Question 1: Multiple Choice Questions
Problem Statement: Non Compliance of Audit include:
a) Acts of omission or commission by the entity being audited either intentional or unintentional, which are not contrary to the prevailing laws.
b) Acts of simply omission by the entity being audited either intentional or unintentional, which are contrary to the prevailing laws.
c) To refer as acts of omission or commission by the entity being audited either intentional or unintentional, which are contrary to the prevailing laws.
d) To avoid error and fraud in financial statement.
e) None of above.
Solution:
The correct answer is (c) To refer as acts of omission or commission by the entity being audited either intentional or unintentional, which are contrary to the prevailing laws. Non-compliance with laws and regulations, also known as illegal acts, are acts of omission or commission by the entity that are contrary to prevailing laws or regulations.
Problem Statement: Assurance services provided by certified auditors and it includes:
a) the record of the audit procedures performed, relevant audit evidence of an entity which being audited are accurate and fair.
b) Data for determining the proper type of audit report which mostly acceptable to stake holders and essential for future compliance.
c) Auditing of historical financial statements are "Fair", effectiveness of internal control on financial reporting, and also provided some measure of assurance of data security and compliance etc.
d) It is not the auditor responsibility to give assurance of audit documents, security and compliance in all respect.
e) None of above.
Solution:
The correct answer is (c) Auditing of historical financial statements are "Fair", effectiveness of internal control on financial reporting, and also provided some measure of assurance of data security and compliance etc. Assurance services are a broad range of services provided by certified auditors. The other options describe components of an audit, not the full scope of assurance services.
Problem Statement: Audit risk equation is:
a) Inherent risk X Detection risk.
b) Inherent risk X Control risk X Detection risk.
c) Inherent risk X Control risk.
d) Inherent risk X Control risk X Detection risk X External risk.
e) None of Above
Solution:
The correct answer is (b) Inherent risk X Control risk X Detection risk. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It is a function of the risk of material misstatement (inherent risk and control risk) and detection risk. The equation is Audit Risk = Inherent Risk x Control Risk x Detection Risk.
Problem Statement: Disclaimer opinion of an Auditors can be based in the case of:
a) Misstatement is material and not pervasive.
b) Misstatement is immaterial and not pervasive.
c) Misstatement is immaterial and pervasive.
d) Misstatement is material and pervasive.
e) None of above.
Solution:
The correct answer is (e) None of above. A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the possible effects on the financial statements of undetected misstatements could be both material and pervasive. The options provided relate to misstatements, not limitations on scope.
Problem Statement: Which one is general procedure to identify contingent liability?
a) Reading minutes of the meeting decision related with contingent liability.
b) The acceptability of accounting policy and standard are adopted properly.
c) Obtaining legal letter as to litigation.
d) Examining invoices & documents.
e) Obtaining Management representation.
Solution:
The correct answer is (c) Obtaining legal letter as to litigation. While all the options are valid audit procedures, obtaining a legal letter is a specific and general procedure to identify contingent liabilities related to litigation or claims. The auditor sends a letter to the client's legal counsel to obtain information about any litigation, claims, and assessments. The other options are also relevant, but they are not as specific to identifying contingent liabilities as obtaining a legal letter.
Problem Statement: Which on relates to principle of audit:
a) Documentation
b) Assessing efficiency
c) Timelines
d) Criminal investigation
e) None of above
Solution:
The correct answer is (a) Documentation. Documentation is a fundamental principle of auditing. The auditor is required to document the audit procedures performed, the evidence obtained, and the conclusions reached. This is a key part of the audit process and is a requirement of the Bangladesh Standards on Auditing (BSAs).
Problem Statement: In continuous audit
a) There cannot be any break.
b) Break may be there and gap is decided by auditor.
c) Gap may be there which is decided by management.
d) Gap may be decided by management and auditor.
e) none of above.
Solution:
The correct answer is (e) none of above. In a continuous audit, the auditor's staff is engaged in a continuous audit throughout the year. The audit is not an all-or-nothing process. The auditor can take breaks, and the gaps are decided by the auditor, not by management. The audit is performed in a phased manner, and the auditor can decide when to perform the audit work. The auditor must, however, perform some audit work on a continuous basis to provide timely assurance.
