Chapter 1 Q-1) Q-2) Q-3) Q-4) Q-5) Q-6) Q-7) Q-8) Q-9) Q-10) Q-11) Q-12) Q-13) Q-14)

Q-15) Q-16) Q-17) What is assurance? What are the elements of assurance engagement? How many people or groups of people are involved in assurance engagement and who are they? What may be subject matter of assurance engagement? What are the suitable criteria in assurance engagement relating to financial statement and in the context of company behavior? How many types of assurance engagement and what are they? What is reasonable assurance engagement? What is limited assurance engagement? What is audit? What is true and fair? In Bangladesh, the auditor will normally express his opinion by reference to the rue and fair view, which is an expression of reasonable assurance. Briefly define the terms true and fair. [MJ10] What are the qualification and disqualification of an auditor? Why is assurance important? What are the benefits of assurance? Why can assurance never be absolute? What are the limitations of assurance? What is expectation gap and what are they?

Q-1)

What is assurance?

An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Q-2) What are the elements of assurance engagement?

Elements of Assurance: The key elements of assurance engagement are as follows: Q-3) Three people or groups of people involved A subject matter Suitable criteria Sufficient appropriate evidence to support the assurance opinion A written report in appropriate form How many people or groups of people are involved in assurance engagement and who are they?

There are three people or groups of people involved (i) The practitioner (accountant) (ii) The intended users (iii)The responsible party (the person(s) who prepared the subject matter) Q-4) What may be a subject matter of assurance engagement?

It is likely to fall one of the three categories: Data System or process Behavior Q-5) What are the suitable criteria in assurance engagement relating to financial statement and in the context of company behavior?

Suitable criteria In assurance engagement relating to financial statement, the criteria might be accounting standard, In the context of company behavior, suitable criteria might be the combined Code on Corporate Governance, Q-6) How many types of assurance engagement and what are they?

Level of assurance The framework identifies two types of assurance engagement: Reasonable assurance engagement Limited assurance engagement

Q-7)

What is reasonable assurance engagement?

A high, but not absolute, level of assurance. - In my opinion, the statement by the Chairman regarding X is reasonable. Q-8) What is limited assurance engagement? In the course of my seeking evidence about the statement by the Chairman, nothing has come to my attention indicating that the statement in not reasonable.

Q-9)

What is audit?

The objective of an audit of financial statement is to enable the auditor to express an opinion whether the financial statements are prepared in material aspect, in accordance with an applicable financial reporting framework. Q-10) What is true and fair? Q-11) In Bangladesh, the auditor will normally express his opinion by reference to the true and fair view, which is an expression of reasonable assurance. Briefly define the terms true and fair. [MJ10] True: Information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records. Fair: Information is free from discrimination and bias in compliance with expected standard and rules. The accounts should reflect the commercial substance of the companys underlying transactions. Q-12) What are the qualification and disqualification of an auditor? The companies Act 1994, requires that auditors must be a member of The Institute of Chartered Accountants of Bangladesh. Professional qualification is the perquisites of membership of ICAB. The Companies Act 1994 also sets out factors which make a person ineligible for being a company auditor, for example, if he or she is: (i) (ii) (iii) (iv) (v) an officer or employee of the company a partner or an employee of any officer, employee to the company a person who is indebted to the company exceeding Tk. 1,000. A person who is director or member of a private company, or a partner of the firm, which is the managing agent of the company. A person who is a director or holder of shares exceeding 5% of the subscribed capital.

Q-13) Why is assurance important? Q-14) What are the benefits of assurance? Benefits of assurance - Independent, professional verification being given to the users. - It may give additional confidence to other parties in a way that benefits the business. - It enhances the credibility of the information. - It may help prevent errors or frauds being made and reduce the risk of management bias. - An assurance service may act as a deterrent. - It helps to ensure that high quality, reliable information exist, leading to effective markets that investors have faith in and trust. - It adds to the reputation of the organizations even countries; so that investors are happy to invest in Country X because there is a strong culture of assurance provision there. Q-15) Why can assurance never be absolute? Assurance can never be absolute. Assurance providers will never give a certification of absolute correctness due to the limitation set out below. Q-16) What are the limitations of assurance? Limitations of assurance: - The fact that testing is used, - The fact that the accounting system on which assurance providers may place degree of reliance also have inherent limitations - Audit evidence is persuasive rather than conclusive, - Sampling approach is used, - Assurance provision Subjective and professional judgment have to be made, - Rely on responsible party and its staff to provide correct information, - Some items in the subject matter may be estimate and therefore uncertain. - The nature of assurance report. Q-17) What is expectation gap and what are they? Expectation gap is a gap between the assurance provider understands he is doing and what the users of the information believes he is doing. Chapter 2 Process of assurance: Obtaining an engagement Q-1) Q-2) Q-3) Q-4) Q-5) Q-6) What What What What What What are the procedures for accepting a new engagement? [ND04]Marks 4 are the basic factors for acceptance of assurance engagement? are the sources of information about new client? are the procedures should be carried after accepting the engagement? is an engagement letter? [ND05,ND04, MJ02] are purposes of an engagement letter?

Q-7) Q-8)

As an auditor what type of information will you include in such a letter? [ND04] Marks 6 Suppose your firm has been appointed as the statutory auditors of Rupam Manufacturing Ltd. for the first time. You are required to draft a suitable engagement letter. [MJ02]

Q-1) 4

What are the procedures for accepting a new engagement? [ND04]Marks

For accepting a new engagement the following procedures should be followed: (a) (b) (c) (d) Ensure professionally qualified to act, Ensure existing resources adequate, Obtain reference, Communicate with present auditors,

(a) (b) (c) (d)

Obtain clients permission to write to the retiring auditors inquiring if there is any professional reason why the appointment should not be accepted. Meet with client to agree the scope of the audit, so far not prescribed by statute. Send a letter of engagement to the client defining the scope of the audit: The client should be asked to acknowledge receipt of this letter, and state if it is in accordance with his understanding of the agreement. What are the basic factors for acceptance of assurance engagement? Factor Prospect Finance Internal control Accounting polices Management Transactions What are the sources of information about new client? Enquiries of other sources, Review of documents, Previous accountants/auditors, Review of rules and standards What are the procedures should be carried after accepting the engagement? Low risk High risk

Q-2) S l 1 2 3 4 5 6

Q-3) (a) (b) (c) (d) Q-4)

The following procedure should be carried after accepting the nomination: (a) Ensure that the outgoing auditors removal or resignation has been properly conducted in accordance with national legislation, (b) Ensure that new auditors appointment is valid, (c) Set up and submit a letter of engagement to the directors of the company. Q-5) What is an engagement letter? [ND05,ND04, MJ02]

Engagement letter is a letter sent by the auditor to his client at the beginning of any new audit. It sets out the terms of the engagement and forms the basis of a contract and thus eliminates the possibilities of misunderstanding that may take place in future. Q-6) What are purposes of an engagement letter?

Purposes of an engagement letter: (a) Define clearly the extent of the firms responsibilities and so minimize the possibility of any misunderstanding between the client and the firm,

(b) Provide written confirmation of the firms acceptance of the appointment, the scope of the engagement and the form of their report. Q-7) As an auditor what type of information will you include in such a letter? [ND04] Marks 6

Content of audit engagement letter The audit engagement letter must document and confirm the auditors acceptance of the appointment, and include a summary of the responsibilities of those charged with governance and the auditor, the scope of the audit and the form of any reports. The form and remaining content of engagement letter may vary for each client, but they would generally include reference to the following: The objective of the audit of the financial statement. Managements responsibility for the financial statements. The scope of the audit, including reference to applicable legislation, regulations, pronouncement of professional bodies to which the auditors adheres. The forms of any report or other communication of results of the engagement. The fact the because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatement may remain undiscovered. Unrestricted access to whatever record, documentation and other information is requested in connection with the audit. As an auditor I shall include the following information in the engagement letter: (a) The audit is distinct from accountancy and other services. (b) The main purpose of audit is not the discovery of defalcation; therefore the audit should not be relied upon for such discovery. However we will exercise that care and skill which may be expected from an auditor. Our function as auditor under the Companies Act 1994 is to examine the accounts presented to us by the directors. As auditors we are not responsible for the preparation of the accounts, nor for the maintenance of the accounting records of the company, which duties are imposed on the directors by the Companies Act. Any accounting services we provide are distinct from our function as auditors.

(c)

(d) Clarify that it is the directors responsibility in: Ensuring that adequate accounting records are kept Establish a suitable and effective system of internal control Prepare financial statement which shows a true and fair view

(e) The fee of the audit and their mode of payment Q-8) Suppose your firm has been appointed as the statutory auditors of Rupam Manufacturing Ltd. for the first time. You are required to draft a suitable engagement letter. [MJ02]

Following matters are usually referred to in the engagement letter: (i) (ii) that the audit will be conducted as distinct from the provision of accounting and other services. that the main purpose of the audit is not the discovery of defalcation, fraud, error etc. and audit should not be relied upon for such discovery.

(iii) that it is the directors responsibility to ensure maintenance of adequate accounting records, to establish effective system of internal control and to prepare financial statements that reflect the true and fair view. Engagement Letter The Managing Director Rupam Manufacturing Ltd Dhaka 20 May 2002 Sub : Audit of Accounts for the year ending 31 December 2002 Dear Sir,

We refer to your letter no. dated by which you have requested us to act as the auditors of your company for the year ending 31 December 2002. we are pleased to confirm our acceptance and set out below our responsibilities as auditors and our understanding of the further services you require us to perform.
Audit (a) Our function as auditors as governed by the Companies Act, 1994 is to examine the accounts presented to us by the directors. As auditors we are neither responsible for the preparation of the accounts, nor for the maintenance of the accounting records of the company, duties of which are imposed on the directors by the Companies Act. Any accounting services we provide are distinct from our functions as auditors: We shall, as required by law, report to the shareholders whether in our opinion the accounts of the company which we have audited give a true and fair view of the state of the companys affairs as of the balance sheet date and of the profit earned or loss incurred for the year ended on that date, whether these accounts comply with the Companies Act, 1994; We, as required by law are to further report that whether we have obtained all the information and explanations which to the best of our knowledge and belief are necessary for the purpose of the audit and made due verification thereof. And whether proper books of accounts have been kept by the company and whether the balance sheet and the profit and loss account dealt with by the report are in agreement with the books of accounts maintained by the company and examined by us; In arriving at our opinion we are required by law to consider some matters but only to report on any in respect of which we are not satisfied. In accordance with normal practice, our audit will be planned to enable us to express our professional opinion. It should not be relied on to disclose defalcations or other irregularities but their disclosure, if they exist, may well result from the audit tests we undertake. The work we shall do to enable us to form our opinion referred to in above will Include:

(a)

(b)

(c) (d)

(e)

(i) (ii)

keeping under review the companys system of book-keeping, accounting and internal control; making such tests and inquires as we consider necessary for the purpose of our audit. Those tests will inter alia apply to: day to day operations of the business, the verification of assets and liabilities.

But their nature and extent will vary according to our assessment of the companys internal control and may cover all aspects of the business, including attendance to observe your stocktaking procedures. In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in internal control which come to our notice during the course of audit. Other Services As per your requirements, we shall provide you with the following services: (a) (b) (c) (d) Fees Our fees will be based on the degree of responsibilities and skill involved and time required for the completion of work. Unless otherwise agreed, each class of work, mentioned above will be billed separately. Please note that this letter will be effective for future years unless our appointment as auditor is terminated, amended or superseded. We shall be grateful if you will kindly acknowledge receipt of this letter. If the contents are not in accordance with your understanding of our agreement, we shall be pleased to receive your further observations and to give you any further information you require. Yours faithfully, sd/ABC & Co. Chartered Accountants
Chapter: 3 Process of assurance: Planning the assignment Q-1) Q-2) What is Audit Strategy? Audit plan?

to assist you in completion of secretarial formalities; to advise on financial matters; to assist you in establishing budgetary control; advice on taxation matters.

