Presented by TOFAYEL AHMED FCA.

ETHICS
What is Ethics?
"Ethics has to do with what my feelings tell me is right or wrong." "Ethics has to do with my religious beliefs." "Being ethical is doing what the law requires." "Ethics consists of the standards of behavior our society accepts." A person following his or her feelings may recoil from doing what is right. In fact, feelings frequently deviate from what is ethical. Nor should one identify ethics with religion. Most religions, of course, advocate high ethical standards. Yet if ethics were confined to religion, then ethics would apply only to religious people. But ethics applies as much to the behavior of the atheist as to that of the saint. Religion can set high ethical standards and can provide intense motivations for ethical behavior. Ethics, however, cannot be confined to religion nor is it the same as religion. Being ethical is also not the same as following the law. The law often incorporates ethical standards to which most citizens subscribe. But laws, like feelings, can deviate from what is ethical. Finally, being ethical is not the same as doing "whatever society accepts." In any society, most people accept standards that are, in fact, ethical. But standards of behavior in society can deviate from what is ethical. An entire society can become ethically corrupt. Nazi Germany is a good example of a morally corrupt society. Moreover, if being ethical were doing "whatever society accepts," then to find out what is ethical, one would have to find out what society accepts. To decide what I should think about abortion, for example, I would have to take a survey entire society and then conform my beliefs to whatever society accepts. But no one ever tries to decide an ethical issue by doing a survey. Further, the lack of social consensus on many issues makes it impossible to equate ethics with whatever society accepts. Some people accept abortion but many others do not. If being ethical were doing whatever society accepts, one would have to find an agreement on issues which does not, in fact, exist. What, then, is ethics? Ethics is two things. First, ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethics, for example, refers to those standards that impose the reasonable obligations to refrain from rape, stealing, murder, assault, slander, and fraud. Ethical standards also include those that enjoin virtues of honesty, compassion, and loyalty. And, ethical standards include standards relating to rights, such as the right to life, the right to freedom from injury, and the right to privacy. Such standards are adequate standards of ethics because they are supported by consistent and well-founded reasons. Secondly, ethics refers to the study and development of one's ethical standards. As mentioned above, feelings, laws, and social norms can deviate from what is ethical. So it is necessary to constantly examine one's standards to ensure that they are reasonable and well-founded. Ethics also means, then, the continuous effort of studying our own moral beliefs and our moral conduct, and striving to ensure that we, and the institutions we help to shape, live up to standards that are reasonable and solidly-base.

Presented by TOFAYEL AHMED FCA. DEFINITIONS OF CODE OF CONDUCT:

(ETHICS)

a set of conventional principles and expectations that are considered binding on any person who is a member of a particular group. A code of conduct is a set of rules outlining the responsibilities of or proper practices for an individual or organization related concepts include ethical codes and honor codes. a set of rules to guide behavior and decisions in a specified situation All professional marketing research societies have a code of conduct that details the rights and responsibilities of those involved with marketing and opinion research. Q. 02 What is professional misconduct liable for disciplinary action ?

Ans. A Chartered Accountant who does not follow the sets of conventional principles and rules outlining the responsibilities in discharging professional duty of attestation of Financial Statements, is guilty of professional misconduct, and thereby liable for disciplinary action and punishment under the BYE-LAW of ICAB. Q. 03 What punishment may impose for professional misconduct of a chartered accountant? Ans. Following punishment or disciplinary action may be imposed for professional misconduct of a chartered accountant (i) Reprimanding the member or (ii) Removing his name from the Register of members for such period not exceeding five years, or (iii) Forwarding the case to the High Court with its recommendations where the council opines for removal of name for a period exceeding five years, or (iv) If the misconduct is of a nature, which as per the Chartered Accountants Act requires action by the High Court, reference to the High Court with recommendations of the council. The procedure of enquiry in respect of disciplinary action against a Chartered Accountant is not only lengthy but rigorous also. Barring a few exceptions, the Chartered Accountant, who has to face action would feel so humiliated that his enthusiasm and working capacity comes to the lowest level. Removal of name as a punishment further nails him with a severe economic blow. Q. 01 What are the Public Interest Requirement ?

Q. 02 What is professional misconduct liable for disciplinary action ? Q. 03 What punishment may impose for professional misconduct of a chartered accountant?
Q. 04 What are the fundamental principles that have to be performed by professional accountants?

Code
Ethical bindings Right or Wrong
Abide by Principles Discipline Code of Conduct Justify Rules Regulations Law Honesty True information, data Acts of social or personal attitude Exact accurate Free Expression

Misconduct
Dishonesty Falsifying Furnishing presenting certifying Disclosing Threat / Improper Misrepresentation misinformation Detrimental (harmful / damaging) to the duties Malicious (nasty, cruel) damage Disruption Intolerance Physical Abus / violence Wrong doing

Class synopsis: Knowledge Level

Ethics (Right or wrong)
Saturday-The 7th January, 2011

Code
Ethical bindings Right or Wrong
Abide by Principles Discipline Code of Conduct Justify Rules Regulations Law Honesty True information, data Acts of social or personal attitude Exact accurate Free Expression

Misconduct
Dishonesty Falsifying Furnishing presenting certifying Disclosing Threat / Improper Misrepresentation misinformation Detrimental (harmful / damaging) to the duties Malicious (nasty, cruel) damage Disruption Intolerance Physical Abus / violence Wrong doing

CODE OF ETHICS FOR CHARTERED ACCOUNTANTS

INTRODUCTION
Financial statements of an enterprise depict the wholesome financial situation of the enterprise for a particular period / at a particular date. The information in these statements are of vital importance for a large section of the society, which deal with that enterprise. It may be suppliers of material, customers, investors, Banks, Financial Institutions, Insurers, Government, Tax Authorities, employees, collaborators and even their competitors. Keeping in view the importance of these statements and the large section of the society who use these statements for taking many vital decisions, it is necessary that these statements are attested by some person who is expert in this field so that the objectivity, integrity, reliability and credibility of the information is assured to a large extent. Professional accountants, who are Chartered Accountants in our country, do this function of attestation--. It has been however, observed that there have been a number of cases in banks and financial institutions wherein due to the erroneous/ambiguous advice tendered by the respective Chartered Accountants, borrower accounts have had to face quick mortality resulting in loss for the bank. Many a time this has also resulted in vigilance cases being initiated with the allegations of connivance/malafide/gross negligence being attributed to the concerned officials. 1.1 For the success of the profession of accountancy a self-imposed Code of Ethics is essential to command the respect and confidence of the general public. Chartered Accountants in the service of the affairs of others have responsibilities and obligations to those who rely on their work. 1.2 A client, before engaging the services of a professional requires to be assured, (i) that he has the required competence and (ii) that he is a person of character and integrity. As regards the first, evidence is available to the client in the form of a certificate that the Chartered Accountant has undergone the training and passed the appropriate examination in accountancy and as regards the second, he would have an assurance only if the professional body to which he belongs has adopted a code of professional ethics for its members. 1.3 The International Federation of Accountants (IFAC), in its guidelines on Professional Ethics for the Accountancy Profession, has stated :Persons who pursue a vocation in which they offer their knowledge and skills in the service of the affairs of others have responsibilities and obligations to those who rely on their work. An essential pre-requisite for any group of such persons is the acceptance and observance of professional ethical standards regulating their relationship with clients, employers, employees, fellow members of the group and the public generally. IFAC in its Code of Ethics for Professional Accountants has also stated as under:The Public Interest A distinguishing mark of a profession is acceptance of its responsibility to the public. The accountancy professions public consists of clients, credit grantors, governments, employers, employees, investors, the business and financial community and others who rely on the objectivity and integrity of professional accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on the accountancy profession. The public interest is defined as the collective well being of the community of people and institutions the professional accountant serves. A professional accountants responsibility is not exclusively to satisfy the needs of an individual client or employer. The standards of the accountancy profession are heavily determined by the public interest, for example :- Independent auditors help to maintain the integrity and efficiency of the financial statements presented to financial institutions in partial support for loans and to stockholders for obtaining capital; - Financial executives serve in various financial management capacities in organizations and contribute to the efficient and effective use of the organizations resources; - Internal auditors provide assurance about a sound internal control system which enhances the reliability of the external financial information of the employer; - Tax experts help to establish confidence and efficiency in, and the fair application of, the tax system; and - Management consultants have a responsibility towards the public interest in advocating sound management decision making.

Professional accountants have an important role in society. Investors, creditors, employers and other sections of the business community, as well as the government and the public at large rely on professional accountants for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters. The attitude and behaviour of professional accountants in providing such services have an impact on the economic well-being of their community and country.

Professional accountants can remain in this advantageous position only by continuing to provide the public with these unique services at a level which demonstrates that the public confidence is firmly founded. It is in the best interest of the worldwide accountancy profession to make known to users of the services provided by professional accountants that they are executed at the highest level of performance and in accordance with ethical requirements that strive to ensure such performance. In formulating their national code of ethics, member bodies should therefore consider the public service and user expectations of the ethical standards of professional accountants and take their views into account. By doing so, any existing expectation gap between the standards expected and those prescribed can be addressed or explained. Objectives The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement set out above. These objectives require four basic needs to be met :* Credibility In the whole of society there is a need for credibility in information and information systems. * Professionalism There is a need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field. * Quality of Services There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance. * Confidence Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services. Fundamental Principles In order to achieve the objectives of the Accountancy profession, professional accountants has to observe a number of prerequisites or fundamental principles. The fundamental principles are :* Integrity A professional accountant should be straightforward and honest in performing professional services. * Objectivity A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. * Professional Competence and Due Care A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques. * Confidentiality A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. * Professional Behaviour A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers and the general public.

* Technical Standards A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. Professional accountants have a duty to carry out with care and skill, the instructions of the client or employer in-so-far as they are compatible with the requirements of integrity, objectivity and in the case of professional accountants in public practice, independence. In addition they should confirm with the technical and professional standards promulgated by :- IFAC (e.g. International Standards on Auditing); - International Accounting Standards Board; IASB - The Members professional body( ICAB) or other regulatory body; and - Relevant legislation. 1.4 Independence When in public practice, an accountant should both be, and appear to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity. 1.5 The over-riding motto has been pride of service in preference to personal gain. A code of professional conduct may have the force of law, as is the case in this country in some matters, as well as the result of discipline and conventions voluntarily established by the members, any breach whereof would result in the person being disentitled to continue as a member of the professional body. In any event, it has a great deal of practical value in so far as it proclaims to the public that the members of the profession will discharge their duties and responsibilities, having regard to the public interest. This, in turn, will give an assurance to the public that in the event of a member straying away from the path of duty, he would be suitably dealt with by the professional body. Other Misconduct In this background, the Chartered Accountants BYE-LAW (as amended up to date), was formulated to regulate the profession of Chartered Accountancy. The BYE-LAW is being administered through the Institute of Chartered Accountants of Bangladesh which functions and discharges its duty through a Council. To ensure discipline in the profession, The Chartered Accountants BYE-LAW along with its schedules sets out different forms of behaviour, which constitute misconduct under the law. The definition of misconduct in the Act is only an inclusive one and is not exhaustive. Over and above this, the council of the Institute (ICAB) has also been given powers under the law to enquire into the conduct of any member of the Institute other than those specified in the BYE-LAW, which may in the view of the COUNCIL be not desirable and/or expected of a Chartered Accountant. This kind of misconduct is known as other misconduct. The other misconduct may not necessarily arise out of professional work. With a view to bring harmony in presentation of the financial statements and an identical treatment in a particular situation, the ICAB has brought out various Statements, Auditing and Assurance Standards, Accounting Standards and Guidance Notes, which are mandatory for a practicing Chartered Accountant to be adhered to while discharging his professional duty of attestation of financial statements. These sets of documents necessitate that financial statements are depicted in a definite manner, and give the required information in the desired manner, which are professionally verified by applying scientific audit techniques to ensure material correctness to a large extent. The objectivity and integrity of the financial statements attested by a Chartered Accountant following these sets of documents, are of a very high degree, and which enhance the credibility and reliability of these statements to the user. A Chartered Accountant who does not follow these sets of documents in discharging his professional duty of attestation, is guilty of professional misconduct, and thereby liable for disciplinary action and punishment under the BYE-LAW , which may be; (i) Reprimanding the member or (ii) Removing his name from the Register of members for such period not exceeding five years, or (iii) Forwarding the case to the High Court with its recommendations where the council opines for removal of name for a period exceeding five years, or (iv) If the misconduct is of a nature, which as per the Chartered Accountants Act requires action by the High Court, reference to the High Court with recommendations of the council. The procedure of enquiry in respect of disciplinary action against a Chartered Accountant is not only lengthy but rigorous also. Barring a few exceptions, the Chartered Accountant, who has to face action would feel so humiliated that his enthusiasm and working capacity comes to the lowest level. Removal of name as a punishment further nails him with a severe economic blow. Still there are instances when it is noticed that the report of Chartered Accountants either misses vital information which must be there, or gives incomplete information or gives an

information in a misleading manner or at times gives a completely wrong information. It is pertinently noticed by bank officials in dispensation of credit and monitoring of some financed cases, that information in the financial statements does not help in taking a right and judicious decision. Though it is difficult to substantiate by tangible evidences, but circumstantial evidences in certain cases, do point out that the intention of all concerned has not been bonafide, rather it is malafide and is done with some ulterior motive. Some of the common points where reports of Chartered Accountants have not been of desirable level are :- Valuation of stocks including work in progress. - Transactions with related parties. - Valuation of investments - Valuation and status of other assets. - Status of Sundry Debtors - Status of Creditors - Status of loans - Provision in respect of all the known liabilities. All these issues have a considerable impact on profit and the real financial health of an enterprise, failure of which would prevent taking of a well informed, correct decision by banks and financial institutions. Here it may not be out of place to mention that banks and financial institutions are heavily relying on Chartered Accountants in discharging their work in judicious manner. For this the banks get various type of reports and certificates which the banks have devised after much deliberations. If these certificates give the required information in the right perspective, the loan assets of the banks to a large extent may be saved from becoming bad. These certificates and reports in general are : Annual Audit Report on the Accounts of Borrower

CAs have to be transparent and absolutely honest while certifying the following items: (a) Valuation of inventory stock, work in progress, finished goods, etc. (It may be observed that variations in the sale of the stocks declared by the companies in their stock statement for the year ending position in March and the value of stocks declared in the annual accounts subsequently are on account of this.) (b) Dealing with group accounts Normally this is where diversion of funds take place. CAs also should comment whether transactions are at par with commercial transactions done with other parties. CAs also should comment whether investments in group companies are safe and sound. (c) It should also be commented whether any bad debt is included under Sundry Debtors, whether loans and advances to group companies are camouflaged under sundry debtors to avail book debt finance, whether any fictitious debt is created to avail finance from banks (like fertilizer subsidy financed against by banks). (d) Whether any fictitious sales are booked to inflate sales/profit. Stock Audit of Borrower accounts CAs should bear in mind that based on their certificate, the banks value the security. Any false certificate will affect the security of the bank and jeopardize their funds. The valuation of stocks should be judged correctly. The valuation of especially work-in-progress should be studied in depth. The sundry creditors position should be analyzed to see whether paid for stocks is adequate. The sundry debtors position should be analyzed to ensure that: _ The debts are good and realizable; _ No bad debt is included; _ In case of debts relating to group company, they are reflecting genuine commercial transaction; _ No fictitious debt is created. Regarding specific certificates/tasks, sometimes, in order to comply with the terms of sanction in a hurry, banks get these certificates from any CA. The purpose of the banks will be served better, if they insist that the statutory auditors to the Company should give these certificates. Specific certificate with respect to infusion of capital or family loans. Monitoring of accounts with a specific objective. Certification of utilization of funds for the desired end use.

However the plight is that these certificates and reports do not give the required information in the required manner and therefore fail to serve the desired purpose. Besides the large number of disclaimers made lessen the authenticity of the Report made by the Chartered Accountant. At times CAs also function as directors of companies on their Boards. What is to be Code of Conduct for them is well defined in Committee Report and should be implemented. If these certificates and reports are objectively prepared keeping in view the statements, standards and guidance notes issued by ICAB, it is believed that the required information in the required manner will be available to a large extent. In short, the essence of the whole issue is that the rigorous disciplinary action of ICAB also seems to be ineffective to some extent in deterring some of the Chartered Accountants from resorting to undesirable practices. The reason for this, seems to be that many a time undesirable practices are not caught and only sparingly CA(s) get punished for their intentional misdeeds; which again is a time taking process. It is suggested that the following be mandated as a Policy :(a) That banks and financial institutions have independent assessment of the work of Chartered Accountants and a list of Chartered Accountants, who work objectively, may be evolved and simultaneously the list of Chartered Accountants, whose work is undesirable, can also be evolved. Such lists may be shared by nationalized banks amongst themselves. Further, if it is found that the Chartered Accountant has not adequately reported non adherence of the laid down Statements Standards and / or Guidance Notes in preparing his reports, the concerned banks should report the matter to The Institute of Chartered Accountants of Bangladesh, who should take the required action against the concerned Chartered Accountant within a specific time schedule. (b) It could be made mandatory that companies should change their statutory auditors every 3 years. Periodic changes will be healthy. (c) Institute of Chartered Accountants of Bangladesh is the body to which banks normally complain. But this body, at the worst, only bars the concerned CA from practice. It could be seen whether deliberate mispresentation given by CAs can be treated as a criminal or an economic offense? (d) Can the Institute of Chartered Accountants of Bangladesh publish a list of names of tainted/banned CAs from time to time, so that banks can take cognizance of the same?

Q. What steps/ disciplinary action/ punishment may be taken against a Chartered Accountant for guilty of misconduct?

With a view to bring harmony in presentation of the financial statements and an identical treatment in a particular situation, the ICAB has brought out various Statements, Auditing and Assurance Standards, Accounting Standards and Guidance Notes, which are mandatory for a practicing Chartered Accountant to be adhered to while discharging his professional duty of attestation of financial statements. These sets of documents necessitate that financial statements are depicted in a definite manner, and give the required information in the desired manner, which are professionally verified by applying scientific audit techniques to ensure material correctness to a large extent. The objectivity and integrity of the financial statements attested by a Chartered Accountant following these sets of documents, are of a very high degree, and which enhance the credibility and reliability of these statements to the user. A Chartered Accountant who does not follow these sets of documents in discharging his professional duty of attestation, is guilty of professional misconduct, and thereby liable for disciplinary action and punishment under the BYE-LAW , which may be; (i) Reprimanding the member or (ii) Removing his name from the Register of members for such period not exceeding five years, or (iii) Forwarding the case to the High Court with its recommendations where the council opines for removal of name for a period exceeding five years, or (iv) If the misconduct is of a nature, which as per the Chartered Accountants Act requires action by the High Court, reference to the High Court with recommendations of the council. The procedure of enquiry in respect of disciplinary action against a Chartered Accountant is not only lengthy but rigorous also. Barring a few exceptions, the Chartered Accountant, who has to face action would feel so humiliated that his enthusiasm and working capacity comes to the lowest level. Removal of name as a punishment further nails him with a severe economic blow.

Or
Every Profession has the obligation to maintain proper standards of work and professional ethics by its members. The CA Ordinance has prescribed a procedure to deal with any breach of professional ethics, which has been detailed in three schedules.

Procedures of investigation of council/ disciplinary committee

The Council has formed an Investigation Committee to investigate such breaches and may provide an opportunity for personal hearing. If such member so desires, Investigation Committee shall permit such member to be represented before it by a counsel or by a member of the Institute. It reports its finding to the Council. The Council also provides an opportunity for personal hearing before taking any one of the following decisions against the members:

reprimand or warn such member; impose such penalty as it may deem necessary and justified; remove the name of such member from the register of members for a period not exceeding five years.

The Investigation Committee and the Council shall for the purpose of an enquiry regarding alleged professional misconduct have been vested with the powers of a Civil Court under the code of Civil Procedure, 1908 (Act of 1908) in respect of the following matters, namely: Schedule II contains the list of misconducts on which only the High Court can take a decision on the recommendation of the Council. The Professional misconducts of the students have also been enumerated in Schedule III. Any member or any aggrieved person may lay before the Investigation Committee any fact indicating that a member or a student has prima facie been guilty of any professional misconduct specified in the respective Schedule. "Suo moto" proceedings can also be initiated in such matters. While members are expected not to overlook to report cases involving possible breach of ethics, they are expected to ensure that allegations in each case have proper basis and are supported by appropriate evidence together with an indication, where possible, the specific clause of the Code of Ethics which is believed to have been infringed. Any disregard of the above consideration may impair the credibility of the complainant with obvious consequences.

THREATS
The threats identified in the Code are: - Self Interest Threat : May occur as a result of a financial or other interest held by the accountant or a family member. - Self Review Threat : When a previous judgement needs to be re-evaluated - you cannot audit your own work. - Advocacy Threat : May occur when an accountant promotes a position or opinion to the point where subsequent objectivity may be compromised. - Familiarity Threat : May occur when, because of a close relationship, the accountant becomes too sympathetic to the interests of others. - Intimidation Threat : May occur when an accountant may be deterred from acting objectively by threats - actual or perceived.

Code of Ethics for Chartered Accountants DUTIES AND OBLIGATIONS TOWARDS THE PUBLIC GENERAL PROVISIONS 1. Each member shall comply with the Chartered Accountants BYE -LAWS, the Professional Code and the regulations there under. The member shall, in particular, take reasonable measures to ensure that each person involved with him in the practice of his profession and any partnership or jointstock company within which he practices his profession complies with the Chartered Accountants Act, the Professional Code and the regulations there under. The practice of the profession includes, but is not limited to, the practice of public accounting and the following other functions when offered to the public :

other functions
(1) management consulting, including investigating and identifying management and business problems related to the policies, technical aspects, structure, operations, finances, systems, procedures, financing or administration of organizations and recommending appropriate solutions ; (2) insolvency services, including receivership, trusteeship in bankruptcy and liquidation as well as the administration of bankrupt or insolvent partnerships, legal persons, trusts, any other enterprises or estates ; (3) (4) (5) information processing, including manual record keeping and electronic data processing ; administratorship, insofar as it involves administering the property of others ; information technology consulting ;

(6) business brokerage, negotiating and advising on business acquisitions, sales, financing or mergers ; (7) (8) (9) liquidation of successions and administering the property of successions ; insurance counselling ; valuation ;

(10) the preparation of personal tax and other returns or statutory documents, but excluding those set out in subparagraph 3 of the third paragraph of this section ; (11) internal auditing.

For the purposes of this Regulation, `public accounting means the offering of services to the public to improve the quality of financial, accounting or decision-making information, or the context in which it is provided, for decision making. Without limiting the generality of the foregoing, such services shall include : (1) accounting services, insofar as they involve synthesis, analysis, advice, counsel or interpretation, and compilation engagements, but excluding record keeping ; (2) assurance services including audit and review engagements, derivative reports and specified auditing procedures engagements within the meaning of the Canadian Institute of Chartered Accountants Handbook ;

(3) taxation services, insofar as they involve advice, counsel or interpretation, including the preparation of tax returns and other statutory documents if required or connected with one of the public accounting services offered, but excluding personal income tax returns ; (4) investigative and forensic accounting services, including financial investigation and financial litigation support ; (5) financial planning services.

2. A member shall not permit others to carry out on his behalf acts which, if he carried them out himself, would place him in violation of the Chartered Accountants BYE -LAWS the Professional Code or a regulation there under. 3. A member's duties and obligations under the Chartered Accountants BYE -LAWS, the Professional Code and regulations there under are in no way changed or reduced by the fact that he practices the profession within a partnership or company. 4. A member shall ensure that his obligations towards the partnership or company of which he is a director or officer are not incompatible with his obligations towards his client or employer. 5. A member shall, at all times, act with dignity and avoid any method or attitude that is likely to damage the profession's good reputation. 6. A member shall keep his knowledge current. He shall keep abreast of developments in the fields of practice of his profession whether or not he offers services to the public and maintain his competence in these fields. 7. A member shall have the personal charge and management of any place of business of a partnership or company holding itself out as a partnership or company of chartered accountants or within which one or more members offer assurance services. 8. A member shall not hold out or imply that he has a place of business in any place where another person who is neither his partner nor a director nor a shareholder of the partnership or company in fact only represents him. Conversely, a member who only so represents a member, partnership or company shall not hold out or imply that he maintains a place of business for such member, partnership or company. 9. A member who practices his profession within a general partnership or an undeclared partnership of which not all partners are members of the Order is subject to the conditions set out in the Regulation respecting the practice of the chartered accountancy profession within a partnership or a joint stock company. 10. A member shall not adopt any method of obtaining or attracting clients which tends to lower the standard of dignity of the profession and, in particular, he shall not urge anyone pressingly or repeatedly to retain his professional services. 11. Shall be guilty of an act derogatory to the dignity of the profession (i) is found guilty by a final judgment of a court of competent jurisdiction of an offence against any tax act or securities act in Canada or elsewhere ; (ii) makes an assignment of his property or against whom a receiving order is made, within the meaning of the Bankruptcy and Insolvency Act, or whose partnership or company, of which he is the sole director and shareholder, makes an assignment of its property or has a receiving order made

against it, within the meaning of the Bankruptcy and Insolvency Act, by a final judgment of a court of competent jurisdiction ; (iii) having made an assignment of his property or having had a receiving order, as that term is used in the Bankruptcy and Insolvency Act, made against him by a final judgment of a court of competent jurisdiction, fails to inform the Order without delay ; (iv) fails to inform the Order that he has reason to believe that a member is practicing his profession in a manner which is detrimental to his clients, his employer or the public, or has violated the Chartered Accountants BYE -LAWS, the Professional Code or the regulations there under, or that he is incompetent ; (v) communicates with the plaintiff without the prior written permission of the authority or when he is informed by the authority that an inquiry into his professional conduct or competence has been initiated by either of the competent authority or when he has been served notice of a complaint under Professional Code. 12. Shall also be guilty of an act derogatory to the dignity of the profession, any member who carries on his professional activities within a partnership or company : (i) with persons who engage in acts that are derogatory to the honor or dignity of the chartered accountancy profession ( ii) in which directors, shareholders, partners or employees practice a profession, carry on a trade, enterprise or business or hold an office or function that is inconsistent with the practice of the profession ; (iii) in which a person contemplated in paragraph 2(1)a of the Regulation respecting the practice of the chartered accountancy profession within a partnership or a joint stock company, who holds partnership or company shares with voting rights or acts as a director or officer is struck off the roll of his professional order or has his professional permit revoked. 13. Notwithstanding section 12, a member is authorized to practise his profession within a partnership or company in which a person contemplated in subsection 12(3) is struck off the roll of his professional order or the equivalent, or has his professional permit revoked, provided the following conditions are satisfied: (i) the said person ceases to be a director or officer of the partnership or company within 10 days from the date on which the penalty or measure imposed becomes executory or within any other additional timeframe authorized by the board of directors; (ii) the said person ceases to attend all shareholder meetings and to exercise, directly or indirectly, his right to vote within 10 days from the date on which the penalty or measure imposed becomes executory or within any other additional timeframe authorized by the board of directors; (iii) the said person disposes of his partnership or company shares with voting rights within 180 days from the date on which the penalty or measure imposed becomes executor or within any other additional timeframe authorized by the board of directors. 14. Shall be guilty of an act derogatory to the dignity of the profession, any member who carries on his professional activities within a partnership or company that holds out or implies that it is a partnership or company governed by the Professional Code where such partnership or company does not comply with the requirements set out in the Professional Code or the Regulation respecting the practice of the chartered accountancy profession within a partnership or a joint stock company.

