CORPORATE REPORTING

Suggested Answers

Answer to the Question # 1

Revised Financial Statements
Statement of profit or Loss and Other Comprehensive Income for the year ended 30 June 2020

Taka ‘000 Taka ‘000

Sales Revenue (150,000-350) 149,650
Less: Return 7,800 141,850
Cost of sales (72,000-6,000 (W1) 72,000
Less: Return 6,000 66,000
Gross Profit 75,850
Operational Expenses (34,800)
Depreciation/Amortisation (W2) (5,100)
Bad debts (9,000-3,000) (6,000)
Fair valuation gain of FA (W3) 600
Finance Income on T. Bond 332
Finance costs (Interest on debenture) (1,200)
Net Profit 29,682
Current Taxation (@ 25%) (7,425)
Deferred Tax (1,500) (8,925)
Net Profit for the period 20,757
Other Comprehensive Income (OCI) 4,500
Total Comprehensive Income 25,257

Statement of financial position as at 30 June 2020

Assets TK.’000
Non-current assets (note ii)
Property at valuation 33,000
Plant and equipment (24,000 -3,000) 21,000
Intangible Asset – Patent Right (3,000 – 600) 2,400
Financial asset (fair valued through profit or loss) W3 8100
Treasury bond- amortized cost 4,582
69,082
Current Assets (30,000 – 7,800 + 6,000 – 9,000-4582+332) 14,950
Other assets 38,000
Total Assets 122,032

Equity and Liabilities

Share Capital (4 million shares issued at Tk.10.00 per share) 40,000
Retained Earnings (W4) 44,217
Revaluation Surplus (30,000 – 25,500) 4,500
Share Money Deposit 10,000
98,717
Non-current liabilities
20% Debenture Stocks (2018-2020) 6,000
Deferred Tax provision - 30 June 2020 (25% of 24,000) 6,000
Deferred revenue 350
Current liabilities
Trade Payables 3,540
Current Tax liability 7,425
Total Equity and Liabilities 122,032
Page 1 of 12
WORKINGS:

W1 Cost of Sales
Sale or return
Sales Revenue will decrease by Tk. 7,800 and Current Assets will decrease Tk. 7,800.

Mark up = 30%
130% = 7,800
100/130 * 7,800 = 6,000

Current Assets will increase Tk. 6,000 and Cost of Sales will reduce Tk. 6,000

W2 Depreciation/Amortisation

Property
Land 3,000
Building 27,000
27,000/18 years = 1,500 depreciation

Plant and equipment =12.5% on reducing balance =0.125*24,000 =3,000

Amortisation of Intangible asset =3,000/5 years = 600

W3 Fair value through profit or loss

Index, If 240.0 = 7,500

259.2 = ?
259.2/240 * 7,500 = 8,100
Fair value gain = 8,100-7,500 =600

W4 Retained Earnings

As per balance sheet 57,960

Profit for the year as per profit or loss (31,500)
Prior year retained earnings 26,460
Less prior year fraud (3,000)
23,460
Add profit for the year 2020 before OCI 20,757
44,217

W5)
Under IFRS 15, each component should be measured separately. As only three months of the
maintenance service has been provided, we should only recognize 3/24 of the maintenance fee as
revenue in the year ended 30 June 2020. The remainder should be treated as deferred income and
recognized as the service is being provided.
The sale of goods, however, should be recognized immediately. As the total of the fair values
exceeds the overall price of the contract, a discount has been provided.
As we do not know what has been discounted, it would seem reasonable to apply the same discount
percentage to each separate component.

Sale of goods (TK.5,000 x 80%) 4,000

Sale of services (3/24 x TK.500 x 80%) 50
Revenue to be recognized 4,050

Deferred income should be measured at TK.3500 (21/24 x TK.500 x 80%). Revenue (retained earnings
should therefore be reduced by TK3500.
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 Dr Retained earnings 350
Cr Deferred Income (CL) 350
Alternative presentation for IFRS 15 for Revenue recognition:

TK. '000 TK. '000

Total transaction price 4400
Revenue to be recognized:

Product sale (Tk.5 million / Tk. 5 million + Tk.0.5 million x Tk.4.4 million 4000

Maintenance (3/24 months x 4000) 50 4050

Deferred revenue 350

W-6)
The initial carrying value of the bond will be as follows:
Amount in '000 Taka
Purchase price (90% of Tk.5000) 4,500
Add: Purchase costs 50
Total asset cost recognized 4,550
Finance income will be recognized @ 7.3% of the opening carrying value 332
Financial assets measured at amortized costs
Finance
Interest
Asset at the Asset at the
Year Income
Received
beginning end
(7.3%)(6%)
Taka in Taka in
Taka in Th Taka in Th
thousand Th
2019-2020 4,550 332 (300) 4,582

Profit or Loss (Extract) for the year ended 30/6/2020

Finance Income 332

Statement of Financial Position as at 30/6/2020 extract

Financial assets 4,582
This bond meets the criteria for classifying it as Amortized Cost. These are:
> the cash flows to be derived from the instrument are solely interest and principal, and
> the entity intends to hold the instrument to draw the contractual cash flows. Hence the amortized cost
method is appropriate. Fair value is irrelevant.

