in which it has occurred: and,
 Further information to evaluate the possible effect on the financial statements.
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter
with management and if possible with those charged with governance.
If management or those charged with governance do not provide sufficient information that
justifies that the entity is in compliance with laws and regulations and in auditor’s judgment
the effect of the suspected non-compliance may be material to the financial statements the
auditor shall consider the need to obtain legal advice.
If sufficient information about suspected non-compliance cannot be obtained the auditor
shall evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor’s
opinion.
 The auditor shall also evaluate the implication of non-compliance in relation to other
aspects of the audit including the auditor’s risk assessment and the reliability of written
representations and take appropriate action.
4. As per NSA 705, Modification of Auditor’s Report, in certain circumstances, an auditor’s
report may be modified by adding an emphasis of matter paragraph to highlight a matter
affecting the financial statements which is included in a note to the financial statements that
more extensively discusses the matter. The addition of such an emphasis of matter
paragraph does not affect the auditor’s opinion. The paragraph would preferably be
included after the opinion paragraph and would ordinarily refer to the fact that the auditor’s
opinion is not qualified in this respect.
The auditor should modify the auditor’s report by adding a paragraph to highlight a material
matter regarding a going concern problem and significant uncertainty (other than a going
concern problem), the resolution of which is dependent upon future events and which may
affect the financial statements.
The addition of a paragraph emphasizing a going concern problem or significant
uncertainty is ordinarily adequate to meet the auditor’s reporting responsibilities regarding
such matters. However, in extreme cases, such as situations involving multiple
uncertainties that are significant to the financial statements, the auditor may consider it
appropriate to express a disclaimer of opinion instead of adding an emphasis of matter
paragraph.
In addition to the uses of an emphasis of matter paragraph for matter that affect the financial
statements, the auditor may also modify the auditor’s report by using an emphasis of matter
paragraph, preferably after the opinion paragraph, to report an matter other than those
affecting the financial statements.
5. If the group engagement partner concludes that:
a) It will not be possible for the group engagement team to obtain sufficient appropriate
audit evidence due to restrictions imposed by group management and,
b) The possible effect of this inability will result in a disclaimer of opinion on the group
financial statements, the group engagement partner shall either:
 In the case of a new engagement, not accept the engagement, or, in the case of
a continuing engagement, withdraw from the engagement, where withdrawal is
possible under applicable law or regulation; or
 Where law or regulation prohibits an auditor from declining an engagement or
where withdrawal from an engagement is not otherwise possible, having
performed the audit of the group financial statements to the extent possible,
disclaim an opinion on the group financial statements.
6. Interim financial information is financial information that is prepared and presented in
accordance with an applicable financial reporting framework and comprises either a
complete or a condensed set of financial statements for a period that is shorted than the
entity’s financial year.
Generally interim financial information is issued for the quarters between the annual
financial statements. The objective is to give investors and other users updated information
of the entity.
General Principles governing the Review of Interim Financial Information:
 While reviewing Interim Financial Information the auditor shall:
 Comply with the ethical requirements relevant to the audit of the annual financial
statements of the entity.
 Implement quality control procedures that are applicable to the individual engagement.
 Conduct the review with an attitude of professional skepticism.
Analytical procedures the auditor may consider when performing a review of interim
financial information include the following:
 Comparing current interim financial information with projected figures such as budget
or business target.
 Comparing current interim financial information with non-financial information such
as legal provisions, pronouncements, rules and so on.
 Comparing different ratios with the expectations developed by the users or target.
 Comparing the figures with those entities operating in same industry.
 Comparing relationships among the elements in the current interim financial
information with corresponding relationships in the interim financial information of
prior periods, for example, expense as percentage of sales or receivable or marketing
expenditure.
7. Matters that should be included in the engagement letter are:
 A list of the procedures to be performed as agreed upon between the parties.
 A statement that the distribution of the report of factual findings would be restricted to
the specified parties who have agreed to the procedures to be performed.
 In addition the auditor may consider attaching to the engagement letter a draft of the
type of report of factual findings that will be issued.
Sample of Engagement letter for an Agreed upon Procedures Engagement
To,
The (Reporting Authority)
XYZ Co. Ltd.
