Audit and Assurance Hand Note

Audit & Assurance
For ICAB Application Level
Syed M Hoq ACCA

Audit & Assurance
Syed M Hoq, ACCA (syedmhoq@gmail.com) Page 1
Contents
Chapter 1: Reintroduction to Audit and Assurance.......................................................................................................2
Chapter 2: Responsibilities ...............................................................................................................................................6
Chapter 3: Professional Standards.................................................................................................................................15
Chapter 4: Professional Ethics........................................................................................................................................17
Chapter 5: Quality Control.............................................................................................................................................29
Chapter 6: Accepting Engagements ...............................................................................................................................33
Chapter 7: Planning.........................................................................................................................................................40
Chapter 8: Understanding the Entity and its Environment.........................................................................................44
Chapter 9: Risk Assessment............................................................................................................................................46
Chapter 10: Audit Approach ..........................................................................................................................................56
Chapter 11: Audits of Different Types of Entity...........................................................................................................68
Chapter 12: Audit Completion .......................................................................................................................................72
Chapter 13: Reporting.....................................................................................................................................................93
Key Facts.........................................................................................................................................................................109

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Chapter 1: Reintroduction to Audit and Assurance
Chapter Summary
1.1 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.
Elements of assurance engagements:
The elements can be remembered using the mnemonic CREST:
 Criteria
 Report
 Evidence
 Suitable Criteria
 Three Party Relationships
1.2 Levels of Assurance:
There are two types of assurance engagement on the basis of level of assurance that can be given:
 Reasonable assurance engagement: a high but not absolute level of assurance, sufficient &
appropriate evidence, positive conclusion given
 Limited assurance engagement: sufficient & appropriate evidence at lower level, negative
conclusion given
1.3 Benefit of Assurance:
The benefits are:
 Independent professional verification is being given
 It enhances the credibility of the information
 An assurance service may act as a deterrent to fraud and error
 In increases investor’s, creditors’ confidence in the business
1.4 Audit Defined:
The objective of an audit of financial statements is to enable the auditor to express an opinion whether
the financial statements is prepared, in all material respects, in accordance with an applicable financial
reporting framework.
The auditor will normally express his audit opinion by reference to the ‘true and fair view’ which is an
expression of reasonable assurance.
True: Information is factual and conforms with reality, not false. In addition the information conforms
with required standards and law. The accounts have been correctly extracted from the books and
records.
Fair: Information is free from discrimination and bias and incompliance with expected standards and
rules. The accounts should reflect the commercial substance of the company’s underlying transactions.
1.5 Limitation of assurance (reasons for not providing absolute assurance):
The limitations of assurance service include:
 The fact that testing is used – the auditors do not oversee the process of building the financial
statements from start to finish
 The fact that the accounting systems on which assurance providers may place a degree of reliance
also have inherent limitations

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 The fact that most audit evidence is pervasive rather conclusive
 The fact that assurance providers would not test every item in the subject matter
 The fact that client’s staff member may collude in fraud that can then be deliberately hidden from
the auditor or misrepresent matters to them for the same purpose
 The fact that assurance provision can be subjective and professional judgments have to be made
 The fact that assurance providers rely on the responsible party and its staff to provide correct
information, which in some cases may be impossible to verify by other means
 The fact that some items in the subject matter may be estimates and are therefore uncertain
Question Bank
Q.1 How do you differentiate Audit and Assurance Engagement? Explain the implications of laws,
standards and other requirements relating to assurance work. [Dec’13, June’12, Dec’11, Dec’10]
Assurance engagement is a broad concept and audit engagement is a part of it. Professional accountants
provide statutory audit, management advisory services, tax and other services to their clients based on
the nature of engagements. All these services termed as assurance engagement. In AGM professional
accountants have been appointed by shareholders to form an independent opinion on the truth and
fairness of the financial statements that engagement is termed as audit engagement. So, it is clear that
audit engagement is a part of assurance engagement.
The auditor is required by BSA 250 to obtain evidence about compliance with laws and regulations. It
states that the auditor should:
 Make enquiries of management
 Inspect correspondence with relevant licensing or regulatory bodies
 Ask those charged with governance if they are on notice of any non-compliance.
The auditor should obtain written representations that management has disclosed all known instances
of actual and possible non-compliance with laws and regulations.
Q.2 Why the level of assurance provided by a report on profit and cash flow forecasts differs from
the level of assurance provided by an audit report on financial statement?[Dec’13]
The reasons for which the level of assurance provided by a report on profit and cash flow forecasts
differs from the level of assurance provided by an audit report on financial statements are as follows:
 An audit conducted in accordance with auditing standards provides a high level of assurance which
is reasonable but not absolute. The delay between the balance sheet date and the date of the audit
report means that even items such as provisions/estimates can often be substantiated.
 A review of forecasts is only likely to provide a moderate level of assurance. This is because the
financial statements are based on historical information, and forecasts are based on assumptions
which are subject to uncertainty.
Q.3 What are the elements of an assurance engagement and what benefits can be derived from an
assurance service? [June’12]
The elements can be remembered using the mnemonic CREST:
 Criteria
 Report
 Evidence
 Suitable Criteria
 Three Party Relationships
The benefits are:

Audit & Assurance
Q.4 Generally a firm is engaged for an audit but may also be engaged by management to provide
additional non-statutory and non-assurance services. Write down at least four non-assurance
jobs, outside audit and assurance, generally performed by our firms in Bangladesh. [June’12]
The following services may be performed:
 Internal audit
 Due diligence
 Business valuation
 Tax services
Q.5 Mr. Ibrahim, the managing director of your client Bashundhara Ltd., a real estate development
company, has written to you saying that during the last 5 years there has been a sharp growth in the
company’s operating activities. He has been considering setting up of an internal audit department to
overview the operational activities with greater focus on internal control. But he heard from his brother,
who is also a director of the company, that the company would be better off abandoning this idea and
getting the external auditor to do some assurance work instead.
Advise Mr. Ibrahim explaining the objectives, characteristics and responsibilities of internal audit,
external audit and assurance. [June’12]
Internal audit:
It is an appraisal or monitoring activity established within an entity as a service to the entity. Its
functions include, amongst other things, examining, evaluating, and reporting to management and the
directors in the adequacy of components of the accounting and internal control systems.
Objectives:
The objectives of internal audit are to:
 Minimize the company’s business risk;
 Ensure the continuing functioning of the company; and
 Ensure compliance with relevant laws and regulations.
Characteristics:
 It is an appraisal or monitoring activity
 It focused on the operations of the entire business
 It is designed to add value and improve and organization’s operations
 Internal audit reports to the Board or the audit committee
 Internal auditors are very often employees of the organization, though sometimes, it may be
outsourced.
Responsibilities:
Internal audit activities usually involve:
 Monitoring internal controls
 Examining financial and operating information
 Review of the economy. Efficiency and effectiveness of operations
 Review of compliance of laws, regulations and other external requirements
 Special investigations, for instance, into suspected fraud
The internal audit department has a two-fold role in relation to risk management:
 Monitoring the company’s overall risk management policy to ensure it operates effectively
 Monitoring the strategies implemented to ensure that they continue to operate effectively

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External Audit – Objectives:
The objective of an audit of financial statements is to enable the auditor to express an opinion whether
the financial statements is prepared, in all material respects, in accordance with an applicable financial
reporting framework.
Characteristics:
 It is focused on the financial statements
 They report to the shareholders of a company on the truth and fairness of the financial statements
 Their works relate to the financial statements. They are concerned with the financial records that
underlie these
 They are independent of the company and its management. They are appointed by the shareholders.
Responsibilities:
It is the responsibility of an external auditor to provide an opinion whether the financial statements
provide true and fair view:
 in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial
year;
 in the case of the profit and loss account, of the profit or loss for its financial year.
It is also the responsibilities of the external auditor to state whether:
(a) They have obtained all the information and explanations which to the best of our knowledge and
belief were necessary for the purposes of our audit and made due verification thereof.
(b) In their opinion, proper books of account as required by law have been kept by the company so far
as it appeared from our examination of those books and (where applicable) proper returns adequate
for the purposes of our audit have been received from branches not visited by us.
(c) The company’s balance sheet and profit and loss account dealt with by the report are in
agreement with the books of account and returns.
(d) The expenditure incurred was for the purposes of the company’s business.
As per BSEC guidelines on corporate governance published on 07 August 2012, every listed company
must have a head of internal audit for conducting internal audit services and accordingly report to the
audit committee of the Board. So, if the company is a listed one, then they may need to set a separate
internal audit department.
Q.6 Jot down four benefits those could be achieved through financial statements being audited.
[Dec’11]
The benefits are:
Q.7 What are the limitations, if any, of a financial statement audit? [Dec’10]
The limitations of financial statements audit include:
 The fact that testing is used – the auditors do not oversee the process of building the financial
statements from start to finish
 The fact that the accounting systems on which assurance providers may place a degree of reliance
also have inherent limitations
 The fact that most audit evidence is pervasive rather conclusive
 The fact that assurance providers would not test every item in the subject matter
 The fact that client’s staff member may collude in fraud that can then be deliberately hidden from
the auditor or misrepresent matters to them for the same purpose

