Patuakhali Science and Technology University

Faculty of Business Administration

A Report on Solving Questions

Course Code: AIS 412
Course Title: Advance Audit and Assurance

Submitted To:

MD. ZAKIR HOSEN

Professor
Department of Accounting and Information Systems
Faculty of Business Administration
Patuakhali Science and Technology University

Submitted By:

ID: 1903019, 84, 87,91,95, 1803071

Reg: 08799, 08864, 67, 71, 75, 08378
Level 4, Semester 1

Date of Submission: 7th January, 2025

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 Patuakhali Science and Technology University
Faculty of Business Administration

Report Submission
Attendance Report

Level :4
Semester :1
Course Code : AIS 412
Course Title : Advance Audit and Assurance
Report Title : A Report on Solving Questions
Date of Submission : 7th January, 2025

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 Attendance Report

ID: 1903019, 84, 87, 91, 95, 1803071

Student Name ID Registration No. Signature

Tomalika Rani Sarker 1903019 08799

Habiba Sultana 1903084 08864

Md. Sohbut Saakib 1903087 08867

Zarin Tasnim 1903091 08871

Himel Majumder 1903095 08875

Rakibul Hasan 1803071 08378

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 AUDIT & ASSURANCE

Time allowed- 3:30 hours

Total marks- 100

[N.B. - The figures in the margin indicate full marks. Questions must be answered in English.
Examiner will take account of the quality of language and of the manner in which the answers
are presented. Different parts, if any, of the same question must be answered in one place in
order of sequence.]
Marks
1. a) Being manager in an audit engagement in Attires Ltd., a readymade garments
manufacturer, you discovered that the payroll officer had been defrauding the client
through not deleting leavers from the payroll records until two months after departure.
By doing it, he was pocketing the money for himself.
Requirement:
What should you do with regard to:
i) Informing the client? 2 ii) The audit report? 2
b) IAS-37 deals with recognition, measurement and disclosure requirements of provisions,
contingent liabilities, and contingent assets. As an audit professional, it often puts you
in difficulty separately evaluating the appropriateness in the treatment provisions and
contingent items.
Requirements:
i) You are required to define following items in the light of IAS-37: 2
• Trade payables & Accruals
• Provisions
ii) Distinguish between legal obligation and constructive obligation 2
c) The auditors’ independence may be impaired include for providing:
i) taxation services to the company and its directors;
ii) accountancy services, including preparing periodic management accounts and
annual financial statements;
iii) management consultancy, including advice on new computer systems and
systems of internal control.
Requirement:
Narrate how each of the situations mentioned above may compromise auditors’ independence, and
the ways in which an audit firm can minimise the effect which the provision of
other services has
on independence.
d) You are the Audit Manager at Rahman & Associates whose client portfolio includes
ABC Credit Ltd. which is a listed financial institution offering loans and credit facilities
to both commercial and retail customers. You have received an email from the Audit
Supervisor who is currently supervising interim testing on systems and controls in
relation to the audit of ABC Credit Ltd. for the year ending 31 October 2022. The email
gives the following details for your consideration:
i) One of the audit team members, Adeeba Sultana, has provisionally agreed to
apply for a loan from ABC Credit Ltd. to finance the purchase of a domestic

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 residence. The loan will be secured on a property and the client’s business
manager has promised Adeeba Sultana that he will ensure that she gets ‘the
very best deal which the bank can offer.’
ii) The payroll manager at ABC Credit Ltd. has asked the audit supervisor if it
would be possible for Rahman & Associates to provide a member of staff on
secondment to work in the payroll department. The payroll manager has
struggled to recruit a new supervisor for the organisation’s main payroll system
and wants to assign a qualified member of the audit firm’s staff for an initial
period of six months.
Requirement:
Assess the ethical and professional implications of the issues raised with respect to the audit of
ABC Credit Ltd. and recommend actions to be taken in each case by the audit firm.
2. a) Your firm, which has seven partners, has been invited by Mr PQR, the managing
director and majority shareholder of WXY Ltd, (The company) to accept appointment
as auditor of the company and also provide assistance with the preparation of the
financial statements and the tax computation.
The company was incorporated on 1 October 2021 and the financial statements
will cover the 15 month period to 31 December 2022. Although the company’s
revenue and assets are below the thresholds for statutory audit purposes, the
company’s bankers require the annual accounts to be subjected to a full audit.
The accounting records are computerised and the company uses software which
was developed by ITS Ltd, a company owned by Mr PQR’s brother. The software
has been customised to integrate inventory control with receivables and payables.
ITS Ltd also provides support for the company’s computer systems. The
accounting records are maintained by Mrs CDE, assisted by Mrs B who works one
day a week and is responsible for payroll processing. Requirements:
i) State, with reasons, the matters to be considered and procedures to be performed
prior to your firm accepting and commencing the audit of WXY Ltd for the
period ending 31 December 2022. 5
ii) Identify, from the information provided above, the factors which should be
taken into account
when assessing the risk of misstatement in the financial statements of WXY Ltd
and explain
why such factors should be taken into account when conducting the audit.
b) Kazal Brothers Ltd is a retailer of academic textbooks which sells through its own
network of book shops and online through its website. The revenue from the website
includes both cash sales and sales on credit to educational institutions. The company has
provided historical analysis from its trade receivables ledger indicating that for sales
made on credit, 25% payment is received in the month of sale, 70% after 30 days and
the remainder are irrecoverable debts.
You are a Manager in Mahin & Company, a firm of Chartered Accountants which
offers a range of services from audit to non-audit for its clients. On 1 July 2023,
your firm was asked by Kazal Brothers Ltd, a company which is not an audit client
of your firm to consider a potential engagement to review and provide an assurance
report on Prospective Financial Information. Mahin & Company has already

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 conducted specific client identification procedures in line with money laundering
regulations with satisfactory results.
Additionally, Kazal Brothers Ltd has approached your firm to obtain an
independent assurance opinion on its cash flow forecast which is being prepared
for its bankers in support of an application for an increase in its existing overdraft
facility.
Requirement:
In line with the relevant ISA: The Examination of Prospective Financial Information, discuss five
matters to be considered by Mahin & Company before accepting the engagement
to review and
report on Kazal Brothers Ltd’s Prospective Financial Information.
3. a) ISA 240, while talks about auditors’ responsibility with regards to fraud in audit of
financial statements, among others uses the term management override to refer to the
unique ability of management to manipulate the accounting records and therefore
produce misleading financial statements. Reasons for management override are many
and varied, for example financial gain, tax avoidance, or the enhancement of personal
or business performance. Auditors need to assess the risk of management override
during the planning stage of the audit, and design appropriate audit procedures in
response.
Requirement:
Indicate the minimum procedures that would give you reasonable confidence in arriving at the
conclusion that frauds emanating from management override have not occurred in
the financial
statements under audit.
b) In the expansionary business environment, it is evident that some companies are
naturally group companies and thus related audit engagements necessitate use of
guidelines prescribed by ISA 600. ISA 600 precisely requires group management to
objectively understand the component auditor.
Requirement:
As manager of a group auditor, you are required to describe the guidelines for the group
management to understand related component auditor.
c) The profession of assurance on the part of Professional Accountants in practice has
been turning
to be tougher day by day. Alongside all existing and emerging regulations, the
business environment across the industry supported all modern technologies
has been posing more risk for the audit professionals to accomplish their audit
managing their risk to an acceptable level. IAASB has always been active to
promulgate appropriate standards and guidelines for the auditors to be able to
effectively accomplish respective engagements retaining their independence
uncompromised. IAASB has accordingly revised ISA-315: Identifying and
Assessing the Risk of Material Misstatements introducing some special features
enabling audit professionals to more effectively assess their risk to accomplish
respective audits.
Requirements:
As an audit manager, you are required to:

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i) Briefly discuss the business model as mentioned in ISA-315 (revised) being necessary
for better
understanding of the entity under audit.
ii) Discuss newly inserted features to better understand about Inherent Risk while assessing
risk
as part of Planning an audit.
4. a) The audit of Nabil Ltd’s financial statements for the year ended 30 June 2022 is
nearing completion and the auditor’s report is due to be signed next week. Nabil Ltd
manufactures parts and components for the aviation industry. You are conducting an
engagement quality control review on the audit of Nabil Ltd which is a listed entity
and a significant new client of your firm. The draft financial statements recognise
revenue of BDT 8·7 million, assets of BDT15·2 million and profit before tax of
BDT1·8 million.
You have identified the following issues during your review:
i) The planned audit approach to trade payables was to place reliance on
purchasing controls and keep substantive tests to a minimum. During control
testing on trade payables, from a random statistical sample, the audit team
identified three purchase orders which had not been authorised by the
procurement manager. On review of the supporting documentation, the audit
team concluded that the items were legitimate business purchases and therefore
concluded that no additional procedures were required.
ii) Following a review of petty cash transactions, the audit assistant identified that
the petty cashier paid for taxi fares for personal, non-business journeys with a
total value of BDT175. Following discussions with the Audit Assistant, you
have ascertained that he did not report the matter as the amount is immaterial.
The audit assistant also commented that the petty cashier is his brother and that
he did not want to get him into trouble.
iii) Cut-off testing on revenue has identified two goods despatch notes, dated 2
December 2022, for items sent to Chinn Co., with a combined sales value of
BDT17,880 which had been included in revenue for the year ended 30 June
2022. The client’s financial controller, Hamidur Rahman, has explained that
Chinn Co. does not order on a regular basis from Nabil Ltd. In the absence of a
regular payment history with Chinn Co. therefore, and in order to minimise the
receivables collection period from this particular customer, the sales invoice
was raised and sent to the customer on the same day that the sales order was
received. The average time period between the receipt of an order and
dispatching the goods to the customer is approximately one to two weeks. The
audit working papers have concluded that no further investigation is necessary.
iv) The Finance Director, Lutful Huq, has not completed the tax computation for
the year ended 30 June 2022. He has recently asked the audit assistant to
compute the company’s tax payable for the year on the basis that as a newly
qualified chartered accountant, the audit assistant was more up to date with
recent changes in tax legislation.
Requirement:
Evaluate the quality control issues and the implications for the completion of the audit
including any further actions which should be taken by your audit firm. Your

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 answer should include the matters to be communicated to management and those
charged with governance in relation to the
audit of Nabil Ltd.
b) Reasonable assurance is the highest level of assurance auditors may provide. However,
due to the
limitations of auditing, it is impossible to guarantee ‘absolute’ assurance. Some
users of financial statements however, have the misconception that an audit
provides absolute assurance; that the audit opinion guarantees that the financial
statements are ‘accurate.’ The ‘Expectations Gap’ refers to these and other
misunderstandings regarding the work of an auditor. Requirements:
i) State the inherent limitations of an audit that makes it impossible to provide ‘absolute’
assurance. 2 ii) State the misconceptions about the role an auditor plays. 2
c) Modern approach to Internal Auditing has been broadened the scope of the functions of
the Internal Audit. The focus has shifted from pure financial audit to covering other
important areas of operations. These include Value for Money audit and Best value
audit.
Requirement:
What you know about ‘Value for money audit’ and ‘Best value audit’?
d) You have been appointed the auditor of Shades which has a year end of 31 May. Shades
is a small registered NGO based in a small town in Khulna. The organisation provides
shelter for abandoned pet animals.
The NGO is managed by a voluntary committee, including a Chairman (Mr X), a
Treasurer (Mr Y) and a Secretary (Mr Z). Appointment is by annual election by the
committee each year however X, Y and Z have held their posts for a number of
years as other committee members feel unable to give the required time
commitment.
Shades also employs a number of paid employees. In addition a number of unpaid
volunteers help out at the shelter as and when they are needed depending on the
number of animals at the centre at a particular point in time.

The main sources of income are as follows:

NGO shop
This is run by a full-time manager, assisted by a team of volunteers. Members of
the public make donations (primarily clothes and toys) which are then sold in the
shop. All transactions are in cash. The shop does not accept cheques or credit
cards. The transactions are recorded by the till, with completed till rolls being
passed on to the bookkeeper.
Collections
Volunteers make house to house calls on a regular basis. In addition, on Saturday
mornings volunteers make collections in three local town centres. All cash is
counted by the volunteers, and returned to the bookkeeper with a receipt
confirming the amount.
Show on pet animal

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 Each year on 1st June, a Festival is held in the town. As part of this event Shades
organise a show on pet animal. Any member of the public can enter their pet
animal by completing an entry form which can be obtained from the shop.
Tickets to see the show can be purchased up to two weeks in advance from the
shop or can be purchased on the day at the Festival. In recent years the show has
been a great success although two years ago it had to be cancelled due to COVID.
T-shirts can also be purchased from a stall manned by volunteers.
Sponsorship
Shades is sponsored by a local pet supplies company. The company makes an
annual donation and provides prizes for the winners of the show. In return for this
their services are advertised in the event programme and their logo is printed on
the T shirts.

The main expenses are as follows:

Rent, rates, heat and light
Both the shelter and the shop are rented properties. These expenses are all paid by
monthly direct debit.
Employee remuneration
Two employees are paid directly into their bank accounts on a monthly basis. Two
employees are
paid by the hour. They are paid by cheque on a weekly basis.
Medicine bill
The local vet provides his time free but any medicines etc do need to be paid for.
Payments are made by cheque on receipt of the invoice.
Printing costs
Leaflets are produced to support fund raising campaigns. The most significant
element of this cost is the show on Pet animal programme which outlines the
timetable of events. The programmes are printed and delivered to Shades in May.
The printer invoices at the time of delivery.
The accounts are maintained by the bookkeeper on a computerised spreadsheet.
Occasionally, the treasurer may also assist with the preparation of accounting
information at particularly busy times in the year, for example, immediately after
the show. Requirements:
i) As the auditor of Shades discuss the key planning issues based on the above
scenario. 6 ii) Outline the audit work you would plan to perform in respect of the
following expenses: 4
• Rent, rates, light and heat • Employee remuneration
• Medicine bills
• Printing costs.
5. a) Healthcare Group., a leading business house, starting business about few decades ago,
has been transformed into formidably a major conglomerate in the country
predominantly in the consumer healthcare products markets.
Consumer Healthcare Ltd., being one of the leading companies in the
conglomerate deals with Health Milk and Safe Milk powder. These two brands
(‘Health Milk’ and ‘Safe Milk’) have been very popular and thus have grabbed a

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 wide range of market across the country by virtue of their consistent quality
commitment as well as other related commitments applicable to healthcare field.
The company has closed their financial year ended 31 December 2022 with about
BDT7.5 billion turnover ensuring growth as high as they expected while planning
for the year.
The financial statements for the year ended 31 December 2021 reflected
inventories BDT2 billion whose cost was BDT3.5 billion as per books. Not having
performed proper procedures of obsolescence testing, the company accountants
applied prudence and written down the inventory values by about 43%. The
directors argued that inventory obsolescence had never exceeded even 15%. But,
here in this case no satisfactory audit procedures were left that could be adopted to
confirm the true figure at the reporting date.
Requirement:
In respect of the issue over inventory, reach a conclusion on whether you would modify your
audit opinion for the year ended 31 December 2022, on the basis that no other matters
arose which might affect the opinion. You should offer reasons supporting your
conclusion and describe any additional statements that would be required to be made in
the audit report. 3
b) Gentle & Co. Chartered Accountants (GentCo) has been appointed auditor for the
Shahab Group of companies for the year ended 31 December 2022. The scope of the
work of GentCo includes auditing and expressing an opinion on the financial statements
of Shahab Holdings Limited and 5
others out of 7 companies of the group. Under the engagement term, GentCo would remain
responsible for issuing opinions on the consolidated financial statements of the
group. Two (2) other companies are also very important and material to the
reporting of the group but are being audited by other firms.
Under strict deadlines to finalise the audits, GentCo finds that they do not have
adequate staff to run all audits in the engaged entities simultaneously. GentCo,
under this unavoidable circumstance, has decided to sub-contract audit
engagements for 2 companies and take loan of 8 staffs from other firms. GentCo
has issued audit instructions to component teams where list of deliverables and
timetable has been mentioned. Component teams are required to determine their
own materiality level.
Requirements:
i) What evidence should GentCo obtain in order to express opinion on the consolidated
financial
statements?
ii) Say, one of the component auditors has expressed qualified audit opinion in its audit
report.
How will this opinion affect the opinion of GentCo on the financial statements
of Shahab
Holdings ltd. and the consolidated financial statements of the group.
c) ‘Based on our examination of the evidence supporting the assumptions, nothing has
come to our attention which causes us to believe that these assumptions do not provide
a reasonable basis for the forecast.’
Requirement:
From the given extract, describe the level of assurance provided by this statement and explain how

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 and why it differs from the level of assurance provided by an audit report on
annual historical
financial statements.
d) You are an Audit Assistant of Ahmed & Partners and your firm is planning the audit of
a client. You have been provided with draft financial statement extracts and the
following information is about your client, TFL International Ltd, who is a kitchen
equipment manufacturer. The company’s year-end is 30 June 2022.
TFL International Ltd has recently been experiencing trading difficulties, as its
major customer who owes BDT0.6 million to TFL International Ltd has ceased
trading, and it is unlikely any of this will be received. However, the balance is
included in the financial statements extracts below. The sales director has recently
left TFL International Ltd and is yet to be replaced.
The monthly cash flow has shown a net cash outflow for the last two months of the
financial year and is forecast as negative for the forthcoming financial year. As a
result of this, the company is unable to settle suppliers whose payment are due and
some are threatening legal action to recover the sums owing.
Due to its financial difficulties, TFL International Ltd defaulted a loan repayment
and as a result of this breach in the loan contract, the bank has asked that the loan
of BDT4.8 million be repaid in full within six months. In view of this, the directors
have decided not to pay dividend for the period. Below is the Financial Statement
extracts for TFL International Ltd for the year ended 30 April:
Draft Actual 2022 2021
Million BDT Million BDT
Current assets
Inventory 3.4 1.6
Receivables 1.4 2.2
Cash - 1.2
Current liabilities
Trade payables 1.9 0.9
Overdraft 0.8 -
Loans 4.8 0.2
Requirement:
Explain the factors that indicate that TFL International Ltd may not be operating as a going concern
entity.
e) Social and environmental issues have become important for the statutory auditor in
recent years because these issues are important to the company as they can
potentially impact on the financial statements. In Bangladesh, these issues have
become even more important due to exploration for discovery and exploitation of
Gas and ternary waste in our territorial waters. Social and environmental issues are
also required to be considered under the International Standards of Auditing – ISA
250. Consideration of laws and regulations in the audit of financial statements and
social and environmental issues impact all the stages of audit in terms of:
• Knowledge of the business (ISA 315)
• Inherent risk assessment (ISA 315 and 330)
Requirement:
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 Discuss six situations where social and environmental issues can potentially impact the financial
statements.
6. a) Distinguish between Auditors’ report and Audit opinion.
b) The chairman of Fitness Ltd wanted to know to the CFO of the company about the type
of Auditor’s report for the year-ended on 30th June 2023. The CFO informed that
the Auditor’s report
is modified but opinion is not modified. – Clarify the response of CFO.