This letter is to confirm our understanding of the terms and objectives of our engagement
and the nature and limitations of the services that we will provide, our engagement will be
conducted in accordance with the Nepal Standard on Related Services (or refer to relevant
national standards or practices) applicable to agreed-upon procedures engagements and we
will indicate so in our report.
We have agreed to perform the following procedures and report to you the factual findings
resulting from our work:
(Describe the nature, timing and extent of the procedures to be performed, including
specific reference, where applicable, to the identity of documents and records to be read,
individuals to be contacted and parties from whom confirmations will be obtained.)
The procedures that we will perform are solely to assist you in (state your purpose). Our
report is not to be used for any other purpose and is solely for your information.
 The procedures that we will perform will not constitute and audit or a review made in
accordance with Nepal Standards on Auditing or Nepal Standards on Review Engagements
and consequently no assurance will be expressed.
We look forwards to full cooperation with your staff and we trust that they will make
available to us whatever records documentation and other information requested in
connection with our engagement.
Our fees which will be billed as work progresses are based on the time required by the
individuals assigned to the engagement plus out of pocket expenses. Individual hourly rates
vary according to the degree of responsibility involved and the experience and skill
required.
Please sign and return the attached copy of this letter to indicate that it is in accordance
with your understanding of the terms of the engagement including the specific procedures
which we have agreed will be performed.

AAA & Co.,

Acknowledged on behalf of AAA Company by
(SIGNATURE)
Name and Title
8.
a) Following are the direct control and test of controls an auditor may seek:
I. Segregation of Duties:
Direct Control: Gokuldham Co. has a separate HR department which is
responsible for admission of new employees. Having a differentiation of roles
between the HR department and payroll department minimizes the risk of fake
employees being set up and paid. This ensures actual recording of payroll costs
which will prevent overstatement of expenditure.
Test of Control: Review the job descriptions of the staffs mentioned in payroll
and HR to confirm the segregation of responsibilities with regards to setting up
new employees. Discuss with the payroll department regarding understanding
the process of setting up new joiners.
II. Pre-printed new employee forms
Direct Control: Pre-printed forms are completed by HR for all new employees,
and includes assignment of a unique employee number, and once verified, a
copy is sent to the payroll department. Payroll is unable to set up new joiners
without information from these forms.
The use of pre-printed forms ensures that all relevant information, such as PAN
number, Bank account number is obtained about employees prior to set up.
In addition, payroll is unable to set up new joiners without the forms and
employee number, it reduces the risk of fictitious employees being set up by
payroll thereby ensuring the occurrence of payroll costs in respect of new
joiners.
 Test of Control: Randomly select a sample of new employees added to the
payroll during the year, review the joiner forms for evidence of completion of
all parts and that the information was verified as accurate and was received by
payroll prior to being added to the system.
Also select a sample of edit reports for changes to payroll during the year: agree
a sample of new employees added to payroll to the joiners forms.
III. Data processing checks
Direct Control: The quarterly bonus is input by a junior staff into the payroll
system but the input is verified by a senior clerk for input errors prior to final
approval. Further they evidence their review via signature. This reduces the risk
of input errors resulting in misstatement of payroll costs and over/underpayment
to the employees.
Test of Control: Attend the time of bonus processing, observe the junior staff
inputting and senior staff verifying the bonus payments into the payroll system.
In addition, obtain listings of quarterly bonus payments and review for evidence
of signature by the senior staff who checks for input error.
IV. Clock card process monitored
Direct Control: Production employees are issues with clock cards and are
required to swipe their cards at the beginning and end of their shift, which is
supervised by security camera 24 hours a day.
This ensures that genuine employees are only paid for the work actually done,
and reduces the risk of employees being paid but not completing their shift.
Additionally due to the supervision it is unlikely that one employee could swipe
in others.
Test of control: Observe the use of clock cards by employees when entering
the power station. Confirm the security team is supervising the process and
following up on discrepancies through discussion with the security staff.