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Chapter 2: Responsibilities
Chapter Summary
2.1 Management’s Responsibilities:
Management is responsible for:
– Managing the business so as to achieve company objectives
– Assessing business risks to those objectives being achieved
– Safeguarding the company's assets
– Keeping proper accounting records
– Preparing company financial statements and delivering them to the Registrar
– Ensuring the company complies with applicable laws and regulations
It is not the responsibility of the auditors of a company to do any of the above.
2.2 Director’s Responsibilities Under the Companies Act 1994:
The directors' statutory duties primarily come from the responsibilities laid out in the Companies Act.
It is important that the directors of a company fully understand these, as in some cases there are
criminal consequences for failing to carry them out correctly. The main responsibilities of the
Directors are summed up below:
 Safeguarding assets:
It is the directors who have the legal responsibility for safeguarding the assets of the company. It
is therefore for them to take reasonable steps for the prevention and detection of fraud and other
irregularities. To carry out this responsibility they need to implement systems and controls to
safeguard the company's assets and they then need to ensure that the systems and controls operate
effectively. Such procedures may include:
 The safekeeping of documents of title to land and buildings and other assets.
 The setting of authority limits, i.e. the limitation of what any one individual can do
without consulting someone else.
 Implementing other procedures to prevent fraud and reduce the likelihood of error.
 Books and records of the company:
It is also the directors who are legally responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the company. This requires
records of:
 All cash payments and receipts
 All sales and purchases of goods by the company
 The assets (including non-current assets and inventory) and liabilities of the company
 In case of a company engaged in production, distribution, marketing, transportation,
processing, manufacturing, milling, extraction, and mining activities, such particulars
relating to utilization of material, labour and other items of overhead cost.
 Preparation and delivery of company financial statements:
Company law also places on the directors the obligation to prepare financial statements for each
financial period (usually a year). These statements must give a true and fair view of the affairs of
the company at the end of the accounting period and of the profit or loss of the company for that
period. In preparing those financial statements, the directors are required to:
 Select suitable accounting policies and then apply them consistently
 Make judgements and estimates that are reasonable and prudent
 Comply with applicable accounting standards
 Prepare the financial statements on the going concern basis unless it is inappropriate to
presume that the company will continue in business.

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2.3 Assurance Providers’ Responsibilities:
The responsibility of the external provider of assurance services is determined by:
 The requirements of any legislation or regulation under which the engagement is conducted,
and/or
 The terms of engagement for the assignment, which will specify the services to be provided
 Ethical and professional standards
 Quality control standards
The legal requirements are currently contained in the Companies Act 1994. In the case of an audit of
financial statements under the Companies Act 1994, it is the external auditor's responsibility to:
 Form an independent opinion on the truth and fairness of the accounts
 Confirm that the financial statements comply with applicable sections of the Companies Act 1994
To achieve these objectives the auditor has to ensure that:
 The audit is planned properly
 Sufficient appropriate audit evidence is gathered
 The evidence is properly reviewed and valid conclusions drawn.
2.4 Internal Controls:
Internal Control is a process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity's objectives
with regard to reliability of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations. It follows that internal control is designed and
implemented to address identified business risks that threaten the achievement of any of these
objectives.
Internal controls are designed in part to prevent errors occurring in financial information, or to detect
errors and correct them.
Reporting on Internal Control Weaknesses:
BSA 260 Communication of Audit Matters with Those Charged with Governance sets out that
auditors should 'consider audit matters of governance interest that arise from the audit of the financial
statements and communicate them with those charged with governance'.
The BSA specifies that material weaknesses in internal control would constitute such a matter. A
material weakness in internal control is a 'deficiency in the design or operation' which could adversely
affect the entity's ability to record, process, summarise and report financial and other relevant data,
and could result in a material misstatement in the financial statements.
 Auditors are responsible for detecting material errors in the financial statements, which they may
do by carrying out tests of control or tests of details.
 Management are responsible for internal control systems capable of preventing or detecting error.
 Auditors are responsible for assessing whether that system is capable of preventing or detecting
errors.
 If the material weaknesses are found, auditors are responsible for reporting these to management
and Carrying out additional tests of details to uncover any potential errors as a result of the
weakness
2.5 Fraud (BSA 240):
For audit purposes, BSA 240, The Auditor's Responsibility to Consider Fraud in an Audit of Financial
Statements, identifies two types of risk of misstatement which can arise from fraud:
 Misstatements arising from fraudulent financial reporting
 Misstatements arising from misappropriation of assets

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Responsibilities of Management regarding fraud:
The BSA 240 states that the primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and with management. To fulfil this responsibility,
various actions can be taken including:
 Demonstrating that management follow a culture of honesty and ethical behaviour and
communicating that they expect all employees to adhere to this culture
 Establishing a sound system of internal control
 From the point of view of those charged with governance, ensuring that management
implement policies and procedures to ensure, as far as possible, the orderly and efficient
conduct of the company’s business.
Responsibilities of Auditor regarding fraud:
The BSA states that the auditor must obtain reasonable assurance that the financial statements, taken
as a whole, are free from material misstatement, whether caused by fraud or error. The auditor does
not therefore offer complete assurance that the financial statements are free from fraud and/or error as
audit testing is not designed to provide this assurance.
Where Fraud is Suspected:
If the auditors identify misstatements which might indicate that fraud has taken place, they should
consider the implications of this for other aspects of the audit, particularly management
representations which may not be trustworthy if fraud is indicated. This may lead to a limitation in the
scope of the audit.
Management Representations:
Auditors are required to obtain particular written representations from management that management
acknowledges its responsibility to design and implement internal controls to prevent and detect fraud
and that management has disclosed any known or suspected frauds by management, employees with
a significant role in internal control, or any other frauds which might have a material impact on the
financial statements to the auditor. In addition, management confirm in writing that it has disclosed
the results of its own assessment of whether the financial statements may be materially affected by
fraud.
Reporting Fraud or Suspected Frauds:
The BSA requires that the auditors should discuss suspected or actual fraud with the directors and
make
the appropriate reports, as set out below:
Management  If they actually discover fraud
 If they suspect fraud
 If they discover substantial error
 If they think the suspected fraud casts doubt on the integrity of the directors
Shareholders  Only if fraud or error causes the financial statements to not give a true and fair
view or there is a fundamental uncertainty –in which case it should be included
in the audit report in the usual way
Third Parties  If it is in the public interest to report a fraud to the proper authorities and the
directors refuse to do so
2.6 Compliance with Laws and Regulations (BSA 250):
Auditors are interested in two categories of law and regulations:
 Those with a direct impact on the financial statements, for example, the Companies Act, 1994
 Those which provide a legal framework within which the company operates

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The auditor is required by BSA 250 Consideration of Laws and Regulations in an Audit of Financial
Statements to obtain evidence about compliance with laws and regulations. It states that the auditors
should:
 Make inquiries of management
 Inspect correspondence with relevant licensing or regulatory bodies
 Ask those charged with governance if they are on notice of any non-compliance.
Non-Compliance Suspected:
When the auditors suspect non-compliance, they should document findings and discuss them with
management. If the auditors cannot obtain sufficient appropriate evidence about the suspected
noncompliance, this might represent a limitation on the scope of the audit, which will result in the
auditors not being able to give an unqualified opinion.
The appendix to BSA 250 gives the following list of indicators of non-compliance:
 Investigation by a government department
 Payment of fines or penalties
 Payments for unspecified services or loans to consultants, related parties, employees or
government employees
 Sales commissions or agents' fees that appear excessive in relation to those normally paid by the
entity or in its industry or to the services actually received
 Purchasing at prices significantly above or below market price
 Unusual payments in cash, purchases in the form of cashiers' cheques payable to bearer or
transfers to numbered bank accounts
 Complex corporate structures including offshore companies where ownership cannot be identified
 Unusual transactions with companies registered in tax havens
 Tax evasion such as the wider declaring of income and over claiming of expenses
 Payments for goods or services made other than to the country from which the goods or services
originated
 Payments without proper exchange control documentation
 Existence of an accounting system that fails, whether by design or by accident, to provide
adequate audit trail or sufficient evidence
 Unauthorised transactions or improperly recorded transactions
 Media comment
 Transactions undertaken by the entity that have no apparent purpose or that make no obvious
economic sense
 Where those charged with governance of the entity refuse to provide necessary information and
explanation to support transactions and other dealings of the company
Reporting of Non-Compliance:
The BSA requires that the auditors should communicate discovered instances of non-compliance with
laws and regulations to those charged with governance (the directors) without delay, and make
appropriate reports, as set out below:
Management  If the auditors suspect non-compliance with laws and regulations
 If the suspected non-compliance causes them not to have confidence in the
integrity of the directors
Shareholders  Only if non-compliance causes the financial statements to not give a true and
fair view or there is a fundamental uncertainty –in which case it should be
included in the audit report in the usual way
Third Parties  If there is a statutory duty to report without undue delay
 If it is in the public interest to report the non-compliance to the proper
authorities and the directors refuse to do so

