Professional Documents
Culture Documents
Best Regards,
Riazul Chowdhury
Requirement:
Respond to your Managing Partner. 12
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2. Pure Publications is a long-established publishing Company listed with both the stock exchanges in
the country. In the last two years, it has made significant losses as a result of its investment in
technology and in particular, the high-tech environment of e-commerce. This investment and the
Company’s sound future prospects have led to a good credit rating since they are generally seen as
leading edge in this field, with good preliminary sales and strong feedback on the ease of use and
marketability of their web site.
Pure’s investments have been funded through use of their reserves built up over many years.
However, two weeks ago, Pure’s shares were suspended, having fallen by 90% on rumours that
reserves had been significantly overstated and that they were no longer financially viable. Your
firm, as the auditors, has come in for significant criticism and is being accused of negligence. Your
firm is also being threatened with legal action in relation to the lack of due care in preparation of
the financial statements.
Requirement:
You are required to explain the legal position of your firm, the requirements for due care and the
steps and procedures the firm could have taken to prevent such a situation occurring. 8
3. You are auditing Ridgewalk Ltd., a trading entity, which markets a wide range of goods (some
1,000 in number). The sales are all on credit and the entity has some 1,000 customers. In the year to
30 June 2019, Redgewalk issued approximately 50,000 sales invoices using a computerized sales
system. The company maintains on the computer a detailed inventory record system. Some relevant
figures for the current and prior years are as follows:
2019 2018
BDT BDT
Sales 62,500,000 45,000,000
Gross profit % 50 48
Trade receivables 8,000,000 6,000,000
Inventories 5,000,000 3,500,000
Requirements:
You have been asked by the engagement partner of the audit assignment to satisfy yourself that the
sales figure for 2019 amounting to Tk.62,500,000 is ture and fair in the context of the financial
statements taken as a whole by answering to following:
(a) Would you say that the copy sales invoices (all 50,000 of them) represent useful evidence? 2
(b) Do you think that the number of invoices you would have to test in detail could be reduced to
manageable proportions if: 3
(i) the company's control environment is good?
(ii) the company system for preparing the invoices was a good one?
(iii) the sales figure in the accounts makes sense in terms of what you know about the company?
(c) Every sale causes a movement in goods to occur. Do you think you could use this fact in the
circumstances of this company to find additional supportive evidence for the sales invoices? 2
(d) Can you think of any way in which the inventory records themselves can be corroborated by
good evidence? 2
(e) Bearing in mind that Ridgewalk Ltd. sells only on credit, is there any other way that you could
obtain satisfaction that the sales invoices represent genuine transactions? 2
4. You are audit manager of Hasan Morshed & Co. Chartered Accountants. You are carrying out the
planning of the audit of James Limited, a specialist skincare product manufacturing company, for the
year ending 30 June 2019. You have received the draft financial statements from the management.
As part of understanding the business, you have performed an industry analysis which shows that
Industry is growing at an average rate of 16%; however export sales has been decreasing over the
years due to increased competition in the global market. A study has reported that many skincare
product manufacturing companies do not arrange sufficient measures to protect their workers from
exposures to various chemicals used in the pharmaceutical companies. Consequently, workers suffer
from various diseases but do not get any compensation. As a result, workers are gradually switching
to less hazardous industries. Shortage of workers is increasing the employee recruitment & retention
costs. Skincare Producers’ Association (SPA), where James Limited is a member, encourages to pay
an annual allowance to workers who work in hazardous environment. James Limited has not made
any provision for hazardous work allowance at the year end of 30 June 2019.
Page 2 of 6
James Limited
Statement of Financial Position
Equity
Share capital (BDT 10/ share) 110,760 110,760
Retained earnings 2,162,463 1,978,183
2,273,223 2,088,943
Current liabilities
Trade payable 456,346 401,128
Inter-company payables 247,411 95,822
Accrued and other liabilities 855,798 1,123,990
1,559,555 1,620,940
Total equity and liabilities 3,832,779 3,709,883
2019 2018
Notes
BDT BDT
Page 3 of 6
3.00 Quantity sold (units)
5. You are the financial controller of Outstanding Security Services (OSS) which is a security
company that offers a complete range of security services to corporate clients. The original focus of
the business was to install security equipment, but it has since expanded into design, maintenance,
monitoring and security consultancy services. It currently has a listing on both DSE and CSE.
It is now January 2020 and you are busy preparing the financial statements for the year ended 31
December 2019. You are under a lot of pressure as you have been asked to present financial
statements to the Board of Directors in three days’ time. The first draft of the financial statements
has been prepared and is now on your desk.
It is 10 a.m and you are about to set to work on these issues, when your email inbox pings. There is
a message from Rashid Siddik, CFO.
To: Financial Controller
From: Rashid Siddik
Subject: Meeting Sunday morning 10am
Hi
I look forward to our meeting on Sunday. I will be travelling back from France Saturday night so I
should be in the office by 9am Sunday morning. I have attached Exhibit -1 which contains a list of
outstanding issues that you need to consider before the financial statements are finalized and
presented to the Board.
CEO and I would like to have a quick chat with you ahead of the board meeting. Could we meet at 10am
Sunday to discuss? Following our chat we may or may not add this matter to the board meeting.
For the time being, I would like you to prepare Three Separate Memos on following issues:
- A brief report on IFRS 15 to make directors understand why a new accounting standard on
revenue recognition was introduced and how to apply the five step approach on revenue
recognition as per IFRS 15 - Revenue from Contracts with Customers.
