CA Aspirants-ICAN Compiled by Dammar Joshi

Important Exam Oriented Short Notes

Audit & Assurance (CAP II)

Compiled by Dammar Joshi

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1)Legal Liabilities of auditor:
Auditors must always perform their work complying the basic principles of audit, which are, integrity,
objectivity, independence, confidentiality, professional competency, due care and technical standards.

If the same is not complied with, then they can be held liable on account of:
i) Non compliance with Nepal Standards on Auditing; and
ii) Failure to protect the interest of stakeholders relying upon the audited financial statements;

Accordingly, the auditors’ liability falls under three categories:

i) To their clients (company itself);
ii) To third parties in case of negligence; and
iii) Civil and criminal liabilities.

2)Internal Audit: Internal audit is an independent, objective assurance and consulting activity designed to
add value and improve an organization's operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes.

3)Engagement Letter: It is letter issued by the auditor to the auditee which includes written terms of
engagement. This letter basically sets out the responsibilities of the auditor and the auditee and includes
other information such as audit fee and its payment terms, out of pocket expenses etc. This letter helps to
resolve the confusion which may arise during or subsequent to audit.

4)During payments vouching, the auditor does not merely check proof that money has been paid away".
Vouching is a substantive audit procedure which aims at verifying the genuineness and validity of a
transaction contained in the accounting records. It involves examination of documentary evidence to
support the genuineness of transaction.
Thus the object of vouching the payments of a business is not merely to ascertain that money has been
paid away; but theauditor aims to obtain reasonable assurance in respect of following assertions in regard
to transactions recorded in the books of account that :
i) a transaction is recorded in the proper account and revenue or expense is properly allocated to the
accounting period;
ii) a transaction pertains to entity and took place during the relevant period;
iii) all transactions which have actually occurred have been recorded;
iv) all transactions were properly authorized; and
v) transactions have been classified and disclosed in accordance with recognizedaccounting policies
and practices. Thus, it is through vouching that the auditor comes to know the genuineness of
transactions recorded in the client’sbooks of account wherefrom the financial statements are
drawn up.
Thus, the auditor’s basic duty is to examine the accounts, not merely to see its arithmetical accuracy but
also to see itssubstantial accuracy and then to make a report thereon

5)Guiding Factors of Materiality Concept

NSA 320 “Audit Materiality”, establishes standards on the concept of materiality and the
relationship with audit risk while conducting an audit. Guiding factors for determiningthe materiality
are:
i. item of materiality may be determined individually or in aggregate.
ii. The materiality depends on the regulatory or legal considerations.
iii. Materiality is not often reckoned with respect to quantitative details above. It hasqualitative
dimensions as well.
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6)Adverse Opinion
An adverse opinion should be expressed by the auditor when the effect of a disagreement is so material
and pervasive to the financial statements that the auditor concludes that a qualification of the report is
not adequate to disclose the misleading or incomplete nature of the financial statements. Whenever the
auditor expresses an opinion that is other than unqualified, a clear description of all the substantive
reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s)
on the financial statements. Ordinarily, this information would be set out in a separate paragraph
preceding the opinion or disclaimer of opinion on the financial statements and may include a reference to
a more extensive discussion, if any, in a note to the financial statements.
7)Going Concern
The going concern assumption is a fundamental principle in the preparation of financial statements.
Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the
foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking
protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded
on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal
course of business.

8)A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party (as
defined in NAS 16 Related Party Disclosures) of the reporting entity, ifthe proceeds of the policy:
a. can be used only to pay or fund employee benefits under a defined benefit plan; and
b. are not available to the reporting entity‟s own creditors (even in bankruptcy) andcannot be paid
to the reporting entity, unless either:
i. the proceeds represent surplus assets that are not needed for the policy to meet allthe related
employee benefit obligations; or
ii.the proceeds are returned to the reporting entity to reimburse it for employee benefitsalready paid.

9) Revaluation of fixed assets: Revaluation of fixed assets is the process of increasing or decreasing their
carrying value in case of major changes in fair market value of the fixed asset. NAS-06, Property, Plant and
Equipment requires fixed assets to be initially recorded at cost but they allow two models for subsequent
accounting for fixed assets, namely the cost model
and the revaluation model. Under the Revaluation model, the asset is carried at a revalued amount, being its fair
value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be
measured reliably. Revaluations should be carried out regularly, so that the carrying amount of an asset does not
differ materially from its fair value at the balance sheet date. If an item is revalued, the entire class of assets to
which that asset belongs should be revalued. Revalued assets are depreciated in the same way as under the cost
model. If arevaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity underthe heading "revaluation surplus" unless it represents the reversal of a revaluation
decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit
or loss. A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset. When a revalued
asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in
equity under the heading revaluation surplus. The transfer to retained earnings should not be made through
profit or loss.

10) Objectiive of audit of financial statements:In conducting an audit of financial statements, the overall objectives of
the auditor are:
 To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or 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
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financial reporting framework;and
 To reporton the financial statements,and communicate as required by the NSAs,in accordance with the
auditor’s findings.

Audits are not conducted with the objective of identifying fraud and errors prevalent in the company,
but the audit process normally result in identification of fraud or errors while conducting internal control
evaluation and using substantive procedures. This is because the auditing standards requires an auditor to
bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may
cause the financial position to be miss-stated. So, detection of material frauds and errors as an incidental
objective of independent financial auditing flows from the main objective of determining whether or not
the financial statements give a true and fair view.

11) Ownership and custody working paper: NSA 230, Audit Documentation contains the set of standards
that deal with working papers. The standard provides that the auditor should prepare, on a timely basis, audit
documentation that provides a sufficient appropriate record of the basis for the auditor’s report, and evidence that
the audit was performed in accordance with NSAs and applicable legal and regulatory requirements. Working
papers provide evidence that an effective, efficient, and economic audit has been carried out. As such, working
papers are the property of the auditor. The auditor may, at his discretion, make portions of or extracts from his
working papers available to his client. The auditor should retain the working papers for the period specific or the
period necessary to fulfill professional responsibility relating to the assignment.