V. Automatic transfer of data
Direct Control: The clock card information identifies the employee number
and links into the hours worked report produced by the payroll system. As the
hours worked are automatically transferred into the payroll system, this reduces
the risk of input errors in entering hours to be paid in calculating payroll,
ensuring accuracy of payroll costs.
Test of control: Utilize test data procedures to input dummy clock card
information, verify this has been updated into the payroll system.
b) Following are the control deficiencies and control recommendations:
Head Control deficiency Control recommendation
Production Production supervisors The bonus should be determined by a
Bonus determine the amount of the responsible official, such as the
discretionary bonus to be paid to production director and should be
employees. formulated based on written policy. If
significant in value, the bonus should
be formally agreed by the board of
directors.
 Production supervisors could pay The bonus should be communicated
extra bonuses to friends or close in writing to the payroll department.
employees.
This will result in additional cost
to the company.
Student Student loan deduction forms are On a regular basis at least annually,
loan completed by relevant employees this statement should be reconciled to
and payments are made directly the loan statement received from the
to the third party until the government and sent to the employee
employee notifies HR that the for agreement.
loan has been repaid in full. In accordance with the schedule,
As the payments continue until payments which are due to cease
the employee notifies HR, and shortly should be confirmed in
employees are unlikely to be writing with the third party, prior to
closely monitoring payments. stopping.
There is the risk that
overpayments may be made,
which then need to be reclaimed
leading to employee
dissatisfaction.
In the case of underpayments, the
company has an obligation to
transfer funds on time and to
reconcile to annual loan
statements. If the company does
not make payments in full and on
time, this could result in non-
compliance by both the company
and employee, resulting in fines
or penalties.
9. Audit risk along with Auditor’s response:
I. New Audit Client:
Audit Risk: Saman.com is a new client for the firm. As the team is not familiar with
accounting policies, transactions, reporting responsibilities, company balances, there will
be an increased detection risk on the audit.
Auditor’s Response: The audit firm should ensure a suitably experience team is assigned.
Also, adequate time should be allocated for team members to obtain understanding of the
company and the risk of material misstatement, including attendance at an audit team
briefing.
II. Perpetual inventory system:
Audit Risk: The Company prefers a monthly count inventory system (perpetual) over a
full year end count. Under such system, all inventory must be counted at least once a
year with adjustments made to the inventory records on a timely basis. Inventory could
be under or overstated if the counting are not complete or even a slight negligence or
ignorance will result in incorrect tally.
 Auditor’s Response: The completeness of the perpetual inventory counts should be
reviewed and the controls over the counts and adjustments to records should be tested.
III. Inventory record discrepancies
Audit Risk: During the interim audit, it was noted that there were significant exceptions
with the physical count of inventory and inventory records. It was noted that inventory
records showed a greater number/value of inventory than actual physical counting. It is
likely to result in overstated inventory.
Auditor’s Response: The level of adjustments made to inventory should be considered to
assess their significance. This should be discussed with management as soon as possible
as it may not be possible to place reliance on the inventory records at the year end, which
could result in the requirement for full year-end inventory count.
IV. Inventory valuation
Audit Risk: During the interim audit, it was noted that there were some lines of inventory
which according to the records were at least 90 days old. It would appear that there may
be obsolete inventory. There is a risk that obsolete inventory has not been appropriately
written down and inventory is overvalued.
Auditor’s Response: Ageing report of inventory should be reviewed and discussed with
management to assess if certain lines of products are obsolete. Detailed cost and net
realizable value testing to be performed to assess whether a write down of inventory is
required.
V. Legal Action
Audit Risk: A customer of Saman.com has commenced legal action against Saman.com
for a loss of profits claim. If it is probable that the company will make payment to the
customer, a legal provision is required. If the payment is possible rather than probable, a
contingent liability disclosure would be necessary. As this has not been adjustment, risk
over the completeness of any provisions and the necessary disclosure of contingent
liability exists.
Auditor’s Response: You should obtain a legal opinion about the likelihood of success
of any claim from wholesale customer. The results of this should be used to assess the
level of provision or disclosure included in the financial statements.
Safeguards to deal with conflict of interest:
 Both Saman.com and its competitor should be informed about your involvement as an
auditor for each company and if required consent should be obtained.
