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AUDITING

Q. Define Audit, Auditor and Auditing. Audit: The word Audit is derived from the latin word Audire which means to hear. In old goods days whenever the proprietor of a concern suspected a fraud certain people were appointed to hear verbal evidence of transactions of barter etc. and to judge the facts. Audit means the independence examination of books, accounts and vouchers of any entity for a particular period of time. An audit is defined by the international Auditing Practicing Committee (IAPC) of international Federation of Accountants (IFAC) as below: The independence examination of financial information of any entity, whether profit oriented or not and irrespective of its size or legal form when such examination is conducted with a view to express an opinion thereon. Auditor: An auditor is a person who reports on the accounts of an undertaking or enterprise. An auditor is a member of the Institute of Chartered Accountants of Bangladesh (ICAB) who has a practicing certificate. Auditing: Auditing means the process of examination of books of accounts and reporting on their accuracy. Auditing is a process by which a competent, independent person accumulates and evaluates evidence about various assertions contained in financial statements of an entity for the purpose of determining and reporting the quality of disclosure of financial information, judging them against the back of established criteria.

Q. Discuss the scope of audit. Scope of audit depends on the nature of the organization and contract made with the auditor and the organization. Scope means the extent of work to be done. a) Collection of information and evidence: After appointment at first the auditor will select the information which is to be audited and also collect related evidence. b) Examination of documentary evidences: The auditor will examine the evidence in support of transaction to ensure whether the evidence are genuine or not. c) Examination of transaction: the auditor will compare the recorded transaction with respective are actual or not. d) Examination of accepted principles and system: Auditor will carefully examine whether generally accepted principles and conventions are followed in accounting. e) Verifications of assets and liabilities: The auditor will examine the valuation of assets and liabilities and also examine the physical existence of assets.

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f) Judgement of efficiency of management: The auditor also judge the efficiency of the management whether they are able to keep the interests of shareholders or owners. g) Submission of Report: After audit, the auditor must submit his report to the proper authority of the organization.

Q. Describe about Audit Program and Audit Methodology. Audit Program: Audit Program is a written scheme of the exact details of work to be done by the auditor and his staff in connection with a particular audit. An audit program is a detailed plan of the auditing work to be performed specifying the procedures to be followed in verification of each item, in the financial statements and giving the estimated time required. The preparation of such a program involves mainly three things; such as a) How much work is to be done? b) Who is going to do particular portion work? c) What is the duration of time by which work to be completed? Thus the audit program is a guide both for auditor and his staff. The audit program must be developed with due care and skill, particular attention should be given to the followings: a) b) c) d) e) f) g) h) Exact scope of the duties of an auditor. Book of original entry and ledgers in use. The system of book keeping employed. System of internal checked and internal control and extent of its reliability. General nature and routine of the business. Special provisions contained in the legal documents. Necessary time limit to complete the audit work. Necessary man power and their efficiency and experience

Audit Methodology: Audit Methodology is designed to enable an adequate review of the accounting system and related internal controls and that the audit planned, controlled and documented at each stage of the process from initiation to completion. In order to ensure quality, efficiency, effectiveness and provide evidence of the work. Q. What is Accounting system and Internal control . Accounting system: Accounting system means the series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. Such system identifies, assemble, analyze, calculate, classify, record, summarize and report transaction and other events.

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Internal control system: Internal control system means all the policies and procedures adopted by the management of an entity to assist in achieving managements objective of ensuring the orderly and efficiency conduct of its business. Q. Discuss about Planning. The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plan should be based on the following things: i) Knowledge of business ii) Understanding the Accounting and Internal Control System. iii) Risk and materiality iv) Nature, Timing and Extent of procedure v) Co-ordination, Directing, supervision and review Plan should be further developed and revised as necessary during the course of audit.

Q. Discuss the purpose of planning Planning is of utmost importance in every path of life, without proper planning it is almost impossible to complete a work successfully, effectively and in a timely manner. Audit of accounts is somewhat a critical task to make it successful to achieve its objectives; an auditor needs to go through a series of work. Proper planning helps the auditor to: i) establish the means of achieving the objectives of the audit ii) delegate right person in the right place iii) direct and control the audit work iv) ensure that the audit work will be completed within the schedule time v) ensure that due attention is paid to the critical aspects of the audit. So a wellplanned audit will result in an effective audit. Q. What is Documentation? Documentation means the working papers prepared or obtained by the auditor and retained by him in connection with the performance of his audit. Q. What are the uses of working papers? Working papers: a) aided in the planning and performance of the audit b) aid in the supervision and review of the audit works c) provide evidence of the audit performed to support the auditors opinion. Q. State the forms and contents of working papers. Hoda Vasi Chowdhury & Co. Page 3 of 47

The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit. The auditor should record in working papers planning, the nature, timing and extent of the audit procedures performed, the result thereof and the conclusions drawn from the audit evidence obtained. The forms and contents of working papers are affected by matters such as: a) the nature of the engagement b) the form of the auditors report c) the nature and complexity of the clientss business d) the nature and condition of the clients records and degree of reliance on internal control e) the specific audit methodology and technology. Q. Design and organization of working papers. Working papers should be designed and organized a) to meet the circumstances b) to meet the auditors need c) to standardize working papers d) to get benefit

Q. Review of financial statements. The auditor is required to express an opinion on the financial statements as a whole. Before forming an opinion, the auditor should carry out an overall review to determine whether: a) the financial statements have been prepared using acceptable and consistently applied accounting policies. These should be appropriate to the business concerned. b) The financial statements comply with all statutory and other regulatory requirements. c) The view presented by the financial is consistent with his knowledge of the enterprises business d) All relevant matters are adequately and meaningfully disclosed e) The conclusions drawn from the overall review, will enable him to form an opinion as to whether the financial statements show a true and fair view. The analytical forms an important part of the overall review. The overall review by itself is not a sufficient basis for expressing an audit opinion. However, the review does provide valuable support for the conclusions arrived at from other audit work. Q. Define audit evidence. Discuss the basic principles and important of audit evidence. Hoda Vasi Chowdhury & Co. Page 4 of 47

Audit evidence: Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence will comprise the source documents and accounting records underlying the financial statements and corroborating information from other source. Importance of audit evidence: The auditor should obtain sufficient appropriate audit evidence through the performance of compliance procedures and substantive procedures to enable him to draw reasonable conclusions there form on which to base his opinion on the financial statements/ information. a) Compliance procedures/ test of control: Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. b) Substantive procedures: Substantive procedures are designed to obtain audit evidence to detect material misstatements in the financial statements. Q. What are the various methods of obtaining Audit evidence? a) Inspection: Inspection consists of examining records, documents and tangible assets. Three major categories of documentary evidences which provide different degrees of reliability to the auditor are: i) Documentary evidence created and held by the third parties. ii) Documentary evidence created by the third parties and held by the entity and iii) Documentary evidence created and held by the entity b) Observation: Observation consists of looking at a process or procedure being performed by others, such as observes the counting of inventories by client personnel. c) Inquiry and confirmation: Inquiry consists of seeking appropriate information of knowledgeable persons inside or outside the entity. Inquires may range from formal written inquires addressed to third parties to informal or oral inquires addressed to persons inside the entity. Confirmation consists of the response to an inquiry to corroborate information contained in the accounting records. d) Computation: Computation consists of checking the arithmetical accuracy of source documents and accounting records or of performing independent calculations. e) Analytical Review: Analytical procedure consists of analysis of significant ratios and trends.

Q. How to obtain adequate and appropriate audit evidence? Through the performance of compliance procedures and substantive procedures. Compliance procedures are tests designed to obtain reasonable assurance that these internal control systems on which audit reliance is to be placed are in effect. Compliance procedures seek to test: Hoda Vasi Chowdhury & Co. Page 5 of 47

a) that the internal control exists b) that the internal control effective c) that the internal control has so operated throughout the period of audit with continuity. Substantive procedures are tests designed to obtained audit evidence to detect material misstatements in the financial statements. Substantive procedures seek to test: a) that an assets and liability exists b) that the enterprise has right over the assets and has obligation over the liabilities c) that a transaction happened during the period d) that all transactions /assets/liability find place in the financial statements without omission e) the monetary values attached to asset or liability is correct or fair f) that a transaction is recorded in proper amount g) data is disclosed according to accounting convention, statutory requirements. Q. Stages of an Audit. 1. The planning of the audit a) ascertain the nature and constitution of the enterprise b) send a letter of engagement of the enterprise c) consider the timetable 2. ascertain and assess the accounting system 3. consider the ways in which sufficient relevant and reliable audit evidence can be obtained 4. ascertain, evaluate and test the adequacy of controls within the accounting system of enterprise 5. carry out tests on transactions within the accounting records 6. verify the existence and values of capital items. 7. confirm the income and expenditure in the profit and loss account reflect accurately the operation of the business 8. Examine the financial statements for compliance with relevant statutes and accounting standards.

Q. What is internal control system? What is the importance of internal control system? Internal control system means all the policies and procedures adopted by the management of an entity to assist in achieving managements objective, as far as practicable, the orderly and efficient conduct of its business including adherence to management policies, the safeguarding of assets, the prevention and detection of Hoda Vasi Chowdhury & Co. Page 6 of 47

fraud and error, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.

The internal system comprises: The Control of environment: The control environment means the overall attitude, awareness and actions of directors and management regarding the internal control system and its importance in the entity. The control environment has an effect on the effectiveness of the specific control procedures. A strong control environment can significantly complement specific control procedures. Control procedures: Control procedures means those policies and procedures in addition to the control environment which management has established to achieve the entitys specific objectives. Importance of Internal Control system: The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective approach. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is reduced to an acceptably low level.

