assurnace short question

Q 1. ABC Co., Chartered Accountants, was due to start the field work for an
audit four months ago but the finance department was not ready. The
financial controller has recently resigned and been replaced. The filing
deadline is now four weeks away and the CFO still expects the accounts to be
filed on time and ABC’s audit is going to have to be squeezed into a very short
period. The CEO thinks that ABC is obliged to finish its audit on time. Discuss.
[Marks 5]

• Answer to the question no. 1
• How ABC Co., Chartered Accountants (ABC), does the audit, and more
pertinently how quickly ABC does the audit, is up to ABC. ABC is not
obliged to meet the CEO's new timetable. ABC should not forget that the
finance department failed to keep to the requirements of ABC's
commencement of field work. The attitude of the CEO may be risky. The
scenario described indicates audit risk. The delays and the subsequent
replacement of the financial controller mean that the possibility of errors
in the financial statements has increased. Also, a skeptical auditor would
be wondering whether the delays followed by the swift exit of the
financial controller could indicate fraud. The idea that fraudsters leave
things to the last minute hoping that the ensuing rush will reduce the
chance of fraud being detected is not always a protection. Taken together,
all of these factors suggest to me that a skeptical auditor would take their
time doing this particular audit, rather than rush it.

2. How should a practicing member of the Institute of Chartered
Accountants of Bangladesh respond to a request to provide a
“second opinion” on a professional matter? Justify your answer.
[Marks 5]

Answer to the question no. 2
Second opinion
If an auditor is asked to comment on an issue such as an accounting treatment, or a proposed
audit opinion by someone who is not a client, then it is likely that he is being asked for a second
opinion and he should take care in his answer.
How to respond to the request
The auditor should ask why the opinion has been sought. He should then contact the person's
auditor to obtain any relevant facts relating to the situation. He should then ensure that a copy
of his (the second) opinion is sent to the first auditor, although he will need permission from
the entity to do this.
If the auditor is told that the situation is hypothetical, when he gives his opinion, he should be
very careful to point out that the opinion is based on hypothetical facts and does not relate to
any specific organization.
Why such care should be taken
The auditor is at risk of giving an inappropriate opinion if he gives an opinion without being
aware of all the relevant facts.
It is also significant possibility that giving a second opinion will put pressure on the company's
auditor (who gave the first opinion) and may compromise his independence.
An auditor should always, therefore, decline to give a second opinion if the client refuses
permission for him to contact the company's auditor.

• 3. Evaluate the role `support letters’ (also called ‘comfort
letters’) as evidence in the audit of financial statements,
especially in the context of consolidated financial
statements.[Marks 5]

Support letters
In the context of group accounts, the parent and subsidiaries are seen to be a single entity, so
if the group as a whole is a going concern then this is sufficient. It is sometimes the case that a
subsidiary, when considered in isolation, does not appear to be a going concern. In such a case
the auditor may request a support letter from the directors of the parent company. This letter
states that the intention of the parent is to continue to support the subsidiary, for example, if
problems regarding its viability subsequently arose. (Banks also often require this type of
confirmation.)
This letter represents documentary evidence and is normally approved by the parent company
board and minuted. If there is a limitation on the time for which the support is to be provided
other evidence may be required that the subsidiary will be able to continue after this date.
Auditors also need to be careful that the parent company is actually in a position to provide the
guarantees (legally, financially and otherwise), and also that the guarantee is capable of being
legally enforced. The context in which a comfort letter was written is important in determining if
it is legally binding or not.

4. If a subsidiary has a going concern issue and is reliant upon the parent
for support, will a letter of support from the parent, on its own,
constitute sufficient appropriate audit evidence on going concern?
Can a component auditor request the parent auditor to carry
out any necessary audit work required? Discuss. [Marks 5]

The scenario would ordinarily require the auditor to obtain a ‘support letter’ from the
group’s management. It is sometimes the case that a subsidiary, when considered in
isolation, does not appear to be a going concern. In the context of group financial
statements, the parent and the subsidiary are seen to be a complete, single reporting
entity, so if the group as a whole is a going concern, that is sufficient.
However, the component auditor will need assurance that the subsidiary, in isolation,
is a going concern. In such a case, the component auditor may request a support letter
(also referred to as a ‘comfort letter’) from the management. This letter states that the
intention of the parent is to continue to support the subsidiary, which makes it a going
concern.
Yes, in this case this support letter constitutes sufficient appropriate audit evidence on
going concern.
Yes, a component auditor may request the parent auditor to carry out any necessary
audit work required such as, the validity of support letter on going concern issues of
the subsidiary, related party transactions, bank guarantees from group to subsidiary
etc.

