AUDIT & ASSURANCE Time allowed 3 hours Total marks 100

Transcription

1 AUDIT & ASSURANCE Time allowed 3 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) Define the `three Es of a value for money audit. 3 (b) BSA 230 Audit Documentation requires auditors to prepare audit documentation for an audit of financial statements on a timely basis. What are the benefits of documentation of audit work? 2 (c) Define audit planning as per BSA 300. Discuss the importance of preparing an audit plan and audit strategy before commencing the audit assignment. 5 (d) You are currently undertaking an assurance engagement for M & R Ltd., a large Advertising firm in Dhaka. During the course of the work you have found a number of issues on which you need to report. These can be summarized as below: i. You have found a total Tk. 1,800,000 unauthorized expenditure on IT. Any IT expenditure in excess of Tk. 15,000 has to be authorized by a Director. ii. The IT expenditure for the year is 65% in excess of budget. There seems to be little reason for the rise. iii. Large sums for travelling expenses are not being authorizedon account of payments made in excessof limit set for Night Allowance. Four executives spent a total of Tk. 2,500,000 in excess of their limit of Night Allowance throughout the year. iv. While examining work in progress, it became clear that there were sums which have been there for more than six months without being billed. These total Tk. 56,00,000. There appears to have no explanation to these. v. While overtime forms are submitted, any amounts of more than three hours per month need to be authorized. This is rarely done. The company paid out Tk. 18,000,000 as unauthorized overtime. vi. There are no controls over non-chargeable time. The proportion of non-chargeable time for individual executives varies from 5% to 34%. Requirements: Identify: (i)the control weakness arising from the above. 4 (ii) The risks to which each identified weakness expose the company. 3 (iii) Actions that the company may take to mitigate those risks (a) Jereen, a Chartered Accountant, was hired as an audit senior by H&B Chartered Accountants in January After attending the firm s normal induction course, she was assigned to the audit of Moon and Sun Ltd., a supplier of agricultural feedstuffs and fertilizers. Her first work assignment was to complete the extensive recalculation of the inventory compilation using the audit test counts and audited unit prices for several hundred inventory items. Her time budget for the work was five hours. She started at 3:00 pm. Knowing that she would be busy the next day, she took all the necessary documentation home. She resumed work at 9:00 pm and did not finish until 1:00 pm. The next morning she returned to her office at her customary starting time of 9:00 am, put the completed documentation on file, and recorded 5 hours in the time budget/actual schedule. Her supervisor was pleased, especially with her diligence in taking the work at home. Page 1 of 5

2 Evaluate the ethical implications of Jereen s `diligence and the understatement of the time she took to finish the work. 5 (b) Khaled is a Chartered Accountant operating as a sole practitioner. One of his three staff members has recently left and instead of replacing him, he started to outsource various tasks using an internet service called E Lance. Basically, this service allows contractors to post jobs for which contractees then bid (Contractors and contractees can be located anywhere in the world). The contractor then chooses from amongst the bids and lodges the agreed fee with E-Lance which takes a pre-determined commission and holds the fee in `escrow (effectively a type of suspense account) until the contractor confirms satisfactory completion. Both parties to the transaction agree in advance to abide by a comprehensive list of regulations to avoid abuse of the service and this is reasonably well policed by the service provider. Khaled is delighted with the service and says he is particularly happy to be able to off-load the boring bits and not to have to either do them himself or listen to his employees complaining about having to do them. Khaled does not make his clients aware of this arrangement. Amongst the tasks he has outsourced to date are: 1. The preparation of financial statements for sole traders, partnerships, and in some cases, limited companies for which Khaledthen completes the audit. 2. The preparation of VAT returns. 3. Inventory valuation calculations for audit clients with rudimentary inventory control systems. 4. The preparation of cash flow forecasts and prospective financial statements for partnership and audit clients. 5. The receivables confirmation process, including choosing the appropriate balances to circularize, posting the circularization letters, receiving the replies, reconciling differences, following up on non-replies or apparently irreconcilable differences, and presenting a summary report of the results. 6. Presenting analytical review reports on clients financial statements when they are close to being finalized. Evaluate the ethical implications of outsourcing work in the manner which Khaled is doing. 5 (c) Described below are situations which have arisen at two unrelated external audit clients of your firm. The year end in each case is 31 March Gable Ltd. (Gable) Gable is an international company operating in the construction sector. The financial statements for the year ended 31 March 2014 include cranes disposed of during the year with a carrying amount Tk.2,200,000. Gable has accounted for the proceeds of the disposal in other income in the statement of profit or loss but has not removed the carrying amount of the disposed cranes from the statement of financial position. The directors refuse to amend the financial statements in respect of this matter because the buyer of the cranes has not yet collected the cranes which are still on Gable s premises. Gable uses sub-contractors who are paid a variable daily rate depending on the location and complexity of the construction project. The system used to process the payments to subcontractors developed a fault during the year and many sub-contractors were paid at incorrect daily rates. The directors estimate that Tk.3,400,000 was overpaid and they have recorded a receivable for this amount at 31 March At the time of completion of the audit, Tk.250,000 had been received in respect of this balance. Your firm s enquiries during the audit revealed that Gable has not had any success in contacting any of the sub-contractors that are still to reimburse the company as they no longer undertake work for Gable. The directors refuse to include an allowance for doubtful debts in respect of the outstanding amount. Gable s total assets at 31 March 2014 are Tk million and profit before tax for the year then ended is Tk.70.6 million. Hye Ltd. (Hye) Page 2 of 5