Q. Discuss the types of internal control system? Or Discuss the types of an adequate and effective system of internal control? Ans: Most enterprise will possess some combination of the following types of control: a. Supervision controls: Responsible officials should supervise on a day-to-day basis the carrying out and recording of transaction. b. Personnel controls: These include controls over selection and training of staff so that the abilities of members of staff match up to their responsibilities. c. Authorization and approval controls: All transactions should require approval or authorization by a responsible official whose duties and authorization limits are clearly defined. d. Management controls: These controls are operated outside the day-to-day routine of the system. e. Segregation of duties: An important means of control is to separate the duties of various individuals so that no one person is in a position to record and process a complete transaction. Segregation of duties reduces the risk of fraud and error. f. Organization Controls: An enterprise should have an effective plan of organization. g. Arithmetical and accounting controls: These controls includes checking the arithmetical accuracy of the records, the maintenance and checking or reconciliations, control accounts and trail balances, and accounting for documents. Hoda Vasi Chowdhury & Co. Page 7 of 47

h. Physical controls: These relate to the custody of assets and aim at restricting access to assets such as stock and cash to specified authorized personnel. Q. Discuss the essential characteristics of an adequate and effective system of internal control? Ans. The characteristics of an adequate and effective system of internal control are as presented below: (CRAMP) 1. Plan of the organization. 2. Management supervision. 3. Authorization. 4. Recording. 5. Custody procedures.

Q. Define internal Audit? Discuss the purpose of Internal Audit? Internal Audit: Internal Audit may be defined as a review of operations and records, sometimes continuous under taken within a business by especially assigned staff. Thus the Internal Auditor is employed by management to assist them in coordinating the performance of the organization. The purposes of the internal audit are as follows: a. Verification of the accuracy of the financial records and of related reports and statistics. b. To ensure that the standard accounting practices of the organization are being adhere to. c. To review and improve the system of internal check. d. To ascertain that proper authority is given for the purchase and disposal of the assets of the organization, and that there is adequate protection afforded to and efficient use of these assets. e. To confirm that liability has been incurred only in respect of the legitimate operations of the organization. f. The prevention and early detection of fraud. g. To undertake special investigations at the request of management. Q-23: Mention the difference between internal audit and external audit? Ans: The difference between internal audit and external audit as follows: Point of discussion 1. Appointment 2. Nature of Internal Auditor By management He is an employee of the External Auditor By shareholders He is an independent person Page 8 of 47

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Appointment 3. Magt concern 4. Basic jobs

company Serving the needs of company Review of operations and internal control for developing improvements and ensuring compliance of policies and procedures Determined by the management Internal auditor need not be a CA It is a kind of continuous audit Remuneration of the internal auditor is fixed by the management Internal auditors have no right to attend the meeting of shareholders Internal auditor has not to submit any report to the shareholders Internal auditor can be removed by management or the directors

Compliance of statutory requirements Expressing of independent opinion on the financial statements Determined by statutes External auditor must be CA Statutory audit is generally conducted after the preparation of final accounts Remuneration of external auditor is fixed by shareholders External auditors have the right to attend the general meeting of shareholders External auditor must have submit report to the shareholders External auditor can be removed only by the shareholders

5. Scope of work 6. Statutory qualifications 7. Conduct of audit 8. Remuneratio n 9. Attendance at meeting 10. Report submission 11. Removal

Q. What are the objectives of audit? Ans: The objectives of an audit are divided into two types: such as 1. Primary Objectives: The primary objectives of audit is to express an independent expert opinion on the financial statements whether the financial statement exhibit a true and fair view of the state of affairs of the organization. 2. Secondary Objectives: The secondary objectives of audit are - to detect fraud error which might have been committed, whether intentionally or not - to provide assistance to his client to help him improve the running of the business and prevent frauds and errors.

3. Specific Objective: It is also called investigation. Hoda Vasi Chowdhury & Co. Page 9 of 47

Objectives of Audit Main Objective -To express expert opinion Fraud Secondary Objectives Specific Objectives (Investigation) Error

Clerical Error Manipulation

Principal

Embossment

Misappropriation

Q-25: Discuss the advantages of audit? Ans: The advantages of audit are given below: a) On the side of organization: 1) Detection of frauds and errors: Frauds and errors are detected easily and preventive measures are taken so that in future these types of errors and frauds may not occur. 2) Proper Accounting: It keeps the account clerks regular and vigilant as they know that the auditors would complain against them if the accounts are not prepared in regular way. 3) Easy collection of loan: Money can be borrowed easily on the basis of the audited accounts. 4) Valuation of assets and liabilities: If the business is to be sold as a going concern, there will not be much difficulty regarding the valuation of assets and liabilities. 5) Development of accounting system: If there is any defect in accounts, frequent audit removes the defect. 6) Dependable Document: In case of insurance claim audited accounts are reliable documents. 7) True and exact picture: A true and exact picture of profit and loss account and financial position can be received from audited account.

b) On the side of owner(s): 1) To have an authentic accounts 2) Satisfactory settlement with partners 3) Valuable advice from auditor 4) To know the way of utilization of money c) On the side of third parties: Hoda Vasi Chowdhury & Co. Page 10 of 47

1) 2) 3) 4) 5)

Determination of tax Disbursement of loan Settlement of claims Determination of sales price Advantages of governments

Q. Discuss the various types and classes of audit? Statuary Audit: These are audit governed by the statute such as the Companies Act 1994. The auditor must carry out his work in whatever manner he considers necessary in order to achieve his duties under statute. The client has no right to restrict the auditors inquiries necessary for the auditor to perform his audit. Non- Statutory Audit: These are audit not specifically required by the law. The scope of the audit will be outlined by the contact between the auditor and his client and these terms should be formalized in an engagement letter Internal Audit: This is a review of operations carried out by specially assigned staff within the clients, business. External Audit: This is a review of operations carried out by third party not the staff. Interim Audit: For larger clients the interim audit is concerned with reviewing the accounting system of the enterprise. Final Audit: The final audit is mainly concerned with the verification of the financial statements. It is also called Balance Sheet audit. Complete Audit: Complete audit is undertaken and completed in a single period following the end of the companys financial year. Continuous Audit: The audit which is carried out continuously during the financial year of the client. Q. What is audit risk? What are the different types of audit risk? Audit risk is a function of the risk of material misstatement of the financial statements i.e., the risk that financial statements are materially misstated prior to the audit and the risk that the auditor will not detect such misstatement. Audit risks are mainly of two types, as follows: i) Risk of material misstatements in the financial statements: The risk that the financial statements are materials misstated prior to the audit is referred to this sort of audit risk. There are two components as follows: a) Inherent Risk: Inherent risk is the suspectibility of an assertion to a material misstatement that could be material either individually or when aggregated with other misstatements, assuming that there is no related controls. Hoda Vasi Chowdhury & Co. Page 11 of 47

b) Control Risk: Control risk is the risk that a misstatement could occur in an assertion and that could be material either individually or when aggregated with other misstatement, will not be prevented or detected and corrected on timely basis by the entitys internal control. ii) Detection Risk: Detection risk is the risk that the auditor will not detect a misstatement that exist in an assertion that could be material either individually or when aggregated with other misstatements. Detection risk is a function of the effectiveness of an audit procedure and its application by the auditors. Q. What is error and fraud? Error: The term error refers to an unintentional misstatements in financial statements including the omission of and amount and disclosure, such as the following: i) A mistake in gathering or processing data from which financial statements are prepared. ii) An incorrect accounting estimate arising from oversight or misinterpretation of facts. iii) A mistake in the application of accounting policies relating to measurements, recognition, claasification, presentation or disclosure. Fraud: The term fraud refers to intentional misrepresentation of financial information by one or more individuals among management, employees or third parties. Fraud may involve: i) manipulation, falsification or alteration of documents and records ii) misappropriation of assets iii) suppression or omission of the effects of transactions from records or documents iv) recording of transactions without substance v) misapplication of accounting principles. Q. Elucidate following functions of the auditor. i) Reviewing ii) Testing iii) Reporting Reviewing: The work performed by each assistant should be reviewed by personnel of equal or competence to determine whether: a) The work has been performed in accordance with professional and firm standards b) The work performed and the results obtained have been adequately documented c) Any significant audit matters remain unresolved d) The objectives of the audit procedures have been achieved and the conclusions expressed are consistent with the results of the work performed and support the auditors opinion on that financial information. Testing: The main objective of an audit is to express an opinion on the financial statements as well as related financial information. Therefore to express an opinion Hoda Vasi Chowdhury & Co. Page 12 of 47

of the financial statements and financial information auditor should conduct audit tests to obtain audit evidence to support the opinion on that financial statements. Reporting: The audit report is the end product of an audit. It is also the only channel of communication between the auditor and the persons / authorities to whom the audit report is directed. In the audit report, the auditor should express clear written opinion as to whether: a) the financial information has been prepared using accounting policies as per Bangladesh Accounting Standards(BAS), which have been consistently applied b) the financial information complies with relevant regulations and statutory requirements. c) The view presented by the financial information as a whole is consistent with the auditors knowledge of the business on the entitys; and d) There are adequate disclosures of all material matters relevant to the proper presentation of the financial information. In case of deviation from the points described above, the auditor should express different types of opinion depending on nature extent of deviations.

