What is audit?

Answer: The term Audit is an effort to find out the fairness and to establish
the reliability or unreliability of an entitys financial statements which consists of
balance sheet, profit and loss accounts cash flow statement notes and other
statement and explanatory notes. ISA 240 is in respect of auditors
responsibility to consider fraud is an audit of financial statements.
Authoritative definition is: An audit is the independent examination of an
expression of opinion on the financial statements of an enterprise by an
appointed auditor in pursuance of that appointment and in compliance with any
relevant statutory obligations.
What are the object/ purpose of an Audit?
Answer:
1. To identify true and fear view of financial statement. To here is given below:
a) He has obtained all the information and explanation necessary for the
purpose of audit.
b) The balance sheet and exhibits a true and fair view of the company its
financial year.
c) The gross and lass accounts fives at true and fear view of the company its
financial year.
d) Proper accounting records have been kept by the company.
e) The financial statement has been properly prepared in accordance with
the provision of the company ordinance and books and accounts.
2. To identify error and mistake the financial statement: An audit while examining
the book accounts applies various types audit procedures in order to certain the
truth and fairness of accounting recoding financial statement but even work has
failed.
a) To control over the internal control system.
b) Provide advice and guidelines improve to the cover of performance.
ISA 240 is in respect of auditors responsibility to consider fraud is an audit of
financial statements. ISA 315 understanding the entity and its environment
and assessing the risks of material misstatement. ISA 330 the auditors
procedures in response to assessed risks are to be applied in relation to the risk
of material misstatement due to fraud.
What are the Characteristics of fraud and error?
Answer: The characteristics of fraud and errors are given below1. The term of error refer to unintentional misstatements in the financial
statement.
a) A mistake in gathering or processing data from which financial statement
are prepared.
b) An incorrect accounting estimate arising from oversight or
misappropriation of facts.
c) A mistake in an application accounting principle relating to measurement
recognition classification and presentation or disclosure.
2. The term of fraud refers to intentional act by one or more individuals among
management, those charge with governance, employee or third parties,
involving the use of deception to obtain unjust or illegal advantages.
1

Two types of intentional misstatement include area) Fraudulent financial reporting.

b) Misappropriation of assets.
a) Fraudulent financial reporting: they are two type of fraudulent of financial
reporting.
Omission of accounts
Management of override controls
Omission of accounts is given below:
Manipulation of alteration of accounting records.
Intentional omission events
Misapplications of accounting principle
Management override controls
Fictitious journal entries
Inappropriately adjusting entries.
Delay reorganization in the financial statement
No disclosure facts.
Complex transaction
Unusual truncation
b. Misappropriation of assets
Misappropriation collection on accounts receivable
Stealing and physical assets
Pay for goods and services not received
Taking assets for personal use.
Fraud involves inceptive or pressure to commit fraud a perceived opportunity to
do so and some rationalizations of acts.
What is the Evaluation of audit evidence?
Answer: Evaluation of audit evidence are given below1) ISA 330, an evaluation may provide further insight about risk of material
misstatement due to fraud and whether there is a need to perform
additional audit procedure.
2) The audit may become aware of discrepancies in accounting records or
conflicting or missing evidence.
3) A large amount of income being reported in the last few weeks in the
reporting periods truncation that is inconsistent with the trends in cash
flow operation.
4) The audit should consider the implications of management in relation of
aspects of the audit partially the reliability of management
representations.
5) The auditor cannot assume that instance of fraud is an isolated
occurrence.
6) Fraud involving a misappropriation of cash from small petty cash fund
normally would be a little significant to the auditor is assessing the risk of
material misstatement due to fraud.
7) ISA320, audit materiality and ISA 700, the auditor report on financial
statement provide guideline on the evaluation and disposition of
misstatement and the effect on the audit report.
2

What are the management representations?