3 The managing director of Hye refused permission for your firm to contact Din Ltd. (Din), a customer, to confirm the balance of Tk.1,850,000 which was outstanding at 31 March He claimed that the relation between the two companies was particularly sensitive and that he did not want to upset that relationship. At the time of completion of the audit, Tk.150,000 had been received in respect of the outstanding balance and the managing director is confident that Din will pay all outstanding amounts. No alternative audit procedures were available to establish the existence of the debt. Hye s total assets at 31 March 2014 are Tk.50.2 million and profit before tax for the year then ended is Tk.10.5 million. For each of the situations outlined above, state whether or not you would modify the audit opinion. Give reasons for your conclusions and describe the modifications, if any, to each audit report (a) ABC Co., Chartered Accountants, was due to start the field work for an audit four months ago but the finance department was not ready. The financial controller has recently resigned and been replaced. The filing deadline is now four weeks away and the CFO still expects the accounts to be filed on time and ABC s audit is going to have to be squeezed into a very short period. The CEO thinks that ABC is obliged to finish its audit on time. Discuss. 5 (b) Bengal Paints Ltd (BPL) is a listed company which manufactures and retails paints and other decorating products. You are the senior in charge of the audit of the Bengal Paints for the year ending 30 June 2014, which is currently in progress. Relevant information: The company owns a large factory for manufacturing paints. These paints are sold retail through Bengal Paints' six superstores and they are also sold wholesale to other retailers. In addition, the six superstores sell a range of other products from different suppliers. The superstores are each separate division, but there are no subsidiaries. On 23 July 2014 a bid was announced by Roxy Paints Ltd (RPL) to acquire the entire ordinary share capital of Bengal Paints. The directors of Bengal Paints are contesting the bid and are anxious to publish the financial statements to indicate that the company is more profitable than indicated by the RPL offer. As a result of the bid your audit partner has sent you the following memorandum. Internal memorandum To A. Rahman (audit senior) From ArmanHabib (partner) Date 24 July 2014 Subject Bengal Paint audit As you will be aware, RPL made a bid for Bengal Paints yesterday and this Increases the significance of the financial statements that we are currently auditing. I am having a preliminary meeting with the finance director on August I to discuss the conduct of the audit. I would like you to prepare notes for me of any audit and financial reporting issues that have arisen in your work to date that may indicate potential problems. Also include any general audit concerns you may have arising from the takeover bid. Let me know what you intend to do about these matters and specify any questions that you would like me to raise with the finance director. Further information The following issues have been reported to you by junior audit staff during the audit to date. (1) There appears to be a significant increase in trade receivables, due to the fact that many wholesale customers are refusing to pay a total of Tk50.00 million for recent deliveries of a new paint that appears to decay after only a few months of use. Some of the wholesale customers are being sued by their own customers for both the cost of the paint and the related labor costs. No recognition of these events has been made in the draft financial statements. Page 3 of 5