Answer to the Question # 2

To : Managing Partner
From : Golam Morshed
Subject : Regarding Audit Procedure and Finalization of Consolidated Financial Statements of Surma Industries Limited (SIL)
Dear Sir,
Please find your required information below:

(a) Financial reporting treatment of the matters raised in the Farzana’s Working Paper
1. 100% owned Subsidiary
As Turag has been recognised as a subsidiary since 2010, the acquisition of a further 20% does not result in any change in
control. As a result, no gain or loss will be recorded. The proposed fair valuation exercise is therefore not required.
The accounting entries required in the consolidated financial statements will be as follows:
DR: Non-controlling interest BDT 266 M
DR: Shareholders equity (balancing figure) BDT 114 M
CR: Cash (or elimination of investment in holding company) BDT380 M
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2. Complex Instruments issuance

The bond issue should be accounted for as a compound financial instrument with a liability element and an equity element.

The liability element of the gross proceeds is calculated as the net present value of the maximum cash flows at the rate of
interest for a similar bond without conversions rights, 8%:

Year Cash flow Discount factor PV

BDT M 8% BDT M

1 47.5 0.926 43.99

2 47.5 0.857 40.71
3 997.5 0.794 792.02
876.72

Hence of the BDT 950 million gross proceeds, BDT 876.72 million should be shown as a liability payable (on issue). The
remaining balance of BDT 73.28 should be shown as equity. The effect on profit before taxation will be charge of 3 months
interest on the bond. This will be BDT 876.72 M @ 8% x 3/12 = BDT 17.53 million.

The adjustment entries will be as follows:

A. Bond (Liability) Dr. BDT 73.28 M

Bond (Equity) Cr. BDT 73.28 M

B. Interest expense on convertible bond Dr. BDT 17.53 M

Interest expense payable on convertible bondCr. BDT 17.53 M

3. Acquisition of 45% share with Call Option for another 20%

IFRS 10 paragraph 12 states that 'An investor with the current ability to direct the relevant activities has power, even if its rights
have yet to be exercised'. IFRS 10 paragraph B47 also requires an investor to consider potential voting rights in considering
whether it has control and (paragraph B22) whether they are substantive, i.e. whether the holder has the practical ability to
exercise the right.

Although SIL does not have the majority of the voting rights in Rupsa and there are other powerful investors, two factors in
accordance with IFRS10 suggest that SIL may still have control and should therefore account for Rupsa as a subsidiary rather
than as an associate.

(i) It has the power to affect its returns from Rupsa through its control of Board decisions over research and
development, arguably the most important decisions in a research driven entity such as Rupsa.

(ii) It has the right to acquire further shares through its call option. The exercise of this option will give it a majority
holding of 65%. In this case the rights to acquire further shares appear to be substantive as SIL’s additional 20%
holding will cost it BDT 142.5 million compared to the BDT 285 million it paid for its initial 45% shareholding.
While this is a higher amount per share it is not substantially higher and can reasonably be expected to be a
competitive price for a stake which takes it to a majority holding in the company.

The SIL’s proposal to account for Rupsa as an associate is therefore incorrect.

Accounting for Rupsa as a subsidiary means that 100% of its results, assets and liabilities will be consolidated within the group
financial statement and the 55% share not owned by the group will be accounted for as a non-controlling interest.

The acquisition will have a significant impact on the group statement of cash flows with the investment shown within investing
activities.

Using the share of net assets method to determine goodwill on acquisition and the net asset information provided will give a
goodwill figure of BDT 285 million - (45% of BDT 19 million) = BDT 276.45 million which will be included as an intangible
asset in the group financial statements and will need to be subjected to a review for impairment.

However further consideration needs to be given to whether some / most of this value should be attributed to intangible assets
which are not shown at present on Rupsa’s statement of financial position. In particular, there may well be value in the research
and development project for the new material which appears to have reached the commercial exploitation stage. Thus, this
project should be valued as a separable intangible on acquisition (and subsequently within the consolidated financial statements)

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if it could be sold separately from Rupsa and has a stand-alone value. Treatment as a separable intangible will also affect group
accounts in future years as intangibles other than goodwill are amortised through the statement of consolidated profit or loss.

As Rupsa is accounted for as a subsidiary, its loss for the 3 months ending 30 June 2020 will be included in group profit before
taxation (although 55% of it will then be attributed to the non-controlling shareholders) – therefore adjustment required of BDT
28.5 M x 3/12 = BDT 7.125 million.

Given Rupsa’s loss for the year, an impairment review should also be considered.