B. Position of an Auditor
Q. What is Engagement Letter? What are the stages of Engagement Letter? Engagement Letter: Engagement Letter is a letter sent by the auditor to his client at the beginning of any new audit. It sets out the terms of the engagement and forms the basis of the contract. New Engagement Stages When invited to become auditor, the following stages should be followed: Stage-1: Obtain clients permission to write to the retiring auditors inquiring if there any professional reason why the appointment should not be accepted. Stage-2: Meet with the client to agree the scope of audit so far as not prescribed by the statue. Stage-3: Send a letter of engagement to the client defining the scope of the audit. Stage-4: The client should be asked to acknowledge receipt of this letter and state if it is in accordance with his understanding of the agreement. Q. You have been appointed a new auditor by Dolci Food Ltd. In view of this appointment, what are the stages you should follow, when invited to Hoda Vasi Chowdhury & Co. Page 13 of 47

become the auditor of the said company? Write a letter of engagement to be sent to the client. When invited to become the auditor of Dolci Food Ltd. I shall follow the following stages before starting the audit of the said company: Stage-1: I shall obtain clients permission to write to the retiring auditor inquiring if there is any professional reason why the appointment should not be accepted. Stage-2: I shall meet with the client to agree with the scope of the audit, so far as not prescribed by statute Stage-3: I have to send a letter of engagement to the client defining the scope of audit. Stage-4: The client should be asked to acknowledge acceptance of this letter and if it is in accordance with his understanding of the agreement.

ENGAGEMENT LETTER Date July 10, 2003 The managing Director Dolci Food Ltd. Gulshan, Dhaka Subject: Letter of Engagement Dear Sir, You have requested through the letter ref. -----dated------that to audit the Balance Sheet of Dolci Food Ltd. as at December 31 2002 and the related statements of income and cash flows for the year ended. We are pleased to confirm our acceptance and set out below our responsibilities as auditors and understanding of the further services you require us to perform: Audit: (a) Our function as auditors as governed by the Companies Act. 1994 is to examine the accounts presented to us by the directors. As auditors we are not responsible for the preparation of the accounts, nor for the maintenance of the accounting records of the company, duties which are imposed on the directors by the Companies Act. Any accounting services we provide are distinct from our functions as auditors (b)We shall, as required by law, report to the shareholders whether in our opinion the accounts of the company affairs at the date of the balance date and of the profit or loss for the year ended on that date and whether these accounts comply with the Companies Act, 1994 (c) In arriving at our opinion we are required by law to consider some matters but only to report on any in respect of which we are not satisfied Hoda Vasi Chowdhury & Co. Page 14 of 47

(d)In accordance with normal practice, our audit will be planned primarily to enable us to express our professional opinion. It should not be relied on to disclose defalcations of other irregularities but then disclosure. If they exist, may well result from the audit tests we undertake (e) The work we shall do to enable us to from our opinion referred to in above will include. i) Keeping under review the companys system of book keeping, accounting and internal control: ii) Marking such tests and inquires as we consider necessary for the purpose of our audit. Those tests will inter alia apply: (a) (b) day to day operations of the business the verification of assets and liabilities.

But their nature and extent will vary according to our assessment of the companys internal control and may cover all aspects of the business including attendance to observe your stocktaking procedures. In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any other services: We shall be pleased to provide, if requested other services such as: (a) assistance with secretarial services in completing statutory documents e.g. annual returns or in acting as company secretary; (b) advice on financial matters; (c) management accounting services etc (d) advice on taxation matters Fees: Our fees will be based on the degree of responsibilities and skill involved and time required for the completion of work. Further services, if provided, will be billed separately from the audit fees. This letter will be effective for future years unless it is terminated amended or superseded. Please sign and return the attached copy of this letter to indicate that it is in according with our understanding of the arrangements for our audit of the financial statements. We shall be pleased to receive your further observations and to give you any further information which you may require. Thanking you Yours truly, Alam Chowdhury Mostafa & Co. Chartered Accounts Q. Discuss the appointment of an auditor of the company under section 210 of Companies Act, 1994? Hoda Vasi Chowdhury & Co. Page 15 of 47

As per section 210 of Companies Act 1994 (1) (2) (3) Every company shall appoint auditor(s) at each annual general meeting and the auditor will hold office until the next AGM. Every auditor will inform to the register in writing his acceptance or refusal within 30 days from the date of receipt of appointment. A retiring auditor shall have right to be re-appointed at AGM.

Appointment under special circumstances: 1) The government may appoint auditor if the appointment is not make at AGM. If the company failed to appoint an auditor in AGM it must notice to govt. for such failure within 7 days of such AGM. 2) The first auditor shall be appointed by the BOD within one month from the date of incorporated and the auditor will hold office until the conclusion of the first AGM. 3) The director may appoint a new auditor and hold office until the end of the next AGM. Q. Mention the remuneration of Auditors under section 210 of CA 1994? As per section 210 of Companies Act 1994 the auditors remuneration is fixed by whoever make the appointment Q. Discuss the removal of auditors as per section 211 of Companies Act 1994? As per section 211 of Companies Act 1994 the removal of the auditors is given below: 1) A company can appoint a new auditor by passing an ordinary resolution at the AGM. 2) A copy of the proposed resolution must be sent to the auditor intended to be removed. 3) Such a resolution requires notice of 14 days before the general meeting except that after receipt of the notice the company calls a meeting within 14 days the section requirements are deemed to have been met.

Q. Mention the qualifications and disqualification of an auditor under section 212 of Companies Act 1994? Ans: As per section 212 of Companies Act 1994 the qualification are as below: Qualifications: A Chartered Accountants with the meaning of Bangladesh Chartered Accountants Order 1973 ( P. O. No. 2 of 1973 ) who has got the practicing certificate Hoda Vasi Chowdhury & Co. Page 16 of 47

from the Institute of Chartered Accountants of Bangladesh shall be appointed as an auditor of any company. Disqualification: None of the following persons are qualified for appointment as auditor of a company under section 212 of Companies Act 1994: 1) an officer or a director of the company 2) a person who is a partner of a director or officer of the company 3) the employee or a director or officer of the company except private limited company 4) any person indebted to the company for an amount exceeding Taka 1000 or a guarantor of any third party in the company for an amount exceeding Taka 1000. 5) Any director holding more than 5% of the equity shares of the Company engaged as Managing Agent of the Company. Q. Discuss the rights and powers and duties and liabilities of the auditors under section 213 of Companies Act 1994? As per section 213 of Companies Act 1994 the rights and powers and duties and liabilities of the auditors are as below: Rights and Powers: 1) The right to access at all times to the companies books of account, documents and vouchers. 2) The right to require form the officers of the company such information and explanations as the auditor consider necessary for the performance of his duties. 3) The right to attend any general meeting of the company and to receive all notice relating to the general meeting. 4) The right to be heard at any general meeting on any matter which concerns him in his capacity as auditor . Duties and Liabilities: The auditors most important duty is to report to the members/shareholders of the company. The report must state whether: a) They have obtained all the information and explanation required. b) In their opinion, the balance sheet and profit and loss account are in conformity with the law. c) The balance sheet exhibits a true and fair view of the state of affairs of the company according to the vest of the auditors, information and explanation given them and as shown by the books of the company, d) In the auditors opinion, books of the company have been kept in accordance with the requirements of the law. If any of these answers is in negative, the report shall state the reason why. Hoda Vasi Chowdhury & Co. Page 17 of 47

Q. An auditor is an officer or agent Discuss the different relationships of auditor with management, director and shareholders of a Company. Under the law of agency an auditor of a Company is an agent of the shareholders. Therefore, it is the duty of an auditor to exercise reasonable care and skill in the performance of the work entitled to him. If he fails to perform his duty with reasonable care and skill then the auditor will liable. On the other hand if the auditor failure to comply with the requirements of the law then he will be liable with reference to the negligence arises. Under section 213 of the Companies Act 1994 auditors duty to submit a report to shareholders on the financial statements examined by him and state his report. a) whether he was obtained all the information and explanation, required by him which were necessary for the purpose of his audit b) whether in his opinion, the balance sheet and profit and loss account exhibit a true and fair view of the state of affairs of the company and are drawn up according to the Companies Act etc. If the auditor does not comply with these requirements or provisions then he will be liable as per law. An auditor is liable to the shareholders of a company by virtue of contract with them. But a controversial legal question arises as to what extent an auditor will be liable to third parties like management and director of the Company with whom he has no contract but who usually rely on statement reported upon by him. It is well settled that in case of fraud can be established any person whether or not he is in contractual relationship with the auditor can bring about an action against the auditor. But would an auditor be liable to third parties for negligence only. Q. Mention the financial and accounting responsibilities of directors? The financial and accounting responsibilities of directors are shown as below: Principal Matters: The main financial and accounting responsibilities of directors are: a) books of account and other accounting records. b) profit and loss account and balance sheet c) directors report. d) prospectus and similar statements made in connection with issue of securities and the borrowing of money and in connection with take over. e) Statutory meeting and statutory report. Other Duties: a) prohibition of financial assistance by a company for the acquisition of its own shares. b) prohibition of directors share. c) prohibition of loans to directors. d) notification and disclosure of directors share interest. Hoda Vasi Chowdhury & Co. Page 18 of 47

e) disclosure of directors interest in contracts. f) disclosure of directors emoluments. g) disclosure of directors service contracts and approval of directors compensation for loss of office by the company.