 Advise one or both clients to seek additional independent advice.
 Use separate engagement teams, with different engagement partners and team
members. Once and employee has worked on one audit, such as Saman.com, then they
should be prevented from being involved in audit of another one.
 Implement procedures to prevent access to information, for example, strict physical
separation of both teams, confidential and secure data filing.
 Communicate clear guidelines for members of each engagement team on issues of
security and confidentiality. These guidelines could be included within the audit
engagement letters.
 Use Non-Disclosure Agreement signed by team members, partners of the firm.
  A senior staff of the audit firm not involved in either audit should regularly monitor the
application of the above safeguards.
10.
a) Steps to resolve the exceptions:
Jetha Pvt. Ltd
 For non-response from Jetha Pvt. Ltd, with the client’s permission, the team should
send a follow-up request.
 If they don’t response to the follow-up request, then with prior approval of client,
the auditor should telephone the customer and confirm whether they will be able to
provide a written statement as a response.
 If there is still no response, the auditor should take additional measure to confirm
the balance such as detailed testing of the balance by scrutinizing the sales invoice,
goods dispatched notes, bank statement.
Babita & Co
 With a difference of NRs.5,850.00 the auditor should identify any disputed
amounts, and identify whether these are related to timing difference or possible
error on internal records.
 If the difference is due to timing such as cash in transit, this should be agreed to
post year end cash receipts in the cash book.
 If the difference relates to goods in transit, then this should be agreed to a pre year
end goods dispatched note.
Iyer Khudra Pasal
 The reason behind credit balance of Iyer Khudra Pasal should be discussed with the
credit controller and Chief Finance Officer to understand how a credit balance has
arisen.
 Review whether Iyer Khudra Pasal is a supplier as well as a customer; if so purchase
invoice may have been posted in error to the receivables rather than payables ledger.
 If the difference is due to credit notes, this should be agreed to a pre year end credit
notes dispatched around the year end date.
 The receivables ledger should be reviewed to identify any possible mis-postings as
this could be a reason for the difference with Iyer Pasal.
b) Allowance for credit losses or receivables provision in the current year:
 Conduct discussion with the CFO about the rationale for not providing against any
receivables and consider the appropriateness of the allowance.
 Obtain a breakdown of the opening allowance of NRs.125,000 and consider if the
receivables provided for in the prior year have been fully recovered as a result of
the additional credit control procedures or if they have now been fully written off.
 Inspect the aged trade receivables ledger to identify any slow moving or old
receivable balances and discuss the status of these balances with the credit
controllers to assess whether they are likely to be received.
  Review whether there are any after date cash receipts for identified slow moving
receivable balances.
 Review customer correspondence to identify any balances which are dispute or are
unlikely to be paid and confirm if these have been considered when determining the
allowance.
 Inspect board minutes to identify whether there are any significant concerns in
relation to payments by customers and assess if these have been considered when
determining the allowance.
 Recalculate the potential level of trade receivables which are not recoverable and
compare to allowance and discuss differences with management.
11.
a) Dhapashi Glass House paid some of it suppliers considerably late than due date and that
too after multiple reminders. Due to which some of the suppliers have withdrawn credit
terms meaning the company must pay cash on delivery. This hints towards the company
was struggling to meet its liabilities as they fell due. Paying cash on delivery means that
the company’s cash flow will be in immense pressure, because it has to pay right away
but will have to wait for cash from receivables due to credit terms.
Main supplier, i.e., Kaji Glass House, who supplies around 80% of highly customized
glass has stopped trading. If the glass is highly customized, there is a possibility that
Dhapashi Glass House won’t be able to obtain these products for other suppliers which
will impact on the company’s ability to trade. There may be other suppliers on the
market but it is likely that the won’t favor Dhapashi Glass House in terms of rate,
discounts, credit terms and so on, which will increase the outflows of the Glass House
and worsen the cash flow position.
Dhapashi Glass House’s overdraft has also grown significantly during the year and is
due for renewal within next month. If the bank does not renew the overdraft and the
company is unable to obtain alternative finance, then it may not be able to continue to
meet its liabilities as they fall due, especially if the supplier continue to demand cash
on delivery, and the company may not be able to continue to trade.