Q-3) Q-4) Q-5) Q-6) Q-7) Q-8) Q-9) Q-10) Q-11) Q-12) Q-13) Q-14) Q-15) Q-16) Q-17) Q-18) Q-19) Q-20) Q-21) Q-22) Q-23) Q-24) Q-25) Q-26)

What is audit planning and programming? [ND07] What are the needs for audit planning? [ND07] What are the objectives of audit planning? [MJ02] What are the purposes of planning and audit? [MJ05] Knowledge of the business is necessary for planning an audit-Discuss. [ND03]Marks 4 Discuss the sources from which an auditor can obtain sufficient knowledge about the entity under audit. [ND03]Marks 6 What sort of facilities can auditor get from an adequate audit planning? [ND07] Discuss the basic principles regarding planning of an audit. [MJ02] Write down the procedures of audit planning. [MJ05]Marks 5 Enumerate the matters which are to be considered by an auditor in developing his overall audit plan. [MJ05]Marks 5 Professional skepticism Distinguish between audit methodology and audit strategy. [MJ02] Explain the term audit Strategy and Audit Methodology. [ND03]Marks 4 The formulation of the general strategy for the client for the audit, audit which sets the scope, timing and direction of the development of the audit plan. Analytical Procedures Materiality Audit Materiality[ND02, ND06] How do you relate Materiality with Audit Risk? [MJ03] Marks 3 Tolerable error: Audit risk: Inherent Risk; [MJ03] Control risk: Detection risk: State briefly the significance of considering the following issues by an auditor at the time of auditing the financial statements of an entity: [MJ02]

(a) Going concern; (b)Materiality; (c) Compliance test; (d)Duty of care to third party.

Q-1)

What is Audit Strategy?

Audit strategy is the formulation of general strategy for the audit which sets nature, scope and timing and direction of audit and guides the development of audit plan.

Q-2)

What is Audit plan?

Audit plan is more detailed than audit strategy, sets out nature, timing and extent of audit procedures (including risk assessment) to be performed in order to obtain sufficient appropriate audit evidence. Q-3) What is audit planning and programming? [ND07]

Audit planning: Audit Plan means developing a general strategy and detailed approach for the expected nature, timing and extent of the audit. The auditor plans to perform the audit in an efficient and timely manner. Audit programming: Audit Program is a component of the overall audit plan. The audit program sets out the nature, timing and extent of planned audit procedure required to implement the overall audit plan. Q-4) What are the needs for audit planning? [ND07]

Overall audit plan will need to be sufficiently detailed to guide the development of the audit program. The audit program serves as a set of instructions to assistants involved in the audit and a means to control and record the proper execution of the work. Need for adequate audit plan - An audit plan describes the scope and conduct of audit. - To set extent of assurance that can be derived from internal control system in operation. - Extent of assurance available from substantive tests. - Assists in deciding in respect of sample size, circularization of debtors balances.

Q-5) Q-6)

What are the objectives of audit planning? [MJ02] What are the purposes of planning and audit? [MJ05]

In all walks of life it is necessary, to plan actions before those actions are performed. The purposes of audit planning are: a) To establish the means of achieving the objectives of the audit b) To assist in the direction and control of the audit work c) To ensure that appropriate attention is devoted to important areas of the audit d) To help prompt identification of potential problems e) To help the work to be completed expeditiously and hence minimize the costs of the auditor f) To assist in proper utilization of audit assistants g) To assist in coordination of work done by other auditors and experts.

Q-7)

What sort of facilities can auditor get from an adequate audit planning? [ND07]

Facilities from adequate audit plan: Q-8) Q-9) Proper utilization of audit force available. Utilization of computer facilities and techniques. Review of field work by seniors becomes simplified and speedy. Knowledge of the business is necessary for planning an audit-Discuss. [ND03]Marks 4 Discuss the sources from which an auditor can obtain sufficient knowledge about the entity under audit. [ND03]Marks 6

The auditor can obtain sufficient knowledge about the entity under audit from the following sources. The client's annual reports to shareholders. Minutes of meetings of shareholders, board of directors and other committees. Internal financial management reports for current and previous periods. The previous years audit working papers and other relevant files. Firm personnel responsible for non-audit services to the client who may be able to provide information on matters that may affect the audit. Discussions with client's management and staff. The client's internal policies and procedures manual. Trade journals or magazines. Visits to the client's premises and plant facilities.

Q-10) Discuss the basic principles regarding planning of an audit. [MJ02] Basic principles regarding an audit plan The auditor should consider the following basic principles in preparing the overall plan of an audit engagement: i. ii. The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plan should cover, among other things: Acquiring knowledge of the clients accounting system, policies and internal control procedures; Establishing the expected degree of reliance on control; Determining and programming the nature, timing and extent of the audit procedures to be performed; and Coordinating the work to be performed.

iii. Plans should be further developed and revised as necessary during the course of the audit. Q-11) Write down the procedures of audit planning. [MJ05]Marks 5 Q-12) Enumerate the matters which are to be considered by an auditor in developing his overall audit plan. [MJ05]Marks 5 Considerable matters: The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. The following matters should be considered by an auditor in developing his over all audit plan: a) Knowledge of the business b) Understanding the Accounting and Internal Control Systems. c) Risk & Materiality d) Nature, Timing and Extent of Procedure e) Coordinating, direction, supervision and review. Plans should be further developed and revised as necessary during the course of the audit. Q-13) Professional skepticism An attitude of professional scepticism means the makes a critical assessment with a questioning mind of the validity of audit evidence and is alert to audit evidence that contradicts or brings into question, the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. Q-14) Distinguish between audit methodology and audit strategy. [MJ02] Q-15) Explain the term audit Strategy and Audit Methodology. [ND03]Marks 4 Q-16) The formulation of the general stategy for the client for the audit, audit which sets the scope, timing and direction of the development of the audit plan. Q-17) Analytical Procedures Q-18) Materiality Q-19) Audit Materiality[ND02, ND06] Materiality Materiality is an expression of relative significance or importance of particular matter in the context of financial statement as a whole. BSA framework for the preparation and presentation of financial statements states that a matter is material if its omission or misstatement would reasonably influence the economic decisions of users taken on the basis of the financial statement. Audit Materiality [ND02, ND06] Audit materiality refers that the information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information. Materiality depends on the size and nature of the item,

judged in the particular circumstances of its omission or misstatement. The auditor has to use his judgment to determine whether a particular item is material or not in a given situation. The auditor is concerned with materiality when: Determining the nature, timing and extent of audit procedure; Evaluating the effect of misstatements on the measurement and classification of accounts; and Determining the appropriateness of presentation of financial information.

Q-20) How do you relate Materiality with Audit Risk? [MJ03] Marks 3 Q-21) Tolerable error: The maximum error that an auditor is prepared to accept in a class of transactions or balances in the financial statement. Q-22) Audit risk: Audit risk is the risk that the auditors give an inappropriate opinion on the financial statement. Q-23) Inherent Risk; [MJ03] Inherent risk refers to the susceptibility of an account balance or class of transactions to misstatement that could be material, either individually or when aggregated with misstatements in other balances or classes, assuming that there are no internal control over such account or class of transactions. It is a function of the entity's business and its environment and the nature of the account balance or class of transactions.

Q-24) Control risk: The risk that material misstatement would not be prevented, detected or corrected by the accounting and internal control system. Q-25) Detection risk: The risk that auditors procedure will not detect a misstatement that exist in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes. Q-26) State briefly the significance of considering the following issues by an auditor at the time of auditing the financial statements of an entity: [MJ02] (e) (ii) (iii) (iv) Going concern; Materiality; Compliance test; Duty of care to third party.

Knowledge of the business is necessary for planning an audit-Discuss. [ND03]Marks 4

ANSWER BSA 200 - Basic Principles Governing an Audit stated that the auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner: Plans should be based on knowledge of the client's business. The auditor needs to have a level of knowledge of his client's business and industry that will enable him to identify the events, transactions, and practices that in his judgment may have a significant effect on the information. This knowledge of business is required to: Effectively assess the inherent risk of potential financial statement misstatements. Evaluating financial performance in relation to industry, business and economic conditions which may provide an indication of the level of risk. For example declining profitability may increase the potential for error (e.g., inventory overstatement) as well as create pressures on the entity or key individuals to commit fraudulent acts or other irregularities. Identify indicators of possible going concern problems. Businesses are generally the primary factors leading to going concern problem. Address client value considerations. Knowledge of the business will often give the audit team the opportunity to contribute information or suggestions, which will be useful to the client in managing its business.

Therefore to achieve the overall goal of the audit the auditors should acquire the knowledge of the business of the client. So that he can prepare an effective plan. By implementing that plan he can achieve his overall goal. Write down the procedures of audit planning. [MJ05]Marks 5 Typical Planning Procedures Although the planning procedures will vary from one audit to the next the following are typical: (a) (b) Consider the background of the client's business and attempt to ascertain any problem for that sector of industry or commerce which may affect work. Considered or outline plan of his audit including the extent to which he may wish to rely upon internal controls and the extent to which work can be allocated to interim or final audit stages. Review matters raised in the audit of the previous year by examining his files and consider those which may have relevance to the current year. Review any management or interim accounts which the client may have prepared as these may indicate areas of concern in his audit. Meet the senior management of the client to identify problem areas, e.g. material variances between budgeted and actual results, significant changes in the client's accounting procedures. Consider the timing of significant phases in the preparation of the timing statements, e.g. dates of stocktaking, balancing of personal ledgers, posting of nominal ledgers, preparation of trial balance and draft accounts. Consider the extent to which the client's employees may be able to analyse and summarise the financial data and the relevance to his audit of work carried out by the client's internal auditors.

(c) (d) (e)

(f)

(g)

(h)

Determine the number and grade of audit staff to be allocated to each stage of the audit. In this respect larger auditing firms will allocate job titles to each member of an audit team to help with this allocation. Job titles vary between firms but the following is a typical analysis: Consult members of the audit team to discuss any foreseeable problems. Often the partners will consult the manager who then becomes responsible for communication with other personnel used on that particular job. The preparation of a memorandum setting out the outline audit approach may be helpful. Prepare a budget allocating the time of each member of the audit team. This budget should be used to control the time spent on that audit and any major variation (both time under or overspent) should be investigated by the manager. The use of the budget for the previous year should prove a valuable aid in the preparation of this year's budget. The client should be informed of the expected date of attendance by the auditor's staff and his agreement obtained.

(i)

(j)

(k)

Explain the term audit Strategy and Audit Methodology. [ND03]Marks 4 When the audit methodology is suited for a specific client (auditee) in conducting an audit is called audit strategy for that particular client. Audit methodology entails devising of an audit strategy suited to the particular conditions of the auditee (client), in a manner so as to ensure an adequate and effective review of the system of accounting and related internal controls of the entity; and ensuring that the audit is adequately planned, controlled and documented at each stage of its progress, 'from commencement to completion; so as to ensure quality, timeliness, efficiency and effectiveness and provide evidence of the work done in accordance with the basic principles of the audit. Distinguish between audit methodology and audit strategy. [MJ02] Following are the difference between audit methodology & audit strategy: Sl. # 1 Audit Methodology Audit methodology is designed to enable an adequate review of the accounting system, planning and controlling of audit and documentation at each stage of completion in order to ensure quality, efficiency, effectiveness and timeliness and provide evidence of the work done. Audit methodology is based on basic of principles governing an audit. Time is not a factor in designing the audit methodology. Audit methodology is related to review the accounting system, control plan, quality and effective completion of work. Audit methodology is dependent on the process of Audit Strategy Audit strategy means the auditors procedures that would help to enable them to conduct an effective audit in an efficient and timely manner Audit strategy is based on the auditors knowledge of the clients business. Time is an important factor in the audit strategy Audit strategy depends on the knowledge of clients business, risk factors, materiality etc.

2 3 4

work to be done, documentation & evaluation of audit evidence. Establish standards, guidelines and practices form the basis of audit methodology.

Audit methodology forms the basis of audit strategy.