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 AUDIT & ASSURANCE

Time allowed- 3:30 hours

Total marks- 100

[N.B. - The figures in the margin indicate full marks. Questions must be answered in English.
Examiner will take account of the quality of language and of the manner in which the answers
are presented. Different parts, if any, of the same question must be answered in one place in
order of sequence.]
Marks
1. Smart Chemical Ltd. is a manufacturing company in the chemical industry. MM Ahmed
& Co. Chartered Accountants have been its auditors and were appointed auditors for a
period of three years. This is the last year of the engagement and the audit for the
current year is about to commence. The opinion for the previous year was an adverse
opinion which arose following a disagreement with management on the basis of the
preparation of the financial statements and a material uncertainty with regards to going
concern that existed at the time.
Before commencement of the audit for the financial statements of the year ended 31
March 2023, Smart Chemical Ltd. advertised for bids from reputable firms of auditors
for offering of audit services. The advertisement indicated that the company wished to
engage auditors who will be required to conduct the audit of the current year financial
statements. MM Ahmed & Co. Chartered Accountants inquired of management of
Smart Chemical Ltd. on why the company wants to replace them before the expiry of
their term of office. A Board resolution was made by Smart Chemical Ltd. to
terminate the contract with MM Ahmed & Co. Chartered Accountants and the
Company Secretary formally wrote to the firm informing it of the decision and that the
firm should return property belonging to Smart Chemical Ltd. immediately. The letter
states that since the audit fee for the previous year audit was paid, the company does
not owe MM Ahmed & Co.
You are the partner in charge of client acceptance in your firm of auditors, Rex &
Partners. Your firm has been in existence for three years and it has grown from being a
two (2) man partnership into a firm with six partners and ten other members of staff.
Your client base comprises largely of trading companies and telecommunication
companies.
Your firm decided to submit a bid in response to the invitation for bids by Smart
Chemical Ltd. The senior members of your firm resolved that although this will be the
first time that the firm will be auditing a client in this industry, it should be able to
conduct a quality audit and if necessary, staff will undergo training before the
commencement of the audit if appointed as auditors by Smart Chemical Ltd. Your
firm has three other audit clients with the same year end as that of Smart Chemical
Ltd. and the audits for their financial statements are due to begin soon.
Smart Chemical Ltd. received five bids from interested audit firms including one from
Rex & Partners. In view of the tight deadlines requiring that the financial statements of
Smart Chemical Ltd. should be finalized and the audit report signed by 27 April 2023
in readiness for the Annual General Meeting on 12 May 2023, the Board of Directors
(BOD) of Smart Chemical Ltd. resolved to nominate Rex & Partners as the new

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 auditors. The Company Secretary of Smart Chemical Ltd. formally wrote to Rex &
Partners informing them of the appointment and requesting them to confirm
acceptance by signing the agreement enclosed in the communication by a specified
date.
As Partner in Charge of client acceptance, you received the letter from Smart
Chemical Ltd. and you are expected to respond as quickly as possible within the
timeframe indicated in the letter.
Requirements:

a) Discuss the termination of the contract for audit services between Smart Chemical Ltd.
and MM Ahmed & Co. Chartered Accountants clearly explaining the professional
requirements that should
be followed.
b) Explain the matters that should have been considered before responding to the invitation
for bids
for offering of audit services by Smart Chemical Ltd.
c) Explain the matters and actions that should be taken from receipt of the notice of
appointment as
auditors from Smart Chemical Ltd. to the time of making a decision whether to
accept the
appointment or not.
2. a) As a qualified senior along with one audit staff you are about to start work on an
assignment. Before the file is passed on to the manager, you are responsible to review
the work of audit staff.
Requirement:
What aspects you will have to be consider when reviewing the work?
b) Honest Gentleman & Co., Chartered Accountants (HGC) has been regarded as one of
the most respected auditors in the market. In a recent audit HGC had a serious
disagreement with the directors of one of their major audit clients on several critical
accounting treatments. As a result, the directors, being displeased, have threatened to
recommend another firm of auditors for appointment in the upcoming AGM.
Requirement:
What are the statutory rights available for HGC to bank on if the directors carry out their threat?
3
c) Recently you have come across the following professional issue.
During the audit of a listed company, you overheard the finance director on the
telephone to a family friend requesting him to buy shares on his behalf, prior to an
announcement about a new product which you know is likely to increase the share
price significantly. The finance director is a chartered accountant.
Requirement:
Set out the problems inherent in the above situation and the action that you should take.
3. a) An assurance firm must accept an engagement judiciously and professionally
ensuring compliance with critical conditions and requirements laid down in the
respective ISAs, ethical codes, applicable laws, and regulations.
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 Requirement:
As an audit professional, you are asked to summarize the actions you need to know underlying
acceptance of an audit engagement.
b) You are an Audit Senior in Ahmed & Partners, a firm of chartered accountants. The
Directors of Coppertech Industries Ltd have nominated Ahmed & Partners to accept
appointment as auditors. Coppertech Industries Ltd is a family company which is
involved in the manufacture of copper components required for electric cars. These are
mainly sold abroad and 60 days credit is allowed. This will be the first time for Ahmed
& Partners to audit a company in this industry. The Finance Director left last year and is
yet to be replaced. Profits have declined in the last three years and this has eventually
led to serious liquidity problems. The previous auditors resigned last month. The Partner
who is in charge of client acceptance asked you to perform client screening procedures.
Depending on the findings, the company will be put forward for approval. The
Engagement Partner will be required to complete a client acceptance form which will be
submitted to the Partner who is in charge of client acceptance. The acceptance form will
be accompanied by the findings and relevant documentation.
If the appointment is accepted, you will be required to draft an engagement letter
before the audit commences. Both Coppertech Industries Ltd and Ahmed &
Partners will be required to sign the engagement letter.
Requirements:
i) Describe the basic factors to consider when screening Coppertech Industries Ltd. 3 ii)
Explain why an engagement letter is important to both the client and the auditor. 3 iii) Suggest
the action(s) to take if Coppertech Industries Ltd does not sign the engagement letter. 3
4. a) During the course of your audit of Midget Ltd the credit controller asks for a private
interview with you. During this interview he makes it known that he suspects the chief
accountant through altering the books is misappropriating company funds received
from debtors.
Requirement:
What steps would you like to take to assess whether the credit controller’s suspicions are
reasonable?
b) ISA 701: Communicating Key Audit Matters (KAM) in the Independent Auditor’s
Report is a new ISA introduced as part of the International Audit and Assurance
Standards Board’s (IAASB) extensive revisions to International Standards on Auditing
(ISAs) relating to audit reporting. The
objective of the IAASB’s revisions was to make the auditor's report more detailed
and useful for the intended users. ISA 701 applies to audits of complete sets of
general purpose financial statements of listed entities.
Subsequently, the Institute of Chartered Accountants of Bangladesh (ICAB) issued
a notice to practitioners which directed that auditor’s report issued on financial
statements for periods ending on or after 31 December 2018 for Public Interest
Entities (PIEs) to include a communication on Key Audit Matters as required by
ISA 701.
You are the Partner in charge of training with Azad and Associates. An audit team
member informed you that one of the clients being audited has an issue which is

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 being contemplated as to whether to report the issue as key audit matter, emphasis
of matter paragraph, other matter paragraph, or to modify the audit opinion.
Requirements:
Prepare briefing notes for the staff of your firm regarding the following:
i) KAMs and state TWO (2) categories of entities in Bangladesh which ISA 701 is
applicable
as adopted by ICAB 3 ii) Factors to be considered in determining KAMs. 3
c) Auditors should consider materiality when determining the nature, timing and extent of
audit procedures. Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of the financial
statements. Ideally an item measuring in large figure having influence in the
credibility of the financial statements is considered material. However, there is
something called performance materiality which is set to a relatively smaller
number.
Requirement:
Briefly discuss about the performance materiality.
5. a) The Brexit Group of Companies comprises a parent company and two subsidiaries
based in foreign countries. The year end of the parent company and one subsidiary
is 31 December. Brexit Group of companies acquired eighty percent of the shares
in another company during the year.
The country in which the existing subsidiary is based has not yet adopted the
International Financial Reporting Standards (IFRSs) in the preparation of financial
statements. The country in which it is based has its own accounting standards
which the subsidiary follows but are not similar with the international standards.
As a result of this, there are disparities in some accounting policies adopted by this
subsidiary with those of the parent company. The financial statements of
subsidiaries are audited by local audit firms in their respective countries.
The subsidiary acquired during the current year is based in a country which
follows the International Financial Reporting Standards (IFRSs). The subsidiary is
audited by a local firm of Chartered Accountants. The auditors in this country are
not regulated and do not perform audits in accordance with International Standards
on Auditing (ISAs).
You work for Ahmed & Associates Chartered Accountants who are the auditors of
the parent company. Your firm has been appointed auditor of the group financial
statements. At a pre audit meeting with the group management, there was concern
from one of the managers on why group financial statements should be audited in
addition to the parent and subsidiary financial statements having already been
audited by their respective auditors. Each of the subsidiaries maintains financial
statements in the currency of the home country. The consolidated financial
statements will be in the currency of the parent company.
You are planning the audit of the consolidated financial statements of the Brexit
Group of Companies. The subsidiary acquired in the year under review is a
significant component from the point of view of the group.
Requirements:

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i) Describe four matters that Ahmed & Associates Chartered Accountants should consider
in the
audit of the consolidated financial statements.
ii) Explain the responsibility for the opinion of the separate financial statements of the
parent and the subsidiaries with that of the consolidated financial statements. 3
iii) Describe the work that should be performed by Ahmed & Associates Chartered
Accountant
on the subsidiary considered as a significant component of the Brexit Group of Companies.
4
b) Omega Ltd was incorporated to engage in the production, supply and retail of sachet
water. The final audit for the Financial Statements ending 31 December 2023 is
nearly complete and it is proposed that the Financial Statements and Audit Report
will be signed on March 31, 2024. Revenue for the year is TK.78 million and profit
before tax is TK.7.5 million.
The following events have occurred subsequent to the end of the reporting year of
the company.
Lawsuit
A key supplier of Omega Ltd is suing them for breach of contract. The lawsuit was
filed prior to the year end, and the sum claimed by the supplier is TK.1 million.
This has been disclosed as a contingent liability in the Notes to the Financial
Statements. However, correspondence has just arrived from the supplier indicating
that they are willing to settle the case for a payment by Omega Ltd of TK.0.6
million. It is likely that the company will agree to this.
Warehouse
Omega Ltd has three warehouses sited in different locations. Following extensive
rain on 20 February, 2024, one of the warehouses was completely flooded and as a
result, all inventory in the warehouse valued at TK.1 million was damaged and has
been disposed off. The insurance company has already been contacted. No
amendments or disclosures have been made in the financial statements. Account
Receivables
A customer of Omega Ltd has been experiencing cash flow problems and its year-
end balance is TK.0.3 million. The company has just become aware that its
customer is experiencing significant going concern difficulties. Omega Ltd
believes that as the company has been trading for many years, they will receive
some, if not full payment from the customer, hence the receivables balance has not
been adjusted.
Requirements:
i) Discuss whether the financial statements require amendment. 3
ii) Describe audit procedures that should be performed in order to form a conclusion on the
amendment.
iii) Explain the impact on the audit report should the issues remain unresolved. 2 c) You have
commenced the audit of Atika Ltd, a company involved in the importation and sale of
plumbing materials. As part of the audit, you have noticed the following:
i) Atika Ltd does not pay its suppliers in Germany through the bank. It relies
mostly on the black market for the transfer of funds to its suppliers.
ii) Atika only sells its goods in Bangladesh.
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 iii) On 25 March within the audit year, there was a cash deposit of
US$2,500,000.00 into the forex account of Atika Ltd.
iv) On 30 March the company transferred the following:
• US$499,999.99 to an unknown account in Canada
• US$399,999.99 to an unknown account in Kenya
• US$499,999.99 to an unknown account in Romania
• US$250,000 to the personal account of the Managing Director •
US$150,000 to an unknown company.
v) The company’s general ledger shows a revenue of TK.1,560,000
vi) The import documentations show purchases of TK.36,000,000 There is no
evidence of payment for the goods from Atika Ltd’s bank accounts.
vii) The closing inventory amounted to TK.2,145,200
The Audit Manager has raised the issue of money laundering considering the
nature of the transactions above.
Requirements:
As the Partner on the engagement,
i) Explain to the team members the various stages of money laundering and show how the
above
transactions confirms the client’s engagement in money laundering. 4 ii) What are the
obligations on the firm for money laundering? 3
6. a) On 1 July 2022, Dilli Aluminium Ltd introduced a ten-year warranty on all sales of its
cooking equipment. Total sales of the cooking equipment for the year ended 31
March 2023 amounted to TK.2.5 million. The draft Auditor’s Report for the year
ended 31 March 2023 showed revenue of TK.5.6 million.
The notes to the financial statements disclosed that since the introduction of the
warranty, Dilli Aluminium Ltd’s cooking equipment has been guaranteed to be
free from defects under normal household use. As a result, no provision was
recognised, as the amount of the obligation cannot be measured with sufficient
reliability.”
The draft report on the Financial Statements of Dilli Aluminium Ltd for the year
ended 31 March 2023 was unmodified.
Requirement:
As the Managing Partner, comment on the draft report before you.
b) Prominent Manufacturer Ltd (Prominent) is an established business in the manufacturing sector.
The company has received different awards over the past decade. Prominent’s
year-end is 30 September 2022. The audit of the financial statements of Prominent
is nearly complete and the financial statements and the audit report are due to be
signed in a few days.
The following additional information on two material events has been given to the
auditor on 3
December 2022:
Event 1:
This event occurred on 10 November, 2022. Production at the Hwange factory was
halted for one day when a truck carrying dye used in coloring the fabric on
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 mattresses reversed into a metal pylon, crashing the vehicle and causing a dye to
spread across the factory premises and into a local river. The Environmental
Authority of Bangladesh is currently considering whether the release of the dye
was in breach of environmental legislation. The company’s insurers have not yet
commented on the event.
Event 2:
This event occurred on 19 October, 2022. The springs in a new type of mattress
have been found to be defective making the mattress unsafe for use. There have
been no sales of this mattress as it was due to be marketed in the next few weeks.
The company’s insurers estimated that inventory worth TK600,000 had been
affected. The insurers also estimated that the mattresses were only worth
TK100,000. No claim could be made against the supplier of springs as this
company was in liquidation with no prospect of any amounts being paid to third
parties. The insurers would not pay Prominent for the fall in value of the inventory
as the company was underinsured. This entire inventory was in the finished goods
store at the end of the year and no movements of inventory had been recorded post
year-end.
Assume that on 10 December 2022, the financial statements and the audit report
were signed, and the Annual General Meeting was to take place on 10 January
2023. The Environmental Authority issued a report on 28 December 2022 stating
that Prominent was in breach of environmental legislation and a fine of
TK800,000 would be levied on the company. The amount is material to the
financial statements.
Requirements:
i) Explain the reporting implication in accordance with IAS 10: Events after the Reporting
Period.
ii) Explain the auditors’ responsibility and the audit procedures that should be carried out
in
accordance with ISA 560: Subsequent Events.
iii) Explain the additional audit procedures the auditor should carry out in respect of the
fine by
the Environmental Authority.
c) UVW Ltd (UVW) is a client of your firm that operates a chain of shops in Cardiff
selling ethically produced herbal cosmetics and toiletries. Since opening its first
store five years ago the company has expanded and now has ten outlets in
Bangladesh. The directors wish to continue the company’s expansion by opening
additional stores in Chattogram city and by introducing a mail order service. In
order to finance these expansion plans the directors of UVW have been discussing
an increase in their borrowing with the company’s bank. In support of the funding
request the directors have
prepared profit and cash flow forecasts for the three years ending 31 December
2023, based on assumptions they have made about the future success of the
business. UVW’s bankers require this information to be examined and reported on
by independent accountants, and the directors have asked your firm to undertake
this assignment.

