Chapter – 1 Concept of and need for assurance 1. Ans: 2. Ans: 3. Ans:
ICAB is a member of IFAC.
True
False.
Who the users are will depend on the nature of the subject matter?
True
False.
The key example of an assurance engagement in Bangladesh is a standard audit.
True
False.
4.
What is the definition of assurance engagement according to IFAC?
Ans:
Assurance Engagement: 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.
5.
What is subject matter? What are the categories of it?
Ans:
Subject Matter: which is evaluated. evaluated. Eg: computer system.
6.
What are the benefits of an assurance engagement?
Ans:
• Independent, Professional opinion. • Confidence to others. • Deterrent to fraud. • Attention to deficiency. • Investors faith.
7. Ans:
Which of the following are specialized audit?
Branch audit Fraud investigations Pension scheme audit
Internal audit Bank audit
8.
Which level of assurance engagement gives the following opinion: “In the course of my seeking evidence about the statement by the chairman, nothing has come to my attention indicating that the statement is not reasonable.”
Ans:
Limited assurance.
9.
Define expectations gap. How can you reduce expectations gap?
Ans:
Expectations gap : Lack of understanding of users. Reduce by :
Clearly indicating scope & limitations.
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10.
What constitutes expectations gap? Explain why?
Ans:
Lack of understanding. Reasons :
i. ii. ii.
Not aware of limitations. Cons Consid ider erin ing g as as gua guara rant ntee ee..
11.
What purpose is served by spelling out clearly, the scope and limitations of an assurance engagement in the engagement letter?
Ans:
Expectation gap is reduced.
12.
What is the key benefit and limitation of assurance?
Ans:
Ben Benefit efit :
Inde Indep pend endent, ent, Prof Profes essi sion onal al veri erifica ficati tion on..
Limi Limita tati tion on :
Risk Risk of of wron wrong g con concl clus usio ion. n.
13.
What risk is associated with the limitations of assurance engagement?
Ans:
To draw wrong conclusion.
14.
Which of the following factor make a person ineligible for being a company auditor?
Ans:
An employee of the client company. A shareholder of 0.05% of the subscribed capital. A person who is indebted to the company not exceeding Tk. 1000. Director of X Ltd. which is the managing agent of the client.
15.
Define reasonable and limited assurance. Compare and contrast between reasonable and limited assurance.
Ans:
Reason Reasonabl ablee assura assurance nce -
A very very high high but but not not absol absolute ute leve levell of assur assuranc ance. e.
Limited assurance -
Low level assurance.
Both the assurance engagement and gives a conclusion. No.
Characteristics
Reasonable Assurance
Limited Assurance
1.
Level of assurance
High
Low
2.
Evidence
Sufficient & appropriate
Limited
3.
Opinion
Positive
Negative
Chapter-3 Process of assurance: Planning the assignment
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1. What is is audit strat strategy? egy? What What is audit audit plan? plan? Differe Differentiat ntiate. e. Ans: Audit strategy – Sets the scope, training & direction - Development of audit plan Audit plan - Sets out nature timing & extent - To obtain sufficient, appropriate evidence
Difference Characteristics Nature Outcome
Audit strategy General Audit Plan
Audit Plan Specific Audit Procedures
2. What proposes are served by an audit plan? Ans: 1. Attention to important areas 2. Identify potential problems and resolve 3. Ensure properly organized audit 4. Assign work to team members 5. Direction & supervision 6. Review work 3. Mention the structure of planning Ans: 1. Ethical requirements continuously met 2. Terms of engagement understood 3. Establish audit strategy 4. Develop audit plan (Including risk assignment procedures) 4. How can you formulate an audit strategy? Ans: 1.Relevant characteristics of engagement (eg. Reporting, framework, entity’s environment) 2. Key dates – Reporting, other communication. 3. Materiality, preliminary risk assessment, testing internal control 5. What are key contents of an overall audit strategy? Ans: 1. Understanding the entity’s environment environment 2. Understanding the accounting & internal control systems 3. Risk and materiality 4. Conquest, nature, timing and extent of procedures 5. Co-ordination, direction, supervision, and review 6. Other matters. 6. Give some examples of overall audit strategy Ans: 1.The terms of engagement engagement 2. Understanding the company and its business 3. Special audit problems (risks) 4. Results of analytical procedures 5. Materiality 6. Risk evaluation and audit approach 7. Other matters 8. Budget and fee 9. Timetable 10. Staffing
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7. Interactive # 1, P.43 8. Under BSA 315, what do you mean by understanding of the entity? Why do we need it? Ans: - to identify risk of material misstatement - to design audit procedures . - to provide framework for audit judgment. 9. What matters are considered in understanding the entity? Ans: 1. Industry- Market competition, technology 2. External factors- recession/growth, interest rate, inflation. 3. Reporting framework- Accounting principles, industry specific practices 4. Nature of the entity- Financing, Financial Reporting, Business operation 5. Selection & application of accounting policies 6. Objectives & strategies – Related risk might cause material misstatement. 7. Review financial performance 8. Internal control 10. How can you achieve an understanding understanding of the entity? Ans: 1. Inquiry Inquiry management, management, others 2. Analytical procedure 3. Observation & inspection – Reading manuals, visit premises, meeting staff 4. Prior knowledge – Previous period – Determine changes. 5. Discussion – about susceptibility - about material misstatement - among team members. 11. Worked example: Inquiries of management and others. P.44 12. Interactive # 2, P.47 13. What is professional professional skepticism? Ans: A critical assessment, with questioning mind, of the validity of the evidence. → Not disbelieve everything → Possess a questioning attitude 14. What is analytical procedure? Ans: Consists of to understanding entity → Significant ratios analysis → Investigation of fluctuation to identify audit risk 15. According to BSA520 what analytical procedures include? Ans: 1. Comparison with a) Prio Priorr perio period d info inform rmat atio ion n b) Anticipated results – Budgets, expectation of auditor c) Industry Industry informa information tion – Ratio of sales sales to trade receivab receivables. les. 2. Relationship between: a) FS eleme elements nts – Rela Relatio tion n of gross gross prof profit it to sale saless b) Financial information and non-financial information → Payroll cost to no. of employees.
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16. What is the basis for choosing analytical procedures for audit? Ans: Auditors professional judgment. 17. At the risk assessment stage, what are the possible sources of information about the client? Ans: 1.Internal financial information 2. Budgets 3. Management accounts 4. Non- financial information 5. Bank and Cash records 6. Vat returns 7. Board minutes 8. Discussion of the correspondents with the client at the year end. 18. Interactive # 3. P.52 19. What is materiality? Ans: Level of error that affects the decision of the users. 20. What does materiality depends on? Ans: Size of the error. 21. According to the BSA320, when should an auditor consider materiality? Ans: 1. Determining nature, training & extent of audit procedure. 2. Evaluating effect of misstatement 22. How does materiality assessment help the in decision making? Ans: It helps to decide: 1. How many many and and what what items items to to exami examine ne 2. Whethe Whetherr to use use sampl sampling ing techni technique quess 3. Level evel of erro error r → Crossing this level will lead to say FS not true and fair 23. How risk & materiality are connected? Ans: Materiality is an audit procedure. Result of this reduces the level of risk. 24. What is tolerable error? Can it change every year? Why? Ans: The maximum error that an auditor is prepared to accept. Yes because: 1. Related to the size of business. 25. Why do you need to review materiality? Ans: Constantly review because of changes. Change in – 1. Draft Draft accou accounts nts – Due Due to materia materiall error error 2. Extern External al Factors Factors – It causes causes change change in risk risk estima estimates. tes. 26. Interactive # 4: Materiality, P.54. 27. What is audit risk: Risk of giving inappropriate opinion. Elements: 1. Risk of material Misstatement – Depends on entity a) Inh Inheren erentt risk risk b) Control risk
2.Risk of failing to detect material misstatement Depends on auditor → 28. What is internal risk and control risk? Differentiat. Ans: Inherent risk: Possibility of material misstatement → Due to nature of the items → No. of related internal control Cont Contro roll Risk Risk:: Possi Possibi bilit lity y of not not prev preven enti ting ng or corr correct ectin ing g a mater material ial misstatement.
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→ →
Due to accounting system Due to internal control system
Difference: Inherent risk 1. Due to items nature 2. No internal control related
Control risk 1.Due to internal control risk 2.Internal control related
29. Give some example that might increase inherent risk. 1. Bala Balanc ncee inclu include dess estim estimate atess 2. Bala Balanc ncee is imp impor orta tant nt 3. Fina Financ ncia iall stat statem emen ents ts → Company in trouble → Company to raise finance → Directors’ motive – eg. Profit target bonus 4. FS contai contains ns comp complex lex accoun accountin ting g 5. Indu Indust stry ry in in whic which h it ope opera rates tes 6. Regu Regula lati tion onss it fall fallss unde under. r. 30. Define detection risk. Which part of audit risk could be controlled by the auditor? How? Ans: Possibility of not detecting a misstatement. → Individually or aggregated → It is in the control of auditor Detection risk could be controlled by the auditor Because: → Inherent and control risk are integral to client → Auditor’s part is detection risk → Auditor’s aim is to reduce overall audit risk, not only one part. 31. Could detection risk be entirely eliminated? Why? Ans: No. Due to inherent limitations of audit. 32. How can detection be reduced? Ans: By carrying out substantial number of losts. → Include high level of audit work 33. If control risk & inherent risk both are high what effect it has on the audit? Ans: → Not rely on the tests of controls. → Carry out extended test of details → To reduce detection risk 34. Determine the audit risk would you accept the engagement? Inherent risk Control risk Detection risk Audit risk High High High ? Medium Low Medium ?
Ans: 1. Audit Audit risk risk = High High.. Not Not accep acceptabl tablee → Reduce detection risk to low level 2. Audit Audit risk = medi medium. um. Accept Acceptabl ablee 35. If control risk is low, would you substantive procedure? Ans: No. Because auditor has to reduce detection risk. 36. See worked example # 1, 2 P. 57.
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37. Interactive # 5: Audit risk. P. 57 38. What are the steps to identify and assess risk? Ans: Step 1: Identify risk at understanding entity level. → Obsolete inventing Step 2: identify risk at assertion level. → Eg. Directors asserted, Inventory is xxx. Step3: Magnitude of misstatement → Inventory is material for a mfc Step4: Likelihood of misstatement → Regular review, scrapping, resale of inventory. 39. Interactive # 6. P. 59 40. According to BSA 315, which factor indicate a significant risk? Ans: 1.Risk of fraud 2.Recent development → Economic, accounting 3.Complexity of transaction 4.Significant transaction with a related party 5.Degree of subjectivity in the financial information 6.Unusual transaction. 41. Why do unusual transaction are more likely to give rise to material misstatement than routine and regular transactions? Ans: Because unusual transaction have more: 1. Manag Managem emen entt interv interven enti tion onss 2. Manua Manuall inte interv rven enti tion onss 3. Comple Complex x accounti accounting ng princip principles les or calcula calculatio tions ns 4. Opportinit Opportinity y for – control control procedure procedure not followed. followed. 42. What should an auditor do when found significant risk? Ans: Auditor must evaluate the design & implemention of entity’s control in that area.
Chapter-4 Process of Assurance: Evidence and Reporting
1. What is Audit Audit Evidenc Evidence? e? What are are the types types of Audit Audit Evidence? Evidence?
ANS:
Information, on which audit opinion is based.
Sample basis
Two Types: 1. Test of Controls Controls-To -To test test effecti effectiveness veness of controls controls..
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2. Subst Substance ance Proced Procedures-To ures-To test assert assertion ion level
Test specific balances
a) Test of details b) Substantive analytical procedures. 2. Why do Auditors Carry out test of control & substantive procedures? ANS:
Test of controls: to test internal control to-
a. Re Repo port rt Sh Shar areh ehol olde der r b. Conclude true and fair view c. Test capabi capability lity to procedu procedure re correct correct inform information ation d. Mat Match ch result result with with inte intended nded resu result. lt. Substantive Procedures: to test balance or transaction to-
a. Te Test st it itss corr correc ectn tnes ess. s. b. It must always carry out.
3. What is Sufficiency and appropriateness of evidence? How to measure the appropriateness of Audit evidence? ANS: Sufficiency:-Quantity
Appropriateness:-Quantity or Reliability. Measure Appropriateness•
External – More reliable than entity’s record.
•
Auditor – Directly by auditor than indirectly.
•
Entity – When control system ok.
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•
Written – Documents than Oral.
•
Originals – Original than facsimiles.
4. What is Financial Financial Statement Assertions? Mentioned the assertions Used by the Auditor? ANS: Anything
presented by management in the Financial Statement.
ASSERTIONS: a. Cl Clas asss of of Tran Transa sacti ction on •
Occurrence - Recorded one occurred and pertains to
entity. •
Completeness – All transactions recorded.
•
Accuracy – Recorded appropriately.
•
Cut-Off – – Correct Accounting Period.
•
Classification – Recorded in Paper Accounts.
b. Ac Acco coun unti ting ng Bala Balanc nces es •
Existence – e.g. Asset, Liabilities Liabilities exist.
•
Rights and Obligations – Rights & Obligations actually
pertain to the entity. •
Completeness – All assets, Liabilities, equity recorded .
•
Valuation & Allocation – Assets, Liabilities included in
FS & Valuation, Allocation recorded.
c. Pr Pres esen entat tatio ion n & Disclo Disclosu sure re
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Occurrence & Rights & Obligations - Disclosed one
•
Occurred – Pertained to entity. •
Completeness – All Disclosures included.
