CA WrtttolnnnB

The Institute gf Cha,@ Accountants of Bangladesh (ICAB)

Suggested Answers

Adv&need Level
mber-December 2019
SUGGESTED AI\ISWERS
CA Professional Stage
Advanced Level
The Institute of Chartered E of Bangladesh (ICAB)

The Suggested Answers haw'beeirlrepared by the Student Atrbirs Division of the Institute of Chartered
Accountants of Bangladeh (CAB)

Firstedition February 2020

All rights reserved. No part of this publication may be reproduced in any form or by any means or stored
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FOR FURTHER COilHtrIffiIGATION:

Study Manual Deparfinent

Student Affairs Division
ICAB - Academic Campus
5l- 53, Kazi Narul Islam Avente,
Kawran Bazar, Dhaka I 2 I 5
Tel : +88096126121WExt: l7l I l4l
Email : pantho@icab.org.bd
l:.r.,..,r

-,,''.'r:,1i ,,
 CORPORATE REPORTING

You are a recently qualified chartered Accountant

who has joined as Audit Manager in a big
the country which has membership with
orre of Top to accounting-Firms i,
cA firm of
of your formal orientation in the drst week, you trr. #".r0. After completion
have u on. io one meeting with Managing partner
Firm, NIr. Riazul Chowdhury. of the

Mr' Riaz has informed you that the firm is considenlq

taking
itself against the consequences of possible.succer.ruiiiiig-rtiL out appropriate insurance cover to protect
against it. He has given you a bunch
clients orthe ri,il.. vouleft his ,oo,,, und'.u*"
of
frf:l'",x.H: H';ffi:H?nT.:4 to your cubicle

client -1: This is a suc-cessful company op^erating in

-from the hospitality-industry. The company
seeking for financial assistance is currently
provide a reference endorsed by their
a-reputabi. ii*t.
rrr" gurk rras asteo the company to
u"aiiorr i, Jution toirr.irluiilry ," service
the roan.
The Finance Director of client I has- requested
your f*m to provide the required reference.
He has assured your firm that.thg castr
flow f.oui"-. being faced by the company
iro".r.y"ro*qiy
are due to normal'seasonal variations within ,t in which c6nt I operates.
"
client-2: The audit of this client for the year ended
30 June.2019 is
to ti. airectors orldrg
despite a number of requests by your completion. However,
n.-
relating to material valuitions, management Cri"-lt i to provide evidence
has not provided the evidence.
The Managing Director was heard instructing other directors in
the company not to give your
firm a lot of information so that audit queies
ail minimised. The Fi;;" Director of the
:ffi"Jff,flJ4f,}1#f instruction's ,"ii" et'" vo* ron a.....-ro the tax pl;;;
client -3: Management of client 3 has assessed
.the
ability
gf ,1, lompany to continue as a going
concern and have concluded that the going
concefu uurrr
company, but a material r rcertainty &irt.. oiu".i;],! ii appropriate
for the
management has appropriately disclosed
tn trr" notes to trr.- nrur.ial statements,
the materiat uncertainty-r.tu,irrg to the going
concefll basis of the Company.

client -4: The entry of a. successful competitor in

the industry of client 4 has threatened
the company to continut ut u going the ability of
conce-. ihil has given .ir" t"
" -"terial
'affecting the company's ability to Jontinue uncertainty
as a going concem although management
the view that this competition is ror a is of
st o.t p".ioo iiti-" orty.
h -y view' the going concern basis of accounting
is not appropriate for this company.
the company has not made any
mention oiirr"
Management of
-u6riur ur.Jriui-rity in the financial statements.
After completion of reading, you have
seen that you have got an email from
Mr. Riaz:

l lPage
Dear Audit Manager,
Hope you have understood the challenges relating to those 4 clients. I want you to ident{y and explain
the ethical and other professional issues relating to Client I and 2. I also want you to discuss the impact
on the audit reports we will have to issue on the financial statements of Client 3 & 4 in relation to the
going concern situations facing each company.
Best Regards,
Riazul Chowdhury
Requirement:
Respond to your Managrng Partner. t2

Ethical and other professional issues:

Client 1

Where no additional work is required to provide a reference, the following matters should be considered
by our Firm:
o lnherent uncertainty of future income and expenditure.
o The difficulty of reporting on present solvency (given that the audit is a historical exercise; such
information might be available if a separate engagement was made).
o The possibility of a duty of care arising.
o That clarification might be required (there has been no engagement and no fees, and that liability
might have to be expressly disclaimed)
However, we might be able to provide certain information without diffrculty depending on the following:
o The length of time they have acted for the client.
o The results declared to the taxation authorities over past years.
o
A statement of a level of negative assurance given past performance.
Where it is necessary to create a separate engagement in order to provide the relevant information, our I
frm should consider the guidance in ISAE 3000(Revised) Assurance engagements other than audits or
reviews of historical financial information.
Client 2
The first thing to consider if our audit report is to be modified and whether the matter in question suggests
that management may not have the requisite integnty. This is particularly relevant where the scope of the
audit has been limited by management, e.g. if management refuses to allow auditors access to all
necessary books and records as is the case with Client2.
It is pos3ible that Client 2's management's integrity could be in doubt given the circumstances in the
scenario. In the light of this, we should reconsider any representations (including written representations)
provided by management during the course of the audit.
It may also be necessary to perform an engagement quality control review on the audit, as a lack of
management integnty would mean that the audit ca:ries a higher level of risk than may have been
envisaged at the planning stage of the audit.
Ifthe matter in relation to which the auditor's report is modified is sufficiently serious, then it may be
necessary to seek to withdraw from the audit engagement. If we seek td withdraw then it will be
necessary to obtain legal advice.

2lPage
 ISA 210 Agreeing the Terms of Audit Engagements states that if there has been a limitation on the scope
of a prior audit which leads the auditor to believe that the audit opinion expressed this year will likely bi a
disclaimer of opinion, then the auditor must not accept the engagement uniess required to do so by law.
Effect on the auditor's report regarding going concern situations:
Client 3:
In this case, there was a material uncertainty with regards going concern which has been adequately
treated and disclosed.
In this situation we should issue an unmodified opinion and introduce a paragraph in the auditor's report
headed- Material Uncertainty Related to Going Concem.

In the event that management did not disclose the going concem uncertainty in the financial statements,
then a qualified or adverse audit opinion will be issued depending on the pervasiveness to the financial
statements.

Client 4:
In this case, the going concern basis of accounting is inappropriate and the impact on the audit report will
be as follows:

Since in the opinion of the auditors t}re use of a going concern basis of accounting is inappropri ate, an
adverse opinion should be expressed. This is notwithstanding that management n ak"s necessary
disclosures or not in the financial statements.
Mrrking Guideline: (Totat 13 Marks)

Max. Marks
int I 4
Client 2 4
Client 3 2
4 2

Pure Publications is a long-established publishing Company listed with both the stock exchanges in the
cotmty- In the last two years, it has made significant losses as a result of its investment in techn6logy and
in particular, the high-tech environment of e-commerce. This investment and the Company's ,o,rrdfut r.
prospects have led to a good credit rating since they are generally seen as leading edge in this field,
I with
good preliminary sales and strong feedback on the ease of use and marketability oltheir 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%o onrumours that reserves had been
significantly overstated and that they were no longer financiaily 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 finn could have taken to prevent such a situation occurring. g

3lPage,

E]
The audit firm has statutory responsibilities under company law including a duty to report on whether
il
1

financial statements show a 'true and fair view' or 'present fairly' the financial position. If the firm is
i

shown to be negligent in this process, they could be subject to various types of action (civil and/or
criminal).

In the specific case of Panjeri, the problems relate to investments from reserves and the collapse in share
price resulting from the 'rumours' of a lack of reserves and lack of financial viability. The suspension of
the panjeri shares allows time to investigate the true position and deal with fact rather than rumour.

During the audit of panjeri, the frm would have considered the company's' ability to continue as a going
concern and would have examined the financial statements for material misstatement. This would include
consideration of the level of reserves. Therefore if there are substantiated problems, the firm would have
been expected to identit/ the situation. The audit process should have been carried out with a due level of
skill, care and diligence and with regard to the required professional standards. If the frm can
demonstrate that the audit was performed in accordance with professional standards, then it will be
difficult to demonstrate negligence. However, if the firm had any suspicions of problems with the
company,s financial position, it should have fully pursued this to establish the facts and, if it has not done
so, could be accused ofnegligence.

The question does not identiff the possible source of legal action. There is a possibility of liability in tort,
under which a third party could sue the firm for damages. However, such a third party would have to
I
prove that: lr
ll
rr,

o the auditors owe a duty of care to the third party

o that appropriate standards ofcare have been breached, and
o that the third party has suffered.loss as a direct result of this breach of standards

A duty of care exists where the auditors knew (or reasonably should have foreseen at the time of auditing
the financial statements) that those financial statements might be relied on for that particular purpose and
that it would be reasonable for such reliance to be placed for that purpose.
To avoid successful allegations of negligence, there are a number of key mechanisms that the auditors of
Panjeri should have followed:

Ensure that evidence is available to demonstrate that best practice procedures were being followed,
including effective qualrty control and supervision of work undertaken on the client.

Effective planning of assignments, including the assignment of staffwith the appropriate skills and
training, as well as effective direction of resources during the assignment.

o The use of appropriate audit programmes and checklists to ensure appropriate focus and effective
documentation and capture of evidence.
Review of business and audit risks. This may have indicated a longer term viability problem, with both
the heavy investment in e-commerce and the reliance on reserves in making this investrnent being
important business risks that should have been managed.
o Regular technical training and updating of all staff and ploper briefingl

4lPage

Q
 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 urd
prior years are as follows: ",rr."ni
20t9 2018
BDT BDT
Sales 62,500,000 45,000,000
Gross profit o/o 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 satisff yourself that the sales
figure for 2019 amounting to Tk.62,500,000 is ture and fair in the context of ihe 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
O) Do you think that the number of invoices you would have to test in detail could be reduced to
manageable proportions if: 3
(0 the company's control environment is good?
(ii) the coryany 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
circrrmstances of this company to find additional supportive evidence for the sales invoices? 2
(d) Cm you think of any way in which the inventory records themselves can be corroborated by gooi
evideoce? 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? z

a) Probably not, in themselves. Copy sales invoices by their nature can easily be reproduced and it
looks as though I will have to look further to satisfr myself that they represent genuine sales. There
are also rather a lot of them and even if I only spend one second on eu"h one, iiwould take the best
part of two working days to complete the checking of them.

b) The 50,000 sales invoices will all have passed through a sales system. If I as auditor can satisfy myself
that the conhol environment is satisfactory and that the system is designed to produce complete and
accurate recording of sales, and I have tested and evaluated its operation myseli this will provide
me
with useful persuasive evidence to support a conclusion on the sales invoices themselves.
Assessment of control risk has a direct impact on the number of transactions and balances
testes.
The 50'000 sales invoices should, of course, all be reflected in the sales figure
in the financial statements,
ry discussions with management and other work reveals that sales u." r"ur6ouble in relation to (sayj

sl Page

I
 prior years' sales, cost of sales, trade receivables, inventories, etc., this will also be evidence enabling me
to form a conclusion on the sales invoices.
I, as the auditor, will be able to reduce the detailed testing of the sales invoices if the systems work
(including that on the control environment) and analytical rwiew produce supportive evidence. This
,rppo.ti* evidence corroborates the rather weak evidence of the copy sales invoice and, in so doing,
strengthens it. I shall consider the impact of this after we have considered a number
of other factors'
system. If the sample
c) We have been told that the company operates a computer-based invelrtory records have gone a step further in
sales invoices are all shown as movements in the inventory records, we shall
sample of inventory {
validating thenq particularly if we work in the opposite direction, take an additional
to take care, however, not
record *or"*.rit and check that they are all included as sales. We do have ..'iidtl*

of Prq)are the inverrtory

:iw
_ to jump too quickly to conclusions. If people independent sales invoicing
I

,.*rdr, they will be able to corroborate tl" iut"r invoices and thereby increase their value as evidence.
of the reasons that it is
I If not, trrey *m te less capable of providing corroborative evidence. This is one
so important for the auditor to evaluate the confiol systems established by
management.
I

I
! d) Audit evidence obtained directly by the auditor is_ a reliable form of evidenee. If the auditor
and finds there is
compares a sample of inventory record balances with actual inventory on hand
agreLment between the two, a further important step has been taken to corroborate
the sales
invoices, although the trail is now somewhat longer:
quantities of inventory on hand are the same as those shown in the inventory
records, the
If
inventory records are likely to be a reliable record of inventory issues also'

o If the inventory record issues are in agreement with sales invoice quantities are accurate'
sources outside
e) The reliability of audit evidence is increased when it is obtained from independent
ledger personal
the entity. Ciearly, Ridgewalk's sales will have flowed through trade receivable
on the sales ledger
accounts. If the auditor can obtain confirmation of balances and movements
been obtained to support the
accounts from credit customers, then additional evidence will have
sales invoices we wish to prove form a complete and accurate record of sales drning the year. The
auditor would clearly wish to ascertain that ihe trade receivables selected to confirm balances were
to post letters to
genuine. Typical procedures to increase this possibility would be for the auditors
credit customers themselves, to have replies sent directly to the auditor's office,
to examine
selected customers and so
postmarks oo ,"pty envelopes carefully, to examine correspondence with
on.