In order to conserve cash, Dhapashi Glass House has decided not to pay a final dividend
for the year ended for F/Y 78/79. This may result in shareholders losing faith in the
company and they attempt to sell their shares; in addition, they are highly unlikely to
invest further equity, and Dhapashi Glass House may need to raise finance to repay its
overdraft.
b) Audit Procedures for Going Concern:
 Obtain the company’s cash flow forecast and review the cash in and outflows.
Assess the assumptions for reasonableness and discuss the findings with
management to understand if the company will have sufficient cash flows.
 Perform a sensitivity analysis on the cash flows to understand the margin of safety
the company has in terms of its net cash in/outflow.
 Evaluate management’s plan for future actions, including their contingency plans
in relation to ongoing financing and plans for generating revenue, and consider the
feasibility of these plans.
  Review the company’s post year-end sales and order book to assess if the levels of
trade are likely to increase and if the revenue figures in the cash flow forecast are
reasonable.
 Obtain a written representation confirming the director’s view that the company is
a going concern.
 Consult legal representatives of the company as to the existence of any litigation.
 Perform audit tests in relation to subsequent events to identify any items which
might indicate or mitigate the risk of going concern not being appropriate.
12. As mentioned in Section 911 of Code of Ethics issued by ICAN, A firm, an assurance
team member, or any of that individual’s immediate family shall not accept a loan, or a
guarantee of a loan, from an assurance client that is a bank or a similar institution unless
the loan or guarantee is made under normal lending procedures, terms and conditions.
Examples of loans include mortgages, bank overdrafts, car loans and credit card balances.
In the above case Mr. Hansraj has accepted credit card beyond the normal lending
procedures, terms and conditions. As per normal standard the bank would only allow a limit
of NRs.20 lakhs with interest if 15% p.a and also obtain every documents necessary to
prove the repayment capacity. But in this case the bank has waived off its screening process,
granted a limit way beyond its normal lending limit, and also decreased the interest by more
than 50%. This clearly shows that both the bank and auditor has granted/accepted the credit
card beyond the normal lending procedure. This may also lead towards the auditor
compromising the independence, integrity and objectivity. Hence Mr. Hansraj has directly
violated the Section 911 of Code of Ethics issued by ICAN and is liable for action by the
ICAN.
13. As mentioned in GUIDELINES ON NETWORKS AND NETWORK FIRMS issued
by ICAN “When a firm forms a larger structure with the co-operation of other firms or
entities with an aim to enhance their ability to provide Professional services to the intended
parties, this formation of a larger structure becomes a Network firm. Formation of a larger
structure in itself does not make a network firm. Creation of a larger structure to function
as a network firm depends on the particular fact and circumstances. It does not depend on
the fact whether the involved firms or entities are legally separate and distinct.”
Conditions and circumstances indicated hereunder throw more insights to distinguish and
determine the real status of the formation of larger structure to be identified as a network
firm:
 The larger structure might be aimed only at facilitating referral of work which in itself
does not meet the criteria necessary to constitute a network;
 The sharing of immaterial costs for example sharing of costs related to development
of audit methodologies, manuals or training courses etc. does not in itself create a
network
 The association between a firm or an otherwise unrelated entity jointly to provide a
service or develop a product does not in itself create a network;
 A cooperation merely with another entity with a sole aim to respond jointly to the
request or an offer for a professional service does not in itself create a network;
  Merely using a common brand name does not create a network unless it includes
common initials or common name: for example, the common brand name as part of,
or along with, its firm name when a partner of a firm signs an audit report;
 Firms and entities shall take due care to prevent the perception that might be created
that a firm belongs to a network firm even if that firm does not belong to a network
firm and does not use the common brand name as part of the firm name for example:
by using brand name on stationery or sign board or presenting as a network by virtue
thought other means such as only taking the membership or other materials which do
not fulfill the above criteria of becoming network firm.