C. Principles of Auditing - 30% Q. Define Accounting and Auditing standards? The institute of Chartered Accountants of Bangladesh has adopted from time to time many standards on matters of accounting and auditing. These standards have been issued with a view to secure compliance by auditors. Hence standards are mandatory in character. If the financial statements device from what is said in any accounting standard or if the auditor is not able to carry out the audit as per the requirement of an auditing standard such deviation or departure is to be highlighted in the audit report. Accounting and Auditing standards are issued to ensure that the financial statements are prepared according to generally accepted auditing practices IAS and issued by IFAC. Auditing Standards:Auditing Standards are the measurement of performance established by the professional authority and consent of the independent auditing community. These are the basic principles and practices which the professional auditors are expected to follow in the conduct of audit to arrive at a defensible audit opinion. The auditors opinion must be based on an examination conducted in accordance with auditing standards. ISA are the definitive Auditing Standards issued by IAPC of IFAC. IFAC has an generally accepted auditing practices and on related services and on the form and consent of the auditors report. IAPC believes that the issue of such standards would improve the degree of uniformity of auditing practices and related services through out the world. Q. Explain the significance of the ISA for improving the quality of audit and reports in Bangladesh? Before explaining the significance of the ISA for improving the quality of audit and reports in Bangladesh. Firstly we have to know about the IFAC came into existence on 7th October 1977 with the board objective of the development and enhancement of a co-ordinates world wide accountancy profession with harmonized standards. In working towards this objective. The council of IFAC has established International Auditing Practicing Committee (IAPC) to develop and issue guidance on generally accepted auditing practice and on the form content of audit reports . So, IAPC is the authorized agency to issue ISA. ISAs contain the basic principles and essential procedures to gather with related guidance in the form of explanatory and other material. ISAs are to be applied in the audit of financial statements ISA are also Hoda Vasi Chowdhury & Co. Page 19 of 47

applied, adopted as necessary to the audit of other information and to be related services. ISA need only be applied to material matters. The main objective of ISA is to help in the improvement of degree of uniformity information of auditing practice and its related services of financial information through the world. Accounting professionals are expected to follow these prescribed basic principles in the conduct of an audit by following this guidance the quality of audit in Bangladesh is improving day by day. ISA 700 is established to provide guidance in the form and content of the auditors report issued by and independent auditor of the financial statements of any entity. Auditors report is the only channel of communication between the auditors and shareholders. The following basic elements of the auditors report are stated in the ISA 700: 1. Title 2. Addressee 3. Opening Paragraph 4. Scope Paragraph 5. Opinion Paragraph 6. Auditors Signature 7. Auditors Address 8. Date of the Report Today we are running on globalization. So all the professionals of Bangladesh prepare their audit report in accordance with ISA to help the users of financial statements who are saying in different countries of the world. So by applying the ISA the audit report of Bangladesh is significantly improved. Q. Give the list of ISA? ISA-1: Object and scope of the Audit of financial statements ISA-2: Audit Engagement Letters ISA-3: Basic Principles Governing an Audit ISA-4: Audit Planning ISA-5: Using the work of an other Auditor ISA-6: Study and Evaluation of the Accounting system and Related Internal Controls in connection ISA-7: Control of the quality of Audit work ISA-8: Audit Evidence ISA-9: Documentation ISA-10: Using the work of an Internal Auditor ISA-11: Fraud and Error ISA-12: Analytical Review ISA-13: The Auditors Report on financial statements ISA-14: Other information in documentation containing Audited financial statements Hoda Vasi Chowdhury & Co. Page 20 of 47

ISA-15: Auditing in an EDP Environment on the Study and Evaluation of the Accounting System and Related Internal Control ISA-16: Computer Assisted Audit Techniques ISA-17: Related Parties ISA-18: using the work of an Expert ISA-19: Audit Sampling ISA-20: The Effects of an LDP Environment on the Study and Evaluation of the Accounting System and Related Internal Control ISA-21: Date of the Auditors Report ISA-22: Representations by Management ISA-23: Going Concern ISA-24: Special Purpose Auditors Reports ISA-25: Materiality and Audit Risk ISA-26: Audit of Accounting Estimates ISA-27: The Examination of Prospective financial information ISA-28: First year Audit Engagements Opening Balances ISA-29: Inherent and Control Risk Assessments and Their impact on substantive procedures ISA-30: Knowledge of the Business ISA-31: Consideration of Laws and Regulations in on Audit of financial statements Q. What is IAS? Give the list of IAS? The International Accounting Standard Committee came into existence on 29 June, 1973 with the objectives to formulate and publish in the public interest, standards to be observed in the presentation of audited financial statements and to promote their world wide acceptance and observance. It is the body having responsibility and authority to issue pronouncements on International Accounting Standards. In 1975 International Accounting Standards Committee (IASC) issued the first of their standard. IASs in issue at the time of updating this manual are: IAS-1: Disclosure of Accounting Policies IAS-2: Inventories IAS-3: Deprecation Accounting IAS-5: Information to be disclosed in the Financial Statements IAS-7: Cash Flow Statement IAS-8: Net profit and loss for the period, Fundamental Error and Charges in Accounting Polices IAS-9: Research and Development Cost IAS-10: Contingencies and Event Occurring after the Balance Sheet Date IAS-11: Construction Contracts IAS-12: Accounting for Taxes pm income IAS-13: Presentation for current assets and current liabilities IAS-14: Reporting Financial information by segments IAS-15: Information Reflecting the Effects of Changes prices IAS-16: Property, Plant and Equipment IAS-17: Accounting for Leases Hoda Vasi Chowdhury & Co. Page 21 of 47

IAS-18: Revenue Recognition IAS-19: Retirement Benefit Costs IAS-20: Accounting for Government Grants and Disclosure of Government Assistance IAS-21: The Effects of Changes in Foreign Exchange Rates IAS-22: Business Combinations IAS-23: Borrowing Costs IAS-24: Related Party Disclosure IAS-25: Accounting for Investments IAS-26: Accounting and Reporting by Retirement Benefit Plans IAS-27: Consolidated Financial Statements and Accounting for Investments in Subsidiaries IAS-28: Accounting for Investments in Subsidiaries IAS-29: Financial Reporting in Hype Inflationary Economies IAS-30: Disclosure in the Financial Statements of Banks and Similar Financial Institutions IAS-31: Financial Reporting of interests in joint Ventures IAS-32: Disclosure and Presentation of Financial Instruments IAS-33: Earning Per Share IAS-34: Interim Financial Reporting Q. Define audit report? What is the important for auditor to know? ISA 700 Audit Report is only channel of communication between the auditor and shareholders of the company. The acts as a bridge taking the large volume of information possessed by the auditors and conveying it to the shareholders in a much abbreviated form: It is important for auditor to know the following: a) the form of an unqualified audit report and meaning of the phrases used. b) the situations where a qualified audit report is needed and how such a report should be phrased. c) the situations where although his opinion is unqualified , it may be relevant to include additional detail emphasizing one particular aspect of the accounts.

Q. Write the basic elements of the auditors report? Ans: Basic elements of the Auditors Report are as follows: 1) Title 2) Addressee 3) Opening Paragraph -------Identification of the financial statements audited -------Financial Statements are the responsibilities of the entitys management and auditors responsibilities is to express an opinion on these financial statements based on their audit 4) Scope Paragraph -------reference to the ISA or relevant national standards or practices Hoda Vasi Chowdhury & Co. Page 22 of 47

-------a description of the work the auditor performed/scope of the audit. 5) Opinion Paragraph --------containing an expression of opinion on the financial statements 6) Signature of the auditors 7) Address of the auditors 8) Date of the audit report. Q. Briefly describe the circumstances under which an auditor will express different types of report? a) Unqualified Opinion: An unqualified opinion should be expressed when the auditor is satisfied that the FSs give a true and fair view in accordance with the identified financial reporting frame work. b) Qualified Opinion: When the auditor discloses the effect of the limitation on scope, disagreement or uncertainty, such as 1) The accounts do not show a true and fair view 2) Proper accounting records have not been kept 3) The accounts are not in agreement with the books and returns 4) The accounts fail to comply with the CA 1994 5) Adequate information and explanation have not been provided by officers of the company. c) Adverse Opinion: when the effect of a disagreement is so material and pervasive to the FSs that the auditor is not satisfied to issue a qualified report only. d) Disclaimer Opinion: when the possible effect of information on scope is so material that the auditor is unable to form an opinion on the FSs. SPECIMEN OF UNQUALIFIED AUDITORS REPORT AUDITORS REPORT To the shareholders of Beximco Pharmaccuticals Limited We have audited the accompanying Balance Sheet of Beximco Pharmaccuticals Limited as at 31 December 2003 and related Profit & Loss account for the year then ended. The preparation of these Financial Statements is the responsibility of the Companys management. Our responsibility is to express an opinion on these Financial Statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (ISA) adopted by the ICAB. 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 the management, as well as evaluating the overall Financial Statements presentation. We planned and performed the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatements. We believe that our audit provides a reasonable basis for our opinion. Hoda Vasi Chowdhury & Co. Page 23 of 47

In our opinion, the Financial Statements exhibit a true and fair view of the state affairs of the Company at 31 December 2003 and the result of its operations for the year then ended. We also report that: a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit and made due verification thereof. b) In our opinion, the Company has kept proper books of account as required by law so far as it appeared from our examination of those books. c) The Balance Sheet and Profit & Loss account dealt with by this report are in agreement with the books of account. And d) The expenditures incurred were for the purpose of the Companys business. Date: Dhaka 15 September 2004 (Shah Alam Chowdury) Alam Chowdhury Mostafa & Co Chartered Accountants 73/3 Green Road, Dhaka Q. Discuss objectives and General (Basic) principles Governing an audit of F/S as per ISA 200. Objectives of an Audit The objective of an audit of Financial Statements is to enable the auditor to express an opinion whether the Financial Statements are prepared, in all material respects in accordance with an identified Financial Reporting Framework. The phrase used to express the auditors opinion are give a true and fair view or present fairly in all material respects which are equivalent terms. General Principles of an Audit: 1. The auditor should comply with the code of ethics for professional accountants issue by IFAC. Ethical principles governing the auditors professional responsibilities are : a) Independence b) Integrity c) Objectivity d) Professional competence and due care e) Confidentiality f) Professional Behavior and g) Technical Standards. 2. The auditor should conduct an audit in accordance with ISA. 3. The auditor should plan and perform the audit with an attitude of professional skepticism recognizing that circumstances may exist, which cause the financial statement to be materially misstated. Hoda Vasi Chowdhury & Co. Page 24 of 47