You are audit manager of Hasan Morshed Co. Chartered Accountants' You are carrying out the
&
year
pf*"i"g of the audit"of James Limited, a specialist skincare product manufacturing company, for the
the management'
Lnding IO lor" 2019. you have received the draft financial statements from
which shows that
As part of understanding the business, you have perforrned an industry analysis
decreasing over the years
Industry is growing at iaverage rate of i6%; ho*tner export sales has been
due to increased ii tn" global market. A stu-dy has reported that many skincare productto
"o-p"titio,
manufacturing companies do not arrange sufficient measiures to protect
their workers from exposures
workers-suffer from various
various chemicals used in the pharrnaceutical companies. Consequently,
diseases but do not get *y As a resuit, workers are gradually switching to less hazardous
"o-p"rsation.
industries. Shortage of workers is increasing the employee recruitrnent
& retention costs' Skincare
producers' Association (sPA), where James rimiteo is a member, encourag€s to pay an annual allowance
not mad6 any provision for hazardous
to workers who work inLazardous environment. James Limited
has
work allowance at the year end of 30 June 2019'

6lPage

W'
Jrmes Limited
Stetement of Financial Position
Notes 2019 2018
BDT BDT
Non-current assets
Property, plant and equipment 8,728 10,584
Non-current security deposits 12,525 13,525
22,253 24,109
Current assets
Trade receivables 30,839 51,102
lnventories 76,669 127,856
Inter-company receivables 962,219 621,222
Advances, deposits, prepayments 250,749 497,040
Crsh and cash equivalents 2,490,059 2,388,555
3,810,526 3,685,774

tht essets 3.832.779 3.709.883

Eqsty
SLgE cryiial (BDT l0/ share) 110,760 110,760
2,162,463 1,978,193
2,273,223 2,099,943
trrbffifieg
Trrdepayable 456,346 40l,l2g
payables 247,411 95,q22
ndfuliabilities 855,798 1,123,990
t' 1,559,555 1,6201940

Trtrl equis and fiffiies 3.832.779 3.709.883

Srlcment of Proftorlocs md Other

Comprehensive Incomc

Notes 2019 2018

BDT BDT

Revenue 1.00 4,136,247 . 3,368,279

Cost of sales 2.00 (3,343,519) (2,6?4,339\
Groos prolit 792,730 743,940
Administrative expenses 4.00 (680,859) (548,239)
Olheroperating income s.00 rg4,4l0 44,932
Opraingprofit , 306,2g0 240,633

,ir;;;
l"-

Finance cost (14,802) (13,419)

Profit before tax 291,478 227,214

lncome tax expenses (107,198) (84,221)
Profit for the year I
184.280 142.992

Notes to the financial statements 2019 2018

BDT BDT
1.00 Revenue
Sales Export 2,688,561 2,565,850
Sales-Looal t,M7,687 802,429
!,!36,U. #53gj..
2.00 Cost of revenue
, Direct Material 2,392,819.. 2,083,695
Direct Labour 636,982 300,406
Overheads 3r3,717 240,238
3343.s18 2.624.339
3.00 Quantity sold (units)
Export 9,255 9,000
Local 6,290 3,560
. 15ts45 12.560
4.00 Administrative expenses
Salary and allowances 350,L77 289,562
Office & general expenses 191,328 146,423
Rent and utilities 107,818 58,594
Professional & legal fees 31,535 . , '53,661
680.8s9 548.239
5.00 Other income
Interest received from banks 21,625 10,7t9
Foreign exchange gain 129,945 24,407
Miscellaneous irregular income 42,840 9,806
I
194.410 - 44,932

Requirements:
(a) Analyse and comment on the financial position and financial performance of James Limited for the
information.
year Lnded 30 June 2019 with available financial & non-financial 16

(b) propare a briefing note for the team members explaining the areas with high audit risk based on
youi analysis and audit procedures to be carried out. Consider the ethical issue(s) involved with
James Limited Financial Statements. 10

SlPage
4
Requirement (a): Analysis of financial statements:
Analvsis of Statement of Financial Positions:

2019 2018 7o change

Short term solvency ratio

Current.Assets
Current Ratio 2.44 2.27 7.5%
Current Liabiltties

Ctrr ent.Assets - Inv entorte s

Quick ratio 2.39 2.19 9.1%
Current Liabtlities

Cash &Cash Equvalents

C.ash ratio 1.60 t.47: 8.4%
Current Liabilities

f,,ong term solvency ratio

Net Debt
Gearing Ratio N/A N/A
Equity

Ilrhrmrnce ratio
f,mmon capital Net Profit
employed 8.t% 6.8% 1.3%
Total Equity
Net P{ofit
4.8% 3.9% 0.95%"
Total Asset

Revenue
Affitumover 1.08 0.91 17.t%
Total Asset
Revenu.e
Net asset tunrover
Totol EEity 1.82 1.61

in--"ntory.. ' :' :

Solvencv of the entitv:

Analysis of financial position of James Limited indicates that James Limited have a strong cash position.
It has current ratio of near to 2.5 whereas current ratio 2 is considered to be standard. This indicates James
Limited suffrcient capacity of paying off the current liabilities from its current assets.
AEid test/ quick ratio helps to understand how quick an entity can convert its current assets in case of
nnodiate payment of current liabilities. Analysis of quick ratio of James Limited shows that the ratio is
dmB 2 in both current year and in prior years. That means James limited has the ability to pay off the
mtttliabilities in case the falls due immediately.
9lPage
Solvency ratio analysis shows that James Limited has a very strong cash position. Most of its current
asset is in form of cash. This indicates that James Limited has unutilized cash which is sitting idle.

James Limited does not have any interest-bearing loan. That's expected from an entity which already has
strong cash position. James Limited is a equity financed company.

Performance ratios of the entitv:

From the analysis of the performance ratio it can be noticed that James Limited is consistently generating
positive returrs for the shareholders utilizing its assets. Return rate are small but constant and increasing.
*
if.t on equity has increased to 8.1% :rr-2}t9 from previous 6.8% whereas return on asset has increased
to 4.8o/q from previous 3.9%. Return % would should much higher rate is the ratio was calculated on
return on fxed assets.

Efficiencv ratios of the entitv:

Efficiency ratio aims to show how efficient an entity is in case of generating revenue utilizing its assets.
Efficiency ratios shows that James Limited was able to generate revenue slightly higher than the total
assets. Hlwever, it was able to generate sales almost double of the invested equity. Hbwever, the ratio
would be much higher if the company invested its idle cash.

Analvsis of Statement of Financial Positions:

Statement of Prolit or Loss and Other Comprehensive Income
2019 2018 Change Change 7o

Revenue 4,136,247 3,368,279 767,968 22.8%

Cost of sales (3,343,518) (2,624,339) (7t9,179) 27.4%

Gross profit 792,730 743,940 48,790 6.6Yo

General & admin expenses (680,859) (548,239) (t32,620) 24.2%

Other operating income 194,410 M,932 t4eA78 332.7%

Operating profit 306,280 240,633 65,647 27.30h

Finance cost (14,802) (13,419) (1,383) lO.3o/o

Profit before tax 291,478 227,214 64,264 28.3Yo

Income tax expenses (107,198) (84,221) Q2,977) 27.3%

Profit for the year 184,280 142,99z 41..288 2g.go

Sales Mix analysis:

2019 2018

Sales Export 6s.0% 76.2%

Sales-Local 35.Oo/o 23.8%

Commentary:
During the year 2019, James Limited increased its sales by BDT 776,968 to BDT 4,136,247 achieving a
sales [ro*th of Z2.Bvo.It is significant$ higher than the industry average of 16%o growth. This indicates
James Limited has outstanding performance in sales generation.

l0 lPage
Sales mix analysis indicates that export sales was 76.2% share in 2018 and 65.0% in2019. Despite being
fte largershares in the sales mix, Export sales has dropped significantly. This is inline with the markei
experience of gradual decrease in exports due to increasing global competition. On the other hand, local
sales had a significant growth in Mix from23.8%o to 35.0%. This shows James Limited is now focusing
more on the local sales and was able to drive the sales through local sales.
In opposite spectrum of Revenue, there is Cost of Revenue which has also increased sharply by 27.4%
ftom previous BDT 2,624,339. This increase is a partial reflection of increased sales as Sales growth is
only 22.8% which is lower then cost of sales increase rate. That means where must have been other
expenses that increased the cost of sales. Employee retention and recruitment cost might be one of the
rBasons as workforce are shrinking as they are switching to difference sections. Due to the high cost of
sales, GP margin grew only by 6.6% compared to sales growth of 22.8%.

General & Admin expense increased by BDT t32,620 n 2019 compared to 2018 expenses. This is a
srbstantial increase rate of 24.2o/o. As the breakdown of the expense shows rent & utility expenses has
increased significantly along with the increase in salary and office expenses.
hcrease in operating expenses has been substantially balanced by other operating" income which is
gmiog from mostly from the foreign exchange gain. As a result, Operating profit shows a healthy 27.3%
Lntase in Operating profit margin.
Fmm fte analysis it is noticed that finance cost has increase by 10.3% which is unusual for James
Limited. Analysis of Statement of Financial position showed a health cash position and no interest being
loan- It is not usual for James to have finance expense and moreover increased from previous year. There
might be interest bearing loan in the middle of the year which incurred the finance cost. But it raises
firther question of the purpose of short-term loan with high interest rate.
Income tax expemse increased as the operating profit increased and in line with the profit increase rate.
Profit for the year increasd to BDT 184280 by 28.9% from previous profit of BDT l42,ggL. This shows
a healthy profit margin and gives signal of future cash flows. Ho*"rnrf the current year profit was mostly
ooctributed by the exchange gain without which profit for the year would be much lower.
Adrdr of Non-Financial information:
@itymld:
2019 20r8
Export 9,255 59.s% 9,000 7t.7%
Local 6,290 40.5yo 3,560 28.3%
15,545 100% 12,560 t00%
(-otmentam:

Analysis of quantity sold shows that James limited was able to keep the export sales stable despite the
export sales decrease in the industry. However, as it focused on local sales, it has almost doubled its local
sales qqntity to 6,290 unit from 3,560 units in previous year. This lead to increase the share of local sales
quantity to 40.5o/o to previous 28.3% which forced to decrease the export sales to 5g.5% from previous
7t.t%.
The analysis on quantity sold indicates that James Limited has a stable export based which is not affected
b!'industry wide decrease in export. Furthermore, it is increasing the local sales. As a result, it will not
&re problem in case export sales drops signifibantly.

11 lPa$e
Requirement (b): Briefing note:
Briefing Notes for Team Members
Prepared by: Audit manger

Subject: Result of the financial statement analysis and addressing

identifred audit risks
year ended 30 June 2019 and
We have received the financial statements of James Limited for the
information. Based on our
performed analysis on those statements and available related non-financial
analysis we have identified following risk areas:
Sales:
16% despite gradual decrease in
Frgm-the industry analysis we have seen that industry growth rate is
which is above industry average'
export sales. Jamls Limited has shown a tremendous increase of 22.8Yo
Limited has not only maintained its
Furthermore, from th";"h qr-,t y analysis we can see that James
level of export sales but also slightly increased the unit sold.
sold quantity"or incorrect sales
This shows a risk of misstatement of revenue either by reporting incorrect
price.
Procedures to he followed:
Understand reveflue arrangements.
Review the sales process and identiff the risk of misstatements'
Identiff the controls available in the sales process and check for their operation
and design

effectiveness.
Perform monthly, customer wise or product wise sales analysis'
Perform substantive analysis on the suspected areas'
Send confirmation to outstanding receivables'
Check past and subsequent collections from the customers'

Cost ofrevenue:
revenue. Despite huge increase in sales, cost
Cost of the revenue has increased even at a higher rate than
general and
;il""*;*;il i".reased. we need to check the cost component and veriff wlether
whether there was any abnonnal loss in the
admin expenses have been included in the cost of sales. or
reported but some costs have been
production process. Also, there is risk that cost is even higher than
rt it.O to inventory to keep the positive gross margin'
Procedures to befollowed: _

Exchangegain:
ri-- --
During 2019, operating {if nf
profit rqmes.T.imifed
of James bv 27.3% wlli:! i: l: rstly contributed by
Limited increased by
increase in Exchange iuir. f*.n*ge gain increased by
approx. 532% ihich is highly unusual' If th:^
see a sharp decrease' case would be worse if
exchange gain was not there, oPYo andnet Profit%o would

12|Page
 ttere were significant exchange loss. We need confirm that Exchange gain or loss are determined
properly and not causing any misstatements.
Procedures to he followed:

trlinance Cost:
AnaJysis of financial position shows that James Limited has idle cash and no interest being loan in the
beginning or at the end of the year. That means there should not be any finance cost as it does not have
any interest-bearing loan. During the year James Limited not only reported finance cost but also 10%
increase in finance cost compared to the amount reported in prior year. This means James limited either
Eing significant amount of short-term loan within the period or it have interest-liearing short-term
ffirlities. Furthermore, there is a risk that James Limited has actually taken loan to show high cash
poeition and misreported the loan liabilities.
tWaresto befollowed:

D ffiftcintercstrate applied andthe duration of loan.