•
Classification & Understandability – Appropriately
presented – clearly expressed. •
Accuracy & Valuation – Disclosed fairly – Appropriate
accounts. 5. Which test shall an Auditor perform to collect audit evidence? ANS: Either
a. Test of Control – To test control system. E.g. Revenue System b. Test of Detail – Substantive Procedure. E.g. Purchase documents, Surveyors report. 6. When Substantive procedure is not sufficient? ANS:
Business conduct with IT system.
7. in carrying out test of control, what else could be helpful? ANS:
a. Inquiry b. Re performance c.
Inspection.
8. How often controls must be tested? ANS: Once
in every three audits – Incase of significant risk, testing must be carried out each year. 9. What type of testing do material items require?
ANS: Substantive procedure. These are: 1. Ag Agre reei eing ng FS FS to rec recor ords ds 2. Exa Examin minee materi material al journ journal al entri entries es
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3. Ad Adjjus ustm tmen ents ts
10. What are the types of substantive procedure? When these are appropriate to use? ANS: 1. Analytical Analytical procedure •
Large volume of transactions
•
Predictable transactions. e.g. wages and salaries 2. Tests of detail
•
Information of account balances
•
Verify assertions. e.g. Inventories, trade receivables.
11. Interactive # 1, P.74 12. According to BSA 700, What are the contents of an Audit Report? ANS: There are several particulars, those are significant to prepare an audit report.
These are
TITLE
ADDRESSEE
INTRODUCTORY PARAGRAPH
MANAGEMENT RESPONSIBILITY
SCOPE-WORK PERFORMED
OPINION
DATE
AUDITORS ADDRESS
AUDITORS SIGNATURE
13. What are the Explicit Opinions? ANS: Explicit opinions are stated as below-
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•
State of Company’s Affairs
•
Profit or Loss
•
Directors report consistent with FS.
14. What are the Implied Opinions? Which matters are related by exceptions? ANS:
Proper books of Accounts in report of a. Money receiv received ed and expande expanded d – With With related related matte matters. rs. b. Sales and particulars. c. Particulars Particulars of Manufact Manufacturing uring Co. – e.g. e.g. Producti Production, on, Distribution, Marketing, Utilization of material, Labor.
15. Why does it need to keep uniformity in the form and content of the audit report? ANS: Because:-
a. Re Read aders ers Unde Unders rsta tand ndin ing. g. b. Identify unusual circumstances.
16. What are the specific issues related to expectation gap? How can we reduce these issues? ANS: Misunderstanding about: 1. Nature Nature of the audited audited financial financial stateme statements nts •
e.g. Balance Sheet is the fair valuation of entity
2. Type Type & exten extentt of work work •
e.g. All items in the financial statements are tested
3. Level Level of of assu assuranc rance e ~
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e.g. Auditor provide absolute assurance
We can reduce those by removing the misunderstandings.
17. What are the contents of an assurance report? ANS: 1. Title – Clearly indicating indicating its independen independence ce 2. Ad Addr dres esse see e 3. Subjec Subjectt matte matterr 4. Crit Criter eria ia 5. Significant Significant inherent inherent limitation limitation 6. Restri Restricti cting ng use of repor reportt •
When criteria made available to specific users.
7. Respons Responsible ible party party •
Party and practitioner’s responsibility
8. ISAE ISAE complia compliance nce •
Engagement performed accordingly
9. Work Work sum summa mary ry •
In case of negative conclusion
10.
Conclusion
11.
Date
12.
Name & address
18. Which issue is normally covered in the report to the management of the client? ANS: Internal control weaknesses.
19. Interactive # 2, P.79 ~
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Chapter – 5 Introduction Introduction to internal control
1.
What Wh at is inte intern rnal al cont contro rol? l? Wh Why y doe doess an an org organ aniz izat atio ion n nee need d IC? IC?
Ans:
Internal control: The process designed to achieve entity’s objectives. Reasons : Main Reason
1.
Minimize business risk
2.
Ensure effective functioning
3.
Ensure compliance with laws & regulations.
Continue operation. 2.
What are the the lim limit itat atio ions ns of in intern terna al con contr tro ols ?
Ans:
1.
3. Ans:
Expensive
May not be worth
2.
Human element
Controls implemented by human Can make mistakes Bad intention Leak password
3.
Unusual transactions
Why Wh y smal smalll com compa pani nies es lack lack effe effect ctiv ivee inte intern rnal al cont contro rols ls? ? 1.
Human element Fewer employees
2. 3.
4. Ans:
Ic is for routine transactions Standards not fit to unusual transactions.
Segregation of duties
Lot of people make large control chain. Fraud caught by next person. Lack
What What are are the the compo componen nents ts of of inter interna nall contr control ol syst system? em? 1.
Control environment
2.
4.
Business risk and entity’s risk assessment process Business risk inherent to operations Risk assessment process identifying business risk to FS Implement IC Information system relevant to financial reporting objectives. Recording procedures. Control Activities Policies ensuring compliance of management directives.
5.
Monitoring Controls
3.
Management functions
Review & Corrective actions.
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5.
What is audit audit commit committee? tee? What are the the terms terms of of referenc referencee of an audit audit commi committee? ttee?
Ans:
Subsection of BOD deals with finance and accounts. Terms of reference: Review the integrity of FS Review internal financial controls & risk management systems. Monitor internal audit Recommend about external auditor Monitor independence of external auditor Implement policy on non – audit services by the external auditor.
1. 2. 3. 4. 5. 6.
* Key issue issue 6.
Financi Financial al statem statement ents. s.
What Wh at are are tthe he type typess of cont contro roll acti activi viti ties es? ?
Ans:
1. 2.
Preventive Detective
All control activities fall under these
Types : 1.
Authorization
Eg. Approval of documents , overtime
2.
Performance review
3.
Information Processing
4.
Physical control
5.
Segregation of duties
Eg. Reconciliations. Comparing internal data with external source. Goods dispatched. Maintain control accounts and TB. TB brings all data together. Arithmetical accuracy. Check sum of invoices. Compare cash inventory with accounting records. Cash count. Limit physical access to assets. Inventory store. Number of people involved in accounting process. Difficult to occur fraud. & accidents. More Checking
7.
In what what ways ways segr segreg egat atio ion n of duti duties es coul could d take take plac place? e?
Ans:
1.
Segregation of function
2.
Segregation of Carry out transaction
3.
Segregation of accounting operation
Transaction carries out. Recording. Maintaining. Steps in transaction. Some staff should not operate.
8.
What ar are th that ty types IT IT co control Pr Procedure?
Ans:
1. 2.
Application controls. General controls.
9.
What Wh at is is appl applic icat atio ion n cont contro roll and and gene genera rall cont contro rol? l? Dif Diffe fere rent ntia ial. l.
Ans:
Application control
Apply to individual application. Ensure. Transaction occurred, authorized, complete, and accurate.
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General control
Apply to Many applications. Ensure. Continued proper operation of system. Supports application control.
Difference
Application control
General control
(a) Scope (b) Control / Support
Individual application Transaction input
Many application Application control
10.
Give some examples of general controls.
Ans:
1. 2. 3. 4. 5. 6.
Development of computer applications. Prevention or detection of unauthorized Changes to programs. Testing and documentation of programs changes. Controls to prevent wrong programs or files being used. Control to prevent unauthorized amendments to data fil es. Control to ensure continuity of operations.
11. 11.
In what what situ situat ation ion,, appl applica icati tion on cont contro roll beco become mess use usele less ss? ?
Ans:
When general control is ineffective. So, review general control first.
12. 12.
Give Give some some exam exampl plee of of app appli lica cati tion on cont contro rol. l.
Ans:
1. 2. 3. 4. 5.
Control over input: Completeness. Control over input: Accuracy Control over input: Authorization Control over processing. Control over mater files and standing data.
13. 13.
What Wh at con contr trol olss shou should ld an an audi audito torr test test abou aboutt appl applic icat atio ion n cont contro rols ls? ?
Ans:
1. 2.
Manual controls manual input is complete, accurate. Control over output System output using CA manual.
3.
Programmed control procedure
Using CAAT.
14. 14.
Iden Identi tify fy app appli lica cati tion on con contr trol ol & Ge Gene nera rall cont contro rol. l.
Ans:
See page no: 95-97
15. 15.
What Wh at are are the the sauc sauces es of inf infor orma matio tion n abo about ut inte intern rnal al con contr trol olss ?
Ans:
1. 2. 3. 4. 5. 6.
Manuals Policies Minutes of meetings Prior year Interview/Staffs Observation important
16. 16.
What Wh at are are tthe he d doc ocum umen ents ts use used d to to reco record rd u und nder erst stan andi ding ng of ent entit ity? y?
Ans:
1.
Narrative notes
Good for short notes.
2.
Questionnaires/Checklist
3.
Diagrams
Aid memories Tick boxes Never asked
Best for recording relationships, reporting lines Time consuming
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17. 17.
Inte Intera ract ctiv ivee # 1, 1, 2, 2, 3, Page Page:: 9999-10 100 0
Chapter-6 Revenue System 1. What are the the key risks associate associated d with ordering? ordering? Ans. •
Accepting customers with poor credit risk
•
Not fulfilling orders.
2. What are the the risks risks associated associated with ordering? ordering? Ans. Orders may be taken from customers who are1. Not Not abl able e to to pay pay 2. Not Not pay pay llon ong g ttim ime e 3. Orders may not recorded recorded properly properly - not fulfilledfulfilled- customers customers lost lost 3. Which internal internal controls controls will mitigate mitigate the the following following risks? risks? 1. Orders may be taken from customer customers s who are Not Not able to to pay 2. Orders may be taken taken from custo customers mers who will Not Not pay long long time 3. Orders Orders may not not reco recorded rded proper properly ly Ans. Sl No. 1
2
3
Risks
Controls
Orders may be taken from customers who are Not able to pay Orders may be taken from customers who will Not pay long time Orders may not recorded properly - not fulfilledcustomers lost
4. What What are are the cont control rol objec objectiv tives? es? 1. Get cust custome omers rs with with good good credit credit risk risk 2. Enco Encour urag age e pro promp mptt pay pay 3. Reco Record rd order orders s correc correctl tly y
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4. Fulf Fulfil ille led d orde orders rs 5. What controls controls can can mitigate mitigate the risks risks of ordering? ordering? 1. Segregation Segregation of of duties – Credit Credit control, control, invoicin invoicing, g, dispatch dispatch 2. Author Authorisa isatio tion n of credi creditt terms terms – •
Reference check
•
Authorize by senior
•
Regular review
3. Author Authorise ise chan change ge in cust customer omer data data – •
Address change with letterhead
•
Deletion request supported by evidence of balance cleared
4. Accept Accept orders orders with with no no credit credit probl problems ems 5. Sequent Sequential ial number numbering ing order order document documents– s– •
Checking with numbers
6. Corr Correc ectt pric price e quo quote ted d 7. Matching: Matching: Customer Customer order order – product production ion order order – despatch despatch notes notes •
Query orders not matched
8. Deal Deal cu cust stom omer er quer queries ies 6. What are the the tests tests of control control over over ordering? ordering? Ans. Check that1. Referen Reference ce obtain obtained ed for all all new custom customers ers 2. New acc accoun ounts ts autho authoriz rized ed by senio seniorr 3. Orders accepted accepted from custom customer er within within specified specified credit credit terms terms and limits 4. Matchi Matching ng order order docume documents nts 7. Manufacturin Manufacturing g company company ltd. Is a large large manufactu manufacturing ring company company selling selling a unique product. It has an established customer base, but as its product is unique, it also receives regular inquiries from potential customers that have not bought products from MCL before. In respect of such new customers, MCL has a significant risk of taking orders from customer who might not be able to pay. What controls should MCL put into place to mitigate this risk?
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Ans. 1. Credit Credit check check from from Credit Credit Rati Rating ng Agenc Agency y 2. Limit Limit cred credit it terms terms 3. Senior Senior member member sign sign off orders orders 4. New custom customer er accounts accounts review for prompt prompt payment. payment. Weak companies will do 1 & 3 only. 8. Inte Intera ract ctiv ive:1 e:1,, p.113 p.113 9. The audit audit senior senior at MCL has been been asked to test controls controls over sales, sales, particularly with reference to new customers. There are three controls in particular that he should check – obtaining credit references, setting credit terms and authorisation. What tests of control should the auditor make over sales? Ans. 1. Select sample of of new custome customers rs by comparing comparing current current to previous previous year 2. Check Check the cust custome omers rs file file for credit credit check check 3. Check terms terms and and evidence evidence that that senior senior staff staff authoris authorised ed 10.What are the key risks associated with dispatch & invoicing? Ans. Despatched but not invoiced 11.What risks a company might face relating to despatch & invoicing? Ans. 1. Despatched Despatched but but not recorde recordedd- goods goods lost to to the busines business s 2. Despat Despatche ched d but but not not invoi invoiced ced 3. Erro Errorr in invo invoic ice e 4. Invoice Invoice cancell cancelled ed by by wrong credit notes. notes. 12.What are the control objectives to mitigate the following risks? Ans. 1. Despat Despatche ched d goods goods record recorded ed 2. Correc Correctly tly invoic invoice e sold sold good goods s
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3. Invoic Invoice e raised raised relate relate to supp supplied lied good goods s 4. Credit Credit note notes s for for valid valid reason reason 13.What are the controls used to mitigate the risks of dispatch & invoicing? Ans. 1. Author Authorisa isatio tion n of of desp despatc atch h •
Despatch only sales orders
•
Only to authorised customers
•
Special authorisation- free of charge goods
2. Examine Examine goods goods outwards outwards-- quantity, quantity, quality, quality, condit condition ion 3. Record Record outw outward ards s on a desp despatc atch h note note 4. Matching: Matching: despatch despatch notes – customer customer orders orders – invoices invoices 5. Pre-nu Pre-numbe mbering ring despat despatch ch note notes s 6. Check Check seque sequence nce of of despat despatch ch notes notes 7. Check Check condit condition ion of return returns s 8. Record Record return returns s on goods goods return returned ed notes notes 9. Despat Despatch ch note note sig signed ned by custom customer er 10.Preparation of invoices and credit notes •
Use authorised price list
•
Authorisation of credit notes
•
Check invoice and credit note- price, quantities, extensions
•
Sequential numbering of invoice and credit notes
11.Updated inventory record 12.Matching- invoice- despatch notes- sales orders 13.Regular review- despatch notes not matched by invoices 14.What are the tests of control used to mitigate risks of despatch & invoicing? Ans.
