26. Hoque & Co, the existing auditor of Bhairab Foods Ltd, is asked by the company's bank to report on the company's covenant compliance. The partner says the acceptance process for a statutory audit, including the general meeting appointment, does not apply. Which statement is correct about accepting this other assurance engagement?

A) The legal appointment requirements do not apply, but the ethical, risk and practical considerations are as valid as for an audit
B) No acceptance considerations apply, because an engagement for a bank is a commercial matter and not governed by the Code of Ethics
C) The same legal appointment requirements apply, so a general meeting resolution is needed to appoint the firm for this engagement
D) Only the practical considerations apply, because ethical and risk considerations are relevant only to statutory audit engagements

Correct: A difficult ICAB Code of Ethics

Similar considerations apply to any assurance engagement. The legal considerations relating to a statutory audit, such as the appointment resolution, are not relevant to other assurance engagements, but the ethical, risk and practical considerations are just as valid. The firm must still consider independence, the integrity and risk of the client, available resources and competence, and agree the terms in an engagement letter.

27. A newly qualified accountant at Karnaphuli & Co is told that the firm will 'tender' for the audit of Meghna Dairy Ltd and will 'advertise' its audit services. Which statement about these two practices is correct?

A) Advertising by accountants is prohibited, and a tender is a binding engagement letter signed by the client before the quote is made
B) Advertising is allowed without any limits, and a tender is a fee fixed centrally by the professional body for all competing firms
C) Advertising is prohibited for audit work, and a tender is a request from the firm to the client for its financial statements
D) Advertising is allowed within professional guidelines; a tender is a competitive quote outlining the firm's benefits

Correct: D complex ICAB Code of Ethics

Accountants are permitted to advertise for clients within professional guidelines, the details of which are not examinable. A tender means offering a quote for services, outlining the benefits of the firm and its personnel, usually in competition with other firms tendering at the same time. A tender is not a signed engagement letter, which is issued after the engagement is accepted, and fees are not set by the professional body.

28. The directors of Dhaka Auto Parts Ltd believe the auditor will find any fraud in the company. Which content of the engagement letter best helps to correct this misunderstanding, as required by ISA 210?

A) A list of the audit staff and the number of hours each will spend on the audit, so the directors can see the level of effort
B) A clause increasing the scope of the audit to cover all transactions, so that every fraud and error will be found by the auditor
C) A statement of the directors' responsibility for preventing and detecting fraud and of the inherent limitations of an audit
D) A statement that the auditor will report to the directors any fraud found, without mention of the directors' own responsibilities

Correct: C difficult ISA 210

The engagement letter explains the scope of the audit, the responsibilities of directors and auditors, and the limitations of an audit. It should state that directors are responsible for safeguarding assets and for preventing and detecting fraud and error, and that, because of the test nature of an audit and the inherent limitations of accounting and control systems, some material misstatements may remain undiscovered. This reduces the expectations gap. A list of staff or hours does not address the misunderstanding, and an audit cannot be extended to guarantee the detection of all fraud.

29. The finance director of Rajshahi Textiles Ltd asks that the engagement letter name the individual audit staff who must perform the audit, and that the firm commit not to change them. How should the firm respond?

A) Decline: the firm may change its team and the client should not influence staffing, though the team's composition can be stated
B) Agree, because naming staff in the letter makes it a binding contract that improves quality and shows the independence of the engagement
C) Agree, because the engagement letter must list all of the audit staff under ISA 210 so that the client can approve them
D) Decline, because an engagement letter may not refer to the audit team at all, even in terms of the number of senior and junior staff

Correct: A difficult ISA 210

The specific staff assigned to the engagement are not normally named in an engagement letter, because the auditors reserve the right to change their arrangements and the client should not have influence over assurance staff. The composition of the audit team may be referred to, for example the number of senior and junior staff. ISA 210 does not require staff to be named, and a general reference to the team is permitted.

30. Shahjalal & Co is engaged to review a three-year cash flow forecast of Sundarban Tea Ltd. The audit manager says the engagement letter will be the same as for an audit, including the fee clause. Which statement is correct?

A) An engagement letter is not needed, because letters are required only for statutory audits and not for any other assurance engagements
B) The same types of content as an audit letter apply, with different scope details, and specific fees will likely be mentioned
C) The letter must be identical to an audit letter in every detail, because ISA 210 requires one form of letter for all assurance work
D) The letter should leave out any statement of scope, because the scope of a forecast review cannot be defined before the work starts

Correct: B difficult ISA 210

An engagement letter for any assurance engagement contains the same types of content as an audit letter, though the details differ; for example, the scope of an audit and the scope of a review of forecast information are different. An engagement letter for an assurance engagement other than an audit is likely to refer to specific fees, whereas for a recurring audit the fees are initially not mentioned. A letter is needed for all engagements, and scope must be defined.