, ts. rCHthepurposeofthe short-termloan.

hrrifrr for compensation for hazardous work:

hf matysis shows workers are not getting sufficient compensation for working in hazardous
G[l,nmt As a result, workers are various diseases including skin diseases. This indicates that lack of
fruc&m for workers and possible low quality of the skincare products. This might be non-compliance
iln frE hbor law of the'country. SPA is encouraging its members to provide compensation io their
ffir Afthough being a member of SPA, James Limited has not yet made provision for hazardous
m* rytion. This might lead to potential complexity with SPA. Furthermore, there could be
ryoe ftrom the regulators. So, theie is potential legal expense for James Limited. On the other
hrd, ;6s$ Limited might be reluctant to spend on safety equipment and making provisions to avoid
mking Wffiting loss. This raises multiple ethical issues including exploitation of workers without
me€msation, non-compliance with laws and understating the expense to show operating profit.
Mwes to befollowed:

D Inquire the reason for not keeping proviSion during the year.

ffiEred to keep these issues in mind whilepreparing our audit plan and perfdrming the above-mentioned
p*es.
13 lPa6e
 you are the financial controller of Outstanding Security Services (OSS) which is a security
company that
original focus of the business was to
offers a complete range of security services to corporate clients. The
install security equipirent, 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
statements to
December 2019. you are undei a lot of pressure as you have been asked to present financial
has been prepared
the Board of Directors in three days' time. The first draft of the financial statements
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
J
rl

message from Rashid Siddik, CFO.

I
To: Financial Controller
From: Rashid Siddik
Subject: Meeting Sunday morning 10am

Hi

I lookforward to our meeting on Sunday. I will be travelling backfrom France Saturday night so I should
be in the ffice by 9am Suniay rnorniig. I have attached Exhibit -l which
contains a list of ou*tanding
and presented to the Board'
issues thaiyou nied to considir before thefinancial statements arefinalized

meeting. Could we meet at l0am

CEO and I would like to have a quick chat with you ahead of the board
to the board meeting'
Sunday to discuss? Following oui chat we may or may not add this matter

For the time being, I would like you to prepare Three Separate Memos onfollowing issues:
on revenue
- A brief report on IFRS 15 to make directors understand why a new accounting standard
approach on revenue recognition asPer
recognitionwas introduced and how to apply thefive step
IFRS 15 - Revenuefrom Contracts with Customers'
outstanding issues
- an explanation and an analysis of the required IFRS accounting treatment for
and the impact, where
listed in exhibit -1. You s'houtd pr"pori relevant calculations discuss
appropriate, on the Financial Statemints for the year ended 3t December
2019'

Regards
Rashid

EXHIBIT _ 1: OUTSTAI\DING ISST]ES FOR 2019 FINAI\CIAL STATEMENTS

1. OSS provides a range of security services to corporate clients' Upon signing a contract with a
premises. There is no charge for
customer, OSS designs and instalis security equipment at clients'
is then put into action' The
this service. Once the Lquipment is installed, a monitoring arrangement
to recognise total
typical contract will be ior five years. It is the current policy of the company
Customers are charged on
contract revenue on a straight-line basis over the period of the contract.
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
installed in their premises'
monitoring services to clientJ who have already security equipment

14 lPage

ffit,tt;1p; a,,,,
t

I Details of sale and monitoring packages that were sold during 2019 are below:

[*u, Number of Contracts sold On lJanuary2Ol9 200

hto On 1 July 2019 225

f., Revenue per Contract

Cumulative sales 425 contracts
BDT 17,450,000 (excluding VAT)
L:, Sale of Equipment stand-alone BDT 7,200,000
h,o Monitoring contract only BDT I1,250,000 for 5 Years

r'
lit u 2.
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.
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
l the current year.

During 2019, two of OSS investment properties changed their use. Property ABC, a commercial
warehouse that had been let on a cofllmercial 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 andBDT 370,000 on
; 31 December 2019. Company policy is to depreciate owner-occupied property at a rate of 2oh per
annum on a monthly basis.
V'
The secondproperty DEF was acquired in 2013 for BDT 500,000 and is valued at BDT 450,000 on
l** I January 2019.Inlate 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
finn 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 3 1 Decemb er 2019.

Ihe remaining investment property GHI is valued at BDT 750,000 at 31 December 2018 and BDT
frl5,(m at 31 December 2019.
-l- (h of OES divisions, located in Southem part of the country, lost a lucrative contract in 2019. As a
lEmh, a cnst savings plan was drawn up. The plan involves the loss of 25 jobs and was finalised in
omtcr2Ol9- It was published on the company website in early November.
LGrtf llecember, employees were called to a meeting to inform them of the situation. They were
frU fril fihe plan would be implemented over a l2-month period commencing in February 2020.
Emgloym could either leave the company on 1 February 2020 witha termination payment of BDT
40,fll0perme,mber or remain with the company for another 12 months to facilitate the orderly wind
down of fte business. If they choose the later, they will receive redundancy lump sum payments on
3l.January 2O2l of BDT 60,000 per employee. The terms and conditions of remaining siaffin this
division will also be affected by the- downturn. It is expected that salaries wi[ be cut by
20Toresulting 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.
{- The deferred taxation tiability 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
@reciation taxed at a rate of 12.5%.. ,

15 | Pagle
 Further differences between the carrying amounts and the tax base have now been identified as
follows:
Difference BDT'000 BDT'OOO

Permanent Difference 10

Taxable temporary timing differences 400

The corporation tax rate remained unchanged in20l9.

Requirement:
Prepare the Memorandums asked by CFO. 28

Memorandum - 1

To: CFO
From: Financial Controller
Re: Reasons for the introduction of IFRS15 Contracts for Revenuefrom customers.
IFRS15 was issued in 2015 and is applicable to reporting entities from lst January 2018. The standard
was developed in order to improve and enhance the reporting of revenue transactions in financial
statements. Former IFRS guidance on revenue recognition concentrated on the transfer of risks and
rewards in the recognitio, of ."rr"rrre while the new standard focuses on control. Revenue will now be
recognized by a vendor when or as control over the goods or services is transferred to the customer.
This forms one of a number of criteria that are assessed in deterrnining whether control has been
transferred.
Reasons for replacement of IAS18/11:
- Risk/return versus control. This is in line with Conceptual ftamework IASIS Lack of clarity on
multi-element salds.
- Difficulty in distinguishing'between'sales of goods/services IAS18 lack of problems in assessing
warranties
- IAS18 couldn't deal with complex transactions - BTINDLED TRANSACTIONS
- IAS18 Disclosures poor.
- The other significant difference between IFRS 15 and the former standard is that IFRS15 contains
significantly more prescriptive and precise requirements in comparison with existing IFRS. This
means that for many entities, the timing and profile of revenue recognition will change. In some
areas the changes will be very significant and will require careful planning, including for
commercial effects,
The full criteria for the transfer of control, is now commonly known as The Five Step Approach:

* Xre krogUo.E e.rtf far@ at :l?ryurcic

Include a brief explanatory note to each step.

15 lPage
 Step (1) Identify the contract
The contract should be clearly defined for both parties, the rights and payment terms should
be included,
the contract should have commercial substance and it should be probable that the consideration
will be
exchanged
Step (2) Identify Performance Obligations of the Contract
At the inception of the contract, the entity should assess the goods or services that have been promised to
the customer, and identi$ as a performance obligation:
. a good or service (orbundle ofgoods or services) that is distinct; or
o a series of distinct goods or services that are substantially the same and that have the same
pattem of transfer to the customer.

Step (3) Identify the Transaction Price

The transaction price is the amount of consideration to which an entity expects to be entifled in
crchange for hansferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (e.g., VAT). In determining the transaction price, consider the variable
mnsideration and constraining estimates, financing component in the contract, non-cash consideration.
fup {4) Allocate the transaction Price to the performance obligations
Done in proportion to their stand-alone selling prices. on a relative stand-alone selling price basis). The
stand- alone selling price for each performance obligation is the price at which ,o *irty would sell a
good or service on a stand-alone basis at contract inception

step (5) Recognise Revenue as Performance obligations are satisfied.

At a point in time or over time depending on the obligations.
ln many instances the form and trming of revenue recognition will not change from IAS18 but there are
puticular areas that require careful thought. These include:
11. Is Revenue recognised over time or a single point in time?
2 Does a contract contain one single performance obligation or is it a bundled contract consisting
of multiple obligations?
3- How should contracts with variable amounts be recognised
4- How should progress be recognised where contracts span a number of accounting periods.
homndum - 2
To: CTO
Erom: Financial Controller
Re: Annual Financial statements for the year to 3l December 2019

. l- Revenue OSS
illmitoring Service
Sfrm I - Identis contract.
r,mract is for sale of bundled conffact of equipment and monitoring services.
fitql 2 IdentiS Performance Obligations
Xbcmtract is a bundled contract. There are multiple performance obligations in the contract.
ffi &lc of Equipment (ii) Monitoring Services

17lPag'e
Step 3 Transaction Price

The transaction price for a bundted contract is BDT 17.45 Million.

Step 4 Allocate the transaction price to the Performance Obligations

the price that the
The bundle price is split in accordance with the stand alone selling price of each PO This
entity would sell the good or service or a stand alone basis.

(BDT'o0o)

Equipment 7,200
Monitoring 11.250 (5years)
18,450
Bundled transactions 17.450
Discount 1.000

Discount allocated between equipment and the servicing :

Allocation Discount (BDT'000) Net (gOt'OOO)

390 6,810
Equipment 7,200W 18,450K* 1,000K
610 10.460
Monitoring 1 1,250M 8,450K* 1,000K
r7.450

Step 5 Recognise revenue as PO is completed (BDT'oo0)

Equipment (BDT 6,810 K*425\ 2,894,250
Servicing:
Soldon 1'tJanuary2019 (200* 1 0,640k/60* 1 2mths) 425,600
Sold 1'tJuly2019 (225 * | 0,640kl60 * 6mths) 239.400
_____3J59250

AT the moment revenue is recognised on a straight tine basis over the period of the contract'
BDT'OOO
698,000
Sold 1st January 200*BDT 17,450k/ 5years
*6 months 392.625
Sold lst July 225*BDT 17,450 / 5years
1.090.625

LESS what has already

Journal required for Revenue that should be recognised this period BDT 3,559,250k
beenrecoglrisedBDT 1,090,625k. Correction of error to bring revenue in line with
IFRS5

(BDT'000) (BDT'000)
Receivables DR. 2,468,625
Revenue CR. 2,468,625

PriorYear adiustment
the cumulative effect of
Retain prior period figures as reported under the previous standards, recognising
applying IFIis 15 asin adjustrnent to the op"oiog balance of equity as at the date of initial application
(beginmng of current reporting period).
(BDT'000) (BDT'000)
Opening Retained Eamings DR. 5,000
Receivables CR. 5,ooo

18 lPage
 L Inveptment Properties OSS
ABC
IAS 40 for a transfet,fro- investnent property carried at fair value to owner-occupied property, the fair
v-alue at the change of use is
the'cost'of the property under its new classification JIAS +O.OO1 The'cost' is
fu depreciated in accordance with company rules.-
(BpT'000)
FairvalueABCat 1.1.19 400
FairvalueABCat 1.5.19 380
Change 20
Depreciatio n at2Yo for Smonths (380* 2o/o* 8 I 12) 5

(BDT'000)
PPE Dr. 380
Fair value adjustnent Dr. 20
Investment Property Cr. 400

Operating Expenses Dr. s.ol

PPE Cr. 5.07

Operating Expenses Dr. 4.93

PPE Cr. 4.93
(Impairment 380-5.07-370)

Thc frirvahrcat3lstDecember20lg is only relevant in terrns of an impairment review of OSS assets. As

fie prropcrty B @Wqred d cost rmder IASI6 rules, the fair value does not need to be disclosed.
i::
DEF '

DEF is held for sale at 31st December 2019. DEF contiues to be presented as an IAS40
investrnent property until it is disposed of (ie IFRS5 Non Cunent Assets held for sale and
discontinued activities does not apply)
([FRSs.5) (BDT'000)
FairvalueDEFat 1.1.19 450
Fair value DEF at 3 1 .12.19 440
Change 10

(BDT '000)
Operating Expenses Dr. 10
Inv. property Cr. l0
GtrI
is no change in use for GHI. GHI only needs to be restated to Fair Values at the year end.
I lilflG

(BDT'000)
FairvalueGHlat 1.1.19 750
Fairvalue GHI at3 I.l2.l9 92s
Change 175

19 lPage
 (BDT'000)
Inv. property Dr. 175
Operating expense Cr. t75

Changes to Financial Statements OSS (BDT'000)

Opuating Expenses Q0+5.07 +4.93+1 0- I 75) -13s(DECREASE)
PPE (380-s.07-4.93) 370 (TNCREASE)
rP (17s-10-400) -235(DECREASE)

3. Re-organisationlssue.

IAS37.71 a provision for restructuring costs is only recognised when the general recognition criteria for
provisions (legal or constructive) are recognised. OSS plan has been formalised and published at the
employees haie been notified before the yearend a constructive obligation exists at the yearend.
Therefore a provision should be created. UAS37.72l
The costs to be capitalised are the costs necessarily entailed by the restructuring and thos'e not associated with
ongoing activitiei [IAS37.73-80]. These include Redundancy costs and legal I administrative costs.
(Continuing staffsalary cost notpart ofplan. These relate to future conduct ofbusiness [IAS27.81]
Also note that only the basic redundancy cost per employee is included in provision BDT 40,000 per
employee. The exciss for those who stay on for another 12 months will be in lieu of work perforrned in2020.
These will be treated as short tennbenefits in2020121 financial statements.