4. Significant Disposal of Wholly Owned Subsidiary

As a significant interest in Tista is expected to be retained, Tista will be an associate following the part disposal. The loss of
control triggers the need to re-measure goodwill and the retained interest will therefore be valued not at net asset value but at
fair value.
Therefore the SIL’s team is correct in its recommendation of the accounting treatment in this instance however the calculation
of the gain on disposal is incorrect. There is in fact a small loss, calculated as shown below:

BDT million
Proceeds received 570
Fair value of 25% interest retained 95
665
Less:
Net assets of Tista 532
Goodwill 142.5
(674.5)
Loss on disposal in group accounts (9.5)

This loss includes the downward revaluation to fair value of the remaining non-controlling interest, thus explaining why it is
different to the calculation performed by SIL’s finance team.
The full results of Tista will be included in the consolidated statement of profit or loss account up to 30 April 2020. From that
date onwards just the group’s share of Tista’s loss after tax will be included and this will also be deducted from the carrying
value of the investment in Tista in the consolidated statement of financial position.
Tista will be included as an associate rather than a subsidiary for the last two months of the year. This will mean that rather
than a loss of BDT 285m x 2/12 = BDT 47.5m, only a loss of 25% of that amount (BDT 11.875) will be included in profit
before taxation. Therefore, an adjustment of BDT 11.875.
As Tista has been making losses it is possible that it will not succeed under its new owners and the remaining investment in the
company will need to be reviewed for impairment.

5. Impairment Testing for Gomati Ltd.

An impairment adjustment will be required if the carrying amount is lower than the higher of the value in use and the fair value
less selling costs. The value in use is BDT 874 million which is below the carrying amount and therefore an impairment charge
should be recorded. The following calculation assumes that it is correct to use the value in use. If the fair value less costs to sell
the remaining business were higher than that figure should be substituted in the calculations above giving a lower impairment
charge.
The impairment in the overall value of Gomati needs to be allocated between SIL and the non-controlling interest. As the non-
controlling interest is determined using the proportion of net assets method, there needs to be a notional grossing up of goodwill
in order to compare the carrying and recoverable amounts.
The parent company’s goodwill of BDT 380 million needs to be notionally adjusted to include the NCI notional goodwill of
BDT 95 million (20%/80% x BDT 380 million) giving a total goodwill figure of BDT 475 million.
Hence the impairment can be calculated as:

BDT m
Net separable assets 760
Goodwill 475

1,235
Value in use (874)

Impairment 361

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Of the total impairment, 80% is allocated to SIL giving a goodwill impairment of BDT 288.8 million to be recorded in the
financial statements which is allocated first to goodwill.

Other financial reporting issues:

Whether there are other costs which should be provided for? There are likely to be redundancy costs and other costs of closure
/ disposal which should be provided for at the point at which a detailed plan and announcement have been made (IAS 37). It is
not clear from the information given whether this is the case or will be by year end. However, both the amount of the required
provision and the timing of its recognition need further consideration.

(b) Effect on consolidated profit before tax for the year ending 30 June 2020.

BDT M
Projected profit before adjustments 665
Turag – no effect on profit before taxation but will affect the amount of profit attributable to the non-controlling
interest as this will be 20% to 31 March and nil thereafter. 0
Bond issue – effect on profit before taxation will be charge of 3 months interest on the bond. At 8% on BDT
876.72 M BDT ((876.72 M @ 8% x 3/12) – (950M @5% X 3/12)) -5.66
Rupsa – as Rupsa is accounted for as a subsidiary, its loss for the 3 months ending -7.125
31 March will be included in group profit before taxation (although 55% of it will then be attributed to the non-
controlling shareholders) BDT 28.5 M x 3/12 = BDT 7.125 M.

Tista – loss on disposal netted off by previous recognized gain (-9.5 M – 28.5 M) -38
In addition, Tista will be included as an associate rather than a subsidiary for the last two months of the year. This
will mean that rather than a loss of BDT 3m x 2/12 = BDT 500,000, only a loss of 25% of that amount (BDT
125k) will be included in profit before taxation. -11.875
Gomati - Impairment charge -288.8
Adjusted projected profit before taxation 313.54

(C) Group audit procedures required on transactions identified

General points on scope of group audit work

The group auditor’s ability to obtain sufficient evidence will be affected by significant changes in the group such as those for
SIL. Identification of significant components may change as entities are added to the group or sold off or as the relative
materiality of their operations change. The group auditor should be involved in the assessment of risk for all significant
components which will require a full audit using component materiality; and audit of specified balances related to significant
risks.

If work done at significant components does not provide sufficient audit evidence , then some non-significant components will
be selected and additional procedures performed at those rather than the analytical reviews performed in the past. Changes in
the group may mean that such an approach becomes necessary.

In this case, work at the components is performed by other teams from the firm but the group audit partner will still need to be
involved in planning and directing the work of those teams to ensure that sufficient assurance is given at group level.

Turag

- As Turag has been a subsidiary for some time, few additional audit procedures are likely to be required.

- However, the sale by the Chief Executive of his shares does increase his incentive to overstate the results of the company
in the period to 01 April 2020. There is therefore an enhanced risk of management override of controls and fraud. The
subsidiary audit team should be made aware of this and asked to report to the group team on the results of focussed
audit procedures on journal entries and judgemental provisions.

- The results as at 01 April 2020 will determine the entry made to reserves and therefore some additional work may be
required to look at whether an accurate cut off in revenue and costs was achieved at that date. Any unusual trends in the
last 3 months compared to the earlier part of the year should also be thoroughly investigated.

- The sale and purchase agreement for the shares should be reviewed to identify key terms and ascertain any performance
conditions or additional liabilities.

- The entries made to record the new investment and the elimination of the non-controlling interest balance should be
reviewed to ensure that they are accurate.

