AUDIT AND ASSURANCE

Nov-Dec 2021
Time allowed- 3:30 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) You have recently joined A Q Shaha & Co. (AQS) Chartered Accountants. Two months before
your joining, you purchased some shares of Diamond Agro Limited whose price has subsequently
fallen significantly and resulted in unrealized loss. You have decided to hold the shares with
expectation that share price will rise in future. After your joining in AQS, you have been assigned
with the team engaged in audit of financial statements of Diamond Agro Limited.
Requirement:
Identify the ethical issue involved and discuss what actions you need to take to overcome the issue
according to International Standards on Auditing (ISAs). 3
(b) Angelic Hotel Limited (Angelic) is a prominent hotel in the city. Your firm frequently organizes
various training sessions and business meetings at the conference room owned and maintained by
Angelic. Also, your firm rents room at Angelic for many foreign delegates who visits your firm on
various business purposes. Your firm has an agreement with Angelic under which your firm will
select Angelic as the preferred hotel service provider, and Angelic will provide reduced rate, credit
facilities and priority services. Your firm has a good business relationship with Angelic and has clear
understanding of its business model. Because of this relationship, board of directors has expressed
their intention to appoint your firm as their next auditor in the upcoming Annual General Meeting.
Requirement:
Discuss the matter your partner should consider while accepting Angelic as an audit client and
how he should respond to the board of directors of Angelic. 3
(c) Pharma Plus Limited (PPL) is an audit client of your firm and your firm has been reappointed as auditor
for the year ending 31 December 2021. On 1st August 2021, PPL has acquired 70% shares of Nova
Research Limited (NRL). Your firm is responsible for designing and implementing SAP system in
NRL which is expected to be completed by 30 September 2021. Once SAP is implemented, NRL will
have automated control over financial management and reporting. NRL plans to record all the
transactions occurred during the year in SAP system and prepare its financial statements for the year
ending 31 December 2021. Financial statements of NRL will be consolidated with the financial
statements of PPL.
Requirement:
Discuss whether any ethical issue arises from providing audit service to PPL and consulting service
to NRL. 3
(d) Ahmed and Mushtaq are the team members of Petronus Media Limited (Petronus). They have
completed field work for the year ended 30 June 2021. After completion of the audit, they took an
Uber ride to transport the hard copy audit files from client premises to their office. Around half an
hour later, after reaching their office, they noticed that they have got off Uber without the audit files.
They called back the Uber driver and requested to return those files. Uber driver handed over those
audit files later at that afternoon and the audit team confirmed that no documents went missing.
Requirement:
Identify the ethical issues involved and current course of actions for Ahmed and Mushtaq. 3
(e) Recently the Institute of Chartered Accountants of Bangladesh (ICAB) has been putting emphasis
on digitalization of audit methodology. As a part of the process, ICAB has offered licenses of
international audit software to audit practitioners at reduced cost.
Requirement: Discuss the benefits of using software in audit and audit documentation. 4

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 (f) You are the audit senior, engaged in the audit of GTex Limited, a multinational thread
manufacturer. You have been assigned to audit trade receivables and you have identified that one
of the major clients of GTex Limited is Q Fashion, a 100% export-oriented company. Your firm
is also the auditor of Q Fashion. One of your friends is the audit manager of Q Fashion and you
share the same apartment with him. Due to COVID-19 lock down, both the audit manager and
yourself are working remotely from home. Recently you overheard the audit manager discussing
in an audit team meeting that Q Fashion was facing financial difficulties due to cancellation of
orders by foreign buyers. He even mentioned that Q Fashion is contemplating voluntary liquidation
under the Companies Act, 1994 due to severe financial difficulties. You checked the expected
credit loss calculation provided by GTex Limited and identified that no impairment loss had been
considered for material amount of trade receivables from Q Fashion as at 30 June 2021.
Requirement: Explain the professional and ethical issues in this scenario. 4
2. (a) The auditor shall consider whether the preconditions for an audit are present before accepting an
audit engagement. What are those preconditions in accordance with ISA 210, Agreeing the Terms
of Audit Engagements? 5
(b) Define the term ‘cold review’. 2
(c) The statutory audit of Teams Limited (the Company) is currently progressing with reporting due
in next month. Teams Limited is a fully owned subsidiary of Gear Pro PLC, a UK based company
that provides mobile health care services in developing countries. The engagement team has
prepared the following extracts based on the draft financial statements and discussion with the
finance director of the Company.
(Figures in Taka)
Financial statements line items Year 2020 Year 2019 Year 2018
Revenue 59,000,000 90,000,000 87,000,000
Loss before tax (126,000,000) (160,000,000) (180,000,000)
Total current assets 15,500,000 143,000,000 135,000,000
Total current liabilities 175,000,000 152,000,000 120,000,000
Total equity (90,000,000) (85,000,000) 45,000,000