Provision for 2019 financial statements:

AdminishationCosts BDT 65,000
Redundancy:
(25 employees by BDT 40k per employee) BpT 1.000.000
Provisionto be created BDT 1,065,000

Journal to incorporate the Provision.

(BDT'000) (BDT'000)
Debit operating expenses 1,065
Credit Provisions 1,065

4. DefenedToxationoSS BDT 'OOO

Permanentdifferences 10 None. Permanentdifferenceswillnotreverse nlacapitalall owances>

bookdepreciation 400 Lowerta:rbase. Actualratetemporarily less than effective rate.
Willreserve Difference to income statement
(ti'mingdifference)[IAS12.17] 50

(BDT'000) (BDT'000)
Debit Tax expenses 50
Cledit Defened Tax Liability 50

20 lPage
 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 t6) which to be implernented
from January 01, 2019. The article was written with too jargon to understand. I only came to lmow
that current classification of operating and finance lease for lessee will no longer exist in new
standard; rather all leases are to be treated asfinance lease. I am worried aboutihts 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 chaiges anld
possible impact on our financials? I want you to cover the
foilowing 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:

Amual rental payments are BDT 100 million, all payable in arrears (at the end of year). As per
, , W*ommendation, we use discount rate of l0%. The lease term is 5 years.

t$* getting your note, I witt discuss it with Board of Directors about the possible impact on
Financ ial St atem ent s. "

Roqrirement:
Prcpue the briefng note for the CEO.
15

flfus Note:

IAS 17 classified a lease as a finance lease and reported on a company's balance sheet only when
a lease
xas detennined to be economically similar to purchasing the undeilying asset. All other leases
were
chsified as operating leases and not reported oo u balancl sheet. Accounting for operating
' lHc as per IAS 17 allows Companies to show lease "o-purry's
assei and liability as off-balance sheet item and thus
rdcrstatement of lease asset and obligation.
Thc absence of information about leases on the balance sheet meant that investors
and analysts did not
ht a complete picture of the financial position of a company, and were unable to propeily compare
lWies that borrow to buy assets with those that lease assets, without making adjustments.
fio ddness this issue and to prohibit Companies to take advantage.of off-balance sheet financing,
Errfirm need to change the current method'oiaccounting for leases. t

21 lPac"e
Maior chanses in IFRS L6 and Impact on Financial Statements

As per IAS 17, at the date of commencement of lease, the lessee has to classifu it either operating or
finance lease. Under IFRD 16, no such classification is needed. IFRS 16 introduces a single mode of
accounting for lessee. Applying that model, a lessee is required to recognize

o Assets and liabilities for all leases with a term of more than 12 months, unless the under$ing asset
is of low value; and
o Depreciation of lease assets separately from interest on lease liabilities in the statement of
comprehensive income.

IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor
continues to classiff its leases as operating leases or finance leases, and to account for those two types of
leases differently.

The most significant effect of the new requirements in IFRS 16 on statement of financial position will be
an increase in lease assets and financial liabilities.

In the statement of comprehensive income, depreciation expense and interest expense will be increased
for all leases under IFRS 16.

No impact on statement of cash flows as change of accounting policy does not have any impact on cash
flows.

Illustration of application of IFRS 16

IAS 17
The lease can be classifies as operating lease and at the commencement date of lease, nothing is to be
done. At the end of each year, rental expenses of BDT 100 million will be recognized as expenses in
statement of comprehensive income, ..-

IF'RS 16
We need to recognize right to use asset in the amount equal to the lease liability. The lease liability is
calculated at present value of lease payrnents over the lease termwhich is BDT 379,078,677.

Accounting entry is then

. Debit Right-of-use asset: 8DT379,078,677

. Credit Lease Liability: 8DT379,078,677

Suhsequently, when we make a payment at the end of reporting period, we need to:

Recognize depreciation of the right-of-use asset over the lease term, in this case BDT 75,815,735
per year (based on straight-line depreciation);
Recognize interest expense as a result of unwinding of discount rate. It will decrease gradually year
by year. Below table summarizes the interest expense in each year.

22 lPage
 Opening Lease Closing Lease
Year Interest @10% Lease Payment
Liability Liability
1 379,079,677 37,907,969 100,000,000 3r6,996,545
2 316,996,545 31,698,654 100,000,000 248,695,199
J 248,695,199 24,969,520 100,000,000 173,553,719
4 173,553,719 17,355,372 100,000,000 90,909,091
5 909.091 g,0g0,g0g 100

If we summarize the impact on profit or loss under both method, we can see that the impact is same over
5 year period under both method. However, IFRS 16 recognizes more expenses in earlier periods of lease
in form of interest expense and depreciation than IAS 17. Below table illustrates this:

IAS 17 IT'RS 16
Year
Lease expense Depreciation Interest Expense TOTAL Expense
I 100,000,000 75,815,735 37,907,869 113,723,603
2 100,000,000 75,8I5,735 31,699,654 107,514,390
3 100,000,000 75,815,735 24,969,520 100,694,255
4 100,000,000 75,815,735 17,355,372 93,171,r07
5 100,000,000 75,815,735 9,090,909 84.906.644
500.000.000 379,078,677 120,921,323 s00.000.000

uder IFRS 16, we show more assets on the balance sheet, but also more debt or liabilities
$smt in IAS 17. Thus IFRS 16 eliminates off-balance sheet financing.
be
in

23 lPag.e
 STRATEGIC BUSINESS MANAGEMENT

shoe manufacturers whose

The footwear industry is growing fast in Bangladesh. In addition to dedicated
sole business are footwe ar, mafiy new players are entering into the
sector looking at its export prospects

and its dependent on large pool of cheap workers similar to RMG.

As of now it has many players
representatives, producing a
including artisanal shoemakers, local and foreign manufacturers, with local
headway in the local market'
wide range of footwear. In Bangladesh, the footwear indus@ is making
Manufacturing Company
with most of the shoes being produced in and around Dhaka. The Dhaka Shoe
Bangladesh, as well as some private
focuses on making footwear for almost all the security agencies in
and small startup companies
security companies. The local market is also filled with individual artisans
bazar. The other regions in
who make footwear for sale in the country located mostly in Dhaka's Rayer
a few individuals who are into
the country such as the Chittagong and the Northern Region also have
is of superior quality and
footwear manufacturing but on a smaller scale. Foreign produced footwear
is projected to have high
ataadskimming pricing compared to the locally produced ones. The sector
with most of its forecasted sales to emanate from low income seglnent with
marginal
growth potential
The growth, among other things,
and flat growth from middle and high-income segments respectively.
to be sourced from
will be fueled by the government's free school uniform policy which is expected
or American brands' The luxury
local manufacturers. tn Bangladesh, luxury shoes are usually European
footwear production in Bangladesh is still a virgin market with a
lot of potential once people start to
the average, it takes three to five years
believe in the high qualrty these Bangladeshi brands can offer. on
down average fixed cost and
for local manufacturers to ramp up production significant enough to drive
accessing the major wholesale
attainttilization of full capacity due to intense competition and difficulty
a good number of local manufacturers sign
and retail outlets trading in footwear. The foreign as well as
major urban centers for exclusive rights to sell
5 to 10 years contract witn major outlets in the entire
customer orders' ln the Footwear
their footwear. The artisanal shoemakers generally produce based on
The key customefs of foreign and
industry, customers easily source from many available alternatives.
are emerging online shops
local manufacturers are the various wholesale and retail outlets. There
including footwear
providing information on prices of goods and services from different manufacturers
The profit margins for the outlets are
free of charge and consumers can easily access that information.
manufacturing companies by
generally low. There have been recent acquisitions of some local footwear
some major wholesale and retail distributors in Bangladesh and
the experts are predicting more of such
transactions. In Bangladesh, there is a cartel of few major importers,
controlling approximately 90o/o of
t i*t n"rfir, natural and synthetic leather market, from whom
many local manufacturers and artisanal
shoemakers procure their raw materials. These importers source
their supplies largely from China and
Europe which compares favorably, in terms of quality and
price, to those available in neighboring
produced with inputs from China and
countries. A recent consumer survey indicates that footwear
conditions locally hence
Europe are durable, of good quality and able to stand high temperature
consumers preference.
bachelor's degree in Fine
Mark Footwear Ltd (MFL) was founded by Amin Ali, who graduated with
the company, Amin met one of his
Arts, from a public university in Bangladesh' Prior to starting

24 lPage
 schoolmates, who owned a business that speci alized in traditional handicrafts including footwear. He
was able to convince him to join MFL. The schoolmate's hands-on experience coupled with Amin,s
competence in drawing and designing will be complementary and indispensable to gaimng competitive
edge. The initial capital for the company was raised from personal savings and severance package
received by Amin from his fomter employment. He was able to acquire requisite tools and machines for
the production of footwear. Based on the determination and ambition of the founder, MFL outpoured its
first production line with four different products including shoes and sandals for men, women, children
as well as boots for security personnel. The products were well received by the public. The company
continued production but it could hardly produce the quantity required by its retailers due to inadequate
funding. Amin, therefore, approached some banks for credit facility but due to lack of credit history he
was unsuccessful. Amin Ali decided to turn to his friend, Sanwar Ali, who lived in Germany and had
earlier expressed interest in investing in the business. Sanwar provided the business with substantial
amount of cash. The capital injection was used to buy more tools and machines in a bid to significantly
utromate the production process. Additional hands were engaged bringing the total number of
ermFloyees to 100. Currently, the company produces on the average 2,200 pair of shoes per month. The
mrin raw materials for footwear, including natural and synthetic leather, synthetic sole and adhesive,
are
:flfrrced from local importers. MFL is contemplating diversifting its raw materials. The shoes produced
ftf tre company are largely distributed through major retail shops dotted across major urban centers
frfolce MFL does not have the required resources to open its own sales outlets. The company also does
direct sales to students on campuses of some tertiary institutions in the country. On strategic approach,
,.f,min believes the company should continue to exclusively rely on engagement of experienced hands
h be industry and should waste no time in formalizing and documenting the company's strategy.
lfiFrAIi also believes that the company should institutionalize a strategic approach that should focus
l[ &G ffide$/ process, financial planning and forecasting as well as sources of finances. Financial
and Plming and forecasting MFL has the potential ef foss6ming a leading producer of footwear in the
hgladesh market. It is however faced with liquidity challenges. The management of MFL has decided
srgn b prepare a six-month budget in order to better manage its tiquidity needs and avoid any shortages
sell arpccially infte lightof limited aocess to bank credit.

tLencial data
and
mL has planned production and sales for the next nine months as follows:

are m April May June July Aug Sept Oct Nov Dec
by
Ittoftction (units) 700 800 1000 t200 t200 1400 1500 1500 1500
such
of
nal kfoU fre period, the business plans to advertise so as to achieve the projected sales. payments for
and
*lil*ng of BDT 12,000,000 and BDT 18,000,000 will be made in June and Septernber respectively.
llh rctring price per unit will be BDT 120 throughout the period. 40% of sales are normally made on
and ffi mds' credit. The other 600/o are settled within the month of the sale. Raw materials used for the
hence
hmr trill be held for one month before they are taken into production. Purchases of raw materials
f,tcm me month's credit. The cost of raw materials is BDT 60 per unit of production. Other direct
Fine lHf*m &lpenses, including labour, are BDT 25 perunit. These will be paid in the month incurred.
of his ffiFroercdon overheads, which during the period to 30 May had run at BDT 21,600,000 a month,
25 lPag.e

','.]
 1 June to 30 September' These are expected
are expected to rise to BDT 24,000,000 each month from
to remain at that level for the foreseeable
to rise again from 1 october to BDT 28,800,000 a month and
each month for depreciation' overheads are
future. These overheads include a steady BDT 4,800,000
per cent in the following month' To help
planned to be paid 80% in the month of productionand20
plant will be bought and delivered in July' The
meet the planned increased production, a new item of
cost of this item is BDT 79,200,000; the contract with
the supplier will speciff that this will be paid in
Raw materials inventories are planned to
three equal installments in August, September and october.
same day is planned to be BDT 89'000'000'
be 1,000 units on 1 June. The balance at the bank on the
The company eams 5olo interest on the closing balance
which is paid in the following month'

Rcquirements:
6
(a) Analyzethe strengths and weakness of MFL'
6
(b) Prepare a report to the Director of MFL on the process of strategic management'
data of MFL'
(c) prepare a cash budget for the six months ending 30 November based on the financial
t
Show all workings.
(d) Recommend to the Directors of MFL strategies for overcoming
the liquidity crisis. (

capital'
(e) Advise the directors of MFL methods of raising long term

a) Assessing the strengths and weaknesses of MFL'

STRENGTIIS
o The school mate's hands on experience coupled with
Amin's competence in drawing and
gaining competitive advantage' They are
designing are complementary and indispensuut" to
believes the company should
highly ski11e4 u-bitio* and have a passion for thcjob. 1.-
from the industry'
continue to exclusively rely on etrgpge,m€nt of experiencedhands
themselves to their tasks to
o The small size of the workforce allows them to fully dedicate
produce high qualrtY Products
industry' The footwear making
o Few competitors in the Bangladesh Luxury shoe making
mainly from Dhaka who produce semi
industry in Bangladesh has un irflo, of local artisans
to MFL' They therefore do not pose
and low qrutiry"rrro"s at very low prices as compared
target market of affluent and well off
much threat to MFL taking into consideration the
customers who are willing to spend more than most'

o in Bangladesh' They do
MFL has strong tertiary presence as compared to its competitors
helps the company to promote their brand'
directs sales to students on campuses and this also

WEAKNESSES
sourced from abroad due to
o The raw materials used to produce MFL',s products are to
country. This serves as extra cost for the company due
unavailability of such qualrty in the
import,handlinganostrippingchargesplusextrachargefromlocalimporters.
olnadequatefrrndingandlackofaccesstofundingfromfihancialinstitutionsduetolackof
credit history

25lPage
 Inadequate resources to open its own sales outlets as the shoes produced
are largely
distributed through major retail shops dotted across the country. This could result in price
differentials among the various retail shops.

