Question No 01

CCB PLC is one of the main bankers operate in Sri Lanka with the history of more than eight years. CCB has obtained
his listed status in the Colombo Stock Exchange on 30th September 2011 with the intention of getting income tax
advantages as per the budget proposal of the government. CW & company is the auditor of the CCB and the following
information is available for your consideration as the engagement partner for the audit of financial statements of CCB
bank for the year ended 31st March 2013.

Income Statement for the year ended 31st March 2013

Year Ended 31st Year Ended 31st

March 2013 March 2012
  Rs. Rs.
GROSS INCOME 2,021,526,006 892,741,711
Interest Income 1,965,450,735 841,349,551
Interest Expenses (1,122,331,587) (448,884,050)
Net Interest Income 843,119,148 392,465,501
Other Income 56,075,271 51,392,160
  899,194,419 443,857,661
OPERATING EXPENCES    
Less    
Personnel Cost 81,072,599 50,178,412
Premises, Equipments &
Establishment Expenses 133,601,927 65,157,066
Other Overhead Expenses 108,287,316 79,649,863
  322,961,842 194,985,341
Profit on operating before Loan
Loss Provision & Taxes 576,232,577 248,872,320
Less    
Loan Loss Provision 33,570,428 21,131,982
     
Profit Before Tax 542,662,149 227,740,338
VAT on Financial Services (34,717,530) (27,766,934)
Tax Expenses (162,528,393) (93,110,543)
     
Profit for the year 345,416,226 106,862,861
Basic/Diluted Earnings Per Share(Rs) 3.28 1.63
Dividend per Share 1.25 0.5
 Statement of Financial Position
As at 31 As at 31 March
March 2013 2012
ASSETS Rs. Rs.

Cash & Short Term Fund 920,613,885 544,659,320

Placement with Banks & Other Finance
Companies 22,095,212 18,962,049

Investment in Dealing Securities 68,416,955 64,055,310

Loans & Advances 1,526,617,651 805,965,014

Rentals Receivable on Lease ,Hire Purchase & 11,480,791,77

Islamic Finance 4 5,876,905,102

Interest & Fees Receivable 50,611,970 41,848,380

Deferred Tax Assets - 23,361,198

Other Assets 457,348,638 190,705,082

Investment in companies 649,982,449 344,634,936

Property Plant & Equipment 93,498,775 83,516,329

15,269,977,30
TOTAL ASSETS 9 7,994,612,720
LIABILITIES    

10,911,231,52
Deposits 6 6,044,888,855

Loans and Borrowings 1,464,143,177 289,808,720

Other Liabilities 937,465,166 791,810,255

Deferred Tax Liabilities 69,585,710 -

13,382,425,57
TOTAL LIABILITIES 9 7,126,507,830

EQUITY    

Stated Capital 1,580,861,658 819,938,823

Statutory Reserve 94,219,614 25,136,368

Investment Fund 25,926,174 -

Other information
Retained Earnings 186,544,284 23,029,699
(i) R e g u l a t o r y i n f
the TOTAL EQUITY 1,887,551,730 868,104,890 time period of 31st March
2011 to 31st March 2012
will 15,269,977,30
get an income tax benefit of
TOTAL LIABILITIES & EQUITY 9 7,994,612,720 50%.
(ii) Two of the buildings own by the company have been revalued during the financial year ended 31st March 2013.
(iii) During the year company has invested Rs.4,361,645 on dealing securities.
(iv) The company has obtained a loan of US $ 3 Mn from a bank in Hong Kong at the rate of 4% p.a. The
exchange rate for the US $ as of the date when the loan was obtained is Rs.129. This loan has a grace period of two
year to commence the installments.
(v) Addition to the property, plant and equipments are mainly due to the expansion strategy that has been carried
out by the company.
(vi) Company has an invested Rs.200 Mn in XY Limited in year 2008 to acquire the 25% stake and the company
exercises the significant influence over the operating and financial policies of the XY Ltd. The XY Ltd has been
incurring losses since last financial year.
(vii) The company has Rs.2 Mn worth of building which they have an intention of sell it in the near future. But the
company believes that since it is being using by the company they should recognize it in the financial statements
(viii) CCB also engage with the pawning business and even the international prices for gold is being significantly
reduced, the company believes that they are able to handle with the current level of profits.
(ix) Company depreciates all its property, plant and equipments at the rate of 10%.
(x) Recently company has introduced its new performance appraisal system for their employees in the leasing
business and it is based on the number of leasing transactions that they are taking in to the company.