Audit & Assurance
2.7 Related Parties (BSA 550):
Transactions with related parties may be carried out on terms which may not be the same as in an
arm's length transaction with an independent third party. The approach adopted in financial reporting
standards is to disclose the relevant amounts and relationships so that the reader of the financial
statements can decide for themselves whether such transactions have led to a manipulation of the
financial statements.
Related parties are those people or companies that might have, or be expected to have, an undue
influence on the company being audited. So as examples (but the full list is much longer), the directors
and key management of a company, together with their families, are regarded as related parties of that
company, as are other companies controlled by them, other companies in the same group, and so on.
BSA 550 Related Parties details the audit work required in respect of related party transactions. The
work can be split into the three main stages of the audit:
 Planning
 Detailed work
 Review
The Planning Stage:
The auditor needs to consider the risk of there being undisclosed material related party transactions.
This is an extremely difficult area, because the materiality rule for related party transactions is not just
the normal one. The normal rule judges materiality by reference to the company being audited,
whereas material related party transactions are judged both by that and by reference to the individual
related party.
The detailed testing stage:
BSA 550 sets out specific procedures that should be carried out:
 Detailed tests of transactions and balances (such as would ordinarily be carried out on audits)
 Reviewing minutes of meetings of shareholders and directors to observe if any related parties or
transactions with them become apparent
 Reviewing records for large or unusual transactions or balances, particularly those recognised
near the end of the reporting period
 Reviewing confirmation of loans receivable and payable and confirmations from banks (which
might indicate guarantor relationships)
 Reviewing investment transactions, for example, when the company has invested in another
company
Audit evidence in relation to related parties and transactions with them may be limited and restricted
to representations from management. Due to this, the auditor should try carry out procedures such as:
 Discussing the purpose of the transactions with management/directors
 Confirming the terms and amount of the transaction with the related party
 Inspecting information in the possession of the related party
 Corroborating the explanation of the transactions with the related party
 Obtaining information from an unrelated third party if possible
 Confirming information with persons associated with the transaction, such as banks, solicitors,
guarantors and agents.
Where related party transactions are found the auditor checks that the appropriate disclosures are made
in the accounts. Remember that all transactions with related parties need to be disclosed, even if they
are at a normal market rate. However, any disclosures should include information that is needed for a
proper understanding of the transaction and this would, of course, include whether the transaction was
or was not at a market rate.

Audit & Assurance
2.8 Money Laundering:
Money laundering is defined as a wide range of activities in relation to criminal property, including
using, acquiring, concealing and removing from the country.
The purpose of money laundering is to:
 Disguise the origins of funds derived from illicit sources, and
 Enable illicit funds to be used by those who control them.
If an auditor finds any transaction of source of fund, income and expenses which is not properly
substantiated, the auditor should report the item into the audit report and if necessary, into the letter
of weaknesses to management.
According to BSA 310, para 2, the auditor should obtain a knowledge of the business sufficient to
enable the auditor to identify and understand the events, transactions and practices that, in auditor’s
judgement, may have a significant effect on the financial statements or on the examination or audit
report. One of the key principles stressed by the authorities dealing with Money Laundering in
Bangladesh and worldwide is KYC - know your client.
 The firm will need to have checked the client's identity, when they first became a client and will
need to keep the evidence on file for a sufficient period after they cease to be a client
 Where does the money come from? Auditors should think about the real nature of the business's
sales, but also about the source of the start-up capital and any other equity and loans raised
 Remember the money launderer wants to overstate income and loves paying tax on the excess,
which goes against the grain of the way most auditors think.
2.9 Expectations Gap:
It means that there is a gap between what the assurance provider understands he is doing and what the
user of the information believes he is doing. It may be defined as the difference between the apparent
public perceptions of the responsibilities of auditors on the one hand and the legal and professional
reality on the other. The following specific points can be highlighted:
 Misunderstanding of the nature of audited financial statements
 Misunderstanding as to the type and extent of work undertaken by auditors
 Misunderstanding about the level of assurance provided by auditors
Assurance provider needs to close this gap in order to maintain the value of the assurance provided
for the user. This can be done by:
 By issuing an engagement letter spelling out the work that will be carried out and the limitations
of that work
 Regularly reviewing the format and content of reports issued as a result of assurance work.
Question Bank
Q.8 What is money laundering? What is your responsibilities and duty to report, as auditor when
you suspect or find any issue of money laundering? [Dec’13, Dec’11]
Money laundering is the process of making dirty money clean. Money laundering is defined as a wide
range of activities in relation to criminal property, including using, acquiring, concealing and
removing from the country.
The purpose of money laundering is to:
 Disguise the origins of funds derived from illicit sources, and
 Enable illicit funds to be used by those who control them.

Audit & Assurance
If an auditor finds any transaction of source of fund, income and expenses which is not properly
of weaknesses to management.
The auditor should obtain a knowledge of the business sufficient to enable the auditor to identify and
understand the events, transactions and practices that, in auditor’s judgement, may have a significant
effect on the financial statements or on the examination or audit report. One of the key principles
stressed by the authorities dealing with Money Laundering in Bangladesh and worldwide is KYC -
know your client.
 The firm will need to have checked the client's identity, when they first became a client and will
need to keep the evidence on file for a sufficient period after they cease to be a client
 Where does the money come from? Auditors should think about the real nature of the business's
sales, but also about the source of the start-up capital and any other equity and loans raised
 Remember the money launderer wants to overstate income and loves paying tax on the excess,
which goes against the grain of the way most auditors think.
Duty to report:
If an auditor finds any transaction of source of funds, income and expenses which is not properly
of weakness to management.
Moreover, in accordance with Money Laundering Act 2012, as a reporting agency, professional
accountants shall have to report/inform to Bangladesh Bank immediately if they find any indication
of money laundering during their audit in a client.
Q.9 You are the Team Leader of the Audit Team of Butterfly (Pvt.) Limited. When performing audit
procedures you found that there are several unidentified balances in the bank reconciliations provided
by the Accountant. You also found that the debtors schedule has not been agreed to the ledger and the
client has not reconciled these amounts as of the year end. The debtor confirmations received during
the year did not agree with the ledger balances, and the Accountant claims it is the debtors’ records
that are in error. The audit partner is being pressurized by Finance Manager to finalize the audit
procedures within a very short period compared to last year, due to the budgeting process that is
scheduled to commence in a couple of weeks.
Required [Dec’13]:
i) Identify the factors that indicate possible frauds in the above scenario.
ii) The audit manager has identified debtors as an area prone to fraud in the entity. List the
procedures you may perform to address the fraud risk relating to debtors.
iii) “An audit may act as a deterrent to fraud but does not certify that one has not occurred”.
Explain.
i) When performing audit procedures the team leader of the audit team of Butterfly (Pvt.) Limited
found the following indication of possible frauds:
 The accountant provided bank reconciliation statement with several unidentified balances.
That means, there may be some debit balances existed in the Bank Book (ledger maintained
by the company) but no corresponding credit balances in the Bank Statement. It can be
happened due to not depositing the cheques (e.g. cash cheque) in the Company’s Bank
Account. If this is the case, cheques might be deposited to personal bank account of
designated employees or en-cashed directly which indicates possible frauds.
 The debtors schedule has not been agreed to the ledger balance and no reconciliation has
been made in this regard. Moreover, the debtors’ confirmation received by auditors did not
agree with ledger balances. It indicates that manipulation made by management to record
debtors in the ledger which indicates possible frauds.