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1. Verify details details of trade sales sales or goods goods dispatch dispatch notes notes with with sales sales invoices checking -
Quantities
-
Pric Prices es cha charg rged ed wit with h offi offici cial al price price lists lists
-
Trad Trade e disc discou ount nts s have have bee been n prop properl erly y deal dealtt with with
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Calx Calxul ulat atio ions ns and and addi additi tion ons s
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Entr Entrie ies s in sal sales es day day boo book k are cor correc rectl tly y analy analyse sed d
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VAT, VAT, wher where e charg chargeabl eable, e, has been been prope properly rly dealt dealt with with
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Post Postin ings gs to rece receiv ivab able les s led ledge gerr
2. Verify details details of trade sales sales with with entries entries in inventor inventory y records records 3. Verify non-rou non-routine tine sales sales (scrap, (scrap, non-curren non-currentt assets assets etc) with: with: -
Appr Ap prop opri riat ate e supp suppor orti ting ng evi evide denc nce e
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Appr Ap prov oval al by by auth author oriz ized ed off offic icia ials ls
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Entr Entrie ies s in in pla plant nt regi regis ster ter
4. Verify Verify credit credit notes notes with: with: -
Corr Corres espo pond nden ence ce or or other other sup suppo port rting ing evi evide denc nce e
-
Appr Ap prov oval al by by auth author oriz ized ed off offic icia ials ls
-
Entr Entrie ies s in in inv inven ento tory ry reco record rds s
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Enti Entire res s in good goods s ret retur urne ned d reco record rds s
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Calc Calcul ulat atio ions ns and and addi additi tion ons s
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Entrie Entries s in day book, book, chec checking king these these are are correc correctly tly analy analysed sed
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Post Postin ings gs to rece receiv ivab able les s led ledge gerr
5. Test numerica numericall sequence sequence of dispatch dispatch notes and enquire enquire into missing missing numbers 6. Test numerica numericall sequence sequence of invoices invoices and credit credit notes, notes, enquire enquire into missing numbers and inspect copies. 7. Test numerica numericall sequence sequence of order order forms and and enquire enquire into missin missing g numbers 8. Check that that dispatc dispatch h of goods free of charge charge or on special special terms have been authorized by management.
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15.Interactive:2 Ans. P. 115 16.What are the risks associated with recording? Ans. Key risk is failure to record sales so that payment is not prompted. 17.What are the controls to mitigate the risks of recording? 18.What are the tests of control of recording? 19.Interactive: 3 Ans. P.117 20.What risk might arise from the following situation? 21.What are the risks associated with cash collection? 22.What are the controls to mitigate risk related to cash collection? 23.What are the tests of control for cash collection? 24.Interactive:4 Ans. P. 121 25.Indentify the weakness of the ….system of ABC Ltd.? 26.How can you identify the weaknesses associated with ordering system? 27.Interactive: 5 Ans. P. 122 28.As an assurance provider how will you perform test of controls in relation to sales?-Term sales?-Term Question Chapter7 Contorls Once the company has identified the risks which exist in t he purchases system, it will try and create controls which mitigate those risks ( that is, meet the control objectives outlines above). What controls will be put into place depend on the nature of the company and the specific risks associated with the way it operates, but the following controls can be used as examples of how the above risks can be mitigated. Segregation of duties; requisition and ordering Central policy for choice of suppliers Evidence required of requirements requirements for purchase before purchase authorised authorised ( pre- set re- order quantities and re- order levels)
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Order forms prepared only when a pre- numbered purchase requisition has been received Authorisation of order forms Pre- numbered order forms Safeguarding of blank order forms Review from from outstanding orders Monitoring of supplier terms and taking advantage of favorable conditions ( bulk order and prompt payment discounts)
Worked example: controls over ordering Truman Limited buys ‘ Drox’ frequently. Drox is highly marketable and easily portable and the company has a history of theft of inventories of Drox. In order to make sure that only Drox required for business use is purchased in the first place, the directors have decided to put the following controls into operation: Simon Radinski, the stores manager, will be in charge of purchase purchase requisitions, which will be made When inventories of Drox have fallen to a pre- set level. Orders will only be raised in respect of purchase requisitions made by Simon Radinski, except in Periods of Simon’s absence, when requisitions may be his deputy Cathy Lewis.
Assurance Orders will be authorized by Linda Fairburn, the purchases director. Random, occasional spot checks will be carried out by Linda Fairburn on the level of Drox when the requisition is raised. Purchase orders will be kept in a locked office in the purchase department. In addition, in order to control inventories, Drox will only be kept in a locked cupboard in the warehouse.
Tests of controls The tests that the assurance providers carry out over such controls will obviously also depend on the exact nature of the control and business. However, again, some general ideas can be generated. Review list of suppliers and check a sample to orders made Check sequence of pre- numbered order forms
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Check orders are supported by a purchase requisition Review security arrangements over blank orders
Worked example: Tests of controls over orders The directors of Truman Limited have requested that the auditors review that new controls over the purchase of Drox are operating effectively. effectively. The audit senior has therefore drafted drafted the following plain: Request Linda Fairburn notifies the audit team of requisitions for Drox during the audit and attend spot check on re- order level Observation of premises for evidence of Drox being stored elsewhere than the locked cupboard Review of sample of orders for Drox to ensure that purchase requisition exists and orders were were made only by Simon Ridinski and were authorized by Linda Fairburn If sampled requisitions were made by Cathy Lewis, check absence records for Simon Radinski Radinski
Interactive question 1: Ordering The directors of Lyton Limited (LL) have just uncovered a fraud being perpetrated by the stores manager. He was in charge of ordering, had raised a number of false orders to non- existent suppliers, raised goods received notes in respect of non- deliveries and forwarded an invoice to the accounts department which was then paid. Which two of the following controls could have prevented this fraud? Approved list of suppliers Check of goods inward by person other than orderer Pre- numbered order forms Blank order forms locked in a safe See Answer at the end of this chapter. Goods inward and recording of invoices
Section overview Risks are of accepting goods not ordered or for accepting invoices for poor quality goods. Controls include matching goods received with orders. Risks and Control objectives
When considering goods inward and recording of i nvoices, a company might recognise all or some of the following risks:
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Goods may be misappropriated for private use Goods may be accepted that have not been ordered Invoices may not be recorded resulting i n non- payment The company may not take advantage of the full period of credit extended The company may not record credit notes resulting in paying invoices unnecessarily These risks lead to the following control objectives: *All goods and services received are used for the company’s purposes, and not private purposes *Goods and services are only accepted if they have been ordered, and the order has been authorized * All goods and services received are accurately recorded * Liabilities are recognized for all goods and services that have been received * Receipt of goods and services is necessary for a liability to be recorded * All credit notes that are received are recorded in the nominal and payables ledgers * All entries in the payable ledger are made to the correct payables ledger accounts * Cut- off applied correctly to the payables ledger
Controls The following are types of controls which could be put in place to fulfil the above objectives. Examination of goods inwards -Quality -Quantity -Condition *Recording arrival and acceptance of goods ( Pre- numbered goods received notes) * Comparison of goods received notes with purchase orders * Referencing of supplier invoices; numerical sequence and supplier reference *Checking of suppliers’ invoices - prices, quantities, accuracy of calculation - Comparison with order and goods received note *Recording return of goods( pre- numbered goods returned notes)
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* Procedures for obtaining credit notes from suppliers * Segregation of duties: accounting and checking functions *Prompt recording of purchases and purchases returns in day books and ledgers Regular maintenance of payables ledger Comparison of monthly statements of account balance from suppliers with payables ledger balances Review of classification of expenditure Reconciliation of payables ledger control account to total of payables ledger balances Create a cut-off accrual of goods received notes not matched by invoices at year-end
Tests of controls
The following tests could be used in relation to the controls noted above. Check invoices for goods are: Supported by goods received notes Entered in inventory records Priced correctly by checking to quotations, price lists to see the price is in order Properly referenced with a number and supplier code Correctly coded by type of expenditure Trace entry in record of goods returned etc and see credit note duly received from the supplier, for invoices not passed due to defects or discrepancy For invoices of all types: Check calculations and additions Check entries in purchase day book and verify that they are correctly analysed Check posting to payables ledger For credit notes: Verify the correctness of credit received with correspondence Check entries in inventory records Check entries in record of returns Check entries in purchase day book and verify that they are correctly analyzed
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Check posting to payables ledger Check for returns that credit notes are duly received from the suppliers Test numerical sequence and enquire into missing numbers of : Purchase requisitions Goods received notes Suppliers’ invoices Purchase orders Goods returned notes Obtain explanations for items which have been outstanding for a long time: Unmatched purchase requisitions Unmatched Purchase orders Unmatched goods received notes Unmatched invoices Verify that invoices and credit notes recorded in the purchase day book are: Initialed for prices, calculations and extensions Cross-referenced to purchase orders, goods received notes etc Authorized for payment Check additions Check postings to nominal ledger accounts and control account Check postings of entries to payables ledger Payable ledger For a sample of accounts recorded in the payables ledger: Test check entries back into books of prime entry Test check additions and carried forward balances Note and enquire into all contra entries Confirm control account reconciliation has been regularly carried out during the year Examine control account for unusual entries
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Payment Risks and control objectives
The following risks arise at this stage of proceedings: False invoices are paid in error Invoices are paid too soon Payment is not correctly recorded Credits are not correctly recorded Payments are not recorded in the right period The key risk is that money might be paid out by the business inappropriately. The following objectives arise out of the risks: All expenditure is goods that are received All expenditure is authorized All expenditure that is made is recorded correctly in the nominal and payables ledgers Payments are not made twice for the same liability
Controls The arrangements for controlling payments will depend to a great extent on the nature of business transacted, the volume of payments involved and the size of the company. company.
Cheque and cash payments writing- generally payments, nor
The cashier generally not be concerned with keeping or up books of account other than those recording
Should he have access to, or be responsible for the custody of, Securities or title deeds belonging to the company. The person responsible for preparing cheques should not Himself be a cheque signatory. Cheque signatories in turn Should not be responsible for recording payments.
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Cheque and bank transfer payments- Cheque and bank transfer requisitions -
Appropriate supporting documentation(for example, invoices)
-
Approval by appropriate staff
-
Presentation to cheque signatories(in case of cheques)
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Instigation of bank transfer by appropriate staff.
Cash payment-
-Authority to sign cheques
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Signat Signatori ories es should should not also approv approvee cheque cheque requis requisiti itions ons
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Limi Limitat tatio ions ns on auth author orit ity y to to spe specif cific ic amou amount ntss
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Number of si signato atories
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Proh Prohib ibit itio ions ns ove overr sign signin ing g of bla blank nk che chequ ques es
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Prom Prompt pt dis dispa patc tch h of sig signe ned d cheq cheque uess
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Prom Prompt pt dispa dispatc tch h of singn singned ed cheq cheque uess
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Obta Obtain inin ing g of of pai paid d che chequ ques es from from ban banks ks
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Paymen Payments ts record recorded ed prom promptl ptly y in cash cash book book and and nomin nominal al and payabl payables es ledgers
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Auth Author oriz izat atio ion n of of exp expen endi ditu ture re
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Cancell Cancellatio ation n of vouche vouchers rs to to ensure ensure they they canno cannott be paid paid twice twice
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Limits on on pa payments
-
Rules Rules on cash advanc advances es to empl employe oyees, es, IOUs IOUs and and cheq cheque ue cashi cashing. ng.