31. Tangail Tiles Ltd has approached Zaman & Co to become its auditor. Which pair of features would suggest that the company is a high-risk client?

A) Strong internal controls and conservative, prudent accounting policies applied across all of the group's companies
B) No finance director, and significant unexplained transactions with connected companies near the year end
C) Good long-term prospects, a well-financed balance sheet and competent, honest management at all levels
D) Few unusual transactions and a stable record of reporting over many years under the same management

Correct: B difficult ICAB Code of Ethics

Features of a high-risk client include poor recent or forecast performance, a likely lack of finance, significant control weaknesses, questionable integrity, no finance director, and significant unexplained transactions or transactions with connected companies. The other options describe low-risk features.

32. Zaman & Co decides that the audit of Tangail Tiles Ltd carries a risk level above low, but still accepts it. Which response is appropriate?

A) Accept the client on the basis that the higher fee will cover any problem that arises later
B) Reduce the planned audit work in areas where management seems unwilling to supply explanations
C) Decline the engagement automatically, as a firm may never audit a client that is not low risk
D) Identify and document the risks, and consider specialist reviewers and closer monitoring

Correct: D difficult ICAB Code of Ethics

Where risk is anything other than low, the specific risks should be identified and documented. Specialists, particularly industry specialists, may be assigned as independent reviewers, and some firms closely monitor high-risk audits that have been accepted. A higher risk does not automatically bar acceptance, and the work should not be cut back.

33. Mirpur & Co estimates 1,200 hours for a new audit client at a cost of CU 350 per hour. Because the client is high risk, a further 80 hours of independent review at a cost of CU 600 per hour is needed. The firm requires a mark-up of 25% on total cost. What is the minimum fee the firm should quote?

A) CU 585,000
B) CU 525,000
C) CU 468,000
D) CU 624,000

Correct: A complex ICAB Code of Ethics

Audit cost is 1,200 x 350 = CU 420,000 and the extra review is 80 x 600 = CU 48,000, so total cost is CU 468,000. A mark-up of 25% on cost gives 468,000 x 1.25 = CU 585,000. CU 525,000 leaves out the review cost, CU 468,000 leaves out the required return, and CU 624,000 treats the 25% as a margin on the fee instead of a mark-up on cost.

34. The partner of Rangpur & Co does not know the directors of Sunamganj Fisheries Ltd personally. What should the firm do before accepting the audit?

A) Rely on a written statement from the directors that they are persons of good standing
B) Move straight to the engagement letter, since references are needed only for listed clients
C) Make independent enquiries, such as of bankers and solicitors, and obtain references
D) Ask the outgoing auditor for an opinion on the personal finances of each of the directors

Correct: C difficult ICAB Code of Ethics

If the directors are not personally known, the proposed auditor should obtain references and make independent enquiries, for example of the company's bankers and solicitors, and review documents such as recent accounts. The integrity of those managing the company is of great importance in deciding whether to accept.

35. Chattogram Steel Ltd has changed auditors. The outgoing auditor is holding the company's accounting records and says it will not release them until its unpaid fee is settled. What is the position?

A) The outgoing auditor has a valid lien over all documents, including the accounting records, until paid
B) The new auditor must decline the appointment because the company still owes fees to the outgoing auditor
C) The outgoing auditor cannot claim a lien over the accounting records; the new auditor need not decline
D) The client must settle the outgoing auditor's fee before the new auditor may see any document

Correct: C difficult ICAB Code of Ethics

An outgoing auditor cannot have a lien over the accounting records of a registered company because the Companies Act requires them to be available for public inspection. The new auditor need not decline appointment just because fees are owing to the outgoing auditor.

36. What is the main purpose of the initial letter that a proposed auditor writes to the retiring auditor, once the client has given permission?

A) To ask whether there are professional reasons why the proposed auditor should not accept
B) To tell the retiring auditor the fee that has been quoted so that the two firms can compare their terms
C) To collect the retiring auditor's working papers before the new appointment has been formally made
D) To obtain the retiring auditor's agreement that the appointment of the new auditor may go ahead

Correct: A difficult ICAB Code of Ethics

The initial communication asks the retiring accountant whether there are any professional reasons why the proposed auditor should not accept nomination, including the reasons behind the change. It is not a request for consent, working papers or a comparison of fees.