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 Two potential properties have been found for the new outlets, both of which are
leasehold premises that will require considerable refurbishment to bring them up to
the standard of existing stores.
The mail order service, for which postage will be charged, will be run from the
main Cardiff branch which incorporates the central delivery warehouse of the
company. The packaging for delivered items will be specially designed to protect
the products in transit and to reflect the company’s logo and ethical trading
credentials. The ingredients for preparing the herbal products are purchased
centrally on credit terms. All ingredients are sourced from Chattogram producers
and all packaging is made from recycled materials. Employees at UVW are paid at
rates above the industry average and are also paid bonuses linked to profits made
by the company as a whole.
Requirement:
Describe the differences between the conclusion expressed in an assurance report on forecast
information and the opinion expressed in an auditor’s report on financial
statements. Give reasons
for these differences.
d) Various auditing standards require auditors to report certain matters arising to those
charged with
governance. This is typically ‘private’ by nature and just for the attention of those
charged with governance, as opposed to the auditor’s report, which is a published
document. In our place the requirements in relation to this private reporting in ISA
260 (revised) Communication with those charged with Governance which
deals with the auditor’s responsibility to communicate with those charged with
governance in an audit of financial statements.
Requirement:
What are the matters to be communicated under the scope of ISA 260?
e) It is often that a review work under ISRE 2400 is fallaciously interpreted as an audit by
the clients. But it is always imperative that a practitioner undertakes appropriate
measures to make the client understand the difference between an audit and a review.
Ideally, like an audit engagement, the practitioner would issue an engagement letter
delineating all critical requirements underlying a review under International Standards
on Review Engagements (ISRE) 2400 (Revised)- Engagement to Review Historical
Financial Statements.
Requirement:
As an engagement manager, you are advised to delineate all critical requirements underlying a
review under ISRE 2400.

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 AUDIT & ASSURANCE

Time allowed- 3:30 hours

Total marks- 100

[N.B. - The figures in the margin indicate full marks. Questions must be answered in English.
Examiner will take account of the quality of language and of the manner in which the answers
are presented. Different parts, if any, of the same question must be answered in one place in
order of sequence.]
Marks
1. a) Recently news scam in financial and nonfinancial organization has been published
in the print and electronic media of the country. Most of them are occurring due to
related party transactions. In the partners meeting of your firm, it has been decided to
perform a training session for the professional staff of the firm and you are given the
responsibility.
Requirements:
You are required to prepare notes for the training session on how to identify
related party
transactions. Your notes should include:
i) 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
ii) A summary of general audit procedures you would perform to ensure that all
material related
part of transactions have been identified.
b) Members of the Institute of Chartered Accountants of Bangladesh (ICAB) are expected
to well grasp the ethical codes promulgated by the IESBA as adopted by the ICAB as
well as those embedded in the Schedule-C of ICAB Bye Laws.
There has been a perennial debate about whether professional accountants can
advertise their services and activities! On the other hand, advertisement is believed
to be one of the key drivers to the business growth. Professional accountants in
practice are usually guided by two sets of ethical codes underlying their services
provided to the clients. Alongside local codes, respective jurisdiction might be
guided by the IESBA codes of ethics.
Requirement:
Being an accountant in practice, describe if accountants in practice are allowed to advertise their
practices.
c) You are the Partner in Charge of client acceptance in your firm of Chartered
Accountants. Below are two prospective clients for your final review.
• Reed Ltd. is a fast-growing company in the trading industry and deals in
hardware. Your firm has been nominated to be the auditor of Reed Ltd. and
formal communication has been received by your firm. Your firm of chartered
accountants has significant shares in the largest distributor of hardware in the
country.
• Fast Communication Ltd. advertised for audit services and your firm submitted
a bid in response to the advertisement and was nominated as auditors. Your

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 firm has audit experience in this industry because it is the current auditor of
Link Ltd. a company in the same industry. The year-end of Fast
Communication Ltd. is different from that of Link Ltd. and so the same
engagement team will audit both Companies.
Requirement:
Describe the response that you will give in view of the nominations for your firm to be auditor of
the two companies above.
2. a) Most of the business entities are small in size in our country. The management of
the company does not want to go to different professionals for professional service.
Most of the companies want to get services from one professional firm. Under these
circumstances, your Chartered Accountancy firm, having seven partners, has been
invited by Mr. Hilton, the Managing Director and majority shareholders of Paltan Ltd.
to accept appointment as the auditor of the company and provide assistance with the
preparation of the financial statements as well as the company tax matters.
The principal activity of Paltan Ltd. is to process and pack tea bags and tea cups
which are sold to customers operating in fast foods and retail shops. The main
purpose of this audited financial
statements is to obtain loan from bank. As per country leading policy, debt equity
ratio is required for such small business is 1:1.
The accounting records are computerized and the company uses the software
which was developed by Proton Software Ltd. a company owned by Mr. Hilton's
brother. The software has been customized to integrate inventory control with
receivables and payables. Proton Software Ltd. also provides support for the
company's computer systems. The accounting records are maintained by Mr. XYZ,
assisted by Mr. PQR who is a part time employee of the company and responsible
for payroll processing.
Requirement:
State, with reasons, what matters are to be considered at procedures to be performed prior to your
firm accepting and commencing the audit of Palton Ltd.
b) ABC Limited, a company dealing with the production and distribution of electrical
equipment, has been in the market since January 2015. About 80% of their production is
sold in the local market so far while the remaining 20% is exported to the Sub-Saharan
countries in Africa. Given the growth in the business coupled with the reputation gained
by the company, there has been a possibility of attracting new investors to their
business. So, with a view to adding more credibility to their financial reporting status
and underlying acceptability, they have started thinking of engaging a better audit firm
to do their audits.
Requirement:
Being a potential auditor of this company, you are asked to delineate the minimum conditions you
would take into consideration before accepting such an engagement.
c) ISA 210 prescribes the terms of an audit engagement. So, a careful read and grasp of the
contents of the respective ISA is critical to accepting an audit engagement.
Requirement:
Elucidate the term as prescribed in ISA 210 for an audit engagement.
3. a) Gamston Ltd. is a private limited company engaged in manufacturing and exporting
garment items. Raw materials (yarn) import and finished products export are taken
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 place on Back-to-Back L/C. Due to Covid-19 and Russia-Ukraine war, the exports,
have been hampered severely. Several export orders have been cancelled by the
buyer. Lending bank has created demand loan by substantial amount and in the
sanction of demand loan, bank has given condition that Gamston Ltd. can be allowed
to open further L/C up to the limit of 75% repayment of demand loan. Under this
situation, your firm has been appointed auditor of Gamston Ltd. In a partners’ meeting
the managing partner of the firm informed the engagement parties of the audit
assignment of Gamston Ltd. that there is a risk of going concern issue in the Gamston
Ltd. and we have responsibility to obtain sufficient appropriate audit evidence about
the appropriateness of management’s use of going concern assumption.
Requirements:
i) Identify the tasks that will have to be carried out to identify the genuineness of going
concern
assumptions of Gamston Ltd.
ii) Write down the possible indications of going concern problems as per ISA 570. 7 b) ISA
240, while talks about auditors’ responsibility with regards to fraud in audit of financial
statements, among others uses the term management override to refer to the unique ability
of management to manipulate the accounting records and therefore produce misleading
financial statements. Reasons for management override are many and varied, for example
financial gain, tax avoidance, or the enhancement of personal or business performance.
Auditors need to assess the risk of management override during the planning stage of the
audit, and design appropriate audit procedures in response.
Requirement:
Indicate the minimum procedures that would give you reasonable confidence in arriving at the
conclusion that frauds emanating from management override have not occurred in
the financial
statements under audit.
4. a) You are planning the audit of the financial statements of Frangos Ltd. for the year
ended 31 December 2022. Frangos Ltd. imports its raw materials through Chottogram
port where port staff generally calls for strike to achieve their salary increment
movement. During the current year the company experienced serious delays in the
arrival of raw materials due to delays arising from the strike. This is the first time you
will be auditing a company in the chemical industry.
You are leading a team of newly recruited Audit Assistants, who completed their
studies recently,
on the audit of the financial statements of Frangos Ltd.
Frangos Ltd. manufactures fertilizers and company was awarded a contract by the
Ministry of Agriculture to supply fertilizer to the Govt. Depots. In the last two
years, Frangos Ltd. could not meet the demand for its products due to the company
failing to meet its production targets. This was attributed to old equipment which
constantly breaks down. As a result of this, the Technical Manager of Frangos Ltd.
resigned this year citing frustrations in failing to meet production levels. It is not
easy to find technical staff in this industry. In view of the award of the contract to
supply fertilizers for the next farming season, the company undertook extensive
repairs of its ageing equipment during the year and in some cases, complete
refurbishment of the equipment. The Managing Director is concerned that if the
company fails to meet its contractual obligations the contract would be cancelled,
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 and the company would face difficulties repaying the bank loan which it secured
for the repairs and refurbishment of the equipment. The loan is secured on the
equipment purchased using the facility.
You establish that a farmer based in Bogra sued Frangos Ltd. in the year under
review claiming that the company supplied him with expired fertilizer resulting in
his losing TK1.5m. The farmer is claiming damages and interest as the courts may
determine.
There has been increased monitoring of the disposal of hazardous substances by
the concerned ministry and agency for managing environment and climate.
Requirements:
i) State four matters that should be documented in the working papers with regards to
materiality in the audit of the financial statements of Frangos Ltd. 4
ii) Identify and explain four audit risks in the audit of the financial statements of Frangos Ltd.
and suggest suitable responses for each risk.
iii) Identify and explain four business risks in Frangos Ltd. 4
b) Chowdhury & Associates are auditors of Cyba Limited and the audit of the financial
statements of Cyba Limited for the year ended 31 December 2023 is nearing
completion.
The company has not paid out any dividends for the last five years on account of
re-investing most of the profits in order to improve the liquidity of the company.
In the year under review, the company failed to satisfy customer requirements
resulting in some customers switching suppliers. In an effort to retain customers
the company offered 30 days extended credit to some of its customers who were
on cash basis. This significantly affected the liquidity of the company. Major
suppliers withdrew credit to Cyba Limited on account of delayed payments.
Because of poor liquidity, the company experienced a number of labor disputes
during the year resulting in workers withdrawing labor. The Audit Manager
performed analytical procedures of the financial statements and the result shows a
net current liability position. The directors of Cyba Limited evaluated the ability of
the company as a going concern and concluded that it was a going concern and
that it would be recapitalized and the liquidity position would improve in the next
twelve months. You are the Engagement Partner for the audit of the financial
statements of Cyba Limited and four other clients of your firm.
You are reviewing the working papers of the four other audit clients and the
following information has been extracted from the working papers:
Client one
The audit team on this audit obtained sufficient appropriate evidence on which to
base the opinion. There is a matter that you are concerned about and you would
like to include it in the audit report. This relates to a provision for a pending legal
case involving a spillage of hazardous substances by the company. You are
concerned that environmentalists may express concern if this matter is not
mentioned in the audit report. The penalty for the spillage according to the act is
small and is considered immaterial to this client.
You are pleased that management correctly accounted for this and adequately
disclosed it in note 2 of the financial statements.

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 Client two
An evaluation of the schedule of uncorrected material misstatements in the audit of
the financial statements shows that the uncorrected misstatements are above the
materiality figures set at the planning stage. The request to management to pass an
adjustment in the financial statements was declined.
The total amount of uncorrected misstatements is material but not pervasive to the financial
statements.
Client three
A few days before the inventory count at the year end, fire gutted part of the
warehouse destroying the entire inventory. The book value of the inventory was
used to determine the inventory value. It was not possible to obtain sufficient
appropriate evidence of the value of inventory at the year end and you concluded
that inventory is material figures in the financial statements and considered
pervasive to the financial statements.
Client four
The client uses a manual accounting system and the audit team observed that the
filing of documents is very poor. The audit team was not able to obtain the
necessary evidence regarding 70% of the samples on sales revenue. It was not
possible to obtain the required evidence through other means and this was brought
to the attention of management.
A misstatement of the revenue figures in the audit of this client will result in a
misstatement of the profit for the year. Requirements:
i) Explain the reasons why auditors are concerned with the ability of client companies
operating
as going concerns.
ii) Identify and explain four conditions that suggest that Cyba Limited has going concern

problems. 3 iii) Suggest, giving reasons, a suitable opinion for each of your firm’s
audit clients one to four above. 3

5. a) Edward & Co. Chartered Accountants (EdCo) has been appointed auditor for the
Mittal Group of companies for the year ended 31 December 2023. The scope of the
work of EdCo includes auditing and expressing opinions on the financial statements of
Mittal Holdings Limited and 5 others out of 7 companies of the group. Under the
engagement term, EdCo would remain responsible for issuing opinions on the
consolidated financial statements of the group. Two other companies are also very
important and material to the reporting of the group but are being audited by other
firms.
Under strict deadlines to finalise the audits, EdCo finds that they do not have
adequate staff to run all audits in the engaged entities simultaneously. EdCo, under
this unavoidable circumstance, has decided to sub-contract audit engagements for
2 companies and take loan of 8 staffs from other firms. EdCo has issued audit
instructions to component teams where a list of deliverables and timetable has
been mentioned. Component teams are required to determine their own materiality
level.
Requirements:
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 i) What are the ethical or professional issues arising from sub-contracting audit
engagements
and taking staff loans?
ii) As principal auditor, what are the procedures that EdCo should perform in
respect of the
components that are not being audited by EdCo?
iii) What evidence should EdCo obtain in order to express its opinion on the
consolidated financial
statements?
iv) Say, one of the component auditors has expressed qualified audit opinion in
its audit report. How will this opinion affect the opinion of EdCo on the
financial statements of Mittal
Holdings Ltd. and the consolidated financial statements of the group.
b) Mittal Holdings Ltd. is a listed company that manufactures and sells various types of
household electrical equipment. To sell their products, the company uses both their own
selling outlets in a few major cities as well as countrywide retailers and distributors.
The latest annual general meeting of the company was held on 28 March 2023, where
shareholders appointed Edward & Co. Chartered Accountants (EdCo) as auditor for the
year ending 31 December 2023.
Being a listed company, the statutory auditors must issue their reports with
mandatory paragraph of Key Audit Matters (KAM). Though the term itself offers
an indication of what those matters should be, the auditors remain confused of
selecting Key Matters to be mentioned.
Requirements:
Being Engagement Manager nominated by your firm to deal with the proposed audit, you are asked
to narrate the determining criteria of KAM as indicated in ISA 701.
6. a) Described below are three situations which have been arisen in three audits. The
year end in each case is 30 June 2023.
(i) Alpha Ltd. sold goods to Beta & Co. valued Tk. 5,000. The goods were
delivered to the store of Beta at 7:00 pm when there was no responsible person
to acknowledge the receipt of goods. At the same night at 10:00 pm fire had
taken place and the delivered goods were burnt. The management of the Beta
has refused to pay the value of delivered goods with a logic that they did not
acknowledge the receipt of the goods. However, Alpha Ltd. has accounted for
the delivered goods as “sales” and “receivable from Beta”. The issue has
remained with the arbitrator.
The pre-tax profits of Alpha Ltd. for the year ended 30 June 2023 was Tk.
3,000,000 and total assets at 30 June 2023 was Tk. 6,000,000.
(ii) Due to the devastating flood inventory sheet kept at the warehouse of TP Ltd.
was destroyed.
The destroyed inventory sheet was only the record of the Company’s
inventories at the year end. The company has included an estimated inventory
figure of Tk. 8,50,000.
The pre-tax profits of TP Ltd. for the year ended 30th June 2023 was Tk.
1,200,000 and total assets at 30 June was Tk. 1,750,000.
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 (iii) During the course of audit of PQR ltd, it has been noted by the auditor that
80% of its revenue is derived from a single retailer customer with whom it has
a three-year renewable contract. This contract is due for renewal in November
2023. However, the directors require the auditor’s report on the financial
statements to be signed on 31 August 2023.
Requirement:
For each situation describe the effect on the auditor's report.
b) As a partner of MNO & Co. Chartered Accountants and engagement partners of
providing audit service to Petersons Ltd. in one hand you have issued audit report with
“unmodified opinion” on the other hand as the second point under the “Report on other
Legal and Regulatory Requirements” you have mentioned.
“In our opinion, proper books of accounts were required by law have not been kept
by the company as far as it appeared from our examination of this books”
Reviewing the report, The Financial Reporting Council wanted clarification as you
have issued contradictory auditor’s report.
Requirement:
You are required to clarify your position in support of issued auditor’s report.

