AUDIT & ASSURANCE

Time allowed – 2½ hours

Total Marks – 100

[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will
take account of the quality of language and of the manner in which the answers are presented.
Different parts, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. (a) What are the elements of an assurance engagement and what benefits can be derived from
an assurance service?
(b) How do you differentiate Audit and Assurance Engagement?
(c) Generally a firm is engaged for an audit but may also be engaged by management to provide
additional non-statutory and non-assurance services. Write down at least four non-assurance
jobs, outside audit and assurance, generally performed by our firms in Bangladesh.
(d) What are the responsibilities of an auditor regarding fraud under BSA 240? 4x4=16

2. (a) During the external audit of Purbachal Ltd. you discovered that the directors have accounted
for research & development costs inappropriately resulting in a material misstatement in
Purbachal’s financial statements.
Your firm plans to issue a modified audit opinion if the misstatement is not corrected as per your
firm’s request. During a conversation with your firm’s audit partner, Purbachal’s Managing
Director, Reaz Ahmed, indicated that it is the directors’ intention to seek the removal of your firm
as external auditors if your firm issues a modified audit opinion in respect of this matter.
What appropriate actions your firm should consider under the above circumstances? 10
(b) Mr. Ibrahim, the managing director of your client Bashundhara Ltd., a real estate development
company, has written to you saying that during the last 5 years there has been a sharp growth in
the company’s operating activities. He has been considering setting up of an internal audit
department to overview the operational activities with greater focus on internal control. But he
heard from his brother, who is also a director of the company, that the company would be better
off abandoning this idea and getting the external auditor to do some assurance work instead.
Advise Mr. Ibrahim explaining the objectives, characteristics and responsibilities of internal
audit, external audit and assurance. 15

3. Described below are three situations which have arisen in three audits. The year end in each case
is 31st March 2011:
i) Asha Ltd. uses leased motor vehicles which have been accounted for as operating leases. However,
you believe that these leases are finance leases and should have been capitalized at Tk.5,100,000.
The current treatment does not comply with accounting standards which required finance leases,
where the user takes on the risks and rewards of ownership, to be included as non-current assets
and capitalized. Profit for the year would then have been reduced by Tk.400,000.
The pre-tax profits of Asha Ltd. for the year ended 31st March 2011 were Tk.60,000,000 and
total assets at 31st March 2011 were Tk.540,000,000.
ii) A fire in the warehouse of Alo Ltd. in April 2011 destroyed the inventory sheets, which were
the only records of the company’s inventory at the year end. The company has included an
estimated inventory figure of Tk.780,000.
The pre-tax profits of Alo Ltd. for the year ended 31st March 2011 were Tk.1.1 million and
total assets at 31st March 2011 were Tk.6.5 million.
iii) Diya Ltd. has included a note in the financial statements explaining that 90% of its revenue is
derived from a national retailer with whom it has a three-year renewable contract. This
contract is due for renewal in September 2011. However, the directors require the audit
report on the financial statements to be signed on 31st May 2011.

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Requirements:
(a) Discuss briefly each of the situations outlined above, referring to materiality considerations.
For each situation describe the effect on the audit report. 12
(b) Describe what is meant by the concept of materiality and true and fair view. 5

4. Your firm has recently been appointed external auditor of Eastern Waste Management Ltd.
(Eastern) for the year ended 31 December 2011. The previous auditors, from whom your firm has
obtained professional clearance, were not re-appointed because the Managing Director of
Eastern, Arif Chowdhury, who is also the majority shareholder of the company, believes that your
firm has the appropriate expertise to assist with his plan to expand the business.
The expansion plan involves the acquisition of small companies in the same industry sector and
Arif Chowdhury would like your firm to undertake Due Diligence investigations over the next five
years on the target companies. The Due Diligence work will include, among other procedures, a
review of the financial statements of the target companies. Your firm has a number of other
clients operating in the same industry sector. Eastern’s principal activity is the provision of waste
management services which include the collection, transfer, recycling and disposal of waste
materials. The company’s activities are overseen by a regulatory body which issues licenses to
companies operating waste management services. The regulatory body has the power to modify,
suspend or revoke the licenses which are granted for periods up to ten years. The licenses set out
the operational criteria and the working practices to be adopted to meet those criteria. Eastern’s
customers include industrial and retail companies and government bodies. The majority of work is
undertaken under renewable contracts covering periods up to ten years. Payment terms vary from
contract to contract, with some customers paying for services in advance whilst others pay after
Eastern has provided the services. Eastern’s largest contract expires in July 2012. This contract
currently represents 35% of Eastern’s revenue. Eastern, along with other companies, has been
invited to tender for the new contract. Eastern is entitled to claim a subsidy from the government
based on the volume of waste recycled. The company is required to submit quarterly returns
detailing the volume of waste recycled and the subsidy is paid 30 days following the end of the
period covered by the return. Eastern’s procedures and records are subject to periodic inspections
by a government auditor to ensure that the claims for the subsidy are valid.
The company has experienced rapid growth due to an increase in demand for its services. During
the year ended 31 December 2011, the company commissioned a number of capital projects
including state-of-art sorting lines at all of its recycling centres and digestion plant. The digestion
plant is to be used in Eastern’s new venture which will involve the conversion of waste material
into biofuel. The sorting lines were assembled from specialist components sourced from an
overseas supplier using a combination of own and sub-contract labour. Those were completed in
December 2010 and came into operation in February 2011. The digestion plant, which is sited on
land purchased from a land development company, Ashulia Lands Ltd. owned by Arif Chowdhury
and his wife, was still in the course of construction. The digestion plant is being built by a
construction company under a fixed-price contract which requires stage payments based on the
value of work certified by a surveyor. The capital projects are funded by a loan repayable in
quarterly installments over ten years. In addition to the loan, the company has negotiated an
increase in its overdraft facility in order to meet its working capital requirements which have
increased due to the expansion of the business.
The accounting function is centralized at head office. However, the processing of payroll is
outsourced to an HR Consulting firm, ZN Consultants, which provides Eastern with monthly payroll
information. Eastern uses this information to pay the wages and salaries directly into its
employees’ bank accounts and the relevant payroll taxes to NBR.
Requirements:
(a) Explain the self-interest and self-review threats arising from the provision of due diligence
services to Eastern and describe how your firm should deal with them. 6
(b) Identify, from the information provided in the scenario, the principal areas of audit risk in respect
of the financial statements of Eastern for the year ended 31 December 2012. For each risk:
(i) List the factors which have led you to identify that risk; and
(ii) Outline the procedures that should be included in the audit plan in order to address the risk. 16

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5. (a) You have recently come across the following professional issues:
i) During the audit of a listed company on which you were involved, you overheard the
finance director on the telephone to a family friend requesting him to buy shares on his
behalf, prior to an announcement about a new product which you know is likely to
increase the share price significantly. The finance director is a chartered accountant.
ii) One of the audit clients you recently worked on was impressed with your courtesy
towards his staff members that he wanted to make you a gift of tickets to the World Cup
football final, along with an overnight stay in a hotel and dinner.
Requirement:
Set out the problems in each of the above situations and the action that you should take. 10

(b) While planning the audit of Raven Ltd. for the year ending 31st March 2012 the finance
director informed you that the company had introduced an incentive scheme under which the
directors are entitled to a bonus on achieving a certain level of profit. The bonus will be paid
30 days after the audited accounts are available.
Identify the audit risks in respect of the above matter, and state how you would address these
risks. 10

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