How do you relate Materiality with Audit Risk? [MJ03] Marks 3 Here is a direct relationship between materiality and audit risk. The higher the materiality of an item, the higher would be the audit risks and vice versa. Keeping in view the materiality of an account balance or a class of transactions, the auditor has to so plan his audit that the audit risk is kept at an acceptably low level. Therefore while planning the audit the auditor assesses the level of inherent and control risk and designs his substantive audit procedures in a manner so as to have an acceptable level of detection risk. Where the inherent and control risks are high, the auditor has to extend his procedures so that the detection risk is low. On the other hand where inherent and control risks are low, the auditor can limit his substantive procedures. State briefly the significance of considering the following issues by an auditor at the time of auditing the financial statements of an entity: [MJ02] (ii) (iii) (iv) (v) Going concern; Materiality; Compliance test; Duty of care to third party.

Significance for considering the issues referred to the question by an auditor at the time of auditing the financial statements of an entity is discussed below: (i) Going concern Going concern concept is the assumption that the enterprise will continue in operational existence for the foreseeable future. This means in particular that the profit and loss account and balance sheet assume no intention or necessity to liquidate or curtail significantly the scale of operations. The auditors need to satisfy themselves that the going concern assumption is reasonable. This is to do for reducing and minimizing the auditors risk in forming the opinion on the financial statements of the entity because the users (existing and potential investors, lenders, suppliers, employees, management, etc.) of the financial statements depend widely on the opinion of the auditors in making decisions relating to the dealing with the entity. If any users depending on the opinion of the auditors suffer, the auditors will be held responsible for this loss. (ii)Materiality Materiality is an essential consideration in determining the appropriate type of report for a given set of circumstances. An item should be considered material, if its omission, nondisclosure or misstatement would result in distortion of, or some other shortcoming in the information being presented in the financial statements, and thereby influence users of the statements when making evaluations or decisions. If, any way, the financial statements are misleading the economic decision making of the users based on the financial statements would also be misleading. To minimize such type of audit risk the

auditors need to consider effects of materiality at the time of conducting the audit and forming opinion on the financial statements. (iii) Compliance test Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. Compliance tests are the tests of controls. They provide evidence as to whether or not the controls on which the auditor wishes to rely are functioning adequately and properly during the period under review. Compliance tests check the functioning of a control. It is a part of overall administration and audit methodology and helps the auditors to determine the scope and extent of substantive audit work which in turn helps to minimize risk of forming a reasonably fair and accurate opinion on the financial statements by the auditors. (iv) Duty of care to third party Auditors are not responsible by laws (as per civil court) to the third parties for their opinion on the financial statements. But lately, as per Law of Tort auditors are responsible for their opinion on the financial statements. Accordingly if any third party to the financial statements of the auditee client suffer any loss s/he can sue against the auditors for making good of the compensation. As a result, at the time of conducting an audit, the auditors need to be more careful in obtaining audit evidence as the basis of forming the audit opinion that would not be contrary to the interest of third parties. As such duty of care to third parties reduces the audit risks.

CH 4
Q-1) What do you understand by the term audit evidence? [ND07, ND05, MJ03]

Q-2) Q-3) Q-4) Q-5) Q-6) Q-7) Q-8) Q-9)

Test of control Substantive procedure Quality of evidence Financial statement assertions Types of opinion Disclaimer of Opinion [MJ08, ND05] Adverse Opinion [MJ08] True and Fair View Audit Opinion ; [MJ01]

Q-10)Reasonable Assurance. [MJ01] Q-11)When an adverse opinion should be expressed? [ND07] Q-12)Draft an adverse opinion for a public limited company. [ND07] Q-13)Describe the circumstances under which an auditor issues a qualified report. [ND04]
Q-14) Describe the circumstances in which an auditor expresses the following audit opinions: [MJ02] (a) Unqualified; (b) (c) Adverse; Disclaimer.

Q-15)Content of the audit report Q-16)Basic Elements of the Auditors Report [MJ08] Q-17)Draft an audit report for a private limited company, containing at least two findings on scope limitation. [MJ08] Q-18)Expectation gap

Q-1)

What do you understand by the term audit evidence? [ND07, ND05, MJ03]

Audit evidence. [ND07] Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence will comprise source documents and accounting records from other sources. The auditor should obtain sufficient appropriate audit evidence on the basis of which he will formulate his audit opinion
What do you understand by the term audit evidence? [ND05] Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based.

Audit evidence will comprise source documents and accounting records underlying the financial statements and corroborating information from other sources. The auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures, which should enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information.

What do you mean by audit evidence? [MJ03] Marks 5 Audit evidence is the data and information used during the course of an audit on which the audit opinion is based. It includes the results of tests, inquiries and discussions with the client. The auditor should obtain sufficient and appropriate audit evidence through tests of control and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information. Sufficiency and appropriateness are interrelated and apply to evidence obtained from both tests of control and substantive procedures. Sufficiency is the measure of the quantity of audit evidence obtained, appropriateness of audit evidence relates to its quality (i.e.) relevance and reliability. Whether any audit evidence is sufficient and appropriate or not depends on auditor judgment. Before applying judgment the following factor should be remembered: (a)The degree of risk of misstatement. This risk may be affected by: i. the nature of the items; ii. the adequacy of internal control; iii. the nature of the business carried on by the entity; iv. situation which may exert an unusual influence on management, and v. the financial position of the entity. (b)the materiality of the item in relation to the financial information taken as a whole (c) the experience gained during previous audits (d)the results of auditing procedures, including fraud or error which may have been found; and (e) the type of information available.

Q-2) Test of control

Test control is performed to obtain audit evidence about the effectiveness of control in preventing, or detecting and correcting material misstatements at the assertion level. Q-3) Substantive procedure Audit procedure performed to detect material misstatement at assertion level. They include- test of detail of classes of transaction, account balances and disclosure. - Substantive analytical procedure. Q-4) Quality of evidence Q-5) Financial statement assertions The representation by the management explicit or otherwise, that are embodied in the financial statement. (a) Assertion about the class of transactions and events for the period under audit: (i) Occurrence, (ii)Completeness, (iii) Accuracy, (iv) Cut-off, (v) Classification, (b) Assertion about account balances at the end of period: (i) Existence, (ii)Rights and obligations, (iii) Completeness, (iv) Valuation and allocation (c)Assertion about presentation and disclosure: (i) Occurrence and rights and obligations, (ii)Completeness, (iii) Classification and understandability, (iv) Accuracy and valuation, Q-6) Types of opinion Q-7) Disclaimer of Opinion [MJ08, ND05] Q-8) Adverse Opinion [MJ08]

Q-9) True and Fair View Audit Opinion ; [MJ01] Q-10)Reasonable Assurance. [MJ01] Q-11)When an adverse opinion should be expressed? [ND07] Q-12)Draft an adverse opinion for a public limited company. [ND07] Q-13)Describe the circumstances under which an auditor issues a qualified report. [ND04]
Q-14) Describe the circumstances in which an auditor expresses the following audit opinions: [MJ02] (d) Unqualified; (e) Adverse; (f)Disclaimer.

Q-15) Content of the audit report Q-16) Basic Elements of the Auditors Report [MJ08] According to BSA 700, the audit report should include the following basic elements, usually in the following layout. (a) Title (b) Addressee (c)Opening or introductory Paragraph (d) A statement of managements responsibility, (e) A statement of auditors responsibility, (f) Scope paragraph (g) Opinion paragraph (h) Date of the report (i) Auditors Address (j) Auditors signature Q-17)Draft an audit report for a private limited company, containing at least two findings on scope limitation. [MJ08] Q-18)Expectation gap Disclaimer of Opinion [MJ08, ND05] 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. Adverse Opinion [MJ08] When an adverse opinion should be expressed? [ND07]

An adverse opinion should be expressed when the affect 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 statement. However, a clear description of all the substantive reasons should be included in the audit report with adverse opinion. Draft an adverse opinion for a public limited company. [ND07] Example of Adverse Report Report of the Independent Auditor to Shareholders To the Shareholders of ABC Ltd. We have audited the annexed Balance Sheet of ABC Ltd., as at June 30, 2007 and its Profit and Loss Account for the year ended as on that date together with the accompanying Cash Flow Statement and Notes thereto. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Bangladesh Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As more fully explained in note Z ., no provision has been made for losses expected to arise on certain long term construction contracts currently in progress, because the directors consider that such losses should be offset against expected but unearned future profits on other long term contracts. In our opinion, provision should be made for considerable losses of individual contracts as required by Bangladesh Accounting Standard. If losses had been so recognized the effect would have been to reduce the profit substantially.

In our opinion, because of fundamental disagreement on Accounting Policies as discussed in the proceeding paragraph, the financial statements do not give a true and fair view of the financial position of the company as of June 30, 2007, and of the results of its operations and its cash flows for the year then ended in accordance with Bangladesh Accounting Standards and that these financial statements have been drawn up in accordance with the requirements of the Companies Act 1994 and the Securities and Exchange rules 1984 containing all the information in the manner required by relevant laws and rules and the International Accounting Standards (ISA) as applicable in Bangladesh. We also report that(a) We have obtained all the information and explanation which to the best of our knowledge and belief were necessary for the purposes of our audit; In our opinion, proper books of account as required by law have been kept by the company so far as it appears from our examination of those books and proper returns adequate for the purpose of our audit have been received from branches not visited by us;

(b)

(c) The companys Balance Sheet and Profit and Loss Account dealt with by the report are in agreement with the books of account and returns; and (d) The expenditure incurred and payments made were for the purpose of the Companys business for the year.

December 15, 2007 Tue & Co Chartered Accountants 10 - Fair Road, Dhaka-1205 (Signed) True and Fair View Audit Opinion ; [MJ01] Auditor has to express an opinion on the truth and fairness of the audited financial statements of the entity. Truth in accounting is quite different from scientific truth. Accounting does not deal with that type of truth which has a fixed and unchanging quality. Costs and revenues for any accounting period which is less than the full life of each venture involved cannot be determined with precision. In accounting only cash draws close

to the concept of scientific truth, but since the value of cash changes with time, it lacks total correspondence with the precision of scientific truth. The word fair can have the following meanings: on the one hand clear, distinct, plain and on the other impartial, just and equitable. All can be considered when fair is used in an accounting context.
The auditor should attempt to ensure that the accounts which are the subject of his audit present clearly and equitably the financial state of affairs of the enterprises. This suggests that in order to achieve the statutory true and fair view it is necessary not only to present certain information impartially but also that this data is shown in such a way that it is clearly understood by the user

Reasonable Assurance. [MJ01] An audit in accordance with BSAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole. Reasonable assurance relates to the whole audit process. An auditor cannot obtain absolute assurance because there are inherent limitations in an audit that affect the auditor's ability to detect material misstatements. These limitations result from factors such as: The use of testing. The inherent limitations of any accounting and internal control system (for example, the possibility of management override or collusion). The fact that most audit evidence is persuasive rather than conclusive. Describe the circumstances under which an auditor issues a qualified report. [ND04] A qualified report should be issued when the auditor concludes that an unqualified report cannot be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or disclaimer of opinion.
Describe the circumstances in which an auditor expresses the following audit opinions: [MJ02] (i) Unqualified; (ii) Adverse; (iii) Disclaimer.

The circumstances related to different forms of audit opinions are as follows: (i) Unqualified opinion An unqualified opinion is expressed in the report when the auditor is satisfied in all material respects. An unqualified opinion indicates implicitly that changes in accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the financial statements. (ii)Adverse opinion An adverse opinion is expressed when effect of a disagreement is so material and pervasive to the financial statement that the auditor concludes that a qualification of his report is not adequate to disclose the misleading or incomplete nature of the financial statements. Examples are as under: there has been a failure to comply with a relevant International Accounting Standard (IAS) and the auditor does not agree; an accounting policy or accounting estimate (not subject to IAS) has been used which the auditor does not consider to be appropriate; and in exceptional circumstances, complying with an IAS could result in the financial statements not showing a true and fair view, etc.

(iii) Disclaimer of opinion A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so significant that the auditor is unable to express any opinion on the financial statements. A significant uncertainty affecting the financial statements may also cause the auditor to disclaim his opinion.