Tests of controls
The following controls may be used: Payments cash book(authorization) book(authorization) For a sample of payments: - Compare with paid cheques to ensure payee agrees - Check that cheques are signed by the persons authorized to do so within their authority limits -Check that bank transfer was authorized and initiated by appropriate person
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- Check to suppliers’ invoices for goods and services. Verify that supporting documents are signed as having been checked and passed for payment and have been stamped ‘ paid’ - Check to suppliers’ statements - Check to other documentary evidence, as appropriate (agreements, authorized expense vouchers, petty cash books etc) Payments cash book( recording )
For a sample of weeks:
-
Check Check the the sequen sequence ce of chequ chequee number numberss and enqu enquire ire into into missin missing g numbe numbers rs
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Trace Trace transfe transfers rs to other other bank bank accou accounts nts,, petty petty cash cash books books or othe otherr records records,, as appropriate
-
Check additions, additions, including including extensions, extensions, and balances balances forward forward at the beginn beginning ing and and end of the months covering the periods chosen
-
Check Check post postin ings gs to the the pay payab ables les ledg ledger er
-
Check Check posti postings ngs to the the nomin nominal al ledger ledger,, includi including ng the the control control accou accounts nts
Bank reconciliations reperform
For a period which includes a reconciliation date
reconciliation( see Chapter 13) Verify that reconciliations have been prepared at regular Intervals throughout the year Scrutinize reconciliations for unusual items Petty cash payments
For a sample of payments: - Check to supporting s upporting vouchers - Check whether they are properly approved -See that vouchers have been marked and initialed by
the Cashier to prevent their re- use
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Chapter-7 Purchase system 1. What are are the key risks assoc associated iated with with purchase purchase ordering? ordering? Ans: 1. Purchase for personal use 2. Not made on most advantageous terms 2. What are are the control control objectives objectives to mitigate mitigate the the risks of purcha purchase se ordering? ordering? Ans. Most important control- Authorisation 1. Orders are authorized authorized and actually actually required required by by the company company 2. Au Auth thor oriz ized ed sup suppl plier ier 3. Comp Compet etiti itive ve pric price e 3. What are are the controls controls to to mitigate mitigate the risk risk of purchas purchase e ordering? ordering? Ans. 1. Segregation Segregation of dutiesduties- requisition requisition and ordering ordering 2. Policy Policy for for choi choice ce of of suppl suppliers iers 3. Evidence Evidence for purchase purchase requirementrequirement- eg. pre-set pre-set re-order re-order quantities, quantities, re-order levels 4. Prepare order order forms after after receiving receiving pre-numbere pre-numbered d purchase purchase requisition requisition 5. Au Auth thor oriz ized ed ord order er form forms s 6. Pre-num Pre-number bered ed order order forms forms 7. Safegua Safeguardi rding ng of blank blank order order forms forms 8. Review Review from from outsta outstandi nding ng orders orders 9. Monitoring Monitoring of supplier supplier terms terms and condition conditionss- eg. bulk bulk order and prompt prompt payment discounts 4. What are are the tests tests of Control Control to mitigate mitigate the risks risks of purchase purchase ordering? ordering? Ans. 1. Review list list of supplier suppliers s and check check a sample sample to orders orders made made 2. Check Check sequenc sequence e of pre- numbe numbered red order order forms forms
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3.
Check orders orders are support supported ed by a purchase purchase requisit requisition ion
4. Review security security arrangements arrangements over blank orders 5. What are are the risks risks associated associated with with goods goods inward inward and recordi recording ng of invoices? Ans. Key risks are: 1. Accept Accepting ing goods goods not not ordered ordered 2. Accepting Accepting invoice invoice for for poor poor quality quality goods Other risks: 1. Misapp Misapprop ropriat riation ion for for privat private e use 2. Accept Accepting ing unordered unordered goods goods 3. Invoices Invoices may may not be recordedrecorded- resulting resulting in non- payment payment 4. Company Company may not not take advanta advantage ge of the full full period period of credit credit extended extended 5. Company Company may not record record credit credit notesnotes- resulting resulting in paying paying invoices invoices unnecessarily 6. What are are the control control objectives objectives to mitigate mitigate the the risks of goods goods inward inward and recording? Ans. 1. Goods Goods recei received ved used used for comp company any 2. Only Only ordere ordered d goods goods are are accep accepted ted 3. Order Order has been been auth authoriz orized ed 4. Accurat Accurately ely record recording ing goods goods 5. Liabilities Liabilities are are recognized recognized for all goods goods and service services s that have have been received 6. Receipt of of goods and services services is necessary necessary for for a liability liability to be recorded recorded 7. All credit credit notes that are are received received are recorded recorded in the the nominal nominal and payables ledgers 8. All entries entries in the the payable payable ledger ledger are made to to the correct correct payables payables ledger accounts 9. Cut- off off applied applied correc correctly tly to the payable payables s ledger ledger 7. What are are the Controls Controls to mitigate mitigate the risks risks of goods goods inward inward and recording? recording? Ans.
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1. Examina Examinatio tion n of goods goods inwa inwards rds -
Quality
-
Quantity
-
Condition
2. Recording Recording arrival arrival and acceptanc acceptancee- Pre-numbered Pre-numbered goods goods received received notes 3. Compare Compare goods goods received received notes with purchase purchase orders orders 4. Referencing Referencing of supplier supplier invoice invoicess- eg. numerical numerical sequenc sequence e and supplier supplier reference 5. Checking Checking suppli suppliers ers’’ invoic invoices es 6. prices, prices, quantit quantities, ies, accuracy accuracy of calcula calculation tion 7. Compare Compare with with order order and goods goods receive received d note note 8. Recording Recording return return of goodsgoods- pre-number pre-numbered ed goods goods returned returned notes notes 9. Procedures Procedures for for obtaining obtaining credit credit notes notes from from supplier suppliers s 10.Segregation of duties- accounting and checking functions 11.Prompt recording of purchases and purchases returns 12.Regular maintenance of payables ledger 13.Comparison of monthly statements of account balance from suppliers with payables ledger balances 14.Review of classification of expenditure 15.Reconciliation of payables ledger control account to total of payables ledger balances 16.Create a cut-off accrual of goods received notes not matched by invoices at year-end 8. What are are the tests tests of Control Control to to mitigate mitigate the risks risks of goods goods inward inward and and recording? Ans. Sl. 1
Check invoices for goods are
1. Suppor Supported ted by goods goods receiv received ed notes notes 2. Ente Entere red d in inve invent ntor ory y reco record rdss 3. Priced Priced correc correctly tly by by check checking ing to quot quotatio ations, ns, price price lists to see the price is in order
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4. Proper Properly ly refer referenc enced ed with with a number number and and suppl supplier ier code 5. Correc Correctly tly cod coded ed by type type of expe expendi nditur turee
2
For invoices of all types
3
For credit notes
4
Check for returns that credit notes are duly received from the suppliers Test numerical sequence and enquire into missing numbers of
5
6
Obtain explanations for items which have been outstanding for a long time
7
Verify that invoices and credit notes recorded in the purchase day book are
8 9
Check additions Check postings to nominal ledger accounts and control account Check postings of entries to payables ledger Payable ledger
10 11
6. Trace Trace entry entry in recor record d of goods goods retu returne rned d etc and and see credit note duly received from the supplier, for invoices not passed due to defects or discrepancy Check calculations and additions Check entries in purchase day book and verify that they are correctly analysed Check posting to payables ledger Verify the correctness of credit received with correspondence Check entries in inventory records Check entries in record of returns Check entries in purchase day book and verify that they are correctly analyzed Check posting to payables ledger
Purchase requisitions Goods received notes Suppliers’ invoices Purchase orders Goods returned notes Unmatched purchase requisitions Unmatched Purchase orders Unmatched goods received notes Unmatched invoices Initialed for prices, calculations and extensions Cross-referenced to purchase orders, goods received notes etc Authorized for payment
Test check entries back into books of prime entry Test check additions and carried forward balances Note and enquire into all contra entries Confirm control account reconciliation has been regularly carried out during the the year Examine control account for unusual entries
9. What are the the key risks associate associated d with Payment? Payment?
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Ans. Payment might be made to wrong person 1. False invoices invoices are are paid in error error 2. Invoices Invoices are are paid too too soon soon 3. Payment Payment is not correctly correctly recorded recorded 4. Credits Credits are not correctly correctly record recorded ed 5. Payments Payments are not recorded recorded in the right right period
10.What are the control objectives to mitigate the risks of Payment? Ans. 1. All expe expendi nditur turee made made for for receiv received ed goods goods.. 2. All exp expen endi ditu ture re is aut autho hori rize zed d 3. All expenditu expenditure re that is is made is recorde recorded d correctly correctly in the nominal nominal and and payables payables ledgers ledgers 4. Paymen Payments ts are not made made twice twice for the the same same liabi liability lity
11.What are the Controls to mitigate the risks of Payment? Ans. 1
2
Cheque and cash payments generally
The cashier generally not be concerned with keeping or writing- up books of account other than those recording payments, nor Should he have access to, or be responsible for the custody of, Securities or title deeds belonging to the company. The person responsible for preparing cheques should not Himself be a cheque signatory. Cheque signatories in turn Should not be responsible for recording re cording payments. Cheque and bank transfer Cheque and bank transfer requisitions payments- Appropriate supporting documentation(for example, invoices) - Approval by appropriate staff - Presentation to cheque signatories(in case of cheques) Instigation of bank transfer by appropriate staff.
Authority to sign cheques - Sign Signat ator orie iess shou should ld not not also also approve cheque requisitions - Limi Limita tati tion onss on auth author orit ity y to specific amounts - Number of of si signatorie ries
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-
3
Proh Prohib ibit itio ions ns over over sign signin ing g of of blank cheques Prompt dispatch of signed cheques Prompt dispatch of singned cheques Obtaining of paid cheques from banks Payments recorded promptly in cash book and nominal and payables ledgers - Auth Author oriz izat atio ion n of of exp expen endi ditu ture re - Canc Cancel ella lati tion on of vouc vouche hers rs to ensure they cannot be paid twice - Limits on on pa payments - Rules ules on cash cash adva advan nces ces to to employees, IOUs and cheque cashing.
Cash payment
12.What are the tests of Control to mitigate the risks of Payment? Ans.
Payments cash book(authorization) book(authorization) For a sample of payments: - Compare with paid cheques to ensure payee agrees - Check that cheques are signed by the persons authorized to do so within their authority limits -Check that bank transfer was authorized and initiated by appropriate person - Check to suppliers’ invoices for goods and services. Verify that supporting documents are signed as having been checked and passed for payment and have been stamped ‘ paid’ - Check to suppliers’ statements - Check to other documentary evidence, as appropriate (agreements, authorized expense vouchers, petty cash books etc) Payments cash book( recording )
For a sample of weeks:
-
Check Check the the sequen sequence ce of chequ chequee number numberss and enqu enquire ire into into missin missing g numbe numbers rs
-
Trace Trace transfe transfers rs to other other bank bank accou accounts nts,, petty petty cash cash books books or othe otherr records records,, as appropriate
-
Check additions, additions, including including extensions, extensions, and balances balances forward forward at the beginn beginning ing and and end of the months covering the periods chosen
-
Check Check post postin ings gs to the the pay payab ables les ledg ledger er
-
Check Check posti postings ngs to the the nomin nominal al ledger ledger,, includi including ng the the control control accou accounts nts
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Bank reconciliations reperform
For a period which includes a reconciliation date
reconciliation( see Chapter 13) Verify that reconciliations have been prepared at regular Intervals throughout the year Scrutinize reconciliations for unusual items Petty cash payments
For a sample of payments: - Check to supporting s upporting vouchers - Check whether they are properly approved -See that vouchers have been marked and initialed by
the Cashier to prevent their re- use 13.What are the weaknesses in a purchase system? Ans. No procedure to track purchase invoice due dates. 14.Give 5 examples of tests to be performed on the cash payment book? – Term Question 15.List four examples of purchase documentation on which numerical sequence should be checked? –Term –Term Question 16.Which two control activities are most likely to reduce the risk of payments being made twice for the same liability? –Term – Term Question
Chapter-8
Employee Costs 1. What is the key risk risk related related to calcula calculating ting wages wages and salaries salaries? ? Ans. paying too much 2. What are are the risks assoc associated iated with calcula calculating ting wages wages and salaries? salaries? Ans. Company might pay employees1. Too much 2. Who Who have have not not bee been n at wor work k
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3. Who Who hav have e lef leftt 3. What are are the controls controls to mitigate mitigate the risks risks associate associated d with calculatin calculating g wages and salaries? Ans. 1. Employees Employees are only paid paid for for work that that they they have have done done 2. Gross pay has has been been calculated calculated correctly correctly and and authorize authorized d 3. Net pay pay has has been been calcul calculate ated d correct correctly ly 4. What are are the tests tests of controls controls to mitigate mitigate the risks risks associat associated ed with calculating wages and salaries? Ans. 1. Staffin Staffing g and segre segregat gation ion of duti duties es 2. Maintenance Maintenance of personne personnell records records & regular regular checking checking 3. Au Auth thor oriz izat atio ions ns--
Enga Engage gemen mentt and and disc discha harge rge of emplo employe yees es
-
Changes in pay rates
-
Overtime
-
NonNon-st stat atut utor ory y dedu deduct ctio ions ns –e. –e.g. g. Pens Pensio ion n
-
Advances of pay
4. Recording Recording changes changes in personne personnell and pay rates rates 5. Keep Keepin ing g tim times eshe heet ets s 6. Revi Review ew hour hours s wor worked ked 7. Reco Record rd adva advanc nce e pay pay 8. Holida Holiday y pay arrang arrangemen ements ts 9. An Answ sweri ering ng queri queries es 10.Review wages against budget 5. Inte Intera ract ctiv ive: e:1 1 6. What are are the risks assoc associated iated with record recording ing of wages and and salaries salaries and deductions? Ans.