• 5. List two reasons why audit evidence is likely
to be persuasive rather than conclusive.

For the following reasons audit evidence is likely to be persuasive rather than
conclusive:
The auditor gathers evidence on a test basis (the sample may or may not be
representative).
People make mistakes-both client and auditor.
Documents could be forged- increasingly easily with digital technology.
The client’s personnel may not always tell the truth.

6. The following situations have arisen for your audit firm:
Situation 1: At the request of NIRMAN Ltd. (an audit client) you
have agreed to provide advice on the preparation of a tender for
a very large contract. Subsequently, client KARIGOR Ltd. (a
company for whom you prepare accounts and provide a wide
range of services) also asks for your assistance in preparing a
tender for the same contract.
Requirement: Explain the action you would take in situation 1.

Situation 1
Additional service:
Tender preparation
When agreeing to provide any additional service to an audit client it is important to recognize that the
independence of the audit may appear to be compromised even though the auditor considers he is able to be
objective in executing his work. In general, additional service of an advisory nature is permitted provided no
executive function is taken on which might conflict with the office of auditor.
Nirman Ltd.
The decision to provide advice and assistance in connection with the tender is not unethical provided it is
made clear to the directors that any tender ultimately remains their responsibility. The directors should be sent
a supplementary engagement letter, distinguishing the nature of an audit from other work and clarifying the
extent of the advice to be given.
Karigor Ltd.
Independence may also be affected by a conflict of interest between two clients. With Nirman Ltd. and Karigor
Ltd. competing by tender for the same contract, it is likely that detailed inside information of both businesses
would be obtained which would be of considerable value to the competitor.
To advise both clients would not appear to be independent. It would be difficult to be objective and avoid
influencing one or other of the tenders unfairly.
It would be preferable to advise only one of the two clients – probably Nirman Ltd. as already agreed – and
thereby avoid conflict. However, the knowledge of Karigor Ltd.’s business may be seen to impair objectivity and
Karigor Ltd. might well object to assistance being provided to Nirman Ltd.
It would be best to advise neither client but to explain the predicament to both and suggest that each consults
another independent firm of accountants.

6. The following situations have arisen for your audit firm:
Situation 2: Whilst carrying out the final audit of the accounts of TIGER Ltd. (deadline
one month after the balance sheet date) you discover a substantial trading debt due
from another client LION Ltd. Although it has not been made public, you are aware
that LION Ltd. is in serious financial difficulties and the bank is considering appointing
a receiver. The directors of TIGER Ltd have made no bad or doubtful debt provision
against the amount due from LION Ltd.
Requirement: Explain the action you would take in situation 2.

Situation 2
Confidentiality
To inform the directors of Tiger Ltd. that the accounts will not give a true and
fair view unless a provision is made against the debt due from Lion Ltd. would
be a breach of confidentiality. It could also have the undesirable effect of
triggering the collapse of Lion Ltd. since the directors of Tiger Ltd. would take
steps to obtain payment from Lion Ltd. as soon as possible.
To ignore the information about Lion Ltd.’s financial position (since it is not
publicly available) and give an unqualified auditors’ report in a situation
where the accounts are known (by the auditor) not to give a true and fair
view, would be prima facie a breach of an auditors’ statutory duty under the
Companies Act.
To avoid being sued for breach of confidence by Lion Ltd., or being sued for
negligence by Tiger Ltd., it may be possible to delay forming an opinion until
the situation crystallizes.