Draft an audit report for a private limited company, containing at least two findings on scope limitation. [MJ08] (a) A scope limitation may be imposed by circumstance e.g. when the timing of the auditors appointment is such that the auditor is unable to observe the counting of physical inventories. It may also arise when, in the opinion of the auditor, the entitys accounting records are inadequate. Under above circumstances it is auditors responsibility to obtain evidences from other sources and also obtain a letter of representation from the management confirming the figures as at the end of the year. If the amount is material then the auditor will have to disclose the fact either as an emphasis of matter or as a qualified report depending on the materiality and significance of the amount. (b) Report of the independent Auditor to Shareholders

To the Shareholders of ABC Ltd. We have audited the annexed Balance Sheet of ABC Ltd., as at June 30, 2007 and its Profit and Loss Account for the year ended as on that date together with the accompanying Cash Flow Statement and Notes thereto. These financial statements are the responsibility of the Companys management. We were not able to observe all physical inventories and confirm accounts receivable due to limitations placed on the scope of our work by the Company. Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statement. December 15, 2007 True & Co Chartered accountants 10- Fair Road, Dhaka-1205 (Signed) Expectation gap Chapter 5 Introduction to internal control Q-1) What is an internal control system? [MJ02] Q-2) What do you understand by internal control? [MJ10,MJ05] Q-3) Discuss the essential characteristics of an internal control system[MJ06, MJ03] Q-4) Briefly discuss the "characteristics" of an adequate and effective system of Internal Control. [MJ01]Marks 6 Q-5) Reasons for internal control Q-6) What are the Limitations of internal control? [MJ10] Q-7) What are the inherent limitations of the internal control system? [ND05] Q-8) What are the components of internal control? [MJ10] Or What are the internal control techniques? [MJ05]Marks 4 Q-9) Discuss the types and significance of an adequate and effective system of internal control. [MJ02, MJ06] Q-10)Control environment Q-11)Audit committee Q-12)Entitys risk assessment process Q-13)Business risk

Q-14)Information relevant to financial reporting objectives Q-15)Control activities Q-16)Types of control activity Q-17)Application control Q-18)General control Q-19)Outline the purpose and major characteristics of a sound system of internal control. As an auditor how would you determine the effectiveness of such a system? [ND07]
Q-20) What matters should be taken into consideration while designing and establishing a sound system of internal control by the management? [ND05]

Q-21)While reviewing the internal control system of M/s Sumona salt limited you have come across the following:- [MJ05]Marks 6 (i) Same person has been engaged in dealing with cash and preparing the accounting records thereof. [MJ05]

(ii) Registers are not maintained for recording incoming and outgoing mails. [MJ05] (iii) Periodic inventory of stores and stocks is not taken. [MJ05] Q-22)Write down the internal control system relating to inventories of a fertilizer company. [MJ04] Marks 4 Q-23)Draw up an internal control system for payment of wages in the case of a garment factory. [MJ03] Marks 6 Q-24)Discuss the methods usually applied by an auditor for ascertaining the internal control system of his client. [ND05] Q-25)Introduction of proper internal control system in an organization can ensure that the possibility of adopting unfair means by an individual employee will be reduced to the minimum level; discuss[ND02].3

Q-1) What is an internal control system? [MJ05, MJ02]

The system of internal control is the plan of organization and all the methods and procedures adopted by the management of an entity to assist in achieving managements objective of ensuring, as far as practicable, the orderly and efficient conduct of its business, including adherence to management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The system of Internal control extends beyond those matters that relate directly to the functions of accounting system. The Individual elements of the system of Internal control are referred to as Internal controls and are collectively known as Internal control.

Q-2) Discuss the essential characteristics of an internal control system[MJ06, MJ03] Q-3) Briefly discuss the "characteristics" of an adequate and effective system of Internal Control. [MJ01]Marks 6 Q-4) Outline the major characteristics of a sound system of internal control. [ND07]
Major characteristics of a sound internal control system:

Right personnel with right responsibility. A plan of organization with appropriate segregation of responsibilities. Supervision by responsible officials of day-to-day transactions and the recording thereof. Adequate authorization system to provide accounting control over assets, liabilities, revenue and expenses. Authorization of transactions to be recorded. Authorization and control over access and custody of assets. Periodic comparison of records with actual assets.

Q-5) Reasons for internal control

Q-6) Limitations of internal control Q-7) What are the inherent limitations of the internal control system? [ND05] Q-8) What are the components of internal control? Or What are the internal control techniques? [MJ05]Marks 4 Techniques of Internal Control System An effective Internal control should have the following components: (a) The control environment. (b) The entity's risk assessment process. (c) The information system, including the related business processes, relevant to financial reporting and communication. (d) (e) Control activities. Monitoring of control.

Q-9) Discuss the types and significance of an adequate and effective system of internal control. [MJ02, MJ06] Q-10) Control environment

The control environment includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entitys internal control and its importance in the entity. Q-11) Audit committee

A subsection of board of director which has a particular interest in the finance and accounting activities of the company. Q-12) Q-13) Q-14) Q-15) Entitys risk assessment process Business risk Information relevant to financial reporting objectives Control activities

Control activities should include the following: a. b. c. d. e. Authorization Performance Review Information Processing Physical control Segregation of duties

Q-16) Types of control activity Q-17) Application control Q-18) General control Q-19)Outline the purpose of a sound system of internal control. As an auditor how would you determine the effectiveness of such a system? [ND07]
Q-20) What matters should be taken into consideration while designing and establishing a sound system of internal control by the management? [ND05]

The following matters should be taken into consideration while designing and establishing a sound system of internal control by the management: i) ii) iii) Clearly defined duties and the limits of authority of the staff members. System of authorization for recording. Separation of duties (Three fundamental elements) a. Authorization b. Custody c. Recording iv) v) vi) vii) ix) x) xi) xii) Effective internal check. No payment without authorization and approval. Regular balancing and reconciling. Rotation of duties. Internal Auditing. Controlled access to assets and important documents. Arrangement of providing important summary information in time. Periodic analysis of variance between recorded fact and physical existence.

viii) Ensuring continuity in normal function of internal check system.

Q-21) While reviewing the internal control system of M/s Sumona salt limited you have come across the following:[MJ05]Marks 6 (i) (ii) (iii) Same person has been engaged in dealing with cash and preparing the accounting records thereof. [MJ05] Registers are not maintained for recording incoming and outgoing mails. [MJ05] Periodic inventory of stores and stocks is not taken. [MJ05]

Q-22)Write down the internal control system relating to inventories of a fertilizer company. [MJ04] Marks 4 Q-23)Draw up an internal control system for payment of wages in the case of a garment factory. [MJ03] Marks 6 Q-24)Discuss the methods usually applied by an auditor for ascertaining the internal control system of his client. [ND05] Q-25)Introduction of proper internal control system in an organization can ensure that the possibility of adopting unfair means by an individual employee will be reduced to the minimum level; discuss[ND02].3 Discuss the types and significance of an adequate and effective system of internal control. [MJ02, MJ06]

An adequate and effective system of Internal Control is of high significance for both the entity and the auditor. Internal control, if adequate and effective, helps to ensure the accuracy and completeness of the accounting records, the timely preparation of reliable financial information, the safeguarding of assets, and the prevention and detection of fraud and error. For the auditor, an adequate and effective system of internal control is important for the following reasons: (1) Decision regarding audit ability (2) Decision regarding reliance on Internal control. (3) Responsibility of obtaining an understanding of internal control under BSAs (4) Responsibility of communicating the material weakness of internal control under BSAs What are the inherent limitations of the internal control system? [ND05]
Inherent limitations of Internal Controls: An internal control system can provide only reasonable assurance that the managements objectives in establishing the system are achieved. This is due to the fact that any internal control system has certain inherent limitations. These limitations arise due to the following reasons. Controls have to be cost-effective. Thus, some controls may not be instituted merely because they are not cost-effective. Most controls are directed at transactions of a usual nature. Therefore, transactions of an unusual nature might escape being subjected to rigorous controls. The potential of human error remains in any system of control. Any system of control has its limitations in preventing frauds through collusion between two or more persons. A member of the management may himself override the controls. Controls may not keep pace with changes in conditions. Management itself may manipulate transactions or estimates.

While reviewing the internal control system of M/s Sumona salt limited you have come across the following:- [MJ05]Marks 6 (i) Same person has been engaged in dealing with cash and preparing the accounting records thereof. [MJ05] (ii) Registers are not maintained for recording incoming and outgoing mails. [MJ05] (iii) Periodic inventory of stores and stocks is not taken. [MJ05]

PRIVATE AND CONFIDENTIAL 30 Nov 1998 The Directors M/S Sumana Salt Limited Motijheel C/A Dhaka-1000
Subject : Audit for the year ended 31st December, 19X1

Dear Sir, In accordance with our normal practice, we are writing to you on matters arising out of audit for the year ended December 31, 19X1, which we consider should be brought to your attention. Our responsibility as auditors are governed by the Companies Act, 1994, and principally requires us to report on accounts laid before the company in general meeting. As directors you have the responsibility of the proper stewardship of the company's assets and their application in the operation of the business. This is normally achieved by establishing a system of internal control both financial and otherwise to carry on the business of the enterprise in an orderly and efficient manner, as far as possible, the completeness and accuracy of the records. This should lead to the satisfactory preparation of the company's accounts which must comply with the Companies Act, 1994 in form and content and give a true and fair view of the state of affairs and profit or loss of the company. The responsibility of directors and auditors are onerous and therefore cannot be taken lightly. We set below those matters which we consider to be of fundamental importance not only to the efficiency of the company but also to its viability as a business. (i) Weakness : Same person has been engaged in dealing with cash and preparing the accounting records thereof. Suggestions:

Same person should not be responsible for custody and operation of cash. This may lead to irregularities. So custodian and operating responsibility should be segregated. (ii) Weakness: Register are not maintained for recording incoming and outgoing mails. Suggestions: Company should use a locked mail box and access to keys should be restricted. Separate register should be maintained for incoming and outgoing mail. Entries of all mail received should be made in the register instantly in the presence of a responsible officer. (iii) Weakness: Periodic inventory of stores and stocks is not taken. Suggestions: Physical stocktaking should be made at regular interval and also at the year end. We would appreciate, if the above recommendations are implemented in order to achieve effective internal control. If you wish our further assistance, please do not hesitate to contact us.
ABC & Co. Chartered accountants

Write down the internal control system relating to inventories of a fertilizer company. [MJ04] Marks 4 Internal control system relating to inventories of a fertilizer company is listed below: (a)Separate centers should be identified at which goods are held (b)Stocks should be held in such locations so that they are safe from damage or theft. (c)All stock lines should be identified and held together, e.g. in bins, which

are marked with all relevant information as to grade, manufacturing date and batch etc. for identification. (d) Deliveries of goods from supplies should pass through a goods inward section to the stores. All goods should pass through stores and hence be recorded as received. (e)Access to the stores should be restricted. (f) Issues from stocks should be made only on properly authorized requisitions. (g) All receipts and issues should be recorded on stock cards, crossreferenced to the appropriate GRN or requisition document. (h) Maximum and minimum stock level should be pre-determined and regularly reviewed for adequacy. (i) Re-order quantities should be pre-determined and regularly reviewed for adequacy. (j) Stock levels should be periodically checked against the records by a person independent of the stores personnel and material differences investigated. (k)Reviews of damaged, obsolete and slow-moving stock should be carried out. Any write-offs should be authorized by appropriate authority. (l) Where continuous stock records are not kept adequately a full stock count should be held at least once a year. (m) The costing department should allocate direct and overhead costs of the value of work-in-progress according to the stage of completion reached. (n) To do this, standard costs are normally used. Such standards must be regularly reviewed to ensure the actual costs being incurred. (o) If the value of work-in-progress is directly comparable with the quantity produced, checks should periodically be made of actual quantity against work-in-progress records. Draw up an internal control system for payment of wages in the case of a garment factory. [MJ03] Marks 6 Internal Control system for payment of wages in the case of a garment factory is given below: (a) The wages department should preferably be a separate department with their personnel not involved with receipts or payments functions. (b) The duties of the wages staff should preferably be rotated during the year and ensure that no employee is responsible for all of the functions in respect of any particular department. (c) Personnel records should be kept for each employee giving details of engagement, dismissal or resignation, rate of pay, holidays etc., with a specimen signature of the employee.