12) Qualities of the auditor: An auditor should adhere to the fundamental principles applicable for the
auditor. The fundamental principles are integrity, objectivity, professional competence and due care,
confidentiality and professional behavior. The qualities required in and auditor are tact, caution, firmness, good
temper, integrity, discretion, industry judgment, patience, clear headedness and reliability. In addition, he must
have the shine of culture for attaining a great height. He must have the highest degree of integrity backed by
adequate independence. He must have a thorough knowledge of general principles of law which govern matters
with which he is likely to be intimate contact. He must pursue an intensive program of theoretical education in
subjects like financial and management accounting, general management, business and corporate laws,
computer and information systems, taxation, economics etc. An auditor must be honest; i.e; he must not certify
what he does not believe to be true and must take reasonable care and skill before he believes that what he
certifies is true.

13)Detection Risk: It is the risk that the auditor will not detect a misstatement that exists in an assertion that could
be material, either individually or when aggregated with other misstatements. Detection risk is a function of the
effectiveness of an audit procedure and of its application by the auditor.

14)Date of Auditor’s Report: The auditor should date the audit report no earlier than the date on which the auditor
has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements.
Sufficient appropriate audit evidence should include evidence that the entity‘s complete set of financial statements
has been prepared and that those with the recognized authority have asserted that they have taken responsibility
for them.

15)Materiality: Information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in
the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point
rather than being a primaryqualitative characteristic which information must have if it is to be useful. The
assessment of what is material is a matter of professional judgment. The auditor should consider materiality and
its relationship with audit risk when conducting an audit.

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16)Going Concern: The going concern assumption is a fundamental principle in the preparation offinancial
statements. Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the
foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection
from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the
entity will be able to realize its assets and discharge its liabilities in the normal course of busi

17) BENEFITS OF IMPLEMENTING IFRS OR EQUIVALENT NATIONAL STANDARDS

There are many benefits of implementing IFRS or its national equivalent financial reporting standards
which can be broadly divided into 3 main parts – Economy, Investors and the Industry.
Benefits to the Economy - As the market expands globally, the need for a global standard is also increasing.
Implementation of IFRS or equivalent standards facilitates the maintenance of orderly and efficient capital
markets and also helps to increase the capital formation and thereby economicgrowth.
Benefits to the Investors - Investors who are willing to invest abroad want information which is more
relevant, reliable, timely and comparable across various jurisdictions. Financial statements prepared using a
common set of accounting standards help investors better understand, at a little cost, the investment
opportunities as opposed to financialstatements prepared using a different set of national accounting
standards.
Benefits to the Industry - the Industry would be able to raise capital from foreign markets ata lower cost if it
can create confidence in the minds of the foreign investor that their financial statements comply with
globally accepted accounting standards.
18) Government Audit in Nepal
Government audit is as old as history of states. The concept and scope of government audit has developed
in tune with political, social and economic development of the countries. Government audit aims to promote
good governance through an independent, efficient and effective audit services. To carry out audit in an
independent manner, some independent institutions are set up through constitutional or legal provisions.
Such institution is empowered to carry out audits of all receipts, expenditure and other matters as specified in
mandate from various aspects such as regularity, economy, efficiency, and effectiveness, and propriety.
In Nepal, government audit is performed by an independent constitutional body, i.e. Office of Auditor
General (OAG). The Constitution of Nepal (2072) provides power to the auditor General, who is appointed on
the recommendation of the Constitutional Council, of conducting audit of all public sector entities with due
regards to regularity, economy, efficiency, effectiveness and proprietary.
As per the Audit Act, 2048, the Auditor General may conduct final audit of the financial activitiesand other
activities relating thereto of the offices, bodies or organization under its jurisdiction, either in detail or
sporadically or a random basis and present the facts obtained there from make critical comments thereon
and submit its reports.
The Auditor General submits his/her annual report to the president and which is caused by the president to
be tabled at parliament for discussion through prime minister.
19)Concept of Materiality
The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating
the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial
statements.
The „Framework for the Preparation and Presentation of Financial Statements‟ states that information is
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material if its omission or misstatement could influence the economic decisions of users taken on the basis of
the financial statements. Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than
being a primary qualitative characteristic which information must have if it is to be useful.
The decision to judge the materiality of the item whether in the aggregation of items, presentation or
classification of items shall depend upon the judgment of preparers of the account on the circumstances of the
particular case.

20)Written Representation
This refers to a written statement by management provided to the auditor to confirm certain matters or to support
other audit evidence. Written representations in this context do not include financial statements, the assertions
therein, or supporting books and records. Writtenrepresentations are necessary information that the auditor requires
in connection with the audit of the entity’s financial statements. Accordingly, similar to responses to inquiries,
written representations are audit evidence. Although written representations provide necessary audit evidence, they
do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
Furthermore, the fact that management has provided reliable written representations does not affect the nature or
extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or
about specific assertions.
The auditor shall request written representations from management with appropriate responsibilities for the
financial statements and knowledge of the matters concerned. Written Representations about management’s
responsibilities include:
• PREPARATION OF THE FINANCIAL STATEMENTS;

• INFORMATION PROVIDED AND COMPLETENESS OF TRANSACTIONS; AND

• OTHER RESPONSIBITY

21)Impairment of Assets: Besides charging annual depreciation on assets by the reason of normal wear and
tear, effluxion of time and obsolescence to re-instate the correct value of the assets considering the future
cash flows that the assets can generate, impairment loss needs to be provided. The difference between the
carrying amount of an asset and recoverable amount is termed as impairment loss. The treatment of
impairment loss is similar to depreciation except
the fact that it can be re-instated in future, if the recoverable amount of the asset exceeds the
carrying amount. The auditor must ensure that the provisions of NAS 36 ―Impairment of
Assets‖ are followed.
22) Audit Note-book: An audit note book is usually a bound book in which a large variety of matters
observed during the course of audit are recorded. Audit note books form part of audit working papers and
for each year a fresh audit note book is maintained. In case an auditor classifies his working paper into
permanent and current, then audit note book shall form part of the current file. It is in any case a part of the
permanent record of the auditor available for reference later on, if required.
The audit note book also provides a valuable help to the auditor in picking up the links of work when the
concerned assistant is away or the work is stopped temporarily. It is also used for recording the various
queries raised in the course of the work and their state of disposal. In respect of disposed queries,
explanation obtained and evidence seen would be recorded in the said book, while queries remaining un-
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disposed of would be noted for follow up.