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 Complex Instruments issuance

- The terms of the convertible loan agreement should be reviewed and agreed to the loan agreement document and ensure
that the financial reporting treatment agrees to the terms.

- In particular, the sources for the comparable interest rate should be checked as it is this which drives the split of the
compound instrument for accounting purposes. A higher or lower rate could make a significant difference.

- The bond is above planning materiality and is a complex transaction and requires scrutiny given the lack of experience
of the client’s staff.

Acquisition of 45% share with Call Option for another 20%

- Review purchase agreement and loan agreement to identify key terms and form an independent assessment as to whether
SIL has control over Rupsa and whether there are other key terms which should be considered in forming that assessment
or determining the amounts to be included in the financial statements.

- Assess the date at which control passed and ensure that Rupsa’s results and cash flows have been consolidated from that
date. Given the immateriality of Rupsa’s results to the group, detailed audit work at the subsidiary level is unlikely to
be required, although consideration should be given to the total level of costs incurred and whether any material amounts
should have been capitalised as R&D – this is unlikely in current year as total loss only expected to be BDT 28.5 million
and this is likely to equate to the costs as no significant revenue expected in start-up phase.

- Ensure that the investment balance held in the holding company has been eliminated on consolidation and that the
goodwill shown has been correctly calculated and disclosed. Check that the investment is correctly included in the group
cash flow statement as an investing cash flow.

- Obtain details of the fair values attributed to assets and liabilities at the date of acquisition. For each significant item
(tangible assets and net current assets are unlikely to be significant based on information provided), consider the basis
for the fair value and assess the reliability of any valuations provided by external experts. This is most likely to be
relevant for separable intangibles such as R&D.

- Ensure that we have sufficient understanding of Rupsa’s operations and commitments to be able to assess whether the
assets and liabilities at the acquisition date are reasonable and complete as it is possible that liabilities may have been
missed or that the identification of separable intangible assets is incomplete. Consider the monitoring controls which
SIL exercises over Rupsa and discuss plans for the company with the SIL nominated Rupsa directors.

- Review Rupsa’s business plans and consider whether there is any indication that the goodwill and / or intangibles are
impaired. There will inevitably be significant judgement involved in the valuation of a research company and the
assessment performed at the time of the acquisition and basis for the offer of BDT 285 million should be relevant in
making this assessment. While significant change would not normally be expected in just a few months it is possible
that a research breakthrough or developments made by a competitor could have a significant effect on the prospects of
New Material project and Rupsa and we need to make enquiries as to whether this is the case. A change in key personnel,
particularly those developing the project, would also be significant.

Tista

- Review sale agreement and ensure in particular that all costs have been recognised and that consideration has been given
to any liabilities or contingent liabilities arising from guarantees or warranties given to the purchaser.
- Consider the terms of the agreement with the new majority shareholder and assess whether SIL’s finance team is correct
in saying that SIL retains significant interest and should therefore account for Tista as an associate.
- Review the accuracy of the accounting entries made to reflect the disposal.
- Consider the extent of procedures required at Tista to provide assurance on the results consolidated for 10 months (which
may still mean it is a significant component) and also whether additional audit procedures are required at the disposal
date at Tista to verify the accuracy of the net asset balance used in the disposal calculation and the split of results between
the period when Tista was a wholly owned subsidiary and that when it is an associate. In considering the level of work
required we should take into account any due diligence procedures undertaken by the acquirer (although we are unlikely
to be given access to these) and whether a closing date audit is planned on which we may be able to rely.
- Consider whether the inclusion of Tista as an associate changes our overall assessment of the work required on the
associate balances – Tista was considered significant when a subsidiary. It may be that in the future it is audited by a
different component auditor and that will give rise to the need to assess that auditor and determine the level of assurance
gained from their work.

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Gomoti

- The key judgement in the impairment calculation is the amount of the value in use. Obtain detailed projections
supporting the value of BDT 874 million and subject both cash flows and discount rate to scrutiny comparing cash flows
to past results, sales order levels etc. and reviewing / performing sensitivity analysis for the key assumptions made.
- There may also be going concern indications and a going concern review should be considered.
- The amounts to be included in the consolidated statement of financial position for Gomoti will be lower than in the prior
year (as will its contribution to profit and revenue as business is declining). Need to consider therefore whether Gomoti
is still a significant subsidiary entity (although it seems likely that this is the case given the size of its remaining value
in use).
- Also need to consider whether, given Gomoti’s diminishing contribution and also the disposal of Gomoti, work will be
required at some of the subsidiaries previously considered insignificant in order to obtain sufficient coverage of key
balances across the group.