15. Shall also be guilty of an act derogatory to the dignity of the profession, any member who concludes or allows to be concluded, within a partnership or company holding itself out to be a partnership or company of chartered accountants, or within which one or more members offer assurance services, any agreement, particularly a unanimous shareholders' agreement, that impairs the independence, objectivity and integrity necessary to provide assurance services or that could lead members to violate the Chartered Accountants BYE -LAWS , the Professional Code and the regulations thereunder. DUTIES AND OBLIGATIONS TOWARDS THE CLIENT AND THE EMPLOYER GENERAL PROVISIONS 16. Whether his duties and obligations be towards the public, a client or an employer, a member shall, in all circumstances before entering into a contract relating to the practice of the profession, consider the extent of his proficiency, knowledge and the means at his disposal. He shall not, in particular, undertake work for which he is not sufficiently prepared or for which he does not have the proficiency or knowledge required without obtaining the necessary assistance. 17. A member shall abstain from practicing in conditions likely to impair the quality of his services and the dignity of the profession. 18. A member shall abstain from intervening in the personal affairs of his client or employer on matters outside the scope of his contract. 19. A member shall act with due care, in keeping with current professional accounting and assurance standards, with the other standards, rules, and guidance and guidelines set out in the Canadian Institute of Chartered Accountants Handbook and with current scientific knowledge. A member who is responsible, in whole or in part, for preparing or approving financial statements or for overseeing the accounting and financial reporting processes shall also ensure that such statements and processes result in a fair presentation in accordance with generally accepted accounting principles. For purposes of this Code, generally accepted accounting principles are those set out in the BANGLADESH Institute of Chartered Accountants Handbook or any other accounting principles that should be applied in accordance with the law or current scientific knowledge. 19.1. A member who participates in an assurance engagement or a specified auditing procedures engagement shall notify the person responsible for the engagement if the financial statements are not presented fairly in accordance with generally accepted accounting principles. If, after notification, the financial statements are still not presented fairly, the member shall notify in writing one of the partners or shareholders with voting rights of the partnership or joint-stock company within which he practices his profession. Such partner or shareholder shall hold the most senior position within the partnership or joint-stock company. The member shall send the notifications provided for in the first and second paragraphs prior to the issuance of the financial statements or, failing which, as soon as possible. He shall also record and retain in the file the purpose of the notifications and the date on which the notifications were sent. The information and the notifications referred to in the second paragraph shall be retained for a minimum of 24 months from the date they were sent or for any other period provided for under the

standards, rules, and guidance and guidelines set out in the BANGLADESH Institute of Chartered Accountants Handbook 19.2. A member who is responsible for applying generally accepted accounting principles or for overseeing their application within an enterprise that is the subject of an engagement contemplated in section 19.1 shall notify his immediate superior if the financial statements are not presented fairly in accordance with these principles. If, after such notification, the financial statements are still not presented fairly, the member shall also notify in writing the enterprise's audit committee or similar body or, where there is no audit committee or similar body, the board of directors and the professional responsible for the engagement. A member shall satisfy the obligations as were provided for. 20. A member who performs a contract, in whole or in part, in the practice of his profession, assumes full personal civil liability arising there from, regardless of his status within the partnership or company. He is forbidden to include in such contract any clause to the effect of directly or indirectly, fully or partially, excluding this liability. He may not invoke the liability of the partnership or company as a ground for excluding or limiting his own liability. 21. A member shall not prevent a client from consulting a member of the Ordure. 22. A member who signs an assurance report shall indicate in the report whether it was prepared by him alone or by several chartered accountants. 23. A member shall perform his professional duties with integrity and objectivity. 24. A member shall avoid any misrepresentation with respect to his level of competence or the efficiency of his own services, the professional services generally performed by the other persons who carry out their professional activities within the partnership or joint-stock company within which the member practices his profession, or the services generally performed by members of the profession. If the interest of a client so requires, he shall, with the authorization of such client, consult another member of the Order, a member of the Institute of Chartered Accountants, another professional or another competent person, or refer such client to one of these persons. 25. A member shall inform a client, as soon as possible, of the scope and terms and conditions of the contract entrusted to him by such client. 25.1. A member shall not perform an assurance engagement or a specified auditing procedures engagement for a fee that is lower than that charged by the member or partnership or joint-stock company he is replacing, or contained in other proposals for the engagement, except in the following circumstances : (1) the persons assigned to the engagement are qualified and are devoting the appropriate time to it ; and (2) there is compliance with professional assurance standards, other standards, rules and guidance and guidelines set out and implemented by the Institute of Chartered Accountants Handbook. 25.2. A member who provides professional services other than those provided in engagements letter shall disclose in any report or other document, including that accompanying the financial statements or the financial information, which is addressed to a person other than his employer, the nature and extent of any influence, interest or relationship which, in respect of the engagement, may be perceived as impairing his professional judgment or objectivity. 34. Whether his duties and obligations be towards the public, a client or an employer, a member shall not, under any circumstances, sign, prepare, produce or even associate himself with :

(1) any letter, report, statement, representation or financial statement which he knows, or should know, is false or misleading ; (2) any financial statement which he knows, or should know, has not been prepared in accordance with this Regulation. 36. A member who performs an assurance engagement or a specified auditing procedures engagement or who participates in such an engagement shall : (1) reveal any material fact known to him which is not disclosed in the financial statements or other subject matter of the engagement, the omission of which renders the financial statements misleading ; and (2) report any material misstatement known to him to be contained in the financial statements or other subject matter of the engagement. 36.1. A member shall handle with reasonable care any property entrusted to him by a client or employer. 36.2. A member who receives, handles or holds money or securities as a trustee, guardian, administrator, agent or liquidator shall maintain such records as are necessary to account for his management, custody, mandate or contract. The money or securities thus received, handled or held shall be kept in a separate trust account or accounts in a financial institution. Except when specifically authorized in writing by a client, a member shall not use, transfer, withdraw or otherwise employ such money or securities as payment for his fees or for purposes other than those for which they were entrusted. DEFINITIONS OF CODE OF CONDUCT:

a set of conventional principles and expectations that are considered binding on any person who is a member of a particular group. A code of conduct is a set of rules outlining the responsibilities of or proper practices for an individual or organization. Related concepts include ethical codes and honor codes. a set of rules to guide behavior and decisions in a specified situation All professional marketing research societies have a code of conduct that details the rights and responsibilities of those involved with marketing and opinion research.

PROFESSIONAL MISCONDUCT
DEFINITION Behavior outside the bounds of what is considered acceptable or worthy of its membership by the governing body of a profession. Professionalism DEFINITION Meticulous adherence to undeviating courtesy, honesty, and responsibility in one's dealings with customers and associates, plus a level of excellence that goes over and above the commercial considerations and legal requirements.

Professional DEFINITIONS (2) 1. Person formally certified by a professional body of belonging to a specific profession by virtue of having completed a required course of studies and/or practice. And whose competence can usually be measured against an established set of standards. 2. Person who has achieved an acclaimed level of proficiency in a calling or trade. See also professionalism Professional Services DEFINITION Accounting, legal, medical and other such services provided by a formally certified member of a professional body. Professional Liability
DEFINITION

Legal obligations arising out of a professional's errors, negligent acts, or omissions during the course of the practice of his or her craft. Professional Standard of Care Definition Ethical or legal duty of a professional to exercise the level of care, diligence, and skill prescribed in the code of practice of his or her profession, or as other professionals in the same discipline would in the same or similar circumstances. Chartered accountant (CA) DEFINITION Professional member of a country's Institute Of Chartered Accountants. He or she must work (and be trained) in the office of a practicing chartered accountant for three years, and pass exhaustive written tests to qualify. On completing the requirements, the trainee is awarded the designatory letters ACA. Code of Practice
Definition

Written guidelines issued by an official body or a professional association to its members to help them comply with its ethical standards. Approved code of practice Definition Guidelines published by regulatory agencies, explaining how to comply with a specific legislation.
Q. 01 What are the Public Interest Requirement ? Public interest requirement set out UNDER ETHICAL bindings by IFAC are narrated below:- Independent auditors help to maintain the integrity and efficiency of the financial statements presented to financial institutions in partial support for loans and to stockholders for obtaining capital;

- Financial executives serve in various financial management capacities in organizations and contribute to the efficient and effective use of the organizations resources; - Internal auditors provide assurance about a sound internal control system which enhances the reliability of the external financial information of the employer; - Tax experts help to establish confidence and efficiency in, and the fair application of, the tax system; and - Management consultants have a responsibility towards the public interest in advocating sound management decision making. - Professional accountants have an important role in society. Investors,creditors, employers and other sections of the business community, as well as the government and the public at large rely on professional accountants for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters. The attitude and behaviour of professional accountants in providing such services have an impact on the economic well-being of their community and country. Professional accountants can remain in this advantageous position only by continuing to provide the public with these unique services at a level which demonstrates that the public confidence is firmly founded. It is in the best interest of the worldwide accountancy profession to make known to users of the services provided by professional accountants that they are executed at the highest level of performance and in accordance with ethical requirements that strive to ensure such performance. In formulating their national code of ethics, member bodies should therefore consider the public service and user expectations of the ethical standards of professional accountants and take their views into account. By doing so, any existing expectation gap between the standards expected and those prescribed can be addressed or explained. Q. 02 What are the fundamental principles that have to be performed by professional accountants? * Integrity A professional accountant should be straightforward and honest in performing professional services. * Objectivity A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. * Professional Competence and Due Care A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques. * Confidentiality A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. * Professional Behaviour A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. The obligation to refrain from any conduct which might bring discredit to the profession requires IFAC member bodies to consider, when developing ethical requirements, the responsibilities of a professional accountant to clients, third parties, other members of the accountancy profession, staff, employers and the general public. * Technical Standards A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. Professional accountants have a duty to carry out with care and skill, the instructions of the client or employer in-so-far as they are compatible with the requirements of integrity, objectivity and in the case of professional accountants in public practice, independence. Q. 03 Who are the Authority to promulgate the technical and professional standards? Generally the technical and professional standards promulgated by :- IFAC (e.g. International Standards on Auditing); - International Accounting Standards Board; - The Members professional body or other regulatory body; and - Relevant legislation.

A professional accountant should carry out professional services in accordance with the relevant technical and professional standards as are promulgated by above authority in addition to due care and skill, the instructions of the client or employer in-so-far as they are compatible with the requirements of integrity, objectivity and in the case of professional accountants in public practice, independence.

VERIFICATION
1. Comparison of two or more items, or the use of supplementary tests, to ensure the accuracy, correctness, or truth of the information.

Verification of assets and liabilities appearing on the balance sheet is one of the main concerns of the auditing exercise.

General principles regarding verification 1. Confirm that the assets were in existence on the date of the balance sheet.
2. Ascertain that the assets had been acquired for the purpose of the business and under proper authority. 3. Confirm that owner ship of the asset rests with the organization. 4. Ascertain that no charge has been created on the asset. 5. Ensure that the current book value of the asset is determined after providing correct amount of depreciation for various years. 6. Ensure that values reflect current physical condition of the asset. 7. Ensure that disclosures regarding assets are adequate. Procedures - Verification of Assets 1. The auditor should verify the records (accounting books) with reference to the documentary evidence. Physical verification of fixed assets is the primarily the responsibility of the the management. 2. The opening balance is to be verified from schedule of fixed assets, ledger or fixed asset register. 3. Assets acquired during the year or improvements done during the year should be verified on the basis of purchase orders, invoices, material receipt notes, and title deeds. 4. Capital assets built inside (self-constructed fixed assets) and capital work-in-progress should be verified by reference to work-order records, contractor bills. 5. For fixed assets fully depreciated during the year of acquisition, the auditor has to examine whether they were recorded in the fixed assets register. 6. In the case fixed assets registered, the auditor should examine (i) the authorisation procedure (ii) sales process (calling for quotations etc.) (iii) adjustments to the account of the asset (iv) accounting for the proceeds of the sale and (v) adjustment for the gain or loss on the sale. 7. Ownership of assets such as land and buildings should be verified by examining the title deeds. In case the title deeds are with other parties such as bankers (mortages or safe custody) and solicitors, confirmation should be obtained directly by the auditor through a request mailed to the concerned persons signed by the client.

8. Physical verification is the responsibility of the management and they need to ensure that it is carried out at appropriate intervals in order to ensure assets are in existence. The auditor has to ensure that physical verification was done. For this purpose, he should observe the verification being conducted. He should examine the instructions given by the management for physical verification and working papers of physical verification. It is to be ascertained that the persons carrying out the physical verification has the necessary competence. Vouching vs Verification Vouching is the process of recognising obligation and authorizing cash disbursements. It deals with the examination of PROFIT AND LOSS items. For example, you see that a company has said to make a payment for that particular object. To ensure this, you need to "find evidence" by vouching it to things like invoice, official receipt, bank statement etc. Normally you vouch to original supporting documents, not photocopies. IT is like tracing it to make sure that the transaction has indeed occured/genuine. This is generally a step in assurance. Or say, the company made a purchase.. these can be traced to purchase order, invoice etc. As for verification, auditors are normally required to see that the supporting documents are verified whilst auditing.Verification is normally done by a nominated person in the company which involves reviewing, inspecting and checking to ensure that the documents conform to specific requirements. On the other hand, there's another physical verification which is done by the auditors themselves. This is an auditing procedure whereby auditors inspects the actual assets of the company to make sure that they are the same with the written records.It is a substantive audit procedure which deals with examination of BALANCE SHEET transactions/items whether they are assets or liabilities are properly stated. Normally we do this by selecting samples or in some audit firms, setting a scope. For example, we do stocktakes =) Main difference between the duo: Vouching is the substantive testing/examination of transaction at their POINT OF ORIGIN whereas Verification usually deals with the FINAL BALANCE in the Final Accounts viz the balance sheet and profit and loss BILL OF LADING It is a Shipping Document. Issued by the Exporter/ shipper/ Supplier. Most popularly the particulars contains in it arei) The TITLE ii) Name and particulars of the Shipper iii) Name and particulars of the CONSIGNEE/ BANK iv) VOYAGE NUMBER v) BILL OF LADING NUMBER vi) EXPORT REFERRANCE( if Any) vii) Port of delivery viii) Port of destination ix) Name of vessel x) Name and particulars of CARRIER xi) Name and particulars of Importer/ goods receiver xii) Mode of freight payment xiii) Description of Packages i.e. Qty/weight/measurement etc. of goods shipped xiv) Name of shipping Agent/Line xv) ADDITIONAL CLAUSES/ STIPULATION xvi) PLACE AND DATE OF ISSUE xvii) SIGNATURE OF Shipper and carrier Generally a copy of FORWARDERS CARGO RECEIPT annexed with the B/L.

THANKS TOFAYEL

AUDIT MATERIALITY
Summary:
Materiality is one of the basic and major concepts of auditing. Auditing and Assurance Standard (AAS) (hitherto known as Standard Auditing Practices (SAPs))-13, Audit Materiality, states that the concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of the financial information in conformity with recognised accounting policies and practices. There are no sets of rules or prescriptions that may be applied consistently to determine materiality in all circumstances. Materiality is a relative terms. What may be material in one circumstance may not be material in another. The assessment of what is material is a matter of professional judgement and experience of the auditor.

Introduction:
Materiality is one of the basic and important concepts of auditing. Auditing and Assurance Standard (AAS) (hitherto known as Standard Auditing Practices (SAPs))-13, Audit Materiality, establishes standards on the concept of materiality and its relationship with audit risk. AAS-6 (Revised), Risk Assessments and Internal Control, provides guidance and establishes standards on the procedures to be followed to obtain an understanding of the accounting and internal control systems and on audit risk and its components. The true and fair presentation of the financial statements depends, among other things, upon the concept of materiality. Materiality is a relative term. What may be material in one circumstance may not be material in another. The consideration of materiality is the matter of professional judgement and experience of the auditor. There are number of matters that are to be considered to decide on materiality. But, however, there are no sets of rules or prescriptions that may be considered and applied consistently to decide on materiality in all circumstances. In this paper, some matters are discussed, which may be considered by the auditor while making materiality assessments.

Concept of Materiality:
Materiality concept is one of the most important concepts of auditing. The materiality concept should be considered by the auditor before making an opinion on the financial statements. The client or management of the entity has the responsibility to ensure that whether the financial statements reveals all relevant material information. When material information is not disclosed or materially misstated, the financial statements will not present true and fair picture. It will not be possible for the auditor to make an opinion on the financial statements without considering materiality concept. The assessment of what is material is the matter of professional judgement and experience of the auditor. AAS-13, Audit Materiality, establishes standards on the concept of materiality and its relationship with audit risk which is another important concept of auditing. According to it information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information. Materiality depends on the size and nature of the item, judged in the particular circumstances of its misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which the information must have if it is to be useful. There are no specific rules or prescriptions that can be followed in all circumstances to assess materiality. It is the matter for the auditor to decide whether a particular misstatement or an item has material impact on the financial statements or not.

Audit Objective and Materiality:

The objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements. Such opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user should not assume that the auditors opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with

which management has conducted the affairs of the enterprise. The materiality concept has an important role in relation to the true and fair presentation of the financial statements. Part II of schedule VI to the Companies Act, 1956, requires that the profit and loss account should disclose every material feature. The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of the financial information in conformity with recognized accounting policies and practices. The auditor should consider materiality at both the overall financial information level and in relation to individual account balances and classes of transactions. It is necessary for the auditor to obtain sufficient appropriate audit evidence which may be influenced by the materiality of the item, before making an opinion on the financial statements.

Matters Influencing Materiality:

There are number of factors which may influence materiality. For example, legal and regulatory requirements, including the requirements which made mandatory by the Institute of Chartered Accountants of Bangladesh (ICAB) and by the competent authority. The contravention of or noncompliance with such requirements may have a significant bearing on the financial information, and considerations relating to individual account balances and relationships. This process may result in different levels of materiality depending on the matter being audited.

Concept of Audit Risk:

AAS-2, Objective and Scope of the Audit of Financial Statements, states that due to the test nature and other inherent limitations of an audit, together with the inherent limitations of any system of internal control, there is an unavoidable risk that some material misstatements may remain undiscovered. According to AAS-13, Audit Materiality, there is an inverse relationship between materiality and the degree of audit risk, that is, the higher the materiality level, the lower the audit risk and vice versa. For example, the risk that a particular account balance or class of transactions could be misstated by an extremely large amount might be very low, but the risk that it could be misstated by an extremely small amount might be very high. AAS-6(Revised), Risk Assessments and Internal Controls, identifies the three components of audit risk i.e. inherent risk, control risk and detection risk. According to it- Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Audit risk has three components: inherent risk, control risk and detection risk. Inherent risk is the susceptibility of an account balance or class of transactions to misstatement that could be material, either individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls. Control risk is the risk that a misstatement, that could occur in an account balance or class of transactions and that could be material, either individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems. Detection risk is the risk that an auditors substantive procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes. AAS-6 (Revised), Risk Assessments and Internal Control, provides detailed guidance on how to assess audit risk and establishes standards on the procedures to be followed to obtain an understanding of the accounting and internal control systems and on audit risk and its components. AAS-6 (Revised), Risk Assessments and Internal Control may be read with AAS-4 (Revised), The Auditors Responsibility to Consider Fraud and Error in an Audit of Financial Statements, which considers audit risk and its components with reference to fraud and error factors.

Audit Risk and Materiality:

As stated earlier, there is an inverse relationship between materiality and the degree of audit risk. When conducting an audit, the auditor should consider materiality and its relationship with audit risk. The level of detection risk can be considered only after considering the level of inherent and control

risks. While planning an audit, the auditor should keep in mind that the audit risk is to be kept at an acceptably low level. The range, efficiency, efficacy, nature and timing of the procedures performed by the auditor will determine the level (i.e. high or low) of detection risk. The nature of evidence is also an important factor that may determine the level of detection risk. For instance, the external evidence like confirmations or certificates from third parties like bank may reduce the level of detection risk than internal evidence.

During Audit Function:

The views and results of assessments established, in respect of inherent and control risks, by the auditor and upon which the audit was initially planned may be changed during the course of audit. Because the audit may have been planned with a view that there is a possibility low inherent and control risks. After considering some matters and information which may come to the auditors knowledge, during the course of audit, it may be decided subsequently that the planned procedures will not low the audit risk and they may not sufficient to uncover the material misstatements, if any. In such situation, the auditor should change, or adopt alternative or additional, audit procedures so as to keep the level of audit risk at an acceptably low level. By performing appropriate substantive audit procedures, the level of audit risk can be kept at an acceptably low level.

Materiality and Reporting:

The auditor may require the client or management of the entity to correct the errors or misstatements, if any, which may be material or immaterial, identified. If the client or management has not corrected, any or all of such errors or misstatements, then the auditor should aggregate such errors or misstatements to assess the level of material effect on the financial information. Where the material misstatements are not corrected in the financial information, the auditor should make qualified report. Qualitative considerations also influence the auditor in reaching a conclusion as to whether the misstatements are material.

Extending the Audit Procedures:

When the auditors tests an account balance or class of transactions by an analytical procedure, ordinarily it would not possible to specifically identify misstatements but an indication of whether misstatements might exist in the balance or class, and possibly its approximate magnitude, would be obtained. If the analytical procedure indicates that misstatements might exist, but not its approximate amount, the auditor ordinarily should employ other procedures to estimate the aggregate misstatement in the balance or class. When audit sampling is used by the auditor to test an account balance or class of transactions, the amount of known misstatements identified in sample to the items in the balance or class from which such sample was selected should be projected. Such projected misstatement, along with the results of other substantive tests, contributes to the auditors assessment of aggregate misstatement in the balance or class.

Determining Materiality:
There are no sets of rules or prescriptions that may be applied consistently for determining audit materiality. What may be material in one circumstance may not be material in another. Part II of schedule VI to the companies Act. 1956, requires that the profit and loss account should disclose every material feature. The users of the financial statements expect that the financial statements should be reliable and should disclose all the material information in respect of financial matters of the entity. While conducting an audit the auditor should adopt appropriate audit procedures and measures to identify material misstatements and to assess them to make an opinion on the financial statements. Whenever the auditor faces a difficult situation to decide whether a particular misstatement is material or not, its impact, either individually or when aggregated with other misstatements, on the financial statements of current period, or its expected impact, either individually or when aggregated with other misstatements, on the financial statements of later periods, should be considered. The points discussed below may be considered by the auditor to identify material misstatements and to assess its material effect on the financial statements.

CODE OF ETHICS OF CHARTERED ACCOUNTANTS Professional Code DUTIES AND OBLIGATIONS TOWARDS THE PUBLIC GENERAL PROVISIONS 1. Each member shall comply with the Chartered Accountants BYE- LAWS and the Professional Code and the regulations there under. The member shall, in particular, take reasonable measures to ensure that each person involved with him in the practice of his profession and any partnership or joint-stock company within which he practices his profession complies with the Chartered Accountants Act, the Professional Code and the regulations hereunder. The practice of the profession includes, but is not limited to, the practice of public accounting and the following other functions when offered to the public :
(1) management consulting, including investigating and identifying management and business problems related to the policies, technical aspects, structure, operations, finances, systems, procedures, financing or administration of organizations and recommending appropriate solutions ;

(2) insolvency services, including receivership, trusteeship in bankruptcy and liquidation as well as the administration of bankrupt or insolvent partnerships, legal persons, trusts, any other enterprises or estates ; (3) (4) (5) information processing, including manual record keeping and electronic data processing ; administratorship, insofar as it involves administering the property of others ; information technology consulting ;

(6) business brokerage, negotiating and advising on business acquisitions, sales, financing or mergers ; (7) (8) (9) liquidation of successions and administering the property of successions ; insurance counselling ; valuation ;

(10) the preparation of personal tax and other returns or statutory documents, but excluding those set out in subparagraph 3 of the third paragraph of this section ; (11) internal auditing.

For the purposes of this Regulation, `public accounting means the offering of services to the public to improve the quality of financial, accounting or decision-making information, or the context in which it is provided, for decision making. Without limiting the generality of the foregoing, such services shall include : (1) accounting services, insofar as they involve synthesis, analysis, advice, counsel or interpretation, and compilation engagements, but excluding record keeping ; (2) assurance services including audit and review engagements, derivative reports and specified auditing procedures engagements within the meaning of the Canadian Institute of Chartered Accountants Handbook ; (3) taxation services, insofar as they involve advice, counsel or interpretation, including the preparation of tax returns and other statutory documents if required or connected with one of the public accounting services offered, but excluding personal income tax returns ;

(4) investigative and forensic accounting services, including financial investigation and financial litigation support ; (5) financial planning services.

2. A member shall not permit others to carry out on his behalf acts which, if he carried them out himself, would place him in violation of the Chartered Accountants Act, the Professional Code or a regulation thereunder. 3. A member's duties and obligations under the Chartered Accountants Act, the Professional Code and regulations thereunder are in no way changed or reduced by the fact that he practises the profession within a partnership or company. 4. A member shall ensure that his obligations towards the partnership or company of which he is a director or officer are not incompatible with his obligations towards his client or employer. 5. A member shall, at all times, act with dignity and avoid any method or attitude that is likely to damage the profession's good reputation. 6. A member shall keep his knowledge current. He shall keep abreast of developments in the fields of practice of his profession whether or not he offers services to the public and maintain his competence in these fields 7. A member shall have the personal charge and management of any place of business of a partnership or company holding itself out as a partnership or company of chartered accountants or within which one or more members offer assurance services. 8. A member shall not hold out or imply that he has a place of business in any place where another person who is neither his partner nor a director nor a shareholder of the partnership or company in fact only represents him. Conversely, a member who only so represents a member, partnership or company shall not hold out or imply that he maintains a place of business for such member, partnership or company. 9. A member who practices his profession within a general partnership or an undeclared partnership of which not all partners are members of the Ordre is subject to the conditions set out in the Regulation respecting the practice of the chartered accountancy profession within a partnership or a joint stock company . 10. A member shall not adopt any method of obtaining or attracting clients which tends to lower the standard of dignity of the profession and, in particular, he shall not urge anyone pressingly or repeatedly to retain his professional services.

DEROGATORY ACTS 11. Shall be guilty of an act derogatory to the dignity of the profession, in addition to those mentioned in the Professional Code, any member who : (1) is found guilty by a final judgment of a court of competent jurisdiction of an offence against any tax act or securities act in Canada or elsewhere ;
(2) makes an assignment of his property or against whom a receiving order is made, within the meaning of the Bankruptcy and Insolvency Act, or whose partnership or company, of which he is the sole director and shareholder, makes an assignment of its property or has a receiving order made against it, within the meaning of the Bankruptcy and Insolvency Act, by a final judgment of a court of competent jurisdiction ; (3) having made an assignment of his property or having had a receiving order, as that term is used in the Bankruptcy and Insolvency Act, made against him by a final judgment of a court of competent jurisdiction, fails to inform the authority without delay ;

(4) fails to inform the Ordre that he has reason to believe that a member is practicing his profession in a manner which is detrimental to his clients, his employer or the public, or has violated the Chartered Accountants Act, the Professional Code or the regulations thereunder, or that he is incompetent ; (5) communicates with the plaintiff without the prior written permission of the Syndic or Assistant Syndic when he is informed by the Syndic or Assistant Syndic that an inquiry into his professional conduct or competence has been initiated by either of them or when he has been served notice of a complaint under specific section of the Professional Code.

12. Shall also be guilty of an act derogatory to the dignity of the profession, any member who carries on his professional activities within a partnership or company : (1) with persons who engage in acts that are derogatory to the honour or dignity of the chartered accountancy profession ; (2) in which directors, shareholders, partners or employees practise a profession, carry on a trade, enterprise or business or hold an office or function that is inconsistent with the practice of the profession ;
(3) in which a person contemplated under the Regulation respecting the practice of the chartered accountancy profession within a partnership or a joint stock company, who holds partnership or company shares with voting rights or acts as a director or officer is struck off the roll of his professional order or has his professional permit revoked.

13. Notwithstanding section 12, a member is authorized to practise his profession within a partnership or company in which a person contemplated under the Regulation is struck off the roll of his professional order or the equivalent, or has his professional permit revoked, provided the following conditions are satisfied: (1) the said person ceases to be a director or officer of the partnership or company within 10 days from the date on which the penalty or measure imposed becomes executory or within any other additional timeframe authorized by the board of directors;
(2) the said person ceases to attend all shareholder meetings and to exercise, directly or indirectly, his right to vote within 10 days from the date on which the penalty or measure imposed becomes executory or within any other additional timeframe authorized by the board of directors; (3) the said person disposes of his partnership or company shares with voting rights within 180 days from the date on which the penalty or measure imposed becomes executory or within any other additional timeframe authorized by the board of directors.

14. Shall be guilty of an act derogatory to the dignity of the profession, any member who carries on his professional activities within a partnership or company that holds out or implies that it is a partnership or company governed by the Professional Code where such partnership or company does not comply with the requirements set out in the Professional Code or the Regulation respecting the practice of the chartered accountancy profession within a partnership or a joint stock company. 15. Shall also be guilty of an act derogatory to the dignity of the profession, any member who concludes or allows to be concluded, within a partnership or company holding itself out to be a partnership or company of chartered accountants, or within which one or more members offer assurance services, any agreement, particularly a unanimous shareholders' agreement, that impairs the independence, objectivity and integrity necessary to provide assurance services or that could lead members to violate the Chartered Accountants Act, the Professional Code and the regulations thereunder DUTIES AND OBLIGATIONS TOWARDS THE CLIENT AND THE EMPLOYER GENERAL PROVISIONS 16. Whether his duties and obligations be towards the public, a client or an employer, a member shall, in all circumstances before entering into a contract relating to the practice of the profession, consider the extent of his proficiency, knowledge and the means at his disposal. He shall not, in particular, undertake work for which he is not sufficiently prepared or for which he does not have the proficiency or knowledge required without obtaining the necessary assistance.

17. A member shall abstain from practising in conditions likely to impair the quality of his services and the dignity of the profession. 18. A member shall abstain from intervening in the personal affairs of his client or employer on matters outside the scope of his contract. 19. A member shall act with due care, in keeping with current professional accounting and assurance standards, with the other standards, rules, and guidance and guidelines set out in the Canadian Institute of Chartered Accountants Handbook and with current scientific knowledge.
A member who is responsible, in whole or in part, for preparing or approving financial statements or for overseeing the accounting and financial reporting processes shall also ensure that such statements and processes result in a fair presentation in accordance with generally accepted accounting principles. For purposes of this Code, generally accepted accounting principles are those set out in the Canadian Institute of Chartered Accountants Handbook or any other accounting principles that should be applied in accordance with the law or current scientific knowledge.

19.1. A member who participates in an assurance engagement or a specified auditing procedures engagement shall notify the person responsible for the engagement if the financial statements are not presented fairly in accordance with generally accepted accounting principles.
If, after notification, the financial statements are still not presented fairly, the member shall notify in writing one of the partners or shareholders with voting rights of the partnership or joint-stock company within which he practices his profession. Such partner or shareholder shall hold the most senior position within the partnership or joint-stock company. The member shall send the notifications provided for in the first and second paragraphs prior to the issuance of the financial statements or, failing which, as soon as possible. He shall also record and retain in the file the purpose of the notifications and the date on which the notifications were sent. The information and the notifications referred to in the second paragraph shall be retained for a minimum of 24 months from the date they were sent or for any other period provided for under the standards, rules, and guidance and guidelines set out in the Canadian Institute of Chartered Accountants Handbook.

19.2. A member who is responsible for applying generally accepted accounting principles or for overseeing their application within an enterprise that is the subject of an engagement contemplated in section 19.1 shall notify his immediate superior if the financial statements are not presented fairly in accordance with these principles.
If, after such notification, the financial statements are still not presented fairly, the member shall also notify in writing the enterprise's audit committee or similar body or, where there is no audit committee or similar body, the board of directors and the professional responsible for the engagement.