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1. Various Various elements elements of pay might might not not recorded recorded correctly correctly in payroll payroll 2. Amount paid might not agree agree with with cash cash books books 3. Pay might might not be recorded recorded correct correctly ly in the the nominal nominal ledger ledger 4. Tax migh mightt not calc calcula ulated ted corr correct ectly ly 7. What are are the controls controls to mitigate mitigate the risks risks associate associated d with recording recording of wages and salaries and deductions? Ans. 1. Gross, Gross, net pay, pay, deduct deductions ions – recorded recorded accurately accurately 2. Paid amounts amounts recorded recorded correct correctly ly in the the bank and and cashbooks cashbooks 3. Wages and and salaries salaries correctly correctly recorded recorded in the the nominal nominal ledger 4. All deduction deductions s have been been calculat calculated ed correctly correctly and authori authorized zed 5. Correc Correctt amoun amountt paid paid to NBR 8. What are are the controls controls that that should should be in place to to mitigate mitigate the risks risks associated with recording of wages and salaries and deductions? Ans. 1. Bases for compila compilation tion of of payroll payroll –e.g. –e.g. Clock cards 2. Reconciling Reconciling to to payroll payroll informat information ion and and approval approval 3. Procedures Procedures for dealing dealing with non-routine non-routine matters matters 4. Maintenance Maintenance of employe employees’ es’ previous previous records records 5. Checking Checking payroll payroll to individ individual ual person personnel nel file file 6. Reconciling Reconciling total total pay and deductio deductions ns between between one pay pay day and and the next 7. Compare Compare actu actual al pay pay with with budg budget et 8. Invest Investiga igate te any any diffe differenc rence e 9. Agreement Agreement of gross gross earnings earnings and and total total tax deducted deducted with taxatio taxation n returns. 9. What are are the tests tests of controls controls to mitigate mitigate the risks risks associat associated ed with recording of wages and salaries and deductions? Ans. Key control is Reconciliation of wages and salaries. For wages reconcile with-
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1. Prev Previo ious us week’ week’s s payro payroll ll 2. Time Times sheet heets s 3. Cost Costin ing g anal analys ysis is 4. Prod Produc ucti tion on budg budget et For salaries reconcile with1. previo previous us month’ month’s s salary salary or, 2. stan standa dard rd payr payrol olll 10.How to check important calculations and re-perform calculations of salaries and wages? Ans. Wages (a number of weeks)1. Ad Addit ditio ions ns of of payr payrol olll 2. Tota Totals ls of pay payro roll ll deta detail il 3. Additio Additions ns and and cross cross casts casts of of summary summary 4. Postin Posting g of summar summary y to nomina nominall ledger ledger 5. Net cash cash colum column n to cash cash book book 6. For volunta voluntary ry deducti deductions, ons, authorizati authorization on needed. needed. Salaries (a number of weeks)1. Same Same as wage wages. s. 11.How to check calculation of taxation and non-statutory deductions? Ans. 1. Scrutinize Scrutinize the contro controll accounts accounts to see appropria appropriate te deductions deductions made made 2. Check payment payment to govt. govt. treasury treasury are correct. correct. 3. For volunta voluntary ry deducti deductions, ons, authorizati authorization on needed. needed. 12.Interactive:2 13.What are the risks associated with payment of wages and salaries? Ans. Key risk is, payment made incorrectly. 1. Empl Employ oyee ee not not pai paid d 2. NonNon-emp emplo loye yee e paid paid
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14.What are the controls to mitigate the risks associated with payment of wages? Ans. Payment of cash wages1. Segre Segrega gati tion on of dut duties ies--
Prep Prepar are e net net pay summa ummary ry
-
Filling ing pay packet kets
-
Dist istribu ibution of of wa wages
2. Author Authoriza izatio tions ns of wage wage cheque cheque cashed cashed 3. Cust Custod ody y of of cas cash h -
When ch cheque ca cashed
-
Secu Securi rity ty of pay pay pac packets kets
-
Security of transit
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Secu Securi rity ty and and pro promp mptt bank bankin ing g of unc uncla laim imed ed wag wages es
4. Verific Verificati ation on of identi identity ty 5. Record Recording ing dis distri tribut bution ions s 15.What are the controls to mitigate the risks associated with payment of salaries? Ans. 1. Prepara Preparatio tion n and authori authorizat zation ion of cheque cheques s 2. Prepare Prepare bank bank tran transfe sferr list list 3. Compare Compare cheques cheques and bank transfe transferr list with payroll payroll 4. Maintain Maintain and reconci reconcile le salaries salaries and wages control control account account 16.What are the tests of controls to mitigate the risks associated with payment of wages and salaries? If wages are paid in cash1. Attend the pay-out pay-out –to ensure ensure procedu procedures res are are followed followed 2. Compare Compare payrol payrolll with with packets packets 3. Examin Examine e receipt receipts s given given by empl employe oyees es
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4. Check unclaim unclaimed ed are recorded recorded in unclaim unclaimed ed wages wages book book 5. Check Check none none receiv receive e more more than than 1 packet packet 6. Check entries entries in unclaimed unclaimed book with with entries entries in payroll payroll 7. Check Check unclaime unclaimed d wages are are banked banked regular regularly ly 8. Check unclaim unclaimed ed wage wage book shows shows reason reason for not claiming claiming 9. Check pattern pattern of unclaimed unclaimed wages wages –variatio –variation n indicate indicate failure to to record For salaries1. Check comparison comparison made between between each month’s month’s payroll payroll 2. Exam Examin ine e paid paid che chequ ques es 3. Check Check certif certified ied copy copy of the the bank bank list list
17.Interactive: 3
18. 18. What hat ca can be be th the wea weak knesse esses s in in a pa payro yroll sy system tem? Wh What are are the possible risks in the system? Ans. 1. No person personnel nel depart department ment.. 2. Employees Employees are engaged engaged by by department department heads heads with with the verbal verbal consent consent of a director Risks 1. No personnel personnel departmen departmentt- so, there there is no personnel personnel record. record. Employee Employee could continue to receive salary through bank transfer even after leaving the company 2. No written written documen documentt –could –could lead to errors errors in pay rates rates 19.Interactive:4 20.List six procedures assurance providers should carry out if wages are paid in cash? –Term Questions 21.How should assurance providers confirm that wages have been paid at the correct rate to individual employees? –Term Questions Ans. By reconciling pay rates with employment contract or appointment letter Chapter-9
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Internal Audit 1. What What is intern internal al aud audit it? ? Ans. 2. In what what ways does internal internal audit audit assist assist the the board? board? Ans. 1. 3. What is the difference difference between between intern internal al audit and external external audit? audit? Ans. 4. What What are the the roles roles of of intern internal al audit audit? ? Ans. 5. What activities activities are normally normally involv involved ed in interna internall audit? audit? Ans. 6. What are are the roles roles of internal internal audit audit in relatio relation n to risk management? management? Ans. 7. What are are the roles of internal internal audit audit in relation relation to interna internall control? control? What is the scope of work of internal auditor in the internal control area? Ans. 8. What is operational operational audit? audit? What What are the the aspects aspects of operati operational onal engagement? Ans. 9. What other function function does does an an internal internal audit do? Ans. 10.What are the elements of an internal audit that have to have completed cyclically? Ans. 11.Interactive: 1 12.What does internal audit audit do? What are the key differences between external and internal audit? -Term Question. 13.Whay are the key differences between external and internal audit? ‘As objectivity is a key issue for internal auditors, they are likely to routinely
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be involved in operational activities’ do you agree? Explain. -Term Question
Chapter-10 Documentation 1. What is audit audit documenta documentation? tion? What What are the purpose purposes s of documentati documentation? on? Ans. Or Working paper is the record of-
Procedures
-
Evidence
-
Conclusions
Purposes: 1. plan plan and and p perf erfor orm m audi auditt 2. direc directt and and sup super ervi vise se 3. to be accoun accountab table le for for work work 4. record matters matters with continuing continuing significanc significance e in future future 5. carry carry out out qualit quality y contr control ol reviews reviews 6. exte extern rnal al insp inspec ectio tions ns 2. What are the reasons reasons for maintain maintaining ing audit audit working working papers? papers? Ans. 3. What are are the factors factors that that affect affect the form form and content content of of audit working working papers? Ans. 1. Nature Nature of of the the audit audit proc procedur edures es 2. Identified Identified risks of material material missta misstatement tements s 3. Exte Extent nt of judg judgme ment nt 4. Signif Significa icance nce of eviden evidence ce 5. Nature Nature and extent extent of prob problems lems 6. Need Need to docu documen mentt of conc conclus lusion ion 7. Au Audit dit meth method odolo ology gy
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4. What working papers does an an audit audit file normall normally y contain? contain? Ans. 1. Information Information to to understand understand entity’ entity’s s environmen environmentt and IC IC - Information of Legal documents - Copies of legal documents - industry, economic environment - extract form IC manual 2. Evidenc Evidence e of audit audit plan plan and and any chan changes ges 3. Interna Internall audit audit and and conc conclus lusion ion 4. Analys Analysis is of transac transactio tions ns and balanc balances es 5. Analys Analysis is of of ratio ratios s and and trend trends s 6. Ass Assess essed ed risk of materia materiall misstat misstatemen ements ts 7. Nature, Nature, timing timing and extent extent and and results results of audit audit procedure procedure 8. Evidenc Evidence e of work work review review of assi assista stants nts 9. Who and and when perfo performed rmed audi auditt procedu procedures res 10.Details of audit procedures performed by another auditor 11.Copies of communication with other auditors, experts and third parties 12.Copies of communication with management- terms of engagement, material weakness in IC 13.Letters of representation 14.Conclusion reached about unusual matters 15. Copies of the financial statements and auditors reports 16.Notes of discussions about significant matters with management 17.Exceptional circumstances –reason for departing principle 5. What matters matters should should a working working paper show? Ans. 1. Clie Client nt name name 2. BS date 3. File File refe refere renc nce e
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4. Prep Prepar arer er name name 5. Date Date of prep prepar arat ation ion 6. Subject 7. Revi Review ewer er name name 8. Date Date of revi review ew 9. Obje Object ctiv ive e of wor work k 10.Source of information 11.How many sample selected 12.Sample size determined 13.The work done 14.A key to any audit ticks or symbols 15.Appropriate cross-referencing 16.Results obtained 17.Analysis of errors 18.Other significant observations 19.Conclusion drawn 20.Key points highlighted 6. What What is auto automat mated ed workin working g paper? paper? Ans. Are packages that aid preparation of working papers , lead schedules, trial balances and the financial statements themselves. These are automatically cross referenced, adjusted and balanced by the computer. 7. What are are the advantages advantages and and disadvant disadvantages ages of automate automated d working paper? paper? Ans. Advantages 1. Low Low risk risk of err error ors s 2. Neat Neater er wor worki king ng paper paper 3. Easy Easy to revi review ew 4. Time Time saving ving
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5. Forms Forms need need not carr carryin ying g to locati locations ons 6. Flexible Flexible to to email email and and fax for for revie review w Disadvantages 1. Lose Lose confi confide dent ntia iali lity ty 2. Loss Loss of dat data a 3. Data Data can can be be manip manipul ulat ated ed 8. Why do auditors auditors need to to file working working papers? papers? Ans. To facilitate review. 9. What documents documents are are contained contained in permanent permanent audit audit files? files? Ans. 1. Enga Engagem gemen entt L Lett etters ers 2. New client client questio questionna nnaire ire 3. Memoran Memorandum dum and artic articles les of assoc associat iation ion 4. Other legal legal documents documents –prospectu –prospectus, s, lease, lease, sales sales agreements agreements 5. Detail Detail hist history ory of of client client busi busines ness s 6. Board Board minutes minutes of cont continu inuing ing relev relevanc ance e 7. Previous Previous years years signed signed accounts accounts,, analytical analytical procedur procedures es and management letters 8. Accounting Accounting systems systems notes, notes, previou previous s years control control question questionnaires naires 10.What documents are contained in current audit files? Ans. contain any information of relevance to the current year’s audit
1. Financ Financial ial statem statement ents s 2. Accoun Accounts ts checkl checklist ists s 3. Manage Manageme ment nt accoun accounts ts detail details s 4. Reconciliat Reconciliations ions of managem management ent accounts accounts and and financial financial statements 5. A summ summary ary of of unadjus unadjusted ted error errors s 6. Report Report to partner partner including including details details of significant significant events events and errors
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7. Revi Review ew note notes s 8. Audit Audit planni planning ng memo memoran randum dum 9. Time Time budgets budgets and and summ summari aries es 10.
Lette etterr of rep reprresen esenta tati tio on
11.
Management le letter
12.
Notes of of bo board mi minutes
13. Commu Communic nicati ations ons with with third third partie parties s such such expert experts s or other other auditors. 11.What documents are contained in current audit files covering each working area? Ans.
1. A lead schedu schedule le including including details details of of the figures figures to to be included in the accounts 2. Problems Problems encount encountered ered and and conclusio conclusions ns drawn drawn 3. Au Audi ditt plan plans s 4. Risk Risk asse assess ssme ment nts s 5. Samp Sampli ling ng plan plans s 6. Analyt Analytica icall proc procedu edures res 7. Details Details of tests tests of detail detail and and tests tests of contro controll 12.What is the need to keep documents secured? What is the time period to retain these documents? Ans. Due to confidentiality requirements According to companies act 1994, section 181 (5), time period is 12 years 13.How to keep secure audit documents? Ans. Paper documents –in locked premises Electronic documents –protect by electronic controls. 14.Who do the audit working papers belong to? Ans. Assurance provider.