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Solutions:
November-December 2023

Answer to the Question# 1(a) (i):

Informing the client

• Report to appropriate level of management;
• If believed that management or employees with significant roles in internal controls are
involved or fraud results in material misstatements report to those charged with
governance;
• If integrity/honesty of management or those charged with the governance is in doubt,
seek legal advice.

Answer to the Question# 1(a) (ii):

Audit report
• If error is corrected, there is no need to qualify;
• If correction is not made, then report should be appropriately qualified;
• If outcome of fraud is uncertain, then a significant uncertainty should be included;
• If outcome can be determined and amount is not adjusted in the financial statement, the
report should carry qualification with except for/disagreement.

Answer to the Question# 1(b) (i):

Trade payables
Trade payables are liabilities to pay for goods or services that have been received or
supplied and have been invoiced or formally agreed with the supplier.
Accruals
Accruals are liabilities to pay for goods or services that have been received or supplied
but have not been paid, invoiced or formally agreed with the supplier, including
amount due to employees.
Provision

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 Provisions can be distinguished from trade payables and accruals because there is uncertainty
about the timing or amount of the future expenditure required in settlement.

Answer to the Question# 1(b) (ii):

Legal obligation
A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.

Constructive obligation
A constructive obligation is an obligation that derives from an entity’s actions where:
(a) by an established pattern of past practice, published policies or a sufficiently specific
current statement, the entity has indicated to other parties that it will accept certain
responsibilities; and
(b) as a result, the entity has created a valid expectation on the part of those other parties
that it will discharge those responsibilities.

Answer to the Question# 1(c):

Taxation services
Many audit firms prepare tax computations for their client companies and this should not
normally compromise independence.
Where taxation services are provided to the company, a conflict of interest could arise in
dealing with the tax affairs of the directors (e.g., if any of the directors are also shareholders,
they may have preferences as to dividends or bonuses, which are not in the best interests of
the company’s tax or cash flow position).

There may also be independence issues in relation to tax advisory work. For example, the firm
may have difficulty in giving an independent view on the acceptability of a scheme to the
Revenue or Customs and Excise if the firm designed the scheme itself in the first place. As a
safeguard, a tax manager (or partner) independent
of the audit function should be assigned to deal with individual director’s tax affairs.
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Accountancy services
For many audit clients it is common to provide a range of accountancy services including
participation in the preparation of accounting records. For listed or other public interest
clients, an audit firm should not participate in the preparation of the company’s accounts and
accounting records except in emergency situations.

Preparing periodic management accounts may draw the auditor, inadvertently, into performing
management functions.

Safeguards for non-listed companies include the following:

• The client accepting responsibility for the records as its own;
The client accepts responsibility for assumptions;
• The auditor not assuming an operational role;
• Conducting appropriate audit tests on records processed/maintained by the auditor.

Management consultancy An auditor’s independence may be compromised if a course of

action is recommended to an audit client. For example, if the auditor advises on a new
computer system which is then found to be unreliable, the auditor may be reluctant to report
the weaknesses to management.

As a safeguard auditors should lay the facts before the directors and let them make the
decision. It is important that the auditor is not seen to be acting as part of the management
function.

The additional guidance on best practice has also now provided that services involving the
design and implementation of financial information technology systems (FITS) should not be
provided unless:
• Management accepts overall responsibility in writing and implementation;
• Management does not rely on the FITS work as the primary basis for determining the
adequacy of internal controls and financial reporting systems, and • The design specifications
are set by management;

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 In any case separate engagement teams are likely to be necessary to mitigate the potential
threat to independence.

Answer to the Question# 1(d):

Ethical and professional issues and actions to be taken by the audit firm.

i) Loan to member of the audit team

According to the International Ethics Standards Board for Accountants (IESBA) Code of
Ethics for Professional Accountants (the Code), a loan to a member of the audit team may
create a significant threat to the auditor’s independence. If the loan is not made under normal
lending procedures, and terms and conditions, a self- interest threat would be created as a
result of Adeeba Sultana’s financial interest in the audit client. The self- interest threat arises
because of the potential personal benefit derived which may motivate the audit team member
to behave in a manner aimed at protecting that benefit.

Such a threat would be so significant that no safeguards could reduce the threat to an
acceptable level. It follows therefore that the audit team member should not accept such a loan
or guarantee. The Code, however, also states that a loan from an audit client which is a bank
or similar institution to a member of the audit team which is made under normal lending
procedures, is acceptable. Examples of such loans include home mortgages, car loans and
credit card balances.

It is possible therefore that the secured loan may be ethically acceptable and the key issue is
whether ‘the very best terms which the bank can offer’ fall within ABC Credit Ltd.’s normal
lending procedures, and terms and conditions. The bank’s standard lending terms and
conditions should be obtained and reviewed alongside the documentation for Adeeba
Sultana’s loan. Ultimately, the audit engagement partner is responsible for ensuring that
ethical principles are not breached, so the partner should be involved with the discussions.
The matter should be discussed with Adeeba and the client’s business manager in order to
establish whether the loan is to be made under the bank’s normal lending procedures. Adeeba
Sultana should be advised of the outcome of the review and ABC Credit Ltd.’s business

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 manager should be advised of this decision, explaining the rationale and ethical rules behind
it.

ii) Temporary staff assignment

The Code states that the lending of staff to an audit client may create a self-review threat to
auditor independence. The self- review threat arises when auditor reviews work which they
themselves have previously performed – for example, if the external auditor is involved in the
process of preparing the payroll figures for inclusion in the financial statements and then
audits them. As a result, there is a risk that the auditor would not be sufficiently objective in
performing the audit and may fail to identify any shortcomings in their own work. In addition,
there is a risk of the staff member assuming management responsibilities if they are involved
in making judgments and decisions which are within the remit of management.

Such assistance can only therefore be given for a short period of time and the audit firm’s staff
must not assume management responsibilities. According to the Code, an audit firm cannot
provide accounting and bookkeeping services (including payroll) to an audit client which is a
listed or a public interest entity unless the services relate to matters which are collectively
immaterial to the financial statements.

In this case ABC Credit Ltd. is a listed bank and is therefore a public interest entity. The
assignment of a qualified member of staff as a supervisor on the client’s main payroll system
is likely to be material to the financial statements of a service industry client such as a bank
and, in addition, may also involve management responsibilities. The audit manager should
therefore discuss details of the proposed role of the seconded member of staff with the payroll
manager and other key client contacts in order to establish the significance of the role and its
materiality to the financial statements. Assuming that the role is material, the audit manager
should decline the proposed staff assignment.

Answer to the Question# 2(a) (i):

Matters/procedures prior to acceptance

of audit (i) Check adequacy of resources
to enable:
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 – Work to be completed to a high standard on a timely basis/use of competent
staff
– Provision of tax/accountancy services without compromising independence (ie
safeguards can be put in place) eg:
– Use of separate personnel to perform accountancy and tax
– Review by an independent partner/senior staff member with appropriate
expertise if tax computation prepared by audit team
– Review of the audit by an audit partner who is not involved in the audit
engagement - Assess competency of Mrs CDE and Mrs B;
(ii) Establish/document existence of informed management – to ensure auditor does not take
management role;
(iii) Consider relationships/familiarity threat – to ensure independence/objectivity not
impaired;
(iv) Consider potential conflicts of interest (eg competing clients) – to ensure act in the best
interest of clients;
(v) Consider integrity of client – to reduce risk of misstatements due to
fraud/misrepresentation;
(vi) Client identification procedures – to reduce exposure to money laundering/comply with
money laundering requirements; Send letter of engagement – to ensure client understands
nature and scope of the work to be undertaken to narrow expectations gap

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Answer to the Question# 2(a) (ii):

Factors Why taken into account

 New client  Lack of familiarity – may not identify events

and transactions which have an impact on the
financial statements/higher detection risk;
 Start-up  Going concern risk
 Doubts/material uncertainty will require
disclosure in the financial statements
 Lack of going concern status will require
financial statements to be prepared on a break-
up basis;
 Lack of prior year figures  Lack of comfort/corroboration from use of
analytical review procedures
 Require more extensive use of tests of details
(substantive tests);
 Bank covenant  Risk that profits or other key items may be
overstated or understated in order to preserve
the debt equity ratio;
 Trading with ITS Ltd  Need to ensure complete disclosure of related
party transactions;
 Customized accounting software  May not be reliable, resulting in errors;
 Lack of segregation of duties  Misstatements may not be prevented or
detected and corrected on a timely basis/higher
control risk
 Determine the audit approach which is likely to
be substantive based;
 Competency of the personnel  Mrs CDE and Mrs B may not have adequate
experience in appropriately keeping the
accounting records;

Answer to the Question# 2(b):

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Matters to consider before accepting the review engagement

Before accepting the review engagement to review and provide an assurance report on Kazal
Brothers Ltd’s cash flow forecast, ISAE 3400 The Examination of Prospective Financial
Information identifies a number of matters which need to be considered:

1. The intended use of the information

2. Mahin & Company must consider, for example, whether the cash flow forecast and
assurance report will be used solely for the purpose of the increase in Kazal Brothers Ltd’s
overdraft facility. If Kazal Brothers Ltd is planning to use the assurance report for purposes
other than an extension to its current overdraft, for example, to arrange new loan finance
from the company’s bank, this must be made clear to Mahin & Company. Distribution of
the information

Mahin & Company needs to consider who will receive the report and potentially rely upon it
as this will impact on the firm’s assessment of the risk associated with the engagement. If the
cash flow forecast is intended for general distribution, this will increase the level of risk for
Mahin & Company as a larger audience will rely on it. In this case, if the information will be
used solely in support of the application to the bank and will not be made available to other
parties, this should be confirmed before accepting the engagement and will reduce the risk of
the assignment.

3. The period covered by the forecast and the key assumptions used Mahin & Company
must also consider the period covered by the cash flow forecast and the key assumptions
which have been used in its preparation. Short-term forecasts are likely to be easier to verify
and provide assurance on than longer term projections. ISAE 3400 states that a prospective
financial information (PFI) engagement should not be accepted when the assumptions used
in its preparation are clearly unrealistic or when the practitioner believes that the PFI will be
inappropriate for its intended use. In the case of Kazal Brothers Ltd, although the forecast is
only for 12 months, the growth rates assumed in relation to its operating cash receipts may,

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 for example, be judged to be unrealistic given recent trends in its business and the requested
overdraft facility of BDT 17 million for the next six months may prove to be insufficient.

4. The scope of the work and resources and skills

Mahin & Company will need to consider the specific terms of the engagement, the level of
assurance being sought by Kazal Brothers Ltd. and the form of the report required by the
bank. Mahin & Company will need to identify clearly the elements which it is being asked
to report on – for example, is it being asked to report on the cash flow forecast only or is
the firm also being asked to report on accompanying narrative or other PFI. Due to the
uncertainty of forecasts and the inevitable subjectivity involved in their preparation, Mahin
& Company will need to confirm that it is only being asked to provide negative assurance
as to whether management’s assumptions provide a reasonable basis for the cash flow
forecast and to give an opinion as to whether it is properly prepared on the basis of these
assumptions.

Mahin & Company needs to consider whether it has sufficient staff available with the
appropriate skills and experience needed to perform the PFI engagement for Kazal Brothers
Ltd. Mahin & Company should also consider whether it can meet the deadline for
completing the work and whether it will have access to all relevant information and client
staff. Given the company’s predicted need for cash in the next six months, presumably the
extended overdraft facility will need to be provided very soon and this may lead to Mahin &
Company being under pressure to meet a tight reporting deadline.

5. Other matters: Client’s integrity and ethical considerations

a. Client integrity

ISQM 1 Quality Control for Firms that Perform Audits and Reviews of Financial Information,
and Other Assurance and Related Services Engagements requires Mahin & Company to
consider the integrity of Kazal Brothers Ltd.’s management in relation to the acceptance
decision. In particular, the firm should consider management’s reasons for appointing a

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different firm from its auditors and the potential for management bias in the preparation of a
cash flow forecast in support of its required overdraft facility.

In addition to the matters identified by ISAE 3400 and ISQM 1, Mahin & Company should also
consider the following ethical matters before accepting the review engagement:

b. Ethical considerations
Given that Mahin & Company are not the auditors, the firm’s independence from Kazal
Brothers Ltd will not have been previously considered. In this regard, it is important to ensure
that there are no threats to the firm’s objectivity which might prevent it from accepting the
appointment. If the firm is not independent and its objectivity is compromised, the reliability
of the assurance report will be undermined.

Mahin & Company should also consider why the auditors have not been asked to provide the
assurance report on Kazal Brothers Ltd’s cash flow forecast. In order to provide an assurance
report on PFI, a good understanding of the client and its business is required and the
incumbent audit firm will usually have the requisite knowledge and understanding. Mahin &
Company should therefore consider whether the use of a different firm creates a risk that the
client may be hoping that the firm may not be in a position to effectively challenge the key
assumptions underlying the preparation of the forecast. When a professional accountant is
asked to perform work for a non-audit client, they should be given permission by the client to
contact its auditors in order to obtain relevant information. If this permission is not given, the
appointment should be declined.

Overall, Mahin & Company must assess the risks associated with the review engagement and
should not accept an engagement when the assumptions are clearly unrealistic or when the
firm believes that the prospective financial information will be inappropriate for its intended
use.

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Answer to the Question# 3(a):

The minimum procedures required to attain reasonable confidence that fraudulent

management override of controls has not taken place should include:
• Testing of journal entries to ensure they are appropriate. Particular attention might be
necessary to the year-end entries;
• Review of accounting estimates to judge whether management bias is evident;
• Scrutinizing significant and unusual transactions;
• Review of audit logs maintained in the critical computer systems, particularly to the GL
system. Habit of unusual use of such sensitive IDs might give rise to potential risk of
modifying recorded numbers;
• Review of recent changes in the management structure as well as in the SoPs that
unusually empower senior officials to some additional work.

Answer to the Question# 3(b):

If the group engagement team plans to request a component auditor to perform work on the
financial information of a component, the group engagement team shall obtain an
understanding of the following:
(i) Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is independent;
(ii) The component auditor’s professional competence;
(iii) Whether the group engagement team will be able to be involved in the work of the
component auditor to the extent necessary to obtain sufficient appropriate audit
evidence;
(iv) Whether the component auditor operates in a regulatory environment that actively
oversees auditors.

Answer to the Question# 3(c) (i):

A description of a business model typically includes:

● The scope of the entity’s activities, meaning what are the activities the entity does as its
core activities;
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● The entity’s structure and scale of its operations;
● The markets or geographical or demographic spheres, and parts of the value chain, in
which it operates, how it engages with those markets or spheres (main products,
customer segments and distribution methods), and the basis on which it competes;
● The entity’s business or operating processes (e.g., investment, financing and operating
processes) employed in performing its activities, focusing on those parts of the business
processes that are important in creating, preserving or capturing value;
● The resources (e.g., financial, human, intellectual, environmental and technological)
and other inputs and relationships (e.g., customers, competitors, suppliers and
employees) that are necessary or important to its success;
● How the entity’s business model integrates the use of IT in its interactions with
customers, suppliers, lenders and other stakeholders through IT interfaces and other
technologies;

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Answer to the Question# 3(c) (ii):

Inherent risk factors relating to the preparation of information required by the applicable
financial reporting framework (referred to in this paragraph as “required information”)
include:
• Complexity―arises either from the nature of the information or in the way that the
required information is prepared, including when such preparation processes are more
inherently difficult to apply.
• Subjectivity―arises from inherent limitations in the ability to prepare required
information in an objective manner, due to limitations in the availability of knowledge
or information, such that management may need to make an election or subjective
judgment about the appropriate approach to take and about the resulting information to
include in the financial statements.
• Change―results from events or conditions that, over time, affect the entity’s business
or the economic, accounting, regulatory, industry or other aspects of the environment in
which it operates, when the effects of those events or conditions are reflected in the
required information.
• Uncertainty―arises when the required information cannot be prepared based only on
sufficiently precise and comprehensive data that is verifiable through direct
observation.
• Susceptibility to misstatement due to management bias or other fraud risk factors
insofar as they affect inherent risk― susceptibility to management bias results from
conditions that create susceptibility to intentional or unintentional failure by
management to maintain neutrality in preparing the information.

Answer to the Question# 4(a):

Evaluation of quality control issues, implications for audit completion and

further actions i) Controls testing on payables

The absence of evidence of authorisation by the procurement manager in relation to the three
purchase orders represents an exception to the effective operation of an internal control on
which the auditor intends to place reliance. The review of the supporting documentation and

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the conclusion that the items were legitimate business expenditure do not resolve the
exception in the effective operation of the control. There is a risk that other exceptions and
further unauthorised purchases may have occurred which may not have been for legitimate
business purposes. The audit procedures therefore appear to have been inadequate. The audit
assistant should have reported the matter to the manager and partner for them to decide if
further work or risk analysis was required and who it should be reported to, i.e. those charged
with governance, etc. This should have also been picked up during the review of the working
papers.