Audit & Assurance
 To conceal the identified frauds or diverting the attention of auditors to other areas, Finance
Manager is insisting on the audit partner to finalize the audit job within a very short period
compared to last year. He is mentioning the commencement of budgeting process in a
couple of weeks. Starting of budgeting process might not be the acceptable reason to
pressurize auditors to complete their job and management is not in a position to do so.
ii) The following audit procedures may be performed to address the fraud risk relating to debtors:
 Cross-check debtors list/schedule with the debtor ledger and identify the
discrepancies/mismatches
 Send confirmation letter to debtors specially those debtors whose balances do not match
with the ledger balance
 After agreeing confirmation, check which balance the debtors confirmed and check the
same with debtors list and ledger balance.
 Cross check with sales ledger and sales invoices regarding the debtors’ balances whose
balances do not match with the ledger balances.
 Examine the delivery challan to confirm the quantity delivered to debtors and cross check
the same with sales invoices
 Examine the cash/bank book whether any posting is pending which is required to update
in the debtors’ list/schedule.
Based on the evidence gathered from the above procedures the auditors shall have to draw
their opinion. If they have found frauds with adequate supporting documents, they have to
modify audit report based on the materiality and pervasiveness of the identified fraud cases.
iii) The objective of an audit of financial statements is to enable the auditor to express an opinion
whether the Financial Statements are prepared, in all material respects, in accordance with an
identified financial reporting framework. An audit conducted in accordance with BSAs is
designed to provide reasonable assurance that the financial statements taken as a whole are
free from material misstatements, whether caused by fraud or error. The fact that an audit is
carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the
prevention of fraud and error.
An audit does not guarantee all material misstatements will be detected because of such factors
as the use of judgement, the use of testing, the inherent limitations of internal control and the
fact that much of the evidence available to the auditor is persuasive rather than conclusive in
nature.
The risk of not detecting a material misstatement resulting from fraud is higher than the risk
of not detecting a material misstatement resulting from error because fraud may involve
sophisticated and carefully organized schemes designed to conceal it, such as forgery,
deliberate failure to record transactions, or intentional misrepresentations being made to the
auditor. Such attempts of concealment may even be more difficult to detect when accompanied
by collusion.
Q.10 You are the audit senior on the external audit of Dug Ltd. (Dug) for the year ended 31 January
2012. In January 2012 Dug sold some office equipment to the wife of Dug’s Managing Director.
The audit junior has noted that the sale has not been disclosed in the note to the financial
statements detailing related party transactions and has suggested the inclusion of an emphasis
of matter paragraph in the audit report to highlight this issue. Comment on the suitability or
otherwise of the audit junior’s suggestion. [Dec’12]
Failure to disclose a material related party transaction results in a disagreement over the preparation
of the financial statements. Therefore, the audit opinion should be modified with a qualified (except

Audit & Assurance
for) opinion and the reason for the disagreement in the audit report should give details of the related
party transaction. An emphasis matter paragraph is used where the auditor considers it necessary to
draw users’ attention to a matter which is presented correctly in the financial statements but where the
audit opinion would not be qualified in respect of the matter in the emphasis of matter paragraph.
Q.11 What are the responsibilities of an auditor regarding fraud under BSA 240? [June’12]
The BSA states that the auditor must obtain reasonable assurance that the financial statements, taken
as a whole, are free from material misstatement, whether caused by fraud or error. The auditor does
not therefore offer complete assurance that the financial statements are free from fraud and/or error as
audit testing is not designed to provide this assurance.
Where Fraud is Suspected:
If the auditors identify misstatements which might indicate that fraud has taken place, they should
consider the implications of this for other aspects of the audit, particularly management
representations which may not be trustworthy if fraud is indicated. This may lead to a limitation in the
scope of the audit.
Q.12 During the statutory audit of Dhaka Metal Ltd., an official of the company informed the audit manager
that the managing director of Dhaka Metal had instructed the official not to record a transaction in the
accounting records as it had nothing to do with Dhaka Metal’s business. The transaction involved a
cash deposit which was paid into the company’s bank account and a week later the same amount was
directly transferred, into a bank account in the name of Salman Chowdhury, a friend of the managing
director. The amount is not material in the context of any of the key figures in the financial statements.
State, with reasons, how the audit manager should deal with this matter. [Dec’11]
The matter is suspected money laundering. The audit manager should do the following:
 Report to firm’s money laundering reporting officer
 Without tipping off
 There is suspected money laundering
 Appears to be disguising/transferring proceeds
 No deminimus where money laundering concerned
Q.13 What is internal control? Why is it important? [Dec’10]
Internal control is the process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity’s objectives
with regard to reliability of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations.
Reasons for internal controls:
 Minimizing the company’s business risks
 Ensuring the continuing effective functioning of the company
 Ensuring the company complies with relevant laws and regulations

Audit & Assurance
Chapter 3: Professional Standards
Chapter Summary
3.1 The International Auditing and Assurance Standards Board (IAASB):
IAASB was set up by IFAC, which nominates a majority of its members –others are nominated by the
forum of firms –to issue professional standards. It replaced its predecessor body the International
Auditing Practices Committee (IAPC). It issues the following standards:
 International Standards on Auditing (ISAs)
 International Standards on Assurance Engagements (ISAEs)
 International Standards on Related Services (ISRSs)
 International Standards on Quality Control (ISQCs)
IAASB also issues practice statements which are designed to help practitioners with interpretation and
implementation of the standards. (IPPS 1 International Professional Practice Statement 1).
Working procedures of the IAASB:
The working procedure of the IAASB is to select subjects for detailed study by a subcommittee
established for that purpose. The IAASB delegates to the subcommittee the initial responsibility for
the preparation and drafting of accounting standards and statements. As a result of that study, an
exposure draft is prepared for consideration by the IAASB. If approved, the exposure draft is widely
distributed for comment by member bodies of IFAC, and to such international organisations that have
an interest in auditing standards as appropriate. The comments and suggestions received as a result of
this exposure are then considered by the IAASB and the exposure draft is revised as appropriate.
Provided that the revised draft is approved it is issued as a definitive International Standard and
becomes operative.
3.2 Harmonization:
The main force behind these changes is known as 'convergence' or the increasingly close alignment
of standards which affect accountants across the world in the areas of:
 Ethics
 Financial reporting
 Auditing
Whilst there have been International Accounting Standards and International Standards on Auditing
for some time they seem to have been always regarded as something which, although good in theory,
would never have very much impact in any individual jurisdiction. However there are a number of
drivers which have caused attitudes to change:
 Global companies are now truly global, and will move their operations at will
 Different regional bodies are increasingly harmonising the rules and regulations affecting
business across member states
 The Satyam and Enron affairs
The Enron affair was important in that as Enron was a US company and its auditor Andersen was
primarily a US based firm, the regulators in the US were forced to look again at their own standards,
and so it probably did as much as anything to enable compromises to be made. However just in case
we in Asia, become too smug, the Satyam scandal reminds us that such events can happen anywhere.
3.3 Clarity Project:
IAASB is in the middle of a clarity project, during which they are reissuing existing BSAs, redrafted
so as to make the requirements within them clearer. Under this project, each BSA will have:
 A stated overall objective

Audit & Assurance
 Clarified obligations, by use of the word 'shall' where a requirement of the BSA is set out
 Eliminating ambiguity in BSAs
 Improving the overall readability of BSAs
The most recent exposure drafts under this project are:
 BSA 320 Materiality in Planning and Performing an Audit
 BSA 450 Evaluation of Misstatements Identified during the Audit
 BSA 260 Communication with Those Charged with Governance
Question Bank
Q.14 Briefly write on The International Auditing and Assurance Standards Board (IAASB) and The
International Federation of Accountants (IFAC). [Dec’11]
The International Auditing and Assurance Standards Board (IAASB) is an independent standard-
setting body that serves the public interest by setting high-quality international standards for auditing,
assurance, and other related standards, and by facilitating the convergence of international and
national auditing and assurance standards. In doing so, the IAASB enhances the quality and
consistency of practice throughout the world and strengthens public confidence in the global auditing
and assurance profession.
IFAC is the global organization for the accountancy profession dedicated to serving the public interest
by strengthening the profession and contributing to the development of strong international
economies. IFAC is comprised of 179 members and associates in 130 countries and jurisdictions,
representing approximately 2.5 million accountants in public practice, education, government service,
industry, and commerce.
Q.15 How does the expanded role of professional accountants affect the accounting profession?
[Dec’10]
Try to do it yourself and then match with the suggested answer.
Q.16 Which statutory provisions are aimed at reinforcing auditor's independence? Discuss. [Dec’10]