23) Subsequent Events: NSA 560 on ―Subsequent Events‖, defines the term ―subsequent events‖ as
events occurring between the date of the financial statements and the date of the auditor‘s report, and facts
that become known to the auditor after the date of the auditor‘s report.,
―subsequent events‖ also refer to significant events which occurred upto the date of report of
the auditor of that component. Thus, subsequent events are those events which occur after the
date of the balance sheet till the audit report is signed by the auditor.

24)Vouching of Advances to suppliers can be done as follows:

 Obtain schedule of debit balances in trade payables‘ account and pay particular attention to
the age of the balances. Also scrutinize the bought ledger.
 Enquiry should be made for long unadjusted outstanding and check as to whether any of
them would require provisioning.
 Examine that the advances have not been shown as deposits in balance sheet.
 Confirmation of balances should be obtained and reconciliation be done in case of any
discrepancies.

25)Employment with audit client:Employment with an audit client may create self-interest and
self-review threats. Later on, familiarity or intimidation threats may be created if a director or
officer of the audit client, or an employee in a position to exert significant influence over the
preparation of the client‘s accounting records or the financial statements on which the firm will
express an opinion, has been a member of the audit team or partner of the firm.

26)Professional skepticism;Professional skepticism is an attitude which includes a questioning

mind, being alertto conditions which may indicate possible misstatement due to error or fraud,
and a critical assessment of evidence. Therefore, the auditor should recognize the fact that
circumstances may exist that may cause the financial statements to be materially misstated
throughout the audit process.

27)Peer review: This is a critical independent review of one public accounting firm's
practices by another public accounting firm. It is a review of the firm ‘s accounting and auditing
practices. It is intended that the review be done by practitioners upon fellow practitioners. Such
an external review offers a more objective evaluation of the quality of performance than could
be done byself-review.

Peer review studies the adequacy of the firm's established quality control policies and tests to
determine the extent of the firm's compliance to these policies. Suggestions for improvement to
the system are outlined in a letter of comments issued by peer reviewers to the reviewed firm.
If a firm fail to take appropriate corrective action, various actions may be imposed e.g.
suspension from membership.
In carrying out the review it is limited to: -

 Professional aspects of the practice.

 The overall total quality control policies.
 Professional aspect of the firms accounting and auditing practices

28)Internal auditing: The concept of independence is equally relevant for internal auditor too.
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Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organization ‘s operations.
Internal auditor is part of the management but s/he evaluates the functioning of the management
at different levels. Therefore, to be efficient and effective, the internal auditor must have
adequate independence. It may be noted that by its very nature, the internal audit function
cannot be expected to have the same degree of independence as is essential when the external
auditor expresses his opinion on the financial information. To ensure his independence, he is
made responsible directly to the Board of Directors through audit committee.
Such a channel of communication provides an independence whereby an internal auditor can
communicate and share his views on the scope of internal audit, findings, etc. If internal auditor
is made subordinate to lower level, his independence will be effected which will affect his
functioning and effectiveness

29) contents of audit documentation: In a recurring audit, the file of working papers that are
relevant to more than one audit engagement or core documents are often kept separately in a file
known as permanent audit file. Permanent audit file is updated regularly with information of
continuing importance to succeeding audit. As per NSA 230, Audit Documentation a permanent
audit file normally includes:
1) Information concerning the legal and organizational structure of the client. In
the case of a company, this includes the memorandum and articles of
association. Ianthe case of a statutory corporation, this includes the Act and
Regulations under which the corporation operates.
2) Extracts or copies of important legal documents, agreements and minutes
relevant to the audit.
3) A record of the study and evaluation of the internal controls
related to the accounting system.
4) Copies of audited financial statements of
previous years.5)Analysis of significant ratios and
trends.
6) Copies of management letters issued by the auditor if any.
7) Record of communication with the retiring auditor, if any
beforeacceptance of the appointment as the auditor and
8) Notes regarding significant accounting policies.
30)Statistical sampling: Statistical Sampling in auditing stands for the technique of forming an
opinion about a group of items on the basis of an examination of a few of the items. On the
basis of audit carried out, an auditor is required to give a report containing his opinion about
thetruth and fairness of the accounting statements. Thus, audit sampling involves the application
of audit procedures to less than 100% of the items within an account balance or class of
transactions to enable the auditor to obtain and evaluate audit evidence about some
characteristics of the items selected in order to form or assist in forming a conclusion
concerning the population.
31)Negative external confirmation: A negative external confirmation request asks the respondent
to reply only in the event of disagreement with the information provided in the request.
However, when no response has been received to a negative confirmation request, the auditor
remains aware that there will be no explicit evidence that intended third parties have received
the confirmation requests and verified that the information contained therein is correct.
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Accordingly, the use of negative confirmation requests ordinarily provides less reliable
evidence than the use of positive confirmation requests, and the auditor considers performing
other substantive procedures to supplement the use of negative confirmations.
Negative confirmation requests may be used to reduce audit risk to an acceptable
level when:
i) The assessed level of inherent and control risk is low;
ii) A large number of small balances is involved;
iii) A substantial number of errors is not expected; and
iv) The auditor has no reason to believe that respondents will disregard these requests.
32)The principle of objectivity imposes the obligation on all professional accountants not to
compromise their professional or business judgement because of bias, conflict of interest or the
undue influence of others.
Professional accountants may be exposed to situations that may impair objectivity which involve
the possibility of pressures being exerted on them. These pressures may impair their objectivity.
It is impracticable to define and prescribe all such situations where these possible pressures exist.
Reasonableness should prevail in establishing standards for identifying relationships that are
likely to, or appear to, impair a professional accountant’s objectivity.