i) The parent company injected fresh capital of Tk121,000,000 during the year.
ii) The company has initiated discussion to secure additional financial support from the parent
company. However, no decision has yet been reached.
iii) During the kick-off meeting the marketing director mentioned that there was no plan to launch
any new product of services in the foreseeable future.
Requirement:
You are the engagement manager on Teams Limited. The engagement partner has asked you to
email him your analysis on the going concern indicators from the above scenario. He also asked
you to share the proposed audit procedures that should be carried out by the engagement team with
respect to the above scenario. 5
(d) Recently your firm Mahbub Islam & Co. Chartered Accountants (MIC) has won the audit
engagement of Super Fresh Limited (SFL). Your firm has sent a draft engagement letter to the
management of SFL for their review and signing. However, SFL management believes that
separate engagement letter is not required, appointment letter issued to the auditor is sufficient as
engagement letter. Explain whether MIC should accept the audit. 3
3. (a) Jamalganj Natural Resource Ltd (JNRL) procures coal from local mines and also imports from
abroad. The coal is washed and sorted into different grades prior to selling to domestic customers
mainly in electricity/power generation, metal production and cement production industries.
Imports are landed at a nearby port, stored there and transported to a company’s premises only
when there is sufficient storage capacity.
The company does not maintain continuous stock records. Purchases and sales are recorded in
goods received book and sequentially numbered dispatch notes respectively. All stock movements
are checked on the weighbridge. The value of stock is a substantial part of current assets as well
as total assets due to nature of business of the client.
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 The company also washes and sorts coal for other merchants. Each merchant is charged a fee by
JNRL for per ton of coal washed and sorted.
Stock quantities are ascertained for the annual financial statements by a physical count conducted
by an independent quantity surveyor who calculates the volume of stock and subsequently converts
the results for each grade into tonnage.
Your firm is the statutory auditor of JNRL for the current year. However, last year you included
an explanatory paragraph in the audit report due to uncertainty over the stock figure. This was
because, subsequent to the count, it came to light that different grades of coal had been mixed
accidentally and the quantity surveyor had treated them as one grade.
The finance director has informed you that the current year stock count will be held at the year-
end which will be Saturday. Business will continue as usual until lunchtime in the same day. The
stock count will last all day. Due to the problems last year, you intend to consider carefully the
arrangements for the stock count.
Requirements:
(i) Prepare, for inclusion in a planning memorandum, a list of potential audit risks in respect of
the ascertainment of stock quantities and the steps that you would take to address them. 7
(ii) Do you think in the above case your firm representatives are required to present in stock
count despite an independent surveyor involved in the process? Explain the matter in light of
the paragraph 8 of ISA 500, Audit Evidence. 3

(b) Rahim Garments Limited (RGL) is a prominent garments manufacturing facility, producing shirts
and casual wears for both men and women. Your firm has been auditing the financial statements
of RGL for the year ended 30 June 2021. During your audit works, your team members have
notified following matters and requested of your suggestion.

Intercompany receivables:
RGL has reported significant amount of intercompany receivables. Out of the reported receivables
there is a long outstanding receivable from Karim Printing Limited (KPL) which is a sister concern
of RGL. Further analysis has shown that KPL purchased some shirts from RGL as uniform for its
employees. However, KPL never paid for the shirts it purchased. Management believes that
receivables from KPL is realizable as it is due from a sister concern.

Property, Plant and Equipment:

On 30 June 2020, RGL has revalued its property, plant and equipment and recognized revaluation
surplus. However, the financial statements for the year ended 30 June 20201 shows that revaluation
reserve has been reversed. Upon further queries, accounts manager has informed that board of
directors is not interested to continue revaluation method. Hence, they have reversed the
revaluation reserves and returned to book value method for valuation for property, plant, and
equipment. Reversal was done by decreasing PPE Cost with the revaluation surplus balance.