Problem Statement: Which one is relevant to audit pre-plan activities?
a) Quality control of work.
b) Understanding of client business.
c) Audit evidence.
d) Monitoring.
e) None of above
Solution:
The correct answer is (b) Understanding of client business. Understanding the client's business is a key pre-plan activity. The auditor must understand the client's business and its environment, including its internal controls, to be able to identify the risks of material misstatement and to design and perform appropriate audit procedures. The other options are part of the audit process, but they are not pre-plan activities.
Problem Statement: Which one is not relevant to audit approach constraints?
a) High fees.
b) Materiality.
c) Audit risk.
d) Documentation.
e) None of above
Solution:
The correct answer is (d) Documentation. Documentation is a fundamental principle of auditing, and it is not a constraint on the audit approach. The other options are all constraints that the auditor must consider when designing and performing the audit. High fees, for example, can limit the amount of audit work that can be performed, while materiality and audit risk are key concepts that the auditor must consider in all audit engagements.
Problem Statement: Which is not relevant to elements of examination of forecast projection?
a) Evaluating agreed upon criteria.
b) Evaluating support underlying assumptions.
c) Evaluating presentation as to relevant guidelines
d) Issuing examination report.
e) None of above
Solution:
The correct answer is (e) None of above. All the options are relevant to the examination of forecast projections. The auditor must evaluate the agreed-upon criteria, the underlying assumptions, and the presentation of the forecasts. The auditor also issues an examination report that expresses an opinion on the reasonableness of the forecasts. The other options are all part of the audit process for forecast projections.
Question 2: Modified True/False
Problem Statement: "Statutory audit is essential for the sole trader-ship and register partnership financial accounts and statement".
Solution:
False. Statutory audit is not essential for a sole proprietorship and a registered partnership's financial accounts and statements. It is mandatory for public limited companies and certain private companies as per the Companies Act. A sole trader or a partnership may opt for a voluntary audit, but it is not a statutory requirement.
Problem Statement: "Code of ethics must be followed by all professional Accountants and for audit is pronounced by law ministry and professional Institution".
Solution:
False. The Code of Ethics for professional accountants is pronounced by professional institutions, such as the Institute of Cost and Management Accountants of Bangladesh (ICMAB), not by the law ministry. The professional institutions are responsible for setting the ethical standards for their members, and the members must follow these standards.
Problem Statement: "Audit working papers are the written records kept by the auditors, of the audit evidences accumulated in the course of audit, the methods and procedures followed and conclusion reached at the end"
Solution:
True. The statement is correct. Audit working papers are the records kept by the auditor of the procedures performed, the evidence obtained, and the conclusions reached. They provide the principal support for the auditor's opinion on the financial statements and are a key part of the audit process.
Problem Statement: "Internal audit have no statutory responsibility and their work is comprehensive"
Solution:
True. The statement is correct. The internal audit function has no statutory responsibility. Its scope and objectives are determined by management and those charged with governance. The work of the internal audit function is comprehensive, as it can cover a wide range of a company's operations, not just its financial reporting. The external auditor, on the other hand, has a statutory responsibility to express an opinion on the financial statements.
Problem Statement: "A disclaimer opinion is given when auditor concludes that Financial Statement is not true and fair"
Solution:
False. A disclaimer of opinion is given when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion and the possible effects on the financial statements of undetected misstatements could be both material and pervasive. An adverse opinion is given when the auditor concludes that the financial statements are not true and fair. The two are distinct and should not be confused.