37. Drew Brothers has accepted the audit of Abysin Ltd and has also been asked to prepare personal tax returns for two of its directors. Which client identification documents should the firm obtain for the directors?

A) The certificate of incorporation of Abysin Ltd, which also identifies each director personally
B) The annual return of Abysin Ltd, as this is sufficient identification for any individual named in it
C) No further documents, since the directors were identified when the audit client was accepted
D) Passports and utility bills for the directors, as well as the company's legal documents

Correct: D difficult Money Laundering Prevention Act 2012

For a company, the firm checks the certificate of incorporation and the annual return, which give the registered office, shareholders and directors. If the firm also takes on work for individuals connected with the company, such as personal tax for directors, it should obtain identification from passports and utility bills as well.

38. Which of the following need NOT be considered by an audit firm in deciding whether to accept a new audit engagement?

A) Whether the firm is ethically barred from acting for the client company in question
B) Whether the client is new to the firm, which is irrelevant to the decision
C) Whether the firm has the staff and time to carry out the engagement properly and on time
D) Whether the engagement is expected to give the firm a sufficient profit for the risk taken

Correct: B difficult ICAB Code of Ethics

The firm must consider whether it is ethically barred from acting, whether it has sufficient resources, whether the client gives permission to contact the outgoing auditor, and whether it can make a sufficient profit, as it is also a commercial enterprise. Whether the client is new is irrelevant, although more procedures may be needed to get to know a new client.

39. The directors of Cumilla Plastics Ltd later claim that they thought the auditor would find any fraud, and the firm had never sent them a written statement of its duties. Which purpose of an engagement letter would have helped most?

A) Confirming the staff who will be assigned to the audit for the year, and the hours each will work
B) Setting out the fee that is to be charged for each audit year ahead, with the billing dates
C) Giving the directors an assurance that the financial statements are free from fraud or error
D) Defining the extent of the firm's responsibilities to reduce the risk of misunderstanding

Correct: D difficult ISA 210

An engagement letter defines clearly the extent of the firm's responsibilities, so minimising misunderstandings between the client and the firm, and gives written confirmation of acceptance, the scope of the engagement and the form of the report. It does not guarantee the absence of fraud, and staff names are not normally included.

40. Which statement about engagement letters for different types of assurance engagement is correct?

A) A letter for an engagement other than audit would not need to describe the scope of the work at all
B) A non-audit letter is likely to refer to specific fees; a recurring audit letter does not at first
C) A letter for an audit is always sent each year with the fee for that year stated in the letter itself
D) A letter for a review of forecasts would need exactly the same scope as a statutory audit of the company

Correct: B difficult ISA 210

An engagement letter for any assurance engagement contains the same type of contents as an audit letter, but details differ, such as the scope. A letter for a non-audit engagement is likely to refer to specific fees, whereas for a recurring audit, specific fees are initially not mentioned.

41. Khulna Jute Ltd's audit engagement letter was issued three years ago. Since then the company has acquired two foreign subsidiaries and the nature of its business has changed. What should the audit firm do?

A) Consider reissuing the letter, as a letter should be reissued when circumstances change
B) Leave it unchanged, since an engagement letter is relevant only to the first audit of a client
C) Replace the letter with a verbal understanding, because the changes are too complex to write down
D) Reissue the letter only if the auditor intends to change the fee for the year ahead

Correct: A difficult ISA 210

An engagement letter is not only sent before the first audit. It should be reissued if there is a change in circumstances, such as a change in the nature of the business, the structure of the group, or the scope of the audit.

42. Which of the following would an auditor include in an audit engagement letter only where it is relevant to the engagement?

A) The objective of the audit of financial statements and the scope of the audit work
B) Management's responsibility to give the auditor unrestricted access to records and information
C) Arrangements concerning the involvement of other auditors and experts in the audit
D) The reporting framework that applies to the financial statements being prepared

Correct: C difficult ISA 210

ISA 210 says the engagement letter shall include the objective and scope of the audit, the auditor's responsibility, management's responsibility including unrestricted access, the applicable framework and the form of reports. Arrangements for other auditors, experts, internal auditors, predecessor auditors and liability restrictions are included where relevant.

43. Barishal Rice Ltd proposes to sign a service contract with its auditor that contains all the terms of the audit instead of a letter of engagement. What is the position under ISA 210?