33) Performance Audit

A performance audit is an objective and systematic examination of evidence for the purpose of providing an
independent assessment of the performance of a governmentorganization, program, activity or function in
order to provide information to improper

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public accountability and facilitate decision making by the parties with responsibility
tooversee or initiate corrective action.
Elements of Performance Audit:
 Economy,
 Efficiency, and
 Effectiveness
34)Those Charged with Governance
Those charged with governance mean the person(s) or organization(s) with responsibility
for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. This includes overseeing the financial reporting process. It
describes the role of persons entrusted with the supervision, control and direction of an
entity. Those charged with governance ordinarily are accountable for ensuring that the
entity achieves its objectives, financial reporting, and reporting to interested parties.
Those charged with governance include management only when it performs such
functions. In some cases, those charged with governance are responsible for approving
the entity’s financial statements (in other cases management has this responsibility). For
entities with a board of directors, this term encompasses the term board of directors or
audit committee used elsewhere in generally accepted auditing standards.
35)EDP Audit
The prime objective of EDP audit is to determine whether computer systems safeguard
assets, maintain data integrity, achieve organizational goals effectively and consume
resources efficiently. A proper system of internal control is necessary to ensure that the
objectives are met. It may be remembered that the overall objectives and scope of an
audit does not change in an EDP environment. However, the use of a computer changes
the processing and storage of financial information and may affect the organization and
procedure employed by the entity to achieve adequate internal control. Similarly; EDP
environment may affect auditor's procedures to be applied in conduct of audit.
36)Environmental Audit
It is a general term that can reflect various types of evaluations intended to identify
environmental compliance and management system implementation gaps, along with
related corrective actions. A management tool comprising a systematic, documented
periodic and objective evaluation of how well environmental issues have been organized
and managed by the entity to safeguard the environment by:
a) Facilitating management control of environmental practices; and
b) Assessing compliance with related national and international laws,
conventions and the company policies, which would include meeting
regulatory requirements.
37)Uses of Negative External Confirmation Requests
A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request. However, when no response
has been received to a negative confirmation request, the auditor remains aware that there
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will be no explicit evidence that intended third parties have received the confirmation
requests and verified that the information contained therein is correct. Accordingly, the
use of negative confirmation requests ordinarily provides less reliable evidence than the
use of positive confirmation requests, and the auditor considers performing other
substantive procedures to supplement the use of negative confirmations. Negative
confirmation requests may be used to reduce audit risk to an acceptable level when:
i. the assessed level of inherent and control risk is low;
ii. a large number of small balances is involved;
iii. a substantial number of errors is not expected; and
iv. the auditor has no reason to believe that respondents will disregard these
requests.
37)Professional Skepticism
Professional skepticism is an attitude which means that the auditor should recognize the
fact that circumstances may exist that may cause the financial statements to be materially
misstated. It 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.
38)Computer Assisted Audit Techniques
Computer assisted audit techniques (CAATs) includes tools used by auditors during their
work. These tools allow auditors to receive data in any form and analyze it better. CAATs
include various methods that can help auditors in many ways. For example, auditors can
use them to identify trends or signal out anomalies in the provided information. These
tools are available for both external and internal audit uses. In essence, computer-assisted
audit techniques refer to the use of technology in auditing. Using these tools, auditors can
assess several aspects of their audit engagement. Whether it is evaluating the client’s
internal controls or extracting specific information, CAATs can be significantly valuable.
While some people assume CAATs apply to large audits only, these tools are beneficial
in any size audits. Traditionally, auditors spend most of their time analyzing data. With
CAATs, they don’t have to take the same time. Instead, they can focus on other more
prominent audit matters.

39)Teeming and Lading

Teeming and lading is a term that describes a practice whereby organizations attempt to
hide an information in one customer’s account by moving in money from another
customer’s account. It is sometimes referred to as lapping, short banking, or delayed
accounting. Essentially, teeming and lading is a strategy that delays a payment deficit from
showing up on a customer’s account by moving money around. Hence, older payments
appear to have been covered before customers, or other organization members might
notice any disparity. Most often, teeming and lading is a strategy used by employees who
have used a customer’s money for personal purposes to cover their tracks. It may also be
used by an employee that has used one customer’s money for another customer’s benefit.
In both examples, teeming and lading helps keep the activity from being found out by
delaying a deficit from showing up in the books and manipulating the company accounts.

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40) Contingent liabilities:The
contingent assets are those which may arise on the happening of an
uncertain event. As a general practice, contingent assets are not recorded in the balance sheet
because that would imply taking credit for revenue which has not accrued. But it is logical
as the contingent liabilities are shown in the balance sheet the contingent assets should also
be shown. The Companies Act does not require disclosure of contingent assets in the
balance sheet. However, if contingent asset have a significant value, it may be advisable to
disclose such assets in a note to the balance sheet.
As regards valuation of contingent assets, it may be noted that ordinarily no valuation
would be required. However, if such assets were disclosed by way of a note, a proper
valuation based on the related contract
would be made. Where full realization of such assets is doubtful even on the face of
contingency occurring, it would be safer to value the assets on a realisable basis.

41) Disclaimer of opinion:

Depending upon the circumstances, an auditor expresses an opinion on the financial
statement. A disclaimer of opinion should be expressed when the possible effect of a
limitation on scope is so material and pervasive that the auditor has not been able to
obtain sufficient appropriate audit evidence and accordingly is unable to express an
opinion on the financial statements.

42) Three important characteristics of an effective system of computer audit

program

Important characteristics of an effective system of computer audit program:

(i) Should be simple to use and eliminate the need to remember countless details normally
required in writing or revising computer programs.
(ii) Should be easily understandable even by those with little computer expertise and
easy to use.
(iii) Should be capable of being used with different configuration of
computers.
(iv)The package has to include adequate support at the time of installation,
provide adequate training to the staff and to provide documentation. There should be a
provision for future revision of the program.
(v) The package should have statistical sampling capability.
(vi) The system has to be acceptable to all users in terms of easy execution and
compatible with the existing system.
(vii) The program has to be capable of processing different types of applications.
(viii) The program should have strong report writing function including the ability to
prepare multiple reports in a single program run and to generate flexible output report
formats.
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43) Analytical procedures in planning an audit

In the planning stage, analytical procedures assist the auditor in understanding the
client’s business and in identifying areas of potential risk by indicating aspects of and
developments in the entity’s business of which he was previously unaware. This
information will assist the auditor in determining the nature, timing and extent of his
other audit procedures.