Scope of an Audit: The terms scope of an audit refers to the audit procedures deemed necessary in the circumstances to achieve the objective of an audit. The procedures required conducting an audit in accordance with having regard to the requirements of ISA, relevant professional bodies, legislation, regulations, the terms of the audit engagement and reporting requirements. Reasonable Assurance: An audit in accordance with ISA is designed to provide reasonable assurance that the Financial Statements taken as a whole are free from material misstatement. Reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the Financial Statements taken as a whole. Reasonable assurance relates to the whole audit process. Responsibility for the Financial Statements: While the auditor is responsible for forming and expressing an opinion on the Financial Statements, the responsibility for preparing and presenting the Financial Statements is that of the management of the entity. The audit of the Financial Statements does not relieve management of its responsibilities. Ethical guidelines and Technical Standards: Ethical principle governing the auditors professional responsibilities are as below: a) Independence b) Integrity c) Objectivity d) Professional competence and due care e) Confidentiality f) Professional Behavior and g) Technical Standards. Q. Discuss the General and basic principles governing an audit ISA -3. The basic principles governing an audit ISA 3 describe the auditors professional responsibilities, which should be exercised whenever an audit is carried out. The basic principles identified in value: a) Independence b) Integrity c) Objectivity d) Professional competence and due care e) Confidentiality f) Professional Behavior and g) Technical Standards. h) Work performed by others Hoda Vasi Chowdhury & Co. Page 25 of 47

i) Documentation j) Planning k) Obtaining audit evidence l) Reviewing accounting system and Internal; Control System m) Reviewing conclusions reached n) Reporting. The basic principles are the cornerstone of all succeeding International Standards on auditing. Q. Discuss the Term Going Concern Concept The Going Concern Concept may be defined as the assumption that the enterprise will continue in operational existence for the foreseeable future. This means that the profit and loss account and balance sheet are prepared assuming no intention of necessity to liquidated on curtail significantly the scale of operations. The auditor will need to satisfy himself that the going concern assumption is reasonable. In the absence of a clear note to the contrary. There is a presumption that the going concern, accruals, consistency and prudence has been observed. Auditors should not assumed the going concern concept would continue to apply but need to conduct specific examination of the factors to reach a decision. This will involve an overall review of financial factors, preferably before the clients year end in order to established whether there are factors which cast doubt on the going concern basis. Q. Discuss the Term Audit Materiality Audit Materiality is a matter if its non disclosure, misstatement, omission items is likely to distort the view given by the accounts. To exercise the professional judgment and the requirement of expression as to must be caution to keep in mind constantly the materiality of a matter. In the accounts of a large company Taka 1000 may be absolutely immaterial. Whereas in a small company, Taka 1,000 may be material item. In assessing the possible monetary effect of errors and frauds, in the question of materiality, it is important to keep in mind that whether it has been caused by a weakness in internal control system or any other causes.
AUDITORS DUTY IN RESPECT OF AUDIT MATERIALITY

1. Auditor should be alert to detect relatively a small amount that could have a material effect on the financial information. 2. When determining the nature, timing and extent of audit procedure and planning auditors should consider audit materiality. 3. In evaluating the effect of misstatements on the measurement and classification auditors should consider audit materiality.

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4. In determining the appropriateness of the presentation and relevant disclosure in the financial information auditor should consider audit materiality. 5. If auditors find any material inconsistency he should determine whether the Financial Statements or other information and need revision, he should request management to correct the material misstatement and if management refuses, he should issue a qualified or adverse opinion. Q. Discuss the term Auditors independence. The Financial Statements duly certified by an auditor are read not only by the shareholders or investors but also by the Creditors of the Company and by those who come in contact with it. Unless these financial statements represent a true and fair view of the state of affairs of Company concern, the object of these statements will not achieved. The reliability of those statements is possible only when an auditor who acts independently and is not influenced by the management or any other quarter audits them. But if he is influenced by the management his opinion in the accounts, which is examined by him, would mean nothing to individual shareholders, prospective investors, Bankers, Government agencies and others.

The shareholders need an objective an honest assessment and evaluation of the information presented to them by management. Company management is unlikely to have this degree of objectivity. Here the auditors acts as a bridge, helping to make management accountable to the shareholders through out the audit report on the annual financial statements. This report lands credibility to the financial statements and may be relied upon by several user groups. The auditors who examine the Balance Sheet and the Profit & Loss account and report that is represents a true and fair view must act independent. Firstly because he is not an employee of the Company. Secondly his work is not subject to the supervision by the management of the Company. Unless the auditor is independent, his opinion is no more reliable then the Balance Sheet and the Profit & Loss account prepared by the management itself. The reports of the auditor will be acceptable by the businessman, financial institution and investors only when he maintains high standard of independence and impartiality. If he fails below that standard, he runs a great risk in losing his reputation. So, while performing the work of an audit the auditors should be independent in the following areas: a) Technical Independence: The auditor should be free of any controls or pressures concerning his audit techniques and procedures and the extent of their application. He must be allowed to develop his own program of work and must not be pressurized by the management or any one else. b) Investigating Independence: The auditor must be free from any attempted restriction relating to that which he wants to examine during the audit. He must have access to all offices of the Company, all books and records and he should free to examine any transaction. Hoda Vasi Chowdhury & Co. Page 27 of 47

c) Reporting Independence: The auditor should be free to express his opinion on financial statement without any pressure and undue influence being imposed upon him. Q. Threats to auditors independence: 1. The fixing of auditors fees frequently delegated to the directors. In any case the directors normally control general meeting where fees are fixed 2. Auditors day-to-day contact with the Company, with the directors or those employed by the directors. Decreases the independence of auditor. 3. The independence and credibility of auditors will deteriorate in case of involvement with the Companys tax, accounting and consultancy. 4. Auditors tend to belong to the same socioeconomic group as the directors. 5. Size of the client Company and the size of the Audit Firm may also influence the independence of auditor. Q. Suggest how auditors independence can be improved. Taking the following measures can improve the auditors independence a) Frequent professional training, seminar and workshop should be undertaken to enhance the independence of auditor. b) Professional bodies should come forward with more detailed provisions of Ethical Guide relating to auditors independence. c) Various Government authorities, such as, Securities and Exchange Commission should ensure the mandatory observance of regulations which in turn will improved the auditors independence. d) The auditors should not be allowed to undertake consultancy and any other work for their clients nor should auditors be permitted to do accountancy work, which they themselves subsequently audit.

Q. Discuss the concept of true and fair view. Answer: An auditor is required by law to report whether the financial statement on which he has been asked to report show a true and fair view of the state of affairs of the Company and its results of operations. Here, truth is not the scientific truth. It is accounting truth. Accounting deals with many estimates, which may be changed. Only cash is close to the scientific truth, but since the value of cash changes with time, it lacks total corresponding with the scientific truth. The word, fair can have the following meanings on one hand clear distinct plan and on the other hand impartial in and equitable. Hoda Vasi Chowdhury & Co. Page 28 of 47

In order to achieve statutory true and fair view, it is necessary not only to present certain information impartially but also that the data is shown in such a way that it is clearly understood by the users. To show a true and fair view accounts must be prepared: --- In accordance with GAAP --- On a consistent basis --- So as not to be misleading. SHORT NOTES 1. Walk through Tests / Checks or In-depth Tests: After recording the accounting system the auditor may trace transactions through the accounting system to confirm that there is no reason to suppose that the accounting system does not operate in the manner in which it is recorded. This test is referred to as walk Through Test. Walk through tests are designed to confirm that there is no major fault in the accounting system. Usually, walk through tests are made with a few transactions. Even only one test may sufficient for Walk -Through Test. 2. Cut-off procedure: During the course of audit, the auditor should examine the link between purchase records, sales records and stock to ensure that there is a complete accord between the physical stock brought in to account, the records of physical movement of stock and the financial records of purchase, sales, debtors and creditors. This is known as cut-off procedure. The purpose of such examination is to determine the degree of reliance to be placed on the internal control exercised over the movements of stocks and in recording the relevant transactions in the book. 3. Internal Control Questionnaire (ICQ): Internal Control Questionnaire (ICQ) is a pre-printed document by the audit firm using it. If it most common used method of assessing the adequacy of accounting system. It consists of a series of question, which are designed to establish which controls exist within the accounting system. It is divided into different sections, which correspond to the clients internal organization, for example, sales and debtors, purchase and creditors, stock and Work-In-Progress, monetary receipts and payments etc. There are two approach of designing the ICQ. The less commonly used approach is to use phrase questions, which require descriptive answer. The most common type of ICQ has the questions phrase to provide answer in either yes or no. ICQ should be reviewed periodically and should be completed by the senior audit staff.