19.3. A member who prepares or approves, in whole or in part, financial statements prepared solely for internal use within an enterprise or for a specified user. 20. A member who performs a contract, in whole or in part, in the practice of his profession, assumes full personal civil liability arising therefrom, regardless of his status within the partnership or company. He is forbidden to include in such contract any clause to the effect of directly or indirectly, fully or partially, excluding this liability. He may not invoke the liability of the partnership or company as a ground for excluding or limiting his own liability. 21. A member shall not prevent a client from consulting a member of the Ordre, a member of the Canadian Institute of Chartered Accountants, another professional of his choice or another person. 22. A member who signs an assurance report shall indicate in the report whether it was prepared by him alone or by several chartered accountants. INTEGRITY 23. A member shall perform his professional duties with integrity and objectivity. 24. A member shall avoid any misrepresentation with respect to his level of competence or the efficiency of his own services, the professional services generally performed by the other persons who carry out their professional activities within the partnership or joint-stock company within which the member practices his profession, or the services generally performed by members of the

profession. If the interest of a client so requires, he shall, with the authorization of such client, consult another member of the Ordre, a member of the Canadian Institute of Chartered Accountants, another professional or another competent person, or refer such client to one of these persons. 25. A member shall inform a client, as soon as possible, of the scope and terms and conditions of the contract entrusted to him by such client. 25.1. A member shall not perform an assurance engagement or a specified auditing procedures engagement for a fee that is lower than that charged by the member or partnership or joint-stock company he is replacing, or contained in other proposals for the engagement, except in the following circumstances : (1) the persons assigned to the engagement are qualified and are devoting the appropriate time to it ; and (2) there is compliance with professional assurance standards, other standards, rules and guidance and guidelines set out in the Canadian Institute of Chartered Accountants Handbook. 25.2. A member who provides professional services other than those provided in engagements referred to in section 36.4 shall disclose in any report or other document, including that accompanying the financial statements or the financial information, which is addressed to a person other than his employer, the nature and extent of any influence, interest or relationship which, in respect of the engagement, may be perceived as impairing his professional judgment or objectivity. 34. Whether his duties and obligations be towards the public, a client or an employer, a member shall not, under any circumstances, sign, prepare, produce or even associate himself with : (1) any letter, report, statement, representation or financial statement which he knows, or should know, is false or misleading ; (2) any financial statement which he knows, or should know, has not been prepared in accordance with this Regulation. 36. A member who performs an assurance engagement or a specified auditing procedures engagement or who participates in such an engagement shall :
(1) reveal any material fact known to him which is not disclosed in the financial statements or other subject matter of the engagement, the omission of which renders the financial statements misleading ; and

(2) report any material misstatement known to him to be contained in the financial statements or other subject matter of the engagement. 36.1. A member shall handle with reasonable care any property entrusted to him by a client or employer. 36.2. A member who receives, handles or holds money or securities as a trustee, guardian, administrator, agent or liquidator shall maintain such records as are necessary to account for his management, custody, mandate or contract. The money or securities thus received, handled or held shall be kept in a separate trust account or accounts in a financial institution.
Except when specifically authorized in writing by a client, a member shall not use, transfer, withdraw or otherwise employ such money or securities as payment for his fees or for purposes other than those for which they were entrusted.

INDEPENDENCE Definitions 36.3. For purposes of this Subdivision, the following terms mean :

affiliate : a company that has control over the client, or over which the client has control, or which is under common control with the client, including the client's parent company or one of its subsidiaries ;
engagement period : period that starts on the date when the member or the partnership or joint-stock company commits to perform the engagement and ends on the date when the resulting report is issued. For an engagement of a recurring nature, the period ends :

(1) in the case of an audit or review engagement referred to in section 36.8, on the date of notification by the client, the member or the partnership or joint-stock company within which the member practices his profession that the professional relationship has terminated or on the date the final assurance report is issued, whichever is later ;
(2) in the case of an audit engagement referred to in section 36.9, on the date when the listed enterprise, the member or the partnership or joint-stock company within which the member practices his profession notifies the securities regulator that the listed enterprise is no longer an audit client of the partnership or joint-stock company within which the member practices his profession ; engagement team : all persons within the partnership or joint-stock company participating in the engagement, who provide quality control for the engagement and all other persons within the partnership or joint-stock company who are in a position to directly influence the outcome of the engagement ; financial interest : a security within the meaning of the Securities Act, a share, including the option to purchase such security or such share and their derivatives or any other debt instruments ; listed enterprise : an enterprise whose shares, debt or other securities are quoted or listed on a stock exchange recognized by THE BANGLADESH or foreign securities regulator or that is subject to the standards established by such stock exchange. network partnership or joint-stock company : a partnership or joint-stock company that is, or can be perceived as being, under common control, ownership or management with the partnership or joint-stock company within which the member practices his profession.

related entity : an enterprise that exercises control over another enterprise within the meaning of the BANGLADESH Institute of Chartered Accountants Handbook.

GENERAL PROVISIONS 36.4. A member who performs or participates in an assurance engagement or a specified auditing procedures engagement shall remain free of any influence, interest or relationship which, in respect of the engagement, may impair or be perceived as impairing his professional judgment or objectivity. 36.5. A member who is a partner or shareholder with voting rights of the partnership or joint-stock company within which he practices his profession or who is in a management position within the partnership or joint-stock company shall not provide a professional service, other than an assurance service, to a client or an affiliate when a person within his partnership or joint-stock company or network partnership or joint-stock company performs an audit or review engagement for such client or affiliate, if the member, or a dependent or spouse, holds and controls a financial interest in the client or affiliate, or holds a financial interest therein that allows him to exercise significant influence over the client's directors or officers. within the meaning of the Bangladesh Institute of Chartered Accountants Handbook. However, a member may provide a professional service, other than an assurance service, if the service is clearly insignificant considering the fees invoiced or the nature of the service provided. 36.6. In an engagement to provide professional services in insolvency as a trustee in bankruptcy, a liquidator, a receiver-manager or an administrator within the meaning of the Bankruptcy and Insolvency Act, a member shall remain free of any influence, interest or relationship which, in

respect of the engagement, may impair or be perceived as impairing his professional judgment or objectivity. Breaches of the independence rule contemplate Assurance engagement or specified auditing procedures engagement 36.7. A member commits a breach of the independence rule contemplated in the Rules if, in the context of an assurance engagement or a specified auditing procedures engagement :
(1) the member participates on an engagement team when he, or a dependent or spouse, holds and controls a financial interest in the client or holds a financial interest in the client that allows him to exercise significant influence over the client's directors or officers within the meaning of the Bangladesh Institute of Chartered Accountants Handbook ; (2) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when the member or partnership or joint-stock company holds and controls a financial interest in the client or holds a financial interest in the client that allows him to exercise significant influence over the client's directors or officers within the meaning of the Bangladesh Institute of Chartered Accountants Handbook ;

(3) the member or partnership or joint-stock company within which he practices his profession performs such an engagement for a client : (a) when the partnership or joint-stock company has a loan from or has a loan guaranteed by the client, except when the client is a bank or other financial institution and the loan or guarantee is immaterial to the partnership or joint-stock company and the client, the loan or guarantee is made under terms and conditions that would have been imposed on any other person in similar circumstances, and the partnership or joint-stock company is complying with the terms of the loan ; (b) that is not a bank or other financial institution when the partnership or joint-stock company has a loan to the client ; (c) when the partnership or joint-stock company guarantees a loan of the client ;

(4) the member or partnership or joint-stock company within which he practices his profession performs such an engagement for a client : (a) when the partnership or joint-stock company has a loan from or has a loan guaranteed by an officer or director of the client or a shareholder of the client who owns more than 10 % of the equity securities of the client ; (b) when the partnership or joint-stock company has a loan to or guarantees a loan of an officer or director of the client or a shareholder of the client who owns more than 10 % of the equity securities of the client ; (5) (a) the member participates on the engagement team when : he has a loan from or has a loan guaranteed by :

(i) the client, unless the client is a bank or other financial institution, the loan or guarantee is made under terms and conditions that would have been imposed on any other person in similar circumstances and the member is complying with the terms of the loan ;

(ii) (iii)

an officer or director of the client ; or a shareholder of the client who owns more than 10 % of the equity securities of the client ;

(b) he has a loan to or guarantees a loan of the client, other than a bank or other financial institution, of an officer or director of the client, or of a shareholder of the client who owns more than 10 % of the equity securities of the client ;

(6) the member or partnership or joint-stock company within which he practices his profession performs an engagement when the partnership or joint-stock company has a business relationship with the client or its directors or officers unless the business relationship is clearly insignificant to the partnership or joint-stock company, the client, or its directors and officers, as the case may be ; (7) the member participates on the engagement team when he has a business relationship with the client or its directors or officers, unless the business relationship is clearly insignificant to the member, the client or its directors and officers, as the case may be ;

(8) the member participates on the engagement team when a dependent or spouse of the member is a director or officer of the client or an employee of the client in a position to exercise direct and significant influence, within the meaning of the Bangladesh Institute of Chartered Accountants Handbook, over the subject matter of the engagement, or was in such a position during the period covered by the financial statements subject to the engagement or the engagement period ;
(9) the member participates on the engagement team when he served as an officer or director for the client or performed functions for the client that put him in a position to exercise direct and significant influence, within the meaning of the Bangladesh Institute of Chartered Accountants Handbook, over the subject matter of the engagement during the engagement period ; (10) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when the member or any other person practicing professional activities therein serves as an officer or director for the client ; (11) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during the engagement period, the member, the partnership or joint-stock company or any other person practicing professional activities therein makes a management decision or performs management functions for the client ; (12) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during the engagement period, the member, the partnership or joint-stock company or any other person practicing professional activities therein provides any of the following services to the client :

(a)

promoting, dealing in or underwriting the client's securities ;

(b) making investment decisions on behalf of the client or otherwise having discretionary authority over the client's investments ; (c) (d) executing a transaction to buy or sell the client's investments ; or safeguarding assets of the client ;

(13) the member participates on an engagement team and he or the partnership or joint-stock company within which he practices his profession accepts a gift or hospitality, including a product or service discount, from the client, unless the gift or hospitality is clearly insignificant to the member or partnership or joint-stock company.

3.2 Audit or review engagement and audit of a listed enterprise 3.2.1 Audit or review engagement 36.8. A member commits a breach of the independence rule contemplated in section 36.4 if, in the context of an audit or review engagement :
(1) the member, partnership or joint-stock company within which he practices his profession, or a network partnership or joint-stock company is in a situation described in paragraphs 1 to 5, 12 or 13 of section 36.7. For the application of these paragraphs, the word client includes affiliates ; (2) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when the member, partnership or joint-stock company, or a network partnership or joint-stock company holds and controls a financial interest in the client or an affiliate or holds a financial interest in the client or an affiliate that allows him to exercise significant influence over the client's directors or officers within the meaning of the Bangladesh Institute of Chartered Accountants Handbook ;

(3) the member, as the person with primary responsibility for an engagement for a client, performs the engagement at the main office in which one of the partners or shareholders with voting rights of the partnership or joint-stock company practices when this partner, this shareholder, a dependent or spouse holds and controls a financial interest in the client or an affiliate, or holds a financial interest in the client or an affiliate that allows him to exercise significant influence over the client's directors or officers within the meaning of the Bangladesh Institute of Chartered Accountants Handbook ; (4) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when the pension or retirement plan of the partnership or joint-stock company, or of a network partnership or joint-stock company, holds and controls a financial interest in the client or an affiliate, or holds a financial interest in the client or an affiliate that allows him to exercise significant influence over the client's directors or officers within the meaning of the Bangladesh Institute of Chartered Accountants Handbook ; (5) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when the partnership or joint-stock company, or a network partnership or joint-stock company, holds a financial interest in an enterprise, and the member or the partnership or joint-stock company knows that the client or an affiliate, or a director, officer or controlling person of the client or affiliate (6) the member participates on the engagement team or any other team within a network partnership or joint-stock company that is in a position to influence the engagement when the member holds a financial interest in an enterprise and knows that the client or a director, officer or controlling person of the client or an affiliate holds a financial interest in the enterprise, unless the client is not in a position to exercise significant influence over the enterprise within the meaning of the Bangladesh Institute of Chartered Accountants Handbook ;

(7) the member or partnership or joint-stock company within which he practices his profession performs such an engagement for a client or an affiliate when a partner or shareholder with voting rights of the partnership or joint-stock company within which he practices his profession. (8) the member participates on the engagement team or any other team within a network partnership or joint-stock company within which he practices his profession that is in a position to influence the engagement when the member knows that a parent, non-dependent child or sibling owns more than 0.1 % of the securities of the client or an affiliate within the meaning of section 1 of the Securities Act, or controls the client or affiliate by means other than the ownership of the majority of the common shares of the client or affiliate ;
(9) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when the partnership or joint-stock company or a network partnership or joint-stock company has a business relationship with the client or its directors or officers, unless such business relationship is clearly insignificant to the partnership or joint-stock company or network partnership or joint-stock company and the client or its directors or officers, as the case may be ; (10) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when a person within a network partnership or joint-stock company serves as an officer or a director of the client other than serving as secretary and the practice is permitted under the law or standards of practice, and the duties undertaken are exclusively administrative in nature ; (11) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or review or the engagement period, a person within a network partnership or joint-stock company makes a management decision or performs management functions for the client ; (12) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or review or the engagement period, the member or another person within the partnership or joint-stock company or within a network partnership or joint-stock company :

(a) prepares or changes a journal entry, determines or changes an account code or a classification for a transaction, or prepares or changes another accounting record without obtaining the approval of the client's management ; or (b) prepares a source document or originating data, or makes a change to such a document or data ;

(13) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or review or the engagement period, the member, the partnership or joint-stock company, a network partnership or joint-stock company or a person within the partnership or joint-stock company or network partnership or joint-stock company provides legal services to the client.

3.2.2 Audit of a listed enterprise 36.9. A member commits a breach of the independence rule contemplated in law if, in the context of an audit of a listed enterprise :
(1) the member participates on the engagement team, or a team within a network partnership or joint-stock company that is in a position to influence the engagement when a parent, non-dependent child or sibling is in an accounting role or a financial reporting oversight role at the client that puts the parent, non-dependent child or sibling in a position to exercise influence over either the contents of the financial statements or anyone who prepares them, or was in such a position during any period covered by the engagement ; (2) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when a person who participated in an audit of the financial statements of the listed enterprise has accepted employment in a financial reporting oversight role with respect to the enterprise before a period of one year has elapsed from the date on which the financial statements were filed with a stock exchange recognized by a Canadian or foreign securities regulator ;

(3) the member performs such an engagement for a listed enterprise, or a related entity, when a person practicing professional activities within the partnership or joint-stock company within which the member practices his profession, or within a network partnership or joint-stock company, serves as an officer or a director of the related entity or as secretary for the related entity ;
(4) the member continues as the person with primary responsibility for the engagement or as the engagement quality control reviewer on such an engagement for a listed enterprise for more than 5 years, and thereafter resumes or assumes such functions before a further 5 years have elapsed from the date on which he ceased to perform these functions ;

(5) the member, who has responsibility for decision-making on auditing, accounting and reporting matters that affect the performance of the engagement, or who maintains regular contact with the audit committee or management of the listed enterprise and provides more than ten hours of assurance services during the engagement period in connection with the annual financial statements or the interim financial information of the listed enterprise, or who has primary responsibility for an audit engagement for a subsidiary of the listed enterprise, continues in such role or roles for more than 7 years and thereafter resumes or assumes such functions before a further 2 years have elapsed from the date on which he ceased to perform these functions. However, this provision does not extend to members who consult with the engagement team regarding technical or industry- specific issues, transactions or events ;
(6) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or the engagement period, another person within the partnership or joint-stock company or a network partnership or joint-stock company makes a management decision or performs management functions for the listed enterprise or a related entity ; (7) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or the engagement period, the member, the partnership or joint-stock company, a network partnership or joint-stock company or another person within the partnership or joint-stock company or a network partnership or joint-stock company, provides professional services to the listed enterprise or a related entity, the results of which are likely to be subject to audit procedures during the financial statement audit, including one of the following services, unless the member determines that the results of these services will not be subject to such procedures :

(a) accounting or bookkeeping services related to the accounting records or financial statements to be audited ;

(b) (c)

valuation services ; actuarial services ;

(d) internal audit services that relate to the enterprise's internal accounting controls, financial systems or financial statements ; (e) financial information systems design, implementation, operation or management services ;

(8) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or the engagement period, the member, the partnership or joint-stock company, a network partnership or joint-stock company or another person within the partnership or joint-stock company or a network partnership or joint-stock company, provides one of the following professional services to a listed enterprise or a related entity :

(a) services that consist in providing an expert opinion or other expert service for the listed enterprise or a legal representative thereof, for the purpose of advocating the enterprise's interest in a civil, criminal, regulatory, administrative or legislative proceeding or investigation ; (b) legal services other than those referred to in section 141 of the Act respecting the Barreau du Qubec ; (c) human resource management services that involve :

(i) searching for or seeking out prospective candidates for management, executive or director positions ; (ii) (iii) engaging in psychological testing, or other formal testing or evaluation programs ; undertaking reference checks of prospective candidates for an executive or director position ;

(iv) acting as a negotiator or mediator on the listed enterprise's behalf with respect to employees or future employees concerning any condition of employment, including position, status or title, compensation or fringe benefits ; or

(v) recommending that the enterprise hire a specific candidate for a specific job or advising it to do so ; (9) the member or partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or the engagement period, an audit partner or shareholder with voting rights who is on the engagement team earns or receives compensation for procuring any engagement that is not an assurance engagement from the listed enterprise, unless the partnership or joint-stock company within which the member practices his profession has fewer than 5 audit clients that are listed enterprises and fewer than ten partners or shareholders with voting rights ;
(10) the member or partnership or joint-stock company within which he practices his profession provides services to a listed enterprise or a related entity without the prior approval of the audit committee, unless the following conditions exist :

(a) the services do not represent more than 5 % of total audit fees paid by the listed enterprise and a related entity to the member, the partnership or joint-stock company and network partnerships or joint-stock companies in the fiscal year in which the services are provided ; (b) (c) and the services were recognized as assurance services at the time of the engagement ; the provision of these services is promptly brought to the attention of the audit committee ;

(d) the audit committee or one or more designated representatives approves the services prior to the completion of the audit for the listed enterprise or the related entity ;
(11) the member or the partnership or joint-stock company within which he practices his profession performs such an engagement when, during either the period covered by the financial statements subject to audit or the engagement period.

Measures to evaluate compliance with the independence rule and obligations imposed on members 36.10. A member who is required to comply with the independence rule provided for in section 36.4 shall, in respect of the particular engagement, identify threats to independence, evaluate the significance of those threats and, if the threats are other than clearly insignificant, identify and apply measures to reduce or eliminate them. The member shall document the decision to accept or continue the particular engagement. The documentation shall include the following information : (1) (2) (3) (4) a description of the nature of the engagement ; the threats identified ; the measures identified and applied to reduce or eliminate the threats ; and an explanation of how the measures reduce or eliminate the threats.

Where the threats cannot be reduced, the member shall : (1) (2) eliminate the activity, relationship, influence or interest creating the threats ; or refuse to accept or continue the engagement.

36.11. A member who violates section 36.4 shall communicate this violation in writing, on a timely basis, to another member, partner or shareholder with voting rights of the partnership or joint-stock company duly appointed by the board of directors or a similar internal management board of the partnership or joint-stock company.
A member who has been assigned to an engagement team to perform assurance services or apply specified auditing procedures shall also communicate in writing to the designated member any situation or facts that would put this member in violation of section 36.4.

CONFLICT OF INTEREST 36.12. A member shall not place himself in a situation where his loyalty to his client or employer may be compromised.
Subject to section 36.13, a member shall not place himself in a position where his self-interest or the interest of the partnership or joint-stock company within which he practices his profession conflicts, or would be perceived as conflicting, with the interest of his client or the clients of the partnership or joint-stock company.

A member shall inform his client or employer of any interests, business connections or relationships of which the client or employer should be informed. 36.13. A member shall, before agreeing to provide professional services, determine whether there is any restriction, influence, interest or relationship which, in respect of these professional services, would place him, or would be perceived as placing him, in a conflict of interest position. Conflict of interest situations shall be assessed in respect of all clients of the partnership or jointstock company.

36.14. A member shall decline to perform professional services or cease to provide such services if the performance of the services creates a conflict of interest or is perceived as creating a conflict of interest, or as soon as he discovers a conflict of interest or is perceived as being in a conflict of interest position, unless the affected clients have knowledge of the conflict of interest and have consented to it or the member uses conflict management techniques and obtains the consent of all affected clients before performing the professional services. 37. A member shall inform his client or employer of any interests, business connections and affiliations of which the client or employer should normally be informed. This does not necessarily include disclosure to his client of professional services that he may be rendering or proposing to render to other clients. 38. A member shall not hold, receive, bargain for or acquire, directly or indirectly, any compensation, fee or benefit for personal advantage or for the advantage of the partnership or jointstock company within which he practices his profession without the client's knowledge and consent or without his employer's knowledge and consent as the case may be. 39. Other than in relation to the sale and purchase of the clientele of a member or of a partnership or company, a member engaged in the practice of public accounting shall not directly or indirectly pay to any person who is not in the practice of public accounting a commission or other compensation to obtain a client, nor shall he accept directly or indirectly from any person who is not in the practice of public accounting a commission or other compensation for referring the products or services of such person to a client.

ACCESS TO RECORDS 46. A member shall respect the right of his client, or of a representative of his client authorized to that effect, to take cognizance and obtain copy of any documents concerning the client in any file developed in connection with him in the performance of a contract. Particularly, a member shall, on request, hand to his client, or to a representative of his client authorized to that effect, copy of any documents which are part of the accounting records of his client. 46.1. A member shall promptly return to a client or, if so instructed by such client, to his successor, the records and documents belonging to the client, whether or not his fees have been paid. Professional Secrecy 48. A member is bound by professional secrecy and may not disclose confidential information revealed to him by reason of his profession, unless he is authorized to do so by the person who confided such information to him or by an express provision of law. In addition, the member is released from his obligation of professional secrecy in the case and in accordance with the terms and conditions set out in section 48.1. 48.1. A member who, pursuant to the third paragraph of section 60.4 of the Professional Code, communicates information protected by professional secrecy to prevent an act of violence shall : (1) communicate the information without delay to the person exposed to the danger or that person's representative, and to the persons who can come to that person's aid ; (2) use a method of communication that ensures the confidentiality of the information under the circumstances ; and (3) enter the following information in the client's record as soon as possible :

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

the purpose of the communication ; the date on which the information was communicated ; the method of communication used ; the name of all persons to whom the information was communicated ; and the reasons for the decision to communicate the information.

49. A member shall not make use of confidential information in a manner which may be prejudicial to a client or employer or with a view to obtaining directly or indirectly a benefit for himself or for another person.

Q. What steps/ disciplinary action/ punishment may be taken against a Chartered Accountant for guilty of misconduct?

With a view to bring harmony in presentation of the financial statements and an identical treatment in a particular situation, the ICAB has brought out various Statements, Auditing and Assurance Standards, Accounting Standards and Guidance Notes, which are mandatory for a practicing Chartered Accountant to be adhered to while discharging his professional duty of attestation of financial statements. These sets of documents necessitate that financial statements are depicted in a definite manner, and give the required information in the desired manner, which are professionally verified by applying scientific audit techniques to ensure material correctness to a large extent. The objectivity and integrity of the financial statements attested by a Chartered Accountant following these sets of documents, are of a very high degree, and which enhance the credibility and reliability of these statements to the user. A Chartered Accountant who does not follow these sets of documents in discharging his professional duty of attestation, is guilty of professional misconduct, and thereby liable for disciplinary action and punishment under the BYE-LAW , which may be; (i) Reprimanding the member or (ii) Removing his name from the Register of members for such period not exceeding five years, or (iii) Forwarding the case to the High Court with its recommendations where the council opines for removal of name for a period exceeding five years, or (iv) If the misconduct is of a nature, which as per the Chartered Accountants Act requires action by the High Court, reference to the High Court with recommendations of the council. The procedure of enquiry in respect of disciplinary action against a Chartered Accountant is not only lengthy but rigorous also. Barring a few exceptions, the Chartered Accountant, who has to face action would feel so humiliated that his enthusiasm and working capacity comes to the lowest level. Removal of name as a punishment further nails him with a severe economic blow.

Or
Every Profession has the obligation to maintain proper standards of work and professional ethics by its members. The CA Ordinance has prescribed a procedure to deal with any breach of professional ethics, which has been detailed in three schedules.

The Council has formed an Investigation Committee to investigate such breaches and after providing an opportunity for personal hearing. If such member so desires, Investigation Committee shall permit such member to be represented before it by a counsel or by a member of the Institute. It reports its finding to the Council. The Council also provides an opportunity for personal hearing before taking any one of the following decisions against the members:

reprimand or warn such member; impose such penalty as it may deem necessary and justified; remove the name of such member from the register of members for a period not exceeding five years.

The Investigation Committee and the Council shall for the purpose of an enquiry regarding alleged professional misconduct have been vested with the powers of a Civil Court under the code of Civil Procedure, 1908 (Act of 1908) in respect of the following matters, namely: Schedule II contains the list of misconducts on which only the High Court can take a decision on the recommendation of the Council. The Professional misconducts of the students have also been enumerated in Schedule III. Any member or any aggrieved person may lay before the Investigation Committee any fact indicating that a member or a student has prima facie been guilty of any professional misconduct specified in the respective Schedule. "Suo moto" proceedings can also be initiated in such matters. While members are expected not to overlook to report cases involving possible breach of ethics, they are expected to ensure that allegations in each case have proper basis and are supported by appropriate evidence together with an indication, where possible, the specific clause of the Code of

Ethics which is believed to have been infringed. Any disregard of the above consideration may impair the credibility of the complainant with obvious consequences.

THREATS
The threats identified in the Code are: - Self Interest Threat May occur as a result of a financial or other interest held by the accountant or a family member. - Self Review Threat When a previous judgement needs to be re-evaluated - you cannot audit your own work. - Advocacy Threat May occur when an accountant promotes a position or opinion to the point where subsequent objectivity may be compromised. - Familiarity Threat May occur when, because of a close relationship, the accountant becomes too sympathetic to the interests of others. - Intimidation Threat May occur when an accountant may be deterred from acting objectively by threats - actual or perceived.