7. Jereen, a Chartered Accountant, was hired as an audit senior by H&B
Chartered Accountants in January 2014. After attending the firm’s normal
induction course, she was assigned to the audit of Moon and Sun Ltd., a
supplier of agricultural feedstuffs and fertilizers. Her first work assignment
was to complete the extensive recalculation of the inventory compilation
using the audit test counts and audited unit prices for several hundred
inventory items. Her time budget for the work was five hours. She started at
3:00 pm.
Knowing that she would be busy the next day, she took all the necessary
documentation home. She resumed work at 9:00 pm and did not finish until
1:00 pm. The next morning she returned to her office at her customary
starting time of 9:00 am, put the completed documentation on file, and
recorded 5 hours in the time budget/actual schedule. Her supervisor was
pleased, especially with her diligence in taking the work at home. [Marks 5]

Answer to the question No. 7
There are several reasons why it is inappropriate for audit staff to understate the time it
takes them to complete an assignment. Some of these reasons are as follows:
i. It distorts the time taken to do particular jobs so it may lead to inequitable charging of
time to different clients.
ii. It may put excessive pressure on staff undertaking the job in subsequent years leading
to either job dissatisfaction, continued inaccurate recording of time, inadequate
completion of aspects of the work or some combination of all three.
iii. Consequently, it may discourage the staff from a thorough and conscientious
approach to their work.
iv. There is another issue here in relation to security of files etc. Practices should have a
protocol in place about the appropriateness of taking files out of the office and bringing
them home or removing them to another location.
On the other hand, some allowance should have been made in the budget allocation for
the fact that Jereen is new to the company and should not be expected to do the work
quite as quickly as a more familiar and experienced staff member.

Q 8. Your audit client imports stock that is held
at an independent secure warehouse by a third
party. Your client does not carry out a stock take
but is happy to rely on the third party, receiving
stock reports from them instead. Stock is
material, but the third party will make good any
losses should they arise. Do you need to
physically verify the stock at the premises of the
third party? [Marks 5]

Put simply, because the client is content to rely on the third
party, it does not mean that auditors have to be. Auditors are,
after all, responsible for their own opinion.
If material, the auditors should obtain sufficient appropriate
audit evidence regarding the existence and condition of stock by
performing one or both of:
i. Request for confirmation from the third party; and
ii. Performing inspection or other appropriate procedures as per
requirement.
Theoretically, a visit to the warehouse may not be required if the
auditors think they can obtain sufficient evidence without such a
visit. Once again, the auditors shall have to provide their own
opinion, so they need to gather sufficient appropriate audit
evidence in support of their opinion.

• 9. While planning the audit of Rolex Limited,
you realized that part of the work you plan to
carry out has already been performed by the
internal audit division of the company. Identify
three factors that may affect the external
auditor’s determination of whether the work
of internal auditors is likely to be adequate for
the purpose of the audit. [Marks 5]

The following factors should be taken into account when considering whether
the work of internal auditors is adequate for the purpose of the audit:
The organizational status of the internal audit, including its ability to be
objective and the level of management it reports to. In this case, the auditor
should have to know to whom the head of internal audit reports (should be
the Board or the Audit Committee of the Board).
The scope of internal audit function, including the nature and extent of
assignments carried out and the action taken by management as a result of
internal audit reports.
The technical competence of the people carrying out the work. In this case,
it is necessary to inquire whether internal auditors have adequate technical
training and proficiency.
The application of due professional care. The external auditor should review
the work carried out by the internal auditor to check that it was documented
in the first place, and to assess whether it was planned and whether there is
evidence of its being supervised and reviewed.

10. The current auditor of Sonali Ltd. will not be proposed for re-
appointment at the annual general meeting to be held in
September 2018. The directors were extremely unhappy at the
additional disclosures in the financial statements for the year
ended 31 December 2017 concerning the status of the company
as a going concern. The auditors had insisted upon these before
they would express an unmodified opinion.
As a result your firm has been asked to accept appointment as
auditors of Sonali Ltd. All the shareholders of the company are
directors.
Set out the matters your firm ought to consider and the
procedures to follow before it should accept appointment as
auditors. [Marks 4]

Matters to consider
Whether the concern issue likely to be present for future accounting periods
Whether the going concern disclosures made were warranted
Whether Sonali Ltd. will give permission to contact incumbent auditors
Whether the current auditors agree with reason given by Sonali Ltd. for not wishing to
reappoint
Likely independence from Sonali Ltd. and therefore able to carry out objective audit
Nature of Sonali’s business:
Whether any special expertise required
Whether have necessary expertise;
Time/resource requirements to be able to perform audit competently.
Procedures to follow:
Discuss with directors regarding current going concern status of Sonali Ltd.;
Review prior year’s accounts whether going concern disclosures were necessary;
Request permission to contact incumbent auditors;
If permission refused decline appointment;
Analyze the reason for not reappointment of prior auditor;
Review any technical expert required for this audit and availability of the resources;
Evaluate the proposed fee compared to manpower and other expenses of the firm.