Audit & Assurance
Chapter 4: Professional Ethics
Chapter Summary
4.1 The Need for Professional Ethics:
The importance of professional ethics is that in order for accountancy services to be meaningful, the
public must trust accountants. Trust is built by the knowledge that accountants are bound by a
professional code of ethics. Independence and objectivity (key features of the Code of Ethics) are
fundamental to the provision of assurance services.
The accountancy profession has a paradoxical image. On the one hand accountants are seen as pillars
of society, providing reliable financial information in their working lives and acting as treasurer for
different public authority institutions, NGOs, banks, educational institutions or local religious
organizations in their spare time.
The other side of the coin is the image of aggressive tax schemes, financial scandals and money
laundering. Yet accountants believe that financial information is important. It is necessary for
governments, shareholders, trading partners, management and any number of other stakeholders, that
the financial and other reports and information provided by accountants are reliable and can be used
by others as they go about their daily lives. So the work that accountants and other assurance providers
do has benefit for the public interest.
Public interest is what differentiates the accounting profession from other professions, such as
lawyers, doctors and engineers. Accountants’work creates major impacts in the national economy
through capital markets as well as through revenue collection for public expenditure (taxes). Ranging
from providing assurance on listed company accounts to just preparing an individual’s tax return,
accountants are relied upon and trusted by millions of public out in the street. There is a third party
involvement in most of accountant’s work; therefore accountants need to maintain independence,
integrity and objectivity.
It follows from this that, if the profession is to survive and thrive and if its members are to maintain
their position, there has to be a code of conduct so that the public are able to feel that they can trust
accountants.
4.2 IFAC Code of Ethics:
The fundamental principles are:
1) Integrity: A professional accountant should be straightforward and honest in all professional and
business relationships.
2) Objectivity: A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments.
3) Professional competence and due care: A professional accountant has a continuing duty to
maintain professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional services based on current developments in practice, legislation
and techniques. A professional accountant should act diligently and in accordance with applicable
technical and professional standards.
4) Confidentiality: A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships and should not disclose any such
information to third parties without proper and specific authority unless there is a legal or
professional right or duty to disclose. Confidential information acquired as a result of professional
and business relationships should not be used for the personal advantage of the professional
accountant or third parties.
5) Professional behaviour: A professional accountant should comply with relevant laws and
regulations and should avoid any action that discredits the profession.

Audit & Assurance
4.3 Threats to Independency and Objectivity:
There are five general sources of threats identified by the Code:
 Self-interest threat
 Self-review threat
 Advocacy threat
 Familiarity threat
 Intimidation threat
4.4 Self-Interest Threats:
1) Financial Interest
2) Close Business Relationships
3) Employment with client
4) Temporary Staff Assignment
5) Partner on client board
6) Family and personal Relationship
7) Participation in compensation and
evaluation policies
8) Gifts and Hospitality
9) Loans and Guarantees
10) Overdue Fees
11) High Percentage of Fees
12) Lowballing
13) Recruitment
4.5 ICAB Code of Conduct:
As part of ICAB bye-laws (Schedule 'C' Part I) a Chartered Accountant in practice shall be guilty of
professional misconduct for any of the following activities:
(1) places his professional service at the disposal of or enters into partnership with an unqualified
person/or persons in a position to obtain business of the nature in which chartered accountants
engage by means which are not open to a chartered accountant: Provided that this paragraph shall
not be construed as prohibiting a member from practising in a country outside Bangladesh in
association with a person who is entitled under the law in force in that country to perform
functions similar to those which a chartered accountant in practice is entitled to perform in
Bangladesh;
(2) allows any person to practise in his name as a chartered accountant unless such person is also a
chartered accountant and is in partnership with or employed by him.
(3) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his professional business, to any other person than a member
of the Institute or a partner or a retired partner or the legal representative or widow of a deceased
partner;
(4) accepts or agrees to accept any part of the profits of the professional work of a lawyer, income-
tax practitioner, auctioneer, broker or other agent or any other person who is not a member of the
Institute;
(5) accepts a position as auditor previously held by another chartered accountant without first
communicating with him in writing;
(6) accepts an appointment as auditor of a company without first ascertaining from it whether the
requirements of section 210 of the Companies Act, 1994, in respect of such appointment, have
been duly complied with;
(7) accepts a position as auditor previously held by some other chartered accountant in such
conditions as to constitute undercutting;
(8) publishes or sanctions the publication of expressions of thanks or appreciation by clients or
promotes in any way laudatory notices with regard to professional matters;
(9) solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means;
(10) advertises his professional attainments or services or uses any designation or expressions other
than chartered accountant on professional documents, visiting cards, letter-heads or sign boards

Audit & Assurance
unless it be a degree of a University established by law in Bangladesh recognised by the
Government of Bangladesh or a title indicating membership of the Institute of Chartered
Accountants or any other Institution that has been recognised by the Council;
(11) allows his name to be inserted in any directory, either in the main section or in classified list
whether printed or not, so as to appear in a leaded type or in any manner, which could be regarded
as of an advertising character;
(12) certifies any documents, exhibits, statements, schedules or other forms of accountancy work
which have not been verified entirely under the personal supervision of himself, a member of his
staff, another member of the Institute or his partner: Provided that the above will not apply in
cases of accounts of foreign branches or subsidiaries of his clients which have been duly certified
by a public accountant;
(13) gives estimates of future profits for publication in a prospectus or otherwise, or certifies for
publication statements of average profits over a period of two or more years without at the same
time stating the profits or losses for each year separately;
(14) charges or offers to charge, accepts or offers to accept in respect of any professional employment,
fees which are based on a percentage of profits or which are contingent upon the findings or result
of such employment except in cases which are permitted under any regulations of Government
or requirements of law;
(15) engages in any business or occupation other than the profession of chartered accountants unless
permitted by the Council so to engage: provided that nothing contained herein shall disentitle a
chartered accountant from being a director of a company or a cooperative society unless he or
any of his partners is interested in such company as an auditor;
(16) allows a person not being a member of the Institute or a member not being his partner to sign on
his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements or any other document required by his client;
(17) discloses information acquired in the course of his professional engagement to any person other
than his client, without the consent of his client or otherwise than as required by any law for the
time being in force;
(18) expresses his opinion on financial statements of any business or any enterprise in which he, his
firm or a partner of his firm has a substantial interest, unless he discloses the interest also in his
report;
(19) fails to disclose a material fact known to him which is not disclosed in a financial statement, but
disclosure of which is necessary to make the financial statement not misleading;
(20) fails to report a material misstatement known to him to appear in a financial statement with which
he is concerned in a professional capacity;
(21) is grossly negligent in the conduct of his professional duties;
(22) fails to obtain sufficient information to warrant the expression of an opinion or his qualifications
are sufficiently material to negate the expression of an opinion;
(23) fails to keep moneys of his client in a separate banking account or to use such moneys for
purposes for which they are intended;
(24) has been guilty of any act or default discreditable to a chartered accountant or a member of the
Institute;
(25) (i) contravenes any of the provisions of the Order or the bye-laws made there under; (ii) is guilty
of such other act or omission as may be specified by the Council in this behalf, by notification in
the Gazette of Bangladesh;
(26) not being a fellow styles himself as a fellow;
(27) does not supply the information called for or does not comply with the requirements asked for.
by the Council or any of its Committees;
(28) fails to invite attention to any material departure from the generally accepted procedure of audit
applicable to the circumstances;
(29) includes in any statement, return or form to be submitted to the Council any particulars knowing
them to be false;

Audit & Assurance
(30) permits his name or the name of his firm to be used in connection with an estimate of earnings
contingent upon future transactions in a manner which may lead to the belief that he vouches for
the accuracy of the forecast:
(31) without first obtaining the permission of the Council associates himself with or promotes
anybody of accountancy, association or institute of accountancy, etc., in Bangladesh
Question Bank
Q.17 What are professional and ethical issues that may arise during an assurance engagement work?
[Dec’13, Dec’11]
During an assurance engagement professional accountants should perform their duties and exercise
their rights to accomplish their job professionally:
 Remind management regarding their right to access at all times to the books, accents and
vouchers of the company (in whatever form they are held)
 Right to require from the company’s officers such information and explanation as they think
necessary for the performance of their duties as assurance providers/auditors
 Ensure whether financial statements have been prepared in accordance with the relevant
legislation, for any disagreement report accordingly
 Examine and review whether adequate accounting records have been kept and the accounts are
in agreement with the accounting records
 For any scope limitation or disagreement, if not resolved, communicate the same to those charged
with governance
The assurance providers must maintain independence from the client. They must follow fundamental
principles of professional ethics during providing assurance services:
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behaviour
Q.18 During the external audit of Purbachal Ltd. you discovered that the directors have accounted for
research & development costs inappropriately resulting in a material misstatement in Purbachal’s
financial statements.
Your firm plans to issue a modified audit opinion if the misstatement is not corrected as per your
firm’s request. During a conversation with your firm’s audit partner, Purbachal’s Managing Director,
Reaz Ahmed, indicated that it is the directors’ intention to seek the removal of your firm as external
auditors if your firm issues a modified audit opinion in respect of this matter. What appropriate
actions your firm should consider under the above circumstances? [June’12]
Actions and explanations:
 Discuss the issue with the directors and request that they amend the financial statements as the
issue may be avoided if the directors understand the problem of incorrect accounting treatment
 Reconsider other areas of the audit or undertake an independent internal quality review as the
intimidation threat may have impaired objectivity on other aspects of the audit work.
 Seek legal advice or advice from the ethics partner in order to ensure that the firm’s exposure to
any risk is limited
 Consider resignation as the directors’ actions represent an intimidation threat and breakdown of
trust as well as raising doubts about management’s integrity.