(d) There should be written authorization to employ or dismiss any employee (e) Changes in rates of pay should be authorized in writing by a responsible officer outside the wages department. (f) Where weekly pay relates to hours at work clock cards should be used. There should be supervision of the cards and the timing devices, particularly when employees are clocking on or off. (g) If job cards also deal with the time at work spent by the employee, checks should periodically be made between the clock card and job card. (h) If wages rates relate to piece-work, the quantities produced should be checked and authorized by a supervisor on the factory floor. (i) (j) Overtime worked manager/supervisor. should be authorized by the works

Payroll should be prepared from clock cards, job cards, etc. and a sample checked for accuracy against current rates of pay.

(k) Payroll details should provide for the accurate calculation of deductions, e.g. PAYE, pensions, trade union subscriptions, etc. (l) Control accounts should be maintained in respect of each of the deductions showing amounts paid periodically to the trade unions, etc.

(m) The person preparing the payroll should sign it. (n) An independent responsible officer should check the payroll and sign it. (o) Other persons within the wages department should make up the pay packets. (p) The wages cheque should be signed by two signatories evidenced against the signed payroll. (q) The system should preferably allow the wages to be checked by the employee before the packet is opened, by using specially designed wage packets. (r) An employee should preferably sign for his wage. (s) No employee should be allowed to take wages of another employee. (t) A surprise attendance at the pay-out should be made periodically by a responsible officer.

(u) Unclaimed wages should be recorded in a register and held by a responsible officer until claimed or until a pre-defined period after which the money should be rebanked. (v) An official should investigate the reason for unclaimed wages as soon as possible. (w) When wages are claimed late, the employee should sign for the wage packet and a responsible officer should authorize the release of the packet. (x) In addition, overall checks on wages and salaries may disclose major discrepancies, e.g. check against budgets, changes in amount paid over a

period of time, check against personnel records. Discuss the methods usually applied by an auditor for ascertaining the internal control system of his client. [ND05]
The following method is usually applied by an auditor for ascertaining the internal control system of his client: Tests of control: These are the procedures which test whether the client is complying with designed internal controls. Tests of control are performed to obtain audit evidence about the effectiveness of the: 1. design of the accounting and internal control systems, i.e. whether they are suitably designed to prevent or detect and correct material misstatements; 2. operation of the internal controls throughout the period. Tests of control may include: i. inspection of documents, ii. inquiries about, and observation of internal controls, iii. reperformance of internal controls.

As an auditor how would you determine the effectiveness of such a system? [ND07] Determination of Effectiveness of a system: Effectiveness of a sound internal control system will comprise following: (a) Control Environment: A strong control environment with tight budgetary controls and an effective internal audit function can complement control procedures. Factors reflected in the control environment include: The functions of the board of directors and its committees. Management philosophy and operating style. Organisational structure and methods of assigning authority and responsibility. Managements control system including the internal audit function, personnel policies and procedures and segregation of duties.

(b) Control Procedures:

Control procedures include: Reporting, reviewing and approving reconciliation. Checking arithmetic accuracy of records. Control charges in computer program. Control access to data files. Maintain and review control accounts and trial balance. Approval and control of documents. Compare internal data with external sources.

Introduction of proper internal control system in an organization can ensure that the possibility of adopting unfair means by an individual employee will be reduced to the minimum level; discuss[ND02].3
The most important element of internal control system is Segregation and Rotation of Duties. The duties of the employees of an organization under perfect internal control system are segregated in such a manner that work of an employee is automatically checked by other employee (s). Moreover, under proper internal control system the duties of the employees are rotated from time to time. Since the work of one employee is checked by other employees it becomes simply impossible to commit any unfair means by any single employee. To commit any unfair means help of other employees will be necessary.

Chapter 09

What is internal audit? What does internal audit do? What are role of an internal auditor? Internal audit is an important control system for the managementDiscuss. [ND03] Marks 4 As objectivity is a key issue for internal auditors, they are likely to routinely be involved in operational activities do you agree? Explain. [MJ10] What is external audit? Distinction between internal and external audit. What are the key differences between internal and external audit? [MJ10] What is operational audit? What are role of an internal auditor?

What are role of an internal auditor? What is internal audit? What does internal audit do? What are role of an internal auditor? Internal audit is an important control system for the managementDiscuss. [ND03] Marks 4
When an entity has an internal audit department, management may delegate to it some of its supervisory functions, especially with respect to the review of internal control. This particular internal audit function constitutes a separate component of internal control undertaken by specially assigned staff within the entity with the objective of determining whether other internal controls are well designed and properly operated. An internal audit may be defined as a review of operations and records, sometimes continuous, undertaken within a business by especially assigned staff. Thus the internal auditor is employed by management to assist

them in coordinating the performance of the organization. Today, the size of many organizations makes it impossible for top management to exercise direct control and supervision of operations. As remoteness increases, so the factors of misinterpretation, misunderstanding and misjudgment operate in such a way as to hamper the achievement of the set goals. The internal auditor may therefore be used to bridge the gap between management and the shop floor and can assure management that the policies and systems laid down are being adhered to.

As objectivity is a key issue for internal auditors, they are likely to routinely be involved in operational activities do you agree? Explain. [MJ10] What is external audit? Distinction between internal and external audit. What are the key differences between internal and external audit? [MJ10] What is operational audit? What are role of an internal auditor? Sitting on right side of the management, modern-day internal auditors are consulted on all aspects of the organization and must be prepared for just about anything. They are coaches, internal and external stakeholder advocates, risk managers, control expert, efficiency specialist and problem-solving partners. They are the organizations safety net. [incomplete]

Chapter 10 Documentation Q-1) Q-2) Q-3) Q-4) Q-5) Q-6) Q-7) Q-8) Q-9) Q-10) Q-11) What is Audit documentation (Working Papers)? ?[ND06] Marks 3 What is automated working paper? Purposes of documentation What are the purposes of keeping documentation or working paper? An audit file normally contains what working papers? Permanent audit file Current audit file Discuss the forms and contents of working papers. [ND06]Marks 12 What contain permanent audit file? What contain current audit file? Classify the working papers into current Audit file and Permanent Audit File: Engagement letter, New client questionnaire, Financial Statement relating to year under review, Management letter, Accounts Check list, Audit Planning Memo, Board minutes of continuing relevance, Accounting system notes.[MJ10]

Q-12) State the relationship between audit evidence and working papers. [ND04] Marks 4 Q-13) Describe the General principles regarding Audit Evidence and Documentation. State the objectives of audit documentation and the matters affecting the form and contents of audit working papers. [ND01]Marks 6

Q-14) State why it is important for audit working papers to include the following:[ND01] 16=6 (i) Name of the client; (ii) Description of the contents; (iii) Period covered; (iv) Initials of the persons involved; (v) Date of the preparation of the working papers; (vi) Index code.

Q-1)

What is Audit documentation (Working Papers)? ?[ND06] Marks 3

Audit documentation (working papers) is the record of procedure performed, relevant evidence obtained, and conclusion reached. Q-2) Q-3) Q-4) Q-5) Q-6) Q-7) Q-8) Q-9) Q-10) Q-11) What is automated working paper? Purposes of documentation What are the purposes of keeping documentation or working paper? An audit file normally contains what working papers? Permanent audit file Current audit file Discuss the forms and contents of working papers. [ND06]Marks 12 What contain permanent audit file? What contain current audit file? Classify the working papers into current Audit file and Permanent Audit File: Engagement letter, New client questionnaire, Financial Statement relating to year under review, Management letter, Accounts Check list, Audit Planning Memo, Board minutes of continuing relevance, Accounting system notes.[MJ10]

Q-12) State the relationship between audit evidence and working papers. [ND04] Marks 4 Audit evidence is all the data and information gathered during the course of an audit on which the audit opinion is based. It includes the results of tests, enquires and discussions with the client. On the other hand audit working papers refer to the documents prepared or obtained by the auditor in support of his work and based on which he expresses his opinion. Therefore, audit evidence and audit working paper are interrelated. Only there is a difference that all audit working papers are evidence in a written form but all evidence may not be working papers because all evidence may not be in written form. Q-13) Describe the General principles regarding Audit Evidence and Documentation. State the objectives of audit documentation and the matters affecting the form and contents of audit working papers. [ND01]Marks 6 Q-14) State why it is important for audit working papers to include the following:[ND01] 16=6 (i) Name of the client; (ii) Description of the contents; (iii) Period covered; (iv) Initials of the persons involved; (v) Date of the preparation of the working papers; (vi) Index code. It is very much important to include following matters in the audit working papers for the following reasons: 1. 2. 3. 4. 5. Name of the client: The auditor should prepare working papers which are sufficiently complete and detailed should include name of the client. Description of the contents: To improve audit efficiency the auditor should include description of the contents of the audit working papers. Period covered: Period means the audit period for which the audit is conducted. Audit working papers should clearly stated the period covered. Initial of the persons involved: working papers should have initial of the person who are involve with the audit work. Date of preparation of working paper: generally every paper, documents and other records should be dated. Audit working paper is very much important in case of reaching conclusion of an audit. So it is important to have date in the working papers. Index Code: Quality control policy and procedure should be implemented at both the level of the audit firm and on individual audit. To maintain quality control in the firm, working paper of any individual audit should have index code.

6.

Discuss the forms and contents of working papers. [ND06]Marks 12 The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit.

The auditor should record in the working papers information on planning the audit work, the nature, timing and extent of the audit procedures performed and the conclusions drawn from the audit evidence obtained. Working papers ordinarily include the following: Information concerning the legal and organizational structure of the entity; Extracts or copies of important legal documents, agreements and minutes; Information concerning the industry, economic environment and legislative environment within which the entity operates; Evidence of the planning process including audit programs and any changes thereto; Evidence of the auditor's understanding of the accounting and internal control systems; Evidence of inherent and control risk assessments and any revisions thereof;

Evidence of the auditor's consideration of the work of internal auditing and conclusions reached; Analyses of transactions and balances; Analyses of significant ratios and trends; A record of the nature, timing and extent of audit procedures performed and the results of such procedures.

Describe the General principles regarding Audit Evidence and Documentation. State the objectives of audit documentation and the matters affecting the form and contents of audit working papers. Marks 6 General principles regarding audit evidence are as follows: a. b. c. d. Sufficiency of the audit evidence Appropriateness of the audit evidence Relevance of the audit evidence Reliability of audit evidence

The use of documentation helps in achieving the following objective: a. b. Assist in planning and performance of the audit. Assist in supervision and review of the audit

Form and contents of working papers are affected by matters such as following: a. b. c. d. e. f. Nature of the engagement. Form of the auditors report Nature of complexity of the business Nature and condition of the entities accounting and internal control system. Needs in particular circumstances for direction, supervision and review of work performed by assistants Specific audit methodology and technology used in the course of the audit.

State why it is important for audit working papers to include the following:[ND01] 16=6 (i) Name of the client; (ii) Description of the contents; (iii) Period covered; (iv) Initials of the persons involved; (v) Date of the preparation of the working papers; (vi) Index code.

Ch 11

Q-1) What are the characteristics of audit evidence? [ND04] Q-2) What are the major objectives of audit evidence? [MJ07]
Q-3) What includes audit evidence?[MJ10] Q-4) What is the relevance of audit evidence? [ND05]

Q-5) Quality of evidence Q-6) What are the procedures to obtain evidence? [MJ10, ND05, MJ03] Q-7) How would you obtain sufficient and appropriate Audit Evidence through the performance of Compliance and Substantive tests? [MJ03] Marks 3 Q-8) What are the auditing procedures Mr. Bashar should consider to gather evidence concerning subsequent events? [MJ04] Marks 4
Q-9) Auditor requires a sufficient amount of relevant, reliable audit evidence to be obtained in order to arrive at an opinion on the financial statements. [ND05]

Q-10)State the basic principles governing an audit in respect to the following:- [MJ04]Marks 6 (i) Accounting System and Internal Control; [MJ04] (ii) Auditor evidence; [MJ04] (iii) Audit planning. [MJ04]

Q-11)What is audit sampling? Q-12)What is population? Q-13)What is statistical sampling? Q-14)What is non-statistical sampling? Q-15)What is error? Q-16)What is expected error? Q-17)What is sampling unit? Q-18)What is sampling risk? Q-19)What is non-sampling risk? Q-20)What are the methods of selecting the sample? Q-21)Anomalous error

Q-1) What are the characteristics of audit evidence? [ND04] The characteristics of audit evidence are; Evidence should be sufficient and appropriate; Evidence should be relevant; and Evidence should be reliable.