You are required to,

(a) Identify and briefly explain the significant audit issues that you want to pay special attention in the audit of
financial statements of CCB. And state why you have concerned them as significant audit issues.

(b) State the audit procedures that you want to follow with respect of issues that you have identified above (a)

Answer
1. Audit issue - Accuracy of the building revaluation – The Audit risk is the total value of PPE that may be
misstated due to over valuation/ Undervaluation of PPE.
Audit procedure –
 The auditor will check the revaluation report of the value and confirm that the value mentioned in the
valuation report matches the amount at which the PPE is revalued and shown in FS.
 Auditor will recalculate the revaluation surplus accordance with LKAS 16 PROPERTY PLANT AND
EQUIPEMENT to check the accuracy of the accounting entries relating revaluation surplus.
 The auditor should agree the assumptions used in the report for reasonableness. For example, the value per
square feet in the valuation report should be similar to the value per square feet of other similar properties in
that locality.
 Auditor should check the independence and the experience of the valuer

2. Audit issue – obligation to the company by foreign loan taken - The Audit risk is the loan taken from foreign
bank may be valued incorrectly and it might not compliance with the exchange control regulation of the
country.
Audit procedure –
 The auditor will check whether they have taken the approval from the central bank in order to obtain the
foreign loan.
 Auditor will check whether it is complying with exchange control regulation inside the country.
 Auditor should check whether they have taken appropriate exchange rate for the loan according to LKAS 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
3. Audit issue – Accuracy of the income tax benefit of 50% -The Audit risk whether company correctly done its
tax calculation according the income tax of Sri Lanka.
Audit procedure –
 Enquiry and confirmation from the Inland Revenue department regarding the tax benefit of 50%
 Recalculate the tax calculation to check the accuracy of the amount
4. Audit issue - Appropriateness of the investment amount. - The Audit risk whether the company correctly
calculated the investment and its significance rights over the company.
Audit procedure –
 Check the confirmation from the associate company
 Get management representation

5. Audit issue – Classification of the asset - The Audit risk is, the company has an intention of selling its
building in near future therefore this building likely to classify as ASSET HELD FOR SALE (SLFRS 5)
Therefore, existing PPE value has inflated.
Audit procedure –
 Check whether they have seized the depreciation
 Check whether they have separately shown as a NCA held for sale at a value of carrying value or FV –
cost to sale , whichever is lower
 Recalculate whether the company has taken the value of NCA held for sale as per SLFRS 5.

6. Audit issue- Receivable balance and the impairment provision - The Audit risk is, the company calculated the
impairment according to the LKAS 36 -IMPAIRMENT OF ASSESTS
Audit procedure –
 Check whether the bank has provided any provision in regard.
 Check how they calculated Discounting factor.
 Check whether cash flow assumptions are realistic.
 If the provision has not made, ask the management to ask provision.
 Recalculate the impairment and check the calculations are accurate.

7. Audit issue – Accuracy of the depreciation calculation – The audit risk is management doing different
depreciation models without consistent and accuracy of the depreciation calculation
Audit procedure –
 Check the deprecation model used by the management what are the data and what assumptions that the
management have made.
 Check whether depreciation provision estimate assumptions are rational and reasonable
 Recalculation of the depreciation.
 Check whether deprecation rates are realistic and check how they calculated depreciation rate.

8. Audit Issue – Occurrence and accuracy of number of leasing transaction - The audit risk is since the new
performance appraisal system is based on the number of leasing transaction there is a possible chance that
misstatement occurring in lease revenue.
Audit procedure –
 Cut off test all the lease transaction before the date of performance appraisal.
 Recalculate the leasing revenue.
 Ask the management to link the performance appraisal of employee to some other criteria other than
number of leasing transaction

9. Audit Issue – Accuracy of the investment balance - The audit risk of investments are improperly valued due
to their complexity and management’s lack of accounting knowledge and Investments are misstated due to
improper cutoff.
Audit procedure –
 Confirming investment balances agreeing them to the general ledger.
 Inspecting period-end activity for proper cutoff of investment.
 Using an investment specialist to value complex instruments.

10. Audit issue - Accuracy of the PPE balances. - The audit risk of PPE not valued properly and PPE
intentionally overstated due to the expansion strategy that has been carried out by the company.
Audit procedure –
 Vouch property additions to related invoices
 Review economic lives assigned to new property for appropriateness
 Agree opening property balances in the depreciation schedule to the prior year ending balances