Answer: The auditor should obtain written representations from management
thats are given below1) It acknowledge design and implementation of internal control to prevent
and detect fraud
2) The risks that the financial statements may be materially misstated as a
result of fraud.
3) Suspected fraud affecting the entity involving:
Management
Employees
Others
4) It has disclosed to the auditor its knowledge of any allegations of fraud.
5) ISA 580 management representation provides guidance on obtaining
appropriate representations from management in the audit.
What is the auditor unable to continue the engagement?
Answer: Auditor unable to continue the engagement are given belowThe auditor encounters exceptional circumstance that bring into question the
auditor ability to continue ability to continue performing the audit the auditor
should.
Consider the professional and legal responsibilities including whether there is a
requirement for the auditor to report to the person who made the audit
appointment.
a) Consider the possibility of withdrawing from the engagement.
b) If the auditor withdraw:
Discuss with the appropriate level of management and those changed
with governance.
Consider whether there is a legal requirement
Such exceptional circumstances can arise for example whena) The entity does not take the appropriate action regarding fraud.
b) The auditor consideration of the risks of material misstatement due to
fraud.
c) The auditor has significant concern about the competence of
management.
What are the inherent limitations of an audit in the context of fraud?
Answer: Inherent limitations of an audit in the context of fraud.
1) There is an unavoidable risk that some material misstatements of the
financial statements will not be detected even though the audit is properly
planned and performed in accordance with ISA
2) The risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting a material misstatement resulting
from error because fraud may involves sophisticated and carefully
organized schemes designed to conceal it such as forgery deliberate
failure to record transaction or intentional misrepresentation being made
to the auditor.
3) The risk of the auditor not detecting a material misstatement resulting
from management fraud is greater than for employee fraud.

4) Material misstatement of the financial statement resulting from fraud does

not in and of itself indicate a failure to comply with ISAs
What is the responsibility of the auditor for detecting material
misstatement due to fraud?
Answer:
1) An auditor conducting an audit in accordance with ISAs obtains reasonable
assurance that the financial statements taken as a whole are free from
material misstatement whether caused by fraud or error.
2) Audit procedures that are effective for detecting error may not be
appropriate in the contest of an identified risk of material misstatement
due for fraud.

What is the professional Skepticism?

Answer:
1) ISA 200, the auditor plans and performs an audit with an attitude of
professional skepticism recognizing that circumstances may exist that
cause the financial statements to be materially misstated. Profession
skepticism is an attitude that includes a questioning mind and a critical
assessment of audit evidence professional skepticism requires an ongoing
questioning of whether the information and audit evidence obtained
suggests that a material misstatement due to fraud may exist.
2) The auditor should maintain an attitude of professional skepticism
throughout the audit, recognizing the possibility that a material
misstatement due to fraud could exist.
3) ISA 315, the auditors previous experience with the entity contributes to
an understanding of the entity. However, although the auditor cannot be
expected to fully disregard past experience with the entity about the
honesty and integrity of management.
4) An audit performed in accordance with ISAs rarely involves the
authentication of documents, nor is the auditor trained as or expected to
be an expert in such authentication.
What are assessment procedures?
Answer: As required by ISA315, to obtain an understanding of the entity and its
environment, including its internal control, the auditor performs risk assessment
procedures.
1) Mikes inquires of management, of those charged with governance, and of
others within the entity as appropriate.
2) Considers whether one or more fraud risk factors are present.
3) Considers any unusual or unexpected relationships.
4) Considers other information that may be helpful in identifying the risks of
material misstatement due to fraud.

What are the inquiries and obtaining an understanding of oversight

exercised by those charged with governance?
Answer: Auditor should make inquires of management regarding:
1) Managements assessment of the risk that the financial statements may
be materially misstated due to fraud.
2) Managements process for identifying and responding to the risk of fraud
in the entity including any specific risks of fraud that management has
identified,
3) Managements communication, if any, to those charged with governance
regarding its processes for identifying and responding to the risks of fraud.
4) Managements communication, if any, to employees regarding its views on
business practices.
5) As management is responsible for the entity internal control and for the
preparation of the financial statements, it is appropriate for the auditor to
make inquires of management regarding managements own assessment
of the risk of fraud and the controls in place to prevent and detect it.
6) In a small owner managed entity, the owner manger may be able to
exercise more effective oversight than in a larger entity, on the other
hand, the owner manger may be more able to override controls because of
the informal system of internal control.
7) Making inquires of others within the entity, in addition to management,
may be useful in providing the auditor with a perspective that is different
from management and those responsible for the financial reporting
process.
8) The auditor makes inquiries of internal audit personnel, for those entities
that have an internal audit function.
Example of:
Operating personnel not directly involved in the financial reporting
process.
Employees with different levels of authority.
Employees involved in initiating, processing or recoding complex or
unusual transaction.
In house legal counsel.
Chief ethics officer or equivalent person and
The person or persons charged with dealing with allegations of
fraud.
What are the kinds of audit?
Answer: The management of a company involves two parties, one who
delegates responsibilities and one who accepts them. The party who delegates
responsibilities is called shareholders and the party who accepts those
responsibilities is called management or direct. These audits are explained as
under:
1. An external audit is that which is concerned with the critical review of the
representations made in published financial statements. It is compulsory for all
companies which are registered under the companys ordinance, 1984 to have
their accounts audited by the professional auditors. these are describe as under:
5