Q-2) What are the major objectives of audit evidence? [MJ07] Major objectives of audit evidence i) To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. ii) To enable the auditor to draw conclusions on which to base the audit opinion.
iii) In case of statutory audit, to enable the auditor to state in his report whether he has been provided with al

Q-3) What includes audit evidence?[MJ10] Q-4) What is the relevance of audit evidence? [ND05]

Q-5) Quality of evidence

Q-6) What are the procedures to obtain evidence? [MJ10, ND05, MJ03]
Methods for obtaining audit evidence: The auditor obtains audit evidence in performing compliance and substantive procedures by one or more of the following methods: inspection; observation;

inquiry and confirmation; computation; analytical review;

Q-7) How would you obtain sufficient and appropriate Audit Evidence through the performance of Compliance and Substantive tests? [MJ03] Marks 3 Q-8) What are the auditing procedures Mr. Bashar should consider to gather evidence concerning subsequent events? [MJ04] Marks 4
Q-9) Auditor requires a sufficient amount of relevant, reliable audit evidence to be obtained in order to arrive at an opinion on the financial statements. [ND05]

Q-10)State the basic principles governing an audit in respect to the following:- [MJ04]Marks 6 (i) Accounting System and Internal Control; [MJ04] (ii) Auditor evidence; [MJ04] (iii) Audit planning. [MJ04]

Q-11)What is audit sampling? Q-12)What is population? Q-13)What is statistical sampling? Q-14)What is non-statistical sampling? Q-15)What is error? Q-16)What is expected error? Q-17)What is sampling unit? Q-18)What is sampling risk? Q-19)What is non-sampling risk? Q-20)What are the methods of selecting the sample? Q-21)Anomalous error
What is the relevance of audit evidence? [ND05] Relevance of audit evidence: A given set of audit procedures may provide audit evidence that is relevant to certain assertions, but not others. For example, inspection of records and documents related to the collection of receivables after the period end may provide audit evidence regarding both existence and valuation, although not necessarily the appropriateness of period-end cutoffs. On the other hand, the auditor often obtains audit evidence from different sources or of a different nature that is relevant to the same assertion. For example, the auditor may analyze the aging of accounts receivable and the subsequent collection of receivables to obtain audit evidence relating to the valuation of the allowance for doubtful accounts. Furthermore, obtaining audit evidence relating to a particular assertion, for example, the valuation of inventory.

Inspection:

Inspection consists of examination of records, documents or tangible assets. An auditor has to examine a large number of documents in the course of an audit as most transactions are supported by documentary evidence. Vouching and verification of assets are general auditing techniques used for inspection. Observation: Observation means taking part in a process or procedures being performed by others as a witness. For example, the auditor may witness the stock taking process to check that the system of stock taking is fair. Inquiry and confirmation: Inquiry is to seek appropriate information by putting questions from knowledgeable persons inside or outside of the entity. Confirmation consists of the response to an enquiry to corroborate information contained in the accounting records. For example, the auditor normally requests confirmation of debtors by direct communication with debtor. Computation: Computation consists of checking the arithmetical accuracy i.e. totaling, balancing, reconciling or performing independent calculations. Analytical review: Analytical review consists of computing significant ratio and trends, comparison and investigating unusual fluctuations and items. In drawing up an audit program, an auditor has to select such a combinations of audit techniques as would enable him to test the propositions under examinations effectively and efficiently. How would you obtain sufficient and appropriate Audit Evidence through the performance of Compliance and Substantive tests? [MJ03] Marks 3 The auditor should obtain sufficient and appropriate audit evidence through tests of control and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information. Tests of control are performed to obtain evidence about the effectiveness of the design of the accounting and internal control systems and evidence of the operation of policies and procedures applied. Through this test the auditor determines whether control techniques that mitigate the risk of material misstatements are operating effectively. In the tests of control procedures, the auditor is concerned with the following assertion; Existence Effectiveness Continuity - the control exists - the control is operating effectively - the control has operated throughout the period.

Substantive tests are designed to obtain evidence as to the completeness, accuracy and validity of the date produced by the accounting system. In the substantive tests the auditor is concerned with the following assertions: Existence Right and obligation Occurrence Completeness Valuation Measurement An asset or liability exists at a given date An asset is a right of the entity and a liability is an obligation of the entity at a given date. A transaction or event took place, which pertains to the entity There are no unrecorded assets, liabilities or transactions. An asset or liability is recorded at an appropriate carrying value. A transaction is recorded in the proper amount and revenue or expenses is allocated to the proper period. An item is disclosed, classified, and described in accordance with acceptable accounting policies and applicable legal requirements.

Presentation and disclosure -

What are the auditing procedures Mr. Bashar should consider to gather evidence concerning subsequent events? [MJ04] Marks 4 Auditing procedures of subsequent events depend upon the nature of circumstances of each client. Audit considerations would entitle a review of minutes of board meetings up to date of signing the audit report; review of correspondences with legal advisers; review of interim or management accounts, budgets and forecasts; review of internal audit working papers and books of accounts; and obtaining a letter of representation containing details of all subsequent events. Auditor requires a sufficient amount of relevant, reliable audit evidence to be obtained in order to arrive at an opinion on the financial statements. [ND05] Auditor requires a sufficient amount of relevant, reliable audit evidence to be obtained in order to arrive at an opinion on the financial statements. [ND05] ISA 8 on audit evidence requires that the auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures, in order to enable him to draw reasonable conclusions on which to base his audit opinion on the financial statements. Audit evidence is obtained from an appropriate mix of tests of controls and substantive procedures. In some circumstances evidence may be obtained entirely from substantive procedures. It is apparent from above that there is a choice for the auditor, if he does not wish to place reliance on internal control there may be other forms of audit evidence available to him to provide basis for his audit opinion. In practice this tends to mean two basic approaches to audit testing: (a) Indirect approach: The evaluation of internal control forms the basis of the audit. Detailed testing of items in the financial statements is kept to a minimum. (b) Direct approach: More detailed testing of items in the financial statements is Carried out. The opinion is based upon ability of the auditor to obtain relevant and reliable evidence from number of sources. 3. (b) Trade Receivables:

i) ii) iii) iv) v) vi) vii)

To check opening balance from audited accounts. To ascertain total credit sales from sales account. To ascertain total cash received from trade debtors. To determine bad debts and discounts allowed. To confirm balances of individual debtors through balance confirmation letter. Casting debit and credit side of accounts and to determine closing balance. Post Balance Sheet receipts.

Related party transactions: i) ii) iii) To check if the transactions fall within the purview of related party transactions. How it has been authorized and initiated. To confirm it through issuing letter of confirmation to respective party.

Capital work in progress: i) ii) iii) iv) To check from the measurement book to what extent the job has progressed. Whether the materials are issued from stores according to requisition. Whether all cost relating to material, labour and overhead which can be directly attributed to work is accounted for. To obtain certificate from engineering department of the client in respect of value of capital work in progress.

State the basic principles governing an audit in respect to the following:- [MJ04]Marks 6 (ii) Auditor evidence; [MJ04] In respect of audit evidence the basic principles governing an audit stated that the auditors should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information. Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. CHAPTER 12
Letter of Representation; [ND05] Management Letter; [ND05] When management representation is required? [MJ10] What do auditors do when receive such representation and in occasions when such evidence do not agree with other evidence? [MJ10] Name six financial statement assertions.[MJ10] Management representations are normally obtained by the auditor in the form of a letter. What are the other ways of its documentation? [ND07] What may be probable points in the management letter on the audit of an industrial unit relating to verification of Stock of Raw Materials, Work in Progress and Finished Goods? [ND03] Marks 6 As an auditor of Sincere Limited you revealed that the cashier of the company frequently allows its officers and employees to receive cash against IOU slips and personal cheques.

You have decided to include the point in your management letter. Draft the report under the headings: a. Observation, b. Impact and c. Recommendation. [ND02] 4 State briefly, the significance of the following regarding an audit: [MJ02] (ii) Letter of Representation

What do you mean by Letter of Weakness? Why such a letter is issued? [MJ05]Marks 4 What is management?

CHAPTER 13

Name six financial statement assertions. [MJ10] Confirmation from customers Types of confirmations What could be the possible reasons for disagreement of Account receivable balances between the client and customer? [MJ10] Balance confirmation from individual customers is the ideal substantive procedure, what are the alternative procedures to verify existence/right of Account receivable? [MJ10] Complete the table, showing which test on tangible assets are designed to provide evidence about financial statement assertion. [MJ10] Completeness Existence Valuation Rights and Obligations

(a) Inspect assets, (b) Verify the valuation certificate, (c) Refer to the title deeds, (d) Compare assets in the ledger to non-current asset (e) review depreciation rate (f) Verify self constructed assets to invoices, (g) Examine invoices after the year end, (h) Review repairs in nominal ledger.
Explain the "significance" of "compliance procedures" and 'substantive procedures" for audit of financial information of a listed company in Bangladesh. [MJ01]Marks 6 As an auditor, what type of controls would you expect in relation to:- [MJ05]Marks 6 (i) Bank Reconciliation; [MJ05] (ii) Trade Debtors; [MJ05] (iii) Cash Disbursement. [MJ05] Suppose you have been assigned to conduct the audit of accounts of Sun Moon Ltd. for the year ended 31 December, 2001 by your principal. Describe the procedures you will apply to audit the following items: [MJ02] (i) Tangible fixed assets;

(ii) Investment (iii) Accrued expenses.

3. As the Audit Senior of Read, Think plan and Write, Chartered Accountants, you have been asked by its Senior Partner, Mr. Read, to briefly explain the objective of the following audit Procedures:- [ND01]35=15 (a) (b) (c) (d) (e) Bank Reconciliation; Opening of Mail; Circularization of Debtors; Attendance at Stock Taking Cash Counting at year end.

For the following items identify and discuss the factors you will take into consideration in assessing the audit risk while planning the audit of accounts of a manufacturing enterprise, and the situations when there will be a high level of audit risk: [MJ02] (j) (ii) (iii) (iv) Inventories; Trade receivables; Contingent liabilities; Contingent assets.

Discuss the general principles in connection with the verification of fixed assets. [MJ08, MJ06] What do you understand by Cut-off Procedure in respect of verification of Stocks? [MJ08] State the verification procedures of;- [MJ05] Marks 5 (i) Stock in transit[MJ05] (ii) Freehold land and Building. [MJ05]

How will you verify the following items appearing in the financial statements of a public limited company? [MJ07]
a. b. c. d. e. Creditors Debtors Depreciation of fixed assets. Taxation Leasehold land and freehold land

How will you verify the following items appearing in the financial statements of a public limited company? [ND07] a. Compensation paid to director for loss of office b.Companys contribution to the Employees Provident Fund c. Miscellaneous (secret) expenditure of Tk. 500,000 d.Foreign travel expenses of the Managing director.

How do you verify (i) Off-Balance Sheet Items; (ii) Contingent assets; (iii) Contingent liabilities and (iv) Provision for taxation? [ND02]3x4=12 What do you understand by Cut-off Procedure in respect of verification of Stock? [MJ06] Marks 3 Distinguish between verification and vouching. [MJ04]Marks 2 State the verification procedures of the following:- [MJ04] Marks 8

(i) Plant and Equipment ; (ii)Revaluation Surplus; 3. (c) Describe the procedure for verifying debtors by direct circularization. [ND04]Marks 4 Name six financial statement assertions.[MJ10] Explain the "significance" of "compliance procedures" and 'substantive procedures" for audit of financial information of a listed company in Bangladesh. [MJ01]Marks 6 As an auditor, what type of controls would you expect in relation to:- [MJ05]Marks 6 (i) Bank Reconciliation; [MJ05] (ii) Trade Debtors; [MJ05] (iii) Cash Disbursement. [MJ05] (i) Bank reconciliations (1) (2) (3) (4) (ii) (1) (2) Bank reconciliations should be prepared at least monthly. The person responsible for preparation should be independent of the receipts and payments function or alternatively, an independent person should check the reconciliation. If the reconciliation is prepared by an independent responsible official he should obtain bank statements directly from the bank and hold them until the reconciliation is completed. The preparation should preferably include a check on at least a sample of receipts and payments against items on the bank statement. Trade Debtors All orders received should be recorded on pre-numbered sales order documents. The orders should be checked against the customer's account and this should be evidenced by the initials of the responsible official. Any new customer should be referred to the credit control department before the order is accepted. Existing customers should be allocated a credit limit and it should be ascertained whether this limit is to be exceeded if the new order is accepted. If so the matter should be referred to credit control. All orders should be authorized by a responsible official before any goods are despatched. The sales order can be used to produce a despatch note for the goods outwards department. No goods may be despatched without a despatch note. Cash payments

(3)

(4) (5) (iii)

1. Mode of payments. As far as possible, payments must be made by crossed cheques marked 'Accounts Payee only' and official receipts should be obtained. 2. Authorization. All payments should be authorized by responsible official duly vested with these powers by the management. Proper verification should be done before the payments are made. All payments of special nature should be minuted by the Board. 3. Recording. All payments should be promptly recorded in the cashbook.