14. The Professional Accountants shall assume custody of clients’ assets or monies in
accordance with provisions of laws and regulations of the local jurisdiction and also in
conformity with the conditions mentioned in the engagement assignment. While assuming
custody of clients’ assets or monies, the professional accountants shall:
 Make enquiries about the sources of such assets; and
 Verify whether all legal and regulatory requirements are appropriately complied with.
Such enquiry about the sources of such assets will reveal and confirm whether the assets
are legally earned by the clients or are earned through illegal activities such as money
laundering, drug or human trafficking or even tax evasion etc.
Verifying compliance of legal or regulatory requirements will ensure whether any
provisions of the laws and regulations are breached or violated such as under or over
invoicing of import or export of goods and services or banking or securities (Security Board
of Nepal) regulatory requirements are breached by not having submitted the KYC
documents etc.
In this case Mr. Gautam readily accepted the custody of cash and jewelry. He should have
first enquired about the source of such cash and jewelry and advised the client to deposit it
in the bank. If the client isn’t able to deposit it in bank due to any reason he should evaluate
the reason behind such and accept it only after complying with regulatory requirement such
as making the client sign a note/contract about hand over of asset.
15. Due diligence is a process of verification, investigation, or audit of a potential deal or
investment opportunity to confirm all relevant facts and financial information and to verify
anything else that was brought up during an merger and acquisition deal or investment
process. Due diligence is completed before a deal closes to provide the buyer with an
assurance of what they’re getting.
Transactions that undergo a due diligence process offer higher chances of success. Due
diligence contributes to making informed decisions by enhancing the quality of information
available to decision-makers.
Due diligence allows the buyer to feel more comfortable that their expectations regarding
the transaction are correct. In mergers and acquisitions, purchasing a business without
doing due diligence substantially increases the risk to the purchaser.
Due diligence is conducted to provide the purchaser with trust. However, due diligence
may also benefit the seller, as going through the rigorous financial examination may, in
fact, reveal that the fair market value of the seller’s company is more than what was initially
thought to be the case. Therefore, it is not uncommon for sellers to prepare due diligence
reports themselves prior to potential transactions.
 The following table summarizes key differences in scope between a due diligence
investigation and an audit of financial statements:
Due Diligence Audit
Draws on a wide range of information Concentrates on the most recent set of
including cash flows, profit forecasts, financial statements.
business plans and management
accounts.
Provides a reviewed set of information to Provides assurance that data is free from
the client. material misstatement.
No detailed audit procedures performed Detailed audit procedures performed.
unless specifically requested or a cause
for concern.
Mainly uses analytical procedures where In addition to analytical procedures,
sets of data are compared, for example. substantive procedures are used where
To each other, benchmarks and samples of information are tested and
competitors. agreed to supporting documentation.
Forward looking - looks ate forecasts and Backward looking – concentrate on the
future expectations for a business. most recent set of financial statements
and only looks at future events that are
relevant to these.
No testing of systems and controls unless Systems and controls will be evaluated
specifically requested. and, if appropriate, tested.
16. Electronic Data Processing audit refers to evaluation of the accuracy and proper function
of an organization’s data processing. The purpose of this audit is to express and opinion
whether or not the results generated by the data processing are appropriate or not.
Approaches to EDP Audit:
 Black Box Approach: It is an approach of auditing where the auditor obtains audit
evidences by reconciling the inputs with the outputs. It is a method where evidences
are drawn and conclusion are reached without considering how inputs are being
processed to provide outputs.
 White Box Approach: In this approach the auditor uses the computer for the purpose
of auditing. The auditor also examines the processing design of the system and
accuracy of the program. The auditor needs to have technical expertise to use this
approach due to the requirement to use CAAT and other audit software.
17. Risk Based Internal Audit (RBIA) as a methodology that links internal auditing to an
organization’s overall risk management framework. RBIA allows internal audit to provide
assurance to the board that risk management processes are managing risks effectively, in
relation to the risk appetite.
It allows internal auditor to provide assurance to the Board of Directors that risk
management processes are managing risks effectively, having regards to the risk appetite
of the organization. It begins by reviewing mission vision and objectives of the
organization, then considered the risk that impact on the achievement of those objectives.
Examines the methodologies in place to mitigate the risk.