11. You have completed the external audit of the financial
statements of Roses Ltd for the year ended 31 December 2014
and unmodified auditor’s report was signed by the engagement
partner on 1 march 2015. Your firm’s audit report has been
provided to the directors who plan to issue the financial
statements and auditor’s report to the shareholders on 30
March.
Whilst reading today’s newspaper, 23 March 2015, you discover
that Belly, a major customer of Roses went into liquidation on 5
March 2015. You were the audit senior on the audit of Roses and
you recall that Belly owed a material amount to Roses at 31
December 2014 which remained outstanding at the conclusion
of the subsequent events review. You have informed the
engagement partner immediately after you came to know about
this news.
Discuss the issues arising as a result of the newspaper article and
state what, if any, action your firm should take. [Marks 7]

Issues arising and actions regarding adjusting subsequent event
Liquidation of customer is a material adjusting subsequent event.
The audit firm has no responsibility to search for subsequent events after
the auditor’s report is issued but needs to consider action where it becomes
aware of material facts affecting the financial statements.
The firm should discuss with management its intentions regarding any
amendments to the financial statements.
Perform procedures to ascertain if any amount is recoverable, e.g. review
correspondence with liquidators.
Carry out procedures to ascertain the impact of a loss of major customer on
the going concern presumption.
If management amend the financial statements the firm should undertake
audit procedures in respect of those amendments and reissue the auditor’s
report accordingly on the new financial statements.

12. During the external audit of Dawn Ltd., a
manufacturer of electrical appliances, you observed
that the company does not maintain a list of approved
suppliers from whom to purchase its raw materials.
There is also huge amount of trade payables
outstanding shown in the draft financial statements.
Prepare notes, in readiness for drafting your firm’s
report to the management of Dawn, outlining the
possible consequences of this significant internal
control deficiency and provide recommendations to
remedy the deficiency.

Consequences:
The quality of raw materials may be inappropriate;
Dawn Ltd. may not benefit from most favorable prices;
Absence of an approved supplier list increases scope for fraudulent acts by
staff ordering goods.
Recommendations:
Compile an approved supplier list by researching price list of suppliers for
best rates, quality of products from each supplier, viability of bulk purchase
discounts, suppliers ability to meet delivery requirements.
Final list of supplier to be approved by the top management;
Communicate the list to the staff responsible for purchase and ordering;
Require that when orders are placed to be authorized by the higher
authority for approval;
Take necessary action against the staff not following the list and violating
the standard procedure;
There should be sufficient arrangement to protect non-compliance by the
supplier;
The suppliers list to be updated from time to time.

Question No. 1
(a) Mr. M.N Islam is a partner of ABC & Co., a firm of Chartered Accountants. Buildsafe Ltd, a
manufacturer of iron and steel products, which is listed with Dhaka and Chittagong Stock
Exchanges, has approached Mr. Islam to act as their auditor for the year-ended on 30th June
2018.You have been working as audit supervisor of ABC for last 3 years.
You have been given the assignment to conduct the audit of Buildsafe for the year ending
30th June 2018. During the course of your audit you came across certain information which
created doubt in your mind that there could be risks of fraud in the area of revenue
recognition.
According to BSA 240 (The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements) you are required to identify and assess the risk of material misstatement due to
fraud.
Requirements:
(i)Discuss how you will identify and asses the risks of material misstatement due to
fraud in revenue recognition.
(i)What are the specific auditor responses in relation to the risks identified?

Answer to the Question No.1. (a) (i)
There are a number of reasons why there should be a presumption that there are risks of fraud in revenue
recognition. One reason is that managers of companies are often under pressure, particularly in listed
companies, to achieve certain performance targets. The achievement of those targets often impacts their
job security and their compensation. These performance targets often include measures of revenue
growth, providing an incentive for management to use earnings management techniques.
There is also usually a high volume of revenue transactions during a financial period. As the volume of
transactions increases, the risk of failing to detect fraud and error using traditional, sample based auditing
techniques also increases. This means that it is potentially easier for management to successfully
manipulate these balances than other balances which are subject to a lower volume of transactions.
Material misstatement through the manipulation of revenue recognition can be readily achieved by
recording revenue in an earlier or later accounting period than is proper or by creating fictitious revenues.
Revenue recognition can also be a judgmental area. Examples include the recognition of revenues on long-
term contracts, such as the construction of buildings, and from the provision of services. These require the
estimation of the percentage of completion at the period end, increasing the scope for management to
manipulate reported results.
As well as requiring judgment, revenue recognition can also be a complex issue. For example, some sales
have multiple elements, such as the sale of goods and the separate sale of related maintenance contracts
and warranties. This added complexity increases the risk of manipulation.