Safeguards
1.00 Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories: a) Safeguards created by the profession, legislation or regulation; and b) Safeguards in the work environment. 2.00 Safeguards created by the profession, legislation or regulation include: Educational, training and experience requirements for entry into the profession. Continuing professional development requirements. Corporate governance regulations. Professional standards. Professional or regulatory monitoring and disciplinary procedures. External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant. 3.00 Parts B and C of this Code discuss safeguards in the work environment for professional accountants in public practice and professional accountants in business, respectively. 4.00 Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such safeguards, which may be created by the accounting profession, legislation, regulation, or an employing organization, include: Effective, well-publicized complaint systems operated by the employing organization, the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behavior. An explicitly stated duty to report breaches of ethical requirements. Education Law 6530 Definitions of Professional Misconduct (from State of New York) Each of the following is professional misconduct, and any licensee found guilty of such misconduct under the procedures prescribed in section two hundred thirty of the public health law shall be subject to penalties as prescribed in section two hundred thirty-a of the public health law except that the charges may be dismissed in the interest of justice: 1. Obtaining the license fraudulently;

2. Practicing the profession fraudulently or beyond its authorized scope; 3. Practicing the profession with negligence on more than one occasion; 4. Practicing the profession with gross negligence on a particular occasion; 5. Practicing the profession with incompetence on more than one occasion; 6. Practicing the profession with gross incompetence; 7. Practicing the profession while impaired by alcohol, drugs, physical disability, or mental disability; 8. Being a habitual abuser of alcohol, or being dependent on or a habitual user of narcotics, barbiturates, amphetamines, hallucinogens, or other drugs having similar effects, except for a licensee who is maintained on an approved therapeutic regimen which does not impair the ability to practice, or having a psychiatric condition which impairs the licensee's ability to practice; 9. (a) Being convicted of committing an act constituting a crime under: (i) New York state law or, (ii) federal law or, (iii) the law of another jurisdiction and which, if committed within this state, would have constituted a crime under New York state law; (b) Having been found guilty of improper professional practice or professional misconduct by a duly authorized professional disciplinary agency of another state where the conduct upon which the finding was based would, if committed in New York state, constitute professional misconduct under the laws of New York state; (c) Having been found guilty in an adjudicatory proceeding of violating a state or federal statute or regulation, pursuant to a final decision or determination, and when no appeal is pending, or after resolution of the proceeding by stipulation or agreement, and when the violation would constitute professional misconduct pursuant to this section; (d) Having his or her license to practice medicine revoked, suspended or having other disciplinary action taken, or having his or her application for a license refused, revoked or suspended or having voluntarily or otherwise surrendered his or her license after a disciplinary action was instituted by a duly authorized professional disciplinary agency of another state, where the conduct resulting in the revocation, suspension or other disciplinary action involving the license or refusal, revocation or suspension of an application for a license or the surrender of the license would, if committed in New York state, constitute professional misconduct under the laws of New York state; (e) Having been found by the commissioner of health to be in violation of article thirty-three of the public health law; 10. Refusing to provide professional service to a person because of such person's race, creed, color or national origin; 11. Permitting, aiding or abetting an unlicensed person to perform activities requiring a license; 12. Practicing the profession while the license is suspended or inactive as defined in subdivision thirteen of section two hundred thirty of the public health law, or willfully failing to register or notify the department of education of any change of name or mailing address, or, if a professional service corporation, willfully failing to comply with sections fifteen hundred three and fifteen hundred fourteen of the business corporation law or, if a university faculty practice corporation wilfully failing to comply with paragraphs (b), (c) and (d) of section fifteen hundred three and section fifteen hundred fourteen of the business corporation law; 13. A willful violation by a licensee of subdivision eleven of section two hundred thirty of the public health law; 14. A violation of section twenty-eight hundred three-d or twenty- eight hundred five-k of the public

health law; or 15. Failure to comply with an order issued pursuant to subdivision seven, paragraph (a) of subdivision ten, and subdivision seventeen of section two hundred thirty of the public health law; 16. A willful or grossly negligent failure to comply with substantial provisions of federal, state, or local laws, rules, or regulations governing the practice of medicine; 17. Exercising undue influence on the patient, including the promotion of the sale of services, goods, appliances, or drugs in such manner as to exploit the patient for the financial gain of the licensee or of a third party; 18. Directly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services; 19. Permitting any person to share in the fees for professional services, other than: a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice medicine, or a legally authorized trainee practicing under the supervision of a licensee. This prohibition shall include any arrangement or agreement whereby the amount received in payment for furnishing space, facilities, equipment or personnel services used by a licensee constitutes a percentage of, or is otherwise dependent upon, the income or receipts of the licensee from such practice, except as otherwise provided by law with respect to a facility licensed pursuant to article twenty-eight of the public health law or article thirteen of the mental hygiene law; 20. Conduct in the practice of medicine which evidences moral unfitness to practice medicine; 21. Willfully making or filing a false report, or failing to file a report required by law or by the department of health or the education department, or willfully impeding or obstructing such filing, or inducing another person to do so; 22. Failing to make available to a patient, upon request, copies of documents in the possession or under the control of the licensee which have been prepared for and paid for by the patient or client; 23. Revealing of personally identifiable facts, data, or information obtained in a professional capacity without the prior consent of the patient, except as authorized or required by law; 24. Practicing or offering to practice beyond the scope permitted by law, or accepting and performing professional responsibilities which the licensee knows or has reason to know that he or she is not competent to perform, or performing without adequate supervision professional services which the licensee is authorized to perform only under the supervision of a licensed professional, except in an emergency situation where a person's life or health is in danger; 25. Delegating professional responsibilities to a person when the licensee delegating such responsibilities knows or has reason to know that such person is not qualified, by training, by experience, or by licensure, to perform them; 25-a. With respect to any non-emergency treatment, procedure or surgery which is expected to involve local or general anesthesia, failing to disclose to the patient the identities of all physicians, except medical residents in certified training programs, podiatrists and dentists, reasonably anticipated to be actively involved in such treatment, procedure or surgery and to obtain such patient's informed consent to said practitioners' participation; 26. Performing professional services which have not been duly authorized by the patient or his or her legal representative; 27. Advertising or soliciting for patronage that is not in the public interest. (a) Advertising or soliciting not in the public interest shall include, but not be limited to, advertising or soliciting that: (i) is false, fraudulent, deceptive, misleading, sensational, or flamboyant; (ii) represents intimidation or undue pressure; (iii) uses testimonials;

(iv) guarantees any service; (v) makes any claim relating to professional services or products or the costs or price therefor which cannot be substantiated by the licensee, who shall have the burden of proof; (vi) makes claims of professional superiority which cannot be substantiated by the licensee, who shall have the burden of proof; or (vii) offers bonuses or inducements in any form other than a discount or reduction in an established fee or price for a professional service or product. (b) The following shall be deemed appropriate means of informing the public of the availability of professional services: (i) informational advertising not contrary to the foregoing prohibitions; and (ii) the advertising in a newspaper, periodical or professional direc- tory or on radio or television of fixed prices, or a stated range of prices, for specified routine professional services, provided that if there is an additional charge for related services which are an integral part of the overall service being provided by the licensee, the advertisement shall so state, and provided further that the advertisement indicates the period of time for which the advertised prices shall be in effect. (c)(i) All licensees placing advertisements shall maintain, or cause to be maintained, an exact copy of each advertisement, transcript, tape or video tape thereof as appropriate for the medium used, for a period of one year after its last appearance. This copy shall be made available for inspection upon demand of the department of health; (ii) A licensee shall not compensate or give anything of value to representatives of the press, radio, television or other communications media in anticipation of or in return for professional publicity in a news item; (d) No demonstrations, dramatizations or other portrayals of professional practice shall be permitted in advertising on radio or television; 28. Failing to respond within thirty days to written communications from the department of health and to make available any relevant records with respect to an inquiry or complaint about the licensee's professional misconduct. The period of thirty days shall commence on the date when such communication was delivered personally to the licensee. If the communication is sent from the department of health by registered or certified mail, with return receipt requested, to the address appearing in the last registration, the period of thirty days shall commence on the date of delivery to the licensee, as indicated by the return receipt; 29. Violating any term of probation or condition or limitation imposed on the licensee pursuant to section two hundred thirty of the public health law; 30. Abandoning or neglecting a patient under and in need of immediate professional care, without making reasonable arrangements for the continuation of such care, or abandoning a professional employment by a group practice, hospital, clinic or other health care facility, without reasonable notice and under circumstances which seriously impair the delivery of professional care to patients or clients; 31. Willfully harassing, abusing, or intimidating a patient either physically or verbally; 32. Failing to maintain a record for each patient which accurately reflects the evaluation and treatment of the patient, provided, however, that a physician who transfers an original mammogram to a medical institution, or to a physician or health care provider of the patient, or to the patient directly, as otherwise provided by law, shall have no obligation under this section to maintain the original or a copy thereof. Unless otherwise provided by law, all patient records must be retained for at least six years. Obstetrical records and records of minor patients must be retained for at least six years, and until one year after the minor patient reaches the age of eighteen years; 33. Failing to exercise appropriate supervision over persons who are authorized to practice only under the supervision of the licensee; 34. Guaranteeing that satisfaction or a cure will result from the performance of professional services; 35. Ordering of excessive tests, treatment, or use of treatment facilities not warranted by the condition of the patient;

36. Claiming or using any secret or special method of treatment which the licensee refused to divulge to the department of health; 37. Failing to wear an identifying badge, which shall be conspicuously displayed and legible, indicating the practitioner's name and professional title authorized pursuant to this chapter, while practicing as an employee or operator of a hospital, clinic, group practice or multiprofessional facility, or at a commercial establishment offering health services to the public; 38. Entering into an arrangement or agreement with a pharmacy for the compounding and/or dispensing of coded or specially marked prescriptions; 39. With respect to all professional practices conducted under an assumed name, other than facilities licensed pursuant to article twenty-eight of the public health law or article thirteen of the mental hygiene law, failing to post conspicuously at the site of such practice the name and licensure field of all of the principal professional licen- sees engaged in the practice at that site (i.e., principal partners, officers or principal shareholders); 40. Failing to provide access by qualified persons to patient information in accordance with the standards set forth in section eighteen of the public health law as added by chapter 497 of the laws of 1986; 41. Knowingly or willfully performing a complete or partial autopsy on a deceased person without lawful authority; 42. Failing to comply with a signed agreement to practice medicine in New York state in an area designated by the commissioner of education as having a shortage of physicians or refusing to repay medical education costs in lieu of such required service, or failing to comply with any provision of a written agreement with the state or any municipality within which the licensee has agreed to provide medical service, or refusing to repay funds in lieu of such service as consideration of awards made by the state or any municipality thereof for his or her professional education in medicine, or failing to comply with any agreement entered into to aid his or her medical education; 43. Failing to complete forms or reports required for the reimburse ment of a patient by a third party. Reasonable fees may be charged for such forms or reports, but prior payment for the professional services to which such forms or reports relate may not be required as a condition for making such forms or reports available; 44. In the practice of psychiatry, (a) any physical contact of a sexual nature between licensee and patient except the use of films and/or other audiovisual aids with individuals or groups in the development of appropriate responses to overcome sexual dysfunction and (b) in therapy groups, activities which promote explicit physical sexual contact between group members during sessions; and 45. In the practice of ophthalmology, failing to provide a patient, upon request, with the patient's prescription including the name, address, and signature of the prescriber and the date of the prescription. 46. A violation of section two hundred thirty-eight of the public health law by a professional other than a professional subject to the provisions of paragraph (f) of subdivision one of section twenty-eight hundred five-k of the public health law. 47. Failure to use scientifically accepted barrier precautions and infection control practices as established by the department of health pursuant to section two hundred thirty-a of the public health law.

CIMA CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Threats and Safeguards 100.12 Threats may be created by a broad range of relationships and circumstances. When a relationship or circumstance creates a threat, such a threat could compromise, or could be

perceived to compromise, a professional accountants compliance with the fundamental principles. A circumstance or relationship may create more than one threat, and a threat may affect compliance with more than one fundamental principle. Threats fall into one or more of the following categories: a) Self-interest threat the threat that a financial or other interest will inappropriately influence the professional accountants judgment or behavior; b) Self-review threat the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountants firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service; c) Advocacy threat the threat that a professional accountant will promote a clients or employers position to the point that the professional accountants objectivity is compromised; d) Familiarity threat the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work; and e) Intimidation threat the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. Parts B and C of this Code explain how these categories of threats may be created for professional accountants in public practice and professional accountants in business, respectively. Professional accountants in public practice may also find Part C relevant to their particular circumstances.

Safeguards
100.13 Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories: a) Safeguards created by the profession, legislation or regulation; and b) Safeguards in the work environment. 100.14 Safeguards created by the profession, legislation or regulation include: Educational, training and experience requirements for entry into the profession. Continuing professional development requirements. Corporate governance regulations. Professional standards. Professional or regulatory monitoring and disciplinary procedures. External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant. 100.15 Parts B and C of this Code discuss safeguards in the work environment for professional accountants in public practice and professional accountants in business, respectively. 100.16 Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such safeguards, which may be created by the accounting profession, legislation, regulation, or an employing organization, include: Effective, well-publicized complaint systems operated by the employing organization, the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behavior. An explicitly stated duty to report breaches of ethical requirements. Ethical Conflict Resolution 100.17 A professional accountant may be required to resolve a conflict in complying with the fundamental principles. 100.18 When initiating either a formal or informal conflict resolution process, the following factors, either individually or together with other factors, may be relevant to the resolution process: a) Relevant facts; b) Ethical issues involved; c) Fundamental principles related to the matter in question;

d) Established internal procedures; and e) Alternative courses of action.

Having considered the relevant factors, a professional accountant shall determine the appropriate course of action, weighing the consequences of each possible course of action. If the matter remains unresolved, the professional accountant may wish to consult with other appropriate persons within the firm or employing organization for help in obtaining resolution. 100.19 Where a matter involves a conflict with, or within, an organization, a professional accountant shall determine whether to consult with those charged with governance of the organization, such as the board of directors or the audit committee. 100.20 It may be in the best interests of the professional accountant to document the substance of the issue, the details of any discussions held, and the decisions made concerning that issue. 100.21 If a significant conflict cannot be resolved, a professional accountant may consider obtaining professional advice from the relevant professional body or from legal advisors. The professional accountant generally can obtain guidance on ethical issues without breaching the fundamental principle of confidentiality if the matter is discussed with the relevant professional body on an anonymous basis or with a legal advisor under the protection of legal privilege. Instances in which the professional accountant may consider obtaining legal advice vary. For example, a professional accountant may have encountered a fraud, the reporting of which could breach the professional accountants responsibility to respect confidentiality. The professional accountant may consider obtaining legal advice in that instance to determine whether there is a requirement to report. 100.22 If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant shall, where possible, refuse to remain associated with the matter creating the conflict. The professional accountant shall determine whether, in the circumstances, it is appropriate to withdraw from the engagement team or specific assignment, or to resign altogether from the engagement, the firm or the employing organization. 110.1 The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness. 110.2 A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the professional accountant believes that the information: a) Contains a materially false or misleading statement; b) Contains statements or information furnished recklessly; or c) Omits or obscures information required to be included where such omission or obscurity would be misleading. When a professional accountant becomes aware that the accountant has been associated with such information, the accountant shall take steps to be disassociated from that information. 110.3 A professional accountant will be deemed not to be in breach of paragraph 110.2 if the professional accountant provides a modified report in respect of a matter contained in paragraph 110.2. 120.1 The principle of objectivity imposes an obligation on all professional accountants not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others. 120.2 A professional accountant may be exposed to situations that may impair objectivity. It is impracticable to define and prescribe all such situations. A professional accountant shall not perform a professional service if a circumstance or relationship biases or unduly influences the accountants professional judgment with respect to that service. 130.1 The principle of professional competence and due care imposes the following obligations on all professional accountants: a) To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and b) To act diligently in accordance with applicable technical and professional standards when providing professional services.

130.2 Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service. Professional competence may be divided into two separate phases: a) Attainment of professional competence; and b) Maintenance of professional competence. 130.3 The maintenance of professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment. 130.4 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. 130.5 A professional accountant shall take reasonable steps to ensure that those working under the professional accountants authority in a professional capacity have appropriate training and supervision. 130.6 Where appropriate, a professional accountant shall make clients, employers or other users of the accountants professional services aware of the limitations inherent in the services. 140.1 The principle of confidentiality imposes an obligation on all professional accountants to refrain from: a) Disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and b) Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. 140.2 A professional accountant shall maintain confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close business associate or a close or immediate family member. 140.3 A professional accountant shall maintain confidentiality of information disclosed by a prospective client or employer. 140.4 A professional accountant shall maintain confidentiality of information within the firm or employing organization. 140.5 A professional accountant shall take reasonable steps to ensure that staff under the professional accountants control and persons from whom advice and assistance is obtained respect the professional accountants duty of confidentiality. 140.6 The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer. When a professional accountant changes employment or acquires a new client, the professional accountant is entitled to use prior experience. The professional accountant shall not, however, use or disclose any confidential information either acquired or received as a result of a professional or business relationship. 140.7 The following are circumstances where professional accountants are or may be required to disclose confidential information or when such disclosure may be appropriate: a) Disclosure is permitted by law and is authorized by the client or the employer; b) Disclosure is required by law, for example: i) Production of documents or other provision of evidence in the course of legal proceedings; or ii) Disclosure to the appropriate public authorities of infringements of the law that come to light; and c) There is a professional duty or right to disclose, when not prohibited by law: i) To comply with the quality review of a member body or professional body; ii) To respond to an inquiry or investigation by a member body or regulatory body; iii) To protect the professional interests of a professional accountant in legal proceedings; or

iv) To comply with technical standards and ethics requirements. 140.8 In deciding whether to disclose confidential information, relevant factors to consider include: a) Whether the interests of all parties, including third parties whose interests may be affected, could be harmed if the client or employer consents to the disclosure of information by the professional accountant; b) Whether all the relevant information is known and substantiated, to the extent it is practicable; when the situation involves unsubstantiated facts, incomplete information or unsubstantiated conclusions, professional judgment shall be used in determining the type of disclosure to be made, if any; c) The type of communication that is expected and to whom it is addressed; and d) Whether the parties to whom the communication is addressed are appropriate recipients.

150.1 The principle of professional behavior imposes an obligation on all professional accountants to comply with relevant laws and regulations and avoid any action that the professional accountant knows or should know may discredit the profession. This includes actions that a reasonable and informed third party, weighing all the specific facts and circumstances available to the professional accountant at that time, would be likely to conclude adversely affects the good reputation of the profession. 150.2 In marketing and promoting themselves and their work, professional accountants shall not bring the profession into disrepute. Professional accountants shall be honest and truthful and not: a) Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or b) Make disparaging references or unsubstantiated comparisons to the work of others.

Are Ethics Important For Professional Accountants? Ethics in professional accountancy are of utmost importance. Now as the business and financial world is adopting international accounting and auditing standards, it is becoming all the more necessary to adhere to certain Code of Ethics prescribed by international and national accountancy bodies. Before arguing in favour of the topic, let's have a look at some basic concepts: Profession A profession is an occupation that requires extensive training and the study and mastery of specialized knowledge, and usually has a professional association, ethical code and process of certification or licensing; for example engineering, medicine, social work, teaching, law, finance, the military, nursing and Accountancy etc. Classically there were only three professions: military, medicine and law. Each of these professions holds to a specific code of ethics and members are almost universally required to swear some form of oath to uphold those ethics, therefore 'professing' to a higher standard of accountability. Each of these professions also provides and requires extensive training in the meaning, value and importance of its particular oath in practice of that profession

AUDITING SUMMER - 2010 Course Syllabus

Welcome to the syllabus of : AUDITING
COURSE DESCRIPTION: The course is designed to provide the student with a basic understanding of all aspects of auditing. These include accepting and planning the audit, evaluating internal controls, verifying account balances and financial statement assertions, reporting on audited financial statements, as well as auditing standards, and the legal liabilities and professional and personal ethical responsibilities of auditors. Text: Auditing: Concepts and Applications, Special one semester student subscription

Class Schedule & Assignments WEEK OF

1/24/05

Topic
Auditing : Definition, Scope Of Audit, Objectives, Advantages And Disadvantages, Type/Nature Of Audit,

Chap
1 2

1/31/05 Professional Responsibility 01 Appointment, Letter Of Engagement, Audit Program, Audit Administration, AUDIT

Methodology, WORKING PAPERS, 2/7/05 2/14/05 2/21/05 Professional Responsibility 02 - Maintaining Quality, Routine Work, Vouching, Verification, Auditor As Watch Dog, Audit Evidence And Materiality, Management Letter, Legal Status And Auditor, Duties And Responsibilities Of An Auditor, Audit Risk Analysis, Auditors Lian, EXAM 1 (Chaps 1-5) 3 4 5 6 7 8 9 10 11 12

2/28/05 Internal Control Concepts. Internal Audit, Internal Check 3/7/05 Internal Control: Risk Assessment 3/14/05 Internal Control & E D P, and I. T Based Audit Technique. 3/21/05 Summer BREAK 3/28/05 Statistical Sampling for Testing Controls 4/4/05 Statistical Sampling for Substantive Tests, walk through test, EXAM 2 (Chaps 6-10) 4/11/05 Substantive Audit Testing: Revenue Cycle 4/18/05 Substantive Audit Testing: Expenditure Cycle 4/25/05 Substantive Audit Testing: Financing/Investing Cycle Completing the Audit 5/2/05 Audit Reporting, auditors opinion, 5/9/05 Operational & Compliance Auditing/Other Attest Services 5/16/05 FINAL EXAM (1-3 PM)

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13 14 16/15

ACADEMIC AND PERSONAL INTEGRITY: We do not lie, cheat, steal, or tolerate those who do. ASSIGNMENTS: The specific assignments due for each class session will be made during the preceding class. Each student should be prepared to present and/or discuss the solutions to the assignments on the due dates. Assignments in BOLD will be submitted in the appropriate format, as e-mail attachments, and graded. ATTENDANCE POLICY: Attendance will be taken at each class meeting. Absences will affect course grades as follows: Absences 3-4 5-6 Letter Grade Reduction 1 2

This policy covers all absences and begins with the 1st class period. WRITING ASSIGNMENTS: Two written assignments (Bio/Career Objectives & Resume) are due on the dates indicated. They should be mechanically perfect (grammar, spelling, diction, and usage), content rich, and stylistically appropriate. They should be prepared in MS Word format and submitted as an e-mail attachment. CASE PRESENTATIONS and COMMUNITY SERVICE AUDITS: All students, in groups of two-four, will make Power Point presentations of audit cases or specific topics, and will perform an audit or provide consulting services to area non-profit organizations. Materials and additional information will be provided separately. Grades will be based upon the overall quality of 1) the case/topic presentation and, 2) the audit/consulting project, including peer and client evaluations. Mock Test A short Mock Test on each chapter will be given at the end of the coverage of that chapter. MAKE UP EXAMS: Must be approved in advance of the originally scheduled exam. GRADING:

Exam 1 Exam 2 Final Exam Community Service Audit/Consulting Case Presentation Writing Assignments Quizzes Class Participation

15% 15 20 20 05 10 05 10 100%

TOFAYEL AHMED FCA

Chartered Accountants

Objectives and advantages of Audit The objectives of an audit may broadly be classified as 1. Primary Objectives 2. Secondary objectives. Primary Objectives: The main purpose of audit is to judge the reliability of the financial statements and the supporting accounting records for a particular financial period. The Companies Act, 1956 requires that the auditor of a company has to state whether in his opinion the accounts disclose a true and fair view of the state of company's affairs, profit and Loss Account and Balance Sheet of the state of affairs of a business, the auditor carries out a process of examination and verification of books of accounts and relevant documents. Such an examination will enable the auditor to report to his client on the financial condition and working results of the organization. While carrying out the examination of the various books of accounts, relevant documents and evidences, the auditor may came across certain errors and frauds. Despite such a possibility the detecting of errors and frauds is an incidental object. However, laymen have always associated the detection of errors and frauds as the main function of an auditor which is not true. At the same time audit also discloses how far the accounting system adopted in the organisation is adequate and appropriate in recording the various transactions as well as the weakness of these systems. Secondary Objectives: As stated above, an auditor has to examine the books of accounts and the relevant documents in order to report on the financial condition of the business. In the process of such an investigation of accounts certain errors and frauds may be detected. These are discussed under the following two heads: A. Detection and Prevention of Errors B. Detection and Prevention of Frauds

Detection and prevention of Errors: Various types of errors are mentioned below:

1. Clerical Errors: Such an error arises on account of wrong posting. For example, an amount received from Thomas is credited to Sunny. Though there is wrong posting still the trial balance will agree. Clerical errors are of three types as follows: i) Errors of Commission: There errors are caused due to wrong posting either wholly or partially of the amount in the books of original entry or ledger accounts or wrong calculations, wrong totaling, wrong balancing, and wrong casting of subsidiary books. For example Rs. 500 is paid to a vendor and the same is recorded in the cash book. While posting to the ledger, the Vendor's account is debited by Rs. 500. It may be due to carelessness of the clerk. Most of the errors of commission are reflected in the trial balance and these can be discovered by routine checking of the books. ii) Errors of Omission: Such errors arise when the transactions are not recorded in the books of original entry or posted to the ledger. For example, sales are note recorded in the sales book or omission to enter invoices in the purchase book. For example Rs. 200 is paid to a vendor. The entry in the cash book is made on the credit side but posting to the vendor side is omitted. Errors due to entire omission will not affect the trial balance whereas errors due to partial omission will affect the trial balance and can be detected. iii) Compensating Errors: When two or more errors are committed in such a way that the result of these errors on the debits and credits is nil, they are referred to as a compensating errors. For example, Anil's account which was to be debited for Rs. 500 was credited for Rs. 500 and similarly, Sunil's account which was to be credited for Rs. 500 was debited for Rs.500. These two mistakes will nullify the effect of each other. Both the sides of the trial balance are equally affected. As such, these errors are difficult to locate unless detailed investigation is undertaken. 2. Errors of Principle: Such errors are committed when some fundamental principle of accounting is not properly observed in recording transaction. For example, if there is incorrect allocation of expenditure or receipt between capital and revenue or when closing stock is over-valued. Though trial balance will not disagree, the Profit and Loss Account may be very much affected. Sometimes, such errors are committed deliberately to falsify the accounts or unintentionally due to lack of knowledge or sound principles of accounting. Thus, a thorough examination is to be done to locate such errors.

Detection and Prevention of Frauds: Frauds are always committed deliberately and intentionally to defraud the proprietors of the organization. If the frauds remain undetected, they may affect the opinion of the auditor on the financial condition and the working results of the organization. It is, therefore, necessary that the auditor should exercise utmost care to detect such frauds.

AUDIT MATERIALITY
Summary:
Materiality is one of the basic and major concepts of auditing. Auditing and Assurance Standard (AAS) (hitherto known as Standard Auditing Practices (SAPs))-13, Audit Materiality, states that the concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of the financial information in conformity with recognised accounting policies and practices. There are no sets of rules or prescriptions that may be applied consistently to determine materiality in all circumstances. Materiality is a relative terms. What may be material in one circumstance may not be material in another. The assessment of what is material is a matter of professional judgement and experience of the auditor. In this paper, concept of materiality concept of audit risk, auditors consideration of materiality while making an opinion on the financial statements, etc. are discussed in brief. The matters that are to be considered, among other things, by the auditor to decide on materiality are also outlined.

Introduction:
Materiality is one of the basic and important concepts of auditing. Auditing and Assurance Standard (AAS) (hitherto known as Standard Auditing Practices (SAPs))-13, Audit Materiality, establishes standards on the concept of materiality and its relationship with audit risk. AAS-6 (Revised), Risk Assessments and Internal Control, provides guidance and establishes standards on the procedures to be followed to obtain an understanding of the accounting and internal control systems and on audit risk and its components. The true and fair presentation of the financial statements depends, among other things, upon the concept of materiality. Materiality is a relative term. What may be material in one circumstance may not be material in another. The consideration of materiality is the matter of professional judgement and experience of the auditor. There are number of matters that are to be considered to decide on materiality. But, however, there are no sets of rules or prescriptions that may be considered and applied consistently to decide on materiality in all circumstances. In this paper, some matters are discussed, which may be considered by the auditor while making materiality assessments.

Concept of Materiality:
Materiality concept is one of the most important concepts of auditing. The materiality concept should be considered by the auditor before making an opinion on the financial statements. The client or management of the entity has the responsibility to ensure that whether the financial statements reveals all relevant material information. When material information is not disclosed or materially misstated, the financial statements will not present true and fair picture. It will not be possible for the auditor to make an opinion on the financial statements without considering materiality concept. The assessment of what is material is the matter of professional judgement and experience of the auditor. AAS-13, Audit Materiality, establishes standards on the concept of materiality and its relationship with audit risk which is another important concept of auditing. According to it information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information. Materiality depends on the size and nature of the item, judged in the particular circumstances of its misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which the information must have if it is to be useful.

There are no specific rules or prescriptions that can be followed in all circumstances to assess materiality. It is the matter for the auditor to decide whether a particular misstatement or an item has material impact on the financial statements or not.

Audit Objective and Materiality:

The objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements. Such opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. The user should not assume that the auditors opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise. The materiality concept has an important role in relation to the true and fair presentation of the financial statements. Part II of schedule VI to the Companies Act, 1956, requires that the profit and loss account should disclose every material feature. The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of the financial information in conformity with recognised accounting policies and practices. The auditor should consider materiality at both the overall financial information level and in relation to individual account balances and classes of transactions. It is necessary for the auditor to obtain sufficient appropriate audit evidence which may be influenced by the materiality of the item, before making an opinion on the financial statements.

Matters Influencing Materiality:

There are number of factors which may influence materiality. For example, legal and regulatory requirements, including the requirements which made mandatory by the Institute of Chartered Accountants of India (ICAI) and by the competent authority. The contravention of or non-compliance with such requirements may have a significant bearing on the financial information, and considerations relating to individual account balances and relationships. This process may result in different levels of materiality depending on the matter being audited.

Concept of Audit Risk:

AAS-2, Objective and Scope of the Audit of Financial Statements, states that due to the test nature and other inherent limitations of an audit, together with the inherent limitations of any system of internal control, there is an unavoidable risk that some material misstatements may remain undiscovered. According to AAS-13, Audit Materiality, there is an inverse relationship between materiality and the degree of audit risk, that is, the higher the materiality level, the lower the audit risk and vice versa. For example, the risk that a particular account balance or class of transactions could be misstated by an extremely large amount might be very low, but the risk that it could be misstated by an extremely small amount might be very high. AAS-6(Revised), Risk Assessments and Internal Controls, identifies the three components of audit risk i.e. inherent risk, control risk and detection risk. According to itAudit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Audit risk has three components: INHERENT RISK, CONTROL RISK AND DETECTION RISK. Inherent Risk is the susceptibility of an account balance or class of transactions to misstatement that could be material, either individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls. Control Risk is the risk that a misstatement, that could occur in an account balance or class of transactions and that could be material, either individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and

corrected on a timely basis by the accounting and internal control systems. Detection Risk is the risk that an auditors substantive procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes. AAS-6 (Revised), Risk Assessments and Internal Control, provides detailed guidance on how to assess audit risk and establishes standards on the procedures to be followed to obtain an understanding of the accounting and internal control systems and on audit risk and its components. AAS-6 (Revised), Risk Assessments and Internal Control may be read with AAS-4 (Revised), The Auditors Responsibility to Consider Fraud and Error in an Audit of Financial Statements, which considers audit risk and its components with reference to fraud and error factors.

Audit Risk and Materiality:

As stated earlier, there is an inverse relationship between materiality and the degree of audit risk. When conducting an audit, the auditor should consider materiality and its relationship with audit risk. The level of detection risk can be considered only after considering the level of inherent and control risks. While planning an audit, the auditor should keep in mind that the audit risk is to be kept at an acceptably low level. The range, efficiency, efficacy, nature and timing of the procedures performed by the auditor will determine the level (i.e. high or low) of detection risk. The nature of evidence is also an important factor that may determine the level of detection risk. For instance, the external evidence like confirmations or certificates from third parties like bank may reduce the level of detection risk than internal evidence.

During Audit Function:

The views and results of assessments established, in respect of inherent and control risks, by the auditor and upon which the audit was initially planned may be changed during the course of audit. Because the audit may have been planned with a view that there is a possibility low inherent and control risks. After considering some matters and information which may come to the auditors knowledge, during the course of audit, it may be decided subsequently that the planned procedures will not low the audit risk and they may not sufficient to uncover the material misstatements, if any. In such situation, the auditor should change, or adopt alternative or additional, audit procedures so as to keep the level of audit risk at an acceptably low level. By performing appropriate substantive audit procedures, the level of audit risk can be kept at an acceptably low level.