MARKING CRITERIA Max. Number

a) Financial Reporting Issues 20
Turag 3
Convertible Bond 3
Rupsa 6
Tista 4
Gomoti 4
b) Consolidated Financial Statements 5
c) Audit Procedures (3 for each transaction) (3 X 5) 12
TOTAL MARKS 37

Answer to the Question # 3

Requirement (a):
Calculation of Expected Credit Loss:
According to IFRS 9, lifetime expected credit loss of financial asset need to calculate. According to IFRS 9, Expected
credit loss should be calculated as
ECL = Amount x Probability of default x loss given default.
Therefore, lifetime expected credit loss would be
Amount Overdue Probability of default Loss given default Expected Credit Loss
(A) (B) (C) (D = A x B x C)
3,000,000 - 2.00% 10% 6,000
1,400,000 1-30 days 4.00% 30% 16,800
600,000 31-60 days 8.70% 55% 28,710
230,000 61-90 days 25.00% 75% 43,125
50,000 91+ days 100.00% 100% 50,000
144,635

Total Expected credit loss allowance to be provided is BDT 144,635. As ECL allowance of BDT 95,000 already provided
for in prior year, incremental amount of (144,635 – 95,000) = BDT 49,635 need to be recognized in the current year
financial statements.
Journal entry to be passed:
Expenses for expected credit loss Dr 49,635
Allowance for Expected credit loss Cr 49,635

Calculation of Share Option:

ETL has provided each of its three department heads with 2,500 share options on 01 July 2018 which will vest on 30 June
2021. ETL has not posted any entries for these share options. IFRS 2 deals with share-based payment. As per IFRS 2 value
of the share option will be recognized as expenses over the vesting period. Based on the information provided in the
question, Value at each reporting period would be:

Date Share Eligible Fair Vesting Period Accumulated Incremental

option persons Value Period Completed Expenses Expenses
at the
date of
grant
1-Jul-18 2500 3 120 3 0 0 0
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 30-Jun-19 2500 3 120 3 1 300,000 300,000
30-Jun-20 2500 3 120 3 2 600,000 300,000
30-Jun-21 2500 3 120 3 3 900,000 300,000

Based on the calculation, on 30 June 2019, expenses should have been recognized at BDT 300,000 and the same amount
should be booked for the year ended on 30 June 2020 and 30 June 2021.

Journal entry to be passed:

For recording remuneration expenses related to prior year
Remuneration expensess Dr 300,000Share to be issued Cr 300,000

The aforementioned treatment will require restatement of financial statement for the year ended on 30 June 2019.
For recording remuneration expenses related to current year
Remuneration expenses Dr 300,000
Share to be issued Cr 300,000

Requirement (b):

Expected Credit Loss:

For audit of expected credit losses, following procedures and evidences to be collected.
Procedures to be performed
 Assess whether entity’s policies and governance framework establish standards that include how the it determined
to select the drivers of credit losses it forecasts and links to ECL.
 Assess whether disclosures made by the entity facilitates understanding entity’s approach to estimating ECL and
highlight the differences from previous allowance estimate approaches.
 Testing the controls related to ECL.
 Assess whether there are any deficiencies in model design that are identified and their impact on the audit work.
 Identify where the ETL has exercised any judgements in the development and use of its models.
 Develop procedures to challenge and evaluate the judgements used.
 Inquire internal auditor `whether there is an independent assessment of the model governance and control process
and evaluate such an assessment.
 Assess the documentation and process implemented for the definition of the scenario(s) adopted in connection with
the calculation of ECL.
 Testing for accuracy and consistency for information used in calculating probability of default and loan given
default.
 Assess historical data supporting the relationships between the macroeconomic variables and the resulting credit
losses used to model the forward-looking estimates.
 Assess whether the model appropriately captures when a significant increase in credit risk has occurred and duly
impacts the measurement of the ECL.
 Consider whether the models are appropriately updated or adjusted on a timely basis for changes identified as
necessary.
 Consider whether there are appropriate change-control policies over the model.
 Confirm the outstanding balances.

Evidence to be collected:

 ETL’s policies and governance framework that include how the it determined to select the drivers of credit losses
it forecasts and links to ECL.
 Documentations of process on ECL model.
 Summary of controls developed for ECL models.
 Results from testing of control for ECL Model.
 Results from testing for accuracy and consistency for information used in calculating probability of default and loan
given default.
 Historical data used in ECL calculation.
 Basis used for developing probability of default and loss given default.
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  Results from inquiry made to the internal auditors.
 Third party confirmations for the outstanding balances.
 ECL Calculation prepared by the management.

Audit of Share options:

For audit of share options, following procedures and evidences to be collected.

Procedures to be performed

 View documentation to verify option terms such as exercise price and term to vesting date.
 Ensure relevant heads of departments are still employed.
 Investigate whether there was any indication that they might leave in the past as this could affect estimation basis
of the prior period adjustment.
 Determine the basis on which the fair value of the options has been calculated- should be based on appropriate
valuation based on marker prices wherever possible. If an option pricing model has been used, determine which
method has been adopted an whether it is appropriate and reflects the nature of the options.
 Confirm that the fair value is calculated as at the rant date and that this is when offer and acceptance has taken place.
 Recalculate the fair value using the same inputs and consider obtaining expert advice if applicable.
 Check volatility to published statistics.
 Agree share price at issue to market price on that date.
 Agree risk free rate appropriate at the time of granting options.
 Assess whether there are any terms of the share options which five the head of departments a choice of exercise
through cash receipt as opposed to exercising the share options.
 Recalculate the expenses spread over the vesting period.
 Obtain written representations from management confirming their view that any assumptions they have used in
measuring fair value are reasonable and that there are no further share-based payment schemes in existence that
have not been disclosed.
 Check disclosure is in accordance with IFRS 2.