Question 3: Matching
Problem Statement: Match the items of column A with the most suitable items of column B. Match only one item of column A with one item of column B. Write your answer on the answer script. Follow the example given below in proving your answer.
| Column A | Column B |
|---|---|
| 1) Verification of assets | (a) Arises both from compliance and substantive procedures. |
| 2) Material weakness | (b) Providing the truth and confirmation of physical existence of an assets, transaction authenticity and procession of the client and record in the books of accounts with documentation. |
| 3) Sampling risk | (c) is the inherent risk of the company in its operation. |
| 4) Contents of audit note books | (d) is weakness in Internal control that could have a material effect on financial statement. |
| 5) Cash flow forecast | (e) included all technical terms used in business by client and confirmation. |
| (f) These estimates are often made when there are uncertainties about the outcome of events and involve the use of judgment. | |
| (g) Which is prepared on the basis of assumptions as to future events which management expects to take place and actions management expects to take as of the date the information is prepared. | |
| (h) Management consider as best-estimated assumptions. |
Solution:
The correct matches are as follows:
- 1) Verification of assets -> (b) Providing the truth and confirmation of physical existence of an assets, transaction authenticity and procession of the client and record in the books of accounts with documentation.
- 2) Material weakness -> (d) is weakness in Internal control that could have a material effect on financial statement.
- 3) Sampling risk -> (a) Arises both from compliance and substantive procedures.
- 4) Contents of audit note books -> (e) included all technical terms used in business by client and confirmation.
- 5) Cash flow forecast -> (g) Which is prepared on the basis of assumptions as to future events which management expects to take place and actions management expects to take as of the date the information is prepared.
Question 4: Audit Risk and Internal Controls
Problem Statement: Describe the different elements of audit risk and explain why the auditor needs to consider risk when conducting an audit.
Solution:
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It is a function of three elements:
- **Inherent risk:** The susceptibility of an assertion about a class of transactions, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
- **Control risk:** The risk that a misstatement that could occur in an assertion about a class of transactions, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.
- **Detection risk:** The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
The auditor needs to consider risk when conducting an audit because the audit process is designed to obtain reasonable assurance, not absolute assurance, that the financial statements are free from material misstatements. By considering risk, the auditor can focus their audit procedures on the areas of the financial statements that are most susceptible to misstatement, which is an efficient and effective way to conduct an audit.
Problem Statement: Identify, from the circumstances outlined above, the factors which indicate high audit risk in respect of the audit of Bengal Ltd. and, for each factor identified, explain why it contributes to high audit risk.
Solution:
The factors which indicate high audit risk in respect of the audit of Bengal Ltd are:
- **Returns policy:** The company offers a generous returns policy, which could lead to a misstatement of sales and receivables. The auditor should perform extensive substantive procedures on the sales and returns.
- **Centralized ordering:** The company places all its orders centrally three times a year, which could lead to a risk of a material misstatement if a large order is misstated. The auditor should perform extensive substantive procedures on the purchases and payables.
- **Foreign currency:** All transactions are conducted in euros, which could create a risk of a material misstatement due to foreign exchange rate fluctuations. The auditor should perform extensive substantive procedures on the foreign currency transactions.
- **Owner-manager:** The managing director is also the company's main shareholder and is involved in all major decisions. This could create a risk of a management override of controls. The auditor should perform extensive substantive procedures on the transactions and balances that are susceptible to a management override of controls.
Problem Statement: Outline the internal controls which Bengal Ltd should put in place to ensure the complete recording of sales and safe custody of cash.
Solution:
The following internal controls should be put in place to ensure the complete recording of sales and safe custody of cash:
- **Complete recording of sales:** The company should have a centralized point-of-sale system that automatically records all sales transactions. The sales transactions should be reconciled with the cash, cheque, and credit card receipts on a daily basis.
- **Safe custody of cash:** The company should have a secure place to keep the cash. The cash should be counted and reconciled with the cash receipts on a daily basis. The cash should also be banked on a daily basis.
- **Segregation of duties:** The duties of handling cash, recording sales, and reconciling cash should be segregated. This would reduce the risk of fraud.
Question 5: Client Understanding and Management Representations
Problem Statement: Explain why auditors need an understanding of the client's industry. What sources are commonly used by auditors to learn about the client's industry?
Solution:
Auditors need an understanding of the client's industry to be able to identify the risks of material misstatement in the financial statements. The industry in which the client operates can affect the client's business risks, which in turn can affect the audit risk. For example, a company operating in a highly regulated industry may have a higher risk of material misstatement due to non-compliance with the regulations.