Inventory:
RGL inventory includes raw materials, work-in process (WIP) and finished goods. Raw materials
mainly include fabrics, accessories and washing chemicals. Raw materials are recognized at
invoice value, whereas finished goods are valued at standard selling price. WIP is valued with
percentage of completion. According to RGL policy, end-product will continue to be part of work-
in-process until it is packed. Only when end-product is packed before shipping it is considered to
be finished goods.

Requirements:
(i) Identify audit risks for each case and identify the assertions being affected. 2
(ii) Design appropriate audit procedures to confirm each assertion and to address the identified risks. 5
(iii) Discuss the audit evidence you plan to collect from your audit procedures. 3

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4. Prominent Diagnostics and Consultations Limited (PDCL) was founded in 2016 at Dhanmondi, Dhaka
as a diagnostics center with name Prominent Diagnostics Limited (PDL). It quickly gained popularity
for its high quality and wide variety of diagnostic services. Due to the increasing demand, PDCL has
opened three new branches in Uttara, Mirpur and Khilgaon. At present it has its primary diagnostic
center and corporate office at Dhanmondi.

Due to the growing demand and request from the diagnostic patients, management of PDCL has
decided to start providing the medical consultation service along with existing diagnostic services. Last
year PDCL started consultation service along with its existing diagnostic services and rebranded itself
as Prominent Diagnostics and Consultations Limited (PDCL). PDCL operates through three divisions:
Diagnostic, Consulting and Administrative Divisions.

Diagnostic Division looks after the diagnostic operation of PDCL. It is primarily involved with
maintenance of diagnostic equipment, maintaining diagnostic procedure quality and proper reporting
of the diagnostic findings, assessing the necessity of replacing existing medical equipment and addition
of medical equipment for new diagnostic tests. Head of Diagnostic Division has been empowered to
take decision for addition and disposal of medical equipment.

Fees for medical tests are kept affordable but covers direct and indirect cost of performing the
procedures. One of the key components of the cost of medical tests are the doctors’ commission. As
per verbal agreement, doctors claim 20%-25% commission on the test fee for their referral for tests.
Commissions are accumulated throughout the month and paid to the doctors in cash. In most cases,
diagnostic fees are collected mostly though POS machine and directly deposited to PDCL Bank
account. Patients also have the option to make payment in cash. Cash at the payment counter is
deposited to accounts department under Administrative Division at the day end. Patients are given paid
copy of invoice when payment is done.

Consultation Division co-ordinates the consultation facilities. Primary responsibility is to allocate

consultation chamber to doctors against monthly rent, preparing consultation shifts and maintains
patient waiting area. However, because of reputation, PDCL often waives the monthly chamber rent
for notable and prominent doctors. Each doctor is assigned with a nurse and an administrative assistant.
Administrative assistant takes the cash as consultation fee from the patients and patient is given a
handwritten receipt. For each patient, doctor receives 60% of the fee whereas PDCL receives 40% of
the fee to cover administrative cost like facility charges, salary of nurses and administrative officers
etc. Doctors take their share of fee after the end of consultation slot assigned for them.

Administrative Division is responsible for overall management of the company. Administrative

division recruits employees, assistants, nurses, lab assistants and doctors for entire PDCL. It has an
accounts section which maintains the financial records, maintains cash, and prepares financial
statements. It often faces problem to reconcile the cash at hand and cash reported in the books of
accounts. Another important role of Administrative Division is to maintain the facility and servicing
office equipment and electrical equipment. Recently it noticed few equipment went missing, but the
same could not be traced as asset register was not completed yet.

Requirements:
(a) Identify and assess the fraud risks for each department. 6
(b) Identify and assess the significant risks (other than fraud risks) for PDCL. 3
(c) As auditor what audit procedure you will design to address the identified risks. 7
(d) Suggest appropriate controls to PDCL management against the identified risks. 4

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5. (a) EPL Limited is a company listed with the stock exchanges in Bangladesh. The Company prepares
both statutory and consolidated financial statements. There are 3 subsidiaries and 2 associates. The
Company reports goodwill in its consolidated financial statements. You have reviewed the audit
working papers and the financial statements to draft the key audit matter paragraph on impairment
testing of goodwill and identified the following:

The following represents an extract from Note 20 to the consolidated financial statements:
Goodwill has been allocated to the following Cash Generating Units for impairment testing as per
IAS 36:
(Figures in millions of Taka)
Cash Generating Unit (CGU) Year 2020 Year 2019
Raw Material Processing CGU 250 250
Export Market CGU 150 150
Total 400 400
The recoverable amount of CGUs, which is based on the higher of the value in use or fair value
less costs of disposal, has been derived from discontinued forecast cash flow models. These models
use several key assumptions, including estimates of future sales volumes and prices, operating
costs, terminal value growth rates and the weighted-average cost of capital. The fair value
measurement was categorized as a Level 3 fair value based on the inputs in the valuation technique
used. The key assumptions used in the estimation of the recoverable amount are set out below. The
values assigned to the key assumptions represent management’s assessment of future trends in the
relevant industries and have been based on historical data from both external and internal sources.
(Figures in millions of Taka)
Raw Material Processing CGU Year 2020 Year 2019
Discount rate 9.0 9.5
Terminal value growth rate 0.9 0.8
EBITDA growth rate 4.4 4.5

(Figures in millions of Taka)

Export Market CGU Year 2020 Year 2019
Discount rate 10 10.5
Terminal value growth rate 0.8 0.9
EBITDA growth rate 3.3 3.5

Conclusion from audit working paper (extract):

Due to complexity and significant judgment required in determining the assumptions to be used to
estimate the recoverable amount, the engagement team engaged valuation expert to review the
models. The engagement team spent significant amount of time on testing the assumptions and the
models for appropriateness. Retrospective testing and sensitivity analysis of the key assumptions
have been extensively documented in the audit working papers. The engagement team involved
in-house valuation specialist in evaluating appropriateness of the discount rates applied by
comparing the weighted-average cost of capital with sector average for relevant markets in which
the CGUs operates. The engagement team also evaluated the adequacy of disclosures in the
financial statements regarding goodwill as per IFRSs. The engagement team concluded that there
was no exception noted on the impairment testing of goodwill.

Requirements:
The engagement partner of EPL Limited asked you to prepare a key audit matter paragraph on
impairment testing of goodwill for the year ended 31 December 2020. You have been asked to
draft the key audit matter paragraph under the following areas:
(i) The key audit matter; 2
(ii) Disclosure of the matter in the financial statements. and 3
(iii) How the matter was addressed in your audit? 3

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(b) You are engagement manager for audit of financial statements of Ehsan Foods Limited (EFL) for
the year ended 30 June 2021. Your team has calculated overall materiality level at BDT 1,000,000
and performance materiality level at BDT 850,000. After the end of your audit your team members
have brought following matters to your attention.
▪ Company has reported revenue of BDT 23,000,000. Audit team confirmed the amount
through analysis and test of control. However, they have noticed that VAT return shows
revenue of BDT 18,000,000. 15% VAT is applicable on sales price.
▪ Suppliers’ payments over BDT 75,000 have been paid in cash.
▪ Foreign currency denominated payable has not been revalued at the year end and as a result
payable has been understated by BDT 575,000.
▪ Management has not performed going concern assessment.
▪ Confirmation for two bank accounts has not yet been received.
These matters have not yet been brought to management attention and your team is not sure how
to draw conclusion for each matter. They have requested for your assistance.
Requirements:
(i) Comment on each matter separately to assist your team member. 5
(ii) Create a communication memo to draw management attention. 5
(iii) What opinion will you express on EFL financial statements? 2

(c) You are an audit manager of SR Khan & Co. (SRKC). You are managing four unrelated clients.
You are regularly monitoring audit activities of your client. While conducting audit, your team
members have identified some audit issues for which they have sought your guidance.

Excel Communications Limited (ECL):

Excel Communications Limited is a software development company. It is primarily involved in
developing industry standard software for its clients with little opportunity for customization as
per requirements. ECL sells license for use of these software and charges annually per user.
However, it also offers multi-use license for multiple years. License fees are collected at the time
of license issuance and the license remains valid for the license period only. ECL recognizes entire
license fees as revenue in the year it originates. We have confirmed the reported revenue with
ledgers and invoices. We also have confirmed the receipt of cash. Hence, we are conducing audit
of ECL revenue without exceptions.

Siam Bottles Limited (SBL):

Siam Bottles Limited is a plastic bottle manufacturing company with year-end on 30 June 2021. It
has taken a long-term loan from bank keeping its fixed assets as collateral. Loan amount is material
for SBL. It has properly recognized and disclosed the loan amount, classification of the loan and
related interest expenses. Management believes that no further information remains to be disclosed
in the financial statements. We have obtained bank confirmation and verified the loan amount and
outstanding balance. We conclude our audit procedures without any exception.

Requirements:
(i) Discuss whether the team members appropriately concluded their audit works. 3
(ii) Discuss their impacts in your audit report 2

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