Prior to finalising the audit, the audit team needs to assess the extent and significance of the
internal control deficiency and should consider increasing the original sample size and
extending the audit testing. If the extended testing identifies further exceptions in the
effective operation of the control, the auditor should review whether a controls-based
approach is appropriate and consider whether more substantive testing on the payables
component is required. The auditor should also consider including the matter in the report to
management.

ii) In line with ISA 260 Communication with Those Charged with Governance, the auditor
is required to communicate significant findings from the audit to those charged with
governance. These include significant difficulties encountered during the audit and any
extensive unexpected effort required to obtain sufficient appropriate audit evidence. The
absence of authorisation by the procurement manager in relation to the three purchase
orders requires extended audit testing and represents a potentially significant deficiency
in the operation of internal controls. It therefore represents a potentially significant audit
finding which should be communicated to those charged with governance. Petty cash
fraud

The personal taxi fares represent a fraudulent transaction by the petty cashier and should be
reviewed in the light of the auditor’s and management’s respective responsibilities in relation
to the prevention and detection of fraud. ISA 240: The Auditor’s Responsibilities Relating
to Fraud in an Audit of Financial Statements states that the primary responsibility for the
prevention and detection of fraud rests with both those charged with governance of the entity
and management. The existence of the fraud may also be further indication of a weak control

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environment. The auditor is responsible for obtaining reasonable assurance that the financial
statements taken as a whole are free from material misstatement, whether caused by fraud or
error. The amount of BDT 175 is clearly immaterial to the financial statements and therefore
does not represent a potential source of material error caused by fraud. The auditor should
review the petty cash records for evidence of any further irregularities and discuss the
matters identified with management. However, if the auditor concludes that the matter
increases the overall assessment of fraud and control risk, management should be informed.

In spite of the immateriality of the amounts involved, however, the relationship of the audit
assistant to the petty cashier represents a familiarity threat. The failure of the audit assistant
to highlight the matter prior to the discussion with the engagement quality control reviewer
may indicate a lack of professional integrity on the part of the audit assistant. In line with
ISA 220: Quality Control for an Audit of Financial Statements, the auditor, primarily the
audit engagement partner, has responsibility to monitor ethical requirements throughout the
audit process. The firm’s procedures for assigning staff to audit teams and for reporting
personal relationships with client staff should be reviewed in light of this responsibility.

If the auditor concludes that the petty cash fraud and any additional issues identified on
review of the petty cash records increases the overall assessment of fraud and control risk,
the matter should be reported to management with a recommendation that all petty cash
transactions should be adequately reviewed and authorized.

iii) Cut-off testing on revenue

IFRS 15: Revenue from Contracts with Customers requires that an entity recognises
revenue when or as the entity satisfies a performance obligation by transferring a promised
good or service (i.e. an asset) to a customer. An asset is transferred when or as the customer
obtains control of that asset. On this basis therefore, revenue has been recognised too early
and as a result revenues, receivables and profits are overstated.

The error identified is in isolation immaterial to the financial statements at 0.2% of revenue
(17,880/8.7 million). The error should be extrapolated based on the incidence of errors
identified and the level of sales to this particular customer in order to assess the potential for
a material misstatement. Based on this assessment, the auditor should extend cut-off testing

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in order to assess further the potential for a material error. The auditor should also confirm
with management that the invoicing procedure is isolated to this particular customer and
consider extending their assessment and testing to any other customers as necessary. The
auditor should also review last year’s cut-off procedures in order to investigate whether there
were any compensating errors in the prior year.

All misstatements identified should be communicated to management and the auditor should
request that they are corrected. ISA 260 requires the auditor to communicate to those charged
with governance his or her views about significant qualitative aspects of the entity’s
accounting practices including accounting policies. The non-compliance with the recognition
criteria of IFRS 15 represents a significant finding from the audit and should be
communicated to those charged with governance according to ISA 260.

iv) Tax advice

The auditor has responsibility to monitor ethical requirements throughout the audit process.
The provision of assistance in calculating the company’s income tax payable for the year
represents a self-review threat as the tax calculation forms the basis of the tax payable in the
statement of financial position and the tax charge in the statement of profit or loss for the
year. This risk is increased by the listed status of Nabil Ltd and according to the IESBA
Code of Ethics for Professional Accountants (the Code), the auditor should not prepare tax
calculations for listed clients unless the calculations are in arithmetic nature. Nabil Ltd is a
listed client and therefore, as auditors, the firm should not undertake any tax services as the
threats to the auditor’s objectivity and independence which would be created are too high to
allow the audit firm to undertake an engagement to prepare calculations of current or
deferred tax liabilities (or assets) for the purpose of preparing accounting entries which are
material to the relevant financial statements, together with associated disclosure notes.

According to ISA 260, the significant audit findings which the auditor is required to
communicate to those charged with governance include matters which, in the auditor’s
professional judgement, are significant to the oversight of the financial reporting process.
The auditor should therefore report the lack of skill and up to date knowledge of the finance
director and the implications of this for the recruitment and training procedures at the client.

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 The auditor should also report the independence issues identified above in relation to the
finance
director’s request for the auditor to calculate the tax payable.

Answer to the Question# 4(b) (i):

The highest level of assurance auditors can provide is reasonable. The inherent limitations of
an audit mean that it is not possible to provide 'absolute' assurance. These inherent limitations
include:
• Financial information includes subjective and judgmental matters;
• Inherent limitations of controls being used as audit evidence;
• Representations from management may have to be relied upon as the only source of
evidence in some areas;
• Evidence is often persuasive not conclusive; and
• Auditors test on a sample basis.

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Answer to the Question# 4(b) (ii):

Some users incorrectly believe that an audit does provide absolute assurance; that the audit
opinion is a guarantee the financial statements are 'correct'. This and other misconceptions
about the role an auditor plays are often referred to as the 'Expectations Gap.' Other
examples of these misconceptions include:
• a belief that auditors test 100% of transactions and balances: they test on a sample
basis;
• a belief that auditors are required to detect fraud; auditors are required to offer an
opinion that the financial statements are free from material misstatement, which may be
caused by fraud;
• auditors are responsible for preparing the financial statements; this is the responsibility
of management.

Answer to the Question# 4(c):

Value for money

Value for money audit is a financial management tool originated in public sector
organization as a way of assessing financial performance in absence of profit-based measure.
This was because the objectives of public sector organizations were not usually to make
profit. The concept has been adopted by commercial entities as a means of assessing
performance on a broader basis than just profit.

The term means getting good value from the money that an entity spends. Value for money is
obtained from a combination of three factors commonly referred to as “3Es’:
(a) Economy
(b)Efficiency
(c) Effectiveness
Economy - means not spending more than is necessary to obtain the required resources.
Simply put, buying the cheapest materials of the desired quality but avoiding excessive cost.
Efficiency – means getting a high volume of output from the resources that are used. The
efficiency of employees is often referred to as productivity. Efficiency can be achieved by
making better use of equipment and machines (eliminating idle time), improving employee
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productivity, making better use of available accommodation or getting better use of out of
marketing spending etc.
Effectiveness – means achieving the objective of the entity with the resources that it uses.
Using resources efficiently is of no use it does not achieve the objective of the enterprise.

Best value audit

Best value audit is about ensuring that there is good governance and effective management of
resources, with a focus on improvement, to deliver the best possible outcomes for the public.
For most government organizations, it is crucial to prioritize the welfare of the general public
ahead of everything else. Best value provides a framework for that.

Best value audits work similarly to value for money audits. Value for money audits looks at
three aspects. These include efficiency, effectiveness, and economy. Best value audit looks at
how government bodies use the best possible combination to provide the best possible
outcomes. For example, it may include the most advantageous combination of quality,
sustainability, whole-life cost, etc.

The fundamental concept of best value is continuous improvement. Organization can attempt
to achieve continuous improvement by focusing on the 4Cs’ as set out below:
• Challenge – Challenge the need for providing a service and where it is found that
there is no need withdraw it.
• Compare – compare the cost being provided with others and investigate how to
improve  Consult- discuss the service with users and make sure their needs are
met  Compete – use fair competition as a means of improving performance.
• Answer to the Question# 4(d) (i):
•
• Planning issues for Shades would be as follows:

• Completeness of income
• Overall, this risk is high due to the following factors: the majority of the income is
generated in cash, there are numerous different sources of income, and a wide range of
people have access to the asset itself due to the use of volunteers.

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• Looking at each source of income in turn the following points are relevant:
•
• NGO shop
• Whilst till receipts can be agreed to cash received this does not guarantee that all sales
have been put through the till. The main problem here is that it may be difficult to
establish an expected relationship between ‘sales’ and ‘cost of sales’. Items sold are
donated by the public and much will depend on how these items are valued by the NGO.
• Collections
• Reconciliations can be performed between cash collected and the receipts submitted
by the volunteers to determine accurate recording. Completeness of income, however,
will depend largely on the integrity of the volunteers and the overall controls put in place
by the NGO. In this instance risk is increased by the unpredictable nature of this source
of income and the fact that the collection boxes are not sealed. Those responsible for
collecting the cash are also responsible for opening the boxes and counting the cash
before handing it over to the bookkeeper. This increases the risk of misappropriation.
•
• Show on Pet animal tickets and T-shirts sales
• Completeness of income in respect of these sources of revenue is still a concern due
to the cash nature of these transactions but more reliable evidence should be available.
Revenue generated from ticket sales can be reconciled to the number of tickets sold. This
assumes that the NGO exercises some control over the issue of tickets for example,
tickets are numbered so that it is possible to determine the number sold.
•
• For the T-shirt sales it should be possible to validate the income by comparing the
number of items sold with the revenue generated. This depends on the NGO adopting
very simple stock control.
• Sponsorship
• Completeness should not be an issue here as the amount involved is predetermined
and is likely to be paid by cheque or by bank transfer.
•
• Controls
• In addition to the specific control issue mentioned above the assessment of the overall
control environment will be essential at the planning stage of the audit. As there are

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 concerns about the completeness of income the control environment will provide key
evidence about the integrity of the revenue balance.
•
• The auditor will need to consider the ability of the committee to run the organisation
effectively. The information suggests that the three main committee members are
responsible for the majority of the management so it will be important to determine their
respective skills and whether they are able to devote sufficient time.
•
• The ability of the bookkeeper will also need to be established in particular the
possible lack of segregation of duties and the fact that the job is currently only done on a
part time basis. It may be that records are not being maintained as they should be due to
the limited number of hours being worked by that individual. This is emphasised by the
fact that the Treasurer is sometimes required to help out.
Accounting Treatment
At the planning stage the accounting policies of the NGO will need to be reviewed to ensure
that they are appropriate and consistent. In particular the point at which income is recognised
will need to be established together with any related costs. This is relevant to the income
generated from the sale of tickets for the annual dog show. Tickets are available in the last
two weeks in May, that is, the last two weeks before the year end and the main cost involved
in the show, being the printing of the show programme is also incurred and invoiced in May.
The show itself takes place in June.

In respect of the ticket sales made in May it could be argued that this income should not be
recognised until the show takes place as it is only earned at this point. However, if the
proceeds are non-returnable irrespective of whether the show takes place or not it could be
argued that it represents a donation which can be recognised on receipt.

In respect of the programme costs the treatment is a little clearer. These should be provided
for at the end of the year even though they relate to an activity which will take place after the
year end. Per FRS 12 there is an obligation to pay for the programmes as a result of a past
event that is, the printing company have produced and delivered the programmes.

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 Evidence
At the planning stage the overall strategy to adopt will need to be determined. In this case it is
likely that a controls-based approach will be adopted (as completeness of income is one of the
key risks) supported by substantive testing, the extent of which will depend on the results of
the tests of controls. The use of analytical review will be more limited due to the lack of
predictive patterns in relation to many aspects of the organisation and the lack of relationships
between account balances.

Answer to the Question# 4(d) (ii):

The audit plan would include the following:

Rent, rates, light and heat
(i) Agree total rent/rates for the year to the lease contract/annual bill;
(ii) Check direct debit amounts in the cash book/bank statement;
(iii) Compare the cost of heat and light for this year and the previous year and follow up if
there are any major differences;
(iv) Review at the date on the last utility bill to determine the need for any prepayment or
accrual adjustment.

Employee remuneration
(i) For salaried staff check annual salary to personnel details/contract of employment;
(ii) For the bookkeeper and the kennel maid review the controls over the recording of hours
worked and check the hourly rates applied to personnel details/contracts of employment;
(iii) Check a sample of standing data used to process the payroll;
(iv) Recalculate a sample of monthly calculations to ensure that deductions are being made
correctly; (v) Review controls over the weekly authorisation of pay checks and monthly
bank transfers.

Medicine bill
(i) Confirm with the vet that he has given his time for free;
(ii) Compare the total vet bill for this year and last year and calculate a ‘cost per animal
rescued’ if possible;
(iii) Trace a sample of entries made in the cash book in respect of vet fees back to the original
invoice to confirm that the cost is in respect of this;
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 (iv) Review invoices received after the year end to ensure that any necessary accruals have
been recognized.

Printing costs
(i) Obtain the printers’ invoice and check that a provision has been included in the accounts
at the year-end for an amount matching that on the invoice.
(ii) Confirm that the required quantity Pen Animal programmes have been received.

Answer to the Question# 5(a):

A limitation on scope has arisen because the auditors were unable to perform procedures
which would quantify the true figure. The amount involved in the case appears to be material
but is not pervasive by nature. As a
result, the audit report should be qualified with terminology ‘except for’.

In accordance with the Companies Act, the auditor needs to report on certain matters by
exception only. In this case the auditor will need to report that, in respect of the limitation on
his work relating to opening inventories alone:
• He has not obtained all the information and explanations that he considered necessary
for the purpose of his audit
• He was unable to determine whether proper accounting records had been maintained.

Answer to the Question# 5(b) (i):

GentCo. should obtain following documents to express opinion on the consolidated financial
statements:
• Independence confirmation from the component auditors;
 Justification for determination of compoenent auditors materiality;
• Audit adjustments suggested by the component auditors;
• Audit report and audited financial statements of the components;
• Management letter issued by the component auditors;
• Financial statements of all the entities being consolidated;
• Details of consolidation adjustments;
• Management representation for consolidated financial statements.

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Answer to the Question# 5(b) (ii):

If any of the component auditors expresses qualified opinion in the auditor’s report, group
auditor should consider the effect of qualification in the current year financial statements. If
the qualification of the component is material to the group, principal auditor shall issue a
qualified report. However, if the component is not material to the group, principal auditor
shall consider whether the qualification has material effect on consolidation. If there is
insignificant impact, principal auditor shall not issue any qualified audit opinion. However, an
emphasis of matter should be given in the audit report about the opinion expressed by the
component auditors.

Answer to the Question# 5(c):

Assurance provider’s report on profit forecast:

This is a negative form of opinion which bears limited assurance.
How it differs from audit of historical financial statements
• Audit provides relatively high-level assurance however that is absolute one rather
regarded as reasonable assurance
• Opinion expressed in positive terms:
Gives true or view opinion or a suitable modified opinion, as the case may be in
accordance with ISA and Companies Act

Why it differs
• Financial statements are based on fact as well as judgements;
• Persuasive (but not conclusive) evidence available since events have already taken
place
• As opposed to audit of historical financial statements, scope of work on forecast is
limited as forecast are based on assumptions about the future and are as such subject to
uncertainty.

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Answer to the Question# 5(d):

i) Indicators of going concern uncertainty

• A major customer of TFL International Ltd has ceased trading owing them BDT 0·6m.
This will result in a significant loss of future revenues and profit, and unless this
customer can be replaced then there will be a reduction of future cash flows.

• The sales director has recently left the company and is yet to be replaced. Loss of a key
director will impact on the company’s sales, as TFL International Ltd has already lost a
major customer, then without an experienced sales director to generate new sales the
company will face significantly reduced sales and cash flows.

• TFL International Ltd is experiencing negative monthly cash flows and this is expected
to continue. If
the company continues to have cash outflows, then it will increase its overdraft further
and will start to run out of available cash.

• The company has been late in paying some of its suppliers. If suppliers are being paid
late then they may refuse to supply TFL International Ltd with goods or impose ‘cash on
delivery’ terms which will disrupt service or sales to customers.

• A number of the suppliers are threatening legal action. If this occurs then TFL
International Ltd will have legal costs on top of the amounts owed already and this will
further increase the pressure on cash flows. In addition, other suppliers may hear about
the legal action and, as a result, stop supplying goods to TFL International Ltd.

• TFL International Ltd has missed a loan repayment which is a breach in the loan
covenant and hence the loan of BDT 4.8 million is now all repayable. The company only
has six months to raise BDT 4.8 million; as it currently stands they do not have this level
of cash available and unless they are able to raise alternative finance or sell non-current
assets, it is difficult to see how TFL International Ltd. will be able to raise this amount.