Not a skong brand intemationally as compared to international competitors. The brand is not
well known amongst the affluent masses in foreign countries as its advertisement does not
reach those boundaries.

b) REPORT ON THE PROCESS OF STRSTEGIC MANAGEMENT

Introduction
- The strategic management process means defining the organization's strategy. It is also defined as
6
the process by which managers make a choice of a set of strategies for the organization that will
6 enable it to achieve better performance. Strategic management is a continuous process that
ryrraises the business and industries in which the organization is involved; appraises its
8 qetitors; and fixes goals to meet all the present and future competitor's and thbn r"ass"sse, each
0nategy.
6

4
ert€dc Management process
Shategic management process has following four steps:

r Environmental Scanning- Environmental scanning refers to a process of collecting,

scrutinizing and providing information for strategic pu{poses. It helps in analyzing the
fuErnal and external factors influencing an organization. After executing the environmental
mhtsis process, management should evaluate it on a continuous basis and strive to improve
'li, r.
and
are
r Strategl Formulation- Strategy formulation is the process of deciding best course of action
ruld
for accomplishing organizational objectives and hence achieving organi zational purpose.
Aftsr conducting environment scanning, managers formulate coryorate, business aad
ryq"strarqgies.
o Srategy InelE@€nffion- Strategy implementation implies making the strategy work as
intended'ot ptit@ fte organization's chosen strategy into action. Strategy impiementation
includes designing the organization's structure, dishibuting resources, developing
decision
making process, and managing human resources.

Strategy Evaluation- Strategy evaluation is the final step of strategy management process.
'
The key strategy evaluation activities are: appraising internal and external factors
that are the
root of present strategies, measuring performance, and taking remedial / corrective
actions.
Evaluation makes sure that the organizational strategy as well as its implementation
meets the
- organizationalobjectives
lErrdusion
These components are steps tbat are carried, in chronological order, when
due to creating a new strategic
mrenagernent plan. FVL that is in the process
due to of institutionalizing a strategic approach will revert to
the steps as per the situation's requirernent, so as to make essential changes.- -

27lPag'e
 c) Cash budget for the six-month period

Cash Budget

July Aus Sept Oct Nov

INFLOWS . -
Trrne
48,000 57,600 62,400
40% of sales revenue ot 2 33,600 38,400 38,400
nrevious months 115.200
72.000 86,400 93,600 100.800
60% cash revenue 57,600
qnr:e 4.450 3.447 3.079 2,093 t47
-f
^r^-aal ^- LonL lrol t77,600
.T'l.\'r,AT IITET r.l\l/S tr3,847 127,879 t43"693 158.547
95.6s0
UU ITLU\ryD 90.000
60,000 72.000 72.000 84.000 90,000
raYaDres 37.500 37.500
2s.000 30.000 30.000 35,000
Direct costs
l-.^*:.: 12.000 18.000
15,360 15,360 19.200 19.200
^^a ono/- 15.360 15.360
3,840 3.840 3.840 4.800
A ano/. 3.360 3.840
26-400 26.400 26,400
l\ew Dtant 176.940 r51.500
MNrAT NTT'FETn\I/Q 115,720 121.200 147.600 182.600
.l \.' (18.393)
o0.070) (7,354)
/19.721) ri8 907) 26.100
NET CASH ILUW 29.48 (s-445\
:-^ Et^l 89.000 68.930 6t,577 41.855
41,855 2.948 (1s.445) 10.655
t1 68"930 61.577
*f Closine Balance
!r

li liquidity crisis of MFL

I d) Strategies for overcoming the
to bill its customers in a timely fashion
and
o Directing MFL',S accounts receivable department unpaid invoices
they become Past due, Money tied up in
t;
chase 4ny unpaid invoices as Soon as
cancauseMFLcompanyseriousriq*aityproblems.TheDirectorsshouldconsideroffering
itscustomersadiscountforsettlingtheirbillsearly.
. savings' Studying all areas of MFL',s business
Analyzing MFL',s overhead and look for cost
and free up funds to bolster its firm's
liquidity'
to see where you can save money
been
o Selling off inventory and assets that are
tying up MFI' company's cash' Stock that's
it the firm money' Discount any inventory
sitting in MFL storeroom for six months "otti"g
back into MFL business' Sell assets it
rarely
thafs proving hard to shift to get cash flowing
use
MFL bank or other lenders' MFL bank might
be
o Discussing short-term funding options with
liquidity problems' If MFL bank is
willing to extend MFL credit line to help it overcome_ to an investor
unable to herp, approach other t.ooo,
or sell some of the equity in MFL firm
to overcome MFL cash flow Problems'
or
o Ask for longer period to settle MFL invoices
Negotiating new terms with MFL suppliers. a good
discuss the possibihty of taking stock
on a sale-or-retum basis' If MFL have been
especially if any
customer i, tt a gooa chance it can come to an arrangement'
"-purt,'there's you're able to buy.
new deal boosts itre amourrt of goods or services

MethodswhichtheDirectorsofMFLcanusetoraiselongtermcapital
I
o Issue of shares: Involve the public issue
of equity and prdference shares in the Dhaka
.^l hr
ffi;;;^ilr"*-shares is the most .o*o,
method of raising long-term capital

28 lPage
 there are various many investors who are ready to invest in the capital market. Therefore,
shares are used to finance projects having long gestation period.

Issue of Debentures: Involve the collection of funds by issuing debentures. When MFL issues
debentures, it needs to pay a fixed rate ofinterest to debenture holders.

Term Loans: Refers to the funds that are raised from financial institutions for financing long-
term projects. The rate of interest on term loans is higher than the rate of interest on
debentures.

o Fund from Operations: Refers to the fund raised by the MFL's own operations. It is the
accumulated profit of MFL; therefore, can be used to finance various short-term and long-
term projects.

r Sale of Fixed Assets: Helps in generating funds by selling fixed assets, such as land,
buildings, plants, and machineries to finance short-term and long-term projects. However, the
usage of this method may hamper the goodwill and creditworthiness of MFL.

Itn nmt Ltd (BBA Ltd) is a listed company. It has been given a substantial fine by the Bangladesh
h fur serious breaches of the banking regulations and, in the same month, the bank reported that it
lht ffi large losses because of unauthorized dealings in financial derivatives by a manager in its
ffif 0eprment. The company's reported profits for ths previous financial year were over-stated
i*F d thcsp losses. The chairman of the audit commiuie of BBA Ltd has resigned, accepting
tilffimffif fu frilures by the committee. A newly-appointed director has been made chairman of the
He has called a meeting with you the CFO. The purpose of the meeting is to review
mHfriltg and internal control, with a view to making recommendations to the board. BBA Ltd
d hue a stong intemal audit function and the company has been using the same firm of external
ffis shce it acquired its listing 8 years ago.

]};:hcmcrts:
frS Erplain thc role md respmsibilities of the audit committee of BBA Ltd with regards to:
il The external mdit oftte company's financial statements; and 4
ilI The internal control system and internal audit function 4
it rarely hrdation to the possible failures in internal controls that have occurred, suggest the changes that
righ be recommended to the board at the next board meeting. 7
isht be
bank is
investor
il'Rol€ of the audit committee in relation to the external audit of the financial statements
o The audit committee should monitor the integrity of the company's financial statements. This
a good means that the audit commiffee has responsibilities regarding the extemal audit.

o The committee, in consultation with the auditors, review the findings of the audit. At the end
of the audit cycle it should assdss the effectiveness of the audit. This assessment should
imhde considering the way in which they have treated key accounting judgments and also
ohining feedback about their conduct from people within the dompany such as the finance
because
, &ctm.

29 lPaSe
 o The audit commifiee should make recommendations to the board in relation to the
appointment, re-appointrnent or removal of the company's external auditors, whose annual
appointment is put to the shareholders for approval in general meeting of the company. The
committee should also approve the remuneration and terms of engagement of the external
auditors that have been negotiated with the auditors by management.

o The audit committee should also review and monitor the independence of the extemal
auditors, and the objectivity and effectiveness of the audit process. Regarding auditor
independence, the committee should also develop and implement the company's policy on
using the extemal audit firm for non-audit work, consistent with the ethical guidelines of the
auditing profession.
o The audit committee should review the reasons why the fraud by the employee in the treasury
department was not identified, and whether the external auditors may have been at fault in
any way in failing to identiff the problem. Although the auditors do not have responsibility
for preventing and detecting fraud, they might be expected to identiff an$ report suspicions
of fraud that are uncovered during *re audit.
ii) Internal control system and internal audit function
The audit committee should review the company's interral financial controls and, unless
addressed by the board as a whole or by another board risk committee consisting of
independent directors, it should also review the company's internal conffol system.

If the company does not have an internal audit function or a weak internal audit function, the
audit committee should consider each year whether there is a need for such a function and
make a recommendation to the board. The reasons for not having an internal audit function
should also be explained in the report of the audit committee to the shareholders in the annud
report.

The audit committee should also review the adequacy of the whistle-blowing arangementS in
the company.

b)
ll
o BBA Bank Ltd has experienced some events that could be atfibutable to weak internal
controls. The fine for breach of environmental regulations may be due to failure by company
employees to apply appropriate procedures, or there may be inadequate procedures within the
company to ensure compliance with the regulations. Management should maintain a
proactive approach to identiffing vulnerabilities unique to their organization and implement
effective and efficient internal controls to help prevent serious breaches of the banking
I

regulations.
i
o The fraud by the employee may have been made possible by lax financial controls, and
possibly also inadequate whistle-blowing procedures that encourage employees to report
suspicions of wrongdoing in confidence. There should be separation of duties involving the
custody ofassets, authorization oftransactions affecting those assets and recording/reporting
of related transactions. The underlying theory of separation of duties is that a single employee
should not be in a position to both commit and then conceal fraudulent activities.

30 lPage

t
I

I
I

[m tte The adequacy of the bank's internal controls should therefore be reviewed as a matter of
some urgency. It is possible that the audit committee has failed in its responsibilities in this
lmnual
ly.Th. respect, but the board may be prepared to allow the new chairman of the audit committee to
hternal lead the investigation.

t
The investigation should be conducted by individuals who are independent of operational
management. The audit committee should also be asked to review, in the light of any failings
[t"-a in internal control, whether the company should establish an internal audit function.
prditor
F"y on
or tne
I
Ilt glass industry in Bangladesh supplies glass to the developers and other household suppliers. There
[o,,o
pmtt
me five major glass manufacturing entities, each with market coverage of between 5o/o and 40%. Quesh
ln lrul b a listed company and a major player in the glass industry. It has a market share approximately
liuitity ffi!}h. h is an old, well established entity with a number of factories used to manufacture glass both locally
picloot rd *rmd It has a stable but unexciting growth rate of 3%o per anmrm and is..facing increasing
qaltion from new glass manufacturing entities setting up in its key markets. However, Quesh's high
I
mrtF kvels of earlier years have resulted in relatively low levels of debt.
[*t"r. Xh rcad office building of Quesh is in the far north of the country in a remote geographical area. It is a
mq*lenable distance from the capital city and major centers of population in the south of the country.
F*"t
I
lf,Le buitding is much larger than the entity requires and several floors are unoccupied. The management
]m oftrs company is highly experienced; the majority of the senior managers have worked for Quesh
hon. the
lhlft rhnle of their working lives. The computer systems of.the company were written especially for
[oo-ano hare in need of replacement in favour of something more flexible and adaptable to changing
lfunction
Mm-
&ihitl l-td with a market share of 10%. is a comparatively new and small but fast growing unquoted
I hm\'-owned entity. It specializes in certain niche markets for high security and extra heat-resistant glass.
tsents m Ile patents for this specialist glass were developed by the founder owner who now acts as Managihg
I
l[fimton. The development of the business has largely been funded by high levels of borrowings at rates
t
I diiErest well above standard market rates. In addition, the directors have often been required to provide
l flffil guarantees against personal assets. The management team of the company works in Dhaka. The
i. internal
1m[ry" has a manufacturing base on the outskirts of the capital city. The management team of the
btnputty
hthln the
iffin5r is enthusiastic to grow the business but is continually frustrated by a lack of financial and
lh lunurces and marketing network that would enable the companyto expand into intemational
lintain a
ffi. Also, on a personal level, many of the senior managers own a substantial number of shares in the
Ilement
] banting
F omFser systems of the company consist of a basic accounting package and an internal network of PCs.