Answer to the Question No.1. (a) (ii)
Specific responses in relation to risk identified:
•Performing substantive analytical procedures relating to revenue using disaggregated data, for
example, comparing revenue reported by month and by product line or business segment during the
current reporting period with comparable prior periods. Computer-assisted audit techniques may be
useful in identifying unusual or unexpected revenue relationships or transactions.
•Confirming with customers certain relevant contract terms and the absence of side agreements,
because the appropriate accounting often is influenced by such terms or agreements and basis for
rebates or the period to which they relate are often poorly documented. For example, acceptance
criteria, delivery and payment terms, the absence of future or continuing vendor obligations, the right
to return the product, guaranteed resale amounts, and cancellation or refund provisions often are
relevant in such circumstances.
•Inquiring of the entity’s sales and marketing personnel or in-house legal counsel regarding sales or
shipments near the end of the period and their knowledge of any unusual terms or conditions
associated with these transactions.
•Being physically present at one or more locations at period end to observe goods being shipped or
being readied for shipment (or returns awaiting processing) and performing other appropriate sales
and inventory cutoff procedures.
For those situations for which revenue transactions are electronically initiated, processed, and
recorded, testing controls to determine whether they provide assurance that recorded revenue
transactions occurred and are properly recorded.

Case2:
You are the audit manager in charge of the audit of Tempest, a limited liability company. The company's year end is 31 December, and
Tempest has been a client for seven years. The company purchases and resells fittings for ships including anchors, compasses, rudders, sails
etc. Clients vary in size from small businesses making yachts to large companies maintaining large luxury cruise ships. No manufacturing takes
place in Tempest. Information on the company's financial performance is available as follows:
20X7Forecast 20X6Actual
$'000 $'000
Revenue 45,928 40,825
Cost of sales (37,998) (31,874)
Gross profit 7,930 8,951
Administration costs (4,994) (4,758)
Distribution costs (2,500) (2,500)
Net profit 436 1,693
Non-current assets (at net book value) 3,600 4,500
Current assets:
Inventory 200 1,278
Receivables 6,000 4,052
Cash and bank 500 1,590
Total assets 10,300 11,420
Capital and reserves:
Share capital 1,000 1,000
Accumulated profits 5,300 5,764
Total shareholders' funds 6,300 6,764
Non-current liabilities 1,000 2,058
Current liabilities 3,000 2,598
10,300 11,420
Other information
The industry that Tempest trades in has seen moderate growth of 7% over the last year.
􀁸 Non-current assets mainly relate to company premises for storing inventory. Ten delivery vehicles are owned with a net book value of
$300,000.
􀁸 One of the directors purchased a yacht during the year.
􀁸 Inventory is stored in ten different locations across the country, with your firm again having offices close to seven of those locations.
􀁸 A computerized inventory control system was introduced in August 20X7. Inventory balances are now obtainable directly from the computer
system. The client does not intend to count inventory at the year-end but rely instead on the computerized inventory control system.
Required: Using the information provided above, prepare the audit strategy for Tempest for the year ending 31 December 20X7.