• In order to conserve cash TFL International Ltd has decided not to pay a final dividend
for 2022. This may result in shareholders losing faith in the company and they may
attempt to sell their shares; in addition, they are highly unlikely to invest further equity,
and TFL International Ltd urgently needs to raise finance to repay their loans.

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 • The current ratio has significantly declined from 4.55 (1.6 + 2.2 + 1.2/0.9 + 0.2) in 2021
to 0.64 (3.4 + 1.4/1.9 + 0.8 + 4.8) in 2022. The current ratio shows that the current assets
are not sufficient to pay the current liabilities. This is another indication of the worsening
liquidity position of the company, which has mainly occurred due to the loan becoming
repayable.

ii) Analytical procedures stages

Analytical procedures can be used at all stages of an audit; however, ISA 315 Identifying
and Assessing the Risks of Material Misstatement through Understanding the Entity and
Its Environment and ISA 520 Analytical Procedures identify three particular stages.

• During the planning stage analytical procedures must be used as risk assessment
procedures in order to help the auditor to obtain an understanding of the entity and assess
the risk of material misstatement.

• During the final audit analytical procedures can be used to obtain sufficient appropriate
audit evidence. Substantive procedures can either be tests of detail or substantive
analytical procedures.
• At the final review stage the auditor must design and perform analytical procedures that
assist him when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.

Answer to the Question# 5(e):

1) When a company makes a provision for future or anticipated payment for a

fine/compensation or restoration of damage to the environment. When a company
provides for a contingent liability in respect of a pending legal action.
2) When the asset values may be impacted example purchased goodwill/products due to
impairment.
3) Capital or revenue expenditure (on social spending, clean-up or to meet a standard)
4) Development costs may be increased due to ensuring meeting environmental or good
corporate citizen (self-imposed or announced standard).
5) Going concern issues due to penalties, fines and judgment costs.

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Answer to the Question# 6(a):

Audit opinion is one of the parts of Auditors’ report. The audit report, in addition to opinion
section, contains other sections such as auditors and management responsibility, key
audit matters (where applicable), other information and report on other regulatory
matters (where applicable).

Answer to the Question# 6(b):

CFO meant that the auditor has modified the Auditors’ report by incorporating therein
“Emphasis of Matter” paragraph where he has mentioned some issues to draw attention of the
shareholders. However, those issues did not modify the Audit opinion.

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 March-April, 2024

Answer to the Question# 1(a):

Termination of contract with MM Ahmed & Co. Chartered Accountants:

There are professional ethics that should be followed in the removal of office of the auditors.
The removal of MM Ahmed & Co. Chartered Accountants by Smart Chemical Ltd. did not
comply with the ethical guidance in the following way:

1) The removal of MM Ahmed & Co. Chartered Accountants was initiated and made by the
Board of Directors (BOD). The removal of auditors should be by special resolution of
members at the Annual General Meeting (AGM) or Extra-Ordinary General Meeting
(EGM) convened for this purpose.
2) The company should have informed the Registrar of Joint Stock Registrar of Companies
(RJSC) of the removal of auditors within 14 days of the event. There is no indication that
Smart Chemical Ltd. has informed the RJSC except to note that the company is in a hurry
to appoint new auditors.
3) It is not correct to suggest that Smart Chemical Ltd. does not owe any money to MM
Ahmed & Co. Chartered Accountants. The firm is entitled to compensation for
termination of contract before the expiry date.
4) Smart Chemical Ltd. will be required to send notice of the meeting at which the term of
office of MM Ahmed & Co. Chartered Accountants should have ended.

Answer to the Question# 1(b):

Matters to consider before submitting bid:

1) Rex & Partners should find out if Smart Chemical Ltd. will be seeking its first auditors or
they are replacing the current auditors.
2) Enquire whether there are reasons/circumstances behind the change which the new
auditors ought to know, also as a matter of courtesy.
3) The firm should consider whether it has the resources in terms of manpower and financial
resources to undertake a clearly bigger audit.
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 4) Consideration should be made on whether it will be able to conduct an efficient audit of a
client in an industry that it has no experience.
5) In view of the other clients with the same year end as that of Smart Chemical Ltd.
consideration of whether the audit can be completed within the timeframe of the
deadlines set by Smart Chemical Ltd.
6) The firm may wish to know the directors of Smart Chemical Ltd. if they are currently not
known.

Answer to the Question# 1(c):

Matters and action after appointment:

1) Consider whether the firm is able to conduct the audit of financial statements for a
company in the manufacturing industry.
2) Rex & Partners must undertake to ensure that their appointment is valid and they are clear
to act.
2) Consider the availability of resources in terms of financial, time and human resources to
undertake the audit.
3) Consider whether the pre-condition for an audit exist if not, then the firm should not
accept the appointment.
4) Consider the integrity of the management of Smart Chemical Ltd. in view of the
termination of the contract with MM Ahmed & Co. Chartered Accountants on account of
a disagreement.
5) Seek the permission of the management of Smart Chemical Ltd. to communicate with
MM Ahmed & Co. Chartered Accountants to find out if there are any reasons to prevent
the firm from accepting appointment.
If permission is not given, then the appointment should be declined.
6) If Smart Chemical Ltd. gives a go ahead to communicate with the outgoing auditors, a
letter will be written to MM Ahmed & Co. Chartered Accountants. if Smart Chemical
Ltd. does not permit MM Ahmed & Co. Chartered Accountants to respond to the letter,
appointment should be declined.
7) If clearance is obtained from MM Ahmed & Co. Chartered Accountants, the firm should
accept appointment and request a copy of the resolution. Management of Smart Chemical

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 Ltd. could call for an Extra Ordinary General Meeting (EGM) if the appointment cannot
wait until the time of the Annual General Meeting (AGM).
8) Once formally appointed the firms should write a letter of engagement to be signed by
both parties.

Answer to the Question# 2(a):

Review of work
• Work properly conducted in accordance with plan/programs
• Working papers to be a standard/evidence recorded
• Conclusions are valid
• Matters identified for further consideration
• Working papers are headed, initialed and dated

Answer to the Question# 2(b):

The Companies Act 1994 has offered several rights for the auditors should there be a situation
like the one under discussion. Those are:
1. To receive notice of the resolution to appoint another auditor.
2. To have written representations circulated to all members or read out at the meeting.
3. To attend the meeting.
4. To be heard at the meeting.

Answer to the Question# 2(c):

• This constitutes insider dealing which is a criminal offence, as the financial director is
benefiting financially from an inside knowledge of the business.
• All chartered accountants and trainees, whether in business or practice, are required to
comply with the Code of Ethics. This states that members should act with integrity at all
times and not act to bring the profession into disrepute.

Action

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 • Inform the audit partner but do not approach the finance director directly yourself.

Answer to the Question# 3(a):

The actions underlying acceptance of an audit engagements can be described in three

segments with necessary sub-actions as follows:

How do assurance firms obtain clients?

Usually, firms get awarded an engagement through a competitive tendering process. However,
to deal with such tendering processes certain issues might be pertinent to consider are:

• While quoting fees necessary care must be taken to ensure that undercutting or
lowballing marks does not arise. Care must be taken to ensure that firm has appropriate
experience to deal with the work under proposal.
• Proposed work must be commensurate to the firm’s reputation.
• Alongside firm’s experience, the firm must have adequate experienced personnel to
properly perform the require work.

How do assurance firms determine whether to accept clients?

Necessary ethical, legal, and related risk indicators must be considered while determining
whether the proposed engagement can be accepted. The following actions might be useful to
consider:
• To do a simple test, if the firm is independent of the proposed client and its management
and staff.
• Necessary communication must be established with previous auditors.
• To check if the previous audit firm had proper removal/resignation.
• A critical and careful thought might be necessary to assess if there is any apparent threat
that might prevent issuing appropriate opinion.
• Do an initial assessment of directors’ integrity, financial records, internal control
practices etc.

How do assurance firms confirm the scope of the engagement?

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 An engagement letter must be contemplated with following:

• Scope and responsibilities to be carefully sorted.

• Consider the appropriateness of changing the level of assurance provided, if requested.
• Consider disclosure terms.

Answer to the Question# 3(b)(i):

Basic factors to consider when screening Coppertech Industries Ltd.

• Management integrity – This will be very important given that Coppertech Industries
Ltd is a family company. It is possible that key family members dominate decision
making in Coppertech Industries Ltd. The control environment may be poor.
• Risk – Coppertech Industries Ltd. may be a high risk client given that the Finance
Director left and is yet to be replaced. In addition, performance in the last three (3) years
has been bad.
• Relationship with Coppertech Industries Ltd. – It will be important to establish whether
the relationship will be long-term or not. A long-term relationship could be favored since
Ahmed & Partners will be assured of income and this will also allow the audit work to
be enhanced by better knowledge of Coppertech Industries Ltd and thereby offer a better
service.
• Ability to perform the work – Ahmed & Partners must have the resources to perform the
work properly, as well as any specialist knowledge or skills. It will be important to
assess the impact on existing engagements in terms of staff time and the timing of the
audit.
• Engagement economics – Expected fees from Coppertech Industries Ltd. should reflect
the level of risk expected. However, Ahmed & Partners may also want to gain entry into
this industry.
• Contacting the previous auditors – Ahmed & Partners must establish the
reasons/circumstances behind the resignation. This will enable the firm to make an
informed decision.

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Answer to the Question# 3(b)(ii):

Importance of an engagement letter

ISA 210 Agreeing the Terms of Audit Engagements gives detailed guidance in this area. The
engagement letter is the written terms of an engagement in the form of a letter. The letter of
engagement is important for both auditor and client mainly because:
• It is a professional requirement
• It sets out the respective responsibilities and thus reduces the likelihood of
misunderstandings arising at a future date
• It also ensures that the client understands what an audit is and how it differs from other
services provided by the auditor
• Allows the auditor to detail any other services he can offer
• It explains the basis on which fees are calculated and when they become payable.

Answer to the Question# 3(b)(iii):

Suggested action(s) to be taken if Coppertech Industries Ltd does not sign the engagement
letter:

• Send another engagement letter

• Contact the acting Finance Director
• If issue remains unresolved, contact those charged with governance • If issue still
remains unresolved, withdraw from the engagement.

Answer to the Question# 4(a):

• Review and obtain photocopies of documents which have aroused her suspicions
• Enquire into reasons for altered pages in books/documents etc.
• Investigate any apparent override/circumvention of company procedure, e.g. cancelling a
sales invoice instead of raising a credit note
• Review previous management letters for any weaknesses facilitating misappropriations
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 • Consider credit controller’s motives for putting chief accountant under suspicion, e.g.
working relationship/job threat
• Take note of chief accountant’s standard of living; appropriate to his status?
• Consider whether past dealings with chief accountant have ever cast doubt on his
integrity
• Increase analytical procedures on revenue and receivables, e.g. monthly revenue/receipts
of major customers/extend circularisation if trade receivables collection period has
increased
• Discuss with engagement partner, who may wish to discuss with client (e.g. board of
directors)
Answer to the Question# 4(b):

Briefing notes to: Audit Staff

From: Audit Partner

Subject: Key Audit Matter

Introduction

This briefing notes will address the meaning of key audit matter and scope of entities in which
ISA 701 is applicable as adopted by the ICAB.

Also, factors to be considered in determining key audit matters shall also be considered.
Finally, the interaction between KAMs, ISA 570 Going Concern and ISA 705 Emphasis of
matter paragraph and other matter paragraph will be duly considered too.

Key audit matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period. Key audit matters are
selected from matters communicated with those charged with governance.

i) Key audit matters (KAMs) must be communicated:

• In the auditor’s report of all Public Interest Entities (PIEs); and

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 • When the auditor is required by law or regulation to communicate key audit matters in
the auditor’s report.

Entities in which ISA 701 is applicable

In Bangladesh, the following entities meet the definition of Public Interest Entities for the
purpose of complying with the communication of KAMs:

• Companies that have made invitations to the public for shares, whether listed or unlisted;
• Mutual Funds licensed by the Securities and Exchange Commission (SEC);
• Investment Advisors licensed by SEC who are also Fund Managers;
• Unit Trusts licensed by SEC;

• Deposit-taking institutions regulated by the Bank of Bangladesh such as:

o Banks,
o Savings and Loans Companies,
o Finance Houses,
o Rural and Community Banks,
and o Deposit –taking
Microfinance Institutions;
o Life Insurance Companies; o
Non-Life Insurance
Companies; o
ii) Factors to be considered in determining key audit matters

ISA 701 explains that in determining KAMs, the auditor shall take into account:
Areas of higher assessed risk of material misstatement, or significant risks;
Answer to the Question 4(c):
An amount or amounts set by the auditor at less than materiality for the financial statements as
a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial statements as a
whole or, if applicable, for a particular class of transaction, account balance or disclosure.

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 Performance materiality should be set so that misstatements which are in themselves
immaterial, but which in aggregate could cause the financial statements to be materially
misstated, are unlikely to remain undetected. In other words, the probability of such
misstatements remaining undetected should be reduced to an acceptably low level.
Performance materiality can be one or more amounts, and it should be revised as the audit
progresses if the auditor becomes aware during the audit of information that would have
caused a different amount to be set in the first place.

Answer to the Question# 5(a)(i):

Matters that must be considered in the audit of group accounts:

1) One of the subsidiaries has a different year-end. The provisions of IFRS 10 will need to be
taken into account.
2) The fact that the country in which one (1) subsidiary is based has not adopted the
International Financial Reporting Standards. The financial statements of this subsidiary
will require adjustments to take into account provisions of International Financial
Reporting Standards (IFRSs).
3) The fact that the subsidiaries maintain financial statements in their local currencies and yet
the consolidated financial statements are prepared in the currency of the parent company.
Issues relating to translation of the local currency financial statements into the currency of
the parent company will be considered.
4) The fact that each of the subsidiaries has different auditors from the parent company
auditors is a matter that should be considered in the audit of the consolidated financial
statements. The financial statements audited by the different auditors will be consolidated
together with the parent company financial statements and so the competence of the
subsidiary auditors will be a matter of consideration by Ahmed & Associates Chartered
Accountants.

Answer to the Question# 5(a)(ii):

Responsibilities for the opinion:

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 The parent company auditors are responsible for the opinion of the individual financial
statements of the parent company. Each of the auditors of the subsidiary companies is
responsible for the opinion of the audits performed by them.

The group auditors will be responsible for the consolidated account’s opinion. This is
notwithstanding the fact that the consolidated accounts include figures not audited by them.

Answer to the Question# 5(a)(iii):

Work on significant component by group auditors:

• A full audit of the significant component financial statements requires to be done by

either the component auditors or the group auditors. This audit should be based on the
component materiality level.
• The group auditors should be involved in the risk assessment of the significant
component.
• The group auditors will audit specified account balances related to identified risks of
the component.
• The group auditors will require to discuss with the component auditors the
susceptibility of the component to material misstatement of the financial statements due
to fraud or error
• A review of the working papers of the component auditors relating to significant risks
of material misstatement.

Answer to the Question# 5(b)(i), (ii) and (iii):

Lawsuit: Requirements for Amendments

A key supplier is suing Omega Ltd for TK.1 million; the company has made contingent
liability disclosures. However, subsequent to the year end the supplier agreed to settle at
TK.0.6 million and it is likely the company will agree. Although the settlement was agreed
after the year end, it provides further evidence that the company had a present obligation as at
31 December.

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The financial statements should be adjusted with the contingent liability disclosures being
removed and instead a provision of TK.0.6 million being recorded.

The following audit procedures should be applied to form a conclusion as to the level of the
adjustment:
• The auditor should contact the company’s lawyers to ask their view as to whether the
settlement is probable and whether TK.0.6 million is the likely amount.
• Review the correspondence with the supplier to confirm that the amount they are
willing to accept is in fact TK.0.6 million.
• Discuss with management as to whether it is probable that they will pay this sum and
obtain a written representation confirming this.

Impact on Audit Report

The sum being claimed is TK.1 million but the probable payment is TK.0.6 million, this is
material as it represents 8% of profit (0.6/7.5) and hence management should provide for this
amount.

If management refuse to provide then the audit report will need to be modified. As
management has not complied with IAS 37: Provisions, Contingent Liabilities and Contingent
Assets and the error is material but not pervasive then a qualified opinion would be necessary.

A basis for qualified opinion paragraph would be required and would need to include a
paragraph explaining the material misstatement in relation to the lack of a provision and the
effect on the financial statements. The opinion paragraph would be qualified ‘except for’.

Warehouse: Requirements for Amendments

The warehouse has been subject to a flood in late February, the entire inventory has been
disposed of and the company has insurance in place. This event occurred after the year end
and the flood would not have been in existence at 31 December, and hence this event indicates

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a non-adjusting event. The financial statements should not be adjusted; however, if the impact
of any uninsured losses are material, then a disclosure of the nature of the event and any
estimates of the financial impact may be required. If the amount is not material, then it may
not be necessary to include any disclosures.