uoa
f,ot, 1&frmctors of Quesh Ltd. have approached the directors of Zahidl-td. with a view
[to report to making a takeover
[hing the
lH h Zahid Ltd. A condition of the bid would be the retention of the current management team of Zahid,
preporting ILlil- Tho have vital knowledge of the specialist manufacturing techniques required to manufacture the
f cmployee ntr rmge of Zahid Ltd. The directors of Zahid Ltd. have been initially quite positive about the bid.
I
i
I
lmFrtLr are concerned that the deal may be referred to Competition.Commission, which regulates the
I
ffirtes mmpetition policy. For approval and that conditions *ay t" ir4posed that could make the
i trmrrkss attractive.
h
I
t

31 lPagie
i-
i
i
i
I
Requirements:
(a) Advise the directors of Quesh Ltd. and Zahid Ltd. on the potential problems of merging the
management structure and systems of the two entities and how these could be minimized; 5

(b) Discuss whether the choice of capital structure for the new combined entity is likely to affect the
overall value of the entity. Include references to Modigliani and Miller's theory of capital structure
in vn,rr errslrlef 5

a) i) The Competition Commission is a govemment-run or funded body which aims to protect

- competition within the local marketplace. Its'brief will vary from country to country, but a
Competition Commission should consider the following issues:
o Whether a merger or acquisition is in the public interest. For example, there may be a policy
to prevent all reservoirs being under one body for security reasons;

Whether there would be substantial lessening of competition, leadinj to the risk of price
settrng and less competitive pricing so that the consumer is forced to pay an inflated price for
goods or services;

The ability to measure whether competition is still operating and prices set fairly after the
merger has taken place, For example, for public utilities, there needs to be a sufficiently large
number of utility entities to enable the regulator to compare prices with other entities in the
same market.

ii) Potential problems in merging the management structures and how to minimizc them
Potential problems that could be raised include the following:

The importance of retaining the current management team- This is key to the success of the
merger and plans to develop the business of Zahid Ltd.:

Different locations (opposing ends of the country);

. Spare capacity in the office building in the north of the country, but the management team of
Zahid1,td. may well not be willing to move out of the capital. On the other hand, moving the
management of Quesh Ltd. down to the capital would result in an expensive empty offrce
block in the north that may stand empty and cost aside, there may not be a suitable office
building to house the combined entity in or near to the capital city.
Possible solutions:

Offer the current management team an attractive salary package;

Obtain guarantees backed by financial incentives for management to stay with the business;

o Determine which key employees and managers are willing to relocate and which operations
need to be centralized and then identifies the lowest cost solution

32 lPage
 rldential problems in merging the systems and how to minimize them

the lotential problems include:

5
o Completely different type of systems at present: PC network for Zaltrd Ltd. and bespoke
the system for Quesh Ltd. It is unlikely that Quesh Ltd. could operate on a network of PCs and
the transition would, in any case, be very problematic. On the other hand, it is unlikely that
the different nature of the business of Zahid Ltd. would fit well into the bespoke system that
Quesh Ltd. operates.

sofution:

o The management may need to agree to run the systems independently and build an effective
interface.

M & M, capital structure is irrelevant if you ignore taxes. However, if tax is included, debt
cheaper because of the tax shield and the value of the entity therefore increases as the
of debt increases. After a certain point, the entity reaches its debt capacity. That is, tle
of debt at which there is a high risk of financial disffess and both lenders and shareholders
increased retums to compensate for the higher levels of risk.

&e information provided in the question, it would appear that Quesh Ltd. is currently
ing at levels well below its debt capacity and would therefore increase the value of the entity
on a higher proportion ofdebt.

7-ahid Ltd. could well be borrowing in excess of its debt capacity and so its value would
by reducing the proportion of debt on its statement of financial position.

Eb lherefore-highlv likely that both entities would benefit from the improved capital structure that
mld result from a merger or takeover if Quesh Ltd. were to fund the takeover of Zahidl,td. usigg
r,ffit orwcrr to acquire T,arhidl-td together qrith its
high levels of debt.

of
the of Bangladesh has enacted Financial Reporting Act (FRA) 2015 in September 2015.
office
office
I Accountants". In recent time, professional accountants face many threats in the
oftheir duties that may negatively affect accountants' objectivity and independence. One of
i* is intimidation threat which may arise from close business relationslips, family and
rddionships, and assurance staffmembers moving to employment with client as well as actual
Exaed litigation. Section 48 and 50 of FRA 2015 empoweied Financial Reporting Council
fucd under FRA 2015, to penalize auditors and accounts for non-compliance of IFRS and
frimrcdby FRC and any otherrelevant laws of the land.

*guards you will consider to deal with actual and threatened litigation as a professional
5

33 lPage
B!
li

Hall Co. has just acquired a subsidiary called W as part of a larger acquisition. Hall Co. has no other
subsidiaries in the same business sector as W, so management are considering disposing of W. A small
listed company called B, whoge core business is similar to W, has been identified, and by using all
published and any other information reasonably available, the following analysis has been prepared:
WB
Return on Capital Employed (ROCE) t4.9% 25.0%
Asset turnover 1.3 times 1.8 times

Net profit margin tt.s% 13.9%

Curent ratio 1.5 times 2.2times
Inventory holding period 68 days 57 days
Receivables collection period 54 days 43 days
Payables payment period 49 days 37 days
Other key Information:
a B has a Price Earnings Ratio @/E) ratio of 18 times.
W made an operating profit of Tk. 860,000 last year.
a W has total non-current assets of Tk.4.87m, out of which land and buildings
comprise Tk.Z.54m.Its net assets at book value areTk.5.11m.
The tax rate is 35%io.

Requirement:
As the Financial Consultant of Hall Co., prepare a report to the directors in which you analyze the
performance of W compared with B; and recommend a price which Hall Co. ought to seek for the
disposal of W. 10

The following safeguards could be considered:

o Disclosure to audit committee- disclosing to the audit committee the nature and extent of the
litigation
o Exclusion from audit team - removing specific affected individuals from the engagement team
o Additional reviewer - involving an additional professional accountant on the team to review work
o Resignationfrom engagement - if the litigation is at all serious, it may be necessary to resign from
. the engagement, as the threat to independence is so great.
o Quality Assurance board within the firm or organization- form ateamwithin the functions of
reviewing the work independently.

I
a

i
i
i
i;
li
t.
I
I

t,
Ir
t;
ii 34 lPage
tl
I

T
 neport to the directors of Hall Co.
Rctum on capital employed (ROCE)
*OCE of W seems to be inadequate mainly due to a low rate of asset turnover, which we must carefully
Lrcstigate.
ffe know that land and buildings account for Tk.2.5m of Ws' fixed asset total of Tk.4.87m and it is
fllportant to establish how much of this properly value represents redundant assets. As to plant and
dinery, it may be that this is substantially new or revalued, in which case the assets may be of good
ffie and the faults may lie mainly in under-capacity working or production inefficiencies. Much more
itstions, however, would be a situation where the plant is old and requiring heavy maintenance, and would
"
lGHputto cope with increasedvolume of throughput.
first of these plant scenarios is correct, then W may well fetch a reasonable price, as a bidder,
B themselves, would be obtaining good assets to add to their own evidently successful
in their sector. If the second scenario applies, then we might find it diffrcult to obtain net
for the assets remaining after sale of the redundant properties.
Rrtio
ratio and inventory holding period are fairly good, but before we put the unit up for sale, we
i:pove our prospects for a reasonable price by taking early action in regard to both receivables
Both are too high and we should aim to tiglten up credit control and also bring payables
mE acceptable level which B's payables payment period indicates is appropriate for the
the
the
10 ftd we can find that, say, Tk.1.5m of land and buildings are redundant and can be separately
rhd fte plant scenario is favourable or can be made so, then it would not seem to be too difficult
remind€r of W a saleable proposition.
can assd$*r"{ftt d& ffiEmest, and taxation of 33Yo, then after- tax profits could be Tk.576,000
Dx 0.67), aad'#iBt'brtrent PIE is 18, we might achieve for W a PIE of 9 or 10 which
npice of between Tk.5.2 and Tk.5.8m, which is comfortably above an asset value of Tk.4.3m
Ik l.5m assets sold).

work
lutrld 160 million people in Bangladesh of which only 13 percent have bank accounts whereas
from fl)percent are mobile phone users. Banks can now offer the banking services to both the rural
t md the population (without banking transaction) through inobile phones. The government of
hes been concerned with low savings culture, low financial inclusion as well as high cash-
@ in the county. In the year 2011, the government decided to pursue policies to grow the
industry (FSI) since it was indispensable to the accelerated economic growth required to
middle income country.

EnEgtty high cost of credit in the'country as the banks complain of difficulty in mobilizing
,,ffineAesU is said to have one of the highest lending rates to the world, placing second in the
rcbased by Trading Economics, a development which has bee4 identified as a disincentive
Gomunity. The govenrment budget deficit as a percentage of Domestic Product (GDP)

35 lPage
 decreased remarkably. In the past, the government relied on external capital markets to fund the budget
deficits but, following the worsening deficit figures, international financial organizations have raised
concerns about the need for the governmont to ensure fiscal discipline.
The major development that revolutionized the FSI launched mobile money solution in 2011 by a bank.
Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile networks
operators. This allows mobile money to be operated from wherever there is network coverage. It is
estimated that there is 95o/o mobile network coverage in Bangladesh.
The Mobile Network Operators (MNOs) deliver mobile financial services largely through thousands of
registered mobile money agents throughout the country. This effectively makes agents closer to the
customers than traditional banks. Most of the traditional banks' branch networks are concentrated in the
urban centers to the exclusion of pre-urban and rura1 communities. The combination of these two factors
enables mobile money services to be administered quickly and efficiently, and in the most remote areas.
The capital requirement for regishation as mobile money agent is Nil and the daily transaction limit is
currently varies at Tk. 50,000. On the average, agents operate one network's mobile money, while very
few agents have signed up to two or more different mobile money solutions. The t6tal number of agents
has increased from about 400,000 in 2014 to 817,000 lrn2019.

The Environment

Mobile money started in the country largely with two products - airtime purchases and domestic
remittances for small amounts. With the passage of time, mobile money service offerings have expanded
to include bill payments, Point of Sales (POS) payments, fund fransfers in increasingly larger amounts,
and deposit collection by banks and non-bank financial institutions. The expansion of the product
offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the
country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using
the expanding offerings from mobile money at the expense of existing products from the banks. There is
growing mobile phone penetration rate as increasing ntrmber of mobile phone users are subscribing to
more than one mobile network.

Furthermore, mobile money has become very popular among middle and lower income earners who make
i up about 80% of the population. The operation of mobile money on the handset is very easy and
convenient and can be done from the comfort of one's location. All that prospective mobile money
customers require are a registered SIM card on the network of choice and a valid national ID. With
these

they can be set up and ready.to use their mobile wallets within minutes. The processes for setting up and
using bank accounts are however more complex due to stricter Know Your Customer (KYC) requirement
ll by the Central Bank. Remittances through mobile money are instant at a fee of I%o of amount remitted or
received. Mobile money transactions in Bangladesh reached Tk. 1000 million by the end of June 2019,
accgrding to the central bank's payment Systems and it is expected to hit Tk. 350 billion by the close of
z1z1.Unttlvery recently, the income from mobile money was not taxed but the Minister of Finance in his
2017 mid-year review hinted of plans to impose a tax on the fees from mobile money operations.
[|
The mobile money operations face the issue of network instability and system downtime as mobile
network operators have not correspondingly expanded their infrastructure to match the growing
subscribers. Sometimes, the agents are unable to meet cash demands of the customers due to mismatch
in
net remittances. This is more pervasive in the rural communities. Due to the weaknesses inherent in the
issuance of valid Identity Cards (IDs), there are many fake ID cards aid this has resulted in fraudsters
having a field day. Some agents and customers have lost sums of money to fraudsters.

35lPage
 Ihe customers and other players in the FSI have expressed concerns about their inability to carry out
mobile money services across the various networks. Accordingly, the Central Bank has tasked its
Peyment Systems Department to ensure interoperability of mobile money across all networks in the
mtry by December 2019. The govemment believes that mobile interoperability will deepen financial
irclusion.
It is
!:gdation
l

of llhhile money services it has operated without any regulatory framework. The indusfry players,
the morAing to a recent survey, suggested that the long-term survival of the mobile money service require
the . fiLryent regulation. The Central Bank has now published guidelines for mobile money operators to be
nmod as Dedicated Electronic Money Issuers (DENA). The proyisions include stringent KYC on the
{lFlts before registration, monthly returns on the activities of the agents, prosecution of the agents for
1S mlile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6%o p.a.
very float on the mobile wallet
agents

of Directors of Excel Telephone Ltd. at a recent meeting discussed the possibility of opening a
to provide mobile money service to take advantage of the newly regulated industry. The Finance
has presented a five-year estimates for the new venture as:

ts'
t
in the
using lsset (400)
is
to'

make
and
money
these
up and

or
2019,
ctose of
pulposes, capital allowances will be available against the taxable profits of the venture, at
in his
lmum on a reducing balance basis and in year 5 any balance would be granted as additional
The rate of tax on taxable profits is 25Yo and tax is paid one year in arrears. The capital
mobile have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of, capital
tobr-24%peranum.
growmg
m
in the tkee environmental factors faced by Excel Telephone Ltd. 6
fte coryetitive environment of mobile money segment using?orter's Five Forces. 5

3TlPage
(c) Identifr and explain four critical success factors for the successful mobile money service
operations. 6
(d) Determine the viability of the project using Net Present Value (NPV) technique and advise the
Board of Directors whether to invest or not. 10
(e) Recommend three strategies which the Board of Directors could implement to give Excel
Telephone Ltd. a competitive edge.

a) Assessment of the macro-environment

The case study under. consideration, has a number of environmental influences or variables to be
considered, including the following: Economi c, Legal, and social-cultural factors.