Case 2:
Audit Strategy
Client: Tempest
Year-end: 31 December 20X7
Prepared by: A. Manager
Scope of audit
Tempest is subject to statutory audit. It cannot take advantage of any reporting or audit exemptions.
The financial statements are prepared under IFRS. The audit will be carried out under ISA
Tempest trades in fittings for ships and stores its inventory at ten different locations. As in previous years, we
have carried out year-end procedures at the three locations with the most significant inventory balances plus
three others on a rotational basis, using staff from our most conveniently located offices. This year, due to the
change in accounting systems we will carry out year-end procedures at all of the locations.
Timings
􀁸 Interim audit
􀁸 Final audit
􀁸 Audit staff planning/briefing meetings
􀁸 Meeting with directors (or audit committee, if one exists)
􀁸 Approval of financial statements by the board
􀁸 Issue of audit report
Materiality for the financial statements as a whole
Preliminary calculations of materiality overall are based on the forecast financial statements and are set out in
Appendix 1. These materiality levels will need to be reassessed when the actual F/S for 20X7 are available and
performance materiality levels will also need to be determined.
Materiality for I/S should be set in the region of $40,000 (being at the upper end of the range based on profit
before tax). Materiality for B/S should be set in the region of $200,000, based on total assets.
Materiality levels overall are generally lower, suggesting performance materiality levels will also be lower. This
is likely to increase sample sizes for procedures; this is appropriate in light of the indications that there may an
increased risk of error this year.

Higher risk areas
(i) Inventory
The forecast significantly lower. Coupled with the mid-year change in the accounting system for inventory there is a
risk of material error in inventory quantities or valuation.
(ii) Sales
Sales are forecast to have increased by 12% . Compared to the average year on year growth of only 7% for the
industry in general there is a risk that sales may be overstated.
(iii) Profit
Gross profit margin has fallen to 17.3% (20X6 21.9%) and net profit margin has fallen to 0.9% (20X6 4.1%). This could
indicate errors in cut off or allocation or that the company has been cutting prices in order to win market share and
has let profitability suffer. Although there is no specific indication of immediate going concern difficulties, this
strategy may not be sustainable in the longer term.
(iv) Receivables
Days' sales in receivables are forecast increased to 47 days (36 days in 20X6).
Indication: problems recoverability of the receivables and a risk that impairments in value of the receivables'
balances are not recognized.
(v) Non-current assets
Decrease in this balance of $900,000. This is far in excess of what could be explained by depreciation of assets that
comprise mainly properties. It may be that there have been disposals in the year. It raises the possibility of incorrect
accounting or inadequate disclosures.
Also in relation to the non-current assets, if the inventory balance has genuinely decreased to approximately 15% ,
some of the storage locations may be redundant. It could be that the reduction relates to impairment write-downs
and it could be the case that further write downs are needed.
(vi) Related party transactions
Given the information that one of the directors purchased a yacht during the year it may be that he has purchased
fittings from Tempest Ltd. There is a risk that any related party transactions have not been fully disclosed.

Audit approach
Where possible evidence should be obtained from tests of control so that detailed substantive
procedures can be reduced.
Special emphasis will be needed in respect of inventory accounting. Procedures will include:
􀁸 Obtaining an understanding of how the transfer of balances to the new system was carried out. Direct
testing of balances from the old to new systems may be needed as well as reviewing evidence of control
procedures carried out by the client at the point of changeover.
􀁸 A sample of sales and purchase transactions should be traced through the new system to check
whether additions to and deletions from inventory are being made correctly.
􀁸 Test counts of inventory at the various locations should be performed at the year-end and agreed to
the inventory records as at that date.
Testing of items in the income statement will need to include:
􀁸 Consideration of the revenue recognition policies being used
􀁸 Cut-off testing on sales and costs of sales
􀁸 Comparison of expense classifications from year to year
The review of events after the reporting period should focus on:
􀁸 Any substantial adjustments to the inventory figure
􀁸 Evidence of recoverability of receivable balances
􀁸 Any information suggesting further reductions in profitability of the business
􀁸 Management accounts and cash flow projections for the post year end period
Appendix 1
Materiality ($'000)
½ –1% of revenue (½% 􀁸 45,928 – 1% 􀁸 45,928) 230 to 459
5-10% of profit before tax (5% 􀁸 436 – 10% 􀁸 436) 22 to 44
1-2% of total assets (1% 􀁸 10,300 – 2% 􀁸 10,300) 103 to 206