Materiality and Reporting:

The auditor may require the client or management of the entity to correct the errors or misstatements, if any, which may be material or immaterial, identified. If the client or management has not corrected, any or all of such errors or misstatements, then the auditor should aggregate such errors or misstatements to assess the level of material effect on the financial information. Where the material misstatements are not corrected in the financial information, the auditor should make qualified report. Qualitative considerations also influence the auditor in reaching a conclusion as to whether the misstatements are material.

Extending the Audit Procedures:

When the auditors tests an account balance or class of transactions by an analytical procedure, ordinarily it would not possible to specifically identify misstatements but an indication of whether misstatements might exist in the balance or class, and possibly its approximate magnitude, would be obtained. If the analytical procedure indicates that misstatements might exist, but not its approximate amount, the auditor ordinarily should employ other procedures to estimate the aggregate misstatement in the balance or class. When audit sampling is used by the auditor to test an account balance or class of transactions, the amount of known misstatements identified in sample to the items in the balance or class from which such sample was selected should be projected. Such projected misstatement, along with the results of other substantive tests, contributes to the auditors assessment of aggregate misstatement in the balance or class.

Determining Materiality:
There are no sets of rules or prescriptions that may be applied consistently for determining audit materiality. What may be material in one circumstance may not be material in another. Part II of schedule VI to the companies Act. 1956, requires that the profit and loss account should disclose every material feature. The users of the financial statements expect that the financial statements should be reliable and should disclose all the material information in respect of financial matters of the entity. While conducting an audit the auditor should adopt appropriate audit procedures and measures to identify material misstatements and to assess them to make an opinion on the financial statements. Whenever the auditor faces a difficult situation to decide whether a particular misstatement is material or not, its impact, either individually or when aggregated with other misstatements, on the financial statements of current period, or its expected impact, either individually or when aggregated with other misstatements, on the financial statements of later periods, should be considered. The points discussed below may be considered by the auditor to identify material misstatements and to assess its material effect on the financial statements.

1. Legal and Regulatory Requirements:

The legal and regulatory requirements should be considered by the auditor to determine materiality of an item. Legal requirements are the requirements which are required by the law. For instance, the Companies Act, 1956, lays down the limits on remuneration that can be paid to the directors. If any payment is made to the directors as remuneration in excess of such limits, it will become material even though the amount so paid may be small. Regulatory requirements are the requirements which made mandatory by the government, appropriate or concerned authority and by the Council of the ICAI. For instance, the Companies (Auditors Report) Order, 2003, (issued under section 227 (4A) of the Companies Act, 1956), a series of Accounting Standards issued by the Council of the ICAI, etc. The auditor must consider the legal and regulatory requirements before making an opinion on the financial statements. AAS-21, Consideration of Laws and Regulations in an Audit of Financial Statements, establishes standards on the auditors responsibility regarding consideration of laws and regulations in an audit of financial statements and discusses the matter in detail. The law, which governs the business of the client or entity, may prescribe the forms and the contents of the financial statements according to which the client or entity should prepare and present the financial statements. For instance, section 211 of the Companies Act, 1956, deals with the matters of form and contents of the balance sheet and the profit and loss account. Where the auditor finds that the legal or regulatory requirements, if applicable, are not followed or not complied with or contravened in the preparation and presentation of the financial statements covered by the audit, or where the audit is to be performed in accordance with such requirements (e.g. requirements like AAS) and when the auditor has not been able to perform the audit in accordance with such requirements, the fact should , with reasons, if applicable , be adequately disclosed in the audit report so that the

user of the financial statements may be aware of such non-compliance with, or such contravention of, legal or regulatory requirements. Paragraphs 21, 22 and 23 of AAS-1, Basic Principles Governing an Audit, may be noted in this regard.

TOFAYEL AHMED FCA

Chartered Accountants SEC. 210. Appointment and remuneration of the auditors Sub Section :(1) Every company shall, each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the next annual general meeting and shall within seven days of the appointment , give information thereof to every auditor so appointed. Provided that no person can be appointed auditor of any company unless his written consent has been obtained prior to such appointment or reappointment. (2) Every auditor appointed under sub- section (1 ) shall within 30 days of the receipt from the company of the intimation of his appointment , inform the Registrar of JSC in writing that he has accepted, or refused to accept , the appointment. (3) At any annual general meeting a retiring auditor , by whatsoever authority appointed , shall be reappointed unless (a) he is not qualified for re- appointment; or (b) he has given the company notice in writing of his unwillingness to be re-appointed; or (c) a resolution has been passed at that meeting appointing somebody else instead of him or providing expressly that he shall not be re- appointed : Provide that for the purpose of passing a resolution under clause (c), a notice thereof shall in accordance with Section 211 be issued prior to the meeting, and such resolution cannot be passed except on the ground of death, incapacity, or dishonesty or disqualification of the retiring auditor, ( 4) if an appointment of an auditor is not made at an annual general meeting the Government may appoint to fill the vacancy. ( 5) The Company shall, within seven days of the Governments power under Subsection (4) becoming exercisable, give notice of that fact to the Government; and, if a company fails to give such notice, the company, and also every officer of the company who is in default, shall be punishable with fine which may extend to ONE THOUSAND TAKA. (6) The first auditor or auditors of a company shall be appointed by the BOARD OF DIRECTORS within one month of the date of Registration of the company, and the auditor or auditors of the company so appointed shall hold office until conclusion of the first annual general meeting: Provided that (a) the company may at a general meeting remove any such auditor or all or any of such auditors and appoint in his or their place any other person or persons who have been nominated for appointment by any member of the company, and or whose nomination notice has been given to the members of the company not less then fourteen days before the date of the meeting; and (b) if the Board Of Directors fails to exercise its powers under this sub section, the company in a general meeting, may appoint the First auditor or auditors.

(7) The Board may fill any casual vacancy in the office of any auditor, while any such vacancy continues, the remaining auditor or auditors, if any may act: Provided that where such vacancy is caused by the resignation of an auditor , the vacancy shall only be filled by the company in general meeting. ( 8) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting. (9) Except as provided in the process pursuant to sub- section (7) any auditor so appoint under this section may be removed from office before the expiry of his term only by a special resolution of the company in the general meeting. ( 10) The Remuneration of the auditors of a company (a) in the case of an auditor appointed by the Board or the Government shall be fixed by the Board or the Government respectively; and (b) subject to clause (a), shall be fixed by the company in the general meeting or in such manner as the company in the general meeting may determine. ( 11) For the purpose of sub- section (10), any sums paid by the company in respects of the auditors expenses shall be deemed to be included in the expression remuneration. 211. Provision as to resolutions for appointing or removing auditors :Sub Section (1) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re appointed. (2) On receipt of such notice the company shall forthwith send a copy thereof to the retiring auditor, (3) Where such notice is given and the retiring auditor makes with respect thereto representation in writing to the company and request their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so (a) In any notice of the resolution given to members of the company, state the fact of the representation having been made; and (b) Send a copy of representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company , and if a copy of the representation is not sent as aforesaid because they were received too late or because of the company default, the auditor may, without prejudice to his right to be heard orally, require that the representation shall be read out in the meeting. Provided that copies of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this sub section are being abused to secure needless publicity for defamatory matter; and the court may order the companys cost on such an application to be paid whole or in part by the auditor, notwithstanding that he is not a party to the application. (4) Sub Section (2) and (3) shall apply to a resolution to remove the First auditor or any of them under sub- section (6) of section 210 or to the removal of any auditor or auditors under sub section (8) of that section, as they apply in relation to are solution that a retiring auditor shall not be reappointed.

TOFAYEL AHMED FCA Chartered Accountants AUDIT COMMITTEE An audit committee generally consists of non executive directors. The main objective is to establish an effective link between the board of directors and management teams which arise engaged/ involved with the day to day operations of the company, specially with regard to control and auditing matters. SCOPE OF WORK Scope of work of the m auditing committee include the following 1. Reviewing the management letter received from the auditor and making recommendations on it. 2. Appraising the companys accounting policies. 3. Identifying the areas of improving audit efficiency. 4. Reviewing the Internal audit reports of a company. 5. Resolving any possible conflicts between the directors of the company.

Working papers The auditors record of the planning and performance of the audit, the supervision and review of the audit work and providing evidence of the audit work performed to support the auditors opinion.

SUBSTANTATIVE PROCEDURE The test designed to obtain evidence as to the completeness, accuracy, and validity of the data produced by the accounting system. They are of two types , tests of details of transactions and balance, analysis of significant ratios and trends including the resulting investigation of unusual fluctuations and items.

Agreed Upon - Procedures

An engagement consisting of procedures of an audit work which the auditor and client have agreed upon in order to meet the client needs for particular information.

Analytical Procedures

The analysis of significant ratios and trends including the resulting investigation of unusual fluctuations of items.

PRESENTATION AND DISCLOSURE

An item is disclosed, classified and described in accordance with acceptable accounting policies and, when applicable, legal requirements.

AUDITOR,S ENGAGEMENT LETTER A document in which an auditor confirms to the clients acceptance of the appointment, the objective and scope of the audit, the extent of the auditors responsibilities to the client and the form of any reports. CONTROL ENVIRONMENT; The overall attitude, awareness, and actions of directors and management regarding control and its importance in the entity. The factors reflected in the control environment include managements philosophy and operating style, the entitys operational/ organizational structure and methods of assigning authority and responsibility and management control system, including the internal audit functions, the functions of the board of directors, personal policies and procedures, and external influences. CONTROL PROCEDURE Those policies and procedures in addition to the control environment which management has established to provide responsible assurances that specific entity objectives will be achieved. Generally they are procedures related to the proper authorization of transaction, segregation of duties, design and use of adequate documents, safeguarded over assets and independent checks of performance. CONTROL RISK The risk that misstatement that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balance or classes, will not be prevented or detected on a timely basis by the system of internal control.

SINKING FUND A Sinking fund is a Reserve Fund created out of profit and usually invested outside the business in readily marketable sequrities and shares. The object is to establish this fund for providing definite Periodic sum at a definite date for the purpose of repayment of liability or replacing a wasting assets. Accumulated sinking fund grows each year with the aid of periodical contribution and interest. It is built up by setting aside a certain yearly and half yearly instalments out of profit and by investing it at compound interest outside the business in order to produce a required sum at the end of a given period. When money is needed for repaying the liability or replacing the assets, the investments are sold out and out of the sale proceeds the liability is repaid or the new assets is purchased. This amount cannot be used for paying a dividend to shareholders. Computer-Assisted Audit Techniques

ISA 16 was released in October 1984 and is entitled Computer-Assisted Audit Techniques The purpose of this ISA is to provide guidance in the use of CAATs. It applies to all uses of CAATs involving a computer of any type or size. Major aspects covered include Description of Computer-Assisted Audit Techniques, Using CAATs and Using CAATs in Small Business Computer Environment. Relevant portions of the above ISA are reproduced below: Description of Computer-Assisted Audit Technique (CAATs) This Standard describe two of the more common types of CAATs : Audit Software and Test Data used for audit purpose. However the guidance provided in this standard applies to all types of CAATs
Audit Software Audit software consists of computer programmes used by the auditor as part of his auditing procedures, to process data of audit significance from the entitys accounting system. It may consist of package programmes, purpose-written programmes, and utility programmes. Regardless of the source of the programmes, the auditor should substantiate their validity for audit purpose prior to use. 1. Package programmes are generalized computer programmes designed to perform data processing functions which include reading computer files, selecting information, performing calculations, creating data files and printing report in a format specified by the auditor.

2.

Purpose-written programmes are computer programmes designed to perform audit tasks in specific circumstances. These programmes may be prepared by the auditor, by the entity or by an outside programmer engaged by the auditor. In some cases existing entity programmes may be used by the auditor in their original or in a modified state because it may be more efficient than developing independent programmes. Utility programmes are used by the entity to perform common data process-ing functions, such as sorting, creating and printing files. These programmes are generally not designed for audit purposes and therefore, may not contain such features as automatic record counts or control totals.

3.

Test Data Test data techniques are used in conducting audit procedures by entering data (e.g. a sample of transactions) into an entitys computer system and comparing the results obtained with predetermined results. Examples of such uses are: 1. Test date used to test, specific controls in computer programmes such as on-line password and data access controls. 2. Test transaction selected from previously processed transactions or created by the auditor to test specific processing characteristics of an entitys com0puter system. Such transactions are generally processed separately from the entitys normal processing. 3. Test transactions used in an integrated test facility where a dummy unit (e.g. a department or employee) is established and to which test transactions are posted during the normal processing cycle. When test data is processed with the entitys normal processing, the auditor should ensure that the test transactions are subsequently eliminated from the entitys accounting records.

Uses of CAATs CAATs may be used in performing various auditing procedures including: 1. Tests of details of transactions and balance-for example, the use of audit software to test all (or a sample) of the transactions in a computer file. 2. Analytical review procedures-for example the use of audit software to identify unusual fluctuations or items. 3. Compliance tests of general EDP controls-(for example the use of test data to test access procedures to the programme libraries. 4. Compliance tests of EDP application controls-for example, the use of test data to test the functioning of a programmed procedure. Consideration in the Use of CAATs

Where planning the audit, the auditor should consider an appropriate combination of manual and computer-assisted audit technique. In determining whether to use CAATs the factors to be considered include:
1. 2. 3. 4. 5. Computer knowledge, expertise and experience of the auditor. Availability of CAATs and suitable computer facilities. Impracticability of manual tests. Effectiveness and efficiency. Timing.

Computer Knowledge, Expertise and Experience of the Auditor

ISA 15 deal, with the level of skill and competence the auditor should have when conducting an audit in an EDP environment and provides guidance when conducting and audit in an EDP environment and provides guidance when delegating work to assistants with EFP skills or when using work performed by other auditors or experts with such skills. Specifically, the auditor should have sufficient knowledge to plan, execute and use the results of the particular CAAT adopted. The level of knowledge required depends in the complexity and nature of the CAAT and of the entitys accounting system. Accordingly, the auditor should be aware that the use of CAATs in certain circumstances may require significantly more computer knowledge and expertise than in others. Subsequent Events-The significant events occurring after the balance sheet date which may have a material effect on the financial statements. Two types of events can be identified; a) those that provide further evidence of conditions that existed at the balance sheet date and b) those that are indicative of conditions that arose subsequent to the balance sheet date. Substantive Procedures-The tests designed to obtain evidence as to the completeness, accuracy and validity of the date produced by the accounting system. They are of two types; tests of details of transactions and balance, and analysis of significant ratios and trends including the resulting investigation of unusual fluctuations and items.

Tolerable Misstatement- The maximum error in the population that the auditor would be willing to accept and still conclude that the result from the sample has achieved the audit objective

Q. What are the different Clauses of Audit Report in accordance of Companies Act 1994. of Companies Act 1994 the audit report should contain the following clauses:

.According to Section 213 (2), (3), & (4)

First Clause (a) Whether or not auditors have obtained all the information and explanations which to the best of their knowledge and belief were necessary for the purpose of their audit.

Second Clause (b) Whether or not in their opinion proper books of account as required by the Act have been kept by the company. Third Clause (c) Whether or not in their opinion the balance sheet and profit and loss account or the income and expenditure account have been drawn up in conformity with the Act and are in agreement with the books of accounts. Fourth Clause (d) Whether or not in their opinion and to the best of their information and according to the explanations given to them, the said accounts give the information required by this ordinance in the manner so required and give a true and fair view : i) in the case of balance sheet, of the state of the companys affairs as at the end of its financial year: ii) in the case of the profit and loss account or the income and expenditure account or the profit, or loss or surplus or deficit, as the case may be, for its financial year; and iii) in the case of the statement of changes in financial position as sources and application of funds of a listed company. of the charges in the financial position or the sources and application of funds for the financial year. Fifth Clause (e) Whether or not their opinion i) the expenditure incurred during the year was for the purpose of the companys business; and ii) the business conducted, investments made and expenditure incurred during the year were in accordance with the objects of the company. Audit Evidence-The Information obtained by the auditor in arriving at the conclusions on which the audit opinion in based. Unqualified Opinion-An opinion which is not qualified is issued when the auditor is satisfied in all material respects. Modified report-Auditors reports can be modified by issuing : qualified opinions, disclaimer of opinions, adverse opinions, or emphasis of matter paragraph(s) Qualified opinions-An opinion issued when the auditor concludes that an unqualified opinion cannot be issued but that the effect of any disagreement (e.g. whether a significant uncertainty has been adequately disclosed), or limitation on scope is not so material as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being except for the effects of the matter to which the qualification relates. Disclaimer of Opinion- An opinion issued when the possible effect of a limitation on scope or uncertainty is so significant that the auditor is unable to express an opinion on the financial statements. Adverse Opinion- An opinion issued when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. Control Environment-The overall attitude, awareness and actions of directors and management regarding control and its importance in the entity. The factors reflected in the control environment include managements philosophy and operating style, the entitys organizational structure and methods of assigning authority and responsibility and managements control system, including the internal audit function, the functions of the board of directors, personnel policies and procedures, and external influences Control Procedures- Those policies and procedures in addition to the control environment which management has established to provide reasonable assurance that specific entity objectives will be achieved. Generally, they are procedures related to the proper authorization of transactions, segregation of duties, design and use of adequate documents, safeguards over assets, and independent checks on performance. Control Risk-The risk that misstatement that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected on a timely basis by the system of internal control.

Documentation-The working papers prepared or obtained by the auditor and retained in connection with the performance of the audit. EDP Application Controls-The specific controls over the relevant accounting applications maintained by the computer. The purpose of EDP application controls is to establish assurance that all transactions are authorized, recorded and are processed completely, accurately and on a timely bases. EDP Environment- The environment when a computer of any type or size is involved in the processing by the entity of financial information of significance to the audit, whether that computer is operated by the entity or by a third party. General EDP Controls-The establishment of a framework of overall control over the EDP activities and to provide a reasonable level of assurance that the overall objectives of internal control are achieved. Prospective Financial Information-The financial information which relates to events and actions that have not yet occurred and may not occur. Related Party- The parties are considered to be related party if one party has the ability to control the other party or exercise significant influence (participation in the financial and operating policy decisions of an enterprise, but not control of those policies) over the other party in making financial and operating decisions. Related Services-The reviews agreed-upon procedures and compilations. Representations by Management-A document the auditor includes in the working papers as evidence of managements representations by sum marizing oral discussions with management or by obtaining written representations from management. The written representation can take the form of a representation letter from management, or a letter from the auditor outlining the understanding of managements or representations duly acknowledged and confirmed by management.

Contact Information Accounting Site Bookmarks PowerPoint Lecture Notes

ACCT 407/608: Spring 2005 Class Schedule & Assignments

KNOWLEDGE AUDIT
Jay Liebowitz R.W. Deutsch Distinguished Professor of Information Systems, UMBC; (LIEBOWIT@UMBC.EDU)

What Do You Hope to Learn?

Further background on KM processes and the role of the CKO in the organization Knowledge management methodology Knowledge audit process Practical advice about knowledge audits

Knowledge Management Process

Developing new knowledge Securing new and existing knowledge Distributing knowledge Combining available knowledge Important element -- Connectivity

What is a CKO? (Earl and Scott, Sloan Mgt. Review, Winter 1999)
Studied 20 CKOs in North America and Europe Usually appointed by the CEO (gut feeling) Primary task is to articulate a KM program CKOs spend a lot of time walking around the organization CKOs are conceptual designers Concentrate on tapping tacit knowledge

Self-starter; not single career-track people Highly motivated (driven) Most have small staffs (3-12 persons) High level sponsorship

A SMART Methodology for Knowledge Management (Liebowitz et al., UMBC)

S=Strategize M=Model A=Act R=Revise T=Transfer Operational/Implementation Steps for the Knowledge Leveraging Model
Conceptualize and Strategize: Define Problem (why are we doing this; what should be the end result?) Assess Cultural Readiness, Technology Needs & Resources Conduct a Knowledge Audit (Knowledge Gap Analysis) Analyze and Develop an Overall KM Strategic Plan (Should Relate to the Centers Strategic Plan; Define Leadership Role, KM Implementation Infrastructure, and Technology Needs)

Knowledge Acquisition: Identify and Apply Methods to Capture Expertise (e.g., structured/unstructured interviews, verbal walkthroughs, observation, simulation, questionnaires, etc.)

Knowledge Codification/Storage/Organization:
Develop a Knowledge Taxonomy for Standardization Represent and Convert the Acquired Knowledge into rules, cases, best/worst practices, lessons learned, etc. Encode the Knowledge into Software Test and Refine the Knowledge Base

Knowledge Distribution:
Release the KM System to the User Community Evaluate the KM System

Knowledge Use and Application:

Perform On-going Use and Maintenance Create New Knowledge

Enabling Mechanisms for Creating a Learning/Sharing Environment:

Create an Organizational Culture that Supports the Value of Sharing Knowledge (e.g., trust; the ability to communicate clearly and with enough bandwidth to transfer meaning; a common context or language; a reason or goal for sharing; the space to think and reflect; the ability to interact with others in a nonpurposeful way; the autonomy to share; awareness that knowledge may be local; a flexible organizational structure that supports knowledge sharing; the infrastructure to support knowledge and information sharing [David Coleman, Collaborative Strategies Inc.] Strengthen and Create Communities of Practice (part of increased knowledge sharing

Knowledge Audit (ONLINX Research Inc.)

A knowledge audit is a review of the firms knowledge assets and associated knowledge management systems A systematic and dispassionate review of the adequacy and integrity of important organizational assets and systems

Knowledge Audit (Dataware, Liebowitz)

In order to solve the targeted problem, what knowledge do we have, what knowledge is missing, who needs this knowledge, and how will we use the knowledge?

Knowledge Audit (Seeley, WarnerLambert)

What information exists in my organization, and where is it located? What expertise resides in my organization--who knows what? What relevant expertise resides outside my organization, where does this expertise exist, and how do I gain access to it? What are the best sources of relevant internal and external information and knowledge?

Value of a Knowledge Audit

(Peter Smith, ONLINX Research Inc.)
Demonstrates exactly where value is being created through human and structural capital Highlights where leverage can best be applied through improved knowledge sharing and organizational learning Helps prioritize projects for improving knowledge management practice Demonstrates firm capabilities to shareholders and other stakeholders Is a key component to strategic planning for any knowledge-based enterprise Is a key adjunct to due diligence and business planning in mergers, acquisitions, strategic alliances, venture capital, and new company formation

Why Audit?
Looking for knowledge-based opportunities in the markets? Is your focus knowledge flows, stores, and sinks in the organization? Is the audit to check compliance with SOPs? Are you searching for ways to leverage internal processes using knowledge? Will you focus on knowledge objects or are you interested in cultural barriers?

Why Audit? (cont.)

Is the audit strictly for gathering baseline data (descriptive) or is there a prescriptive element? Is the audit part of a larger BPR project? Does the mandate include all stakeholders, suppliers, customers, stockholders, etc.? Where does the learning take place that generates the knowledge? How fast is the learning? What are the key leverage points in the learning process?

Top 5 Reasons for Implementing a KM Solution (Delphi Group)

Organizing corporate K (63%) New ways to share tacit K (39%) Support for research and K generation (31%) New ways to share explicit K (29%) Smart tools to aid DM (26%)

Knowledge Reuse
Provides for the capture and reapplication of knowledge artifacts (episodes in memory, stories, relationships, experiences, rules of thumb, and other forms of knowledge acquired by individuals or groups) Relies as much on the use of negative experiences, flawed reasoning, or wrong answers as on correct results Failure and Lessons Learned in Information Technology Management: An International Journal (Jay Liebowitz, Editor-in-Chief; Publisher: Cognizant Communications Corp., NY; cogcomm@aol.com)

Information Audits (TFPL)

Identify the information needs of the organization, the business units, and individuals Identify the information created and assess its value Identify the expertise and knowledge assets Identify the information gaps Review the current use of external and internal information sources

Information Audits (TFPL) (cont.)

Map information flows and bottlenecks within those flows Develop a knowledge map of the organization indicating appropriate connections and collections

Knowledge Management at Monsanto Co.

Developed a Knowledge Management Architecture (KMA) -- Director of Knowledge Management Includes a learning map that identifies questions answered and resulting decisions made Information map that specifies the kind of information that users need Knowledge map that explains what users do with specific information (conversion of information to insight or knowledge)

Audit (TFPL)
Independent team Mix of interviews, questionnaires, discussion groups, and focus groups Number of people in central positions are interviewed Detailed questionnaire to all staff Do post-audits periodically

Perform a knowledge audit first! If youre a manufacturer, you inventory your physical assets before you change your manufacturing plans and processes. Should we do less with knowledge resources? Consider such factors as:
What information do people need to do their jobs? What is the function of the information? Who holds that knowledge now? Who needs it? When? How can that information be made substantially more effective? What connection should you make between documents and work flow? Do you really want document management tied to work flow, processes, and business process reengineering? What precisely, is the nature of knowledge resources?

Teltechs Audit Process

Begins at the top, identifying the clients key decision making areas and tasks, and drills down to evaluate the types, level, and location of info and K required to support those decisions Gap analysis identifies information/K weak areas

Teltechs (cont.)
Teltechs knowledge audit takes 3-4 weeks at one location with 200-600 employees Assesses knowledge-related behavior (e.g., how receptive is a clients culture to accessing information electronically?)

Knowledge Audits & Related Projects (Liebowitz et al., UMBC)

BRI/PAC core competency process at the Social Security Administration (2 surveys, follow-up interviews) Knowledge management strategy for the FCC Knowledge mapping for ASID Web-based expert system for HCFA Agent-based system for the Navy Other work at our Lab for KM

Knowledge Organization
Invest in education and training of the firms human capital Develop knowledge repositories for preserving, sharing, and distributing K Provide incentives to encourage employees and management to contribute to the organizations knowledge repositories and use this knowledge Consider evaluating annually each member of the firm on the quality and quantity of knowledge contributed to the firms knowledge bases as well as the organizational knowledge used by that firm member

Knowledge Organization (cont.)

Develop methodologies for managing and structuring the knowledge in the knowledge repositories Provide an infrastructure of individuals whose main job is to manage the creation, development, and maintenance of knowledge repositories Place the Chief Knowledge Officer (CKO) in either a staff position directly under the CEO or in a line position equivalent to a VP Adapt to the changing competitive environment by forming project teams based on the employee knowledge profiles

CGIAR KM Survey Results

Most Centers dont measure the value of the IC People are the most important knowledge carriers Most of the Centers strategic goals dont include KM explicitly KM objective: facilitate the re-use & consolidation of K Sharing of K: intranets, documentation--Center level Unit-level: intranets, cross-functional teams, training

Creation of K: lessons learned analysis Storing K: manuals and handbooks Some understanding and support for KM Mixed reaction on motivating and rewarding for KM No formal Webmaster function in most Centers Email & videoconferencing: intranet to support KM No tracking of new K generation

Financial audit
From Wikipedia, the free encyclopedia

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Accountancy

Key concepts Accountant Bookkeeping Trial balance General ledger Debits and credits Cost of goods sold Double-entry system Standard practices Cash and accrual basis GAAP / IFRS Fields of accounting Cost Financial Forensic Fund Management Tax Financial statements Balance sheet Income statement Cash flow statement Equity Retained earnings Auditing Financial audit GAAS Internal audit SarbanesOxley Act Professional Accountants CPA Chartered Accountant CGA CMA

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A financial audit, or more accurately, an audit of financial statements, is the review of the financial statements of a company or any other legal entity (including governments), resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. Financial audits are typically performed by firms of practicing accountants due to the specialist financial reporting knowledge they require. The financial audit is one of many assurance or attestation functions provided by accounting and auditing firms, whereby the firm provides an independent opinion on published information. Many organisations separately employ or hire internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. External auditors may choose to place limited reliance on the work of internal auditors.

Contents
[hide]

1 Purpose 2 History o 2.1 Audit of government expenditure 3 Governance and Oversight 4 Stages of an audit o 4.1 Planning and risk assessment o 4.2 Internal controls testing o 4.3 Substantive procedures o 4.4 Finalization 5 Commercial relationships versus objectivity 6 Related qualifications 7 See also 8 References

[edit] Purpose
Financial audits exist to add credibility to the implied assertion by an organization's management that its financial statements fairly represent the organization's position and performance to the firm's stakeholders (interested parties). The principal stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in ensuring that the financial statements are accurate. The audit is designed to reduce the possibility that a material misstatement is not detected by audit procedures. A misstatement is defined as false or missing information, whether caused by fraud (including deliberate misstatement) or error. "Material" is very broadly defined as being large enough or important enough to cause stakeholders to alter their decisions. Audits exist because they add value through easing the cost of information asymmetry, not because they are required by law. For example, a privately-held company that does not issue securities on a public exchange might engage a firm to audit its financial statements in order to obtain more desirable loan terms from a financial institution or trade accounts with its customers. Without the audit, the lending party would not have assurance as to whether or not the company's financial position is accurate. In turn, the lender could price protect against this information asymmetry. The exact form and content of the "audit opinion" will vary between countries, firms and audited organizations. In the US, the CPA firm provides written assurance that financial reports are fairly presented, in all material respects, in conformity with generally accepted accounting principles (GAAP), where the threshold for materiality is determined via auditor's judgment.