Evidence to be collected:

 Copy of the offer made to the head of departments.

 Obtain board minutes related to issuance of share options to the board of directors.
 Documents supporting continuing employment of head of departments during vesting period.
 Documents supporting basis for fair value calculation of share options.
 Communication from management related to assumption used in fair value calculation.
 Document showing agreements of share price with market price.
 Published statistics used.
 Management representation letter.

Answer to the Question # 4

Requirement (a):
Analysis of the financial Position:
Key ratios:
2020 2019 % change
Short term solvency ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio 0.55 .35 59.7%
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ & 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑣𝑎𝑙𝑒𝑛𝑡𝑠
Cash ratio 0.22 0.28 -21.2%
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝑒𝑡 𝐷𝑒𝑏𝑡
Gearing Ratio 5.24 3.10 68.7%
𝐸𝑞𝑢𝑖𝑡𝑦
Performance ratio
Return on capital 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
-56.2% -57.4% 1.2%
employed 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
Return on assets -9% -14% 4.97%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Efficiency Ratio
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Asset turnover 0.25 0.54 -28.6
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Page 10 of 12
 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Net asset turnover 1.57 2.20 -63.6%
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Commentary from ratio analysis:

Solvency of the entity:
Analysis of financial position of Pearl Limited indicates that Company is in distress and in liquidity crisis. It has current ratio
of only 0.55 whereas current ratio 2 is considered to be standard. This indicates Pearl Limited doesn’t have sufficient capacity
of paying off the current liabilities from its current assets. Furthermore, cash ratio for Pearl Limited is 0.22 which is very low.
This indicates that Pearl need to find a source for accessing cash. Overall solvency of the company is in distress.

Requirement (b):

The CFO should be persuaded that professional ethics are an inherent part of the accounting profession. Professional ethics
are a set of moral standards applicable to all professionals. Each professional body has its own ethical code which requires
its members to adhere to a set of fundamental principles in the course of their professional duty, such as confidentiality,
objectivity, professional behaviour, integrity and professional competence and due care.

Often there may be ethical principles which conflict with the profit motive and it may be difficult to decide on a course of
action. An accountant has an ethical obligation to encourage the board of directors to operate within certain boundaries
when determining the profit figure. Users are becoming reactive to unethical behaviour by directors. This is leading to
greater investment in ethical companies with the result that unethical practices can have a greater impact on the value of
an entity than the reporting of a smaller profit figure. Ethical issues are becoming more and more complex and it critical
to have an underlying structure of ethical reasoning, and not purely be driven by the profit motive.

Answer to the Question # 5

(a) A list of potential COVID-19 impacts on audit with reference to the related international standards on auditing are given
below:
i) Identifying new risks from COVID-19 related impact and re-assessments of the initial Risk of Material Misstatement
(RMM) and Materiality in line with ‘ISA 315 (Revised) Identifying and Assessing the Risks of Material
Misstatement Trough Understanding the Entity and its Environment’ and ‘ISA 320 Materiality in planning and
Performing an Audit’.
ii) Evaluating applicability of going concern assumption used by management for the preparation of the financial
statements in line with ‘ISA 570 (Revised) Going Concern’.
iii) Considering all subsequent events from the date of year-end to the date signing audit report and assessing whether
these are adjusting or non-adjusting events requiring recognition and disclosure in the financial statements
respectively and auditors obligation in accordance with ‘ISA 560 Subsequent Events’.
iv) Obtaining specific representations from management especially on any estimates and judgments applied related to
COVID-19 related impact in line with ‘ISA 580 Written Representations’.
v) Formulation of Auditor’s Opinion in accordance with ‘ISA 700 (Revised) Forming an Opinion and Reporting on
Financial Statements’, ‘ISA 705 (Revised) Modifications to the Opinion in the Independent Auditor’s Report’, ‘ISA
706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report’.
vi) Due to COVID-19 related impact if any changes is required in Key Audit Matters (KAM) previously communicated
to TCWG, updated KAM should be discussed with Management and TCWG in accordance with ‘ISA 701
Communicating Key Audit Matters in the Independent Auditor’s Report’.
vii) Risk of material misstatements in financial statements due to fraud including fraud risk factors identified previously
may require re-assessment due to pervasive changes in economic environment from COVID-19 related impact and
hence the auditor should consider this matter in audit in accordance with ‘ISA 240 The Auditor’s Responsibilities
Relating to Fraud in an Audit of Financial Statements’.
viii) All listed entities in Bangladesh are required to publish annual reports and most likely there would be comments
about COVID-19 and its impact on those entities in their annual reports. The auditor now has an added responsibility
to read and comment on other information published along with the financial statements such as contents in annual
report. Accordingly, the auditor should read such disclosure in the annual report and follow the steps prescribed in
‘ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other Information’.