A) It is not acceptable, as a letter of engagement is the only written form of agreement allowed
B) It is acceptable if the terms are in writing, as any appropriate form of contract may be used
C) It is acceptable if the terms are agreed orally, as writing is only needed for non-audit work
D) It is unnecessary, since the objective and scope of the audit are already established by law

Correct: B difficult ISA 210

ISA 210 requires the agreed terms to be in writing. The usual form is a letter of engagement but any other appropriate form of contract may be used. Even where the objectives and scope are set by law, an engagement letter may be informative for clients.

44. An extract of an audit engagement letter tells the directors that they cannot rely on the auditor finding all errors. Which statement is consistent with the extract?

A) Directors prevent and detect fraud; the auditor expects to detect significant misstatements but gives no guarantee
B) The auditor is responsible for preventing and detecting fraud, and the directors only have to provide access to records
C) The auditor guarantees that all significant misstatements, including those caused by fraud, will be found
D) The directors have no responsibility for internal control, because the auditor tests the controls each year

Correct: A difficult ISA 210

In the extract, the directors are responsible for safeguarding assets and for preventing and detecting fraud, error and non-compliance. The auditor will plan the audit so that it can reasonably expect to detect significant misstatements, but the directors cannot rely on the auditor finding all such errors.

45. According to the audit engagement letter extract, how will the auditor tell the directors about significant deficiencies in the accounting and internal control systems that come to its notice?

A) Orally at the closing meeting, since the audit is designed to find all such deficiencies in the system
B) In the audit report, which lists each deficiency for the benefit of the shareholders as a whole
C) In a note to the financial statements agreed with the directors before they are approved by the board
D) In a separate letter in writing, although the audit is not designed to identify all deficiencies

Correct: D difficult ISA 210

The extract says that, in addition to the report on the financial statements, the auditor will provide a separate letter about any significant deficiencies in accounting and internal control systems that come to its notice. The audit is not designed to identify all such deficiencies.

46. Ahmed & Co is invited to accept the audit of Rangpur Dairy Ltd, but its audit staff are already fully committed in the busy season. What should the firm consider?

A) The effect on existing engagements in staff time and timing
B) Whether the new client has been audited by the firm before
C) The size of the fee, since resources can be hired once it is agreed
D) Whether the directors of the client are known to the partners

Correct: A difficult ISA 210

The firm must have the resources to perform the work properly, including specialist knowledge or skills, and must estimate the impact on existing engagements in terms of staff time and the timing of the audit.

47. Which of the following should NOT affect the decision of an audit firm to accept an engagement?

A) Whether the firm is barred from acting for ethical reasons
B) Whether the client is new to the firm
C) Whether the firm has the resources to carry out the work
D) Whether the firm will make a sufficient profit from the work

Correct: B difficult ISA 210

Ethical bars, resources, profit and permission to contact the outgoing auditors are all relevant. Whether the client is new is irrelevant to the decision, although extra procedures may be needed to get to know a new client.

48. After accepting nomination, what should the new auditors do to be sure their own appointment is valid?

A) Ask the directors to confirm by telephone that they want the new auditors
B) Ask the outgoing auditors to state that the appointment has their approval
C) Obtain a copy of the resolution of the general meeting appointing them
D) Send a copy of the engagement letter to the Registrar of Companies

Correct: C difficult Companies Act 1994

The new auditors should obtain a copy of the resolution passed at the general meeting appointing them as the company's auditors. They should also check the removal or resignation of the outgoing auditors was properly conducted.

49. How can the new auditors check that the removal or resignation of the outgoing auditors was properly carried out?

A) By relying on the oral assurance of the directors at the first meeting
B) By waiting for the outgoing auditors to send a statement of their fees
C) By reading the previous year's audit report on the financial statements
D) By seeing a valid notice of resignation or confirming a proper removal

Correct: D difficult Companies Act 1994

The new auditors should see a valid notice of the outgoing auditors' resignation, or confirm that the outgoing auditors were properly removed, in accordance with national legislation.

50. Why is the integrity of management of special importance when deciding whether to accept a new client controlled by one person?

A) A dominant owner-manager may override controls and mislead the auditor
B) Owner-managers always pay the audit fee late and so create bad debts
C) Owner-managers never agree an engagement letter before the audit starts
D) A single owner-manager means the audit risk is always low for the firm

Correct: A difficult ISA 210

The integrity of those managing a company is of great importance, particularly if the company is controlled by one or a few dominant personalities. Doubtful integrity makes the client high risk.