[edit] History
[edit] Audit of government expenditure
The earliest surviving mention of a public official charged with auditing government expenditure is a reference to the Auditor of the Exchequer in England in 1314. The Auditors of the Imprest were established under Queen Elizabeth I in 1559 with formal responsibility for auditing Exchequer payments. This system gradually lapsed and in 1780, Commissioners for Auditing the Public Accounts were appointed by statute. From 1834, the Commissioners worked in tandem with the Comptroller of the Exchequer, who was charged with controlling the issue of funds to the government. As Chancellor of the Exchequer, William Ewart Gladstone initiated major reforms of public finance and Parliamentary accountability. His 1866 Exchequer and Audit Departments Act required all departments, for the first time, to produce annual accounts, known as appropriation accounts. The Act also established the position of Comptroller and Auditor General (C&AG) and an Exchequer and

Audit Department (E&AD) to provide supporting staff from within the civil service. The C&AG was given two main functions to authorise the issue of public money to government from the Bank of England, having satisfied himself that this was within the limits Parliament had voted and to audit the accounts of all Government departments and report to Parliament accordingly. Auditing of UK government expenditure is now carried out by the National Audit Office. Sing industry (acting through various organisations throughout the years) as to the accounting standards for financial reporting, and the U.S. Congress has deferred to the SEC. This is also typically the case in other developed economies. In the UK, auditing guidelines are set by the institutes (including ACCA, ICAEW, ICAS and ICAI) of which auditing firms and individual auditors are members. Accordingly, financial auditing standards and methods have tended to change significantly only after auditing failures. The most recent and familiar case is that of Enron. The company succeeded in hiding some important facts, such as off-book liabilities, from banks and shareholders. Eventually, Enron filed for bankruptcy, and (as of 2006) is in the process of being dissolved. One result of this scandal was that Arthur Andersen, then one of the five largest accountancy firms worldwide, lost their ability to audit public companies, essentially killing off the firm. A recent trend in audits (spurred on by such accounting scandals as Enron and Worldcom) has been an increased focus on internal control procedures, which aim to ensure the completeness, accuracy and validity of items in the accounts, and restricted access to financial systems. This emphasis on the internal control environment is now a mandatory part of the audit of SEC-listed companies, under the auditing standards of the Public Company Accounting Oversight Board (PCAOB) set up by the Sarbanes-Oxley Act.

[edit] Governance and Oversight

Many countries have government sponsored or mandated organizations who develop and maintain auditing standards, commonly referred to generally accepted auditing standards or GAAS. These standards prescribe different aspects of auditing such as the opinion, stages of an audit, and controls over work product (i.e., working papers). Some oversight organizations require auditors and audit firms to undergo a third-party quality review periodically to ensure the applicable GAAS is followed.

[edit] Stages of an audit

A financial audit is performed before the release of the financial statements (typically on an annual basis), and will overlap the year-end (the date which the financial statements relate to). The following are the stages of a typical audit:[citation needed]

[edit] Planning and risk assessment

Timing: before year-end Purpose:

To understand the business of the company and the environment in which it operates. o What should auditors understand?[1] The relevant industry, regulatory, and other external factors including the applicable financial reporting framework The nature of the entity The entitys selection and application of accounting policies The entitys objectives and strategies, and the related business risks that may result in material misstatement of the financial statements The measurement and review of the entitys financial performance Internal control relevant to the audit

To determine the major audit risks (i.e. the chance that the auditor will issue the wrong opinion). For example, if sales representatives stand to gain bonuses based on their sales, and they account for the sales they generate, they have both the incentive and the ability to overstate their sales figures, thus leading to overstated revenue. In response, the auditor would typically plan to increase the rigour of their procedures for checking the sales figures.

[edit] Internal controls testing

Timing: before and/or after year-end Purpose:

To assess the operating effectiveness of internal controls (e.g. authorisation of transactions, account reconciliations, segregation of duties) including IT General Controls. If internal controls are assessed as effective, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do (see below).

Notes:

In some cases an auditor may not perform any internal controls testing, because he/she does not expect internal controls to be reliable. When no internal controls testing is performed, the audit is said to follow a substantive approach. This test determines the amount of work to be performed i.e. substantive testing or test of details.[citation needed]

[edit] Substantive procedures

Timing: after year-end (see note regarding hard/fast close below) Purpose:

to collect audit evidence that the management assertions (actual figures and disclosures) made in the Financial Statements are reliable and in accordance with required standards and legislation.

Methods:

where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained) where internal controls are weak, auditors typically rely more on Substantive Tests of Detail (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items)

Notes:

Some audits involve a 'hard close' or 'fast close' whereby certain substantive procedures can be performed before year-end. For example, if the year-end is 31st December, the hard close may provide the auditors with figures as at 30th November. The auditors would audit income/expense movements between 1st January and 30th November, so that after year end, it is only necessary for them to audit the December income/expense movements and the 31st December balance sheet. In some countries and accountancy firms these are known as 'rollforward' procedures.

[edit] Finalization

Timing: at the end of the audit Purpose:

To compile a report to management regarding any important matters that came to the auditor's attention during performance of the audit, To evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was obtained for every material assertion and To consider the type of audit opinion that should be reported based on the audit evidence obtained.

[edit] Commercial relationships versus objectivity

One of the major issues faced by private auditing firms is the need to provide independent auditing services while maintaining a business relationship with the audited company. The auditing firm's responsibility to check and confirm the reliability of financial statements may be limited by pressure from the audited company, who pays the auditing firm for the service. The auditing firm's need to maintain a viable business through auditing revenue may be weighed against its duty to examine and verify the accuracy, relevancy, and completeness of the company's financial statements. Numerous proposals are made to revise the current system to provide better economic incentives to auditors to perform the auditing function without having their commercial interests compromised by client relationships. Examples are more direct incentive compensation awards and financial statement insurance approaches. See, respectively, Incentive Systems to Promote Capital Market Gatekeeper Effectiveness and Financial Statement Insurance.

[edit] Related qualifications

There are several related professional qualifications in the field of financial audit including Certified General Accountant (CGA), Chartered Certified Accountant, Chartered Accountant and Certified Public Accountant.

Audit evidence Audit evidence is evidence obtained during a financial audit and recorded in the audit working papers audit evidence is the information ... 2 KB (281 words) - 08:39, 29 March 2010

ISA 500 Audit Evidence Editing ISA 500 Audit Evidence is one of the International Standards on Auditing . auditor is to obtain audit evidence from an appropriate ... 3 KB (440 words) - 13:49, 9 March 2010

ISA 501 Audit Evidence Additional Considerations for Specific Items ISA 501 Audit Evidence - Additional Considerations for Specific Items is one of the International Standards on Auditing . 500 Audit Evidence ... 854 B (92 words) - 20:27, 4 January 2010

International Standards on Auditing (section Audit evidence)

professional standards for the performance of financial audit of financial information. ... Audit evidence : ISA 500 Audit Evidence ... 4 KB (463 words) - 10:25, 22 April 2010

Audit working papers Audit working papers are the documents which record all audit evidence obtained during financial statements auditing . support the audit ... 2 KB (227 words) - 13:46, 2 April 2010

Financial audit A financial audit, or more accurately, an audit of financial statements, is the ... that should be reported based on the audit evidence obtained. ... 13 KB (1,790 words) - 23:42, 19 March 2010

Management representation Management representation is a letter issued by an auditor's client to the auditor in writing as one of audit evidence s. date of audit ... 1 KB (166 words) - 03:33, 12 June 2009

Information technology audit process (section Evidence) Information technology audit process: ... If the auditor cannot form an opinion based on the audit evidence obtained, the auditor should then ... 28 KB (3,994 words) - 16:42, 2 March 2010

Audit trail Audit trail or audit log is a chronological sequence of audit records, each of which contains evidence directly pertaining to and resulting ... 3 KB (381 words) - 12:36, 21 April 2010

ISA 230 Documentation and review of the audit work ; and the recording of audit evidence resulting from the audit work in order to support the auditor's opinion. ... 3 KB (464 words) - 12:46, 26 March 2010

ISA 505 External Confirmations Its primary aim is to require the auditor to obtain external sources of audit evidence rather than only relying on internally provided ... 827 B (90 words) - 20:27, 4 January 2010

Observation (disambiguation)

Observation in auditing, a procedure to obtain audit evidence. Observations and Measurements , an information model and data transfer ... 906 B (116 words) - 18:33, 7 March 2010

Audit and Assurance Standards issued by ICAI order to comply with International Audit and Assurance Standards. | + ... Statements | SA 501 | AAS 34 | Audit Evidence Additional ... 4 KB (541 words) - 13:11, 26 April 2010

Statements on Auditing Standards (USA) external auditors on generally accepted auditing standards (abbreviated as GAAS) ... the Audit Evidence Obtained | February 2006 | In effect | ... 23 KB (2,951 words) - 11:46, 21 April 2010

Hong Kong Engagement Standards The Hong Kong Engagement Standards is a set of auditing standards issued by the ... Hong Kong Standards on Auditing: HKSA 500 - Audit Evidence ... 3 KB (360 words) - 12:53, 9 November 2009

Information technology audit An information technology audit, or information systems audit, is an examination of ... collecting and evaluating evidence of an organization's ... 15 KB (2,047 words) - 02:14, 22 April 2010

Auditor independence (section Audit committees) The Charter of Audit and the reporting to an Audit Committee ... The collection of audit evidence is an essential process, and cannot be ... 21 KB (3,273 words) - 23:48, 14 April 2010

Audit The general definition of an audit is an evaluation of a person, organization, ... the existence of objective evidence of processes, to assess ... 10 KB (1,405 words) - 08:39, 23 April 2010

Generally Accepted Auditing Standards sets of standards against which the quality of audit s are performed and may be judged. ... sufcient appropriate audit evidence by performing ... 3 KB (487 words) - 00:09, 15 April 2010

Clinical audit

Clinical audit is a process that has been defined as "a quality improvement ... where there is conclusive evidence about effective clinical ... 20 KB (2,955 words) - 10:26, 4 February 2010

Audit evidence
From Wikipedia, the free encyclopedia

Jump to: navigation, search Audit evidence is evidence obtained during a financial audit and recorded in the audit working papers.[1]

In the audit engagement acceptance or reappointment stage, audit evidence is the information that the auditor is to consider for the appointment. For examples, change in the entity control environment, inherent risk and nature of the entity business, and scope of audit work. In the audit planning stage, audit evidence is the information that the auditor is to consider for the most effective and efficient audit approach. For examples, reliability of internal control procedures, and analytical review systems. In the control testing stage, audit evidence is the information that the auditor is to consider for the mix of audit test of control and audit substantive tests. In the substantive testing stage, audit evidence is the information that the auditor is to make sure the appropriation of financial statement assertions. For examples, existence, rights and obligations, occurrence, completeness, valuation, measurement, presentation and disclosure of a particular transaction or account balance. In the conclusion and opinion formulation stage, audit evidence is information that the auditor is to consider whether the financial statements as a whole presents with completeness, validity, accuracy and consistency with the auditor's understanding of the entity.

[edit] See also

International Standards on Auditing ISA 500 Audit Evidence HKSA 500 Audit Evidence Financial statement assertions

Audit Documentation: Its a Whole New World

By Howard B. Levy The skill of an accountant can always be ascertained by an inspection of his working papers.
Robert H. Montgomery, Montgomerys Auditing, 1912

JUNE 2005 - Montgomerys Auditing was the primary source for auditors about the purpose and content of audit work papers until Statement on Auditing Procedure (SAP) 38 was issued in 1967, 55 years later. But from 1967 until now, authoritative auditing standards have provided guidance primarily for the

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ownership and custody of auditors work papers, with only very broad guidelines as to the content and objectives of the work papers. Statement on Auditing Standards (SAS) 41, issued in 1982, changed very little from SAP 38. Like its predecessor, SAS 41 reestablished that auditors should have work papers, the form and content of which should follow its broad guidelines and meet the circumstances of a particular engagement. The work papers would constitute the principal record of the work done and conclusions reached, and provide the principal support for auditors reports. It provided primarily that the work papers should document the following:

The work has been adequately planned and supervised; Internal control has been appropriately studied and evaluated; and The evidence obtained and procedures performed afford a reasonable basis for an opinion.

At the time of SAS 41s issuance, there were very few explicit requirements elsewhere in professional standards to document specific matters. These requirements consisted principally of an audit program, a legal letter, a client representation letter, and a notation that material internal control weaknesses were communicated orally if not reported in writing. SAS 96 was a project-in-process in October 2001 when the Enron scandal broke. By then, a few other specific requirements had crept into various other standards, but SAS 96 was intended to be a fresh, comprehensive approach to the objectives and content of audit documentation at the standard level. In the decades leading up to SAS 96, intense competition for audit services inspired the profession, led by the largest firms, to seek more efficient ways to audit. Besides developing riskbased auditing, a tendency began to emerge to shortcut audit documentation to achieve efficiencies apparently still permissible under the authoritative literature. In addition, a growing trend of audit failures and related litigation in the pre-Enron years caused the largest firms to adopt a defense strategy (undoubtedly recommended by their lawyers) to further minimize audit documentation. Although hailed by its preparers and promoters as responsive to Enron-related issues, the hastily released SAS 96 did little to add any substantive audit documentation requirements or to reduce the opportunity to apply judgment; it was not an effective improvement to the status quo. The case against Andersen with regard to its audit of Enron focused largely on the destruction of documents. The resultant Sarbanes-Oxley Act of 2002 (SOA) created the Public Company Accounting Oversight Board (PCAOB), and required and empowered the PCAOB to establish regulatory documentation and records-retention standards. Critical of the perceived softness of SAS 96, the newly formed PCAOB quickly addressed audit documentation and records retention in developing its Auditing Standard 3, applicable to audits of SEC issuers. PCAOB Standard 3 creates high hurdles for auditors to clear in improving audit documentation in several substantive ways. In many respects, it appears to have been motivated largely to facilitate the work of the PCAOB inspectors, but it will likely also aid other adversaries, such as plaintiffs attorneys, making audit documentation a much more defensive process than ever before. Almost 100 years after Montgomerys Auditing, its a whole new world. The implications for audit documentation in the post-Enron world stretch beyond SEC registrants. Some state regulators (notably in New York and California) and federal government auditors began seeking more uniformity and accountability among auditors in the preparation and retention of audit documentation for non-SEC entities. Recognizing that the prior standard continued to allow for too much diversity in judgment to satisfy governmental oversight and enabled reduced documentation for the purposes of efficiency and litigation defense, and feeling pressure from the new standardssetting body, the AICPAs Auditing Standards Board (ASB) appointed a task force to revisit SAS 96. It prepared, and issued for public exposure and comment in January 2005, a proposed new SAS that closely mirrors PCAOB Auditing Standard 3 in most, but not all, significant respects. The Scope of the New Documentation Standards Beginning with periods ending on or after November 15, 2004, the new PCAOB documentation standard applies to financial statement and SOA section 404 internal control audits for all SEC issuers, as well as reviews of their quarterly financial information filed in Form 10-Q or 10-QSB. The proposed SAS (to replace SAS 96) will not be finalized until later this year at the earliest and

will likely be made effective beginning with 2006 audits (fiscal years ending on or after December 15, 2006). When finalized, the new standard will apply to all audits of financial statements of nonSEC audit clients. Many CPAs with significant SEC audit practices will choose early adoption of the provisions of this proposed standard in order to minimize the need to temporarily differentiate the nature and quality of audit documentation between SEC and non-SEC audit engagements. It is costly and confusing to maintain two sets of standards and quality-control policies and procedures. In addition, in the event of an adversarial challenge, it could be difficult to defend the use of a lower standard when there is knowledge of, and evidence of proficiency in, a higher standard. Although far more specific than earlier standards, both new standards continue to provide only broad, general requirements, and there are many more specific documentation requirements that will continue to be in effect. A comprehensive list of such requirements appears in Appendix A to the proposed SAS. The Objectives of Audit Documentation Although standards setters (particularly the ASB) recognize that audit documentation is an essential element of audit quality, they caution that it alone does not assure a quality audit. Audit documentation provides the principal written record to support the following:

The auditors report assertion that the audit was performed in accordance with applicable standards, and The auditors conclusions about each significant financial statement assertion, and their opinion on the financial statements taken as a whole.

Audit documentation must clearly demonstrate that the work was in fact performed in compliance with applicable standards, must provide a clear link to significant matters (findings or issues), and must contain sufficient information, in sufficient detail, for a clear understanding by an experienced auditor of the following:

The nature, timing, and extent of the auditing procedures planned; The work performed; The purpose of the work; The source of the information analyzed and supporting evidential matter obtained, examined, and evaluated; and The conclusions reached.

An experienced auditor is someone who has no previous experience with the engagement and has a reasonable understanding of accounting and auditing in general, and in particular with regard to issues relevant to the audit clients industry. The experienced-auditor principle requires that the written audit documentation (i.e., workpapers) stand on its own without oral supplementation except by way of clarification for written documentation that is, in fact, already present. The PCAOB acknowledged that the experienced-auditor principle for evaluating audit documentation was derived from section 4.22 of the Government Accountability Offices Yellow Book. The experienced-auditor principle in the Yellow Book, however, makes no specific reference to industry expertise, because it was meant primarily to be applied to government reviewers trained and experienced in government accounting and auditing. The following are the more specific purposes of audit documentation:

Assisting auditors to plan and perform the audit; Assisting those responsible to direct, supervise, and review the work performed; Providing and demonstrating the accountability of those performing the work (i.e., compliance with applicable standards); Assisting quality-control reviewers to understand and assess how the engagement team reached and supported significant conclusions; Enabling internal and external inspection teams and peer reviewers to assess compliance with professional, legal, and regulatory standards and requirements; and

Assisting successor auditors.

The last three items focus on assisting reviewers in meeting their responsibilities with minimal reliance on oral explanations. PCAOB Standard 3 suggests that inadequate documentation makes it difficult or impossible to determine if the work was actually done, and states that, if it is not clearly evident from the audit documentation, an auditor must demonstrate, with persuasive other evidence, that sufficient procedures were performed, sufficient evidence was obtained, and appropriate conclusions were reached. Although it may be used to clarify written evidence, oral explanation alone will not constitute persuasive other evidence. The Nature, Form, Content, and Extent of the Audit Documentation The proposed SAS contains an affirmative statement to the effect that it is neither necessary nor practical to document every matter the auditor considers during the course of the audit. PCAOB Standard 3 does not contain a similar statement, although it implies as much by suggesting judgmental factors in determining the extent of documentation required. Audit documentation and workpapers can be stored in any medium, and include a variety of documents, including the following:

Audit programs and other planning documents; Analyses; Memoranda; Confirmations; Representation letters; Checklists; Extracts of important documents; Significant correspondence; and Details of tests performed and documents examined.

There is nothing new about this list, but as became evident in the Andersen case, auditors must become more disciplined about incorporating significant e-mails into their workpapers, retaining them, and timely deleting those that are not necessary. The quality, type, and specific content of audit workpapers are matters of professional judgment. Expanded criteria included in new and proposed standards can assist auditors in determining the nature and assessing the adequacy of audit documentation, including the following factors:

The nature of an auditing procedure; The risk of material misstatement; The extent of judgment required in performing the procedure and evaluating the results; The significance and quality of evidence obtained; The nature and extent of exceptions found; and The extent to which the conclusion, or basis therefor, is or is not readily apparent.

Specific items tested. The new standards include very detailed requirements as to the specific content of the workpapers. It is unnecessary to retain copies of client source documents inspected or lists of entire populations from which balances or transactions were selected for detailed tests of controls or substantive tests (unless needed to enable an experienced auditor to understand the work performed and conclusions reached). Audit documentation should instead describe identifying characteristics of the specific items tested (sufficient to enable reperformance of the test for the same items), such as the source or population and the selection criteria; for example:

For an audit sample selected from a population of checks, the specific check numbers of the items included in both the population and the sample; or For a test of all items over a specific amount from a given population, the scope and the population, such as all journal entries over $25,000 in the general journal for the year; or

For procedures that involve inquiries, the name and job description of persons interviewed, the date and content of the inquiries, and the responses received.

With regard to contracts and other significant documents, the standards require the retention of either contracts, corporate minutes, or other documents significant to financial statement assertions, or abstracts thereof. Conclusions. The standards require documentation of conclusions for all relevant or significant financial statement assertions, except when the conclusion is readily apparent or obvious from the documentation of the work performed. Relevant assertions are those that have a meaningful bearing on whether the account is fairly stated. Although the standards do directly address context, it is generally inappropriate to state in a conclusion merely that an account balance is or appears reasonable without a frame of reference as to what reasonable means in terms of risk and materiality (i.e., the likelihood of an undiscovered material misstatement). When several procedures (primary and corroborative) relate to the same assertion for the same population, only one conclusion should be documented, and it should be based on the results of all relevant tests considered together. The standards also prohibit apparently unsupported conclusions, but require that documentation be adequate to enable an experienced auditor (as previously defined) to assess the evidential support for all conclusions. Significant matters. Both standards contain similar requirements for documenting significant matters, including the timely documentation of all significant discussions with management or with those charged with corporate governance, and the records of discussions with stockholders, other investors, analysts, or other interested parties, for SEC registrants. Individual significant issues or findingsdefined as substantive matters important to the procedures performed, evidence obtained, or conclusions reachedmust be documented. This would include the following:

Matters involving the selection, application, and consistency of accounting principles and related disclosures, especially those regarding complex transactions, estimates, and related assumptions and uncertainties; Disagreements among professional staff or consultants; Significant difficulties in applying audit procedures; or Audit findings or results indicating o a need for revised risk assessments and modification of scope; o possibly material misstatements; o audit adjustments (defined by both standards); o possible management fraud or illegal acts; o significant internal control deficiencies; or o possible modification of an audit report or auditor withdrawal.

Any possible impairment of independence should also be documented. Discussions of any technical research or audit evidence that is inconsistent with or contradicts a final conclusion should be disclosed, along with how it was addressed in reaching the conclusion. Other significant matters include intentional departures from any applicable SAS judged necessary to more effectively achieve an audit objective, along with the justification thereof. This expands older GAAS requirements that were limited to justifying not confirming receivables or not observing physical inventories. There is no similar requirement in PCAOB Standard 3, but it could be viewed as covered by the significant issue documentation requirement. An engagement completion summary is required for SEC issuers. It may include either all information necessary to understand the significant findings and issues, or, as appropriate, crossreferences to other available supporting audit documentation. The summary, together with all crossreferenced supporting documentation, should collectively be as specific as necessary in the circumstances for a reviewer [presumably, an experienced auditor] to gain a thorough understanding of all the significant findings or issues. Identification of preparers, reviewers, and dates. Many firms have long had quality-control policies requiring the signing and dating of workpapers, but this is the first time it has been a requirement in

professional standards. All workpapers, individually or in clearly identified groups, must now be signed and dated by the principal preparer and reviewer for the audit to be in accordance with applicable auditing standards (GAAS or PCAOB). Revisions to Audit Documentation PCAOB Standard 3 places no restrictions on revisions to the workpapers during the audit, as long as all minimum documentation requirements are met. After the report is released, there begins a 45-day file assembly (housekeeping) period that permits the tidying up of unclear or incomplete documentation and the removal of redundant or unnecessary documentation. After this period, only additions may be made, with documentation of the name of the person making the addition, the date it was made, the reason for the addition, the effect on audit conclusions, and any additional actions required. The proposed SAS is the same as PCAOB Standard 3 in this regard except that it would allow a file assembly period of up to 60 days after release. A proposed international audit standard would start its 60-day file assembly period from the report date. Security. Both standards require that audit firms maintain appropriate controls over audit documentation that would:

Ensure that the workpapers clearly disclose to subsequent reviewers when and by whom anything was created, changed, or reviewed; Protect the integrity of the documented information, especially during the audit, when it is shared within the audit team or transmitted to others electronically; Prevent unauthorized changes; and Allow access by authorized parties as necessary to properly discharge their responsibilities.

Superseded, redundant, and other unnecessary material. Robert Montgomery also wrote in 1912 in Montgomerys Auditing: [The] practitioner who aspires to a high place in his profession will avoid all unnecessary compilations and comments and he will ruthlessly destroy his papers as soon as their value is questionable. Timely removal of superseded, redundant, and other necessary material from paper or electronic workpapers is not only permitted but encouraged during the audit and during the file assembly period, but not after a subpoena (or notice of regulatory investigation) arrives. Materials that are unnecessary for (and may impair) the achievement of the objectives of workpapers should be removed and discarded before the workpapers are ready for final review or storage, as well as during (but never after) the post-release file assembly period. This includes early drafts of management letters and financial statements and other superseded materials, open-items lists, followup notes, and review comments. Private desk files and information stored by professional and administrative staff members on a network, personal computers, PDAs, or external disks, including e-mailboxes, also should not contain items that are superseded, in draft form, inconsistent with the final workpapers, or unnecessarily duplicative. Client correspondence that is not related to the audit may be retained in separate correspondence or desk files, but not in audit workpapers. Records Retention Among most clear and direct consequences of the Enron and Andersen scandals are the requirements now applicable to retention of audit documentation. As mandated by SOA, PCAOB Standard 3 requires the retention of all audit documentation (subject to the housekeeping permitted during the 45-day file assembly period) for completed engagements for a minimum of seven years after report release. The proposed SAS would require only five years. Both, however, are subject to state and local statutory and regulatory minimums, if longer. A unique feature of the PCAOB standard is a requirement to retain documentation for incomplete engagements (for which no report was issued) for seven years after the cessation of audit work due to an auditor withdrawal or termination. For multi-office or multi-firm engagements, PCAOB Standard 3 obligates the office of the firm issuing the report to retain (or have access to) for the minimum retention period (seven years) all

audit documentation obtained or prepared by participating auditors associated with other offices of the firm or other firms, whether affiliated or nonaffiliated. The office must also obtain and review certain specified summary documentation prior to release of the audit report. The standard also holds the issuing office responsible for ensuring compliance with its documentation requirements by such other participating auditors. A warning for auditors of SEC issuers, however: Rule 2-06 of Regulation S-X requires retention of documentation beyond the requirements of PCAOB Standard 3, including all correspondence and memoranda in paper or electronic media; e-mails created, sent, or received in connection with an audit or related professional practice engagement; and engagement-related conclusions, opinions, analyses, and data, subject to exceptions for redundant, superseded, and other material, as specified in SEC Release 33-8180, Retention of Records Relevant to Audits and Reviews. A question might arise as to how the file-retention provisions of PCAOB Standard 3 (or the proposed SAS) would apply in the event the engagement partner leaves the audit firm (or even changes offices within the firm) and the client moves with her. This question is not addressed directly in either standard, so what follows is the authors analysis and opinion. It is clear that the file-retention requirements of the new and proposed standards apply to the issuing firm (and in the case of the PCAOB standard, the issuing office of a multi-office firm). Therefore, the audit documentation files may not be surrendered to a departing partner before the minimum retention period has expired. Under these circumstances, the departing partners professional relationship with her former firm becomes no different from any other successor-predecessor auditor relationship, which is governed presently by SAS 84. Nothing in SAS 84, or in either documentation standard, requires a predecessor to share audit documentation with a successor, nor is there anything that prevents or limits such sharing as a matter of professional courtesy. Therefore, in an amicable separation, the issuing firm is free to give copies of its audit files, in whole or in part, to the successor, if it chooses to do so, but it must continue to comply with the file-retention requirements. Summary of the Major Changes If the new SAS is adopted substantially as proposedand there is no reason to believe it wont be auditors will be faced with a whole new world of audit documentation, even if they have little or no SEC audit work. A summary of the principal features of both new standards that change the status quo is shown in the Exhibit. Each standard

is based on an experienced-auditor principle; provides expanded criteria for determining the nature and extent of necessary audit documentation; specifies a minimum file-retention period; requires documentation of auditors competency and independence (which may be contained in central administrative records and, presumably, retained for the minimum file-retention period); requires effective signing and dating of all workpapers (or groups of related workpapers); specifies a file assembly period after which nothing may be deleted and subsequent additions and changes must be documented; provides guidance on what documentation need, or need not, be retained; and requires documentation of whenever evidence or technical research material is identified that is contradictory or inconsistent with a final conclusion, and of how it was addressed.

Assurance services have been defined by the American Institute of Certified Public Accountants (AICPA) as 'Independent Professional Services that improve information quality or its context'. Assurance services reduce the information risk; risk that the information provided is incorrect, on more than just financial data. The major purpose of assurance services is to provide independent and professional opinions that improve the quality of information to management as well as other decision makers within a given firm.