The following audit procedures should be applied to form a conclusion as to the extent of any
disclosures:

• Discuss the matter with the directors, checking whether the company has sufficient
inventory to continue trading in the short term.
• Obtain a written representation confirming that the company’s going concern status is
not impacted.
• Obtain a schedule showing the inventory destroyed and compare this to the average
inventory in the other two warehouses to see if the amount claimed to be damaged is
reasonable.
• Review any correspondence from the insurers, confirming the amount of the insurance
claim to assess the extent of any uninsured amounts.

Impact on Audit Report

The amount of damaged inventory is likely to be material; however, the company has
insurance and so it is only the uninsured level of inventory which should possibly be
disclosed.

If disclosures are not required, because the uninsured loss is immaterial, then there will be no
reporting implications for the audit report.

If disclosure of this subsequent event is required and management refuse to make these
disclosures, then the audit report will need to be modified with a qualified ‘except for’
opinion.

If the impact of the uninsured level of inventory is such that the company’s going concern
status is impacted, consideration should be given to modifying the audit report opinion. This

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would involve including a paragraph titled as ‘Material Uncertainty related to Going Concern’
drawing attention to the possible risk in relation to going concern.

Receivable: Requirement for Amendments

A customer, owing TK.0.3 million at the year end, is experiencing significant going concern
difficulties. This information was received after the year end but provides further evidence of
the recoverability of the receivable balance at the year end. Under IAS 10: Events after the
Reporting Period, if the customer is experiencing cash flow difficulties just a few months after
the year end, then it is highly unlikely that the TK.0.3million was recoverable as at 31
December.

The receivables balance is overstated and consideration should be given to adjusting this
balance, if material, through the use of an allowance for receivables or by being written off.

The following audit procedures should be applied to form a conclusion as to the level of the
adjustment:

• The correspondence with the customer should be reviewed to assess whether there is
any likelihood of payment.
• Discuss with management as to why they feel an adjustment is not required and obtain
a written representation
• Review the post year-end period to see if any payments have been received from the
customer.
• Debtors’ circularization

Impact on Audit Report

The receivable of TK.0.3 million is not material as it represents 4% of profit (0.3/7.5) and
0·4% of revenue (0.3/78) and therefore, although overstated, it does not require adjustment.
However, the TK.0.3m should be noted in the summary of unadjusted errors.

As the error is immaterial then no amendment is required to the audit opinion.

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Answer to the Question# 5(c)(i):

The three stages of money laundering are as follows;

Placement:

This is when the criminal places illegal cash in what appears to be a legitimate business
transaction. The deposit of US$ 2,500,000 into the forex account of the company may suggest
the placement of illegal proceeds into the company.

Layering: In this stage, the funds move through several transactions or ‘layers’. The
transactions will be complex and may move the funds between different countries to make the
source of the illegal funds more difficult. The transfers on the 30 March suggests the layering
of the funds.

Integration: In this final stage, the funds are moved back into the economy to convert them
into a legitimate form. The purchase of goods suggests the integration of the funds back into
the economy.

Answer to the Question# 5(c)(ii):

Obligations on firms regarding money laundering:

1. Appoint a money laundering reporting officer whose responsibility is to receive reports

on suspected money laundering activities from other employees and report them to the
appropriate authorities (BFIU, Bangladesh Bank).
2. Establish procedures with the firm for reporting any suspicion of money laundering by
client companies.
3. Training and educating staff in procedures for detecting and reporting suspicions of
money laundering activities.
4. Put in place systems, controls and procedures to ensure that the firm is not used for
money laundering purposes.

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Answer to the Question# 6(a):

The sales of cooking equipment represent TK.2.5 million of revenue for the year which is
44.6% of total revenue and therefore material to the accounts.

The conditions for recognising a provision in the financial statements in accordance with IAS
37 Provisions, contingent liabilities and contingent assets are that there is a present obligation
as a result of a past event, it is probable that a transfer of economic benefits will be required to
settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Dilli Aluminium Ltd's management should recognise a provision in the financial statements
for the year ended 31 March 2023 if the conditions are met. However, the disclosure in the
accounts is as a contingent liability – but it is very unlikely that the company cannot make a
reliable estimate of the obligation.

If a provision is not made for the warranty, then the auditor's opinion would be qualified on the basis
of a material misstatement ('except for') in respect of non-compliance with the requirements of IAS
37.
Answer to the Question# 6(b)(i):

Reporting Implication

Event 1

The release of dye occurred after the end of the reporting period, so this is indicative of
conditions existing after the end of the reporting period – the event could not be foreseen at
the end of the reporting period.

In this case, no adjustment to the financial statements appears to be necessary. However, the
investigation by the Environmental Authority could result in a legal claim against the
company for illegal pollution, so as a material event, it will need disclosure in the financial
statements.

Event 2

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 The problem with the inventory of mattress provides additional evidence of conditions
existing at the end of the reporting period as the inventory was in existence and the faulty
springs were included in the inventory at this time.

The value of the inventory is overstated and should be reduced to the lower of cost and net
realisable value in accordance with IAS 2 Inventories.

An adjustment for this decrease in value must be made in the financial statements. The
mattresses should therefore be valued at TK100,000 being the net realisable value.

Answer to the Question# 6(b)(ii):

Auditors Responsibility

Event 1

As with event 1, the event takes place before the signing of the audit report, therefore the
auditors have a duty to identify material events affecting the financial statements.

The event is after the reporting period but represent new conditions arising and therefore will
qualify to be nonadjusting event. If the impact on the financial statements is material, the
auditor should ensure adequate disclosure. Where disclosure is not made and the auditor
considers disclosure is necessary, modify the audit opinion on the grounds that the Financial
Statements did not disclose all the information required. This will be for lack of disclosure
(not provision) even though the amount cannot yet be determined.

Alternatively, if the auditor considers that the release of dye and subsequent fine will affect
Prominent Manufacturer Ltd’s ability to continue as a going concern, draw the members’
attention to this in the material uncertainty relating to going concern paragraph of the audit
report.

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Audit procedures will include:
• Obtain any documentation on the event, for example board minutes, copies of
environmental legislation and possibly interim reports from the Environmental Authority
to determine the extent of the damage.

• Inquire of the directors whether they will disclose the event in the financial statements.

• If the directors plan to make disclosure of the event, ensure that disclosure appears
appropriate.

• If the directors do not plan to make any disclosure, consider whether disclosure is
necessary and inform the directors accordingly.

Event 2

Auditor’s Responsibility

These procedures should be performed as close as possible to the date of the auditor’s report
and in addition, representation regarding subsequent events should be sought on the date the
report was signed. The auditor should ensure that management have accounted for or
disclosed subsequent events properly if not the implication on the audit report should be
considered.

Audit procedures will include:

• Obtain documentation from the insurers confirming their estimate of the value of the
mattresses and that no further insurance claim can be made for the loss in value.

• Contact solicitors/administrators of the spring supplier to confirm that no refund will be

expected for the defective springs.

• Obtain the amended financial statements and ensure that the directors have included
TK100,000 as at the end of the reporting period and that the year-end value of inventory
has been decreased to TK100,000.

• Review inventory lists to ensure that the defective springs were not used in any other
mattresses and that further adjustments are not required to any other inventory.

• Obtain an additional management representation point confirming the accuracy of the

amounts written-off and confirming that no other items of inventory are affected.
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 • Finally, assessing the effect on the audit opinion after the decision of the directors
regarding the inventory value is known. A qualified opinion may be required where
appropriate adjustments are not made to the financial statements.

Answer to the Question# 6(b)(iii):

Additional Audit Work

The notification of a fine has taken place after the audit report has been signed. Audit
procedures will include:

• Discuss the matter with the directors to determine their course of action.

• Where the directors decide to amend the disclosure in the financial statements, audit the
amendment and then re-draft and re-date the audit report as appropriate.

• Where the directors decide not to amend the disclosure in the financial statements, the
auditor can consider other methods of contacting the members. For example, the auditor
can speak at the upcoming Annual General Meeting (AGM) to inform the members of the
event.

• Other options such as resignation seem inappropriate due to the proximity of the Annual
General Meeting
(AGM). Resignation would allow the auditor to ask the directors to convene an
Extraordinary General Meeting (EGM), but this could not take place before the AGM so
the auditor should speak at the AGM instead.

Answer to the Question# 6(c):

Differences between assurance and auditor’s reports:

Assurance report
The conclusion of the assurance report on the forecast information will include a statement of
negative assurance (ie limited or moderate assurance) in the form of ‘nothing has come to our
attention which causes us to believe that the assumptions do not provide a reasonable basis
for the forecast’. It will also include an opinion on whether the forecast information is
properly prepared on the basis of the assumptions and is presented in accordance with the
relevant financial reporting framework.
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 Using negative assurance, the auditor is warning users that the cash flow forecast may be
inaccurate. Less reliance can therefore be placed on the forecast than the financial statements,
where the positive assurance was given.

With negative assurance, the auditor is also warning that there were limited audit procedures
that could be used; the cash flow relates to the future and therefore the auditor cannot obtain
all the evidence to guarantee its accuracy.

Auditor’s report
The audit report on statutory financial statements provides positive or reasonable assurance;
that is the financial statements do show a true and fair view.

Financial statements relate to the past, and so the auditor should be able to obtain the
information to confirm they are correct; hence the use of positive assurance.

Reasons
Financial statements are mainly based on historical information whereas forecast information
is based on assumptions about future events. The historical information can be verified to a
greater degree than forecasts, which will always be subject to uncertainty.

Answer to the Question# 6(d):

The scope of ISA 260 (Revised) is limited to matters that come to the auditor’s attention as a
result of the audit; the auditors are not required to design procedures to identify matters of
governance interest. Such matters would include:
The auditor’s responsibilities in relation to the financial
statement audit
Planned scope and timing of the audit
Significant findings from the audit
Auditor’s independence (in the case of public interest/ listed entities)

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Answer to the Question# 6(e):

Reviews of financial statements may be performed for a wide range of entities that vary by
type or size, or by the level of complexity in their financial reporting. In some jurisdictions,
the review of financial statements of certain types of entity may also be the subject of local
laws or regulations and related reporting requirements.

However, the requirements of ISRE 2400 are expressed under the following heading:
• Conduct of review engagement
• Ethical requirements
• Professional skepticisms and professional judgment
• Engagement level quality control
• Acceptance and continuance of client relationships and review engagements
• Communication with the management and those charged with governance
• Performing the engagement
• Subsequent events
• Written representation
• Evaluating evidence obtained from the procedures performed
• Forming the practitioner’s conclusion on the financial statements
• The practitioner’s report
• Documentation

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 July-August 2024

Answer to the Question# 1(a) (i & ii):

Notes for a training session for professional staff on how to identify related party transactions

Purpose of the training

To assist professional staff in the application of IAS 24 Related Party Disclosures and ISA
550 Related Parties, and specifically on how to identify related party transactions.

Related parties

IAS 24 defines related parties as individuals or entities (e.g. companies) with more than a
simple business relationship with the client. This would be because they are directors, owners
or major investors of the client and can include family and close friends of the directors or
owners.

At the start of each audit you will be provided with an up-to-date list of known related parties.
It is important that if you come across any transactions involving these parties during the
audit you should record them on the audit file.

The directors should provide us with a complete list of these related party transactions.
However, we need to be certain that their list is complete, and by comparing the transactions
you find with the list from the directors we can obtain evidence as to its reliability.

General audit procedures

Unless we determine that the risk of non-disclosure of related party transactions is high, we
gain a significant amount of evidence needed from general audit procedures. These are listed
in (b) below.

Additionally, they may intentionally or otherwise leave out certain transactions from the list
they provide and you therefore need to be aware of indicators of potential undisclosed related
party transactions. These are given in (a) below.

If you notice any such transactions, record them on the audit file. If there is a significant
number of such transactions, immediately ask the manager for specific guidance on what
action to take.

i) List of possible features which would lead you to investigate a particular transaction to
determine whether it is a related party transaction.
1. Transactions which have unusual terms of trade, e.g. unusual prices, interest rates,
guarantees and repayment terms.
2. Transactions which appear to lack a logical business reason for their occurrence.
3. Transactions which are overly complex.
4. Transactions which involve previously unidentified related parties.

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 5. Transactions which are processed in an unusual manner.

Summary of the general audit procedures you would perform to ensure that all material related party
transactions have been identified.
6. Obtain a list of current known related parties, eg directors, other companies with
common directors, family members of directors, significant private company
investments of directors, associate or joint venture companies, key personnel and
significant investors (>20%).
7. Ensure that the permanent file is updated for related parties.
8. If it is the first year of the audit perform company search; otherwise review
statutory records to confirm directorships, other directorships and significant
investors.
9. Discuss the list of related parties as disclosed by the directors as to its accuracy
and completeness.
10. Enquire of directors as to whether there have been any material transactions with
the related party, e.g. loans, purchase or sale of assets, consultancy fees.
11. List all transactions disclosed by the directors.
12. Review the accounting records before and after the year end for any large or
round sum amounts; investigate and analyse with reasons.
13. Analyse all loans receivable or payable, and seek confirmation of identity of
lender or borrower.
14. Review board minutes and enquire as to whether the company has provided any
guarantees.
15. Analyse the details of guarantees given and review the terms.
16. Include confirmation of all related party transactions or lack of them within the
letter of representation.
17. Check the accuracy of disclosure within the context of IAS 24.

Answer to the Question# 1(b):

IESBA Codes of Ethics guidance

 When a professional accountant undertakes marketing or promotional activities, through
advertising or other forms of marketing, there may be a threat to compliance with the
fundamental principles
 A professional accountant shall not bring the profession into disrepute when marketing
professional services. The professional accountant shall be honest and truthful, and shall
not:
- Make exaggerated claims for services offered, qualifications possessed, or experience
gained; or
- Make disparaging references or unsubstantiated comparisons to the work of another.
 If a professional accountant is in doubt about whether a form of advertisement or
marketing is appropriate, the accountant is encouraged to consult with the relevant
professional body.

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 ICAB Bye Laws
As per ICAB Bye Laws soliciting clients or professional work either directly or indirectly by
circular, advertisement, personal communication or interview or by any other means is treated
as professional misconduct.

Answer to the Question# 1(c):

Client acceptance and conflict of interest:

Reed Ltd:

There is a conflict of interest between the interests of the firm and that of Reed Ltd. This
arises from the fact that the firm has shares in a company in direct competition with the
prospective client. This will result in loss of objectivity on the part of the firm when providing
assurance services.

Response:
The rules prohibit firms to accept appointment as auditor of a company where there is a
conflict of interest. The firm should decline the nomination as auditor of Reed Ltd. the firm
could consider disposing of the interest in the competing company as a safeguard in which
case it may opt to accept appointment as auditors of Reed Ltd.

Fast Communications Ltd:

The prospective client is in the same industry with one of the existing clients of the firm
which is in direct competition. This gives rise to a conflict of interests between clients. One or
both companies may not be willing to be audited by the same firm for fear of transferring
sensitive information between them.

Response:

The firm should communicate to the existing client and inform its management that it has
been offered to be auditor of a competing company. The firm should also disclose to Fast
Communications Ltd. the fact that it has a client in direct competition with it. If either of the
clients is not willing to be audited by the same firm the firms should decide whether to
decline the offer from Fast Communications Co or give up the audit of the existing client and
accept nomination to be auditor of Fast Communications Ltd.

Answer to the Question# 2(a):

Matters/procedures prior to acceptance of audit

(i) Check adequacy of resources to enable:
– Work to be completed to a high standard on a timely basis/use of competent
staff – Provision of tax/accountancy services without compromising
independence (i.e. safeguards can be put in place) e.g.:
– Use of separate personnel to perform accountancy and tax

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 – Review by an independent partner/senior staff member with appropriate
expertise if tax computation prepared by audit team
– Review of the audit by an audit partner who is not involved in the audit
engagement
(ii) Establish/document existence of informed management – to ensure auditor does not
take management role (iii) Consider relationships/familiarity threat – to ensure
independence/objectivity not impaired
(iv) Consider potential conflicts of interest (e.g. competing clients) – to ensure act in the
best interest of clients
(v) Consider integrity of client – to reduce risk of misstatements due to
fraud/misrepresentation
(vi) Client identification procedures – to reduce exposure to money laundering/comply
with money laundering requirements
(vii) Send letter of engagement – to ensure client understands nature and scope of the work
to be undertaken/narrow expectations gap

Answer to the Question# 2(b):

When deciding whether to accept an assurance engagement, the auditors need to consider the
following:
• Whether the firm has prior experience to work in the industry under which the potential
client is doing business.
• A primary risk analysis is always encouraged prior to accepting an assurance engagement.
So, the results of such risk analysis.
• Whether there are any ethical issues which prevent acceptance.
• Whether the firm has sufficient experience and resources (mainly staff who are
appropriately qualified, experienced and available) to undertake the engagement.
• Whether all the legal requirements associated with the appointment of the outgoing
auditors have been met.
Answer to the Question# 2(c):

The auditor shall usually agree the terms of the audit engagement with management or those
charged with governance, as appropriate. However, if law or regulation prescribes in
sufficient detail the terms of the audit engagement, the auditor need not record them in a
written agreement.