Audit & Assurance
Q.19 You have recently come across the following professional issues:
i) During the audit of a listed company on which you were involved, you overheard the finance
director on the telephone to a family friend requesting him to buy shares on his behalf, prior to
an announcement about a new product which you know is likely to increase the share price
significantly. The finance director is a chartered accountant.
ii) One of the audit clients you recently worked on was impressed with your courtesy towards his
staff members that he wanted to make you a gift of tickets to the World Cup football final, along
with an overnight stay in a hotel and dinner.
Requirement [June’12]:
Set out the problems in each of the above situations and the action that you should take.
Share purchase for Finance director:
Problems Actions
 This constitutes insider dealing which is a criminal offense, as the
finance director is benefiting financially from an inside knowledge of
the business
 All chartered accountants and trainees, whether in business or practice,
are required to comply with the code of ethics. This states that members
should act with integrity at all times and not to act to bring the
profession into disrepute.
Inform the audit
partner but do not
approach the finance
director directly
yourself.
Accepting a gift from an audit client:
Problems Actions
 Firm’s independence on the audit may be called into question; need to
consider.
 Size and availability to all employees of the client company.
 Whether own firm’s regulations may prohibit this.
Discuss with partners
and only accept if
firm’s permission is
given.
Q.20 Farzana Huq is employed as an audit manager in a firm of chartered accountants. As part of the
planning of the external audit of Rahman Foods Ltd., for the year ending 30 June 2011, Farzana met
with the Finance Director. At the end of the meeting, the Finance Director informed Farzana that he
is retiring in October 2011 and the directors of Rahman Foods Ltd. would like to offer her the post of
Finance Director. Farzana is very much interested and has agreed to meet the board of directors to
discuss the offer in more detail.
State, with reasons, how Farzana and her firm should respond to this offer, including any actions
to be taken by the firm if Farzana accepts the offer. [Dec’11]
Actions to be taken:
 Farzana should inform the audit form immediately. The firm should:
- Remove Farzana from the audit team
- Undertake a review of any work undertaken by farzana on the current audit and if consider
appropriate, on previous audit
- Documents the threats and safeguards
- Include a quality control review
- Consider the composition of the audit team
Reasons for actions:
 Self-interest threat: Farzana may be insufficiently sceptical and too sympathetic when
considering judgement areas so as to jeopardize her employment prospects
 Intimidation threat: Management may attempt to exert pressure by threatening not to appoint
her to the position of finance director.

Audit & Assurance
 Familiarity threat: There may be members of the audit team with whom Farzana has
relationships and may be too trusting her.
Q.21 ABC & Co., a firm of Chartered Accountants has been approached by the directors of Amari Coppers
Ltd. to quote for the statutory audit of Amari Coppers Ltd. for the year ending 31 December 2011.
Amari Coppers Ltd. is required to have a statutory audit under the Companies Act 1994 but Amari
Coppers Ltd’s previous statutory auditor is not seeking reappointment.
Amari Coppers Ltd. is a successful company selling cleaning equipment to hospitals all over
Bangladesh. An increased focus on cleanliness in hospitals has led to Amari Coppers Ltd’s
Bangladesh sales rising significantly. Amari Coppers Ltd. was incorporated three years ago by Masum
Khan, the managing director and Nasir Ahmed, the finance director. Masum and Nasir previously
worked for a competitor company as sales managers and finance manager respectively. Masum and
Nasir invested their own money in Amari Coppers Ltd. and all of the ordinary shares in the company
are held equally between them.
The following is a transcript of a telephone call made by Masum to ABC & Co. on 1 November 2011:
“We are inviting a large number of firms to quote as we want enough competition among the firms to
keep the statutory audit fee low. I don’t really see that there is any value in Amari Coppers Ltd. having
a statutory audit – Nasir and I are the only shareholders and we know the business very well.”
“Whoever wins the statutory audit contract will have to keep work to a minimum; we are too busy
running the business to answer lots of questions. I have been told that testing internal controls is an
efficient way to conduct an audit so we would want the successful firm to agree to this audit
methodology.”
“Our expansion means we need some business advice on our strategy and we would be very keen that
the statutory auditors help with this and assist us in obtaining some finance for further expansion. We
really need the auditor to be part of the team here at Amari Coppers Ltd. The nature of this work
would be much more valuable to us and we therefore expect to pay a higher fee in respect of this
assignment.”
“We also need some help with implementing a new accounting information technology system that
can handle the growth in our business. The current system was bought when we set up Amari Coppers
Ltd. and it is no longer sophisticated enough for our business at present. We would like the successful
firm to advise us as to whether we should purchase an `off-the-shelf accounting package’ or whether
we should have a system designed for us. We would also seek the firm’s services to implement the
new system, including advice on design of a System if this proves necessary.”
“We think that the business advisory and information technology services that we wish to purchase
will mean that it is worthwhile quoting a lower fee for the statutory audit work.”
Requirements [Dec’11]:
a) Outline the case for and against an owner managed business such as Amari Coppers Ltd., being
required to undergo a statutory audit.
b) Explain any threats to objectivity and independence, and outline any appropriate safeguards,
that ABC & Co. should consider with respect to:
i) appointment as statutory auditors of Amari Coppers Ltd.;
ii) provision of the business advisory services on strategy and financing; and
iii) provision of advice on the new accounting information technology system.
c) Identify additional factors that ABC & Co. should take into consideration before deciding to
quote for the statutory audit of Amari Coppers Ltd. Your answer should include any preliminary
audit risks identified from the information provided.

Audit & Assurance
Answer to Question (a):
For audit of owner-managed business:
 Adds credibility/quality to financial statements
 Independent scrutiny of the business
 Assurance to third parties such as providers of finance
 Subsidiary benefits such as recommendations for improvement in internal controls
 Deterrent against fraud by employees
Against audit of owner-managed business:
 May not be cost effective for the client
 May be disruptive for client staff due to answering questions from auditors
 Arguably the owners as managers know the business anyway.
Answer to Question (b) (i):
Appointment as statutory auditors of Amari Coppers Ltd.:
The managing director has strong view as the value of the audit and nature of the audit work that
should be undertaken. This may mean that ABC & Co. are unable to undertake the necessary audit
procedures and could result in an intimidation threat. A self-interest threat arises due to the risk of
low-balling which is being encouraged by the managing director. A self-review threat may also arise
if non-audit services are provided and these have material effect to the financial statements.
Safeguards:
 Contact the previous auditors, with client permission, to ascertain their reasons for not seeking re-
appointment
 If ABC & Co. decide to quote for the audit, it should do so at a fee which is comparable with its
estimate of the actual work required and the level of risk associated with the client.
 As part of the quotation proposal and the engagement letter the firm should clearly outline to
management its role in the audit process
 Consider if ABC & Co. has staff to work on the audit that are able to deal with the dominant
nature of the MD
 Undertake an independent internal quality review
 Review regular fee income form the company to identify whether it is likely to reach the 10% and
15% of annual fee income thresholds set out by ethical standards.
Answer to Question (b) (ii):
Provision of business advisory services on strategy and financing:
A management threat arises as the managing director sees ABC & Co. becoming ‘Part of the team’
and the nature of the business advisory services could involve the firm taking management decisions.
This would also mean that there may be advocacy threat as the firm will be raising finance on behalf
of the client. There may be self-interest threat if the firm agrees to quote a lower fee keeping in mind
the fee income form the non-audit services.
Safeguards:
 The firm must not accept appointment that would require taking management decisions. This is
prohibited by ethical standards.
 If the work is accepted, separate teams should work on the audit engagement and business
advisory work
 Undertake an independent internal quality review
 The firm should ensure that there is ‘informed management’.
Answer to Question (b) (iii):
Provision of information technology services:

Audit & Assurance
Providing advice on Amari Coopers Ltd.’s information technology system could involve the firm
making management decisions, particularly as Masum and Nasir are likely to lack the necessary
expertise themselves. Consequently, a management threat arises in respect of this assignment. There
may be self-review threat if the firm is expected to rely on the system as part of their audit.
Safeguards:
 They should not accept the assignment if it is significant to the accounting system and the
production of the financial statements.
 The risk may be reduced of ABC & Co. is only engaged to consider ‘off the shelf packages’. In
this case the necessary safeguards should be put in place:
- Separate teams should work on the audit engagement and IT services
- Undertake an independent internal quality review
- The firm should ensure that there is ‘informed management’
Answer to Question (c):
Additional factors:
Preliminary risk analysis:
 Amari Coppers Ltd. would be a new client and hence there is a lack of cumulative audit knowledge
and experience and an increased risk of misstatement in opening balances.
 The fact that the firm may not be appointed until after the year end potentially limits the
procedures available to verify certain figures increasing the risk of an inappropriate opinion
 The dominating attitude of management and possible doubts as the management integrity increase
the inherent risks of the audit
 The fact that the company is seeking to raise finance also increase the risk of management bias in
the financial statements.
 The current spending cuts in Bangladesh, international economic uncertainty and Amari Coppers
Ltd.’s rapid expansion may all indicate that the company is not a going concern.
 Neither of the directors has a finance background and the accounting systems appear to be
outdated increasing the risk of misstatements in the accounting records and financial statements.
Other factors:
 Insufficient involvement of management in the statutory audit process
 The firm needs to consider whether they have the sufficient experience of the industry to carry
out the audit work
 The timing of the audit also needs to be considered
 The firm needs to consider whether any conflicts of interest with existing clients are likely to arise.
Q.22 Your firm has recently been appointed external audit of Hatil Ltd (Hatil) for the year ending 30 June
2010. The previous auditor did not seek reappointment. Your firm has also been invited to provide tax
planning and compliance work for the company.
All of the shares in Hatil are owned by the Patwari brothers, Martin and Maruf. They are the only
directors and spend on average three days a week managing Hatil as they have other business interests.
The company employs a full‐time qualified accountant but does not have a finance director.
Matin and Maruf have plans to grow the business and wish to recruit a finance director. They have
asked your firm to assist with the recruitment of a suitable candidate and advise on the remuneration
package.
Hatil’s principal activity is the manufacture and sale of high quality leather sofas, chairs and other
forms of seating which are sold to the public, clubs, hotels and restaurants. Items are produced by
hand in the company’s workshop which is located in the North of Dhaka. Customers place their orders
by telephone or over the internet and pay by cheque or credit or debit card. All sales are transacted in
BDT.

Audit & Assurance
The company’s terms of trade require a 50% deposit with the order. Once the order is completed, the
balance must be paid five days prior to delivery. Typical production time is three to four weeks.
Customers are required to check the items on delivery and have seven working days to return the items
if not completely satisfied. All items are sold with a one‐year guarantee. At peak times the company
uses sub‐contractors to assist with the manufacture of the seating. These sub‐contractors are required
to invoice Hatil at the end of each month.
The company does not supply goods from inventory as all items are made to customer order. Finished
goods in the workshop relate to items awaiting dispatch to customers. The company does not have
continuous records for raw materials inventory and undertakes a full count of raw materials at
each month end including at the year end. The quantities are recorded on inventory sheets and are
subsequently costed by the company accountant. Matin Patwary estimates the value of work in
progress and finished goods awaiting dispatch.
Raw materials are sourced from number of suppliers based in Bangladesh and overseas. All of the
timber used in the frames for the seating is purchased from Timber Ltd. which is owned by Matin and
Maruf’s mother, Selina Patwary.
There has been steady growth in sales in recent years and, in May 2010, Hatil acquired the premises
adjacent to its existing workshop to allow expansion of its manufacturing capacity. The new
premises are not yet in use as they are currently undergoing extensive refurbishment in order to make
them fit for purpose.
The acquisition was funded by a bank loan repayable in quarterly installments over ten years. The
existing workshop, which is owned by the company and included in the financial statements at cost
less accumulated depreciation, was revalued by an external valuer in April 2010. The directors wish
to incorporate the revalued amount in the financial statements for the year ending 30 June 2010.
Requirements [June’11]:
a) Outline the procedures your firm should have undertaken, prior to accepting appointment, in
order to assess the integrity of Matin and Maruf Patwary. For each procedure describe how it
would have assisted with your firm’s assessment of the integrity of Matin and Maruf.
b) Explain what is meant by a self‐review threat in the context of the provision of taxation services
to Hatil and state the safeguards available to your firm in order to reduce this threat.
c) In respect of the recruitment and remuneration package, explain the threats to independence
which may arise from the provision of each of these services and discuss how your firm might
respond to these threats.
d) Identify, from the information provided in the scenario, the principal areas of audit risk in
respect of the financial statements of Hatil for the year ending 30 June 2010. For each risk:
i) list the factors which have led you to identify that risk; and
ii) outline the procedures that should be included in the audit plan in order to address the
risk.
You should present your answer in a two‐columnar format using the headings (i) audit risk and
factors; and (ii) procedures to address the risk.
Answer to Question (a):
The procedures that have to be undertaken by our firm to accept the audit appointment and to assess
the integrity of Matin and Maruf are presented below:
Procedures Detailed procedures Assessment of integrity
Communication with
previous auditor
We will communicated with
the previous auditor of Hatil
to now about the reasons of
The communication will assist us as follows:
 whether auditor can act independently or
not;

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his discontinuation as
auditor in written
 identifying any major lapses in
controlling system which may not able
us to issue unqualified audit opinion
 whether the perception of doing business
is good or not.
Discussion about the
major observations,
if any, and audit
reporting thereon
We will discuss with the
management of Hatil about
the major observations that
have been identified at the
time of primary discussion
to accept the audit. The
major observations
specially, which may not
able us to issue an
unqualified audit report.
If the discussion concludes that there are
major lapses in financial statements, we will
communicate that we will issue modified
audit report.
The feedback of the management of Hatil
will help us to assess the independence of the
auditor.
Percentage of audit
fee of total revenue
We will assess the
proportion of the audit fee
on the total revenue of the
engagement partner or of the
firm
If the audit fee reflects a major portion of the
total revenue of the engagement partner, it
will reflect the dependency of our firm on the
audit of Hatil. The dependency may create
self-interest threat for us.
Answer to Question (b):
Self-review threat:
Our taxation service will cover the compliance status of taxation laws of Hatil which is also the
responsibility of us to assess the compliance of taxation laws as an auditor. Any major non-compliance
of taxation laws may cause modified audit report. Therefore, the taxation service may cause self-
review threat.
Safeguard:
To eliminate the self-review threat, the taxation service can be provided by any partner of our firm
except the audit engagement partner. The taxation service provider teams has also to be different than
the audit team.
Answer to Question (c):
Threats to independence:
If our firm assist with the recruitment of suitable candidate and advice on the remuneration package,
it may cause familiarity threat to our firm.
Safeguard:
The finance director should be independently appointed by the management of Hatil. The person
should not be from our firm or any familiar person of the engagement partner of Hatil. Ensuring it,
our firm may assist Hatil in the process of finance director appointment as well as the remuneration
package.
Answer to Question (d):
Audit risks and factors Audit procedures
New Audit client:
Lack of cumulative prior knowledge, from
which assurance can be derived, increases
Accounting systems and internal controls need
to be ascertained. Flowcharting will probably be
appropriate and current period audit work should

Audit & Assurance
inherent risk. Adequate planning is therefore
necessary.
have regard to the opening balances to provide
assurance as to the accuracy of the opening
position.
Directors of Patwary Brothers are engaged with
the management of Hatil.
Business and operation policies can be taken to
avoid and evade tax through related party
transactions and non-disclosure of related
parties.
Transaction with Patwary Brothers should be
identified, compliance of taxation laws should
be cheked carefully, and proper disclosures
regarding related parties should be ensured.
Telephone/internet order in case of cash sale
(Debit card):
This increases the risk of sales return due to lack
of understanding of the product by the
customers.
Sales return items should have been separately
identified out of the inventories and the reasons
of return should have been critically reviewed.
Telephone/internet order in case of credit sale:
Increases additional risks of use of fake/stolen
credit cards and may increase bad debts.
Controls test should be conducted for selecting
customer for credit sale and recoverability and
assess the adequacy of the bad provision.
Engagement of sub-contractor:
Enhances the possibilities of fake expenditures
and possibility of related party transactions
The sales order and manufacturing capacity of
sub-contractor should be checked along with
ownership and agreement to identify whether or
not it is a related party.
Stock of finished goods:
As per policy, Hatil should not have any finished
goods inventory. Inventory may include sales
return and financial loss may also relate with
further sale of the inventory which may cause
further provision for loss.
Dispatch schedule of the finished goods
inventory should be checked. Reasons for long-
term inventory should be identified and
provision evaluated.
Periodic inventory recording system:
Enhances the misuse of inventory for not having
updated inventory balance. Inventory value may
be materially misstated.
Physical inventory count should be conducted
and should be attended by the auditors and
reconcile to the inventory record.
Value of work-in-progress:
Inventory may be materially misstated due to
difficulties in determining stage of completion.
The methods used to determine the stage of
completion should be evaluated and justified.
Procurement of raw materials:
Purchase form overseas suppliers may involve
money laundering case and purchase from Selina
Patwary is a related party transaction.
Local and overseas purchase should have been
identified separately and related party
disclosures should be evaluated.
Revaluation of existing workshops:
Financial position may be overstated and profit
can be increased instead of equity.
Basis for revaluation used and the expert’s
competency, independency need to be checked.
The accounting treatment needs also to be
evaluated.
Q.23 Shahana Parvin has been working at Shahana Jesmin & Co., a firm of Chartered Accountants for 3
years. Shahana and her partner Jesmin are both interested in environmental issue and have participated
in community work concerning the environment. During a pharmaceutical company's annual audit for
the financial year ended 30 June 2010, Shahana notices the company has recently changed its

Audit & Assurance
contractor for waste management to Safedumping Ltd. Shahana is happy to know, through her
community activists, that Safedumping is being investigated by the local council for the level of toxic
waste at one of its sites.
The waste management contract between Safedumping and the pharmaceutical company does not
specify damages and has not been signed by Safedumping. The contract is for a substantial amount
and is valid for 3 years, and Shahana is concerned about the implications. The local council carries
out strict inspections and imposes heavy fines for toxic dumping.
Shahana raises the issue with Jesmin, the partner in charge of the audit. 'This is reality, Shahana'
Jesmin says. 'As far as I am concerned, we are responsible for the correctness of its financial report,
and nothing else. Besides, you do not have the qualification to judge if a company is good corporate
citizen or not. We are not concerned with the business management.' Jesmin asks Shahana not to take
this issue too seriously and told not to raise any fuss in this matter.
Required [Dec’10]:
a) Explain the ethical issues involved here.
b) Recommend a course of action for Shahana.