[edit] Types of assurance service

Audits can be considered a type of assurance service. However audits are only designed to test the validity of the financial statements. Under an assurance engagement, accountants can provide a variety of services ranging from information systems security reviews to customer satisfaction surveys. Unlike audit and attestation services that are often highly structured, assurance services tend to be customized and implemented when performed for a smaller group of decision makers within the firm. Often managers must make decisions on things they have incomplete or inaccurate data for, and decisions made on such data may be incorrect and increase the overall business risk. In this respect, assurance services can be very helpful in reducing such risk and help managers or decision makers make more confident decisions within a given firm. This is similar to audits in that investors will choose to invest in a firm that is publishing financial statements that have been audited by an independent firm. Assurance services can test financial and non-financial information; due to this assurance services can be classified as consulting services. However, assurance services are not considered consulting[citation needed] because in consulting services generally, an accountant uses their professional knowledge to make recommendations for a future event or a procedure, such as the design of an information system or accounting control system. In contrast, assurance services are designed to test the validity of past data of the business cycles. Although there is no boundary to what an accountant can test in assurance services, an accountant will not likely[vague] accept an assurance engagement in which his firm or previous experiences does not provide them with enough expertise to make a professional opinion on the given data. Assurance services done by accountants differ from nonassurance services. Other examples of assurance services include:

Business risk assessment Information systems security review Customer satisfaction survey Internal audit outsourcing Accounts receivable review

Auditor's report
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Key concepts Accountant Bookkeeping Trial balance General ledger Debits and credits Cost of goods sold Double-entry system Standard practices Cash and accrual basis GAAP / IFRS Fields of accounting Cost Financial Forensic Fund Management Tax

Financial statements Balance sheet Income statement Cash flow statement Equity Retained earnings Auditing Financial audit GAAS Internal audit SarbanesOxley Act Professional Accountants CPA Chartered Accountant CGA CMA

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The Auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit or evaluation performed on a legal entity or subdivision thereof (called an auditee). The report is subsequently provided to a user (such as an individual, a group of persons, a company, a government, or even the general public, among others) as an assurance service in order for the user to make decisions based on the results of the audit. An auditors report is considered an essential tool when reporting financial information to users, particularly in business. Since many third-party users prefer, or even require financial information to be certified by an independent external auditor, many auditees rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditors report is essentially worthless for investing

auditor's report

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Document prepared by the auditors appointed t

auditor's report

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Definition
Document prepared by the auditors appointed t

auditor's report

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Definition
Document prepared by the auditors appointed t

auditor's report

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Document prepared by the auditors appointed t

purposes.[1]

Contents
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1 Auditors report on financial statements o 1.1 Unqualified Opinion report o 1.2 Qualified Opinion report o 1.3 Adverse Opinion report o 1.4 Disclaimer of Opinion report o 1.5 Auditors report on internal controls of public companies o 1.6 Going concern o 1.7 Other explanatory information and paragraphs o 1.8 Auditors reports on financial statements in different countries 2 Opinion shopping 3 Auditors reports for a Single Audit 4 Other engagements and reports 5 References

[edit] Auditors report on financial statements

See also: Financial audit It is important to note that auditor reports on financial statements are neither evaluations nor , or any other similar determination used to evaluate entities in order to make a decision. The report is only an opinion on whether the information presented is correct and free of material misstatements, whereas all other determinations are left for the user to decide. There are four common types of auditors reports, each one presenting a different situation encountered during the auditors work. The four reports are as follows:

[edit] Unqualified Opinion report

The most frequent type of report is referred to as the Unqualified Opinion, and is regarded by many as the equivalent of a clean bill of health to a patient,[2] which has led many to call it the Clean Opinion, but in reality it is not a clean bill of health[3]. This type of report is issued by an auditor when the financial statements presented are free of material misstatements and are represented fairly in accordance with the Generally Accepted Accounting Principles (GAAP), which in other words means that the companys financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor. The report consists of a title and header, a main body, the auditors signature and address, and the reports issuance date. Traditionally, the main body of the unqualified report consists of three main paragraphs, each with distinct standard wording and individual purpose, however certain auditors (including PricewaterhouseCoopers[1]) have since modified the arrangement of the main body (but not the wording) in order to differentiate themselves from other audit firms. The first paragraph (commonly referred to as the introductory paragraph) states the audit work performed and identifies the responsibilities of the auditor and the auditee in relation to the financial statements. The second paragraph (commonly referred to as the scope paragraph) details the scope of audit work, provides a general description of the nature of the work, examples of procedures

performed, and any limitations the audit faced based on the nature of the work. This paragraph also states that the audit was performed in accordance with the countrys prevailing generally accepted auditing standards and regulations. The third paragraph (commonly referred to as the opinion paragraph) simply states the auditors opinion on the financial statements and whether they are in accordance with generally accepted accounting principles.[1][2] The following is an example of a standard unqualified auditors report on financial statements as it is used in most countries, using the name ABC Company as an auditees name: AUDITOR'S REPORT (or INDEPENDENT AUDITORS REPORT) Board of Directors, Stockholders, Owners, and/or Management of ABC Company, Inc. 123 Main St. Anytown, Any Country We have audited the accompanying balance sheet of ABC Company, Inc. (the Company) as of December 31, 20XX and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in (the country where the report is issued). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in (the country where the report is issued). AUDITORS SIGNATURE Auditors name and address Date of the reports issuance

[edit] Qualified Opinion report

A Qualified Opinion report is issued when the auditor encountered one of two types of situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or clean opinion, but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated. The two types of situations which would cause an auditor to issue this opinion over the Unqualified opinion are:

Single deviation from GAAP this type of qualification occurs when one or more areas of the financial statements do not conform with GAAP (e.g. are misstated), but do not affect the rest of the financial statements from being fairly presented when taken as a whole. Examples of this include a company dedicated to a retail business that did not correctly calculate the

depreciation expense of its building. Even if this expense is considered material, since the rest of the financial statements do conform with GAAP, then the auditor qualifies the opinion by describing the depreciation misstatement in the report and continues to issue a clean opinion on the rest of the financial statements.

Limitation of scope - this type of qualification occurs when the auditor could not audit one or more areas of the financial statements, and although they could not be verified, the rest of the financial statements were audited and they conform GAAP. Examples of this include an auditor not being able to observe and test a companys inventory of goods. If the auditor audited the rest of the financial statements and is reasonably sure that they conform with GAAP, then the auditor simply states that the financial statements are fairly presented, with the exception of the inventory which could not be audited.

The wording of the qualified report is very similar to the Unqualified opinion, but an explanatory paragraph is added to explain the reasons for the qualification after the scope paragraph but before the opinion paragraph. The introductory paragraph is left exactly the same as in the unqualified opinion, while the scope and the opinion paragraphs receive a slight modification in line with the qualification in the explanatory paragraph. The scope paragraph is edited to include the following phrase in the first sentence, so that the user may be immediately aware of the qualification. This placement also informs the user that, except for the qualification, the rest of the audit was performed without qualifications: Except as discussed in the following paragraph, we conducted our audit... The opinion paragraph is also edited to include an additional phrase in the first sentence, so that the user is reminded that the auditors opinion explicitly excludes the qualification expressed. Depending on the type of qualification, the phrase is edited to either state the qualification and the adjustments needed to correct it, or state the scope limitation and that adjustments could have but not necessarily been required in order to correct it. For a qualification arising from a deviation from GAAP, the following phrase is added to the opinion paragraph, using the depreciation example mentioned above: In our opinion, except for the effects of the Companys incorrect determination of depreciation expense, the financial statement referred to in the first paragraph presents fairly, in all material respects, the financial position of For a qualification arising from a scope of limitation, the following phrase is added to the opinion paragraph, using the inventory example mentioned above: In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to perform proper tests and procedures on the Companys inventory, the financial statement referred to in the first paragraph presents fairly, in all material respects, the financial position of Due to the phrases added to the scope and opinion paragraphs, many refer to this report as the Except-For Opinion.[4]

[edit] Adverse Opinion report

An Adverse Opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditees financial position and results of operations. Investors, lending institutions, and governments very rarely accept an auditees financial statements if the auditor issued an adverse opinion, and usually request the auditee to correct the financial statements and obtain another audit report. Generally, an adverse opinion is only given if the financial statements pervasively differ from GAAP.[5] An example of such a situation would be failure of a company to consolidate a material subsidiary. The wording of the adverse report is similar to the qualified report. The scope paragraph is modified accordingly and an explanatory paragraph is added to explain the reason for the adverse opinion after

the scope paragraph but before the opinion paragraph. However, the most significant change in the adverse report from the qualified report is in the opinion paragraph, where the auditor clearly states that the financial statements are not in accordance with GAAP, which means that they, as a whole, are unreliable, inaccurate, and do not present a fair view of the auditees position and operations. In our opinion, because of the situations mentioned above (in the explanatory paragraph), the financial statements referred to in the first paragraph do not present fairly, in all material respects, the financial position of

[edit] Disclaimer of Opinion report

A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements. This type of report is issued when the auditor tried to audit an entity but could not complete the work due to various reasons and does not issue an opinion. The disclaimer of opinion report can be traced back to 1949, when the Statement on Auditing Procedure No. 23: Recommendation Made To Clarify Accountants Representations When Opinion Is Not Expressed was published in order to provide guidance to auditors in presenting a disclaimer.[6] Statements on Auditing Standards (SAS) provide certain situations where a disclaimer of opinion may be appropriate:

A lack of independence, or material conflict(s) of interest, exist between the auditor and the auditee (SAS No. 26) There are significant scope limitations, whether intentional or not, which hinder the auditors work in obtaining evidence and performing procedures (SAS No. 58); There is a substantial doubt about the auditees ability to continue as a going concern or, in other words, continue operating (SAS No. 59) There are significant uncertainties within the auditee (SAS No. 79).

Although this type of opinion is rarely used,[6] the most common examples where disclaimers are issued include audits where the auditee willfully hides or refuses to provide evidence and information to the auditor in significant areas of the financial statements, where the auditee is facing significant legal and litigation issues in which the outcome is uncertain (usually government investigations), and where the auditee has going concern issues (the auditee may not continue operating in the near future).[6] Investors, lending institutions, and governments typically reject an auditees financial statements if the auditor disclaimed an opinion, and will request the auditee to correct the situations the auditor mentioned and obtain another audit report. A disclaimer of opinion differs substantially from the rest of the auditors reports because it provides very little information regarding the audit itself, and includes an explanatory paragraph stating the reasons for the disclaimer. Although the report still contains the letterhead, the auditees name and address, the auditors signature and address, and the reports issuance date, every other paragraph is modified extensively, and the scope paragraph is entirely omitted since the auditor is basically stating that an audit could not be realized. In the introductory paragraph, the first phrase changes from We have audited to We were engaged to audit in order to let the user know that the auditee commissioned an audit, but does not mention that the auditor necessarily completed the audit. Additionally, since the audit was not completely and/or adequately performed, the auditor refuses to accept any responsibility by omitting the last sentence of the paragraph. The scope paragraph is omitted in its entirety since, effectively, no audit was performed. Similar to the qualified and the adverse opinions, the auditor must briefly discuss the situations for the disclaimer in an explanatory paragraph. Finally, the opinion paragraph changes completely, stating that an opinion could not be formed and is not expressed because of the situations mentioned in the previous paragraphs. The following is a draft of the three main paragraphs of a disclaimer of opinion because of inadequate accounting records of an auditee, which is considered a significant scope of limitation:

We were engaged to audit the accompanying balance sheet of ABC Company, Inc. (the Company) as of December 31, 20XX and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. The Company does not maintain adequate accounting records to provide sufficient information for the preparation of the basic financial statements. The Companys accounting records do not constitute a double-entry system which can produce financial statements. Because of the significance of the matters discussed in the preceding paragraphs, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion of the financial statements referred to in the first paragraph.

[edit] Auditors report on internal controls of public companies

See also: Sarbanes-Oxley Act Following the enactment of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) was established in order to monitor, regulate, inspect, and discipline audit and public accounting firms of public companies. The PCAOB Auditing Standards No. 2 now requires auditors of public companies to include an additional disclosures in the opinion report regarding the auditees internal controls, and to opine about the companys and auditors assessment on the companys internal controls over financial reporting. These new requirements are commonly referred to as the COSO Opinion. The auditors report is modified to include all necessary disclosures by either presenting the report subsequent to the report on the financial statements, or combining both reports into one auditors report. The following is an example of the former version of adding a separate report immediately after the auditors report on financial statements. Internal control over financial reporting We have also audited managements assessment, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 20XX, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and

procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that ABC Company maintained effective internal control over financial reporting as of December 31, 20XX, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by COSO. Furthermore, in our opinion, ABC Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 20XX, based on criteria established in Internal ControlIntegrated Framework issued by COSO.

[edit] Going concern

Going concern is a term [2] which means that an entity will continue to operate in the near future which is generally more than next 12 months, so long as it generates or obtains enough resources to operate. If the auditee is not a going concern, it means that it is either dissolved, bankrupt, shutdown, etc. Auditors are required to consider the going concern of an auditee before issuing a report.[7] If the auditee is a going concern, the auditor does not modify his/her report in any way. However, if the auditor considers that the auditee is not a going concern, or will not be a going concern in the near future, then the auditor is required to include an explanatory paragraph before the opinion paragraph or following the opinion papragraph, in the audit report explaining the situation,[7][8] which is commonly referred to as the going concern disclosure. Such as opinion is called an "unqualified modified opinion". Unfortunately, many auditors are increasingly reluctant to include this disclosure in their opinions, since it is considered a self-fulfilling prophesy by some.[7] This is because a disclosure for a lack of going concern is viewed negatively by investors, lending institutions, and credit agencies, and therefore reduces the chance that the auditee may obtain the capital or borrowing it needs to survive once the disclosure is made. If this situation occurs, the auditee is more likely to stop being a going concern while the auditor loses potential future audit engagements, and so the auditor may be pressured to avoid including a going concern disclosure. In a study performed on 2001 bankruptcies, nearly half (48%) of selected public companies who faced bankruptcy in 2001 did not have a going concern disclosure in the previous auditors reports.[7] Additionally, 12 of the 20 largest bankruptcies in U.S. history occurred between 2001 and 2002 and none of them had a going concern disclosure in their previous auditors report.[7] As for the actual wording of the auditors report, when a lack of going concern is determined by the auditor, the disclosure paragraph should state the situation, state the auditors determination, and state the auditees plan to correct the situation. The disclosure paragraph should immediately follow the opinion paragraph. The following is the most widely used format of the paragraph which, in this case, deals with a company that has recurring losses:[9] The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note (X) to the financial statements, the Company has suffered recurring losses and has a net capital deficiency. These conditions raise substantial

doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note (X). The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.mean while

[edit] Other explanatory information and paragraphs

Although the auditor reports mentioned above are the standard reports for financial statement audits, the auditor may add additional information to the report if it is deemed necessary without changing the overall opinion of the report. Usually, this additional information is included after the opinion paragraph, although some situations require that the additional information be included in paragraphs before the opinion paragraph. The most frequent paragraphs include:

Limiting distribution of the report In some occasions, the audit report is restricted to a specified user and the auditor includes this restriction in the report, such as a report for financial statements made in cash basis which are prepared for tax purposes only, financial statements for a wholly-owned subsidiary whose sole user of its financial statements is its parent company, etc. Additional or supplemental information Certain auditees include additional and/or supplemental information with their financial statements which is not directly related to the financial statements. Examples include governments that incorporate health, crime, and education statistics along with the financial statement reports for the general public to read and use. Since it is not directly related to the audit of the financial statements, the auditor includes a brief disclaimer paragraph to state that the auditors report only applies to the financial statements and its respective notes. Certain audit work performed by another auditor Sometimes an auditee requires that two or more auditors perform audits on its operations in order to obtain a more effective audit. This usually occurs in large governments and corporations who have certain dependencies, subsidiaries, or other similar components which require an auditor different from its main auditor to perform an audit on the original auditees component due to size, time, location, and/or technical constraints. When the main auditor has to rely on another auditors work, the main auditor may either accept responsibility for the components information and not modify the audit report, or may chose to disclaim the audit on the specific component, stating that the main auditor did not audit the component, that another auditor audited the component, that the components audited information is therefore the responsibility of another auditor, and that the main auditor is simply including it in the original auditees information. If used, this disclaimer is usually included in the introductory paragraph.

[edit] Auditors reports on financial statements in different countries

See also: International Standards on Auditing The auditors report usually does not vary from country to country, although some countries do require either additional or less wording. In the United States, auditors are required to include in the scope paragraphs a phrase stating that they conducted their audit in accordance with generally accepted auditing standards in the United States of America, and, in the opinion paragraph, state whether the financial statements are presented in conformity with generally accepted accounting principles in the United States of America. Some countries, such as the Philippines, use similar reports to those issued in the United States, with the exception that second paragraph would state that the audit was conducted in accordance with Philippine Standards on Auditing, and that the financial statements are in accordance with Philippine Financial Reporting Standards.

[edit] Opinion shopping

Opinion shopping is a term used by external auditors and, after the Enron and Arthur Andersen accounting scandals, the media and general public refer to auditees who contract or reject auditors based on the type of opinion report they will issue on the auditee.[7] The underlying principles of this concept are that auditees determine the compensation to auditors for their work (called audit fees) as well as awarding future audit engagements; that such fees are the auditors main source of income; that certain auditees may try to contract auditors that will issue audit opinions based on the auditees needs; and that certain auditors are willing to comply with such demands so long as they are assured future audit engagements. The most common example is an auditee that knows that the current auditor is going to issue a qualified, adverse, or disclaimer of opinion report, who then rescinds the audit engagement before the opinion is issued, and subsequently shops for another auditor who is willing to issue an unqualified opinion, regardless of any qualifying situations mentioned in the previous sections. However, opinion shopping is not limited to auditees contracting auditors based on issuing opinions. It also includes auditors who are over-pleasing to auditees by issuing unqualified reports without properly auditing, or by simply overlooking material issues affecting the audit. These auditors objective is to appear much more attractive and easy-going than other auditors in order to secure future audit engagements and fees. == Experts agree that, although the great majority of auditors are not willing to jeopardize their profession and reputation for guaranteed audit fees, there are some that will issue opinions solely based on obtaining or maintaining audit engagements. This includes auditors who knowingly emit unmodified unqualified opinions for auditees who are engaged in illegal activities, auditees who have caused a material scope of limitation, auditees that have a lack of going concern,[7] or auditees who present fraudulent financial statements (e.g. Enron and Arthur Andersen). This situation is a clear conflict of interest which should hinder an auditors independence and the ability to audit (AICPA Code of Ethics), but some auditors willingly ignore this statute. Recent laws and industry standards have been implemented in order to correct this situation, which include the Sarbanes-Oxley Act and the AICPAs Peer Review Program.

[edit] Auditors reports for a Single Audit

Main article: Single Audit In the United States, Single Audits are performed on various entities who receives federal aid from the U.S. federal government. Auditors who perform these Single Audits are required to emit three auditors reports. The first report is a report on the entitys financial statements as discussed in the previous sections. The other two reports are compliance-oriented reports related to specific requirements of the OMB Circular A-133 and of Government Auditing Standards (otherwise known as the Yellow Book standards). The American Institute of Certified Public Accountants (AICPA) provides illustrative audit reports [3] of the OMB A-133 and the Yellow Book reports for auditors who are performing Single Audits.

[edit] Other engagements and reports

There are various other audits and evaluations which an external auditor performs in addition to the engagements mentioned in the previous sections, each with their respective standard report(s):

Certification audit reports (for example, an ISO 9000 audit report) Compilations (not an audit, but requires a report) Due Diligence Environmental audit report Financial forecasts Filing of a public companys Form 10-Q and Form 10-K Agreed Upon Procedures

Internal audit reports Regulatory inspection reports Review of financial statements (an overview with very limited auditing procedures) Fraud & Materiality Memo Second opinion

itor's opinion

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Definition
Statement recorded in an auditor's report by the external auditor. It is of three major types: (1) Unqualified opinion indicates the auditor's endorsement of the accuracy and adequacy of the disclosed information and of the firm's financial picture presented by it. (2) Qualified opinion is not necessarily negative and may indicate a limited scope of examination, or that the auditor was unable to directly verify certain information (see auditor's qualified opinion for details). (3) Adverse opinion indicates serious problems with the audit, and can be very damaging in its effect on the firm's reputation and financial position. Also called accountant's opinion or audit opinion. Rate:
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auditor's opinion
See also accountant's opinion

Related Terms:
accountant's opinion statement signed by an independent public accountant describing the scope of the examination of an organization's books and records. Because financial reporting involves considerable discretion, the accountant's opinion is an important assurance to a lender or investor. Depending on the scope of an audit and the auditor's confidence in the veracity of the information, the opinion can be unqualified or, to some degree, qualified. Qualified opinions, though not necessarily negative, warrant investigation. Also called auditor's certificate.

An accounting estimate can be defines as an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption of an asset that results from the assessment of the present status and the expected future benefit and obligation associated with assets and liabilities.(IASB) An example of an accounting estimate is company A making a 5% provision for bad debts on credit sales. This is because company A can't know how much of its receivables that they won't be able to collect. This is to make sure that the entity is prepared for any loss of income associated with their credit sales. A change in the accounting estimate for bad debts could be cause by a change in the accounting policies that the entity is using and by any changes made by IASB. But because at times it is hard to distinguish between an accounting estimate and an accounting policy, the change is considered an accounting estimate. (IASB) The IAS 8 required that to recognized the change the change should be recognized prospectively by including it in the profit and loss in the period of the change if the change affects that period only. As with the example of bad debt it will affect the current period of the entity as current sales will be affected by the provision for bad debt.

Another requirement of the IAS 8 is that if the change gives a rise to a change in assets it shall be recognized by adjusting the carrying amount of the related cost. This is because for my example on bad debts the entity will have to reduce its receivables by the amount of the provision for bad debts. A prospective recognition in the accounting estimate means that the change is applied to the transaction, other events and condition from the date of the change in estimate. This would be that the provision for bad debt would be taken into account and this would affect the current period only. This is recognized as an expense in the current period.

ACCOUNTING ESTIMATES & ASSUMPTION

Management makes many estimates and assumptions in the application of generally accepted accounting principles (GAAP) that may have a material impact on the company's consolidated financial statements and related disclosures and on the comparability of such information over different reporting periods. All such estimates and assumptions affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. Estimates and assumptions are based on management's experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known. The discussion in this section of "critical" accounting estimates or assumptions is according to the disclosure guidelines of the Securities and Exchange Commission (SEC), wherein:

1. the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and 2. the impact of the estimates and assumptions on the company's financial condition or operating performance is material.

Besides those meeting these "critical" criteria, the company makes many other accounting estimates and assumptions in preparing its financial statements and related disclosures. Although not associated with "highly uncertain matters," these estimates and assumptions are also subject to revision as circumstances warrant, and materially different results may sometimes occur. For example, the recording of deferred tax assets requires an assessment under the accounting rules that the future realization of the associated tax benefits be "more likely than not." Another example is the estimation of crude oil and natural gas reserves under SEC rules that require " geological and engineering data (that) demonstrate with reasonable certainty (reserves) to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made." Refer to Table V, "Reserve Quantity Information," for the changes in these estimates for the three years ending December 31, 2007, and to Table VII, "Changes in the Standardized Measure of Discounted Future Net Cash Flows From Proved Reserves" for estimates of proved-reserve values for each of the three years

ending December 31, 2007, which were based on year-end prices at the time. Note 1 to the Consolidated Financial Statements includes a description of the "successful efforts" method of accounting for oil and gas exploration and production activities. The estimates of crude oil and natural gas reserves are important to the timing of expense recognition for costs incurred. The discussion of the critical accounting policy for "Impairment of Properties, Plant and Equipment and Investments in Affiliates," includes reference to conditions under which downward revisions of proved-reserve quantities could result in impairments of oil and gas properties. This commentary should be read in conjunction with disclosures elsewhere in this discussion and in the Notes to the Consolidated Financial Statements related to estimates, uncertainties, contingencies and new accounting standards. Significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements. The development and selection of accounting estimates and assumptions, including those deemed "critical," and the associated disclosures in this discussion have been discussed by management with the Audit Committee of the Board of Directors. The areas of accounting and the associated "critical" estimates and assumptions made by the company are as follows: Pension and Other Postretirement Benefit Plans The determination of pension plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. For other postretirement benefit (OPEB) plans, which provide for certain health care and life insurance benefits for qualifying retired employees and which are not funded, critical assumptions in determining OPEB obligations and expense are the discount rate and the assumed health care cost-trend rates. Note 20 includes information on the funded status of the company's pension and OPEB plans at the end of 2007 and 2006; the components of pension and OPEB expense for the three years ending December 31, 2007; and the underlying assumptions for those periods. Pension and OPEB expense is recorded on the Consolidated Statement of Income in "Operating expenses" or "Selling, general and administrative expenses" and applies to all business segments. The year-end 2007 and 2006 funded status, measured as the difference between plan assets and obligations, of each of the company's pension and OPEB plans is recognized on the Consolidated Balance Sheet. The funded status of overfunded pension plans is recorded as a long-term asset in "Deferred charges and other assets." The funded status of underfunded or unfunded pension and OPEB plans is recorded in "Accrued liabilities" or "Reserves for employee benefit plans." Amounts yet to be recognized as components of pension or OPEB expense are recorded in "Accumulated other comprehensive income." To estimate the long-term rate of return on pension assets, the company uses a process that incorporates actual historical asset-class returns and an assessment of expected future performance and takes into consideration external actuarial advice and asset-class factors. Asset allocations are periodically updated using pension plan asset/liability studies, and the determination of the company's estimates of long-term rates

of return are consistent with these studies. The expected long-term rate of return on U.S. pension plan assets, which account for 67 percent of the company's pension plan assets, has remained at 7.8 percent since 2002. For the 10 years ending December 31, 2007, actual asset returns averaged 8.7 percent for this plan. The year-end market-related value of assets of the major U.S. pension plan used in the determination of pension expense was based on the market value in the preceding three months, as opposed to the maximum allowable period of five years under U.S. accounting rules. Management considers the three-month period long enough to minimize the effects of distortions from day-to-day market volatility and still be contemporaneous to the end of the year. For other plans, market value of assets as of the measurement date is used in calculating the pension expense. The discount rate assumptions used to determine U.S. and international pension and postretirement benefit plan obligations and expense reflect the prevailing rates available on high-quality fixed-income debt instruments. At December 31, 2007, the company selected a 6.3 percent discount rate for the major U.S. pension and postretirement plans. This rate was selected based on a cash flow analysis that matched estimated future benefit payments to the Citigroup Pension Discount Yield Curve as of year-end 2007. The discount rates at the end of 2006 and 2005 were 5.8 percent and 5.5 percent, respectively. An increase in the expected long-term return on plan assets or the discount rate would reduce pension plan expense, and vice versa. Total pension expense for 2007 was $620 million. As an indication of the sensitivity of pension expense to the long-term rate of return assumption, a 1 percent increase in the expected rate of return on assets of the company's primary U.S. pension plan would have reduced total pension plan expense for 2007 by approximately $70 million. A 1 percent increase in the discount rate for this same plan, which accounted for about 60 percent of the companywide pension obligation, would have reduced total pension plan expense for 2007 by approximately $155 million. An increase in the discount rate would decrease the pension obligation, thus changing the funded status of a plan recorded on the Consolidated Balance Sheet . The total pension liability on the Consolidated Balance Sheet at December 31, 2007, for underfunded plans was approximately $1.7 billion. As an indication of the sensitivity of pension liabilities to the discount rate assumption, a 0.25 percent increase in the discount rate applied to the company's primary U.S. pension plan would have reduced the plan obligation by approximately $250 million, which would have increased the plan's overfunded status from approximately $160 million to $410 million. Other plans would be less underfunded as discount rates increase. The actual rates of return on plan assets and discount rates may vary significantly from estimates because of unanticipated changes in the world's financial markets. In 2007, the company's pension plan contributions were $317 million (including $78 million to the U.S. plans). In 2008, the company estimates contributions will be approximately $500 million. Actual contribution amounts are dependent upon plan-investment results, changes in pension obligations, regulatory requirements and other economic factors. Additional funding may be required if investment returns are insufficient to offset increases in plan obligations.

For the company's OPEB plans, expense for 2007 was $233 million and the total liability, which reflected the underfunded status of the plans at the end of 2007, was $2.9 billion. As an indication of discount rate sensitivity to the determination of OPEB expense in 2007, a 1 percent increase in the discount rate for the company's primary U.S. OPEB plan, which accounted for about 75 percent of the companywide OPEB expense, would have decreased OPEB expense by approximately $20 million. A 0.25 percent increase in the discount rate for the same plan, which accounted for about 87 percent of the companywide OPEB liabilities, would have decreased total OPEB liabilities at the end of 2007 by approximately $60 million. For the main U.S. postretirement medical plan, the annual increase to company contributions is limited to 4 percent per year. The cap becomes effective in the year of retirement for pre-Medicare-eligible employees retiring on or after January 1, 2005. The cap was effective as of January 1, 2005, for pre-Medicare-eligible employees retiring before that date and all Medicare-eligible retirees. For active employees and retirees under age 65 whose claims experiences are combined for rating purposes, the assumed health care cost-trend rates start with 8 percent in 2008 and gradually drop to 5 percent for 2014 and beyond. As an indication of the health care cost-trend rate sensitivity to the determination of OPEB expense in 2007, a 1 percent increase in the rates for the main U.S. OPEB plan, which accounted for about 87 percent of the companywide OPEB liabilities, would have increased OPEB expense $8 million. Differences between the various assumptions used to determine expense and the funded status of each plan and actual experience are not included in benefit plan costs in the year the difference occurs. Instead, the differences are included in actuarial gain/loss and unamortized amounts have been reflected in "Accumulated other comprehensive loss" on the Consolidated Balance Sheet. Refer to Note 20 for information on the $3.3 billion of before-tax actuarial losses recorded by the company as of December 31, 2007; a description of the method used to amortize those costs; and an estimate of the costs to be recognized in expense during 2008. Impairment of Properties, Plant and Equipment and Investments in Affiliates The company assesses its properties, plant and equipment (PP&E) for possible impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Such indicators include changes in the company's business plans, changes in commodity prices and, for crude oil and natural gas properties, significant downward revisions of estimated proved-reserve quantities. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, an impairment charge is recorded for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses, production profiles, and the outlook for global or regional market supply and demand conditions for crude oil, natural gas, commodity chemicals and refined products. However, the impairment reviews and calculations are based on assumptions that are consistent with the company's business plans and long-term investment decisions.