4. Vouchers. All supporting vouchers of payment should be serially numbered and filed in order to facilitate the subsequent checking by the auditors. 5. General To Check Arithmetical accuracy and carry forwards of all amounts in the cashbook. Suppose you have been assigned to conduct the audit of accounts of Sun Moon Ltd. for the year ended 31 December, 2001 by your principal. Describe the procedures you will apply to audit the following items: (i) Tangible fixed assets; (ii) Investment (iii) Accrued expenses.

[MJ02] The verification procedures of the items given in the question are presented below:
(i) Tangible fixed assets Freehold land and buildings Examine documents of title, or land registry entry Ensure buildings are being depreciated at an appropriate estimate Consider appropriateness of valuation basis (usually existing use basis)

Leasehold land and buildings Examine lease and ensure correctly classified as short or long Ensure lease being amortized over period of lease Ensure buildings are being depreciated at an appropriate estimate Consider appropriateness of valuation basis (usually existing use basis)

Mines, quarries and wasting lines Examine current estimates of useful life Ensure that there are no restrictions to the use and title to the assets Ensure that the assets are being depreciated at an appropriate estimate motor vehicles, equipment, furniture and

Plant, machinery, fixtures -

Examine estimates of useful lives Ensure that there are no restrictions on the use and title to the assets Ensure that the assets are being depreciated at an appropriate estimate

Consider appropriateness of valuation basis (usually existing use basis) Ensure physical verification of the assets is conducted at year end Examine the proof of ownership of the assets.

(ii) Investment (a) Title-Establishment of title and beneficial ownership of investments is not conclusively possible. However, evidence is available in the form of: (i) (ii) Share certificates, etc. Payments for securities

(iii) Dividends/interest from securities (iv) Internal control procedures. (b) Valuation Valuation of quoted securities is easily confirmed with appropriate financial publications. Directors valuation of unquoted securities is something on which the auditors report, and the basis of the calculations must therefore be examined. The auditor must also consider whether any provisions for fall in value are adequate, which may mean examining copies of accounts of companies in which investments are held. (c) Income Income from securities can be verified with known interest rates for fixed interest securities. Unquoted share income must be verified with copies of the accounts. (iii) Accrued expenses Procedures to check the accruals and other liabilities are as follows: compare with previous year verify whether estimation of charges are made on a reasonable basis review the items on the schedule of accruals and other liabilities for: (a) reasonableness; (b) consistency of amounts between years; (c) any obvious omissions from the list or any material understatement of liabilities, based on overall understanding of the business; and

(d) any unusual item (e) examine third partys documents and supporting (f) circularize the parties concerned, etc.

3. As the Audit Senior of Read, Think plan and Write, Chartered Accountants, you have been asked by its Senior Partner, Mr. Read, to briefly explain the objective of the following audit Procedures:- [ND01]35=15

(a) (b) (c) (d) (e)

Bank Reconciliation; Opening of Mail; Circularization of Debtors; Attendance at Stock Taking Cash Counting at year end.

For the following items identify and discuss the factors you will take into consideration in assessing the audit risk while planning the audit of accounts of a manufacturing enterprise, and the situations when there will be a high level of audit risk: [MJ02] (k) (ii) (iii) (iv) Inventories; Trade receivables; Contingent liabilities; Contingent assets.

Discuss the general principles in connection with the verification of fixed assets. [MJ08, MJ06]
The general principles of verification of assets in an audit is as follows: 1) 2) 3) Fixed assets should be verified to confirm whether the entity has the ownership right on the asset Whether the Fixed assets were in existence as of the balance sheet date. Whether the amount shown in the balance sheet includes all the assets and the amounts are complete

4) Whether the valuation of the asset were done in accordance with the accounting standards 5) 6) Whether the addition, disposal and depreciation of the asset has been properly accounted for the year under audit Whether the relevant data and information relating to the asset has been properly presented and disclosed in the financial statement of the company.

What do you understand by Cut-off Procedure in respect of verification of Stocks? [MJ08, MJ06] (i) Cut-off Procedures are test of transactions occurring close to the year-end (cut-off date) to ensure that the transactions are recorded in the correct accounting period. The nature and extent of cut-off procedures vary, according to the circumstances, the nature of the accounting system and the perceived risk of material error. For example, where the inventory valuation is derived from a full physical inventory at the yearend, any cut-off error which fails to match inventory with purchases, directly affects earnings for the year in addition to accounts payable. However, where the inventory is updated

(ii)

simultaneously with purchase records and accounts payable, any cut-off error affects only the balance sheet amount of inventory and accounts payable and does not affect earnings. (iii) Areas in which auditors normally test cut -off include: Inventories At the initial stage, auditors will collect last numbers of the following documents: (i) Last GRN number and date (ii) Last Stores Issue Note number (iii) Last incoming invoices registration number and date The auditor should check cut-off by noting the serial numbers of delivery notes (challan) and invoices just before and after the year end to check whether those have been included in the correct period and to make sure whether any adjustment is required to be made in stocks. State the verification procedures of;- [MJ05] Marks 5 (i) Stock in transit[MJ05] (ii) Freehold land and Building. [MJ05] Following procedures should be performed to verify the stock in transit:

Where the inventory valuation is derived from a full physical inventory at the year-end, any cut-off error which fails to match inventory with purchases, directly affects earnings for the year in addition to accounts payable. However, where the inventory is updated simultaneously with purchase records and accounts payable, any cut-off error affects only the balance sheet amount of inventory and accounts payable and does not affect earnings.
(iii) Areas in which auditors normally test cut -off include: Inventories (shipments and receipts) Cash (receipts and payments) Accounts receivable (shipments, cash receipts and credits granted)

Accounts payable (disbursements and goods and services received) New Paragraph. At the initial stage, auditors will collect last numbers of the following documents: (i) Last GRN number and date (ii) Last Stores Issue Note number (iii) Last incoming invoices registration number and date (iv) Last Money Receipt number and date (v) Last Payment voucher number and date The general principles of verification of freehold land and building in an audit is as follows: 1. 2. 3. 4. 5. To confirm whether the entity has the ownership right on the asset Whether the assets were in existence as of the balance sheet date. Whether the amount shown in the balance sheet includes all the land and building and the amounts are complete Whether the valuation of the land and building were done in accordance with the accounting standards Whether the addition, disposal and depreciation of the land and building has been properly accounted for during the year under audit

6.

Whether the relevant data and information relating to land and building has been properly presented and disclosed in the financial statement of the company.

How will you verify the following items appearing in the financial statements of a public limited company? [MJ07]
f. g. h. i. j. Creditors Debtors Depreciation of fixed assets. Taxation Leasehold land and freehold land

How will you verify the following items appearing in the financial statements of a public limited company? [ND07] e. Compensation paid to director for loss of office f. Companys contribution to the Employees Provident Fund g.Miscellaneous (secret) expenditure of Tk. 500,000 h.Foreign travel expenses of the Managing director.

How do you verify (i) Off-Balance Sheet Items; (ii) Contingent assets; (iii) Contingent liabilities and (iv) Provision for taxation? [ND02]3x4=12 Distinguish between verification and vouching. [MJ04]Marks 2
Vouching is the examination of a document or series of documents to satisfy the auditor that a transaction is in order, has been properly authorized and is correctly recorded in the books of account. On the other hand the verification is obtaining evidence of the existence and ownership of the assets enumerated in the balance sheet. Vouching involves examining the evidence of the purchase of assets, to establish the price paid for their acquisition. Verification involves examining the evidence that the asset acquired continues to exist and remains actually in the ownership of the client. Verification also refers to liabilities. We vouch each item once, but we may verify the item several times.

State the verification procedures of the following:- [MJ04] Marks 8 (i) Plant and Equipment ; (ii)Revaluation Surplus; Procedures to be followed as listed below: Obtain detailed list of plant and equipment and confirm the figure with the ledger and fixed assets register. Vouch 100% addition of plant and equipment during the year under audit through the procurement documents, in case of local purchase and bill of lading and other documents in case of import. Review the Board minutes for confirming the authorization of purchase of plant and equipment.

 (ii)

Verify the value of building through review the current utilization of machinery capacity, current market value of the same machinery and future utilization of the same. Review that the depreciation method followed is in conformity with the Accounting Standard and appropriate amount has been provided in the income statement or not. Verify whether any income obtained from plant and equipment has been duly recorded or not. Check whether the plant and equipment is subject to mortgage. If under mortgage then adequate disclosures have been given or not. Review the annual physical inventory of plant and equipment and note discrepancy if any. Review the management action regarding disposal of such discrepancy. Verify and confirm that adequate insurance policy has been taken against any loss by fire, or any incident etc, Check whether the required disclosures have been provided in the Financial Statements or not. Revaluation Surplus: Obtain the calculation of revaluation surplus. Review the procedures of revaluation of the assets/liabilities and ensure whether the revaluation was made by professional firm or company itself. If the revaluations is made by professional firm then review the revaluation report and confirm the revaluation surplus. Ensure that the use of revaluation reserve, if any, is in compliance with the articles of association of the company.

3. (c) Describe the procedure for verifying debtors by direct circularization. [ND04]Marks 4 Ideally the circularization should be carried out at the year end as this provides direct evidence of the balance sheet figures. In practice, pressures to complete the audit by a deadline may mean that the circularization is carried out one or two months before year end. In the latter case movements on the control accounts should be reviewed in the period between the circularization and the year end for reasonableness. The form of the request will be a letter of specially designed format. There are two types of request: a) b) Positive- Customer asked to confirm to the auditor direct if he agrees or disagrees with the balance Negative - Customer only asked to confirm to the auditor direct if he disagrees

Although in auditing either method is allowed, positive circularization are now generally used. It is useful if the circularization letter or form is accompanied by a copy of the customers ledger account in the client's books, this makes it more likely that fraud or error will be discovered. Control of circularisation In all cases the circularisation must be controlled by the auditor:

Selection: Customers to be circularised should be selected by the auditor from a sales ledger listing agreed to the nominal ledger control accounts. Particular attention should be given to : (i) (ii) old unpaid accounts accounts written off during the period under review

(iii) accounts with credit balances The following should not be overlooked: (i) (ii) accounts with nil balances accounts which have been paid by the date of the examination.

Explain the "significance" of "compliance procedures" and 'substantive procedures" for audit of financial information of a listed company in Bangladesh. Marks 6 The significance of compliance procedure and substantive procedure for audit of financial information of listed company in Bangladesh are as follows: Significance of compliance procedure:

Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect.
They provide evidence as to whether or not the controls on which the auditor wishes to rely were functioning adequately during the period under review. Compliance tests check the functioning of a control, not the transaction itself. For that reason all exceptions revealed by the compliance test should be thoroughly investigated irrespective of the amount involved in the particular transaction which is being used as the medium for carrying out the test. Significance of substantive procedure: Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity of the date produced by the accounting system. They are of two types: tests of details of transactions and balances; analysis of significant ratios and trends including the resulting investigation of unusual fluctuations and items.