Analytical procedures in planning the audit use both financial data and non-financial
information, such as number of employees, the square feet of selling space, volume of
goods produced and similar information

44) Familiarity threat:

The circumstances in which professional accountants operate may create specific threats
to compliance with the fundamental principles which the auditors are required to
comply. Threats may be created by a broad range of relationship and circumstances

One of such threat may be Familiarity threat. It is a threat that due to a long or close
relationship with a client or employer, a professional accountant will be too sympathetic to
their interests or too accepting of their work. Some of the circumstances that create
familiarity threat

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include:
 A member of the audit team having a close or immediate family member
who isadirector or officer of the client,
 Senior personal having a long association with the audit client etc.

45)Detection risk: Detection risk is the risk that the auditor will not detect a misstatement
that exists in an assertion that could be material, either individually or when aggregated with
other misstatements. Detection risk is a function of the effectiveness of an audit procedure
and of its application by the auditor. Detection risk cannot be reduced to zerobecause the
auditor usually does not examine all of a class of transactions, account balance, or
disclosure and because of other factors. Such other factors include the possibility that an
auditor might select an inappropriate audit procedure, misapply an appropriate audit
procedure, or misinterpret the audit results. These other factors ordinarily can be addressed
through adequate planning, proper assignment of personnel to the engagement team, the
application of professional skepticism, and supervision and review of the audit work
performed.

46) Audit Strategy

Audit planning is the process of gathering information and design audit strategies. The main
output of audit planning is a tailored audit approach supported by appropriate
administrative arrangements.

Audit strategy is concerned with designing optimized audit approaches that seeks to achieve
the necessary audit assurance at the lowest cost within the constraints of the information
available. Audit procedures should be relevant to the important assertions, and as cost
effective as possible to perform.

Audit strategy generally involves the following steps:

i) Obtaining knowledge of clients business,
ii) Performing analytical procedures at initial stage,
iii) Evaluating inherent risks,
iv) Evaluating internal control system for strategy purpose and
v) Formulating the strategy.

The auditor should also develop the strategy by considering the results of gathering
or updating information about the client, and making preliminary judgment about
materiality, inherent risk and control effectiveness.

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The initial assessment of the quality and complexity of the client’s system will affect theamount of the
information the auditor needs to gather. Sometimes, on a new engagement,the appropriate strategy may be
oblivious from a limited amount of investigation work.

47) Features of Government Audit

Citizen of the country are more concern on issues concerning public accountability, including
themisuse of public funds, evaluation of the effectiveness and outcomes of government programs,
information disclosure based on the “right-to-know,” and requests for disclosure of government
financial data through financial statements. To meet these challenges, each government has one
Supreme Audit Institution that is responsible for the public auditing whereas Financial Comptroller
General is responsible to maintain public accounting.

Supreme Audit Institution in Nepal is called the office of the Auditor General (OAGN) who conduct
public audit of the government budget and expenditure. Regarding the aim of auditing, public audits
are carried out as comprehensive audits that include financial auditing and performance auditing or
value-for-money (VFM) auditing.

The aim of audit of government auditing has some audit areas that are completely different from
those concerning the auditing of corporate accounts. In government auditing, the scope of financial
auditing includes audit areas other than the audit of accounts, and performance auditing includes the
evaluation of economy, efficiency, and effectiveness. OAGN also performs the auditof regularity and
propriety.

Government auditing was initially conducted as compliance audits, which means accurate account
auditing or financial auditing. Subsequently, government organizations were required toprovide
effective public services by efficient management in the performance of their trusteeshipobligations,
which in turn necessitated performance auditing.

As a feature of performance auditing, the Auditing Standards of the International Organization

ofSupreme Audit Institutions (INTOSAI) point out that “performance audits should not
concentratesolely on criticism of the past but should be constructive.

48) Tolerable error: Tolerable error is the maximum error that that the auditor would be willing to accept
and still concludes that the result from the sample has achieved the auditobjective. Tolerable error is considered
during the planning stage and for substantive procedures related to the auditor judgment about materiality.
The smaller the tolerable error, the greater the sample size will need’s be.

In test of control, the tolerable error is the maximum rate of deviation from a prescribedcontrol by control
procedure that at the auditor would be willing to accept, based on thepreliminary assessment of control risk. In
substantive procedure, tolerable error is the maximum monetary error in an account balance or a class of
transactions that the auditorwould be willing accept, so that when the result of all audit procedure are reasonable
assurance, that the financial statement are not materially mis-stated.

49)Professional skepticism:It is a requirement of NSA 200 that, when planning and performing an audit, the
auditor should adopt an attitude of professional skepticism. Professional skepticism is defined by NSA 200 asan
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.

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This does not mean that the auditors should disbelieve everything they are told, but they should view what they are
told with a skeptical attitude, and consider whether it appears reasonable and whether it conflicts with any other
evidence. In other words, they must not simply believe everything management tells them.
50)Use of positive confirmation:A positive external confirmation request asks the respondent to reply to the
auditor in all cases either by indicating the respondent‘s agreement with the given information, or by asking the
respondent to fill in information. A response to a positive confirmation request is ordinarily expected to provide
reliable audit evidence. There is a risk; however, that a respondent may reply to the confirmation request without
verifying that the information is correct. The auditor is not ordinarily able to detect whether this has occurred. The
auditor may reduce this risk, however, by using positive confirmation requests that do not state the amount (or
other information) on the confirmation request, but ask the respondent to fill in the amount or furnish other
information. On the other hand, use of this type of ―blank‖ confirmation request may result
in lower response rates because additional effort is required of the respondents.