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15.Whom do the audit report belong to? Ans. The client, after issued. 16.In what condition the confidentiality of working papers may be breached? What are the procedures? Ans. Working paper may be shown to third party, when there is permission of the client. 17.Classify the following working papers into current Audit files and permanent audit file: -Term Question (2 times) a. Enga Engage gemen mentt lett letters ers b. New client client questi questionn onnair aire e c. Financial Financial stateme statements nts relating relating to to year year under under review review d. Mana Managem gemen entt lett letter er e. Ac Acco coun unts ts chec checkl klis istt f. Au Audi ditt pla plann nnin ing g memo memo g. Board Board minutes minutes of of continu continuing ing relev relevanc ance e h. Accoun Accountin ting g system system notes notes
Chapter-11 Evidence and Sampling 1. What What are are the types types of of eviden evidence? ce? Ans. a. Test Tests s of con contr trol ols s b. Subs Substa tant ntiv ive e proc proced edur ures es 2. What are the the procedures procedures to obtain obtain evidences? evidences? 3. What is CAAT? What What are the the types types of CAAT? CAAT? Why do do auditors auditors need need CAAT? 4. What is test data? data? What What are the the stages stages in the use use of test test data data in CAAT? CAAT? 5. What is Audit softwa software? re? What is the basis basis of work of audit audit software? software? 6. Give some examples examples of what audit software software can can do. 7. What is analyt analytical ical procedure? procedure? How How can an auditor auditor use analytic analytical al procedure procedure to obtain evidences?
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8. What are are the factors factors to consider consider when using using analytica analyticall procedures? procedures? 9. What are are the suitability suitability factors factors of of analytical analytical procedures? procedures? Mention Mention with with examples. 10.What are the reliability factors of analytical procedures? Mention with examples. 11.In your opinion, what should an auditor do when analytical procedures indentify significant fluctuations? Ans. Investigate further. 12.What should an auditor do when indentified inconsistency or unexpected result? Ans. Make inquiries of management and corroborate with other evidence. 13.If management responses are not available, what should an auditor do? Ans. Extend the audit testing. 14. What are the possible sources of information for analytical procedure? 15.What is directional testing? What are the types of directional testing? Ans. •
Derived from the principle of double entry system.
Any misstatement in one side will result in a corresponding misstatement in the opposite direction. Types: Test to discover Errors- over or understatement • •
-e.g. To ensure that sales picked correctly -start with sales invoice. •
Test to discover Omissions – understatement -e.g. To discover whether all raw materials purchased properly processed. -start with goods received notes.
16.When directional testing is normally used? Ans. When testing financial statement assertions of•
Existence
•
Completeness
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•
Rights and obligations
•
Valuation
17.How the tests are designed in directional testing?
Test Item Debit items – Expense/Asset s
• • •
Check Overstatement From nominal ledger Value and existence
•
•
Credit items – Income/Liabiliti es
• •
•
Understatement From independent source Posted in correct nominal ledger
•
Example Non-current asset of TK.9,000 recorded as TK.10,000 Asset sold TK.10,000 not recorded Revenue in despatch note not recorded in revenue account.
18.Interactive: 1, p.195 19.Why audit of accounting estimates are so important? What are the methods used by an auditor to audit accounting estimates? Ans. Because these are•
Not third party transactions
•
Result of management’s judgment.
20.Define Audit sampling and Population? What are the testing procedures that do not involve sampling? 21.Auditors use sampling approach for testing. When a 100% sampling is preferable? Ans. For certain substantive procedures. 22.What is the extent of sampling used in tests of control? Ans. Less than 100% 23.What are the means of selecting samples? Ans. 1. Stat Statis isti tica call samp samplin ling g 2. Non-st Non-stati atisti stical cal sampli sampling ng 24.Define statistical sampling and non-statistical sampling. What is the difference between these?
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Ans. Statistical Sampling – an approach to sampling in random basis. Non-Statistical sampling – subjective approach Difference: Sl No. 1 2
Characteristics
Statistical Sampling Random Consistently
Non-statistical sampling Subjective Not consistently
Approach Use of of Mathematical techniques 3 Evaluation of result Mathematically Subjectively 25.How can samples be collected in non-statistical sampling? Ans. 1. High High value value or key item item 2. All item items s over over a certa certain in amoun amountt 3. Items Items to obtai obtain n informa informatio tion n – about clien clientt 4. Items to to test proced procedures ures – whether whether particul particular ar procedures procedures are are performed. 26.What matters to consider when designing the sample? Ans. 1. Objec Objecti tive ves s of of aud audit it 2. Attribu Attributes tes of popula populatio tion n
27.Define with example: 1. Error, 2. Expected Expected error, 3. Sampling Units, 4. Tolerable error. 28.Define Sampling risk and Non-Sampling risk. 29.What could be the reasons for arising non-sampling risk? 30.Give some examples which influence sample size. 31.“The smaller the tolerable error, the greater the sample size will need to be”-Do you agree? Explain. 32.What should an auditor consider when considering expected error? 33.What are the methods for selecting samples? 34.Interactive 2, p.201 35.What is the purpose of sampling? Ans. To project the conclusion to the whole population.
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36.If the projected error exceeds tolerable error then what should be the course of action of an auditor? Ans. Sampling risk must be reassessed & further audit procedure required. 37.Auditor should consider the qualitative aspects of an error. True/ False? 38.What is anomalous error? Ans. – Arises from isolated event. -
Occurr Occurred ed for specif specifica ically lly identi identifia fiable ble occasi occasions ons
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Not Not repre represe sent ntat ativ ive e of erro errorr in the the pop popul ulat atio ion. n.
-
Extr Extra a wor work k nee neede ded d to to ide ident ntif ify. y.
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Audit Au ditor or mus mustt be cert certai ain n that that it it is ano anoma malo lous us..
39.What factors to consider when drawing conclusion from sampling? Ans. – consider the effect of projected error on other areas of the audit -
Estima Estimate te prob probabl able e error error by extrap extrapola olatin ting g the the error errors. s.
-
If erro errorr excee exceeds ds toler tolerabl able e error error,, reass reassess ess sampli sampling ng risk risk..
40.Interactive 3, p.203
Chapter-12 Management Representations 1. What What is managem management ent repres represent entati ations ons? ? Ans. Statement confirming certain representations in writing. 2. When management management representati representations ons are required required? ? Ans. When it is the only audit evidence available. Situations are1. When When the facts facts are manag managemen ementt intenti intention on 2.
When the the matter matter is judgmenta judgmentall or opinion opinion – eg. Trading Trading position position of a particular customer
3. Defin Define e mana manage gemen ment. t. Ans. Management - officers who perform senior managerial functions 4. What is the benefit benefit of written written confirma confirmation tion of oral oral representat representation? ion?
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Ans. It avoids confusion and disagreement 5. Who gives gives manag manageme ement nt represe representa ntatio tion? n? •
Senior management – usually directors in BD
6. What elements elements in a managemen managementt representati representation on is required required by BSA 580 580 to confirm in writing? Ans. management 1. Acknowledges Acknowledges its respons responsibilit ibility y for prepara preparation tion of FS 2. Acknowledges Acknowledges its its responsibi responsibility lity for design design and and implementatio implementation n of IC 3. Believes Believes that, uncorre uncorrected cted misstatem misstatement ent aggregated aggregated by the the auditors auditors are immaterial 7. When a manageme management nt representa representation tion can can be used used as an audit audit evidence evidence? ? 1. Material Material matters in respect respect of of which other other sufficient sufficient , appropriat appropriate e audit evidence cannot reasonably be expected to exist. 8. In what conditio condition n management management representa representation tion cannot cannot be used used though though other evidence is not available? Ans. When other evidence expected to be available but lost, destroyed or not available, then management representation can not be used 9. What is the auditors auditors course course of of action action after receivin receiving g management management representation? 1. Seek Seek corrobo corroborat rative ive audit audit evide evidence nce 2. Evaluate Evaluate whether whether representa representations tions appear appear reasonab reasonable le and are are consistent with other evidences 3. Consider Consider whether whether the individ individuals uals making making represent representations ations can be expected to be well-informed on the particular matters. 10.What should be the course of actions when management representations do not agree with other evidences? Ans. The auditors should 1. Investigate Investigate the circumstan circumstances ces of the disagreement disagreement 2. If further inquiries inquiries produce produce insufficie insufficient nt answers, answers, carry carry out alternative alternative procedures 3. Consider Consider whether whether disagreement disagreement cast cast doubt doubt on other represe representatio ntations. ns. 11.Write a management representation letter.
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12.Interactive 1, p.215
Chapter-13 Substantive Procedures - Key Financial Statement Figures 1. What are are the reasons reasons for which which tangible tangible non-current non-current assets assets are missta misstated? ted? Ans. 1. Company Company not not actua actually lly own own the the asset. asset. 2. Ass Asset et doesn’ doesn’tt actual actually ly exist exist or sold sold 3. Owne Owned d ass asset et omit omitte ted d 4. Asset overva overvaluedlued- by inflatin inflating g cost or undercha undercharging rging deprecia depreciation. tion. 5. Asset underva undervalued-by lued-by not including including revaluat revaluation ion or overchargi overcharging ng depreciation 6. Ass Asset et incorr incorrect ectly ly prese presente nted d in FS 2. What are are the financial financial statement statement assertio assertions ns for the assess assessment ment of risk risk of material misstatement of non-current assets? Ans. 1. Exis Existe tenc nce e 2. Righ Rights ts and and oblig obligat ation ions s 3. Comp Comple lete tene ness ss 4. Valuat Valuation ion and alloca allocatio tion n 5. Present Presentati ation on and and disc disclos losure ure 3. What are are the sources sources of of information information for non-cu non-current rrent assets assets? ? Ans. 1. Non-cu Non-curre rrent nt ass asset et regis register ter 2. Pu Purc rcha hase se invo invoic ice e 3. Sales Sales invo invoice ice for for asse assett sold sold 4. Registratio Registration n documentsdocuments- e.g. title deeds deeds for for property property 5. Valu Valuat atio ions ns
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6. Lease Lease or hire hire purchas purchase e documen documentat tation ion 7. Physic Physical al inspe inspecti ction on by audito auditorr 8. Depreciation Depreciation record record or or calculatio calculationsns- asset asset register register.. 4. Worked example: example: non-curren non-currentt asset asset assuranc assurance e engagement engagement Peter auditing Non-current asset assurance engagement at Manufacturing Company Limited (MCL). Related matters are•
MCL has lots of fixed plants- replaced 3 years ago.
•
Several industrial vehicles- distributes inventory
•
Few cars- staffs use
•
Office furniture, fittings, computers To give the assurance on the the assets Peter will test the following:
Completeness Obtain a schedule of non-current • assets. Agree figures- schedule- FS- nominal • ledger Compare schedule to asset register to • check all the assets in the schedule are owned by the company Select some physically present asset • and ensure they are in the register Confirm additions in the schedule are • correct
Existence Select sample from register and ensure • those are physically present on site.
Presentation and disclosure Ensure disclosure requirements • regarding non-current assets have been met.
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Valuation Confirm sample asset’s cost to • invoice or valuation to valuation certificates Compare sample asset’s brought • forward depreciation file to previous audit file Review brought forward asset • register files. Confirm accounting policy for • depreciation is correctly applied Review calculation and ecalculate • depreciation o disposed asset o profit/loss on disposal o Rights and obligations Select sample from register and • vouch for registration documentsVehicles- although indicates o the registered keeper, not owner. Building- title deeds o Plant and Fixtures- Purchase o invoice, ensure its not lease. Review sales invoice for sold assets Other matters Focus on asset additions. • -these are large portion of assets and least depreciated. Check property documents- 100%, • other assets-sampling basis.
5. Worked example: example: self-constr self-constructed ucted assets. assets. Katie auditing non-currents assets of super market mark et chain Quickshop Ltd. -company built 4 new stores this year. -capitalised Audit objective- Completeness -Relevant costs have been capitalised - Valuation -stores valued correctly CheckCompleteness •
Obtain architect’s certificate- ensure work is complete
•
Obtain schedule of all the costs capitalized- ensure costs are complete Valuation •
Vouch a sample cost to –appropriate source source of evidence evidence o
•
E.g. labor cost to payroll records
Ensure all finance cost included- check bank statement)
6. What are are the major risks risks of misstateme misstatement nt of the intangibl intangible e non-current non-current asset balances in the financial statement? Ans. 1. Expense Expense being being capital capitalised ised as as non-curre non-current nt assets assets 2. Inappr Inappropr opriat iate e chargi charging ng of amortizat amortization ion 3. Inflat Inflated ed cost cost or valu valuati ation on 4. Impairment Impairment review not carried out properly properly 7. Give some some examples examples of intangible intangible non-curr non-current ent asset asset assertions assertions.. Existence 1. Expe Expens nse e bein being g capitalised as noncurrent assets
Valuation 1. Inappr Inappropr opriat iate e char charging ging of amortization 2. Inflat Inflated ed cost cost or valu valuati ation on 3. Impa Impairm irmen entt revi review ew not not carried out properly 8. What are are the sources sources of information information for for intangible intangible non-curren non-currentt asset? asset? Ans.