4. Post Balance Sheet Events Hoda Vasi Chowdhury & Co. Page 29 of 47

Suppose the year end of a Company is 31 December 2007 and directors approve the financial statements at board meeting held on 22 March 2008 certain events occurring during the intervening period will provide information which will help in preparing the financial statements. Those post Balance Sheet events fall into two categories: 1. Adjusting Events: Such as: a) Provision for stock and debts; b) Amount received or receivable in respect of insurance claims which were being negotiated at the balance sheet date; c) Proposed dividend d) Appropriation to reserve e) Dividend receivable from subsidiary Company f) Effect of changes in taxation 2. Non- adjusting events: a) The issue of new share or loan capital; b) Acquisition of new Company: c) Financial consequences of losses of fixed assets or stocks as a result of fires or floods. 5. Minutes Books: Every Company must cause minutes of all proceedings at meetings of directors or managers to be entered in a minute book; and also minutes to be made of all proceedings and resolution at members meetings and entered in the members minute book. Any minute purporting to be signed by the chairman of meeting, or by the chairman of the next succeeding meeting, is evidence of the proceeding. a) Directors minute book- matters which may be included are: i) Allotment of shares, making calls, forfeiting shares ii) Authorizing the use of the Company seal iii) Adoption of contracts iv) Appointment & remuneration of Managing Director, Manager, Secretary or other officials v) Appointment of auditors prior to the first general meeting of the Company vi) Authorization of capital expenditure vii) Resolution to pay interim dividend, where such are within the authority of the directors viii) Payment of traveling expenses or special remuneration to director ix) Adoption of accounts x) Adoption of directors report to the members and recommendation as to division of profit The directors minute book may be useful source of evidence for particular audit point such as contingencies and post balance sheet events. It may also include policy decisions relevant for the auditors understanding of the enterprise and the view given by its financial statements. Hoda Vasi Chowdhury & Co. Page 30 of 47

b) Members minute book- This is likely to deal with: i) Adoption of accounts

6. Letter of representation A letter of representation is a written record of the managements representations relating to significant matters affecting the accounts. Such a letter reminds management of their duty to ensure that the financial statements which they present give a true and fair view. The letter tends to cover a wide area including: a) Stocks and work-in-progress b) Liabilities c) Contingencies and Post balance sheet events d) Fixed assets e) Profit and loss account Example of representation is relating to stock Stocks appearing in the balance sheet at a total value of Tk ---- were verified at the annual stocking or were agreed with balances on stock records which were covered by continuous stock taking. Stocks have been valued at the lower of cost and net realizable value on a basis consistent with the previous year. Work-in-progress and finished goods include direct costs and a proportion of factory overheads Due provision has been made for obsolete slow moving and damaged stock Stocks held on behalf of third parties have been excluded 7. Management Letter Letter of wickness Private and confidential Date: 15 August To The Manager XXXXX Limited Chittagong Subject: Audit for the year ended 31 December, 2007 Dear Sir In accordance with our normal practice, we are writing to you on matters arising out of audit for the year ended 31 December 2007, which we consider should be brought to your attention.

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As directors you have the responsibility of the proper stewardship of the companys assets and their application in the operation of the business. This is normally achieved by establishing a system of internal control both financial and otherwise to carry on the business. This should lead to the satisfactory preparation of the companys accounts which must comply with the companies Act, 1994 in form and content and give a true and fair view of the state of affairs and profit and loss account of the company. The responsibility of directors and auditors are onerous and therefore cannot be taken lightly. It is that governs our approach tom our work on all audit engagements. We set out those matters, which we consider to be fundamental importance not only to the efficiency of the Company but also its validity as a business. a) Raw material stock: Weakness Stock usage are not recorded in stock ledge and bin card promptly as per stock requisition. Recommendation Timely recording of stock usage as per stock requisition should be ordered by management. If shortage of personnel is the reason of this weakness, this should be overcome immediately by recruiting more personnel in this department. b) Receipt of sale proceeds: Weakness Receipts of sale proceeds are not recorded against bill Recommendation All receipts of sale are to be recorded against the respective bill. c) Finished stock Weakness A considerable quantity of unsold finished goods is in stock for more than one year. Recommendation These goods should sold immediately to reduce further loss, if necessary at a reduced price. We would appreciate, if the above recommendations are implemented in order to achieve effective internal control. If you wish our further assistance, please do not hesitate to contact us. Yours truly Xxxxxxxx. 8. Accountants Lien Where a creditor has property of the debtor in his possession he may have the right to retain that property until the debts is paid. He may also be entitled to sell the property and apply the proceeds to payment of the debt. Such rights are called liens. The accountants has a particular lien on his clients papers in his possession until paid for work done on those papers. Among the papers of an accountant of only the following are the property of the client and so subject to possible lien: Hoda Vasi Chowdhury & Co. Page 32 of 47

Documents handed to the accountants by the client Correspondence between the accountant and the Tax authorities on the clients affairs 9. What is Vouching? What are the characteristics of a valid voucher? A voucher is a documentary evidence which proves the accuracy of a transaction appearing in the books of account. Vouching means and includes the examination of every business transaction with its supporting documentary evidence, the checking of which enables the auditor to satisfy himself that the transaction is in order that it has been properly authorized and that it has been correctly allocated and entered in the book. Vouching is the very essence of auditing. The whole success of the audit very much depends upon the intelligence. Critical bend of mind, commonsense, observation and skill with which he works. At the time of vouching the audit staff should look for the following essentials: the date of the document and the name of the supplier to whom is the document addressed what goods and services is it for? Has the amount therefore been allocated to the appropriate head Do the amount & date agree with the books? Has the document been properly checked and approved for payment? Features of a valid vouchers Vouchers must be valid. To be valid voucher, the following characteristics must be hold in Name: Voucher must be in the name of the business concern under audit Date: There must be date & the date must be within the period, under audit & it must be same as recorded in the books of accounts. Definite figure of money: There must be a definite sum of money and it must be the same as recorded in the books of accounts Particulars: Particulars in voucher must be the same as recorded in the accounts. Approval: Voucher must beapproved by the appropriate authority. Revenue stamp: Vouchers, more than a minimum amount must bear proper revenue stamps. Alteration: Any alteration in voucher will not accepted except counter signature of proper authority. 10 How will you vouch the following items a) Cash sale b) Wages I will vouch the following items applying the following techniques of vouching: a) Cash sale: I will see whether there was internal check and internal control system or not I will compare the counterfoil with the sales report of salesman I will compare the sales report of salesman with the report of the cashier Hoda Vasi Chowdhury & Co. Page 33 of 47

I will compare the records with the counterfoil and report I will observe whether there is same policy regarding trade discount in respect of cash sales Where the automatic till is used the entries in the cash book should be checked and from the till records A summary of daily cash should be checked with the sales register The summary should be tallied with the receipts recorded in the cash book b) Wages I will examine whether internal control system in effective or not I should check the casts of the wages sheet I should inquire the basis of payment I should check the time keeping records and /or piece work records I will check payees acknowledgement I will ensure that the wages sheets have been properly signed by a responsible officer. 11. Subatance Over Form It is an accounting concept (SSAP-21), whereby transactions are accounted for and presented in accordance with their economic reality, rather than their legal form. It means transactions will be recorded in the accounts based on commercial practice rather than legal consideration. Reservation of the title by unpaid seller: Seller has delivered goods to the buyer but has reserved title until he is paid the price. In such case the goods should be treated as sold by the supplier and purchased by the customer. The goods should be assets included in stock of customer and the liability to the supplier included in creditors. Which the buyer shows as his assets goods which do not yet belong to him in law. Assets held under hire purchase agreement: When assets purchased under hire purchased agreements, the title does not pass until the end of the hire purchase agreement. In such cases, however, it is usual to include the assets in fixed assets at in cash cost and to show the outstanding hired purchase payment (net of interest) under liabilities. Interest is charged to P/L accounts as it arises. But, on a strict legal interpretation of the facts of the transaction, the hire purchase should not include the goods as fixed assets in his balance sheet until the final instalment is paid.

** Credibility of Financial statements Credibility of financial statements refers to the acceptability of the same without any doubt to user groups i. e. existing shareholders, investor, lenders and creditors, trade unions, Government agencies etc. Financial statements will be credible in the Hoda Vasi Chowdhury & Co. Page 34 of 47

eyes of the user group when the same is prepared in accordance with Accounting Standards and the same is audited by the independent auditors. 11. Define verification. Mention the six points techniques of verification. Verification: Verification means proving the truth or confirmation. This is the process of determining whether an asset or a liability shown in the balance sheet actually exists or not. Six points techniques of verification are given below: 2. 3. 4. 5. 6. 7. Physical existence of an asset or liability Correct valuation Ownership of assets & liabilities Proper disclosure Assets suffering from any charge or not Authorization by proper authority

12. How will you verify the following items? a) Goodwill b) Motor vehicles c) Trade debtors d) Sundry creditors e) Loan on mortgage f) Stock in transit g) Land and building h) Related party transaction i) Capital work in progress Answer: I will verify the following items as the following ways a) Goodwill: Goodwill is an intangible asset. As such it is a bit difficult task to verify goodwill. Cost: It may arise either by means of business acquisition i.e. purchased goodwill or by valuation thereof i.e. generated goodwill. In case of purchase goodwill, Boards minutes and vendors agreement should be verified. The difference between purchase consideration and net goodwill acquired is goodwill. In case of generated goodwill, Boards minutes and computation of goodwill done by an expert must be verified to confirm the cost of goodwill Authorization: Directors minutes book must be examined. Valuation: Valuation of goodwill should be verified as per the procedures mentioned in para under the head of Cost. It should be examined. Whether the goodwill is being amortized on straight line basis in view of exhausting it within 5 years or 20 years, if justified. If it is probable that future economic benefit will not derive then, goodwill must be written down immediately. Hoda Vasi Chowdhury & Co. Page 35 of 47