No major individual impairments of PP&E were recorded for the three years ending December 31, 2007. An estimate as to the sensitivity to earnings for these periods if other assumptions had been used in impairment reviews and impairment calculations is not practicable, given the broad range of the company's PP&E and the number of assumptions involved in the estimates. That is, favorable changes to some assumptions might have avoided the need to impair any assets in these periods, whereas unfavorable changes might have caused an additional unknown number of other assets to become impaired. Investments in common stock of affiliates that are accounted for under the equity method, as well as investments in other securities of these equity investees, are reviewed for impairment when the fair value of the investment falls below the company's carrying value. When such a decline is deemed to be other than temporary, an impairment charge is recorded to the income statement for the difference between the investment's carrying value and its estimated fair value at the time. In making the determination as to whether a decline is other than temporary, the company considers such factors as the duration and extent of the decline, the investee's financial performance, and the company's ability and intention to retain its investment for a period that will be sufficient to allow for any anticipated recovery in the investment's market value. Differing assumptions could affect whether an investment is impaired in any period or the amount of the impairment and are not subject to sensitivity analysis. From time to time, the company performs impairment reviews and determines that no write-down in the carrying value of an asset or asset group is required. For example, when significant downward revisions to crude oil and natural gas reserves are made for any single field or concession, an impairment review is performed to determine if the carrying value of the asset remains recoverable. Also, if the expectation of sale of a particular asset or asset group in any period has been deemed more likely than not, an impairment review is performed, and if the estimated net proceeds exceed the carrying value of the asset or asset group, no impairment charge is required. Such calculations are reviewed each period until the asset or asset group is disposed of. Assets that are not impaired on a held-and-used basis could possibly become impaired if a decision is made to sell such assets. That is, the assets would be impaired if they are classified as held-forsale and the estimated proceeds from the sale, less costs to sell, are less than the assets' associated carrying values. Business Combinations Purchase-Price Allocation Accounting for business combinations requires the allocation of the company's purchase price to the various assets and liabilities of the acquired business at their respective fair values. The company uses all available information to make these fair value determinations, and for major acquisitions, may hire an independent appraisal firm to assist in making fair value estimates. In some instances, assumptions with respect to the timing and amount of future revenues and expenses associated with an asset might have to be used in determining its fair value. Actual timing and amount of net cash flows from revenues and expenses related to that asset over time may differ materially from those initial estimates, and if the timing is delayed significantly or if the net cash flows decline significantly, the asset could become impaired.

Goodwill Goodwill resulting from a business combination is not subject to amortization. As required by FASB Statement No. 142, Goodwill and Other Intangible Assets, the company tests such goodwill at the reporting unit level for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Contingent Losses Management also makes judgments and estimates in recording liabilities for claims, litigation, tax matters and environmental remediation. Actual costs can frequently vary from estimates for a variety of reasons. For example, the costs from settlement of claims and litigation can vary from estimates based on differing interpretations of laws, opinions on culpability and assessments on the amount of damages. Similarly, liabilities for environmental remediation are subject to change because of changes in laws, regulations and their interpretation, the determination of additional information on the extent and nature of site contamination, and improvements in technology. Under the accounting rules, a liability is generally recorded for these types of contingencies if management determines the loss to be both probable and estimable. The company generally records these losses as "Operating expenses" or "Selling, general and administrative expenses" on the Consolidated Statement of Income. An exception to this handling is for income tax matters, for which benefits are recognized only if management determines the tax position is "more likely than not" (i.e., likelihood greater than 50 percent) to be allowed by the tax jurisdiction. For additional discussion of income tax uncertainties, refer to Note 15. Refer also to the business segment discussions elsewhere in this section for the effect on earnings from losses associated with certain litigation, and environmental remediation and tax matters for the three years ended December 31, 2007. An estimate as to the sensitivity to earnings for these periods if other assumptions had been used in recording these liabilities is not practicable because of the number of contingencies that must be assessed, the number of underlying assumptions and the wide range of reasonably possible outcomes, both in terms of the probability of loss and the estimates of such loss.

| Consolidated Statement of Income

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Year ended December 31

Millions of dollars, except per-share amounts

2007

2006

2005

Includes excise, value-added and similar taxes:

$10,121 $9,551 $ 8,719

Year ended December 31

Millions of dollars, except per-share amounts

2007

2006

2005

Includes amounts in revenues for buy/sell contracts; associated costs are in "Purchased crude oil and products." Refer also to Note 13.

$6,725 $23,822

See accompanying Notes to the Consolidated Financial Statements.

Millions of dollars, except per-share amounts

2007

2006

2005

Includes excise, value-added and similar taxes:

$10,121 $9,551

$ 8,719

Includes amounts in revenues for buy/sell contracts; associated costs are in "Purchased crude oil and products." Refer also to Note 13.

$6,725

$23,822

See accompanying Notes to the Consolidated Financial Statements.

Revenues and Other Income

Sales and other operating revenues 1,2

$214,091 $204,892 $193,641

Income from equity affiliates

4,144

4,255

3,731

Other income

2,669

971

828

Total Revenues and Other Income

220,904 210,118 198,200

Costs and Other Deductions

Purchased crude oil and products 2

133,309 128,151 127,968

Operating expenses

16,932

14,624

12,191

Selling, general and administrative expenses

5,926

5,093

4,828

Exploration expenses

1,323

1,364

743

Depreciation, depletion and amortization

8,708

7,506

5,913

Taxes other than on income 1

22,266

20,883

20,782

Interest and debt expense

166

451

482

Minority interests

107

70

96

Millions of dollars, except per-share amounts

2007

2006

2005

Total Costs and Other Deductions

188,737 178,142 173,003

Income Before Income Tax Expense

32,167

31,976

25,197

Income Tax Expense

13,479

14,838

11,098

Net Income

$18,688 $17,138 $14,099

Per-Share of Common Stock

Net Income

- Basic

$8.83

$7.84

$6.58

- Diluted

$8.77

$7.80

$6.54

Consolidated Balance Sheet

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At December 31

Millions of dollars, except per-share amounts

2007

2006

See accompanying Notes to the Consolidated Financial Statements.

Assets

Cash and cash equivalents

$7,362

$10,493

Marketable securities

732

953

Accounts and notes receivable (less allowance: 2007 $165; 2006 $175)

22,446

17,628

Inventories:

Crude oil and petroleum products

4,003

3,586

Chemicals

290

258

At December 31

Millions of dollars, except per-share amounts

2007

2006

Materials, supplies and other

1,017

812

Total inventories

5,310

4,656

Prepaid expenses and other current assets

3,527

2,574

Total Current Assets

39,377

36,304

Long-term receivables, net

2,194

2,203

Investments and advances

20,477

18,552

Properties, plant and equipment, at cost

154,084

137,747

Less: Accumulated depreciation, depletion and amortization

75,474

68,889

Properties, plant and equipment, net

78,610

68,858

Deferred charges and other assets

3,491

2,088

Goodwill

4,637

4,623

Total Assets

$148,786

$132,628

Liabilities and Stockholders' Equity

Short-term debt

$1,162

$2,159

Accounts payable

21,756

16,675

Accrued liabilities

5,275

4,546

Federal and other taxes on income

3,972

3,626

Other taxes payable

1,633

1,403

Total Current Liabilities

33,798

28,409

Long-term debt

5,664

7,405

Capital lease obligations

406

274

Deferred credits and other noncurrent obligations

15,007

11,000

At December 31

Millions of dollars, except per-share amounts

2007

2006

Noncurrent deferred income taxes

12,170

11,647

Reserves for employee bene t plans

4,449

4,749

Minority interests

204

209

Total Liabilities

71,698

63,693

Preferred stock (authorized 100,000,000 shares, $1.00 par value; none issued)

Common stock (authorized 4,000,000,000 shares, $0.75 par value; 2,442,676,580 shares issued at December 31, 2007 and 2006)

1,832

1,832

Capital in excess of par value

14,289

14,126

Retained earnings

82,329

68,464

Notes receivable key employees

(1)

(2)

Accumulated other comprehensive loss

(2,015)

(2,636)

Deferred compensation and benefit plan trust

(454)

(454)

Treasury stock, at cost (2007 352,242,618 shares; 2006 278,118,341 shares)

(18,892)

(12,395)

Total Stockholders' Equity

77,088

68,935

Total Liabilities and Stockholders' Equity

$148,786

$132,628

SIGNIFICANT ACCOUNTING POLICIES

General Exploration and production (upstream) operations consist of exploring for, developing and producing crude oil and natural gas and marketing natural gas. Refining, marketing and transportation (downstream) operations relate to refining crude oil into finished petroleum products; marketing crude oil and the many products derived from petroleum; and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. Chemical operations include the manufacture and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant oil additives.

The company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America. These require the use of estimates and assumptions that affect the assets, liabilities, revenues and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. Although the company uses its best estimates and judgments, actual results could differ from these estimates as future confirming events occur. The nature of the company's operations and the many countries in which it operates subject the company to changing economic, regulatory and political conditions. The company does not believe it is vulnerable to the risk of near-term severe impact as a result of any concentration of its activities. Subsidiary and Affiliated Companies The Consolidated Financial Statements include the accounts of controlled subsidiary companies more than 50 percent-owned and variable-interest entities in which the company is the primary beneficiary. Undivided interests in oil and gas joint ventures and certain other assets are consolidated on a proportionate basis. Investments in and advances to affiliates in which the company has a substantial ownership interest of approximately 20 percent to 50 percent or for which the company exercises significant influence but not control over policy decisions are accounted for by the equity method. As part of that accounting, the company recognizes gains and losses that arise from the issuance of stock by an affiliate that results in changes in the company's proportionate share of the dollar amount of the affiliate's equity currently in income. Investments are assessed for possible impairment when events indicate that the fair value of the investment may be below the company's carrying value. When such a condition is deemed to be other than temporary, the carrying value of the investment is written down to its fair value, and the amount of the write-down is included in net income. In making the determination as to whether a decline is other than temporary, the company considers such factors as the duration and extent of the decline, the investee's financial performance, and the company's ability and intention to retain its investment for a period that will be sufficient to allow for any anticipated recovery in the investment's market value. The new cost basis of investments in these equity investees is not changed for subsequent recoveries in fair value. Subsequent recoveries in the carrying value of other investments are reported in "Other comprehensive income." Differences between the company's carrying value of an equity investment and its underlying equity in the net assets of the affiliate are assigned to the extent practicable to specific assets and liabilities based on the company's analysis of the various factors giving rise to the difference. The company's share of the affiliate's reported earnings is adjusted quarterly when appropriate to reflect the difference between these allocated values and the affiliate's historical book values. Derivatives The majority of the company's activity in commodity derivative instruments is intended to manage the financial risk posed by physical transactions. For some of this derivative activity, generally limited to large, discrete or infrequently occurring transactions, the company may elect to apply fair value or cash flow hedge accounting. For other similar derivative instruments, generally because of the short-term nature of the contracts or their limited use, the company does not apply hedge accounting, and changes in the fair value of those contracts

are reflected in current income. For the company's commodity trading activity, gains and losses from the derivative instruments are reported in current income. For derivative instruments relating to foreign currency exposures, gains and losses are reported in current income. Interest rate swaps hedging a portion of the company's fixed-rate debt are accounted for as fair value hedges, whereas interest rate swaps relating to a portion of the company's floating-rate debt are recorded at fair value on the Consolidated Balance Sheet, with resulting gains and losses reflected in income. Where Chevron is a party to master netting arrangements, fair value receivable and payable amounts recognized for derivative instruments executed with the same counterparty are offset on the balance sheet. Short-Term Investments All short-term investments are classified as available for sale and are in highly liquid debt securities. Those investments that are part of the company's cash management portfolio and have original maturities of three months or less are reported as "Cash equivalents." The balance of the short-term investments is reported as "Marketable securities" and are marked-to-market, with any unrealized gains or losses included in "Other comprehensive income." Inventories Crude oil, petroleum products and chemicals are generally stated at cost, using a Last-In, First-Out (LIFO) method. In the aggregate, these costs are below market. "Materials, supplies and other" inventories generally are stated at average cost. Properties, Plant and Equipment The successful efforts method is used for crude oil and natural gas exploration and production activities. All costs for development wells, related plant and equipment, proved mineral interests in crude oil and natural gas properties, and related asset retirement obligation (ARO) assets are capitalized. Costs of exploratory wells are capitalized pending determination of whether the wells found proved reserves. Costs of wells that are assigned proved reserves remain capitalized. Costs also are capitalized for exploratory wells that have found crude oil and natural gas reserves even if the reserves cannot be classified as proved when the drilling is completed, provided the exploratory well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project. All other exploratory wells and costs are expensed. Refer to Note 19 for additional discussion of accounting for suspended exploratory well costs. Long-lived assets to be held and used, including proved crude oil and natural gas properties, are assessed for possible impairment by comparing their carrying values with their associated undiscounted future net beforetax cash flows. Events that can trigger assessments for possible impairments include write-downs of proved reserves based on field performance, significant decreases in the market value of an asset, significant change in the extent or manner of use of or a physical change in an asset, and a more-likely-than not expectation that a long-lived asset or asset group will be sold or otherwise disposed of significantly sooner than the end of its previously estimated useful life. Impaired assets are written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved crude oil and natural gas properties in the United States, the company generally performs the impairment review on an individual field basis. Outside the United

States, reviews are performed on a country, concession, development area or field basis, as appropriate. In the refining, marketing, transportation and chemical areas, impairment reviews are generally done on the basis of a refinery, a plant, a marketing area or marketing assets by country. Impairment amounts are recorded as incremental "Depreciation, depletion and amortization" expense. Long-lived assets that are held for sale are evaluated for possible impairment by comparing the carrying value of the asset with its fair value less the cost to sell. If the net book value exceeds the fair value less cost to sell, the asset is considered impaired and adjusted to the lower value. As required under Financial Accounting Standards Board (FASB) Statement No. 143, Accounting for Asset Retirement Obligations (FAS 143), the fair value of a liability for an ARO is recorded as an asset and a liability when there is a legal obligation associated with the retirement of a long-lived asset and the amount can be reasonably estimated. Refer also to Note 23 relating to AROs. Depreciation and depletion of all capitalized costs of proved crude oil and natural gas producing properties, except mineral interests, are expensed using the unit-of-production method by individual field as the proved developed reserves are produced. Depletion expenses for capitalized costs of proved mineral interests are recognized using the unit-of-production method by individual field as the related proved reserves are produced. Periodic valuation provisions for impairment of capitalized costs of unproved mineral interests are expensed. Depreciation and depletion expenses for mining assets are determined using the unit-of-production method as the proved reserves are produced. The capitalized costs of all other plant and equipment are depreciated or amortized over their estimated useful lives. In general, the declining-balance method is used to depreciate plant and equipment in the United States; the straight-line method generally is used to depreciate international plant and equipment and to amortize all capitalized leased assets. Gains or losses are not recognized for normal retirements of properties, plant and equipment subject to composite group amortization or depreciation. Gains or losses from abnormal retirements are recorded as expenses and from sales as "Other income." Expenditures for maintenance (including those for planned major maintenance projects), repairs and minor renewals to maintain facilities in operating condition are generally expensed as incurred. Major replacements and renewals are capitalized. Goodwill Goodwill resulting from a business combination is not subject to amortization. As required by FASB Statement No. 142, Goodwill and Other Intangible Assets, the company tests such goodwill at the reporting unit level for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Environmental Expenditures Environmental expenditures that relate to ongoing operations or to conditions caused by past operations are expensed. Expenditures that create future benefits or contribute to future revenue generation are capitalized. Liabilities related to future remediation costs are recorded when environmental assessments or cleanups or both are probable and the costs can be reasonably estimated. For the company's U.S. and Canadian marketing facilities, the accrual is based in part on the probability that a future remediation commitment will be required. For crude oil, natural gas and mineral producing properties, a liability for an asset retirement obligation is made, following FAS 143. Refer to Note 23 for a discussion of FAS 143. For federal Superfund sites and analogous sites under state laws, the company records a liability for its designated share of the probable and estimable costs and probable amounts for other potentially responsible parties when mandated by the regulatory agencies because the other parties are not able to pay their respective shares. The gross amount of environmental liabilities is based on the company's best estimate of future costs using currently available technology and applying current regulations and the company's own internal environmental policies. Future amounts are not discounted. Recoveries or reimbursements are recorded as assets when receipt is reasonably assured. Currency Translation The U.S. dollar is the functional currency for substantially all of the company's consolidated operations and those of its equity afliates. For those operations, all gains and losses from currency translations are currently included in income. The cumulative translation effects for those few entities, both consolidated and afliated, using functional currencies other than the U.S. dollar are included in the currency translation adjustment in "Stockholders' Equity." Revenue Recognition Revenues associated with sales of products, and all other sources are recorded when title passes to the customer, net of royalties, discounts and allowances, as applicable. Revenues from auxiliary production from properties in which the company has an interest with other producers are generally recognized on the basis of the company's net working interest (entitlement method). Excise, value-added and similar taxes assessed by a governmental authority on a revenue-producing transaction between a seller and a customer are presented on a gross basis. The associated amounts are shown as a footnote to the Consolidated Statement of Income. Referring to note for a discussion of the accounting for buy/sell arrangements. Stock Options and Other Share-Based Compensation Effective July 1, 2005, the company adopted the provisions of FASB Statement No. 123R, Share- Based Payment (FAS 123R), for its share-based compensation plans. The company previously accounted for these plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations and disclosure

requirements established by FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123). Refer to Note 21 for a description of the company's share-based compensation plans, information related to awards granted under those plans and additional information on the company's adoption of FAS 123R. The following table illustrates the effect on net income and earnings per share as if the company had applied the fair-value recognition provisions of FAS 123R to stock options, stock appreciation rights, performance units and restricted stock units for the full year 2005.

Year ended December 31

2005

*Fair value determined using the Black-Scholes option-pricing model.

Net income, as reported

$ 14,099

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

81

Deduct: Total stock-based employee compensation expense determined under fair-valuedbased method for awards, net of related tax effects*

(108)

Pro forma net income

$ 14,072

Net income per share:

Basic as reported

$ 6.58

Basic pro forma

$ 6.56

Diluted as reported

$ 6.54

Diluted pro forma

$ 6.53

Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. A good financial analyst will build in financial ratio calculations extensively in a financial modeling exercise to enable robust analysis. Financial ratios allow a financial analyst to:

Standardize information from financial statements across multiple financial years to allow comparison of a firms performance over time in a financial model. Standardize information from financial statements from different companies to allow an apples to apples comparison between firms of differing size in a financial model. Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates comparison of these relationships over time and across firms in a financial model.

In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are:

Performance ratios Working capital ratios Liquidity ratios Solvency ratios

These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following questions or concerns: Performance ratios

What return is the company making on its capital investment? What are its profit margins?

Working capital ratios

How quickly are debts paid? How many times is inventory turned?

Liquidity ratios

Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term)

What is the level of debt in relation to other assets and to equity? Is the level of interest payable out of profits?

There is also an excellent financial ratio analysis template available in the Finance 3.0 forums, that allows you to calculate, analyze and compare a set of business & financial ratios to assess & measure the operating performance of your own business or businesses / stocks that you intend to invest in. To make sensible investment decisions, a good financial analyst should use a method that considers all of the costs and benefits of each investment opportunity, and makes a logical allowance for the timing of those costs and benefits. The net present value (NPV) method provides for these investment assessment criteria. The NPV is a financial valuation concept that is essential to all financial modeling projects.

The NPV of an investment is the present value of its cash inflows minus the present value of the cash outflows. Why would $100 to be received in a years time be as unequal in value to $ 100 to be paid immediately? The 3 major reasons are:

Interest Lost Risk Effects of inflation

The steps involved in computing NPV are: 1. 2. 3. 4. 5. Identify all cash flows Determine, r, the discount rate Using discount rate, find PV Sum all PVs Apply NPV rule. If NPV is positive, investor should undertake it else not undertake

This simplified formula illustrates the NPV method: PV of the cash flow of year n = Actual cash flow of year n / (1+r) ^ n The basic rule for NPV is that if the project shows a positive NPV, we need to accept the project. This is because the underlying rule is that if a project has a positive NPV it increases the shareholder wealth because all money goes to investors. The NPV decision rules are:

Projects with positive NPV should be accepted Projects with negative NPV should be rejected In case of mutually exclusive projects, the one with higher NPV should be selected

When the project NPV is zero, the rate at that point of time is considered to be its Internal Rate of Return (IRR). The IRR decision rules are:

Projects with an IRR which is better than that of the firm should be accepted Projects with an IRR which is less than that of the firm should be rejected

In case of a single project, the concluding decision will be the same in case of IRR or NPV. Solvency ratios indicate the risk inherent in the company as a result of its debt. A good financial analyst will use solvency ratios to keep tabs of the forecasts made in a financial modeling exercise on debt accumulation to ensure that they are realistic and prudent. A good financial analyst will also use solvency ratios to assess [...] 4 Comments | Read full article

Using Analytical Tools in Financial Modeling

Several types of analytical tools are available to help a good financial analyst develop the big picture and perform sanity checks on the results of a financial modeling project to ensure that results are reliable and within expectations. Horizontal analysis helps identify abnormal changes over time. Vertical analysis, or common-sized statements, can be used to develop insights [...] No Comments | Read full article

Financial Modeling Discipline Use Built in Spreadsheet Tools to Check for Errors

A good financial analyst will always use the built-in spreadsheet auditing & testing tools of Microsoft Excel that allow checking for errors in cell logic (and macro logic, if Excel VBA macros are used) in the financial model. Doing so on a regular basis is good financial modeling discipline and good spreadsheet risk management practice, ensuring error minimization [...] 3 Comments | Read full article

Net Present Value An Overview

To make sensible investment decisions, a good financial analyst should use a method that considers all of the costs and benefits of each investment opportunity, and makes a logical allowance for the timing of those costs and benefits. The net present value (NPV) method provides for these investment assessment criteria. The NPV is a financial [...] No Comments | Read full article

Financial Modeling Discipline Consistent Scales, Units and Labels

A good financial analyst gets the time scales and units right, and labels clearly and consistently throughout the financial model. Such good practice will help eliminate human errors in a financial modeling exercise, and ensure that results are robust and accurate. Be explicit about assumptions related to inflation indices and percent changes in your financial model, [...]

Advanced Placement Macroeconomics

Course Description: This course provides an introduction to and overview of economics, specifically macroeconomics, with a focus on preparation for the Macroeconomics Advanced Placement exam. Campbell McConnell and Stanley Brue, the authors of our textbook, define economics as the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.1 This definition can be simplified by describing economics as the study of human decision-making, or, as another economist put it: Economics seeks to identify circumstances that affect the costs of alternative choices, to analyze their implications for human decisions, and to make verifiable predictions about economic outcome. Economics, then, is the science of choice.2 This course introduces some basic general economic concepts, but the bulk of the class will focus on macroeconomics, the division of economics that analyzes economies and decision-making on a large scale. Macroeconomics addresses aggregates and whole economies rather than the particular decisions and interactions of individual persons, industries, firms, markets, etc., which are the focus of microeconomics. (See the attached course outline for more specific information on the content of this course.) Text: McConnell, Campbell R. and Brue, Stanley L. Economics: Principles, Problems, and Policies (Fifteenth Edition). Boston: McGraw-Hill Irwin, 2002. Workbook: Morton, John S. Macroeconomics: Student Activities. New York, NY: National Council on Economic Education, 1998. Additional Readings and Materials: The Economist, London: The Economist Newspaper Limited. Morton, John S. Advanced Placement Economics: Teacher Resource Manual. New York, NY: National Council on Economic Education, 1996.
1 McConnell 2 Pejovich,

and Brue, 3. Svetozar. Economic Analysis of Institutions and Systems (Revised Second Edition). Boston: Kluwer Academic, 1998, 5.

Course Outline: AP Macroeconomics

Each unit includes reading assignments from McConnell and Brue as well as activities
from Morton. Also, the course includes 2-3 timed writings per unit that require students to generate, interpret, label, and analyze graphs, charts, and data to describe and explain economic concepts; these also serve to simulate the free response portion of the Advanced Placement exam. Multiple choice tests follow each unit and prepare students for that portion of the AP exam. The final two weeks of the course consist of a course review, a practice released AP exam, and an examination of the students performance on the practice AP exam.

Unit 1: Basic Economic Concepts (2.5 weeks) S ocarcity, tradeoffs and the nature of economic systems G o raphs and relationships P oroduction possibilities and opportunity costs T ohe functions of an economic system (what, how, and for whom) and alternative economic systems T ohe circular flow model D o emand, supply, and price determination T ohe public and private sectors F oorms of business organization
Graphs: Production possibilities curve (frontier) Circular flow model Demand and supply curves showing equilibrium Demand and supply curves showing shifts in demand/supply Key Terms: economics, macroeconomics, scarcity, factors of production, land, labor, capital, entrepreneurship, positive economics, normative economics, ceteris paribus, fallacy of composition, opportunity cost, production possibilities, law of increasing opportunity cost, demand, law of demand, quantity demanded, substitutes, complements, normal goods, inferior goods, supply, law of supply, quantity supplied, market equilibrium, equilibrium price, equilibrium quantity, corporation, sole proprietorship, partnership, stocks, bonds, limited liability,

principal-agent problem, monopoly, transfer payment, subsidy, excise tax, sin tax, spillovers (externalities), public goods Chapters Included: McConnell and Brue, Chapters 1-5 Activities: Morton, Activities 1-4, 6 Market simulation activity Unit 2: The United States in a Global Economy (2.5 weeks) Open vs. closed economies o Gains from specialization and trade (absolute and comparative advantage) o Exchange rates o Balance of payments (current account and capital account) o The o foreign exchange market and exchange rates Government intervention and trade barriers o Tariffs Quotas Subsidies Graphs: The circular flow model in an open economy Production possibilities curve Foreign exchange market Supply and demand curves with trade barriers Key Terms: open economy, closed economy, specialization, absolute advantage, comparative advantage, terms of trade, balance of payments, current account, capital account, official reserves, flexible exchange rates, fixed exchange rates, tariffs, quotas, subsidies Chapters Included: McConnell and Brue, Chapters 6, 37, 38 Activities: Morton, Activities 55-62, 64

Unit 3: Measuring Economic Performance (2 weeks) G o ross domestic product and national income National income accounting calculations (expenditures and income approaches) Economic growth o Unemployment o Types Full employment and natural rate of unemployment Inflation and price indices (inflating and deflating) o Types (demand-pull, cost-push) Costs of inflation The o business cycle Nominal vs. real figures (GDP, income) o
Graphs: Phases of the business cycle Key Terms: Gross domestic product, gross national product, intermediate goods, expenditure approach, income approach, personal consumption expenditures, gross private domestic investment, net private domestic investment, government purchases, net exports, national income, consumption of fixed capital, depreciation, personal income, disposable personal income, nominal GDP, real GDP, GDP deflator, business cycle, peak, recession, trough, recovery, labor force, unemployment rate, frictional unemployment, structural unemployment, cyclical unemployment, seasonal unemployment, fullemployment (natural) rate of unemployment, inflation, consumer price index, demand-pull inflation, cost-push inflation, nominal income, real income, deflation, hyperinflation Chapters Included:

McConnell and Brue, Chapters 7, 8 Activities: Morton, Activities 5, 7-14 Unit 4: Aggregate Demand, Aggregate Supply, and Fiscal Policy (3 weeks) The o aggregate expenditures model Aggregate supply (Classical and Keynesian approaches) o Aggregate demand o Real o output and price level Fiscal Policy o The multiplier Crowding out Automatic Stabilizers o Supply-side fiscal policy o
Graphs: Aggregate expenditures model Consumption, savings, and investment schedules (functions) Investment demand curve Aggregate demand and aggregate supply curves Key Terms: Aggregate expenditures, consumption schedule, savings schedule, investment schedule, marginal propensity to consume, marginal propensity to save, wealth effect, unplanned changes in inventory, recessionary gap, inflationary gap, break-even income, multiplier, balanced-budget multiplier, leakage, injection, real-balances effect, interest-rate effect, foreign purchases effect, aggregate demand, aggregate supply, equilibrium price level, equilibrium real output, fiscal policy, expansionary fiscal policy, contractionary fiscal policy, budget deficit, budget surplus, built-in stabilizer, progressive tax system, regressive tax system, proportional tax system, crowding-out effect, net export effect, supply-side fiscal policy Chapters Included:

McConnell and Brue, Chapters 9-12 Activities: Morton, Activities 17-20, 23-33 Unit 5: Money, Banking, Monetary Policy, and Economic Stability (3 weeks) The o financial sector Money and banking o Definitions of money o Multiple-deposit expansion o The o money and loanable funds markets

Supply and demand for money The o Federal Reserve system Monetary policy tools o Monetary policy, real GDP, and price level o Velocity of money o
Key Terms: medium of exchange, unit of account, store of value, M1, M2, M3, checkable deposits, demand deposits, time deposits, legal tender, asset demand, transaction demand, liquidity, fractional reserve system, required reserves, reserve ratio, excess reserves, actual reserves, Federal funds rate, prime interest rate, discount rate, open-market operations, money multiplier, nominal interest rate, real interest rate, Federal Open Market Committee, Federal Reserve Banks, velocity of money, easy money policy, tight money policy Graphs: Money market Loanable funds market Investment demand curve Aggregate demand/aggregate supply model Chapters Included:

McConnell and Brue, Chapters 13-15 Activities: Morton, Activities 34, 35, 37-41, 63 Unit 6: Long-run Analysis and Macroeconomic Policy Disputes (3 weeks) Monetary and fiscal policy interactions o Short- vs. long-run Aggregate Supply o The o Phillips curve (short and long run) Economic growth o Deficits, surpluses, and debt o Macroeconomic theories and disagreement o Classical Keynesian New classical economics (monetarism and rational expectations)
Graphs: Aggregate demand/aggregate supply model (including long- and short-run aggregate supply) Phillips curve Production possibilities curve Laffer curve Key Terms: short run, long run, Phillips curve, stagflation, disinflation, supply shocks, supply-side economics, Classical view, Keynesian view, New Classical economics, monetarism, rational expectations, efficiency wage, monetary rule, equation of exchange, infrastructure, human capital, economies of scale, network effects, public debt, cyclically balanced budget, social security trust fund, public investments Chapters Included:

McConnell and Brue, Chapters 16-19 Activities: Morton, Activities 43-46, 50, 52-54 Final 2 weeks: Course review and testing Course review o Released Advanced Placement test (multiple choice and free response) o Review of released Advanced Placement test o