51)Use of Flow Charts in evaluation of internal control: It is a graphic presentation of each part of the
company‘s system of internal control. A flow chart is considered to be the most concise way of recording the
auditor‘s review of the system. It minimizes the amount of narrative explanation and thereby achieves a
consideration or presentation not possible in any other form. It gives bird‘s eye view of the system and the flow of
transactions and integration and in documentation, can be easily spotted and improvements can be suggested. It is
also necessary for the auditor to study the significant features of the business carried on by the concern; the nature
of its activities and various channels of goods and materials as well as cash, both inward and outward; and also a
comprehensive study of the entire processof manufacturing, trading and administration. This will help him to
understand and evaluate the internal controls in the correct perspective.

52)Cut-off arrangements: Accounting is a continuous process because the business never comes
to halt. It is, therefore, necessary that transactions of one period would be separated from those in the ensuing
period so that the results of the working of each period can be correctly ascertained. The arrangement that is made
for this purpose is technically known as ―cut-off arrangement‖. It essentially forms part of the internal control
system of the organization. Accounts, other than sales, purchase and stock are not usually affected by the continuity
of the business and therefore, this arrangement is generally applied only to sales, purchase and stock. The auditor
satisfies by examination and test-checks that the cut-off procedures are adequately followed and ensure that:
 Goods purchased, property in which passed on to the client, have in fact been includedin
the inventories and that the liability has been provided for in case of credit purchase.
 Goods sold have been excluded from the inventories and credit has been taken for the
sales. If the value of sales is to be received, the concerned party has been debited.
The auditor may examine a sample of documents, evidencing the movement of stock into and out
of stores, including documents pertaining to period shortly before and after the cut- off date and
check whether stocks represented by those documents were included or excluded as appropriate
during stock taking for perfect and correct presentation in the financial statements.
53) Audit risk:Audit risk is considered at the financial statement level during the audit planning process.
At this time, the auditor should undertake an overall audit risk assessment based on his knowledge
of the client‟s business, industry, management, control environment and operations. Such an
assessment provides preliminary information about the general approach to the engagement, the
auditor‟s staffing needs and the framework within which materiality and audit risk assessments can
be made at the individual account balance or class of transactions level. As part of this overall risk
assessment, the auditor should consider whether there is potential for pervasive problems, for
example, liquidity or going concern problems.
a) i. When planning to use the work of an expert, the auditor should assess the professional
competence of the expert which will involve considering the expert‟s:
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a. Professional certification or licensing by, or membership in, an appropriate professional
body;
b. Experience and reputation in the field in which the auditor is seeking audit evidence.
ii. The auditor should assess the objectivity of the expert. The risk that an expert‟s
objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity, for example, by being financially dependent
upon or having an investment in the entity. If the auditor is concerned regarding the
competence or objectivity of the expert, the auditor needs to discuss any reservations with
management and consider whether sufficient appropriate audit evidence can be obtained
concerning the work of an expert.
The auditor may need to undertake additional audit procedures or seek audit evidence from
another expert.
54)The appropriate capabilities and competence expected of the engagement team as awhole includethe
following:
 An understanding of, and practical experience with, audit engagements of a similar
nature and complexity through appropriate training and participation.
 An understanding of professional standards and regulatory and legal requirements.
 Appropriate technical knowledge, including knowledge of relevant information
technology.
 Knowledge of relevant industries in which the client operates.
 Ability to apply professional judgment.
 An understanding of the firm‟s quality control policies and procedures.

55)Financial Indicators
 Net liability or net current liability position.
 Fixed‐term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short‐term borrowings to finance long‐term assets.
 Indications of withdrawal of financial support by debtors and other creditors.
 Negative operating cash flows indicated by historical or prospective financial
statements.
 Adverse key financial ratios.
 Substantial operating losses or significant deterioration in the value of assets usedto
generate cash flows.
 Arrears or discontinuance of dividends.
 Inability to pay creditors on due dates.
 Inability to comply with the terms of loan agreements.
 Change from credit to cash‐on‐delivery transactions with suppliers.
 Inability to obtain financing for essential new product developmentor otheressential
investments.
56) consultation in quality audit:NSQC 1 and NSA 220 provides that the engagement partner should:

• Be responsible for the engagement team undertaking appropriate consultation ondifficult or

contentious/controversial matters;
• Be satisfied that members of the engagement team have undertaken appropriate consultation
during the course of the engagement
• Be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are documented and agreed with the party consulted; and

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Determine that conclusions resulting from consultations have been implemented

57) self review threat:It is the threat that a professional accountant will not appropriately evaluate the
results of a previous judgment made or service performed by the professional accountant, or by another
individual within the professional accountant’s firm or employing organization, on which theaccountant will
rely when forming a judgment as part of providing a current service.

58) Teeming and lading concept:It is a fraud arrangement whereby amount received from a customer
being misappropriated; also to prevent its detection the money received from another customer
subsequently being credited to the account of the customer who has paid earlier. Similarly, moneys received
fromthe customer who has paid thereafter being credited to the account of the second customer andsuch a
practice is continued so that no one account is outstanding for payment for any lengthof time, which may
lead the management to either send out a statement of account to him or communicate with him.

59) Audit of contingent liabilities

The auditor may take following steps to verify the contingent liabilities:
i. Inspect the minute books of the company to ascertain all contingent liabilities known tothe company.
ii. Examine the contracts entered into by the company and the likelihood of contingentliabilities
emanating there from.
iii. Scrutinize the lawyer’s bills to track unreported contingent liabilities.
iv. Examine bank letters in respect of bills discounted and not matured.
v. Examine bank letters to ascertain guarantees on behalf of other companies orindividuals.
vi. Discuss with various functional officers of the company about the possibility ofcontingent
liability existing in their respective field.
vii. Obtain a certificate from the management that all known contingent liabilities havebeen
included in the accounts and they have been properly disclosed.
viii. Ensure that proper disclosure has been made as per NAS 12, Provisions, ContingentLiabilities
andContingent Assets.
60)Uses of Negative External Confirmation Requests
A negative external confirmation request asks the respondent to reply only in the event of disagreement with the
information provided in the request. However, when no response has been received to a negative confirmation request,
the auditor remains aware that there will be no explicit evidence that intended third parties have received the
confirmation requests and verified that the information contained therein is correct. Accordingly, the use of negative
confirmation requests ordinarily provides less reliable evidence than the use of positive confirmation requests, and
the auditor considers performing other substantive procedures to supplement the use of negative confirmations.