The nature, extent and timing of substantive tests are a matter of judgment for the auditor. Where the auditor places reliance upon internal control, and his evaluation of internal control and compliance tests provide assurance that the controls are working adequately, the auditor will limit the substantive tests to be carried out. Where weaknesses in (or the absence of) internal control arise the auditor will need sufficient evidence that material errors or omissions have not occurred in the financial statements. In this situation he should not limit his substantive tests. CHAPTER 14

Q-1) Q-2) Q-3) Q-4) Q-5) Q-6) Q-7) Q-8) Q-9)

What are the Fundamental principles of IFAC code? Define Independence of mind [MJ10] Define Independence of appearance[MJ10] What are the sources of Threats? Name different categories of threats to independence. [MJ10] What are the threats to auditor's independence? [MJ03] Marks 3 What are the safeguards against threas? The IFAC code of ethics applies only to statutory audits. True/ False [MJ10] As per IFAC code of Ethics, when Audit engagement partners of listed companies should be rotated away from the engagement? [MJ10] Q-10) Why do independence and objectivity matter so much? [MJ10] Q-11) What can auditor do to preserve objectivity? [MJ10] Q-12) Q-13) Q-14) Q-15) What do you mean by audit independence? [ND04, ND02, MJ01] State the points that influence auditors independence. [ND04]Marks 6 Suggest how auditor's independence can be improved. [MJ03] Marks 5 Explain the provisions of the Companies Act, 1994 relevant to the issue of auditors independence. [ND06] Marks 8 Q-16) Discuss the limitation in applying the auditing guidelines in small companies. Discuss two factors that work against auditors independence in small companies. [ND06]Marks 7 Q-17) One of the ethical principles for the auditor is independence. Keeping in view with the independence of auditors, the Companies Act, 1994 has conferred certain rights and powers on the auditors. What are those rights and powers? [MJ08]

Q-1) Q-2) Q-3) Q-4) Q-5) Q-6) Q-7)

What are the Fundamental principles of IFAC code? Define Independence of mind [MJ10] Define Independence of appearance[MJ10] What are the sources of Threats? What are the safeguards against threas? The IFAC code of ethics applies only to statutory audits. True/ False [MJ10] As per IFAC code of Ethics, when Audit engagement partners of listed companies should be rotated away from the engagement? [MJ10]

Audit Independence Independence is a mental and psychological manifestation of the human mind, indicating an individual's behavior and attitude towards a given situation. It implies that the judgment of a person is not subordinate to the wishes or directions of others who have engaged him or to his own self interest. Auditor's Independence refers to the ability of the auditor to act and report with honesty, integrity and objectivity. It is a reflection of the auditors mental strength of character and personality. International Standard on Auditing (ISA) objective and basic principles Governing

an audit, in elucidating integrity, objectivity and independence, states that the auditor should be straightforward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity. The need for the auditor to be independent of the client is so obvious that the auditing professional always assumes it for granted and should ensure its application in practice. Auditor independence may entail technical independence, investigative independence or/and reporting independence. The concept of auditors independence is based upon the fact that the financial statements duly attested by a public accountant are read not only by the shareholders and investors but also by lenders and other user-groups who need to rely upon them. Unless these statements represent an independently formulated true and fair view opinion on the state of affairs of the company, the basic objective of the audit will not be achieved. State the points that influence auditors independence. [ND04]Marks 6 Points that influence the auditors independence The fixing of auditors' fees is frequently delegated to the directors. In many cases the directors normally control annual general meeting, where fees are fixed. Auditors day to day contact with the company, with the directors or those employed by the directors, decreases the independence of auditors. The independence and credibility of auditors will deteriorate in case of involvement with the company tax, accounting and consultancy. Auditors tend to belong to the same socio-economic group as the directors. The range of accounting policies available for dealing with specific matters which are not covered by the standards give chances to act in accordance with the interest of influence groups. Size of the client company and size of the audit firm may be a threat to the independence of auditor.

Suggest how auditor's independence can be improved. [MJ03] Marks 5 Taking the following measures can improve the auditor's independence: 1. 2. 3. Frequent professional training, seminar and workshop should be undertaken to enhance the independence of auditor. Professional bodies should come forward with more detailed provisions of Ethical Guide relating to auditors independence. Various Government authorities, such as, Securities and Exchange Commission should ensure the mandatory observance of regulations which in turn will improve the auditors' independence. The auditors should not be allowed to undertake consultancy and any other work for their clients nor should auditors be permitted to do accountancy work, which they themselves subsequently audit.

4.

Explain the provisions of the Companies Act, 1994 relevant to the issue of auditors independence. [ND06] Marks 8 COMPANIES ACT PROVISIONS AND AUDITORS INDEPENDENCE Provisions of companies Act 1994 relevant to the issue of auditors independence include: Section 210: The auditor will be appointed by the shareholders in the annual general meeting (AGM). The auditors remuneration is fixed in that AGM. Section 212: The following persons are not qualified for appointment as auditor of a company. an officer of the company; a partner or an employee of any officer, employee to the company; a person who is indebted to the company exceeding Tk.1,000. a person who is a director or holder of shares exceeding 5% of the subscribed capital. Section 210: A retiring auditor, shall be re-appointed unless: he is not qualified for re-appointed, or he gives notice for his unwillingness a resolution has been passed at the meeting appointing somebody instead of him provided that such resolution can only be passed on the ground of death. incapacity or dishonesty or disqualification.

Section 213: The auditor has the right of access to books of accounts, vouchers and the right to acquire information and explanations from the directors and officers. Section 217: The auditor has the right to receive notice of AGM and to attend any general meeting and to be heard on the matters which concern him as auditor.

Discuss the limitation in applying the auditing guidelines in small companies. Discuss two factors that work against auditors independence in small companies. [ND06]Marks 7 The auditor needs to obtain the same level of assurance in order to express an unqualified opinion on the financial statements of both small and large entities. But there are some limitations in small business in applying auditing guidelines: 1. Many internal controls which would be relevant to large entities are not practical in the small business. 2. 3. In small businesses, accounting procedures may be performed by a few persons who may have both operating and custodial responsibilities. The audit evidence necessary to support the auditor's opinion on the financial statements may have to be obtained entirely through the performance of substantive procedures.

Auditor's Independence and Small Companies:

Two factors work against auditor's independence in small companies: (a) Involvement of audit with management. Inevitably, the small company is likely to look to its auditors for professional advice and guidance. It is also likely that the auditor may be involved in preparation of accounts and taxation matters. Audit fee is likely to be relatively lower for a small client than a large client. The auditor will be under pressure to restrict costs and hence audit time.

(b)

It is, however, the auditor's professional duty to overcome these problems and maintain his independence One of the ethical principles for the auditor is independence. Keeping in view with the independence of auditors, the Companies Act, 1994 has conferred certain rights and powers on the auditors. What are those rights and powers? [MJ08] (b) Rights and powers of auditor under the companies act 1) 2) 3) 4) 5) 6) 7) 8) Access to the books, accounts and vouchers. Obtaining information and explanations. Inquiring into particular issues regarding loans, advances, transactions etc. Receiving notice and attending the general meeting. Reporting to the members. Visiting branch(es) and access to the branch accounts. Signing the audit report. Receiving remuneration.

CHAPTER 15
Q-8) Q-9) Q-10) Q-11) Q-12) Q-13) Q-14) Q-15) What can auditor do to preserve objectivity? [MJ10] Why do independence and objectivity matter so much? [MJ10] What do you mean by audit independence? [ND04, ND02, MJ01] Name different categories of threats to independence. [MJ10] What are the threats to auditor's independence? [MJ03] Marks 3 State the points that influence auditors independence. [ND04]Marks 6 Suggest how auditor's independence can be improved. [MJ03] Marks 5 Explain the provisions of the Companies Act, 1994 relevant to the issue of auditors independence. [ND06] Marks 8 Q-16) Discuss the limitation in applying the auditing guidelines in small companies. Discuss two factors that work against auditors independence in small companies. [ND06]Marks 7 Q-17) One of the ethical principles for the auditor is independence. Keeping in view with the independence of auditors, the Companies Act, 1994 has conferred certain rights and powers on the auditors. What are those rights and powers? [MJ08]

Integrity Objectivity Independence Threats and Safeguard Contingent fee

Write short notes on the following: [May-June, 09] (a) Working Papers (b) Audit Evidence (c) Bank Reconciliation (d) Contingent Liability (e) Finance Lease. 1. Write short notes on the following : [November-December, 08] (a) Audit program (b) Audit engagement letter (c) Prospectus (d) Operating leases (e) Fraud & Error 1. Write short notes on the following: 12[May-June, 08] (a) Disclaimer of opinion (b) Adverse opinion (c) Basic elements of the auditors report (d) Performance audit (e) Fraud & Error (f) Prudence

May-June, 09 2. (a) What are the purposes of planning an audit? Enumerate the matters which are to be considered by an auditor in developing his overall audit program. 4 (b) Write down the procedures of audit planning. 4 3. (a) What are the provisions of the Companies Act, 1994 regarding:i. Qualification of auditors and 3 ii. Powers and duties of auditors 3 (b) What do you understand by the term Letter of Weakness? Why and to whom such a letter is issued? 4 4. (a) How do you relate Materiality with Audit Risk? 3 (b) Write short notes on: (3x3)= 9 i. Inherent risk; ii. Credibility of financial statements; and iii. Substance Over Form. 5. (a) What do you mean by audit independence? State the points that influence auditors independence. 6 (b) Describe the circumstances under which an auditor issues a qualified report. 4

May-June, 09 Section I Marks 50

Marks 2. (a) What are the responsibilities of an auditor, if there has been a limitation on the scope of the audit? 4 (b) Draft an audit report for a private limited company, containing at least two findings on scope limitation. 6 3. (a) Discuss the general principles in connection with the verification of fixed assets. 4 (b) What do you understand by Cut-off Procedure in respect of verification of Stocks? 3 4. (a) List the books of account, which should be kept as per Companies Act, 1994. 3 (b) One of the ethical principles for the auditor is independence. Keeping in view with the independence of auditors, the Companies Act, 1994 has conferred certain rights and powers on the auditors. What are those rights and powers? 4 (c) Discuss the relevant provisions of remuneration of auditor under the Companies Act, 1994? 3 5. (a) What is divisible profit? Explain the guiding principles regarding payment of dividend. 5 (b) Discuss the following situations with reference to the decided court cases: 6 (i) Whether a company can distribute capital profits; (ii) Whether depreciation on fixed assets must be made good before distribution of current profits; November-December, 08 Section-I Marks-50 Marks 2. (a) What are the responsibilities of an auditor, if there has been a limitation of scope of the audit? 3 (b) Draft an audit report for a private limited company, containing at least two findings on limitation of scope of the audit. 5 3. The fair presentation of financial statements is the responsibility of the management. Describe the assertion of management with regard to fair presentation of financial statements. 7 4. (a) What are the provisions regarding appointment of the auditors under the Companies Act, 1994? 4 (b) A firm has been invited to accept appointment as auditor of a company following resignation of the previous auditor. Give at least three reasons why the firm might decline the invitation. 6 5. State verification procedure of the items appearing in the financial statements of the Company, as noted below: 15 Borrowing from banks by financial institutions Capital work in progress Accounts receivable Trade creditors Investment in Subsidiary Company May-June, 08 Marks 50 Marks 2. (a) What are the responsibilities of an auditor, if there has been a limitation on the scope of the audit? 4 (b) Draft an audit report for a private limited company, containing at least two findings on scope limitation. 6 3. (a) Discuss the general principles in connection with the verification of fixed assets. 4 (b) What do you understand by Cut-off Procedure in respect of verification of Stocks? 3

4. (a) List the books of account, which should be kept as per Companies Act, 1994. 3 (b) One of the ethical principles for the auditor is independence. Keeping in view with the independence of auditors, the Companies Act, 1994 has conferred certain rights and powers on the auditors. What are those rights and powers? 4 (c) Discuss the relevant provisions of remuneration of auditor under the Companies Act, 1994? 3 5. (a) What is divisible profit? Explain the guiding principles regarding payment of dividend. 5 (b) Discuss the following situations with reference to the decided court cases: 6 (i) Whether a company can distribute capital profits; (ii) Whether depreciation on fixed assets must be made good before distribution of current profits;