AUDIT AND ASSURANCE

Time allowed – 3:30 hours

[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take
account of the quality of language and of the manner in which the answers are presented. Different
parts, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. a) What are the common ethical dilemmas faced by professional accountants? 4
b) The International Ethics Standards Board for Accountants (IESBA), with a view to further
understanding a number of fee-related matters in response to feedback from regulatory bodies (such
as IOSCO) and the changing global environment, wants to assess whether there is a relationship
between fees and threats to compliance with the fundamental principles or to independence, or
whether there are reasonable perceptions that such threats exist, as well as how such threats might
be addressed. A working group (WG) of IESBA started working on the issue from 2016 and
submitted a report in June 2018 focusing on:
• Level of audit fees for individual audit engagements.
• Relative size of fees to the partner, office or the firm, and the extent to which partners’
remuneration is dependent upon fees from a particular client (fee dependency).
• The ratio of non-audit services fees to audit fees paid by an audit client.
• The provision of audit services by a firm that also has a significant non-audit services
business (business model).
Requirements:
Based on the above WG focus areas, describe your views about what the impacts of audit fees
are on auditor’s independence and quality of audit. Is there any effective regulation in
Bangladesh regarding the amount of fees charged by auditors? 4
c) You are working as manager of Advisory department of Musa & Co. Chartered Accountants.
Recently you have participated in a seminar on ‘cyber security’ where you have met with Mr. Munir
who owns a software development company that specializes in developing accounting and other
business softwares tailored according to the business need. Several days after attending the seminar,
Mr. Munir have approached you with a proposal to sell his company software to your firm’s
advisory clients. Under the proposal, you would recommend his software to your clients. You will
receive a referral commission for every successful sale. Furthermore, he will recommend your firm
for implementing his software at each client.
Requirement:
Evaluate acceptability of the proposal placed by Mr. Munir. 3
d) Your firm has been auditing Cosmos Limited for several year and you are currently the assigned
manager for Cosmos. Your firm has been reappointed as auditor for the year ending 31 December
2019. In you earlier year audit, you have pointed out to management that the employees in the
Accounts department does not have adequate training on financial reporting standards and unaware
of the requirement of newly issued standards. Based on your recommendation, management has
decided to provide required training on financial reporting standards including those which have
been issued recently. As you are aware of the areas where employees required training, management
has requested you to conduct the training session.
Requirement:
Identify whether there are any ethical or professional issues from accepting the training
engagement. 3
e) Anis & Co. Chartered Accountants has recently moved to a new office. Partners of the firm have
decided to make a completely new interior in the new office which will include setting up partners'
room, multiple conference room, a cafeteria, reception & waiting room, cubicles for audit staffs work
area. Old furniture will be replaced to harmonize with new interior. Victor Interior Limited, one of the
audit clients of Anis & Co, has approached the partners with a proposal for interior design. Proposal
mentions that furniture matching with interior will be purchased from Lily Furniture Limited which is
also another audit client of Anis & Co. Victor has provided a 10% discount to Anis & Co.
Requirement:
Point out to the partners of Anis & Co. about the factors including ethical & professional issues that
should be considered before accepting & awarding the contract to Victor. 3
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 f) Orbit Limited is an audit client of Ashraf & Co. Chartered Accountants. It’s CFO Mr. Nasim
loves to play golf and is a member of Gazipur Golf Club. Mr. Ashraf, Proprietor of Ashraf &
Co. is also a member of Gazipur Golf Club. Both plays golf on a regular basis and participated
in various golf tournaments. Being golf enthusiastic and living in the same neighbourhood, both
have been seen travelling together to the golf club several times. Explain the concept of
‘Independence in fact’ and ‘Independence in appearance’.
Requirement:
Discuss whether association between Mr. Nasim and Mr. Ashraf raises any threat to
independence for Orbit Limited Audit. 3