a) Continuous audit: Under continuous audit an auditor is required to attend

at regular intervals during financial year, say monthly or quarterly and
examine the books of accounts. The audit is conducted in the following
cases:
Where the audit accounts are required immediately after the close of
financial year viz.
Where monthly audited accounts are required throughout the year.
Where there is no satisfactory internal control system in force.
Where a concern is large and numerous transactions are to be checked.
2. Interim audit:
b) Advantages of interim audit.
It helps to complete final audit quickly and save time
Errors and frauds can be easily detected.
It enables the staff of the client to become more efficient.
c) Disadvantages of interim audit:
1. Figures already checked may be altered at later stage.
2. The management of the concern has to bear additional
expense for arranging interim audit.
A. Government audit: it is mainly concerned with the audit of:
I.
Receipts
II.
Expenditures
III.
Sanctions
IV.
Provisions of fraud.
V.
Rules and orders
VI.
Debt and remittance transactions
VII.
Stores and stock.
B. Cot audit: cost audit is concerned with the verification and examination of
books of cost accounts in order to ensure whether these have been
correctly maintained in accordance with the system of cost accounting
employee by the company.
C. Internal audit: internal audit is a continuous process of reviewing and
appraising all business activities pertaining to accounting, financial and
other operations.
D. Propriety audit: propriety audit is concerned with the assessment of
executive actions and plans bearing on the financial and expenditure side
of the company.
E. Management audit: it is an audit to examine, review and independently
appraise the various policies of the management on the basis of objectives
standards. Its aim is to reveal the shortcomings or irregularities in
management and suggest ways and means to management for improving
operational profitability and organization viability.
Distinction between AUDITING & ACCOUNTING
ACCOUNTING

AUDITING

1. It is concerned with the

techniques and procedures of
recording, classifying,
summarizing, interpreting and
communicating the results
6

1. It is analytical, critical,
investigative and concerned with
the basis for accounting
measurements and assertions.

thereof.
2. The spade work is done by the
accountant.

2. The finishing touch is given by

the auditor.

3. Unaudited accounting records

cannot be relied upon.

3. Audit accounts records can be

relied upon.

4. It is no mandatory that an
accountant must be a
chartered accountant.

4. It is mandatory that an auditor

of public companies and certain
private companies is a chartered
accountant.

5. The accountant is appointed

by the management of a
company.

5.The auditor is appointed by the

shareholders of a company.

What is usefulness of auditing?

The usefulness of auditing may be justified on the basis of its following
advantages:
A. Fraud detection: An auditor may detect fraud. In this way, the audit not
only helps the management in preventing and detecting frauds but also
limits the temptation of employees to perpetrate frauds.
B. Errors detection: It is duty and responsibility of the employee of the
business to maintain book of accounts and other financial records correctly
and accurately but a sound system of audit may detect material errors
and provide assurance to the management of the business regarding
accuracy of accounts and effectiveness of the internal control system.
C. Regularity and vigilance of the staff: the staff of the accounts department
becomes regular and vigilant due to conduct of an audit. They keep the
book of accounts up to date and correct.
D. Reliance on audited accounts by outside parties the purpose of:
a) Income tax assessments.
b) Claim for compensation
c) Raising a loan
d) Proposed sales of the business.
E. Reliance on audited accounts by parties:
a) Ensure the observance of the provision of the partnership
agreement relating to the right of each partner.
b) Enable the partners to settle the accounts of a retiring
c) Enable an incoming partner to assess
d) Facilities the settlement of accounts between the existing
partners.
F. Improvement of internal control system: an independent audit of the
entity accounts may pin point the weak areas of the internal control and
accounting procedures.
G. Legal obligation: in view of the appreciation of audit utilities to all types of
business and government organization.
These are following reason:
a) As the whole business affairs of the companies are managed by
the chief executives:
7

I.