Q. What is the difference between audit engagement and assurance engagement?
A. All audit engagements are assurance engagements but not all assurance engagements are
audit engagements. Audit engagement is one type of assurance engagement that provides reasonable
assurance. Assurance engagements can be reasonable assurance engagements, limited assurance
engagements or other assurance engagements ( eg. Expressing opinion on internal control system)
Any engagement is an assurance engagement when it fulfills the criteria of Existence of three party
relationships, Subject matter, Criteria, Gathering of sufficient appropriate evidence, Expression of
opinion.
However, for an assurance engagement to be an audit engagement one additional requirement is that
level of assurance provided by such engagement needs to be of reasonable level.
Another important factor that differentiates audit engagement from other assurance engagements is
in audit the expression of opinion is positive as auditor has conducted extensive examination and thus
as a result of reasonable assurance obtained his opinion will leave no grey areas. However, in other
assurance engagements like in review engagement the expression of opinion is negative as auditor
has conducted limited examination.
Other differences include:
 Audit engagement is for whole financial statements whereas certain assurance engagements can
be for single financial statement.
 The terms of engagement in case of audit are in line with ISA whereas in case of assurance
engagementterms may restrict the practitioner only to specific area.
 Rights and liabilities of the auditor in audit engagement higher than any other form of assurance
engagement.
 In case of audit engagement the audience includes generally all stakeholders whereas in
assurance engagements other than audit audience may be restricted to just one type of
stakeholder for example management.

Q. Define Independence of Mind/ in Appearance/ in Fact ?
Independence of mind is a desirable psychological–behavioral trait in an auditor. He or she
should be objective and free from bias. Independence of mind is a state of mind that
permits the provision of an opinion unaffected by influence that compromise professional
judgement, allowing an individual to act with integrity , and to exercise objectivity and
professional scepticism.
Independence in appearance ( or perceived independence) is about avoiding relationships
or circumstances that can threaten, or may be seen to threaten, the willingness or ability
to scrutinize and criticize managers. For example, having a managerial or advisory role in
the client firm can impair the auditor’s objectivity and hence his or her ability to carry out
an effective audit on behalf of shareholders. Independence in appearance is the avoidance
of facts and circumstances that are so significant that a reasonable and informed third
party, having knowledge of all relevant information, including applied, would reasonably
conclude a firm's, or a member of the assurance teams', integrate, objectivity or
professional scepticism had been compromised
Independence in Fact is based on your actions in a situation or real independence.
Auditors would not be able to make independent decisions if they were pushed into a
corner and under pressure. Independence in fact is a state of mind that permits the
provision of an opinion without being affected by influences that compromise professional
judgment, allowing an individual to act with integrity, and exercise objectivity professional
scepticism.

1. What are the key contents of an overall audit strategy?
a) Understanding the entity’s environment
 General economic factors and industry conditions; and
 Important characteristics of the client.
a) Understanding the accounting and internal control system
 The accounting policies and charges in those police;
 The effect of new accounting or auditing pronouncements; and
 The auditor’s cumulative knowledge of the accounting and internal control systems.
a) Risk and materiality
 The expected assessments of risks of fraud or error;
 The setting of materiality for audit planning purposes;
 The possibility of material misstatements.
 The identification of complex accounting areas including those involving estimates.
a) Consequent nature, timing and extent of procedures
 Possible change of emphasis on specific audit areas; and
 The effect of information technology on the audit.
a) Coordination, direction, supervision and review
 The number of locations;
 Staffing requirements; and
 Need to attend client premises for inventory count or other year-end procedures.
a) Other matters
 The possibility that the going concern basis may be subject to question;
 Conditions requiring special attention;
 The terms of the engagement and any statutory responsibilities; and

1. What are the appropriate procedures used by the auditor in obtaining an understanding
of the entity?
Understanding the entity
BSA 315, followed for obtaining an understanding of the entity and its environment and
assessing the risks of material misstatements states that, “the auditor should obtain an
understanding of the entity and its environment, including its internal control, sufficient to
identify and assess the risks of material misstatement of the financial statements whether due to
fraud or error, and sufficient to design and perform further audit procedures.
The appropriate procedures to obtain an understanding of the entity and its involvement
include:
Why
1. To identify and assess the risks of material misstatement in the financial statements;
2. To enable the auditor to design and perform further audit procedures;
3. To provide a frame of reference for exercising audit judgment, for example, when setting
audit materiality.
What
1. Industry, regulatory and other external factors, including the reporting framework.
2. Nature of the entity, including selection and application of accounting policies, internal
control.
3. Measurement and review of the entity’s financial Performance.
How
1. Inquiries of management others within the entity.
2. Analytical procedures, observation and inspection.
3. Prior period knowledge.
4. Discussion of the susceptibility of the financial statement to material misstatement among the
engagement team.

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