- an explanation and an analysis of the required IFRS accounting treatment for outstanding
issues listed in exhibit -1. You should prepare relevant calculations and discuss the impact,
where appropriate, on the Financial Statements for the year ended 31 December 2019.
Regards
Rashid
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EXHIBIT – 1: OUTSTANDING ISSUES FOR 2019 FINANCIAL STATEMENTS
1. OSS provides a range of security services to corporate clients. Upon signing a contract with a
customer, OSS designs and installs security equipment at clients’ premises. There is no charge
for this service. Once the equipment is installed, a monitoring arrangement is then put into
action. The typical contract will be for five years. It is the current policy of the company to
recognise total contract revenue on a straight-line basis over the period of the contract.
Customers are charged on this basis. Customers paid on the due dates in 2019.
As well as security packages, OSS also sells stand-alone security equipment to clients and
monitoring services to clients who have already security equipment installed in their premises.
Details of sale and monitoring packages that were sold during 2019 are below:
Number of Contracts sold On 1 January 2019 200
On 1 July 2019 225
Cumulative sales 425 contracts
Revenue per Contract BDT 17,450,000 (excluding VAT)
Sale of Equipment stand-alone BDT 7,200,000
Monitoring contract only BDT 11,250,000 for 5 Years
The prior period effect on revenue re-statement is a decrease of BDT 5,000,000. OSS has
elected to apply the cumulative effect approach on transition, as permitted by IFRS15.
2. OSS has three investment properties on its books. Investment properties are measured in the
financial statements at fair values (as permitted under IAS40 – Investment Properties) while
owner-occupied properties are measured at cost less accumulated depreciation and impairment
losses. The properties are currently presented at 2018 year end valuations. No adjustments have
been made for the current year.
During 2019, two of OSS investment properties changed their use. Property ABC, a
commercial warehouse that had been let on a commercial basis for a number of years, was re-
assigned as office space for the company. The tenants were notified and vacated the premises
on 1 May 2019. ABC was valued at BDT 400,000 on 1 January 2019, BDT 380,000 on 1 May
2019 and BDT 370,000 on 31 December 2019. Company policy is to depreciate owner-
occupied property at a rate of 2% per annum on a monthly basis.
The second property DEF was acquired in 2013 for BDT 500,000 and is valued at BDT
450,000 on 1 January 2019. In late 2019, resulting from falling property prices in this area, the
directors agreed to dispose of this property. The property, empty since September, was put on
the market in October with an asking price of BDT 440,000. Although there has been some
interest in the property, no firm offers had been made by the year end. Estimates of disposal
costs are about BDT 30,000. The value remained at BDT 440,000 at 31 December 2019.
The remaining investment property GHI is valued at BDT 750,000 at 31 December 2018 and
BDT 925,000 at 31 December 2019.
3. One of OSS divisions, located in Southern part of the country, lost a lucrative contract in 2019.
As a result, a cost savings plan was drawn up. The plan involves the loss of 25 jobs and was
finalised in October 2019. It was published on the company website in early November.
In early December, employees were called to a meeting to inform them of the situation. They
were told that the plan would be implemented over a 12-month period commencing in February
2020. Employees could either leave the company on 1 February 2020 with a termination
payment of BDT 40,000 per member or remain with the company for another 12 months to
facilitate the orderly wind down of the business. If they choose the later, they will receive
redundancy lump sum payments on 31 January 2021 of BDT 60,000 per employee. The terms
and conditions of remaining staff in this division will also be affected by the downturn. It is
expected that salaries will be cut by 20%resulting in operating savings of BDT 250,000 per
annum. The administrative and legal costs associated with the restructuring are estimated to be
BDT 65,000.
No entries have been made to the financial statements to record this transaction.
4. The deferred taxation liability in the draft financial statements of OSS above represents the
deferred tax balance at 1 January 2019 and is made up entirely of an excess of capital
allowances over book depreciation taxed at a rate of 12.5%.
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Further differences between the carrying amounts and the tax base have now been identified as
follows:
Difference BDT'000
Permanent Difference 10
Taxable temporary timing differences 400
The corporation tax rate remained unchanged in 2019.
Requirement:
Prepare the Memorandums asked by CFO. 28
6. You are CFO of a large paint Company. You have received an email from your CEO who is now
on holiday.
“Dear CFO,
I have read an article on new accounting standard on lease (IFRS 16) which to be implemented
from January 01, 2019. The article was written with too jargon to understand. I only came to know
that current classification of operating and finance lease for lessee will no longer exist in new
standard; rather all leases are to be treated as finance lease. I am worried about this as you know
all of our 150 distribution centres are operating on rental basis and we treat these as operating
lease. Can you please prepare a briefing note for me to make me understand the changes and
possible impact on our financials? I want you to cover the following things:
- The reason for change in the current method of lease accounting where lessee classified lease as
either operating or finance lease?
- What are the major changes brought in by IFRS 16 in respect of lease accounting and what are
the impacts on Financial Statements?
- Show the impact on the statement of financial position and statement of comprehensive income
about following facts of lease contracts by applying IAS 17 and IFRS 16 and compare the result
under both standards:
Annual rental payments are BDT 100 million, all payable in arrears (at the end of year). As per
your recommendation, we use discount rate of 10%. The lease term is 5 years.
After getting your note, I will discuss it with Board of Directors about the possible impact on
Financial Statements.”
Requirement:
Prepare the briefing note for the CEO. 15
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