Negative confirmation requests may be used to reduce audit risk to an acceptable level when: (a) the assessed level
of inherent and control risk is low; (b) a large number of small balances is involved; (ca substantial number of errors
is not expected; and (d) the auditor has no reason to believe that respondents will disregard these requests.

61)Use of Assertion in an Audit of Financial Statements

Assertions are the implicit or explicit claims and representations made by the managementresponsible for
the preparation of financial statements regarding the appropriateness of thevarious elements of financial
statements and disclosures.
Auditor may use those assertions for audit examination during audit of Financial Statements. In preparing financial
statements, management is making implicit or explicit claims (i.e. assertions) regarding the recognition,
measurement and presentation
of assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable financial
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reporting framework (e.g. NAS/NFRS).
Following Assertions for class of transaction, account balance and disclosures can be used.
 Occurrence,
 Completeness,

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 Accuracy cut-off,
 Classification and understandability
 Existence,
 Rights and Obligations
 Valuation and allocation

62)Key Audit Matters

Those matters that, in auditor's professional judgment, are of most significant in the audit of financial statements
of the current period are referred as key audit matters. Such key audit matters are selected from matters
communicated with those charged with governance. The auditor is required to communicate such matters to those
charged with governance and include in audit report in the Key Audit Matters Section.
The purpose of communicating key audit matters is to enhance the communicative value of auditor's report by
providing greater transparency about the audit that was performed. Communicating key audit matters provides
additional information to intended users of the financial statements to assist them in understanding those matters
which are of most significancein the audit of the financial statements. Communicating key audit matters is not a
substitute for disclosure in the financial statements or the substitute for the auditor expressing a modified opinion.
In determining key audit matters, auditor may take into account the areas of higher assessed risks and areas
requiring significant management judgment.

63)Powers to issue Directives by the Auditor General

The Auditor General may, subject to the Constitution of Nepal and the prevailing laws, issue directives
to the concerned Government Offices, and Corporate Bodies wholly or substantially owned by
Government of Nepal, from time to time to make proper arrangements on matters of accounts and to
maintain regularity therein. It shall be the duty of the concerned offices or organizations to abide by
such directives.

64)Audit Risk
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.
Risk of material misstatement is a product of inherent
risk and control risk whereas detection risk is a situation where auditors audit procedures fail to
detect material misstatement. To reduce audit risk at acceptable level, the auditor should
appropriately respond to the assessed risk.

65)Audit Committee
As per Section 164 of Companies Act as amended, a listed company with paid up capital of
thirty million rupees or more or a company which is fully or partly owned by the Government
of Nepal shall form an audit committee under the Chairpersonship of a director who is not
involved in the day-to–day operations of the company and consisting of at least three members.
At least one member of the audit committee shall be an experienced person having obtained
professional certificate in accounting or a person having gained experience in accounting and
financial field after having obtained at least bachelor’s degree in accounts, commerce,

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management, finance or economics. The committee is responsible to review internal control

systems of the company.

66)Cut Off Procedure

Cut-off procedures mean procedures employed to ensure the separation of transactions at the
end of one year from those in the commencement of the next year. For the cut off procedure of
inventory, the auditor should satisfy himself by examination and test check that these procedures
adequately ensure that:
 Goods purchased for which property has passed to the client have in fact been
included in inventories and that the liability if any, has been provided for.
 Goods sold have been excluded from the inventories and credit has been taken
for sales.
The auditor may examine a sample of documents evidencing the movement of stocks
intoand out of stores, including documents pertaining to period shortly before
and shortlyafter the cutoff date, and check whether the stocks represented by those
documents were included or excluded, as appropriate, during the stock-taking.
67)Corporate Governance
Corporate Governance is a system by which the business organizations are directed and
controlled. It is a set of processes, customs, policies, laws, and institutions affecting the way an
organization is directed, administered or controlled. The corporate governance structure
specifies the allocation of rights and responsibilities among board, managers, shareholders,
employees, suppliers, customers, government etc. and spells out the rules and procedures for
making decisions on corporate affairs.

Corporate governance is thus 'an internal system encompassing policies, processes and people,
which serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with corporate fairness, transparency, independence, integrity and
accountability. Further, it influences how the objectives of the company are set and achieved,
how risk is monitored and assessed, and how performance is optimized. It encourages companies
to create value (through entrepreneurism, innovation, development and exploration) and provide
accountability and control systems commensurate with the risks involved

68)Limited Assurance Engagement

A limited assurance engagement is an assurance engagement in which the practitioner reduces
engagement risk to a level that is acceptable in the circumstances of the engagement but in which
the risk is greater than for a reasonable assurance engagement.For a limited assurance engagement,
the team must understand the subject mattersufficiently to identify areas where a significant
deviation is most likely to arise. Further, obtaining an understanding of internal control relevant
to the engagement is usually not required. The evidence needed in a limited assurance engagement
would normally be limited to that obtained by inquiry, analytical procedures, and discussion,to
enable the practitioner to conclude that the subject matter is plausible in the circumstances. In
contrast to reasonable assurance engagements, the practitioner in a limited assurance engagement
would not normally seek to corroborate evidence obtained as long as the information obtained
from carrying out the audit procedures appears plausible in the circumstances to the practitioner.
The conclusion for a limited assurance engagement is in the negative form, i.e. “based on the
procedures performed and evidence obtained, nothing has come to our attention (…).”
69)Contents of Permanent Audit File
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Contents of Permanent Audit Files:

 Information concerning the legal and organizational structure of the entity. In the case
of a company, this includes the Memorandum and Articles of Association. In the case
of a statutory corporation, this includes the Act and Regulations under which the
corporation functions.
 Extracts or copies of important legal documents, agreements and minutes relevant to
the audit.
 A record of the study and evaluation of the internal controls related to the accounting
system. This might be in the form of narrative descriptions, questionnaires or flow
charts, or some combination thereof.
 Copies of audited financial statements for previous years.
 Analysis of significant ratios and trends.
 Copies of management letters issued by the auditor, if any.
 Record of communication with the retiring auditor, if any, before acceptance of the
appointment as auditor.
 Notes regarding significant accounting policies.
 Significant audit observations of earlier years.