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1. Accounting Accounting standar standards ds on what const constitutes itutes an an intangible intangible asset asset 2. Pu Purc rcha hase se invo invoic ice e 3. Client Client calcu calculat lation ion or or schedu schedules les 4. Spec Specia iali list st valua valuati tion ons s 5. Auditors Auditors understan understanding ding of the entity entity for signs signs of impairment impairment factors factors 9. What are the the key areas for testing testing inventories inventories? ? Ans. 1. Atte Attend nd inve invent ntor ory y count count 2. Valuat Valuation ion at at lower lower of cost cost and and NRV NRV 3. Confirm Confirmati ation on of owners ownership hip 10.Give some examples of financial statement assertions on inventory. Ans. Existence Attend inventory count Inventory doesn’t exist but included in FS
Valuation Valuation at lower of cost and NRV Obsolete or damaged inventory stated in full value Wrong inventory value due to miscalculation Inventory stated at cost, at the mean time NRV decreased
Rights and obligations Confirmation of ownership
Completeness All inventory not included in FS
Rights and obligations Cut-off Inventory belongs to Inventory actually sold third party included in included in FS FS 11.What are the major risks of misstatement of the inventory balance in the financial statement? Ans. 1. Inventory Inventory doesn’t doesn’t exist exist but but included included in FS 2. All inve invento ntory ry not not incl include uded d in FS 3. Obsolete Obsolete or damaged damaged inventory inventory stated stated in full full value 4. Wrong inventory inventory value due to to miscalcu miscalculation lation 5. Inventory Inventory stated stated at at cost, cost, at the the mean time time NRV decreased decreased
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6. Inventory Inventory belongs belongs to third party included included in FS 7. Invent Inventory ory actua actually lly sold sold inclu included ded in FS 12.What are the sources of information for testing the assertions related to inventory? Ans. 1. Company’s Company’s control control over over inventory inventory counting counting 2. Attendi Attending ng invent inventory ory count count 3. Confirmation Confirmation with with third partyparty- holding holding inventory inventory at at client premises premises.. 4. Pu Purc rcha hase se invoi invoice ces s 5. WIP WIP rec recor ords ds 6. Post-y Post-yearear-end end sales sales invoi invoices ces 7. Post-y Post-yearear-end end price price list list 8. Post-y Post-yearear-end end sales sales order order 13.What are the controls that should be in place when counting inventory? Ans. 1. Orga Organi niza zati tion on of of coun countt 1. Superv Supervisi ision on – by by senio seniorr staff staff 2. Mark Marking ing inve invent ntor ory y 3. Restriction Restriction of inventor inventory y movement movement during count 4. Identify Identify damage/ damage/obsol obsolete/th ete/third ird party party inventory inventory 2. Cou Counting 1. Syst Systema emati tic c coun counti ting ng 2. Two coun counter ters s or two inde indepen penden dentt count count 3. Recording 1. Seri Serial al numb number erin ing g 2. Sheets Sheets are are comple complete te and and signed signed in in ink 3. Inform Informati ation on record recorded ed in count count record records s 4. Record Record quant quantity ity,, condit condition ions, s, WIP WIP 5. Last numbers numbers of inwards inwards and outwar outwards, ds, internal internal transfer transfers s
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6. Reconcile Reconcile invent inventory ory records records and investigati investigation on 14.What control should be present in counting inventory under perpetual system? Ans. Year-end count not necessary. The control system should be tested. 15.What matters should be checked by auditor when perpetual inventory count is used? Ans. Check that management 1. Ensures Ensures all invento inventory ry lines counted counted at least least once once a year 2. Maintains Maintains up-to-date up-to-date inventory inventory records records 3. Has satisfactor satisfactory y inventor inventory y count count procedures procedures 4. Conc Concer erned ned wit with h cutcut-of off f 5. Investigate Investigates s and corrects corrects all all material material differenc differences. es. 16.What should be the audit plan for perpetual inventory count? Ans. 1. Attend Attend one one of the the inven inventor tory y counts counts 2. Follow Follow up the the invento inventory ry count count attend attended ed 3. Revi Review ew the the year’ year’s s coun countt 4. Compare Compare the listing listing of inventory inventory with with the detailed detailed inventory inventory records records 17.When NRV is likely to be less than cost? Ans. When there has been: 1. Incr Increa ease se in in cos costt 2. Fall Fall in in sell sellin ing g pric price e 3. Ph Phys ysic ical al deteri deterior orat atio ion n 4. obso obsole lesc scen ence ce 5. marketing marketing decisio decision n to sell product product at at loss loss 6. errors errors in produ producti ction on or purch purchasi asing ng 18.Worked example: Audit of inventory.
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Rajeev is auditing inventory at Icket Ltd a tableware producer. Produces 10% more than ordered. This 10% is obsolete. One store Argus maintains inventory at Icket’s premises. What are the key ke y issues when auditing inventory? Ans. 1. Ensure Ensure obsolete obsolete invento inventories ries not not included included in in full cost 2. Invent Inventory ory in FS FS really really exist exist.. 3. All invento inventory ry included included including including retail retail outlet outlets s 4. Argus Argus invent inventory ory not in FS FS 5. Invent Inventory ory valu valued ed approp appropria riately tely in in FS
Test the following assertionsExistence Obtain and review count • instructions Identify key issues in • counting- eg. Anything that make counting complex. Plan count attendance • Attend inventory count• - Sample co count - Follo llow procedure fo for damaged ones. - Separ eparat ate e Arg Argus us inv invento entory ry Select sample on final sheets • and trace back to original Rights and obligations Obtain confirmation from • Argus about level of inventory. Compare reply to Icket’s • records
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Completeness Follow up whether sampled • items took to final sheet Follow up Argus inventory • not included to final sheet Cut-off test – year-end • inventory not double counted.
Valuation Calculation of valuation • made correctly Select sample from• - Raw materials - WIP - FG Identify accounting policy • and check appropriateness Trace cost to purchase • invoice Trace appropriate production • level- WIP or FG? Check production record and • payroll- whether labor cost allocated to WIP Overhead allocation- eg. Idle • time not included, compare
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with previous year. Lower of cost or NRV?- check • year-end FG valuation to post-year-end sales. Obsolete items included in • valuation at lower of NRV or cost. Excess branded products• value Zero, price from managers list. 19.What are the key areas when testing Receivables? Ans. 1. Confirm debt debt owned by by customerscustomers- existenc existence, e, rights, rights, obligations obligations,, valuation 2. Confirm debt still still likely likely to to be collecte collected d – valuatio valuation n 20.What are reasons of the major risks of misstatement of the receivables balance? Ans. 1. Debts Debts being being uncollec uncollectib tible le (valuat (valuation ion)) 2. Debt being being contested contested by custom customers ers – existence, existence, rights rights and and obligations obligations 21.What is the objectives of audit tests in respect of receivables? Ans. To prove that assertions about the receivables re ceivables balance is correct. 22.What are the sources of information that can be used to test assertions about receivables? 1. Receiv Receivabl ables es ledger ledger inform informati ation on 2. Confirm Confirmati ations ons from custom customer er 3. Cash Cash payment payments s receive received d after year-e year-end. nd. 23.What purposes are achieved by verification by direct communication with the customers? Ans. Financial statement assertion are tested regardingre garding1. Exis Existe tenc nce e 2. Righ Rights ts and and oblig obligat ation ions s 24.What should the auditors do when client refuses to communicate with the customers? Ans. Should consider it as a limitation.
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25.What are the methods of confirmation from customers? Describe each. Ans. 1. Posi Positi tive ve met metho hod d -
reque request sted ed to giv give e the the balan balance ce,, conf confirm irm acc accura uracy cy
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preferable
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enc encoura ourage ges s def defiinit nite rep reply
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can can lea lead d to to low lower er resp respon onse se rate rate
2. Nega Negati tive ve met metho hod d -
request requested ed to to reply reply only only iiff stat stated ed amou amount nt is is d disp ispute uted. d.
26.When the negative method of obtaining confirmation from customers should be used? Ans. 1. Low risk risk of of materia materiall missta misstateme tement nt 2. Large Large numb number er of of small small balance balances s 3. Erro Errorr expec expecta tati tion on is low low 4. Auditor Auditor has no reason reason to to believe believe that custom customers ers will disrega disregard rd the request. 27.Where should the undelivered items return? Ans. To the auditor’s firm, not client’s cli ent’s office. 28.Write a positive request for confirmation with balance provided as a client. Ans. P.233 29.What classes of account should receive special attention when constructing the sample customers to contact? Ans. 1. Old Old unp unpai aid d acc accou ount nts s 2. Ac Acco coun unts ts writ writte ten n off off 3. Accoun Accounts ts with with credit credit bala balance nces s 4. Accoun Accounts ts settle settled d by round round sum paym payment ents s 5. Accoun Accounts ts with with nil nil bala balance nces s
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6. Accounts Accounts that that have been been paid paid by the the date of the the examinatio examination n 30.Which receivables need further work to carry out? Ans. which 1. Disagr Disagree ee with with balanc balance e state stated d 2. Do not not resp respon ond d 31.What are the reasons for disagreements in the receivables balances? Ans. 1. Disput Dispute e between between clien clientt and custo customer mer 2. Cut Cut off off prob proble lems ms 3. Money sent before before year year end but recoded recoded after year-end year-end 4. Money received received may may be posted posted to wrong account. account. 5. Customers Customers who who are are suppliers suppliers may net net off balances balances 6. Teeming and ladinglading- stealing stealing money and and incorrectl incorrectly y posting posting 7. Confirm Confirmati ation on by custo customer mer not rece receive ived d 8. Confirmation Confirmation received received just just before before the the year-end year-end 9. Differences Differences arising arising in invoice invoice and cash cash in transit transit-do -do not require require adjustments, but dispute and error by client need further substantive work. 32.What are the alternative procedures to verify existence/rights and obligations? Ans. When impossible to get confirmation 1. Check Check cash cash rece receipt ipt after after date date 2. Verify Verify valid valid purcha purchase se orde orderr 3. Examin Examine e the acco account unt for for valid validity ity 4. Explanation Explanation about invoices invoices remainin remaining g unpaid unpaid 5. CheckCheck- if balan balance ce of the the accoun accountt growing growing 6. Test control control onon- iss issue ue of credit credit notes notes and write write off of bad bad debts debts 33.What should be the test of bad debts? Ans. Reviewing the cash received after date.
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34.Worked example: Audit of receivables Ans. P.235 35.What are the major risks of misstatement of the bank and cash balances in the FS? Ans. 1. Not all bank bank balances balances owned by the the client being being disclosed disclosed-- Rights & obligations/Existence 2. Bank reconci reconciliatio liation n differences differences misstatedmisstated- valuation valuation 3. Material Material cash floats floats misstated misstated or omittedomitted- Complete Completeness ness/Exis /Existence tence 36.What are the sources of information that can be used to test the assertion about bank balance is correct? Ans. 1. Cas Cash book 2. Confirm Confirmati ation on from the bank bank 3. Bank Bank sta state teme ment nts s 4. Bank Bank reconc reconcili iliati ation on by by clien clientt 37.What are the most commonly requested information about bank balances from the bank? Ans. 1. Current 2. Deposit 3. Loan 4. Othe Otherr acc accou ount nts s 38.What are the additional information requested about bank account from bank? Ans. 1. Nil ba balanc lances es 2. Closed accou accounts nts within within 12 months months prior prior to confirma confirmation tion date. date. 3. Maturi Maturity ty and intere interest st terms terms 4. Unus Unused ed faci facilit lities ies,,
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5. Lines Lines of credit credit/st /stand andby by facilit facilities ies 6. Any offset or other other rights rights or encumbr encumbrances ances 7. Details Details of colla collater teral al given given or receiv received ed 8. Safe Safe cus custo tody dy 39.What should the request letter contain? Ans. 1. Ac Acco coun untt num numbe berr 2. Type Type of curre currency ncy for the the accou account nt 40.What are the procedures for direct confirmation with bank? Ans. 1. Bank require require explicit explicit written written authority authority to disclo disclose se information information.. 2. Assurance Assurance provider’s provider’s request request must must refer refer client’s client’s letter of of authority authority and date 3. Or coun counter tersig signed ned by client client 4. Or accompa accompanie nied d by letter letter of autho authorit rity. y. 5. Joint Joint accou accountnt- sign signed ed by all all parti parties es 6. Time period period of disclosu disclosurere- specific specific period period or indefinit indefinite e time 7. Request Request should should reach reach bank branch branch manager manager two two week before before client’s client’s year end 8. Auditors Auditors should should check check bank respon response se cover cover all the information information 41.What is window dressing? Ans. An attempt to overstate the liquidity of the company by1. Taking remittan remittance ce received received after year year end- increasin increasing g balance balance at bank and reducing receivables (cash is more liquid) 2. Recording Recording cheques cheques paid paid not not actually actually despatched despatched before year end (healthy looking current ratio) 42.What matters should be included in planning cash count? Ans. 1. Time and locati location on of cash cash count count 2. Name Name of audit audit stuff stuff cond conduct ucting ing count count
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3. Name Name of client client staf stafff attendi attending ng count count 43.Where location visit for cash count could not be attended what should be done? Ans. Obtain a letter from client confirming the balance 44.What matters apply to the count? Ans. 1. All cash cash book book written written in ink ink 2. Up to date 3. Count Count all all balanc balances es at the same same time time 4. Auditor Auditor should not not leave alone alone the cash cash and negotiabl negotiable e securities. securities. 5. Record cash count on working working paper paper on current current audit audit file. 45.Worked example: audit of bank Ans. P.239 46.What are the key areas when testing payables? Ans. 1. Ensuring Ensuring that all liabili liabilities ties are include included d 2. All liabiliti liabilities es are bona fide owned owned by the the company company 47.What are the major risks of misstatements of payables in the financial statements ? Ans. 1. Entity Entity understat understating ing its liabili liabilities ties in the the FS (Complete (Completeness) ness) 2. Cut-off between between goods goods inward inward and liabilitiy liabilitiy recordin recording g being incorrec incorrectt (Cut-off) 3. Non-existent Non-existent liabili liability ty being declared declared (rights (rights and and obligation) obligation) 48.What are the objectives of test is respect of payables? Ans. To prove that assertions about the liabilities are correct. 49.What are the sources of information? Ans. 1. Paya Payabl bles es led ledge gerr
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2. Supp Supplie lierr confir confirma mati tion on 50.When analytical procedure could help? Ans. When balance of payables is inexplicably reduced re duced from previous year. 51.What is the most important test when considering trade payables? Ans. Comparison of supplier’s statement with payables ledger le dger balances. 52.What kind of payable account balance have the possibility to error of understatement? Ans. It could occur occur in payables with low and nil balances as with high. -
Low Low bala balanc nce e wit with h maj major or su supp ppli lier er..