2. a) You are senior manager in Rashid & Co. Chartered Accountants. Your firm has been pursuing audit of
Dolphin Holding Limited (Dolphin) and 2 of its subsidiaries, Penguin Limited and Whale Limited.
After performing a background search, you concluded that there is no ethical or independence threat.
Based on your conclusion you have submitted your audit proposal to management of Dolphin.
Dolphin management accepted your audit proposals and awarded the engagement. When you received
the auditor appointment letter, you noticed that you have been appointed as auditor for Sharks Limited
in addition to Dolphin and 2 subsidiaries. Management has requested to provide the appointment
acceptance letter. Discuss whether your appointment for Sharks Limited is acceptable.
Requirement:
What procedures will you perform before issuing the acceptance letter? 3
b) Astro Chemical Limited (Astro) is a prospective client of Zubayer& Co. Chartered Accountants
where you are working as audit manager. You have submitted a fees proposal for audit of financial
statements for the year ended 30 June 2019. Soon after submitting the audit proposal, Finance
manager of Astro made a phone call to you when he informed you that management of Astro has
reviewed the proposal and accepted the proposed fees. However, Astro will take at least two weeks
to issue the appointment letter as the appointment needs to be approved by the shareholders. Finance
manager has also informed you that Astro has a deadline to complete the audit and sign off the
audited financial statements by 31 December 2019 so that it can prepare and submit its tax return by
15th January 2020. As appointment process will take some time, Finance manager has requested you
to start the audit works from next week.
Requirement:
How will you respond to request made by the finance manager? 3
c) Multicon Limited is a recurring audit client of your firm. You have completed audit of financial
statements for the year ended 31 December 2018 and now has been reappointed for the year
ending 31 December 2019. Meanwhile, finance department of your firm has informed you that
invoice for prior year audit fees is still outstanding.
Requirement:
Analyse the impact of the unpaid fees on assessment for audit engagement continuance. 3
d) RubiTex Limited is planning to set up a branch office in Bangladesh. Management of RubiTex has
approached your firm requesting assistance in setting up the branch office. Management of RubiTex
is also interested to outsource the managerial responsibility of branch office to your firm for a fixed
amount of fees. Under this scope, your firm will be responsible for managing treasury, bookkeeping,
payroll and tax service and arranging audit of the financial statements. Your firm will have the
autonomy to take relevant business decisions.
Requirement:
Identify the risk from accepting the engagement and assess whether the engagement can be
accepted. 3
e) A key audit partner of your firm ABC & Co. has recently been contacted by another CA firm XYZ
& Co. offering their assistance to give your firm an appointment to work for a large corporate, one
of the major audit clients of XYZ & Co., for some non-audit services. In return your firm has to pay
them a commission constituting 15% of the first-year fee. Your firm is currently under pressure to
increase number of clients as the firm is heavily dependent on a group of companies (some are
publicly listed) and total revenue from that audit client represents 25% of the total fees of the firm
consecutively for last two years.
Requirements:
Should ABC & Co accept the appointment? State with reasons. Outline the responsibilities of
your firm in respect of fee dependency and ratio of non-audit service fees to audit fees. 3
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3. Alleviate Pharma Limited (APL) is a small pharmaceutical company operating in Bangladesh
having its head office in Dhaka and manufacturing plant in Gazipur. In addition, APL has 8
distribution depots in 8 divisions of Bangladesh. APL is involved in import and manufacturing of
commonly used medicines. APL has two revenue streams. First revenue stream comes from selling
foreign medicines imported by APL and the other revenue stream comes from selling locally
manufactured medicines. APL conducts its operation through its 6 operational and service
departments which are Import, Manufacturing, Distribution, Promotion, Finance and HR.
Import department is responsible for importing the foreign medicines and raw material for local
manufacturing. APL imports different medicine products of international brands and sells in the local
market. This is a very profitable business for APL, and it currently generates around 40% revenue for
APL. APL aims to manufacture those imported brands locally in future through Franchising agreements.
In addition to importing foreign medicines, APL imports raw materials for local productions.
Manufacturing department is responsible for developing production plan based on the current
inventory level, current product demand and future trends provided by the distribution department.
Manufacturing department issues material requisitions to import departments once production plan
is ready. When import department imports the raw materials, manufacturing department produces
the medicines and completes the packaging with own brand names.
Distribution department controls the distribution depots and is responsible for arranging logistics to
transport imported and manufactured medicines to the depots and ensuring availability of medicine
in each depot. Each depot is responsible for supplying medicines to the pharma shops e.g.
pharmacy and drug houses based on purchase order collected by sales promotion teams. Most of the
sales to pharma shops are on credit, and revenue is recognized once products are delivered to the
pharma shops. At the end of the month, Sales Promotion Officers (SPOs) collect the outstanding
amounts in cash from pharma shops and deposit to the depots. Depots accumulate all the collections
and deposit the entire collection to APL bank account at the month end. Depots then send the
monthly sales statements, cash collection statements and inventory balance to Finance department.
HR department is responsible for recruiting, training and retaining the employees including SPOs.
HR department makes assessment of employee requirement. In case of SPOs, fresh graduates are
preferred as their salary are in minimum range. This keeps the Salary expenses for APL under
control. In addition to regular compensation package, SPOs are eligible for reimbursement claim
for conveyance bill and mobile bills. At the end of each month, SPOs submit the expense claims at
depots which are then routed to Finance department. Salary paid to these SPOs are also disbursed
through the distribution depots At the month end, HR department collects the bonus information
form Promotion department and expense claims from sale depots This information is then
incorporated in the monthly salary statements. Newly recruited SPOs are trained properly so that
they can communicate with the medicine shops properly. However, in recent times, APL
experienced higher employee turnover which led to higher recruitment and training costs.
APL Promotion department is responsible to increase overall sales. Promotion department has 8 regional
promotional managers (RPMs) who work closely with the sales depots SPOs recruited by HR
department are assigned under RPMs who then assign the SPOs in specific territories. SPOs regularly
communicate with depots regarding product availability. Based on the product information, SPOs
collect order from medicine shops. SPOs are given monthly target for order collection. SPOs are offered
a performance bonus if they can collect sales order exceeding their monthly target.
Finance department plays a vital role in managing the funds flow, recording transactions and
reporting the financial results. Finance department receives the purchase documents from Import
department and upon verification, they record the inventory purchase to cost of sales and makes
payments against purchase to appropriate suppliers when due. At the end of month Finance
department receives the sales, inventory and cash collection statements from depots and update the
sales, inventory and receivables ledger. There are always some discrepancies between inventory
quantity produced and total of quantity sold and at hand. Finance department updates the cash
balance after reconciling the cash collection statements with bank statements. Prior to month end,
HR department prepares a salary statement based on which Finance department makes the payment.
After receiving all financial information, Finance department records the transactions and prepares
monthly financial statements. APL’s latest financial statements show a negative bottom line despite
sales growth at 5%. This was largely caused due to significant increase in bad debt expenses,
recruitment and training cost, performance bonus expenses.