Economic Factors

There are a number of economic factors in Bangladesh that pose serious threats to br+siness operations and
these include:

High interest rates - the interest rate regime in the coun@ is high, second highest in the World.
This means that businesses looking to raise debt capital would have to pay high cost and this can
negatively iffect businesses relying on debt.

Growing budget deficit - the increasing budget deficit coupled with the government heavily
relying on domestic money and capital markets to make up for shortfall, the govemment is
essentially competing with the private sector for limited credit. This will crowd out the private
sector and push up cost of credit and this will deprive businesses of needed capital for investment.

Concerns raised by intemational financial organisnliols about the need for financial discipline. The
govemment need to contain expenditure so as to reduce worsening budget deficit.

Legal

There are some issues.that have legal underpinnings and these include the following factors:

Introduction of taxation - the introduction of taxes on the mobile money services will obviously
increase the cost of doing business. For the agents to remain profitable as before the introduction of
taxes they may be forced to increase the charges on remittances.

Law to regulate operations of mobile money- With the passage of new law the KYC
requirements have been made stringent and this places higher burden on both the agents and
operators. This to some extent is likely to limit the number of people who can do agency since if
you have prior criminal record you may not be allowed to be an agent.

Socio-cultural Factors

A number of factors can be considered here:

o Low Savings culture - there is generally low savings culture among the citizens of the
Bangladesh. This has implication of capital formation and deposit mobilization by the financial
sector. This limits amount of credit that will be available to deficit/ryending units in the country.

38 lPage
 Financial Inclusion - a sizeable number of the citizens of Bangladesh remained outside financial
6 services sector. This could be one of the factors accounting for low savings culture in the country.
the fbchnotogical factors
l0
Inadequate technological infrastrucfure - the mobile network operators have failed to match the
growing subscribers and the attendant demands on the mobile infrastructure resulting in network
instability as well as down time. This is impacting mobile money service negatively.
a rnnovation - Mobile money started in the country largely with two products airtime purchases
-
md domestic remittances for small amounts. With the passage of time, mobile money service
offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in
increasingly larger amounts, and deposit collection by banks and non-bank financial institutions.

"frelyse the competitive environment of mobile money segment

ille Porter's live forces analysis include the following:
New Entrant

requirement - the minimum capital required by an agent is Tk. Nil which appears to be
within ttre reach of average Bangladeshi people. This may be deduced from the number
people joining as agent rising from 17,467 :m2013 to 93,376 in2016 and projected annual rapid
Itowe in the next 3 years.

ilcrr f^egilraior .Ld KYC roquiremenb - with introduction of new legislation and KyC
lEts0rffi' m p@ vto may have questionable record may not be allowed to operate
motfli -$|i Bm tfo ry not constihrte serious entry barrier since once a person does not have
my ffi*liii,*u*rtql& san pass the KyC test.

cost- since the mobile money appears to be standardised service and not differentiated it
m cost customers anything to switch from one agent to another hence new agents can always
customers and will not constitute any significant entry barrier.

analyses enby barriers are generally low and this will make competition much keener as
join the fray.

existing agents
KYC
and
of agents - there are large number of agents and the number is increasing and therefore
Itriftar
if lmcftm for customers is going to be very intense all things being equal.
growth rate - the mobile money service looks to be in growth stage. Given the
of agents joining the business one can assert that the segment is yet not at maturity or
stage- With the potential for growth competition is likely not to be intense as compared to
or declining stage.

hplementation of mobile interoperability - successful implementation of intended

ryoe€rdbility which wi.l,,l allow transactions across all the four networks, this is likely to
fteooryetition among the agents.

39 lPage
 Standard nature of service - the mobile money service is not differentiated in any way among the
various networks. The fees charge is the same across the four networks hence this is
likely to
intensify competition since a customer can walk to any nearest point and get the service.

Low switching cost - due to low switching cost there willbe intense rivalry among mobile money
providers.

Bargaining Power of Customers/Buyers

Self-service - the customers are able to do a number of mobile transactions

by themselves
including airtime purchase, transfer from one mobile wallet to another, pay utility
bills etc' The
either put
only point that mobile money agents are most needed is where a customer wants to
*orr"y on his or her wallet or physically withdraw from the wallet. This makes customers somehow
power and effectively deny agents some fees.

Low switching costs - the customers really are not facing any switching cgsts hence mobile
agents
place of convenience'
are at their mercy and can chose to transact business with any agent at any
perhaps to have repeated business the agents would have to do extra work to encourage customers
to always return to them for business. This makes customers very powerful.
it is projected to further increase'
the number of agents are increasing and
Access to many agents -
power very
The gives the customer many alternatives and that makes the custorner bargaining
strong.

Bargaining power of suPPliers

are the four

concentrated or Dominant or Few Suppliers - the main suppliers to the agents
network providers. These operators are large and can dictate the terms of the relationship. The

agents are very small relative to the network operators. Again, most of
the fees end up with the
operators. Hence the operators are very powerful'
and is being
There are no alternatives/substitutes - the mobile money service was launched
operated by mobile network operators and are leveraging on their existing
nation-wide

infrastructure. There are no other companies that have nation-wide capability

to deliver mobile
bargaining power of
money solution apart from the four network operators. This even makes the
network operators very potent and veritable.
group - the network
The agent group is not an important customer of the network operators
opefators core business is voice and data which make up the substantial source
of revenue' Mobile
power of
money service is just ancillary to their main lines of business. This makes the bargaining
suppliers still very strong.
I
I
I
i
Threat of substitute Products
i

i o given less stringent KYC requirements of mobile

Less attractive substitute services from banks -
compared to the
money compared to higher KYC requirements, convenience of mobile money
i

I
t
mobile money services are more attraclive. This make bank services as
banks, increasingly
i
substitute less of a threat to mobile money'

40 lPdge
 Lowlzero switching cost for customers - it does not cost customer to switch to mobile money for
remittances and other transactions executable on the mobile money solution. This again makes
banking services as substitute no threat to mobile money

c) Critical success factors for the successful mobile money service operations
a Network reach - there is currently only 90%o coverage of Bangladesh by the network operators.
For effective remittances across the whole country, there must be expansion of network to
unreached areas.

. Network stability - stable network and zero-down time is a prerequisite for the confidence in
mobile money solution. Customers may feel frustrated if the network is not stable. Network
instability is one major challenge identified.

I Product offering - continuous expansion of services offered on mobile money will guarantee its
long-term profitability and success

Mobile Technology Infrastructure - the mobile money nrns on the mobile telephony technology
11 Provided
by network operators without which mobile money solution would be impossible. Mobile
tmney solution survival will depend on the survival of network operators.

lp Regulation - to protect customer's money and build confidence stringent regulations have been
called for and that has been put in place effective 1 December 2017. This will ensure long-term
survival of mobile money operations in Bangladesh.

tDctermine tre virbility of &e proiect using NPV technique

,t,,..1

four
Allbw*nee:ecmffiton
The'
the

mobile
to the
as

4llPag.e
Computation on NPV

I 3 4 5 6
0 2
Year TK.'000 TK.'000
Tk.'00u TK.'000 TK.'000 TK.'000
s00 600 700 700 600
Gross Fees (Jvu,
T\:-^^+ ^^of onrl nfher cosfs (310) (370) (430) (430)
190 230 270 270 2to
(57.50) (67.5t (67.5\ (52.5\
A7.50\
25 18.76 r4.06 10.54 3t.64

(400)
Uapltar lnvesrmcrt (u, 35
(40) (10) (10) (10)
Investment in working
caDital ('e) (20.86)
(440) 180 t97.5 221.6 2t6.56 . 223.04
Net Cash Flow
{ a-rD-rufu-rE, 0.3411 0.2751
/;\ n Ao/^ I 0.806s 0.6504 0.5245 0.4230
l-rlsutrurll
91.60 76.08 (s.74\
A40\ IL\ IR 128.46 116.06
rrcsellt
Net Present Value 11,1.64

implement to give Excel Telephone Ltd a

e) strategies which the Board of Directors could
comPetitive edge
o Opening more sales points or outlets'

o Giving promotional items to customers'

o Operate with all the available mobile operators'

o Embark on advertisements and publicity'

42 lPage
 CASE STUDY

Draft Report
of
Dhaka Beverages & Confectionary Ltd. (DBCL)

on
Evaluation of business modernisation and expansion proposat of DBCL and
t viability based on past performance and future prospects and other
associated issues.

43lPage'
 Dhaka Beverages & Confectionary Ltd'
(DBCL)

Table of contents

Terms of reference
Executive SurrnarY
ProPosed modernisation

andexpansionwithbestaltemativeoffinanceofthemodernisationand

tion on modernisation

ed Accountants a4rd

comments oncorporate got"*u'9t of 2P9L'

assuulitrtt;lr w rlrr
AssesG"nt of Social, economic and ethical
DBCL operations and fund raising through IPO
Appendixes

44 lPage
 ChaPter - 02

Executive Summarv

in food and
Beverages and confectionary Ltd. (DBCL, the company) is an emerging company
Dhaka and distributed directly
soft drinks and confectionary items
beverages industry. It produces carbonated organic growth for
to the customers around the country. The corrpany has chosen
through own channels is planning for
the current status' The company
its expansion strategy along with maintaining through opening of new plant and
16 new show
of business
mordernisation of processes and expansion proposed plan and other
the company is evaluating its past performance and viability of
aooms for which
associated issues.
new outlets across
to export outside the country and opening
The Board of Director of DBCL intended
thecouutry.Thecompanyalsodecidedtoaddressthecustomercomplaintsandmodernizeandexpandthe
the business performance
the foah, the board decided to evaluate
existing opera{ions. f, orO.. to execute options'
from and social perspective and financing
and viability the expansion plan ""ono-i"

(66
periods. It has increased by 24%
superb revenue growth over the
The company has been experiencing
million) over last vear and cumulative
averase s'o*th *t' (clcl)-::1"^:"lTi:J:il1llriJ;/;'lll
the
#,",1i," _ ,'1,.*t* ,*1l: customer base which also supports
Hffi]#:;:flJ:f"ffi#", Gross profit of the company increased
by 5,3% but Gp ratio of sales
modernization and expansion p1an. GP ratio and oP
over the periods. operating profrt (oP) has decreased by 10%' The
has been decreasing and inflation rate
due to inadequate ovef operating costs, material costs
and consider the economies of
has been decreasing "o',t'ot.
should tighten the marginal costs
persisting in the economy. The complny The BoD should
the outsourcing of ,epetitire works to control 0verhead costs.
scale. It can think about
also think for alternativeuse of idle capaclty of the plant'

Recommendations
outsourcing of the
It should consider economies of scale through
its cost.
The company needs to focus on use of idle capacity to boost
works. The company strongry think about the artemative
administrative
export globallY.

Expansion Dlan
using
The proposed plan of moderni zation'"9 jt:itt"" -b', l'":T:,;',:-."::::,:.i: #':Tt #
in carcurating required rate or return' The
;,::"ff#-::*''ffj*:;;;0"" *';Jc^iM m{od
the {i-onniql
--r ^- +L^
million. Hence based on
considerations,s. the
rinanciar nnnsideratiot
:il:ffi:T^:J;r:'il;;il""&;-i.-iso.:
feasible'
is
expansion and modemizatronplan
further analysis might be
that cost estimation of management is very high for which
Besides, we observed
in Appendix-3'
required. The detail analysis is captured
based on the above stated
prospects and
the overall performance of the company is satisfactory a.nd
since
idlecapacity,thecompanycanadbptandexecutemodernizationandexpansionplan.

45lPage
 Initial public offerings (IPo) could be the best option
of raising Tk. 360 million to finance business
modernization and expansion plan. Under IPo,
the company has no obligation pay dividend to the
shareholders immediately. we used 3 different
and methods of valuation to explore offer price per
share to the
general public' we have taken some assumptions
ly to calculate the value of tentative offer price of shares.
The share price could be from Tk. 25 to Tk. 55 per
for share. we used the following price under different
method for valuation: .i
for .l

show 1. NetAssetvalue method -Tk.23.20 per Share

other
2. Value based on sector p/E ratio - Tk. 55.80 per Share
3. Value based on similar stock - Tk. 55.80 per Share

The company may obtain approval of IPo at premium of Tk. 2 per share. [Detail in Appendix-2].
On the other hand, the company can use subordinate
bond which has pressures on cash flows due to
payment of fi nance charge.