Traditional Approach of Audit RBIA
 Audit Plan is based on audit cycle due to Audit plan is based on the results of the
which there is a strict time duration. business unit’s risk evaluation. Risky
areas are covered first and far more
frequently.
Important risks may not be covered in the Provides assurance that important risks
audit program. are being managed properly.
Focusing on deficiencies in controls and The focus is on risks that are not properly
cases of non-compliance of the firm’s controlled and/or overly controlled.
policies and procedures.
An understanding of the business unit Creates an in-depth understanding of the
operation is built through time business unit operations through risk
consuming process mapping exercises assessment workshops and with the
and might rely on outdated policies and participation of business unit
procedures manuals. management.
18. Excess of Loss (XOL) can be defined as a special arrangement between the insurance
companies as mentioned in Re-insurance treaty where the reinsurance company is liable to
pay the loss only if the claim exceeds a particular threshold under a particular portfolio.
XOL treaty also provides for an underlying limit, which is a limit of maximum amount of
loss the ceding company would bear. For eg: If the underlying limit of motor portfolio
under XOL Treaty is NRs.17 Lakhs per policy, then the re-insurance company won’t
entertain a claim till the limit of NRs.17lakhs per policy.
Types of XOL treaties:
XOL cover on non-prevent basis: Losses resulting from one event are considered
together and aggregate amount of loss is determined and one loss underlying limit is
deducted from the aggregate amount of the loss to determine the liability of the excess
of loss reinsurer. This type of cover provides protection to an insurer against the
numerous losses caused by one or the same event such as cyclone, flood etc.
XOL cover on prevent basis: In this case as a result of one event several risks are
affected, the loss under each risk is arrived at separately and the underlying limit is
applied to each risk to determine the liability of the insurer.
19. In determining the suitability of the criteria to evaluate the design of controls, the service
auditor shall determine if the criteria encompass, at a minimum, whether:
 The service organization has identified the risks that threaten achievement of the control
objectives stated in the description of its system and
 The controls identified in that description would, if operated as described, provide
reasonable assurance that those risks do not prevent that stated control objectives from
being achieved.
In determining the suitability of the criteria to evaluate the operating effectiveness of
controls in providing reasonable assurance that the stated control objectives identified in
the description will be achieved, the service auditor shall determine if the criteria
encompass, at a minimum, whether the controls were consistently applied as designed
throughout the specified period. This includes whether manual controls were applied by
individuals who have the appropriate competence and authority.
20. Different types of threats are:
Threats Definition
Self Interest A threat that occurs when an audit
Threat firm or a partner or a member of
the firm could derive benefit either
financial or non-financial, out of
self-interest (i.e having vested
interest) from an audit client.
Self-Review A threat that occurs when an audit
Threat firm or an individual is placed to
review an assignment or a subject
matter related to that assignment
for which the firm or individual
was previously responsible for.
Advocacy A threat that occurs when the audit
Threat firm or an individual of that firm
promotes or is perceived to
promote audit client’s
position/opinion to such an extent
that the overall objectivity may be
questioned.
Familiarity A threat that occurs when an audit
Threat firm or a member of audit team
develops close relationship with
audit client, its board of directors
or top level management to such
an extent that the audit team
becomes too sympathetic to the
client’s interest.
Intimidation A threat that occurs when audit
Threat firm or a member of audit team
feels threats either actual or
perceived from the actions of audit
client and fails to act objectively
and professionally.
Example
Having direct financial interest in
an audit client or,
Having significant indirect
financial interest in an audit client
or,
Having close business relation
with audit client.
Providing service of both
management consultant and
external auditor.
A member of the firm handling an
audit client where previously
he/she was in a position to exert
significant influence upon business
decision and other internal matters
of the audit client.
Acting as an advocated on behalf
of the audit client,
Dealing for, or being a promoter
of, or a significant shareholder of
audit client.
Having close family relation with
audit client,
Long association with top level
management of the client,
Acceptance of gifts, hospitality
unless the value of such gifts is
insignificant.
Threat of replacement of auditor
due to disagreement over audit
points.
Dominant attitude of top level
management.