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 Requirements:
a) Perform a fraud risks analysis on APL’s business operation and identify risks of material
misstatement due to fraud. 6
b) Identify and assess the risks of material misstatement other than fraud in financial statements of
Alleviate Pharma Limited. 3
c) What will be your overall audit strategy? Design appropriate audit procedures to address the
identified risks. 4
d) Determine the evidences to be documented from audit procedures performed. 3
e) Suggest appropriate controls for APL to address the identified risks. 4

4. Immersive TV Industries Ltd. (Immersive) is making a huge progress in Bangladesh. The sale of
this brand is currently one of the highest because of its cheap range. Immersive TVs have the best
specifications, vibrant colors, the amazing sound system at the cheapest range. Your firm was
recently appointed as external auditor of Immersive for the year ended 31 December 2018.
Immersive is a manufacturer of various models of highly technology incorporated smart television,
LCD, LED, 2K LED, 4K LED alongside manufacturing of different necessary parts of televisions
like PCB board, panel, mother board and cabinet. Its factory is located at Gazipur, the outskirts of
capital Dhaka. Its inventory includes glass, gases (neon, xenon, argon etc), chemical elements
(phosphor, cerium) and materials such as plastics, copper, tin, zinc, silicon, gold and chromium. All
inventories are stored in two separate facilities; large items in Unit-1 and chemical and other
precious items in Unit-2. You are the audit supervisor of Immersive audit team. During the audit of
the financial statements for the year ended 31 December 2018, the following issues in relation to
inventories were identified:
• At Unit-1 due to the small size of the store and lack of space some items are stored in separate
areas in less secure locations.
• At Unit-2 auditors noted that gases, poisonous chemical elements, hazardous electronic items
and precious materials safe keeping are not safe enough. Moreover, continuous monitoring of
safety & security environment is not system driven.
• Unit-1store issues and receipt records are maintained. However there is no inventory listing
maintained based upon this information. The last inventory listing supplied to auditors was
updated up to 30.09.2018. As such there are currently no records maintained for the Unit-1
store to inform management of the amount and level of stock retained in the store at any given
time. Goods received in the store are not checked prior to being accepted.
• There was no independent stock take undertaken at Unit-1 and Unit-2 stores in the last financial
year. There are no procedures or written instructions made available to staff as to how to
undertake the stock counts, nor was training provided. There is a lack of clarity over whose
responsibility it is to develop these procedures. Auditors were unable to obtain sufficient
appropriate audit evidence using alternative audit procedures regarding the opening inventory
balance of BDT 189.98 million. The draft financial statements for the year ended 31 December
2018 show profit before tax of BDT 2,089.78 million. Your firm is of the opinion that the
statement of financial position at 31 December 2018 is fairly presented.
• Formal cyclical counts of the major items of stock do not take place throughout the year.
• Minimum and maximum stock levels have not been established at either of the stores.
• No system is currently in place to identify slow moving or obsolete stock.
Requirements:
a. Write a letter to the management identifying internal control deficiencies, their implications and
your recommendations to improve internal control of inventory management of Immersive. 12
b. Detail out the inventory audit procedure your team followed to be comfortable that the
valuation of the inventory asset done by management is reasonable, and to identify the internal
control deficiencies. 8