53.Where should the sample be collected from? Ans. Client’s list of suppliers, not payables ledger. 54.Is confirmation from suppliers needed? Ans. No 55.What are the circumstances when confirmation from supplier is needed? Ans. 1. Suppliers’ Suppliers’ statement statement is unavaila unavailable ble or or incomplete incomplete.. 2. Weakne Weakness ss in in inter internal nal contro controll 3. Nature Nature of busines business s make it it possible possible to a material material misstat misstatement ement of liabilities. 4. Client is deliberat deliberately ely trying trying to to understa understate te payables. payables. 5. Accounts Accounts appear to be be irregular irregular or abnorma abnormal. l. 56.Third party evidence is important. Because testing for understatement. 57.What are the major risks of misstatement of long-term liabilities? Ans. 1. Not all all long-term long-term liabilit liabilities ies disclose disclosed d (completen (completeness) ess) 2. Interest Interest payables payables not not calculated calculated correct correctly ly (accuracy (accuracy)) 3. Interest Interest payables payables not included included in the correct correct accountin accounting g period (cut-off) (cut-off) 4. Disclosure Disclosure is is incorrect incorrect (presentati (presentation on and disclosure) disclosure) 58.What are the complications an auditor may face in case of debentures?
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Ans. 1. Debentures Debentures and and loan agreement agreements s frequently frequently contain contain conditions conditions company must comply 2. Restri Restricti ctions ons on on total total borro borrowing wing 3. Adhere Adherence nce to specif specific ic borrowin borrowing g ratios. ratios. 59.What are the sources of information for long-term liabilities? Ans. 1. Schedu Schedule le of loan/ loan/prio priorr audit audit file file 2. Statutory Statutory booksbooks- eg. Register Register of of debentures, debentures, Articles Articles of of Association Association 3. Loan Loan agr agree eeme ment nts s 4. Bank letter letter and direct confirmation confirmation from lenders 5. Cas Cash book 6. Boar Board d minu minute tes s 7. Client Client sched schedule ules s and calcu calculat lation ions s 8. Accoun Accountin ting g polic policies ies in in the the FS. 60.What are the items include in the plan of long-term liabilities? Ans. 1. Obta Obtain in sch sched edul ule e of loan loans s 2. Compare Compare opening opening balance balance with previous previous working working paper 3. Test Test cleric clerical al accu accurac racy y 4. Compare Compare balan balances ces to to the nomina nominall ledger ledger 5. Check name of of lender lender to register register of debenture debenture holders holders 6. Trace additions additions and and repayment repayments s to cash book 7. Confirm repayments repayments agree with loan agreement agreement 8. Examine Examine cancelled cancelled cheques cheques and memoranda memoranda of satisfac satisfaction tion for loans loans repaid 9. Verify Verify borro borrowing wing limit limits s not exce exceeded eded 10.Examine signed board minutes relating to new borrowings/repayments 11.Obtain direct confirmation from lenders
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12.Verify interest charged entered in the register and notified to the registrar 13.Review restrictive covenants relating to default: -
Revi Review ew any any cor corre resp spo onden ndenc ce
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Revi Review ew confi confirm rmat atio ion n repli replies es for for non-c non-com ompli plian ance ce
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If a default default appears appears to exist, exist, determi determine ne it’s it’s effect effect
14.Review minutes, cash book to check all all loans recorded. 61.What is the key area when testing income statement items? Ans. Completeness 62.What is the type of testing used for revenues and purchase? Ans. Testing of controls 63.What is the major risk associated with revenue? Ans. Being overstated 64.How can revenue be tested? Ans. Select items from nominal ledger, trace back to source documentseg. Sales invoice, dispatch notes 65.With what items do purchase, revenue, payroll costs have strong relationships? Ans. 1. Purchase Purchase has strong strong relations relationship hip with invento inventories ries and payables payables 2. Revenue Revenue has strong strong relations relationship hip with with receiva receivables bles 3. Payroll Payroll costscosts- number of staff, staff, pay rates, rates, overall overall costs, costs, Tax/NI Tax/NI rates rates and pay. 66.How can purchase be tested? Ans. Select sample transactions. Start with goods received recei ved notes, trace transactions through out to ensure completeness. 67.What are the test of details carried out for payroll costs? Ans. Check a sample payroll record for 1.
Time worked worked correctly correctly recorde recorded d to clock cards
2. Employ Employees ees exist exist – from from persona personall records records
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3. Employees Employees are are being being paid paid at correct correct rate rate - from contra contracts/p cts/person ersonnel nel records 4. Payroll Payroll is calculated calculated correct correctly ly – reperform reperform the the calculation calculations. s. 5. Payment Payment to staffs and tax tax authorit authorities ies - ensure by bank bank statem statement ent 6. Check posting posting from from payroll payroll to nomina nominall ledger ledger 68.How can interest paid/received be tested? Ans. 1. By iinsp nspect ecting ing bank bank state statemen mentt 2. Confirm Confirmati ation on from from other other lend lender er 69.How can expenses be tested? Ans. 1. An Anal alyt ytic ical al proce procedu dures res 2. Vouching Vouching transa transactions ctions to purchas purchase e invoice. invoice.
Chapter-14 Codes of Professional Ethics 1.
What is tthe he need need for ethics ethics in CA professi profession? on? Ans. Because1. People People rely rely on on the the accou accounta ntants nts 2. Accoun Accountan tants ts hold hold positio position n of trust trust
2. What What is the the source source of ethi ethical cal guid guidanc ance? e? Ans. 1. ICAB 2. ISA ISA iss issue ued d by by IFA IFAC C 3. What are the advantages advantages of principles principles based guidance? guidance? Ans.
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1.
Active Active consideration consideration and and demonstrati demonstration on of conclusion conclusion-- independence independence for every given situation rather than agreeing a checklist of forbidden items.
2. Broad interpreta interpretation tion of ethical ethical situation situations s – principles principles encourage encourage compliance and rules engender deception 3. Individual Individual situati situations ons covered covered – it allows allows variations variations that that are found found in individual situations 4. Flexible Flexible to changing changing situation situation – it can can accommodate accommodate a rapidly rapidly changing changing environment 5. Can incorporat incorporate e prohibitions prohibitions – contain contain certain certain prohibitio prohibitions ns
4. What are the the fundame fundamental ntal principles principles of IFAC? IFAC? Ans. 1. Integrity Integrity – should be straight straight forward forward and honest honest 2. Objectivity Objectivity – should should not allow bias, bias, conflict conflict of interest, interest, undue undue influence influence over professional judgments 3. Professiona Professionall competence competence and due care care – CPD is required required all all time. Work Work diligently 4. Confidentiali Confidentiality ty – not disclose disclose information information to third third party without without consent consent 5. Professiona Professionall behavior behavior – comply with with laws and and regulations regulations.. Avoid any any behavior that discredits the profession 5. What are are the steps steps of guidanc guidance e for the firms firms and members of IFAC? IFAC? Ans. 1. Identi Identify fy threa threats ts to inde indepen penden dence ce 2. Evaluate Evaluate whether whether the threats threats are insigni insignificant ficant 3. If not insignifi insignificant, cant, identify identify and and apply safeguar safeguards ds – eliminate eliminate or reduce reduce 6. Where no no safeguard safeguard is availab available le what should should an an auditor auditor do? Ans. 1. Eliminate Eliminate the the interes interestt causing causing the threat threat 2. Decli Decline ne the the engage engagemen ment. t. 7. Define independ independence ence of mind mind and Indepen Independence dence in in appearance. appearance.
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Ans.
Independence of mind – state of mind to conclude without being affected by influences that compromise professional judgment Independence in appearance – avoidance of facts which create doubt that auditors’ integrity, objectivity or professional skepticism has been compromised. 8. What are are the sources sources of of threats threats identified identified by the IFAC IFAC code? Ans. 1. Self-interest Self-interest –eg. Having Having a financi financial al interest interest in a client 2. Self-review Self-review –eg. –eg. Auditing Auditing FS prepared prepared by the the firm 3. Advocacy Advocacy –eg. Promot Promoting ing client’s client’s position position by dealing dealing in its its share 4. FamiliarityFamiliarity- eg. Auditor Auditor have have family family member member at client 5. Intimidation Intimidation –eg. Threaten Threaten to to replace replace the the auditor auditor 6. Management Management –eg. –eg. Doing Doing managements managements’’ job, design design or or implement implement IT system 9. What are are the general general safeguards safeguards to the the threats identi identified fied by IFAC IFAC code? Ans. 1. Safeguards Safeguards created created by the professi profession, on, legislati legislation on or regulatio regulation n 2. Safegua Safeguards rds with within in the work work enviro environmen nmentt 10.Give some examples of safeguards created by the profession. Ans. 1. Educationa Educationall training training and experience experience requiremen requirementt to entry in profession profession 2. CPD 3. Corp Corpor orat ate e Gover Governa nanc nce e 4. Profe Profess ssio iona nall stan standa dard rds s 5. Professiona Professionall monitoring monitoring / disciplin disciplinary ary procedu procedures res 1. Externa Externall review review by lega legall third third party party 11.Give some examples of safeguards in the work environment. Ans. 1. Involving Involving an additio additional nal professiona professionall account account for review or advice advice
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2. Consulting Consulting an indepen independent dent third third partyparty- eg. Professional Professional regulato regulatory ry body 3. Rotati Rotating ng senior senior person personnel nel 4. Discussing Discussing ethical ethical issues issues with those those charged charged with with governance governance in client client 5. Disclosing Disclosing nature nature of services services provided provided and and extent extent of fees charged charged to those charged with governance 6. Involving Involving other firm to to reperform reperform the the engagemen engagement. t. 12.What is the period of engagement? Ans. From the commencement of work until the final report being produced. 13.What is the key guidline of ICAB code? Ans. Professional accountants should follow the code in all their professional and business activities.
Chapter-15 Integrity, Objectivity and Independence 1. Define Integrity, Integrity, Objectivit Objectivity, y, and and Independ Independence. ence. 2. Why do do independen independence ce and objectivity objectivity matter so much? much? 3. What are the the threats threats to independ independence? ence? Describe. Describe. Ans. 1. SelfSelf- iint ntere erest st thr threa eatt 2. SelfSelf- revi review ew thre threat at 3. Ad Advo voca cacy cy thr threa eatt 4. Fami Familia liarit rity y threa threatt 5. Inti Intimi mida dati tion on thr threa eatt 4. What actions actions of the the client pose pose threat threat to the firm’s firm’s integrity integrity or professi professional onal behavior? Ans. Arise from1. Illega Illegall activi activitie ties s of the the clien clientt 2. Appare Apparent nt disho dishones nesty ty of of the clien clientt 3. Questionabl Questionable e accounti accounting ng practice practices s of the client. client.
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5. What should should an auditor auditor do when when client client pose threats threats to firm’s firm’s integrit integrity? y? Ans. 1. Should be declined. Or, 2. Accept- with commitment from those charged with governance to improve corporate governance. 6. What are the ICAB code code for resolving resolving ethical ethical conflicts? conflicts? Ans. Auditor should consider1. The The rel relev evan antt fac facts ts 2. The The relev relevan antt par parti ties es 3. The ethica ethicall issue issues s invol involved ved 4. The fundament fundamental al principles principles related related to to the matter matter in questi question on 5. Establ Establish ished ed interna internall procedu procedures res 6. Alt Alterna ernativ tive e cours courses es of action. action. 7. How should should an an auditor auditor approac approach h to a ethical ethical conflict conflict? ? Ans. 1. Consider Consider which action action most most aligns with with the fundament fundamental al principles principles 2. If cannot cannot determine determine best best course course of action, action, refer refer it to the the relevant relevant department of his firm for advice 3. Firms Firms come come to conclus conclusion ion ‘in-h ‘in-hous ouse’ e’ 4. Furthe Furtherr advi advice ce from ICAB. ICAB. 8. As a trainee, trainee, how should should you resolve resolve ethica ethicall conflicts? conflicts? Ans. Refer to senior member of the firm. 9. What advice advice does does the code code of ethics give give for the conflict conflicts s of interest interest for the accountant? Ans. Should evaluate the threats that such such situations bring bring and apply safeguards. Includes: 1. Obtain advice advice from within within the employer employer or and independent independent professional advisor or the ICAB 2. Use a formal formal dispute dispute resolutio resolution n process process of the the organizati organization on 3. Seek Seek legal legal advi advice ce..
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