Existence: Future economic benefit must derive from goodwill if it is to be incorporated in the balance sheet. The auditor must observe the managements review in this connection. Benefit: No direct benefit arises from goodwill but indirectly it increases the profitability of the entity. The auditor must verify whether this extra benefit derives from the goodwill. Ownership: Contract, directors minutes book, accounting records and experts report can substantiate the ownership of goodwill. Depreciation: Goodwill must be shown at gross amount less accumulated amortization in the balance sheet. b) Motor Vehicles: Cost: Cost can be confirmed by checking quotation submitted by the supplier, subsequent bill after purchase and invoice, payment of bill should also be checked. Authorization: Director minute book should be examined in case of big amount purchase. In other cases the approval of the committee, formed for the purpose of purchasing motor vehicles, is to be examined along with the authorization limit of the committee. Valuation: It is to be confirmed, whether these assts are valued on the basis of historical cot or re-valued amount along with minutes of the directors and valuers certificate. Existence: Verification of existence can be made through examination of registration document and log-book. Physical verification of motor vehicles is to be carried out. Benefit: If leased out, the Hire Receipts should be examined. Deprecation: Motor vehicle must be shown at cost less depreciation. c) Trade Debtors: Verification of trade debtors of a Company owing several branches should be carried out in the following ways: Accounting system and internal control system have to be evaluated to judge whether the systems are adequate. Debtors schedule signed by the branch manager should be obtained which will show name of debtors, current years balance, last years balance and age of the current years balance. Hoda Vasi Chowdhury & Co. Page 36 of 47

In the head office debtors ledger and stock registers maintained for branches, have to be verified with proforma invoices. Verify the statements received from branches showing quantity and value of goods received from the head office, goods sold and goods in hand. Check whether all sales and collections are accounted for in the head office. Values of goods sold should be checked whether the goods are sold as per instructions of the head office. Any trade discount allowed must be compiled with Companys policy. Check whether adequate provision for bad debts, related to old outstanding balances, has been made in the accounts and in line with previous experience. Check whether any party became insolvent during the period under review and the recovery of the amount is very remote. Cut-off procedure relating to debtors should be checked by verifying stock movements with sales. Pay a visit to the branches, if possible, to verify whether the stock registers, sales ledger and debtors ledger maintained by the branches are in line with the statements sent to the head office. Balance confirmation letter should be circulated to obtain evidence as to the correctness of the balances shown by the branches.

d) Sundry Creditors: The following steps are recommended for verifying sundry creditors: Evaluate the system of internal control on purchases of goods and services and payments thereof. Obtain a list of sundry creditors and check it with the creditors ledger. Scan the creditors account and judge the nature of balance by its age, nature of supplies and dispute. If any regarding admissibility of the balances. A test check should also be made with suppliers statements or invoices duly supported by Daily Receipt Return or Goods Receipt Note. Where a purchase ledger is not maintained by the client, a schedule of the invoices supporting the balance on the control account should be obtained and verified by checking or testing with suppliers statements or invoices. Where creditors are paid at regular intervals, check the subsequent payments from the Cash Book or Bank Account, to ascertain how much of the creditors have since been paid to ascertain the correctness of the list of creditors. Scrutinize the payment entries of the Cash Book and Bank Account of the subsequent period, up to the date of audit, to ascertain whether there is any material omission from the list of sundry creditors. Check the schedule of advances to suppliers and find out whether any advance is lying unadjusted for an unusually long time. Compare the current years list of sundry creditors with that of the previous year to find out if any amount is outstanding from the last year. If so, find out the reason for such non-payment. Hoda Vasi Chowdhury & Co. Page 37 of 47

Seek confirmation from selected creditors by asking the client to write to the creditors with the request that they should write directly to the auditor. For the purpose envelopes with the auditors address already printed should be sent. Reconcile the total amount in the sundry creditors list with the balance in the control account.

E) Loan on Mortgage: C- Mortgage deed for amount of loan and date A- Board minute and use of seal V- Valuer should give valuation of security for mortgage. Also consider if all recoverable. E- Check mortgage deed for name of parties, details of security, and then check title deeds of security B- Mortgage deed will stipulate interest, check interest received. O- Certificate direct from mortgagee also check covered for fire insurance D- Show mortgage as liability not as a deduction from asset pledged.

F) Stock in Transit Procedures to be followed as listed: Obtain details schedule of stock in transit and check the balance with the books and stock ledger Obtain stock in transit reconciliation statement and check the opening balance, addition, goods and closing balance. Check the stock in transit with relevant supporting and policy of the organization. Check and calculate the value of stock in transit shown in the financial statement and ensure that the value. G) Freehold Land and Building Procedures to be followed as listed: Obtain details list of freehold land and building and confirm the figure with the ledger and fixed assets register. Verify the all title deeds of land and confirm the ownership and cost of land Review the Board minutes for confirming the authorization of acquiring the land and building Vouch 100% the addition of land during the year under audit. Verify the value of land and building, if the land and building are revalued then review the revaluation procedures and confirm the revalued value. Check the mutation, land revenue receipts, khatian etc. and confirm that all type of government revenue has been paid up to date.

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Review the depreciation method followed is in conformity with the Accounting Standards and appropriate amount has been provided in the income statement or not. Verify and confirm that adequate insurance policy has been taken against any loss by fire or natural disaster. Confirm the required disclosures have been provided in FS or not. G) Related party transaction The auditor should information provided by the directors and management identifying the names of all known related parties and should perform the following procedures: Review prior year working papers for names of known related parties Review the entitys procedures for identification of related parties Inquire as to the affiliation of directors and officers with other entities Review shareholder records to determine the names of principal shareholders or if appropriate, obtain a listing of principal shareholders from the share register. Review minutes of the meetings of shareholders and the board of directors and other relevant statutory records such as the register of directors interest Inquire of other auditors currently involved in the audit or predecessor auditors, as to their knowledge of additional related parties and Review the entitys Income Tax returns and other information supplied to regulatory agencies. H) Capital Work in Progress The following work should be undertaken Verify valuation with invoices, bills work orders and job cards etc Examine the basis of charging labour and overhead expenses Obtain progress reports from the engineer in charge and verify subsequent installation and completion with the architects certificate on the basis of which its transfer to fix assets should be traced Ensure that any internal profit on inter departmental transfers has been eliminated Ensure that cost of own manufactured assets does not include any cost inefficiencies. I) Plant and Equipment Procedures to be followed as listed below: Obtain details list of plant and equipment and confirm the figure with the ledger and fixed assets register Vouch 100% the addition of plant and equipment during the year under audit through verifies the procurement documents, in case of local purchase and bill of landing and other documents in case of import Review the board minutes for confirming the authorization of purchase of plant and machinery Verify the value of building through review the current utilization of machinery capacity, current market value of the same machinery and future utilization of the same Hoda Vasi Chowdhury & Co. Page 39 of 47

Review the depreciation method followed is in conformity with the Accounting Standards and appropriate amount has been provided in the income statement or not. Verify whether any income obtains from plant and equipment has been duly recorded or not Check whether the plant and equipment is subject to mortgage. If under mortgage then adequate disclosures have been given or not. Review the annual physicals inventory of plant and equipment and note discrepancy if any observed. Review the management action regarding disposal of such discrepancy Verify and confirm that adequate insurance policy has been taken against any loss of by fire, or and incidental etc. Check the required disclosures have been provided in FS or not. J) Revaluation Surplus Obtain the details calculation of revaluation surplus Review the procedures of revaluation of the assets /Liabilities and ensure whether the revaluation was made by professional firm or company itself. If the revaluation made by professional firm then reviews the revaluation report and confirms the revaluation surplus. Ensure that the uses of revaluation reserve, if any, with the compliance with the article of association of the Company. K) Off Balance Sheet Items Off Balance sheet items represent transactions made by banks that are presently not recognized as assets and liabilities in the balance sheet but which give rise to contingencies and commitments. Off balance sheet items may arise from transaction carried out on behalf of customers or from banks own trading position. Because most commitments and contingencies often not recorded in the Banks accounting records as an auditor I should: Identify those activities, which have the potential to generate contingent liabilities Ascertain with regard to these activities whether the banks system of internal control is adequate Perform substantive audit tests to establish the completeness of the recorded obligations. Such tests should include confirmation procedure as well as examination of related fee income. Review the reasonableness of the year-end contingency figures in the light of experience and knowledge gathered of the current years activities Obtain representation from management that all contingent liabilities has been recorded L) Contingent Assets Procedures to be followed as listed below: Review the clients system of recording claims including the procedures for bringing them to the attention of management. Discuss with the legal department or company secretary regarding possible claims Examine board or management minutes for indications of possible claims Hoda Vasi Chowdhury & Co. Page 40 of 47

Examine correspondence with solicitors including invoices issued Obtain a list of matters referred to solicitors with the companys estimates of possible claims Obtain a letter of representation from the relevant director that he is not aware of any other matters referred to solicitors. M) Contingent liabilities Procedures to be followed as listed below: Review the clients system of recording claims including the procedures for bringing them to the attention of management Discuss with the legal department or company secretary the procedures for instructing solicitors. Examine board or management minutes for indications of possible claims. Examine correspondence with solicitors including bills rendered Obtain a list of matters referred to solicitors with the companys estimates of possible liabilities Obtain confirmation from Banks Obtain a letter of representation from the relevant director that he is not aware of any other matters referred to solicitors. N) Provision for Taxation Verification procedures to be followed as listed below: Obtain computation of taxable income and tax thereon Check the claim of exempted perquisites and depreciation with the existing rules and procedures of tax rules Check the prevailing tax rate claimed by the clients Check the adequate tax liability has been accounted for or not Obtain representation/certificate from tax advisor regarding tax liability of the company. Duty care to third party A professional accountant is liable to the shareholders of a company by virtue of contract with them But a controversial legal question arises as to what extent an auditor will be liable to third parties with whom he has no contract but who usually rely on statement reported upon by him. It is well settled that in case of fraud can be established any person whether or not he is in contractual relationship with the auditor can bring about an action against the auditor. But would an auditor be liable to third parties for negligence only. This question of liability to third parties for negligence alone has been examined by the courts quite a few times. In past it was held that the auditor had no responsibility towards persons with whom he had no contract. It was held in a number of cases that in the absence of contractual relationship a plaintiff cannot hold suit against the auditor. The fact that the plaintiff is a member of the society or that he has suffered damages by relying on the auditors skill does not render the auditor liable to him. Such have been the decisions in De savory Vs. Holden Howard and Co. and in Candler Vs. Crane Christmas and Co. But recently the courts in the U.K. and the U.S.A. have not been accepting the legal Hoda Vasi Chowdhury & Co. Page 41 of 47