Page 11 of 12
(b) Extract of audit report:
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Description of Key Audit Matters
Revenue recognition
At year end the Company reported total revenue of BDT[x]
Revenue is measured net of discounts, incentives and
rebates earned by customers on the Company’s sales.
Within a number of the Company’s markets, the estimation
of discounts, incentives and rebates recognized based on
sales made during the year is material and considered to be
complex and judgmental. Therefore, there is a risk of
revenue being misstated as a result of faulty estimations
over discounts, incentives and rebates.
There is also a risk that revenue may be overstated due to
fraud through manipulation of the discounts, incentives and
rebates recognized resulting from the pressure local
management may feel to achieve performance targets.
IT Systems and Controls
Our audit procedures have a focus on information
technology systems and controls due to the pervasive
nature and complexity of the IT environment, the large
volume of transactions processed in numerous locations
daily and the reliance on automated and IT dependent
manual controls.
Our areas of audit focus included user access management,
developer access to the production environment and
changes to the IT environment. There are key to ensuring
that IT dependent and application based controls are
operating effectively.
---The End---
Our response to Key Audit Matters
We have tested the design and operating effectiveness of
key controls focusing on the following:
 Calculation of discounts, incentives and rebates;
 Segregation of duties in invoice creation and
modification; and
 Timing of revenue recognition.
Our substantive procedures in relation to the revenue
recognition comprises the following:
 Obtaining supporting documentation for sales
transactions recorded either side of year-end as
well as credit notes issued after the year-end date
to determine whether revenue was recognized in
the correct period;
 Within a number of Company’s markets,
comparing current year rebate accruals to the
prior year and, where relevant, completing further
inquiries and testing;
 Agreeing a sample of claims and rebate accruals
to supporting documentation;
 Critically assessing manual journals posted to
revenue to identify unusual or irregular items; and
 Finally assessing the appropriateness and
presentation of disclosures against relevant
accounting standards.
We tested the design and operating effectiveness of the
Company’s IT access controls over the information
systems that are critical to financial reporting. We tested IT
general controls (logical access, changes management and
aspects of IT operational controls). This included testing
that requests for access to systems were appropriately
reviewed and authorized.
We tested the Company’s periodic review of access rights.
We inspected requests of changes to systems for
appropriate approval and authorization. We considered the
control environment relating to various interfaces,
configuration and other application layer controls
identified as key to our audit.
Where deficiencies were identified, we tested
compensating controls or performed alternate procedures.
In addition, we understood where relevant, changes were
made to the IT landscape during the audit period and tested
those changes that had a significant impact on financial
reporting.
Page 12 of 12
 CORPORATE REPORTING

Suggested Answers

Answer to the Question # 1

Revised Financial Statements
Statement of profit or Loss and Other Comprehensive Income for the year ended 30 June 2020

Taka ‘000 Taka ‘000

Sales Revenue (150,000-350) 149,650
Less: Return 7,800 141,850
Cost of sales (72,000-6,000 (W1) 72,000
Less: Return 6,000 66,000
Gross Profit 75,850
Operational Expenses (34,800)
Depreciation/Amortisation (W2) (5,100)
Bad debts (9,000-3,000) (6,000)
Fair valuation gain of FA (W3) 600
Finance Income on T. Bond 332
Finance costs (Interest on debenture) (1,200)
Net Profit 29,682
Current Taxation (@ 25%) (7,425)
Deferred Tax (1,500) (8,925)
Net Profit for the period 20,757
Other Comprehensive Income (OCI) 4,500
Total Comprehensive Income 25,257

Statement of financial position as at 30 June 2020

Assets TK.’000
Non-current assets (note ii)
Property at valuation 33,000
Plant and equipment (24,000 -3,000) 21,000
Intangible Asset – Patent Right (3,000 – 600) 2,400
Financial asset (fair valued through profit or loss) W3 8100
Treasury bond- amortized cost 4,582
69,082
Current Assets (30,000 – 7,800 + 6,000 – 9,000-4582+332) 14,950
Other assets 38,000
Total Assets 122,032

Equity and Liabilities

Share Capital (4 million shares issued at Tk.10.00 per share) 40,000
Retained Earnings (W4) 44,217
Revaluation Surplus (30,000 – 25,500) 4,500
Share Money Deposit 10,000
98,717
Non-current liabilities
20% Debenture Stocks (2018-2020) 6,000
Deferred Tax provision - 30 June 2020 (25% of 24,000) 6,000
Deferred revenue 350
Current liabilities
Trade Payables 3,540
Current Tax liability 7,425
Total Equity and Liabilities 122,032
Page 1 of 12
WORKINGS:

W1 Cost of Sales
Sale or return
Sales Revenue will decrease by Tk. 7,800 and Current Assets will decrease Tk. 7,800.

Mark up = 30%
130% = 7,800
100/130 * 7,800 = 6,000

Current Assets will increase Tk. 6,000 and Cost of Sales will reduce Tk. 6,000

W2 Depreciation/Amortisation

Property
Land 3,000
Building 27,000
27,000/18 years = 1,500 depreciation

Plant and equipment =12.5% on reducing balance =0.125*24,000 =3,000

Amortisation of Intangible asset =3,000/5 years = 600

W3 Fair value through profit or loss

Index, If 240.0 = 7,500

259.2 = ?
259.2/240 * 7,500 = 8,100
Fair value gain = 8,100-7,500 =600

W4 Retained Earnings

As per balance sheet 57,960

Profit for the year as per profit or loss (31,500)
Prior year retained earnings 26,460
Less prior year fraud (3,000)
23,460
Add profit for the year 2020 before OCI 20,757
44,217

W5)
Under IFRS 15, each component should be measured separately. As only three months of the
maintenance service has been provided, we should only recognize 3/24 of the maintenance fee as
revenue in the year ended 30 June 2020. The remainder should be treated as deferred income and
recognized as the service is being provided.
The sale of goods, however, should be recognized immediately. As the total of the fair values
exceeds the overall price of the contract, a discount has been provided.
As we do not know what has been discounted, it would seem reasonable to apply the same discount
percentage to each separate component.

