Advanced Audit and Assurance

Section:01
Total marks:40 marks
Last Date of Submission:31/05/2020
Student Name: Student ID:
Answer the following questions:

1. a. Internal control is the collection of policies and procedures that are followed by the
organizations while performing the activities required to attain their goals. It facilitates the
organizations to stay in the right path and to mitigate the risks they face on a day to day basis.
A good internal control system enhances the efficiency and effectiveness of the organizations
as well. It provides signals about the deviations of operations and thus organizations can take
appropriate measures to overcome those situations.

a. What is the difference between policies and procedures?

b. Define the term control activities. Briefly discuss the types of control activities that are
introduced by the organizations in designing a good internal control system.

5 marks

2 a. BSA 530 “Audit Sampling” states that 'when designing audit procedures, the auditor
should determine appropriate means for selecting items for testing so as to gather
sufficient appropriate audit evidence to meet the objectives of the audit procedures'.

In this context what do you understand by “Audit Sampling”? Some testing

procedures do not involve sampling. Explain.

5 marks
3 a. Kowloon Ltd works on contracts to design and manufacture large items of medical
equipment such as radiotherapy and X-ray machines. The company specialises in the
design, production and installation of bespoke machines under contract with individual
customers, which are senior has left the following note for your attention:
‘One of Kowloon Ltd’s major customers is the Bay Medical Centre (BMC), a private
hospital. In June 2015 a contract was entered into, under the terms of which Kowloon
Ltd would design a new radiotherapy machine for BMC. The machine is based on a
new innovation, and is being developed for the specific requirements of BMC. It was
estimated that the design and production of the machine would take 18 months with
estimated installation in December 2016. As at 31 December 2015, Kowloon Ltd had
invested heavily in the contract, and design costs totalling $350,000 have been
recognised as work in progress in the draft statement of financial position. Deferred
income of $200,000 is also recognised as a current liability, representing a payment
made by BMC to finance part of the design costs. No other accounting entries have
been made in respect of the contract with BMC.

As part of our subsequent events review, inspection of correspondence between

Kowloon Ltd and BMC indicates that the contract has been cancelled by BMC as it is
unable to pay for its completion. It appears that BMC lost a significant amount of
funding towards the end of 2015, impacting significantly on the financial position of
the company. The manager responsible for the BMC contract confirms that BMC
contacted him about the company’s financial difficulties in December 2015.
The matter has been discussed with Kowloon Ltd’s finance director, who has stated
that he is satisfied with the current accounting treatment and is not proposing to make
any adjustments in light of the cancellation of the contract by BMC. The finance
director also advised that the loss of BMC as a customer will not be mentioned in the
company’s integrated report, as the finance director does not consider it significant
enough to warrant discussion.
Kowloon Ltd is currently working on six contracts for customers other than BMC. Our
audit evidence concludes that Kowloon Ltd does not face a threat to its going concern
status.’ Your review of the audit work performed on going concern supports this
conclusion.

Requirements:
(i) Comment on the matters to be considered, and recommend the actions to be
taken by the auditor; and
(ii) Explain the audit evidence you would expect to find in your review of the audit
working papers

c. (i) Discuss why understanding the entity and its environment is highly critical
for a successful audit.
(ii) Formulate the approach how you will review an entity to develop your overall
understanding about the entity and its environment.
(iii)Explain how you will utilize your understanding about the entity and its
environment in your audit planning and audit conclusion.
15 marks
4 a. AK Group is one of the leading conglomerates of Bangladesh and started its journey as
a tobacco marketing company back in 1953. With headquarters based in the
commercial capital Chittagong, the group flourished into a multi-business portfolio of
fast moving consumer goods, steel, cement, ceramics, marble, shipping and trading
business.
The group opened a separate company under the banner of AK Consumer Goods
Limited (AKCGL) in 1994 to spearhead fast moving consumer products business. With
its flagship brands of Starship and later Marks milk powders, the company gradually
became the major player in the market. Over the years, both the brands have
successfully acquired an iconic stature through providing superior quality as well as
making significant social contributions.
AKCGL has grown during the year ending 31December 2017 and its profit before tax
for the year will be around Tk. 700 crores.
The financial statements for the year ended 31 December 2016 showed inventories of
Tk. 250 crores. Inventories at cost were Tk. 500 crores. A review of obsolescence was
not performed but, on the recommendation of the company's accountants, the cost was
written down by 50% on the grounds of prudence. The directors admit that obsolete
inventories rarely exceed 10%. but there are no satisfactory audit procedures that could
be adopted to confirm the true figure at that date.
Requirements
In respect of the issue over inventory, reach a conclusion on whether you would
modify your audit report on AKCGL for the year ending 31 December 2017, on
the basis that no other matters arise which affect the opinion. You should give
reasons for your conclusion and describe any additional statements which would
need to be made in the audit report.
15 marks