Where there is no law and regulation prescribing detailed terms, the agreed terms of the audit
engagement shall be recorded in an audit engagement letter or other suitable form of written
agreement and shall include:

(i) The objective and scope of the audit of the financial statements.

(ii) The responsibilities of the auditor. Management might need to be aware that
preparation of the financial statement is not the responsibility of the auditor, rather
auditors will issue one opinion based on their audit.

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 (iii) The responsibilities of management. Auditors may need to make the management
understand their critical responsibilities including the preparation of the financial
statements in accordance with the applicable financial reporting framework. It would
also be the responsibility of the management to allow auditors unrestricted access to
all information.

(iv) Identification of the applicable financial reporting framework for the preparation of the
financial statements; and

(v) Reference to the expected form and content of any reports to be issued by the auditor
and a statement that there may be circumstances in which a report may differ from its
expected form and content.

(vi) It may contain other information concerning practical details of the audit.

Answer to the Question# 3(a) (i):

The tasks will include:

• Consideration of all areas of the statement of financial position to see whether there are
indications that the going concern concept may be inappropriate such as:
– Significant receivables unable to pay
– Lines of inventory and WIP where net realisable value may be less than cost
– Material non-current assets which are no longer usable
– Deferred development expenditure which is irrecoverable against relevant revenues –
Investments (in subsidiaries or other companies) which have lost value

• Review of future plans for the business including financial forecasts and projections, to
ensure that it is probable that the company will be able to continue to trade for at least the
forthcoming year (that is, not less than 12 months from the reporting date). If the period to
which those charged with governance have paid particular attention in assessing going
concern is less than one year from the date of approval of the financial statements, and those
charged with governance have not disclosed that fact, the auditor shall do so within the
auditor’s report.

• Review of the company’s borrowing facilities and other sources of finance to ensure that
they will be adequate for the forthcoming year and that conditions and covenants imposed
by lenders will not be breached. Review of minutes and other information such as
correspondence with legal advisers, for indications of potential going concern problems.

Answer to the Question# 3(a) (ii):

Possible symptoms of going concern problems as described in ISA 570 (Going Concern), are:

• Financial indications
– Net liability or net current liability position

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 – Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment, or excessive reliance on short-term borrowings to finance long-term assets
– Indications of withdrawal of financial support by creditors
– Negative operating cash flows indicated by historical or prospective financial statements
– Adverse key financial ratios
– Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows
– Arrears or discontinuance of dividends
– Inability to pay creditors on due dates
– Inability to comply with terms of loan agreements
– Change from credit to cash-on-delivery transactions with suppliers
– Inability to obtain financing for essential new product development or other essential
investments

 Operating indications
– Management intentions to liquidate the entity or to cease operations
– Loss of key management without replacement
– Loss of a major market, key customer(s), franchise, license, or principal supplier(s) –
Labour difficulties
– Shortages of important supplies
– Emergence of a highly successful competitor

 Other indications
– Non-compliance with capital or other statutory requirements
– Pending legal proceedings against the entity that may, if successful, result in claims that
the entity is unlikely to be able to satisfy
– Changes in law or regulation or government policy expected to adversely affect the
entity
– Uninsured or underinsured catastrophes when they occur Answer to the Question# 3(b):

The procedures so required in the question above should include:

• Testing of journal entries to ensure they are appropriate. Particular attention might be
necessary to the year-end entries
• Review of accounting estimates to judge whether management bias has been applied
• Scrutinizing significant and unusual transactions
• Review of audit logs maintained in the critical computer systems, particularly to the GL
system. Habit of unusual use of such sensitive IDs might give rise to potential risk of
modifying recorded numbers
• Review of recent changes in the management structure as well as in the SoPs that
unusually empower senior officials to some additional work

Answer to the Question# 4(a) (i):

Documentation of work on materiality:

The working papers for the audit of the financial statements of Frangos Ltd should contain
the following information regarding work done with regards materiality.
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 1) The basis for setting the materiality for the financial statements as a whole and the
amount set for materiality for the financial statements as a whole.
2) The basis for setting a different materiality level for the amount of inventory and the
materiality level for inventory set at the planning stage.
3) The performance materiality for the financial statements as a whole and that for
inventory set at the planning stage and when revised should be documented.
4) The revision made for the materiality figures in view of the changes made during the
year. The new materiality figures should be documented for both the financial
statements as a whole and the materiality for inventory.

Answer to the Question# 4(a) (ii):

Audit risks and responses in audit of Frangos Ltd financial statements:

Audit risk Suitable response:

1. First time audit
The fact that Frangos Ltd is the first client in
Consider the assignment of more
the chemical industry, there is a risk that the
experienced audit team members. Further,
audit team members may not have the skills there is need for close supervision of the
and experience necessary to carry out a work done and possible quality control
quality audit. The detection risk is high and review by another partner who will not be
should be managed.
involved in the audit. If the firm does not
have the skills to perform some aspects of the
2. Opening balances: audit consideration should be given to
engaging an auditor expert.
The prior year financial statements will have The audit team should perform audit
been audited by different auditors. There is a procedures on all material opening balances.
risk that the opening balances may be This includes looking out for evidence that
misstated and could result in the relates to opening balances in the audit of the
misstatement of the current year figures. current year financial statements.
3. Regulation of chemical industry & disposal of hazardous materials:

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The chemical industry is highly regulated and
there is a risk that Frangos Ltd may not be
compliant with relevant laws and regulations.
This could impact on the ability of the
company as a going concern and also
provisions may be understated in view of
noncompliance with laws and regulations.

Read management meeting and board

meetings minutes and look out for any
evidence of non-compliance with laws and
regulations. During substantive tests look out
for any non-compliance with laws and
4. Valuation of work in progress and finished goods:
There is a risk that inventory may be Attend the year-end inventory count and
misstated in view of obsolete inventory that observe following of inventory count
may exist. The determination and valuation instructions. If necessary, engage the use of
of work in progress most probably requires an auditor expert in the determination and
specialist skills which both management and valuation of work in progress and closing
the auditors may lack hence relying on the
inventory.
use of management experts.
5. Old unreliable equipment:
Frangos Ltd has old unreliable equipment in Inquire from management in an impairment
use. Most likely this equipment is impaired review was carried out. If it was performing
and an impairment review should be audit procedures on the impairment exercise.
undertaken by management. There is a risk If no impairment review was conducted
that no impairment review has been taken request management to conduct one.
and the equipment could be carried in the
financial statements at amounts greater than
the recoverable amounts.

6. Repairs and refurbishment:

Part of the bank loan obtained by Frangos Examine the supporting documents for
Ltd is meant to be used for repairs and repairs and refurbishment and ensure that
refurbishment of equipment. Refurbishment costs have been correctly charged to revenue
of equipment will require capitalization of or capitalized. Emphasize to the audit team
the amounts involved. There is a risk that for application of professional skepticism
management could capitalize revenue during the audit and look out for wrong
expenditure for repairs and also charge classification of expenditure.
against revenue amounts that should have
been capitalized.
regulations. Review the details of legal
payments made during the year and
determine cause of such payments.

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7. Composition of the audit team: The audit team comprises largely on newly qualified assistants
with little practical auditing knowledge. There is a risk that the work that they will perform will not
meet the auditing standards and the risk that material misstatements will remain undetected is high.
There will need for close supervision of the work done by more senior members of the audit team.
Answer to the Question# 4(a) (iii):

Business risks in Frangos Ltd:

1. Failure to meet demand:
The failure by Frangos Ltd. to meet customer demand may result in customers switching
suppliers which could lead to reduced revenue for the company. Further, failure to meet
demand will tarnish the reputation of the company which could adversely affect the
operations of the company.

2. Old equipment:
Old equipment will impact Frangos Ltd negatively in that the company will fail to meet
production levels. This will impact on the revenue and liquidity of the company which can
have an impact on the company continuing operations.

3. Resignation of Technical Manager:

The resignation of the Technical Manager will impact negatively the operations of the
company which are already failing to meet customer demand. The company may have
difficulties finding a suitable replacement in view of the high demand for the skills in the
industry and this may result in Frangos Ltd failing to meet its objectives.

4. Secured loan:
Frangos Ltd secured a loan secured on the equipment of the company. The company may fail
to repay the loan due to poor liquidity and the bank could enforce its security which may
result in the company failing to continue operations.

5. Strike:
The strike in the country and the neighboring country through which essential raw materials
are imported is likely to result in delays in the movement of raw materials. This will impact
production and may result in the company running out of materials and therefore fail to meet
customer requirements.

Answer to the Question# 4(b) (i):

Reasons why auditors are concerned with going concern:

Historical financial statements are prepared on the assumption that a company is a going
concern. If a company is not a going concern the preparation of the financial statements
would be on the alternative basis which is the break up basis.

Auditors require to obtain evidence whether or not the company is a going concern in order to
ensure that the financial statements are prepared on the appropriate basis.

Answer to the Question# 4(b) (ii):

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 Indicators of going concern problems in Cyba Limited:

1. Failure to pay dividends for 5 years suggests that the company has going concern
problems.

2. The fact that customers are switching suppliers on account of Cyba Limited failing to
meet their requirements. This will result in a worsening liquidity problem for the company
which may fail.
3. The fact that suppliers have withdrawn credit facilities to Cyba Limited suggests that they
have lost confidence in the company. With a poor liquidity problem withdrawal of credit
facilities may cause the company to fail.
4. Employees withdrawing labor on account of non-payment of wages and salaries. This will
negatively impact the operations of Cyba Limited
5. The fact that the company has a net current liability position. This may mean that if
creditors demanded to be paid immediately, the company will fail to do so and may be
declared insolvent.

Answer to the Question# 4(b) (iii):

Suggested opinions:

1. Client one - Unmodified opinion Justification:

Although this matter appears to be pervasive to the financial statements in that

environmentalists are concerned about it, the amount involved is not material to the financial
statements. Immaterial amounts would not result in the auditors modifying their opinion.

2. Client two - Qualified opinion

Justification:
The uncorrected misstatements are material but do not impact on the decisions made by users
of the financial statements.

3. Client three - Disclaimer of opinion

Justification:
Closing inventory is likely to be a material figure in the financial statements of a
manufacturing or trading company. Further, any misstatement in the figure of inventory will
result in a direct misstatement of the profit figure which figure impacts on decisions made by
users of financial statements. Since the auditors could not obtain sufficient appropriate
evidence they are not in a position to form an opinion hence issuing a disclaimer of opinion.

4. Client four - Adverse opinion

Justification:

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 The amount involved is material and will impact on decisions made by users of the financial
statements. The amount is both material and pervasive to the financial statements and the opinion
should be an adverse opinion. Answer to the Question# 5(a) (i):

Though IESBA Code of Ethics for Professional Accountants in practice is silent about sub-
contacting audit work, it is auditor’s responsibility to maintain confidentiality of client’s
information. Hence, before subcontacting any part of the audit engagements, approval from
client should be obtained. In addition, as EdCo has been appointed as the auditor by the
client, the ultimate statutory responsibility of the audit lies with EdCo. As there are some
unusual situations involved in these engagements with respect to sub-contacting the
engagements as well as borrowing staffs, the auditor should keep eyes on the following
ethical challenges:
Sub-contacting:
• The sub-contracted auditors might not perform their professional duties properly.
• Sun-contracted auditors might not be independent to client’s affairs.
Borrowing staffs:
Borrowed staff
• might not be independent to the client.
• might not have the required qualifications to conduct the audit.
• might not perform their professional duties.
• might not follow the methodology of the firm.
• might not maintain client confidentiality.

Answer to the Question# 5(a) (ii):

EdCo is the principal auditor who is responsible for issuing opinion on consolidated financial
position. In the consolidated financial statements, all entities are considered. As EdCo is
auditing only 5 companies out of 7, EdCo has to rely on two external component auditors. As
the entities that are being audited by separate auditors will be consolidated, EdCo needs to
obtain sufficient assurance and evidence before expressing opinion on consolidated financial
statements. EdCo should perform following procedures:

• Obtain list of entities that are not being audited by EdCo

• Send audit instructions to the component auditor mentioning the reporting and auditing
frameworks to be followed and timeline of audit.
• Obtain independence confirmation from the component auditors.
• Hold planning meeting with component auditors
• Obtain the audit strategy of the component auditors
• Discuss with the component auditors regarding the important areas
• Obtain the corrected and uncorrected audit adjustments suggested by the component
auditors  Obtain the audit report and audited financial statements of the
components  Obtain the management letter issued by the component auditors.
• Review component auditors audit working papers
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 • Use component auditors’ reports to identify consolidated adjustments
EdCo should perform above mentioned procedures to obtain comfort over entities not being
audited by EdCo.
Answer to the Question# 5(a) (iii):

EdCo should obtain following documents to express opinion on the consolidated financial
statements:
• Independence confirmation from the component auditors
• Audit adjustments suggested by the component auditors
• Audit report and audited financial statements of the components
• Management letter issued by the component auditors
• Financial statements of all the entities being consolidated
• Details of consolidation adjustments
• Management representation for consolidated financial statements.
Answer to the Question# 5(a) (iv):

If any of the component auditors expresses a qualified opinion in the auditor’s report, the
principal auditor should consider the effect of qualification in the current year financial
statements. If the qualification of the component is material to the group, principal auditor
shall issue a qualified report. However, if the component is not material to the group,
principal auditor shall consider whether the qualification has material effect on consolidation.
If there is insignificant impact, principal auditor shall not issue any qualified audit opinion.
However, an ‘emphasis of matter’ should be given in the audit report about the opinion
expressed by the component auditors.
Answer to the Question# 5(b):

The auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit.
In making this determination, the auditor shall take into account the following:
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with ISA 315 (Revised).
(b) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the
period.
The auditor shall determine which of the matters determined in accordance with the criteria
were of most significance in the audit of the financial statements of the current period and
therefore are the key audit matters.

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Answer to the Question# 6(a):

Effect on auditor’s report

Alpha Ltd.
As the adjustment is not material, even if the directors refuse to adopt accounting standard
treatment the audit opinion would be unmodified, stating that the accounts give a true and
fair view.

TP Ltd.
Assuming that the inability to obtain sufficient appropriate audit evidence is material but
not so material or pervasive (as the problem is isolated to one balance in the accounts) the
auditor’s report would be affected as follows.
(i) It would refer to the fact that the audit work could not be performed fully in (ii)
accordance with auditing standards.
(ii) It would state that we planned our audit so as to obtain all information necessary
but the reference to performance would be dropped.
(iii) A description of the limitation would be given, ie physical inventory records
destroyed including an estimate of the effect.
(iv) The opinion would be modified using the ‘except for... might’ opinion.

PQR Ltd.

Assuming the accounts are prepared on a going concern basis

(i) Provided that the auditor is satisfied that this treatment is appropriate and that
disclosure of the situation is sufficient, an unmodified audit opinion will be issued.
Reference to the significant uncertainty would be made by modifying the auditor’s
report using an ‘Material uncertainty relating to going concern’ paragraph, together
with a statement that the opinion itself is not modified.
(ii) If the auditor disagrees with the treatment adopted (i.e. if he feels that it is unlikely
that the contract will be renewed) or the level of disclosure is inadequate, the
opinion will be modified on the grounds of material misstatement.
(iii) Normally the matter is of such significance that an adverse opinion is issued (i.e.
the accounts do not give a true and fair view).

If the accounts are prepared on a break-up basis

Provided the auditor agrees with this treatment and that the basis of preparation is fully
disclosed, an unmodified audit opinion will be issued.

In this instance the most likely outcome would be modified report with reference to the
significant uncertainty but an unmodified audit opinion.

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Answer to the Question# 6(b):

Date: ……….

The chairman
Financial Reporting Council
Dhaka
Subject: Clarifications on Auditors’ Report of Petersons ltd. issued by our firm.

Dear sir,
We have issued Auditors’ Report on the financial statements of Petersons ltd. dated
……………… The opinion of the report was ‘unmodified’ and in the second point under
the ‘Report on other legal and Regulatory Requirements’ we have mentioned that “in our
opinion proper books of account were required by law have not been kept by the company
as far as it appeared from our examination of this books”. Reviewing this and considering
it as a contradictory auditors’ report we have been asked for clarification from your office.

In response we would like to mention that during the course of our audit we have
identified some deviations from the guideline of Companies Act as regards to recording
the transactions in the accounting books. But the effect or possible effect of such
deviation on the financial statements was not material. Therefore, the opinion of the
auditors’ report was ‘unmodified’. The limitations which was arisen due to not
maintaining the accounting books and records properly that limitations were resolved by
applying alternative audit approach. On the other hand, since the books of accounts kept
by the company were not fully maintained in accordance with the requirements of
Companies Act, we have mentioned under the “Report on other Legal and Regulatory
Requirements’ “In our opinion, proper books of account were required by law have not
been kept by the company as far as it appeared from our examination of this books”.

From our above explanation it is clear that the opinion of the audit report is not
contradictory. So, we shall be grateful if you please settle the matter based on our
clarification.

Thanks and regards

……………………………
MNO & Co.
Chartered Accountants

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