5. a) Your firm is the auditor of Liam Plastic whose CEO informed you that he thinks that auditor’s
report is incomplete as it directly writes whether the financial statements have been presented fairly.
You replied to him that your firm will communicate key audit matters in the auditor’s report.
Requirements:
Explain the concept of the key audit matter (KAM) and its hidden benefits based on ISA 701. 6
b) Your firm conducted a number of audits of financial statements for the year ended 30 June
2019 and auditor’s reports will be submitted shortly. As part of quality control procedure, you
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 are reviewing a number of reports and corresponding working files. What will be your opinion
as senior auditor on financial statements based on scenarios described below? 4
(i) Surma Bank Ltd. was audited as per the relevant provisions of the Banking Companies Act
and you observed that provision shortfall against loans & advances was BDT 200 million.
Majority of the loans & advances are unsecured, that is the bank does not have any
collateral to liquidate and realize its assets. Accordingly, Surma Bank must make complete
provision of BDT 200 million in its Profit and Loss Statement and reduce its Profit by the
same amount before adjusting for tax.
(ii) Rata Shoes BD Ltd. has reported Inventories on its Balance Sheet at Cost instead of the
ideal practice of stating at lower of Cost or Net Realizable Value as per the relevant
Accounting Standard pertaining to Valuation of Inventories. As per the records shared by
Rata, if such Inventories were recorded at lower of Cost or Net Realizable Value, it would
have resulted in Rata’s Gross Profit falling by BDT 17.50 million with consequential
reduction in Income Tax Expenses by BDT 4.25 million and Net Profit by BDT 13.25
million.
c) You are working as manager of audit department of Musa & Co. Chartered Accountants. Your
client Mango Limited has made an operating loss like prior years. Revenue of the company is
decreasing gradually leading to pile up of unsold inventories. This is causing a higher inventory
holding cost for the company and increased requirement for working capital. Furthermore,
company has defaulted in its loan repayment. However, management of Mango Limited
considers it to be a going concern.
Requirements:
i. Explain why it is important for auditor to assess entity’s ability to continue as going concern. 3
ii. What procedures need to be conducted to ascertain whether Mango Limited is a going concern? 3
iii. Explain the effect on your auditor's report if:
a. your assessment indicates that Mango Limited is not a going concern;
b. you receive letter of comfort from parent company. 3
d) Parent company of Pineapple Limited is Peach Limited which is also the key supplier and
customer for Pineapple Limited. Peach Limited makes order to Pineapple Limited. Pineapple
Limited identifies the required raw material quantity which then is imported from Peach
Limited. To ensure smooth operation, Peach Limited makes sales advance to Pineapple
Limited. Furthermore, Peach Limited has granted a 10-year term interest free loan to Pineapple
Limited so that it can upgrade its current manufacturing plant. Pineapple Limited maintains a
single ledger where all the transactions are recorded. Management has reported the balance of
Peach Limited ledger in the financial statements as intercompany payables.
Requirements:
i. Conclude on the recording and reporting process of above-mentioned transactions in the
financial statements. 2
ii. How will you conclude if management fails to segregate the transaction balances? 2
e) In June 2019 year-end financial statements, Cherry Limited reported an investment of BDT 2
million for 15% common stocks in Berry Limited. Investments were made in 2015. As
evidence of investments, Cherry Limited has provided you the Annual summary of
Shareholders of Berry Limited filled to Registrar of Joint Stock Companies & Firms (RJSC) in
2017. They also shared the audit report of Berry Limited for the year ended 30 June 2017 which
shows the name of Cherry Limited as shareholder.
Requirements:
What will be your conclusion from your audit procedures if management is unable to provide
any further evidence? Explain how it will affect auditors’ report. 2

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