70)External confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party (the confirming party), in paper form, or
by electronic or other medium. External confirmation procedures frequently are relevant
when addressing assertions associated with certain account balances and their elements.
However, external confirmations need not be restricted to account balances only. For
example, the auditor may request confirmation of the terms of agreements or transactions
an entity has with third parties; the confirmation request may be designed to ask if any
modifications have been made to the agreement and, if so, what the relevant details are.
External confirmation procedures also are used to obtain audit evidence about the
absenceof certain conditions, for example, the absence of a “side agreement” that
may influence revenue recognition.

71)Audit Strategy
Audit strategy is concerned with designing optimized audit approaches that seek to
achieve the necessary audit assurances at the lowest cost within the constraints of
the information available.
Audit procedures should be relevant to the important assertions, and as cost effective
as possible to perform. Audit strategy generally involves the following steps:
i) Obtaining knowledge of business.
ii) Performing analytical procedures at initial stages.
iii) Evaluating inherent risks.
iv) Evaluating internal control system for strategy purpose.
v) Formulating the strategy – identifying risk areas, development of appropriate
auditstrategy for those area

72) Those charged with governance:Those matters that, in auditor's professional judgment,
are of most significant in the audit of financial statements of the current period are referred as
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key audit matters. Such key audit matters are selected from matters communicated with those
charged with governance. The auditor is required to communicate such matters to those
charged with governance and include in audit
Report in the Key Audit Matters Section.
The purpose of communicating key audit matters is to enhance the communicative value
of auditor's report by providing greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters which are of most
significance in the audit of the financial statements. Communicating key audit matters is
not a substitute for disclosure in the financial statements or the substitute for the auditor
expressing a modified opinion. In determining key audit matters, auditor may take into
account the areas of higher assessed risks and areas requiring significant management
judgment.
73) Key management personnel:Key management personnel are those persons who have the
authority and responsibility for planning, directing and controlling the activities of the reporting
entity.
It may be noted here that non-executive directors of a company will not be considered as
key management personnel under NAS 24 by virtue of merely their being directors,
unless they have the authority and responsibility for planning, directing and controlling the
activities of the reporting entity.
Further, the requirements of NAS 24 should not be applied in respect of a non-executive
director even if he participates in the financial and/or operating policy decision of the
enterprise unless he falls in any of the categories discussed in other NASs.
74) Audit strategy: Audit strategy is concerned with designing optimized audit approaches that
seek to achieve the necessary audit assurances at the lowest cost within the constraints of the
information available.
Audit procedures should be relevant to the important assertions, and as cost effective as
possible toperform. Audit strategy generally involves the following steps:
i. Obtaining knowledge of business.
ii. Performing analytical procedures at initial stages.
iii. Evaluating inherent risks.
iv. Evaluating internal control system for strategy purpose.
v. Formulating the strategy.
75) Cost audit: Cost Audit represents the verification of cost accounts and check on the adherence to
cost accounting plan. It ascertains the accuracy of cost accounting records to ensure that they are in
conformity with Cost Accounting principles, plans, procedures and objective. Cost audit provides useful
information to the management regarding regulating production, economical method of operation,
reducing cost of operation and reformulating Cost accounting plans. It aims to identify the undue wastage
or losses and ensure that costing system determines thecorrect and realistic costof production.
Cost Audit comprises following;
 Verification of the cost accounting records such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and costing technique and
 Examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objective.
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76)Professional skepticism: It is a state of mind having a questioning mind and refers to being alert to
anythingthat may indicate misstatement due to error or fraud. It involves critically assessing audit evidence
It is a requirement of NSA 200 that, when planning and performing an audit, the auditor
should adopt an attitude of professional skepticism. Professional skepticism is defined by
NSA 200 as 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.
This does not mean that the auditors should disbelieve everything they are told, but they
should view what they are told with a sceptical attitude and consider whether it appears
reasonable and whether it conflicts with any other evidence. In other words, they must not
simply believe everything managementtells them.
77) Internal check: Internal check means the management of duties in such a manner
that the work of one person is automatically checked by other person during execution of normal
duty. It is a part of overall control system and operates basically as a built- in-device as far as
organization and job-allocation aspects of the controls are concerned. The system provides
existence of checks on the day-to-day transactions which operate continuously as part of the
routine system whereby the work of each person is either proved independently or is made
complimentary to the work of another.

78) Audit working paper: Audit working papers are the evidenced obtained/ created
by the auditor during the audit. It constitutes the link between the auditor‟s report and the client‟s
record. These documents are considered as the property of the auditor. Audit working papers are
documents prepared or obtained from the client and retained by auditor in connection with the audit.
Audit working papers are means of controlling audit work, evidence of work performed by the
auditor, information about the client and supporting documents related to accounts under audit.

79) Written representation letter: NSA 580 “Written Representations” establishes

standards and provide guidance on the use of management representations as audit evidence, the
procedures to be applied in evaluating and documenting management representations, and the
action to be taken if management refuses to provide appropriate representations.
The management representation as audit evidence:
 During an audit, management makes many representations to the auditor, either
unsolicited or in response to some specific enquiries.
 The auditor also should obtain representation from management, where
considered appropriate and necessary.
 The management representation is taken to corroborate audit evidence, but
representations by management cannot be a substitute for other audit evidencethat the
auditor could reasonably expect to be reasonably available.
 In certain cases, where knowledge of facts is confined to management, a
representation by management may be the only audit evidence, which can
reasonably be expected to be available.

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