Keeping the proper book of accounts in accordance with

the requirement of the companys ordinance 1984.
II.
Drawing up the balance sheet and profit and loss
accounts.
III.
The agreement of the balance sheet, profit and loss
accounts and the notes with the book of accounts.
IV.
Consistently application of accounting policies
V.
The expenditure incurred, investment made in business in
accordance with objects of the company.
b) The public utilization such as Gas electricity company public
bodies such as municipalities obligation their accounts audited.
What is engagement letter?
Engagement letter: issuance of engagement letter is one of the procedure to be
followed before the commencement of an audit and is in response to the
appointment to the for a new audit assignment. The engagement letter as
suggested. In ISA 210 is supplementary to operational and reporting standards.
What is appointment letter?
Appointment letter: appointment letter is official written information by the
management of an organization to the auditor informing him of his appointment
as an auditor thereof for conducting the audit of accounts for a particular period.
Objectives of engagement letter:
The main objectives of engagement letter are:
a) Define clearly of auditor responsibilities and to minimize the possibility of any
misunderstanding.
b) Provides written confirmation of the auditor acceptance of his appointment.
c) Client becomes aware of the statutory responsibilities of the directors.
d) Client is explained the statutory requirements the auditor would be free to
report on the matter in respect of which he is not satisfied.
e) Client becomes informed about the other professional service that the auditor
can provide.
f) Basis of computation of fees.
Engagement letter to whom sent:
It should be sent to the following
a) Engagement letter should be sent to all new clients.
b) Engagement letter may also be sent existing clients.
c) When an auditor of a parent company is also the auditor of its
subsidiaries a separate engagement letter should be sent to
each company audited by him.
d) When there are joint auditors engagement letter in similar terms
be sent by each auditor.
Example of an audit engagement letter
To the board of director.
You have requested that we audit the balance sheet of 30 th as of 2016 and the
related statement of income and each flow for the year then ending. We are
pleased to confirm our acceptance and our understanding of this engagement.
8

We will conduct our audit in accordance with Bangladesh standards on auditing

those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the auditing before commencement are free material
misstatements.
Because of the inherent limitations of an audit there is an unavoidable risk that
even some material misstatements may remain undiscovered.
In addition to our report. We will inform you concerning any materials weakness
in accounting and internal control system.
We remind you that responsibility for the preparation of financial statements.
We will request from management written confirmation concerning
representation.
We look forward to full cooperation with your staff and we trust that they will
make equitable to us whatever records documentation and other information are
requested in connection with our audit our fees. This will be billed as work
programs.
This letter will be effectives 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 accordance with your understanding of the arrangement for our audit
of the financial statements
XYZ@CO
Acknowledged on behalf of ABC Company by
Signed
Name and title
What is definition approach?
Fundamental approach: The audit approach should consist of the fundamental
objectives of an audit both the point of view of the auditor and the client. It is the
responsibility of the auditor that he must ensure that the work carried out by him
is effective and efficient in accordance with the term of engagement.
2. Constraints in audit approach:
a) Constraining factor: are include this
I.
Audit risk
II.
Materiality and
III.
Practicality.
These are describing it>:
I. Audit risk: an audit is required to make an audit report which is an
expression of opinion on the fairness of the clients financial statement.
Such opinion can be made only when the auditor is certain about
reasonableness and reliability of the conclusions he has drawn from the
examination of the available evidence.
So to reduce audit risk sufficient competent evidence should be
obtained through inspection observation inquires.
II. Materiality: since the object of an audit is to enable an auditor to
express an opinion on the financial statements as a whale, the auditor
should gather evidence on the material item the financial statements.
III. Practicality: one of the crucial constraints already confronted by an
auditor is the clients time table and reporting declines the auditor plan