principles enunciated above. Many recent judgments show that the courts are taking a much broader view of an auditors liability. In the case of hedely Byrne and Co. Ltd vs. Heller and Partners it has been held that an action for negligence can be brought against the in tort by persons with whom accountant is not in a contractual relationship but to whom he owes a duty. Audit Flow Chart Audit flowchart is a diagrammatically representation of various operations, controls and stages involved in a system on and organization which to be audited. Auditor uses audit flow charts in analyzing a system and in evaluating its effectiveness. Prudence The preparation of financial statements do however, have to contend with uncertainties that inevitably surround many events and circumstances, such as the collectibles of doubtful receivables, the probable useful of plant and equipment and the number of warranty claims that may occur. Such uncertainties are recognized by the disclosure of their nature and extent and by the exercise of prudence in the preparation of financial statement. Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainly, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income, or the deliberate overstatement of liabilities or expenses; because the financial statements should be not neutral and therefore, not have the quality of reliability. Accrual Concept In order to meet their objectives, financial statements are prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Financial statements prepared on the accrual basis inform users not only of past transactions involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions.

Q. The role of the audit is essentially linked with the role of accounting information. Hoda Vasi Chowdhury & Co. Page 42 of 47

Accounting is an Information System. It is, In fact, the language of business as the business information is expressed or conveyed through accounting statements, Accounting is essentially a service function designed to provide relevant Information concerning an entity for those who are interested in interpreting and using that information. The principal purpose of an audit is to lend credibility to a companys financial statements. In making the audit the auditor carefully examines the companys financial statements and the accounting, records from which they have been prepared. In the examination, the auditor make sure the financial statements fairly reflect the companys financial position and operating results and have prepared in accordance with generally accepted financial reporting framework. The stock holders to the statements depend on the auditor to verify the dependently on the information the financial statements contain. The pivotal role of accounting is to provide information to the decision makers inside and outside of the organization. On the other hand, the role of the audit is to verify the audit arithmetical accuracy of the accounting information and proper vouching of the entries in the books, to make the test the accounts make error or even dishonesty and to report the financial statement give to the shareholder and other interested stock holders reliable information respecting the true financial position and operating result of the entity from making economic decision. Under the stewardship system of financial reporting, the owners distinct separate from the management. The owner appoints management to manage the entity in the best interest ownership. The owners need an honest, independent, objective, expert and professional opinion evaluation of the performance of responsibilities upon the management. Financial statements and the product of accounting system reflect the view of such performance. An audit confirms the views presented by the financial statements. Q. Explain the nature of audit postulates. Postulates are assumptions they do not lend themselves to direct verification. Once postulates are accepted propositions can be deduct from them. If the postulates are consistent and sufficient and the inferences down from then follow the rules of logic and reason, the result should be consistent and satisfactory. Audit postulates are some basic assumption, which do not lend themselves to direct verification. The nature of audit postulates can be explained as under: a) Audit postulates provides basis for auditors independence, integrity and objectivity and eliminate conflict between the auditor and the management. b) Audit postulates provide auditors ability, expertise and competence in relation to verification of data contained in the financial statements. c) Audit postulates are basis for inference that existence of a sound and effective system of internal control eliminates the probability of irregularities and that consistent application of generally accepted financial reporting framework results in the fair presentation of financial position and the results of operations. Hoda Vasi Chowdhury & Co. Page 43 of 47

d) Audit postulates are the basis for professional ethics of the auditor that is the auditor acts in the capacity of an auditor and perceives his professional obligation in verifying financial information and expressing opinion thereon. Q. What type of internal controls would you expect in relation to Bank Reconciliation. The following procedures may be followed a) Bank reconciliation should be prepared at least monthly b) The person responsible for preparation should be independent of the receipts and payments function or alternatively, an independent person should check the reconciliation. c) If the reconciliation is prepared by an independent responsible officer, he should obtain bank statements directly from the bank and hold them until the reconciliation is completed. d) The preparation should preferably include a check on at least a sample of receipts and payments against items on the bank statement. Q. Discuss the methods usually applied by an auditor for ascertaining the intetnal control system of his client. Primarily the auditor should understand and assess the clients internal control structure and ensure whether they have been placed in operation by a walk through test. Then the auditor Q. ISA provide an overall guidance for efficient, effective and quality audit Discuss ISA provide a set of specific policies, principles and procedures for conducting an audit. A professional accountant is required to comply with these policies and procedures. Policies and procedures provide guideline on the independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour, technical standards and scope of audit. There are standards on Audit Administration, Audit Management, and Terms of Audit Engagement which deals with audit contracts and responsibility. Quality Control of Audit Work deals with the requirements and procedures to get a quality audit performance and audit reporting. There are standards dealing with various components of audit such as audit documentation, working paper, audit evidence, audit materiality, related parties, subsequent events, going concern, management representation etc. There are also some standards on different stages of an audit such as audit planning, risk assessment and internal control. As a natural consequence, following or complying with the International Standard on Auditing would definitely result the audit work to be effective, i.e. doing the right thing in the right way, efficient, i.e. finishing the audit within the right time; and finally getting the right output, a quality reporting. Hoda Vasi Chowdhury & Co. Page 44 of 47

Q. What matters should be taken into considerations while designing and establishing a sound system of internal control by the management? Internal control system is a system of control as a whole in order to carry on business in an orderly and efficient manner ensuring the adherence of the company policies, safeguarding the assets, detection and prevention of fraud and errors, accuracy and completeness of the accounting records, and timely preparation of financial information. Therefore the following matters should be taken into consideration while designing the internal control system. S Segregation of duties P Physical Control A Authorization & Approval Control M Management Control Such as internal audit or review of management accountant S - Supervision O Organization The formal structure of authority & responsibility. A Arithmetical & Accounting Controls P Personal Control Q. Discuss the methods usually applied by an auditor for ascertaining the internal control system of client? Primarily the auditor should understand and assess the clients internal control structure and ensure that whether they in operation by a walk through test. Then the auditor should perform test of control to obtain evidence about the effectiveness of the design of the internal control system and also operating effectiveness of the same. Test of control includes inspection of documents to obtain evidence that controls have operated properly. It also includes inquiries and observations of controls which leave no audit trail. (e.g. Determining who actually performs each function not merely who is supposed to perform it.) Q. What are the inherent limitations of the internal control system? Internal control can provide only reasonable assurance that management objectives are reached because of inherent limitations, as follows; Managements usual requirement that the internal control should be cost effective. a) Most of the controls tend to be effective for anticipated or usual transactions but not to the unusual types. b) The probability of human error due to carelessness, mistakes of judgment or misunderstanding of instructions. c) The probability that a person responsible for exercising the control may misuse the responsibility. d) The probability of the controls become inadequate due to changes in conditions or compliance with procedures may deteriorate. Hoda Vasi Chowdhury & Co. Page 45 of 47

Q. Discuss about the direct and indirect approaches of audit testing. Common approaches applicable to examine various types of financial information, transaction and accounting records could be separated between direct and indirect testing. Direct Testing: It normally relates to the examination of balance sheet accounts. It includes the procedures such as confirmation of account balances, accounts receivable, accounts payable, cash in bank, physical examination of assets, inventories and analytical tests of financial statements. Indirect Testing: Indirect tests are primary means for satisfying substantive audit objectives as they relate to the account balances. It normally constitutes tests of samples of individual transactions. Common indirect tests are test of sales transaction to determine the accuracy of pricing and other related aspects, test of cash disbursement to determine the clerical accuracy of disbursements, tests of cash receipt to determine the accuracy of posting and also test of posting in the general ledger. Q. Discuss the factors to be considered in developing an audit plan. The auditor should consider the following matters in developing an overall audit plan; A. The terms of his engagement and other statutory responsibilities. B. The nature and timing of report and other communication that are expected under the engagement. C. The accounting policies adopted by the company and subsequent changes on the same. D. The effect of new accounting or auditing pronouncements on the audit. E. The identification of significant audit areas. F. The setting of materiality level for the audit purpose. G. Conditions requiring special attentions, if any. H. Expected degree of reliance on accounting system and internal control. I. The nature and extent of audit evidence to be obtained. J. The involvement of internal auditor, other auditor in subsidiaries or branches and experts. For each financial audit, the audit team should identify the nature, general extent and timing of the planned substantive procedures that are responsive to the risk assessment. The audit team should consider whether the combination of audit procedures selected is sufficient to reduce the risk of misstatement to an accepted low-level. Q. Write down the procedures of audit planning. Although the audit procedure may vary from one audit to next, in general the following procedures are followed; A. Consider the clients business back-ground and ascertain any problem for that sector of business which may affect the audit work. Hoda Vasi Chowdhury & Co. Page 46 of 47

B. Consider an out line plan of the audit based on which auditor can rely upon internal control and allocate the work to interim or final audit. C. Consider the relevance of the matters raised in the previous year audit report. Q. What are the basic audit assumption? The basic audit assumption are; a) Financial statements and financial data are available b) there is no necessary conflict of interest between the auditor and the management of the enterprise under audit. c) the financial statements and other information submitted for verification are free from collusive and other unusual irregularities. Collusion means in this context, staff working together in secret for dishonest purpose d) the existence of a satisfactory system of internal control eliminates the probability of irregularities.

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