4 (2) A special retail offer of 3-for-2 on wallpaper purchased from an outside supplier during the year has been incorrectly recorded, as the offer was not programmed into the company s IT system. The sales assistants were therefore instructed by store managers to read the bar codes of only two of the three items, and ignore the third free item. The wallpaper sells for Tk60 per roll and cost Tk. 50 per roll from the supplier. A total of 20,000 of these rolls were processed through the IT system by sales assistants during the year. The reason for the special offer was that a bonus payment of Tk million will be due to Bengal Paints from the supplier if 40,000 of these rolls of wallpaper are sold by 31 December Bengal Paints has taken 50% of this amount (i.e. Tk.0.45 million) into its draft statement of comprehensive income as revenue for the year to 30 June (3) One of the six superstores was opened on 30 May The land had been purchased at a cost of Tk million on 1 August 2013, but it was only on 1 September 2013 that the company began to prepare an application for planning permission. This was granted and construction commenced immediately thereafter, being paid for in two progress payments of TK million each on 1 December 2013 and on 1 June Construction was completed, and the store opened, on 30 May All the costs were financed by borrowing at 8% per annum and all the interest incurred up to 30 June 2014 has been capitalized as part of the cost of the non-current asset in the draft financial statements. There was no interest earned on surplus funds from this loan. Draft the notes required by ArmanHabib s memorandum (a) The most difficult type of fraud for auditors to deal with is fraud perpetrated or instigated by management. Discuss the above statement. 5 (b) Listed below are four independent events: 1. Outgrow Pharmacy Ltd. counted its inventory on 31 December which is the date of its financial year-end. The auditor observed the count at 20 of the 86 pharmacies where inventory was maintained. The company falsified the inventory at 22 locations not observed by the auditor by including fictitious goods in the count. The total overstatement was Tk.1,416,222, a material amount in the context of the financial statements. 2. One of the cashiers of Good Food Ltd. left the premises with Tk.20,413 in cash and cheques being the day s takings for 31 December (the last day of the financial year). It was part of his duties to deposit this in a night safe at a local bank branch. However, he disappeared without trace and at the date the audit report is due to be signed, neither he nor any of the money has been located. The amount is not material in the context of the financial statements. 3. In the audit of Go About Ltd. it has been discovered that a total of Tk.414,516 has been overclaimed as expenses by five sales staff. This has mainly come about due to unauthorized use of company credit cards for personal expenses. The amount is material in the context of the financial statements. 4. The management of Ifty Ltd. has recorded the purchase of inventory in the sum Tk.515,876 as an addition to property, plant, and equipment. This was possible because the company business is the provision of office furniture, fittings, equipment and the like and the management merely ordered that certain invoices be coded to the property, plant, and equipment account and not to cost of sales. The amount is material in the context of the financial statements. For each of the above independent events, critically evaluate: (i) The effect of the error or fraud on the financial statements; 5 (ii) The auditing or internal control procedures that could have prevented or detected the error or fraud. 8 Page 4 of 5

5 5. (a) Your audit client imports stock that is held at an independent secure warehouse by a third party. Your client does not carry out a stock take but is happy to rely on the third party, receiving stock reports from them instead. Stock is material, but the third party will make good any losses should they arise. Dou you need to physically verify the stock at the premises of the third party? 5 (b) How should a practicing member of the Institute of Chartered Accountants of Bangladesh respond to a request to provide a second opinion on a professional matter. Justify your answer. 5 (c) Evaluate the role `support letters (also called comfort letters ) as evidence in the audit of financial statements, especially in the context of consolidated financial statements. 5 (d) Extrasport Ltd. recently expanded its overseas operations by entering into an agreement on 1 May 2013 with the government of Ruritania. The intention was to gain market share for its goods in that part of the world. A new company called Lankasport was set up with a share capital of Tk.50 million owned equally by Extrasport Ltd., and the Ruritanian government. The agreement stipulated that Extrasport Ltd. would provide finance, equipment (sold at cost to Lankasport), and expertise; the government would provide premises, materials, and labour, and would help to create a market for the goods. The company has been incorporated for an initial five-year period and will operate under a special government scheme to help regenerate a part of the country which suffered badly in a civil war that ended a few years ago. After the five-year period, the agreement states that either party can insist that the business be wound up or its terms can be renegotiated. In the event of a wind-up after five years or, if the business is not viable, the government has a priority in the repayment of its share of the original capital. In that event, Extrasport Ltd. will receive no more than a refund of its original capital investment. The board of Lankasport consists of equal numbers of directors from Extrasport and from the Ruritanian government. The Chair, who has a casting vote, is rotated annually between the two sides. In the first year Extrasport will nominate one of its directors to act as Chair. On that basis, the Financial Controller of Extrasport has decided to treat Lankasport as a subsidiary of Extrasport in the consolidated financial statements. You are the audit partner reviewing the audit file. You find the following note from the audit senior on the report to partner file: Treatment of Lankasport as a subsidiary The financial controller s treatment appears reasonable given the facts, so an unqualified opinion is appropriate. However, given the nature and complexity of this investment, I suggest that we add the following emphasis of matter paragraph to our audit report. Emphasis of matter investment in Lankasport In forming our opinion, which is not qualified, we have considered the treatment of the investment in Lankasport, details of which can be found in Note 22 to the financial statements. We concur with the financial controller s view that as Extrasport Ltd. has a casting vote on the board of Lankasport, it has control of the entity and it is justifiable to treat the entity as a subsidiary. Opinion In our opinion, the financial statements give a true and fair view. Critically analyse the audit senior s proposed audit report, including an assessment of both the opinion itself and the format of the report The End - Page 5 of 5