The sources commonly used by auditors to learn about the client's industry are:
- **Industry publications:** Industry publications and reports can provide the auditor with an understanding of the industry's trends and risks.
- **Previous audit files:** The previous audit files can provide the auditor with an understanding of the client's business and its environment.
- **Previous experience:** The auditor's previous experience with clients in the same industry can also be a valuable source of information.
- **Discussions with management:** Discussions with management can provide the auditor with an understanding of the client's business and its environment.
Problem Statement: What are the responsibilities of the successor and predecessor auditors when a company is changing auditors?
Solution:
The responsibilities of the successor and predecessor auditors are:
- **Successor auditor:** The successor auditor must make inquiries of the predecessor auditor to determine whether there are any professional reasons why the new engagement should not be accepted. The successor auditor must also obtain a copy of the predecessor auditor's working papers to gain an understanding of the client's business and its internal controls.
- **Predecessor auditor:** The predecessor auditor must respond promptly and fully to the successor auditor's inquiries. The predecessor auditor must also make their working papers available to the successor auditor, with the client's consent.
Problem Statement: What factors should an auditor consider prior to accepting an engagement? Explain.
Solution:
The factors that an auditor should consider prior to accepting an engagement are:
- **Professional competence:** The auditor should assess whether they have the necessary skills and resources to perform the audit.
- **Independence:** The auditor should assess whether there are any threats to their independence, such as a financial interest in the client.
- **Integrity of management:** The auditor should assess the integrity of the client's management by making inquiries of the predecessor auditor and third parties.
- **Terms of engagement:** The auditor should agree on the terms of engagement with the client, including the scope of the audit and the fee.
Problem Statement: Reconcile the auditor's responsibility for discovering material misrepresentations by management with these comments.
Solution:
The auditor's responsibility for discovering material misrepresentations by management is a key part of the audit process. While the auditor may rely on management's representations and judgments, the auditor must perform audit procedures to obtain sufficient and appropriate audit evidence to support their opinion. The auditor should not rely solely on management's representations, as they may be biased or misstated.
The auditor's responsibility is to maintain a professional skepticism throughout the audit and to challenge management's representations when they are not supported by evidence. The auditor should also perform substantive procedures to verify the financial statements and to ensure that they are free from material misstatements, whether due to fraud or error.
Question 6: Audit Planning and Opening Balances
Problem Statement: Describe S & Co's responsibilities in relation to the company's opening balances in accordance with BSA 510 and BSA 710.
Solution:
As this is a new audit engagement, the auditor has a responsibility to obtain sufficient appropriate audit evidence about the opening balances. As per BSA 510, "Initial Engagements - Opening Balances," the auditor's responsibilities are to ensure that:
- **Opening balances do not contain misstatements:** The opening balances do not contain misstatements that materially affect the current period's financial statements.
- **Accounting policies are consistently applied:** The accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements, or that changes in accounting policies have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
- **Previous year's audit report:** The previous year's audit report was not modified. If it was, the auditor should consider the impact of the modification on the current period's financial statements.
Problem Statement: Explain why it is important for auditors to plan their audit work.
Solution:
It is important for auditors to plan their audit work for the following reasons:
- **Efficiency and effectiveness:** Planning the audit work helps the auditor to be efficient and effective. It allows the auditor to focus their procedures on the areas of the financial statements that are most susceptible to misstatement.
- **Risk assessment:** Planning the audit work helps the auditor to identify and assess the risks of material misstatement. This is a crucial step in the audit process and is a requirement of the BSAs.
- **Direction and supervision:** Planning the audit work provides a framework for the audit. It helps the auditor to direct and supervise the audit team and to ensure that the audit is performed with professional skepticism and due care.
- **Resource allocation:** Planning the audit work helps the auditor to allocate the audit resources appropriately. It helps the auditor to determine the nature, timing, and extent of the audit procedures to be performed.
Problem Statement: Describe the matters you will consider in planning the further action you will take concerning the information you obtained during your recent visit to the company.
Solution:
The auditor should consider the following matters in planning further action:
- **Materiality:** The auditor should assess the materiality of the issues identified during the visit. If the issues are material, the auditor should perform further audit procedures to address them.
