AUDIT & ASSURANCE Time Allowed
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AUDIT & ASSURANCE Time allowed – 3 hours Total marks – 100 [N.B. – The figures in the margin indicate full marks. Question 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 answer in one place in order of sequence.] Marks 1. (a) You are in charge of audit of Holiday Resort Limited financial statements which is a popular tourist destination. Your team have completed audit fieldwork. You and your team had a discussion meeting with General Manager regarding the identified exceptions. At the end of the discussion, General Manager of the resort (GM) appreciated the audit team for finding all the improvement areas and thanked the audit team for the hard work. As a token of appreciation, he offered you and the full team a free stay in the resort including complimentary breakfast and free access to amenities during any weekend of your choice. You know the resort is very luxurious and it is very expensive as well as difficult to book the resort during the weekend. What will you respond to the General Manager? 3 (b) You are engagement manager for the audit of Alpha Technologies Limited (Alpha). During the audit, your team members has notified you that management of Alpha has decided to dispose some fully depreciated laptops, desktops and Cars. Most of the times disposed assets are in workable condition or require minor repair. As per the general practice, Alpha first invites internal bidding from employees for the assets being disposed. Alpha only calls for public bid if any asset remains unsold after internal bidding. Accountant of Alpha asked your team whether they want to participate in the internal bidding. Your team members have expressed their interest to you and requested your permission to participate in the bidding for laptops and cars. How will you respond to your team members’ request? 3 (c) Examples of situations when the auditor’s independence may be impaired are: (1) Providing taxation services to the company and its auditors (2) Providing accountancy services, including preparing periodic management accounts and annual financial statements (3) Providing management consultancy, including advice on new computer systems and systems of internal control Requirement: Describe how each of the situations listed above may compromise auditor’s independence, and the ways in which an audit firm can minimize the effect which the provision of other services has on independence. 6 (d) Mesh Apparels Ltd., a well-established garments manufacturing and exporting company where you have joined recently as financial controller, is owned by Habibur Rahman (40%), Mominur Rahman (35%) and Rashidul Huq (25%). Upon joining you identified that the company has documentation lacking specially in revenue and payable segments. The company has various bank loans amounting to Tk. 180 crore but revenue stream does not match fixed expenses. You came to know that Mominur Rahman who is the Chairman leads a flamboyant life. A few days after your joining suddenly Habibur Rahman who was the Managing Director of the company died of cardiac arrest. After MD’s sudden death Mominur took over all executive authorities of the company and invited Shafa Habib, who is the widow of Habib and who gave her properties as mortgage against bank loans, to join the company as MD only as a formality merely to sign loan related official documents. In the first week after MD’s demise, the sales director (Chairman’s spouse) brings to you a cheque in settlement of the account of a major buying house. She explains that the cheque (which appears to clear the amount due) is in fact an overpayment, as the balance showing on the sales ledger is before allowing bulk discount (which is calculated retrospectively). The sales director shows you her calculations and the agreement as authorized by the board. The sales director states that the buying house’s Managing Director has come to collect the discount in cash. She says that this is not an unusual occurrence for some of the company’s better parties. It helps to maintain a good relationship with those parties, which leads to purchasing loyalty. Another benefit of this arrangement is that it gives the sales director regular face-to-face meetings with the senior staff of those parties. It also reduces the high charges that the bank makes for handling cash. Page 1 of 5 You ask the sales director why the customers prefer to receive a refund in cash, rather than simply pay the net amount needed to settle the account. She replies that it is not appropriate for her to question their motives. In the second week the production manager gave you a panic call that the workers in the factory started agitation for demand of paying-off their wages and overtimes, which are pending for last two months. When you talked to the Chairman he advised you to pursue bank to release more fund to pay the workers. When you talked the bank manager straight forwardly said that no fund will be released until a trust worthy Accounts Receivables list is submitted to the bank. You also received a call from warehouse manager who informed you that there is significant mismatch between production data and actual physical inventory at the warehouse. At this issue your chairman advised you to launch an investigation against Rashidul Huq, who was salaried factory in-charge before being taken as shareholder and director. The company received a letter from tax authority claiming huge pending tax and penalty. When you consulted with the company’s tax retainer for submitting appeal petition, he accepted that the company’s tax returns were submitted based on fake sales figures and using tampered vouchers so chances of winning the appeal is bleak. The above situation led you to seriously confronting with ethical choices and moral dilemmas in the course of discharging your professional duties. Requirement: In given situation above, what are the main ethical issues & the ethical choices and moral dilemmas you are confronting? What should be your responses to those ethical issues as an individual professional accountant? 8 2. (a) Paradise Limited is one of the oldest audit clients of your firm. You are engagement manager for the client and currently preparing for the audit of year end 31 December 2018. You have formed a team who has previous auditing experience with the client. Before starting any auditing activities, your team senior has informed you in private that there is a vacancy at accounts department of Paradise Limited and its management has approached him offering the vacant position as he had understanding of the business and accounting process of Paradise Limited. Your team senior has not yet decided whether to accept the position. Requirement: Identify and explain the issues that have arisen in the above situation. 2 (b) An accountancy firm has previously used the services of an independent provider to conduct cold reviews of its completed audit engagements. However, the partners have decided to undertake in-house all aspects of monitoring the quality of audits carried out. Requirement: Set out the objectives of conducting cold reviews which in-house system must achieve. 3 (c) A prospective auditor is required to write to the client's existing auditor to seek information which could influence his decision as to whether he may accept the auditor appointment. Give examples of relevant matters which could be within this letter and which would influence the prospective auditor's decision to accept the audit appointment. If previous auditor informs you that their fees for last audit engagement remains unpaid, should your firm accept the engagement? 4 (d) You are the engagement manager for the audit of a private commercial bank having a network of more than 150 branches, across the country. During a recent meeting, a member of the audit committee referred to an instance of irregularity in a branch, whereby the Branch Manager had extended credit to a close relative without following the bank’s credit disbursement procedures. The member criticized the auditors for their failure to detect such instances and bring it to the notice of management and audit committee. The engagement partner to the audit has advised you to justify your position in writing to the client. Requirement: As an engagement manager, write a letter to the audit committee informing your point of view with specific references to the International Standards on Auditing, where applicable. 3 (e) Fieldwork for the annual audit of Greentec Textile Mills Limited (GTML) has been completed and the financial statements and the audit report are due to be signed next week. During the Page 2 of 5 concluding meeting with the client, the auditor was informed that a fire has destroyed all the raw cloth placed in the warehouse at the mill. About 60% of the destroyed cloth was purchased after the reporting date. However, due to certain defect in the insurance policy, the insurance company settled the claim by paying 80% of the amount of loss. Requirement: State the audit procedures and actions that should be carried out by the auditor in the above situation. 3 3. (a) Walton Motors, produced by Walton Group was established in 1977. Walton is the first motorcycle manufacturer of Bangladesh with different models of 80cc to 150cc motorcycle. The company exports products in different countries of the world. Ruhul Amin, Partner announced that your firm has just received the audit engagement letter of Walton Motors (WM) and instructed you to officially start the audit planning phase. You assigned Harun and Lima senior associates of the audit team with the task to gain an understanding of business of Walton Motors.