should contain the audit time table and date agreed with the client for
staring and completing the audit.
B. identification of constraining factors:
Other should consider the following factors:
I.
Knowledge of the clients business
II.
Assessment of clients system.
What are the evaluations of evidence?
Obtaining relevant and reliable audit evidence: The audit approach adopted by
an auditor should enable him to obtain sufficient appropriate audit evidence for
drawing reasonable conclusions there from to form the basis of his opinion as to
the truth and fairness of the financial of the statement. The auditor should
examine and identify the assertions in the financial statements as regards
existence, ownership, valuation and presentation, as well income and expense.
Sources for deriving evidence: The available sources in term of their adequacy,
validity and relevance as regarding materiality efficiency and effectives in each
case.
Substantive and compliance tests: Substantive tests mean those tests of
transactions and balances and other procedures such analytical review, which
seek to provide audit evidence as to complete accuracy. Compliance procedures
on the other hand are the tests which are designed to obtain reasonable
assurance that those internal controls on which audit reliance is to be placed are
in effect.
Volume of evidence: When the volume of transactions is large then test requires
the testing of large samples of items to form an efficient opinion. In such case
the auditor should consider up to what extent he can rely upon the substantive
testing by using other sources.
Accounting system: The audit approach to a great extent depends on the system
of accounting followed by the client. The business transaction documents etc.
Relevant internal control procedure: The competence and acceptability of the
evidence in the form of accounting and information system will depend on the
effectiveness of the system of control operation.

What is audit programmers?

Audit programmer: audit programmer is the auditors plan of action indication
the audit tests and procedures to be followed to collect adequate and reliable
evidence in support of his opinion as to the truth and fairness of representations
made in the financial statements of the client.
a. Nature of engagement.
b. Form of audit report.
c. Nature and complexity of client.
What are the audit times?

10

Audit time: unless a complete detailed time record is maintained in respect of

every audit engagement the auditor does not know his cost. A time estimate is
prepared by estimating the time required for each step in the audit. Planning
Estimating fees, measuring of efficiency of staff and determination of progress of
audit at various intervals of completion
The time budget should make provision for the following:
a. Detailed time budget for each stage of audit.
b. Analysis of each section of work and grade of the staff.
c. Record of time spent by each audit staff on the work.
d. Comparison of actual time spent with the budgeted time.
e. Investigation into reasons when actual time spent exceeds the budgeted
time.
What is definition of audit planning?
Audit planning means that the action to be taken by an auditor that it may
enable his auditor to conduct an audit more effectively. According of, audit
should be planned adequately regardless of the size of the enterprise concerned
end the work during performance be controlled and record in order to carry out
the audit effectively and efficiently and best use may be made of the firms
resources available.
On the other hand, an audit programmer Is the auditors plan of action indication
the work to be accomplished the audit tests and procedures to be followed, the
persons responsible for the accomplishment of the work, and the time within
which the work is to be accomplished. Thus an audit programmer is a written
scheme designed by then audit and to distribute the same among the staff.
What are factor of audit planning?
Factor such as followed:
a. Nature, complexity and size of enterprise.
b. Environment in which an enterprise operates.
c. Methods of processing transactions.
d. Reporting requirements.
e. Previous experience with the client.
f. Knowledge of client business.
g. Industry in which the enterprise is involved.

What are doing to planning procedure?

It can be classified under the following stages:
I. Obtaining knowledge about clients business both existing.
II. Developing an overall audit plan paying specific emphasis on such
activities like audit strategy, timing, staffing.
III. Implementing the audit plan through the process of audit programmers.
IV. Updating the audit plan in the light of current circumstance
V. Post audit planning review in form of suggestions from all levels of audit
staff.
11

Doing the adjusting of planning?

No planning may be as perfect as not to require adjustment as the audit work
proceeds. The auditor should be continuously amendable to circumstances with
which he is confronted during the course of compliance testing the progress
made. The enquires had and the error noticed should be given due consideration.
The auditor while considering the scope of adjustments to be made in the audit
strategy should keep in view the following point:
a. How far the high risk areas have been given consideration.
b. Low risk areas have not been given attention more than it was
needed.
c. Whether insignificant areas were left out.
d. To what extent the possibilities of existence of errors and
omissions have been safeguarded by audit planning.
e. Whether all transaction in view of their materially in amount
have been given due attention in verification.
f. Whether decision based on judgment have been suitably
document and support by reason.
Advantages audit programmer?
1. It facilitates to monitor the progress of the assistants.
2. Uniformity in the audit work in maintained throughout as the same audit
3. Division of wore amongst the staff can be made easily.

12