- **Risk assessment:** The auditor should reassess the risk of material misstatement in the financial statements in light of the issues identified. If the risk is high, the auditor should increase the nature, timing, and extent of the audit procedures.
- **Management representations:** The auditor should obtain management representations about the issues identified during the visit. The management representations should be in writing and should be signed by management.
- **Internal controls:** The auditor should assess the internal controls over the issues identified during the visit. If the internal controls are weak, the auditor should increase the substantive testing.
Problem Statement: Describe S & Co's responsibilities in relation to obtaining understanding of the services provided by Karim & Co. when planning the audit.
Solution:
As the payroll function is outsourced, S & Co has a responsibility to obtain an understanding of the services provided by Karim & Co. As per BSA 402, "Audit Considerations Relating to an Entity Using a Service Organization," the auditor should obtain an understanding of the services provided by the service organization, including the nature of the services, the controls at the service organization, and the relationship between the service organization and the user entity. The auditor should also obtain a report on the service organization's controls, which is a key source of audit evidence.
Question 7: Going Concern & Audit Implications
Problem Statement: Explain what is meant by the going concern concept and why the auditor should consider whether a company is a going concern
Solution:
The **going concern concept** is a fundamental assumption in financial reporting that a business will continue to operate in the foreseeable future without the intention or necessity of liquidation. It is a key assumption that underpins the valuation of assets and liabilities. If the going concern concept is not appropriate, the financial statements should be prepared on a liquidation basis, which would result in a different valuation of assets and liabilities.
The auditor should consider whether a company is a going concern because it can have a significant impact on the financial statements and the audit opinion. If there is a material uncertainty about the company's ability to continue as a going concern, the auditor must obtain sufficient appropriate audit evidence to confirm the company's going concern status. If the auditor is unable to obtain sufficient appropriate audit evidence, they may have to issue a modified audit opinion.
Problem Statement: Identify the matters to be considered when reviewing the profit and cash flow forecasts prepared by the company, in order to assess whether the company is a going concern.
Solution:
The auditor should consider the following matters when reviewing the profit and cash flow forecasts:
- **Assumptions:** The auditor should evaluate the reasonableness of the assumptions underlying the forecasts. The assumptions should be based on the company's business plans and its environment.
- **Consistency:** The auditor should verify that the forecasts are consistent with the company's business plans and its past performance.
- **Reliability:** The auditor should assess the reliability of the forecasts. The forecasts should be based on reliable data and should be prepared in a methodical manner.
- **Sensitivity analysis:** The auditor should perform a sensitivity analysis to assess the impact of changes in key assumptions on the forecasts.
- **Supporting evidence:** The auditor should obtain sufficient appropriate audit evidence to support the forecasts. The auditor should also obtain a written representation from management about the forecasts.
Problem Statement: Discuss the implications for the audit report of Garb Ltd in respect of the financial statements for the year ended 30 September 20XI, if the negotiations for the replacement loan are not completed by the time the audit report is signed.
Solution:
If the negotiations for the replacement loan are not completed by the time the audit report is signed, there is a material uncertainty about the company's ability to continue as a going concern. The auditor would have to consider the impact of this on the audit report.
The implications for the audit report are:
- **Unqualified opinion with an Emphasis of Matter paragraph:** If the auditor concludes that the company has a going concern problem, but the financial statements are otherwise free from material misstatements, the auditor would issue an unqualified opinion with an Emphasis of Matter paragraph to draw attention to the going concern problem. The auditor would also include a section in the report to explain the reason for the Emphasis of Matter paragraph.
- **Qualified opinion:** If the auditor concludes that the going concern problem is a material misstatement, but not pervasive, the auditor would issue a qualified opinion. The auditor would also include a section in the report to explain the reason for the qualified opinion.
- **Adverse opinion:** If the auditor concludes that the going concern problem is a material and pervasive misstatement, the auditor would issue an adverse opinion. The auditor would also include a section in the report to explain the reason for the adverse opinion.
- **Disclaimer of opinion:** If the auditor is unable to obtain sufficient appropriate audit evidence about the company's going concern status, the auditor would issue a disclaimer of opinion.