ASSURANCE suggested answers (1-6)
Time allowed – 1½ hours Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take account of the quality of language and of the way in which the answers are presented. Different parts, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. a. Which of the following procedures might an auditor use in gaining an understanding of the entity? 3
(i) Inquiry
(ii) Recalculation
(iii) Analytical procedures
(iv) Re performance of a control
(v) Observation and inspection.
Answer:
An auditor might use gaining an understanding of the entity by using the following procedures:
i. Inquiries of management and others within the entity
ii. Analytical procedures
iii. Observation and inspection
Answer is to be limited in above and additional points -
iv. prior period knowledge
v. Discussion of the susceptibility of the financial statements to material misstatements among the engagement team.
b. The audit team is required to discuss susceptibility of the financial statements to material statements. 2
True √
False
2. In Bangladesh, the auditor will normally express his audit opinion by reference to the ‘true and fair view’, which is an expression of reasonable assurance. Briefly define the terms ‘true’ and ‘fair’. 3
Answer:
“True and fair view which is 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 books and records.
Fair- Information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance if the company’s underlying transaction.
3. You are an Accountant who has been approached by Mr. X, who wants to invest in company ABC Ltd. He has asked you for assurance whether the most recent financial statements of company ABC Ltd. are a reliable basis for him to make his investment decision.
Identify the key elements of an assurance engagement in this scenario, if you accepted the engagement. 5
Answer:
Three party involvements
Mr. X (the intended user)
You (the practitioner)
The directors of ABC Ltd as they are produce the financial statements (the responsible party)
Subject matter
The most recent financial statements of ABC Ltd are the subject matter
Suitable criteria
Here the criteria would be accounting standards; so that Mr. X was assured that the financial statements were properly prepared and comparable with other companies’ financial statements
Sufficient appropriate evidence
You would have to agree the extant of procedures in relation to this assignment with Mr. X so that he knew the level of evidence you were intending to seek. This would depend on several factors, including the degree of secrecy in the proposed transaction and whether the directors of ABC Ltd allowed you to inspect the books and documents
Report
Again, the nature of the report would be agreed between you and Mr. X, however, it would be a written report containing your opinion on the financial statements.
4. What forms and contents will normally be contained in a letter of engagement? 3
Answer:
The form and content of the audit engagement letter may vary for each entity, but they would generally include reference to the following:
The objective of the audit of financial statements.
AUDITING
Elaboration of the scope of the audit, including reference to applicable legislation, regulations, ISAs, and ethical and other pronouncements of professional bodies to which the auditor adheres.
The form of any other communication of results of the audit engagement.
The fact that because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with ISAs.
Unrestricted access to whatever records, documentation and other information is requested in connection of the audit.
[Answer of the question is ended]
For additional knowledge-
The auditor may wish to include the letter the following items:
Arrangements regarding the planning and performance of the audit, including the composition of the audit team.
The expectation that management will provide written representations
The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable.
The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued.
The basis on which fees are computed and any billing arrangements.
A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein.
When relevant, the following points could also be made in the audit engagement letter:
Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
Arrangements concerning the involvement of internal auditors and other staff of the entity.
Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
Any restriction of the auditor’s liability when such possibility exists.
A reference to any further agreements between the auditor and the entity.
Any obligations to provide audit working papers to other parties.
5. You own an accounting firm. XYZ Ltd. is your prospective client. However, it declines permission to contact the previous auditors, what should be your course of action? 2
Answer:
As an auditor I should consider carefully the reason for such refusal when determining whether or not to accept the appointment.
6. a. What is Audit Risk? What are the different types of Audit Risk? For each of the following examples, indicate the type of risk illustrated: 4+4=8
i. Vendors’ payments are processed, booked and reconciled in the system by the same person in the Accounts Department.
ii. The organization is highly connected with the building trade.
iii. The assurance firm may do insufficient work to detect material errors.
iv. The financial statements contain a number of estimates.
Answer:
Audit risk: the risk that when the auditor give an inappropriate audit opinion on the financial statements
The different types of audit risks-
Inherent risk: The susceptibility of an accounting balance or class of transactions to misstatement that could be material either individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls.
Control risk: The risk that a material misstatement would not be prevented, detected or corrected by the accounting and internal control systems.
Detection risk: The risk that the auditors’ procedures will not detect the misstatements when the financial statements are materially misstated.
Type of risk illustrated in the question:
| i. Vendors’ payments are processed, booked and reconciled in the system by the same person in the Accounts Department | Control - The fact that the same person processed the vendors’ payments, booked and reconciled in system means that there is no segregation of duties. |
| ii. The organization is highly connected with the building trade. | Inherent – This is a naturally risk industry |
| iii. The assurance firm may do insufficient work to detect material errors. | Detection – This is in essence the definition of detection risk |
| iv. The financial statements contain a number of estimates. | Inherent – There is a risk that estimates may be inappropriate. |
b. If control and internal risk are assessed as sufficiently low, substantive procedures can be abandoned completely. 2
True
False √
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