We concluded that the company can go for expansion

and modernization project. It should apply
(66 immediately to BSEC for approval of IpO at premium
to finance the project. We believe that the
The company has prospect for further growth.
the
we recommend for expansion and more market analysis
sales for demand and cost factor and arrange finance
fuough IPO.
OP
rate
ies of
should
ffc analyzed the strength, weakness, opportunity and
threat (swor) of the company in its business
unrironment' The GAGR of the company was
L7o/o inlast 5 years. It also grown by 2a%last
year. DBCL,
hr clear prospect to grow further.
mL has strong distribution network having 170 distributors and 25 retailoutlets
in the main cities
of the ms the country' we noticed that DBCL has been facing remarkable market competition
boost tk of product quality and customer complain with regard to bottling and and threat in
unethicaimarketing activities.
fihdd€ring the value chain, we belief that the companrpossesses
-
(U Bargaining power with suppliers;

usmg (!) substitute ofproducts to satisfy customers' need

and consumers marginal utility;
The ffi) Loyal customers to grow further.
the
if;lt Mass young generation and average age of
the people below 40.

situation and market condition indicates that the

company has great opportunities for ensuring
: business growth.

that the management of the company will concentrate on the quality

ff**u of products and
t

n
4TlPage
 ADDointment of ABC & Co. as external auditor instead of existins auditor POR & Co.
We evaluated the situation and observed that existing auditor expressed their willingness for re-
appointment. The DBCL management has to conform the following for appointment of new auditor, peR
& Co.-
1. Have to take consent from existing auditor
2. Give notice to existing auditor
3. Need board approval
4:. Have to inform to RIC
5. Take approval from shareholder in AGM.

Besides this ABC & Co. have to take clearance from existing PQR & Co.
Management should not appoint new auditor for corporate governance issue. It's Chairman and Chief
Executive or Managing Director will be same person, the board face the following problems:

Chairman review and approved the activity at the company and give advice for correction. MD do
If same person do the both work it may hamper.
the business operation related function.

a BSEC writing regulation prohibit this.

a One person may impose more power

a Other director and independent director will be unable to do their responsibility.

By considering the above situation, chairman and MD should be separate person.

I We recommend its separate Chairman and MD and auditor should not compromise their independence.

Economic & Social impact of the companv

I By assessing'the economic and social impact we see that expansion plan of the company has positive
impact in the economy and society such as:

I
o Contribution to GDP
o Create more employment

o Ensure quality consumable product

o Donation its NGO and health program
o Give more tax and VAT to the national exchanges

But the company ethical issue may hamper reputation. Such as financial supports to CA firm student and
its external auditor for over statement at profit and asset.

Conclusion and Recommendation :

We recommend the management for not doing unethical activities.

t

48 lPage
 Chanter 3

Evaluation of performance and viability of the proposed modernisation and expansion plan of
DBCL best alternative to linance the modernisation and expansion plan.

Financial Performance:

The company has been experiencing significant and astonishing growth in terms of revenue and
profit. Revenue of the company has increased by TK 66 (233%) to TK 343 due to market share and
quality product.

GP increasedby 2m(5.I3o/o) to 41 m and operating profit 4m decreased by 1m to 25m due to lesser

cost control.

Liquidity position at the company in good but quick rapid in only 0-82 due to huge inventory hold
up.

The company's greasing in only 19.46% which indicate more room for further decreasing.

The company revenue growth in high but profitability is not good. The company should give
concentration to control cost.

The expansion plan of the company in viable by considering position NPV of TK 150.3 million.
fDetail in Appendix-3]

The company has promising growth prospect with expansion plan.

The company should reassessed the market and revenue as well as cost prediction.

Financins Option:

The company should select IPO for financing the new project. One is IPO and another is
subordinate band.

The company can take option to finance through IPO. It has no payment pressure to the
shareholders. Financial statement preparation will be as per IAS and IFRS.

o Have to show profit for previous consecution there year.

e Must company all rule and regulation of BSEC
o TakeapprovalfromBSEC
. . Issue prosperity
o Arrange road shows.
. Manage institutional investor.
. Appoint issue manager.
. Arrange AGM regularly.
o Home to need clear CIB.
o Arrange no objection from auditor. t

49 lPage
 Subordinate bond:

By issuing subordinate bond the:emlpany can ammge fund that it has following consequences;

o Gearing will be higher

o Have the company installment
o Finance cost will be higher
o Various regulatory compliance have to maintain

Conclusion:

Debt financing in less cgstly but delivery issue pressure and finance cost.

Recommendation:

We recommend the managemen! its go enforcing through IPO financing and comply all regulatory
and ethical issues. Managemuit should not mis-state its financial position and perfonnance.

50 lPage

I
l
 Chanter 4

Evaluation of SWOT of DBCL and recommendation to the Board of Directors of DBCL on

modernisation and expansion plan

Evaluation of SWOT for the expansion plan:

The SWOT analysis provides a good overview whether the company's overall performance is healthy to
do to sustain in the market with growth prospect we carefully reviewed the overall process and marketing
activities financial viability market competition ethical issue etc. The review noted the following aspects -

Streneth:

The company captured 35 percent of market share of soft drinks and 18 percent of confectionary food
products in Bangladesh. It has been growing significantly over last 5 years and cumulative average
growth rate (CAGR) was 17 percent. DBCL has strong distribution channel and reaches the customers
through own delivery vans. Own delivery vehicle

The demand of the products are growing very fast every year. The customers are very loyal to the
company and the product delivery is ensured within the customers need.

Weakness:

DBCL is primarily a family owned business. The board of directors could not make a professional
management and the corporate govemance are very poor. Accountants are not qualified professionals to
face the future business challenge. Accountants do not take decision independently. The company board
is also not well organized.

Opportunities:

Big market with economic growth. The median age in Bangladesh is 27.6 years with more thanl60
million people. The urbanization rate is very high because of tuming the small village into small town.
The working women is increasing and currently around 36%o females are working in different
organization The scarcity of maid servant or home makers. Bangladesh wants to be a developed economy
by 2041 and hence we need more investments in local and foreign investors. The govemment has been
providing fiscal and financial incentives through cash subsidy to cutting levy's on raw materials.

Threats:

New companies are coming in the sector which make it more competitive in the country. The current
competitors are offering competitive price and very similar products. Through this process company in
some tiine failed to comply with the laws and regulations, accounting of company transactions as per
IFRS. The govemment may impose sugar levy and DBCL will face production and sales threats. The
general people of the country now-a-days are health conscious. They do not take more sugar and reduced
carbohydrate.

Conclusion and Recommendation

Considering the SWOT, DBCL has the shong potentials to grow fuither in near future. The BOD of
DBCL should take actions to translate threats into opportunities and weaknesses into strength.

s1 lPape

i iji,:iiii; :: . i:ii ;iiii:ii. it:j;t . lirl;itilsiiltiirltfl

 Chaoter 5

Evaluate the appointment procedures of ABC & Co. Chartered Accountants and comments on
corporate governance of DBCL.

Anpointment of Auditor. ABC & Co. :

The auditor of a company must be appointed by complying with the Companies Act 1994 who is
registered with the Financial Reporting Council (FRC) under section 31 of Financial Reporting Act 2015.
Beside this, for appointment of auditors has to comply with the following:

1. Take consent from entering auditors;

2. Give notice to entering auditors;
3. Need board approval;
4. Have to inform RISC;
5. Take approval from shareholders in AGM
Moreover, ABC & Co. have to take professional consent from PQR & Co.

The observation made by PQR & Co. on corporate governance issues:

As per corporate governance guideline and BSEC requirement chairman and MD of Board will be the
separate person. Chairman responsible for reviewing activity of the company and MD's responsibility to
run banking operations smoothly. If the chairman and MD will be same person, the following issues may
arise:

Conclusion:

From the above issue indicates that chairman and MD will not be the same person.

Recommendations:

Chairman and MDwill be separate person. Auditor should not compromise with professional code of
ethics and their independent.

52 lPage
 Chapter 6

Economic and sociel contribution and evaluation of ethical issues

Economic and mcial contribution and evaluation of ethical issues

We analyzed DBCL business and its marketing and financing strategy. We also evaluated the corporate
governance and Government's fiscal and macro-economic development policies. The review noted the
following aspects -

Economic:

The soft drinks and confectionary foods industries'contribute significantly to GDP. It created more
employment through which government is getting more tax revenue. DBCL also providitrg more tax and
VAT to national exchequer. It also contributed in infrastructure development of the country. The per
capitz income of the people will also increase.

Social:

The company has been manufacturing qualrty and healthy products. It donates for social welfare works
and Health program for under privileged people. DBCL will continue to provide benefits to the working
ladies who can saves time and energy in making foods at home. However, the critical diseases like
diabetes, high blood pressure, obesity, heart diseases, etc. may arise.

Ethical issues:

The company misstated its financial position and performance. Moreover, donation has been given where
one of the directors have personal interest. The auditors compromised its independence. DBCL
unethically tried to appoint ABC & Co. Chartered Accountants as a second auditor at the same fees.

Conclusion:

The company has great contribution to economy and society. But ethical issue may hamper its reputation.

Recommendation:

The company should not misstate its financial statement. Auditor must quatiff the report to conform the
professional code of ethics and independent. The company compact its resign extemal auditors for
corporate governance issue. The Chairman and MD play same role and same person.

53 lPage
 Chapter 7

Appendix
Appendix I
Performance Analysis:

Adjustments to the net profit before tax

Amount in Taka

Reported Net profit before tax

24.932.622 26-931.086 24.259"039 19.079.564 14,849,506
Adjustments of goods sold but
returned (3.000.000)

Adjustments of vehicles leased

(420.000) (420.000) (420.000) (420.000)
Bad debt written off (1.000.000)
Customer compensation (500.000)
Provisions for Contributorv PF (1.000.000) (1.000.000) (1.000.000) 1,000,000)
Tax provision @35% on 1% of
sales plus 5m (2.949.33s\ o.720.6s8\ o.549.497\ (2.385.985) (2.297.087\

Adjusted profit before tax

16.483-287 22.790.428 20.289.s42 t5.273.579 12.t32.4t9
Less: Tax @35%
5.769^ls0 7.976.6s0 7.10r"340 5.345.752 4.246.347
Profit after tax
10.7t4-137 t4"813.778 13.188.202 9.927.826 7.886.072
EPS 3.57 4.94 4.40 3.31 1,.63

Average profit before tax

86;969,254
Less: Tax @35% 30.439-239

Average profit after tax

s6.530.01s

No. of shares outstanding

3.000-000
Revised pPS(Taka)
3.77

54 lPage
 Taka in Million

Gross revenue 342.67 277.33 228.43 181.71

Revenue growth 23.60/o 21.4% 25.7% 16.4%
Profitability
Gross profit 4t.12 38.83 41.12 32.71
Gross margin 12.0% 14.0% t8.0% r8.0%
Grossmargin increased(decreased) -I4.3o/o -22.2% 0.0% 0.3%
Operating profit 24.93 26.93 24.26 19.08
Operating margin 7.28% 9.7to/o 10.62% t0.s0%
Operating qargin increased(decreased) -25.t% -8.6% r.t% l0.t%
Liquidity:
Current ratio 1.37 t.22
Quick ratio 0.82 0.6
Solvency:
Earnings (percentage) 19.46% 9.45%
Interest cover(times) t6 37
Debt to equlty (percentage) 51 54

Management Efficiency:
Receivable turnover (days) t7 t4
Inventory turnover (days) 33 38
Payable tumover (days) 39 35
Operating Cycle (days) 50 52 0 0
Cash cycle (days) 11 l7 0 0

55 lPage
 Appendix 2

Calculation of indicative offer price:

Method-l: Net Asset Value (NAV) method

Amount in
Taka
Total equity 70,673,624
Less: Intangible (300,000)
Less : oyerstated profit (4t11x25%) (1,000,000)
Adjusted net assets 69,373,624
No. of share 3,000,000
Value per share (taka) 23.12

Method-2: Share Value based on P/E ratio of similar companies

Profit after tax per share:3.77

Value per share :3.77*10.78:55.80

Method-3: Value based on similar companies

A PIE:

Value based on similar stock: Tk.3.77*14.80 : Tk. 55.80 per share.

56 lPage
 Appendix-3:
NPV Calculation

Previous year's sales 342.66 445.46 512.28 563.s0 591.68

Incremental sales 102.80 66.82 51.23 28.18 0.00
Total sales 445.46 5r2.28 563.s0 591.68 591.68
Incremental Revenue 103.00 66.82 5t.23 28.18
Cost sf sales (88%) (90.64) (s8.80) (45.08) (24.80)
New employee cost (3.38) 0.38 0.30 0.30 0.15
Incremental cost of sales
(COS*20%*2o/o over inflation %) (1.27) (0.e4) (0.81) (0.40)
Cost of trnance of working capital
(5.00) (5.00)
@10%
Depreciation (260/ 5 years) (52.00) (52.00) (52.00) (52.00) (s2.00)
Operating Profit before tax (49.281 (49.5s) (46.36) (48.721 (s1.8s)
Tax
Add: depreciation 52.00 52.00 s2.00 52.00 52.00
Cash flow 2.72 2.45 5.64 3.28 0.15
DF @4% 0.90 0.81 0.73 0.66 0.s9
PV 2.4s t.99 4.12 2.t6 0.09

Expected rate of return (as per CAPM method) : 6%+OO%-6%)x 1.25 : llo/o

Total PV of Future cash.flows

10.81
Terminal value= (360 -260)
*0.593/.11 s39.09
Total value 549.9
Less: Investment 360
Net Present Value 150.3

Assumption:

(i) After 2023-2024 costwill be decreased to 70Yo and no depreciation will be required.
(ii) Maierial costs remains in proportionate to sales of 20lg-19
(iii) All other cash expenses e.g. Salaries and wages increased as follows:
2019-20: TYo,For 2020-2r: Byo,For 2021-22: 9o/oFor 2022-23: g% For
2023-24 7o/o
(iv) Material costs is 8U/o arrd,20%o

(v) Depreciation per year: 2@ 15: 52 mn.

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