Audit & Assurance
Chapter 5: Quality Control
Chapter Summary
5.1 Approach to Quality Control:
Quality control procedures are essential to ensure that an acceptable job is carried out by the assurance
firm and assurance engagement risk is reduced to an acceptable level. An engagement could go wrong
due to client-based problems, or assurance firm based problems, for example that the engagement
team has insufficient knowledge of the business or are badly directed and supervised. Audit quality is
monitored by the QAD Department of ICAB under the Quality Assurance Board (QAB). There are
six key elements of a quality control system:
 Leadership
 Ethical requirements
 Acceptance and continuance of client relationships/specific engagements
 Human resources
 Engagement performance
 Monitoring
BSQC1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information and other Assurance and Related Services Engagements lists the following as elements
of a firm’s quality control system:
 Leadership responsibilities for quality within the firm
 Ethical requirements
 Acceptance and continuance of client relationships and specific engagements
 Human resources
 Engagement performance
 Monitoring
In other words, BSQC1 deals with the sort of procedures you would expect in a straightforward,
logical way.
5.2 Leadership:
It is important that the culture of the firm is that quality is essential in performing assurance
engagements. This should be led by the leaders of the firm, that is, the partners. In practical terms, the
people directing the firm and its resources should ensure that:
 Commercial considerations do not override the quality of work performed.
 The firm’s policies in relation to staff promotion, remuneration and performance review
incorporate the importance of quality work.
 Sufficient resources are allocated to the development, documentation and support of quality
control policies and procedures.
5.3 Ethics:
The firm should have policies and procedures designed to ensure that ethical requirements are met. It
is very important ethics are to assurance providers, as they underpin the public trust required to make
assurance services viable. The firm must put together policies and procedures to ensure that it meets
ethical requirements.
5.4 Acceptance of Engagements:
The firm should also have policies and procedures designed to ensure that only appropriate clients are
accepted in the first place and retained. The engagement partner should carry out similar

Audit & Assurance
considerations as he did when he accepted the client every year when bearing in mind whether to
retain the client.
5.5 Human Resources:
As part of the firm’s overall culture of quality control, it should have policies and procedures to ensure
that it employs and retains staff with the capabilities, competence and commitment to ethical
principles necessary to perform the engagements. This means it should have policies on all aspects of
employing professional staff. The BSQC lists the following:
 Recruitment
 Performance evaluation
 Capabilities
 Competence
 Career development
 Promotion
 Compensation
 The estimation of personal needs
The engagement partner should ensure that he allocates appropriate staff to the engagement team.
Staff
need:
 Understanding of/practical experience with similar engagements
 Understanding of relevant professional and legal requirements in relation to the client
 Appropriate technical knowledge
 Knowledge of the relevant industry
 Ability to apply professional judgement
 Understanding of the firm’s quality control procedures and policies
5.6 Engagement Performance:
Direction:
The engagement partner is responsible for ensuring team members know:
 What work they are supposed to be doing
 The nature of the entity’s business
 Any risks relevant to the engagement
 Problems that might arise during the engagement
 The detailed approach to the engagement
Supervision:
BSA 220 lists four features of supervision:
 Progress tracking
 Monitoring the performance of the audit team
 Addressing significant issues arising during the audit
 Identifying matters for consultation or where a greater degree of expertise or experience is
required
Good supervision can be a difficult skill to master:
 If it is too close it can stifle initiative and waste the time of supervisor and assistant alike
 If it is too loose, mistakes may be made or time wasted in ineffective work
The partner has overall responsibility for supervising the audit, but will normally delegate supervisory
duties to a manager or supervisor who will similarly delegate to the 'senior' or 'in charge' who is
responsible for the day-to-day management of the engagement.

Audit & Assurance
Review:
The purpose of the review is to consider whether the work done is in line with the audit strategy and
whether:
 The work has been performed in accordance with professional standards and regulatory and legal
requirements
 Significant matters have been raised for further consideration
 Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented
 There is a need to revise the nature, timing and extent of work performed
 The work performed supports the conclusions reached and is appropriately documented
 The evidence obtained is sufficient and appropriate to support the report and
 The objectives of the engagement procedures have been achieved
Independent Review:
This review is conducted by a suitably-qualified partner not otherwise involved in the engagement or
by an external consultant. The purpose of this independent review is not to re-perform the other
reviews in the audit process but to provide an additional safety check about the validity of the firm’s
opinion on the financial statements. The following matters need to be considered:
 The evaluation of independence in relation to the engagement that has taken place
 Significant risks identified and responses to those risks
 Judgements made during the engagement, for example, in relation to materiality and significant
risks
 Whether appropriate consultation has taken place on contentious issues
 The significance of corrected and uncorrected misstatements
 The matters to be communicated to the clients
 Whether the documentation selected for review reflects the work performed in relation to the
significant judgements and supports the conclusions reached
 The appropriateness of the proposed report
5.7 Monitoring (or ‘Cold Review’):
The BSQC states that firms must have policies in place to ensure that quality control procedures are
adequate and relevant, that they are operating effectively and are complied with. The firm might have
a compliance or quality department which carries out such reviews. Monitoring might take place by
ongoing evaluation of the system and also by periodic review of selected engagement files to assess
whether policies and procedures were put into place during the engagement.
Cold reviews are designed to be a continuing part of the quality control process and take place after
the assurance assignment has been completed. They are usually conducted either:
 As a process, whereby partners in a firm review each other’s work
 By a team specifically constituted to conduct such reviews –usually under the direction of a
partner, but the work is usually carried out by suitably qualified and experienced managers
 By a suitably qualified external consultant.
The review team should also develop appropriate courses of action where failures are identified,
including:
 Communication of the findings within the firm
 Additional training and professional development
 Changes to the firm’s policies and procedures
 Disciplinary action against those who repeatedly fail to comply with the firm’s standards.
5.8 Getting the Assurance Opinion Wrong:
Getting the audit opinion wrong could lead to:
 Being sued for professional negligence

Audit & Assurance
 Disciplinary proceedings from ICAB
 Loss of reputation, clients, key staff
 Assurance firm collapse
In the context, quality control procedures are important. Risk is another key issue associated with
getting the opinion wrong –are some clients too risky to accept?
Question Bank
Q.24 You are the audit senior with responsibility for directing, supervising and reviewing the work
of your team members during the external audit of Golden Co. Ltd. Explain how you would
discharge these responsibilities before and during the audit assignment. [Dec’13]
The audit senior should have to discharge his responsibilities regarding direction, supervision, and
review the work of team members in the following ways:
Direction:
Direction involves informing assistants of their responsibilities and the objectives of the procedures
they are to perform. The audit senior is responsible for ensuring team members know:
 What work they are supposed to be doing
 The nature of the entity’s business
 Any risks relevant to the engagement
 Problems that might arise during the engagement
 The detailed approach to the engagement
Supervision:
Supervision is closely related to both direction and review and may involve elements of both. The
audit senior carrying out supervisory responsibilities performs the following functions:
 Progress tracking
 Monitoring the performance of the audit team
 Addressing significant issues arising during the audit
 Identifying matters for consultation or where a greater degree of expertise or experience is
required
Review:
Work performed by team members is reviewed by audit senior to consider whether:
 The work has been performed in accordance with professional standards and regulatory and legal
requirements
 Significant matters have been raised for further consideration
 Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented
 There is a need to revise the nature, timing and extent of work performed
 The work performed supports the conclusions reached and is appropriately documented
 The evidence obtained is sufficient and appropriate to support the report and
 The objectives of the engagement procedures have been achieved

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