Cases/ Short Questions relating to Responsibilities

Case/Question 1: You are finalizing the audit of a company. The audit highlights
memorandum indicates that the company has failed to maintain proper books and records. This
is because there is no non-current asset register and it was not possible to draw up a register,
as some of the invoices were missing. The director is furious that the audit firm says this makes
it impossible to give an unqualified audit opinion. He says that the audit firm prepared the
accounts and therefore it is simply a matter of the auditors’ incompetence.

Requirement:

Explain the directors’ responsibilities in relation to the books and records of the company. (5
marks)

Case/Question 2: During the course of your audit of Slipstream Ltd. the credit controller asks
for a private interview with you. During this interview she makes it known that she suspects the
chief accountant of misappropriating company funds received from debtors and altering the
books.

Requirement:

What steps would you take to enable you to assess whether the credit controller’s suspicions
are reasonable? (5 marks)

Case/Question 3: During the course of the audit you discover that the wages clerk has been
defrauding the client through not deleting leavers from the payroll until two months after
departure, and was pocketing the money herself.

Requirement:

What should you do with regard to:

a) Informing the client? (3 marks)

b) The audit report? (3 marks)

Case/Question 4: During the course of the audit of Gamma Ltd. (‘Gamma’) an employee of
the company informed you that a substantial cash deposit was paid into the company’s bank
account and a month later, the same amount was paid by direct transfer into a bank account in
the name of Epsilon, a company based overseas. The employee also informed you that the
managing director of Gamma had instructed him not to record the transaction in the accounting
records as it had nothing to do with Gamma’s business.

Requirement:

State, with reasons, what further action you should take in relation to this matter. (5 marks)

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Case/Question 5: Your firm is the auditor of Alpha Ltd. (‘Alpha’). The managing director of
Alpha discovered that the assistant accountant had used company cheques and bank transfers
fraudulently to pay his own personal expenses. The expenditure was reported as company
expenses in the statement of profit or loss. Although the amounts involved are immaterial in the
context of the financial statements, it transpired that this had been going on for several years.
The managing director has expressed concern that your firm did not discover this fraud and has
requested a meeting to discuss this matter.

Requirement:

Using Alpha’s fraud as an example, compare and contrast the responsibilities of the auditors in
respect of fraud with the expectation of the managing director of Alpha. (5 marks)

Case/Question 6: Related party transactions

The training partner in your office is aware that you have covered ISA 550 Related Parties in
your Professional Stage studies. He has asked you to help him prepare for a training session he
is about to give.

Requirements

Prepare notes for a training session for junior staff on how to identify related party transactions.
Your notes should include:

(a) A list of possible features which would lead you to investigate a particular transaction to
determine whether it is in fact a related party transaction. (6 marks)

(b) A summary of the general audit procedures you would perform to ensure that all
material related party transactions have been identified. (8 marks)

Case/Question 7: You are the auditor of a company with numerous branches spread
throughout the Bangladesh. Revenue for the year ended 31 December 20X1 was BDT 25
million, profit before tax was BDT 1,500,000 and net assets were BDT 9,500,000. Your audit
report was signed in March 20X2 without qualification. Your report to management after the
audit pointed out that internal controls were weak at the branches due to the small number of
staff.

You have been telephoned by the finance director, Ray Gomes, and told that the sales ledger
clerk at the Goose Green branch had been caught ‘teeming and lading’. His investigations so far
show that during the year to 31 December 20X1 the sales ledger clerk had diverted BDT 50,000
of receipts from customers to his own bank account. Ray has asked you to attend a meeting
with him to discuss the matter. He is particularly concerned as to why the fraud was not
discovered during the course of the audit and what the effect on the accounts might be.

At 31 December 20X1 the Goose Green branch had net assets of BDT 400,000. For the year
ended on that date the branch had revenue of BDT 1,000,000 and made a small loss.

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Your re-examination of your audit working papers shows that your staff had visited the Goose
Green branch, that no grounds for suspicion arose during the audit and that appropriate audit
procedures were carried out.

Requirements

(a) Prepare notes to guide you in your discussions with the finance director. (6 marks)

(b) Following the meeting the finance director has asked you to carry out additional
assurance work to establish the extent of the fraud. Outline the main areas to which you
would direct your attention in order to establish the extent of the fraud and the loss to
the company and state why you would consider those areas. (6 marks)

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