Sale of goods (TK.5,000 x 80%) 4,000

Sale of services (3/24 x TK.500 x 80%) 50
Revenue to be recognized 4,050

Deferred income should be measured at TK.3500 (21/24 x TK.500 x 80%). Revenue (retained earnings
should therefore be reduced by TK3500.
Page 2 of 12
 Dr Retained earnings 350
Cr Deferred Income (CL) 350
Alternative presentation for IFRS 15 for Revenue recognition:

TK. '000 TK. '000

Total transaction price 4400
Revenue to be recognized:

Product sale (Tk.5 million / Tk. 5 million + Tk.0.5 million x Tk.4.4 million 4000

Maintenance (3/24 months x 4000) 50 4050

Deferred revenue 350

W-6)
The initial carrying value of the bond will be as follows:
Amount in '000 Taka
Purchase price (90% of Tk.5000) 4,500
Add: Purchase costs 50
Total asset cost recognized 4,550
Finance income will be recognized @ 7.3% of the opening carrying value 332
Financial assets measured at amortized costs
Finance
Interest
Asset at the Asset at the
Year Income
Received
beginning end
(7.3%)(6%)
Taka in Taka in
Taka in Th Taka in Th
thousand Th
2019-2020 4,550 332 (300) 4,582

Profit or Loss (Extract) for the year ended 30/6/2020

Finance Income 332

Statement of Financial Position as at 30/6/2020 extract

Financial assets 4,582
This bond meets the criteria for classifying it as Amortized Cost. These are:
> the cash flows to be derived from the instrument are solely interest and principal, and
> the entity intends to hold the instrument to draw the contractual cash flows. Hence the amortized cost
method is appropriate. Fair value is irrelevant.

Answer to the Question # 2

To : Managing Partner
From : Golam Morshed
Subject : Regarding Audit Procedure and Finalization of Consolidated Financial Statements of Surma Industries Limited (SIL)
Dear Sir,
Please find your required information below:

(a) Financial reporting treatment of the matters raised in the Farzana’s Working Paper
1. 100% owned Subsidiary
As Turag has been recognised as a subsidiary since 2010, the acquisition of a further 20% does not result in any change in
control. As a result, no gain or loss will be recorded. The proposed fair valuation exercise is therefore not required.
The accounting entries required in the consolidated financial statements will be as follows:
DR: Non-controlling interest BDT 266 M
DR: Shareholders equity (balancing figure) BDT 114 M
CR: Cash (or elimination of investment in holding company) BDT380 M
Page 3 of 12
2. Complex Instruments issuance

The bond issue should be accounted for as a compound financial instrument with a liability element and an equity element.

The liability element of the gross proceeds is calculated as the net present value of the maximum cash flows at the rate of
interest for a similar bond without conversions rights, 8%:

Year Cash flow Discount factor PV

BDT M 8% BDT M

1 47.5 0.926 43.99

2 47.5 0.857 40.71
3 997.5 0.794 792.02
876.72

Hence of the BDT 950 million gross proceeds, BDT 876.72 million should be shown as a liability payable (on issue). The
remaining balance of BDT 73.28 should be shown as equity. The effect on profit before taxation will be charge of 3 months
interest on the bond. This will be BDT 876.72 M @ 8% x 3/12 = BDT 17.53 million.

The adjustment entries will be as follows:

A. Bond (Liability) Dr. BDT 73.28 M

Bond (Equity) Cr. BDT 73.28 M

B. Interest expense on convertible bond Dr. BDT 17.53 M

Interest expense payable on convertible bondCr. BDT 17.53 M

3. Acquisition of 45% share with Call Option for another 20%

IFRS 10 paragraph 12 states that 'An investor with the current ability to direct the relevant activities has power, even if its rights
have yet to be exercised'. IFRS 10 paragraph B47 also requires an investor to consider potential voting rights in considering
whether it has control and (paragraph B22) whether they are substantive, i.e. whether the holder has the practical ability to
exercise the right.

Although SIL does not have the majority of the voting rights in Rupsa and there are other powerful investors, two factors in
accordance with IFRS10 suggest that SIL may still have control and should therefore account for Rupsa as a subsidiary rather
than as an associate.

(i) It has the power to affect its returns from Rupsa through its control of Board decisions over research and
development, arguably the most important decisions in a research driven entity such as Rupsa.

(ii) It has the right to acquire further shares through its call option. The exercise of this option will give it a majority
holding of 65%. In this case the rights to acquire further shares appear to be substantive as SIL’s additional 20%
holding will cost it BDT 142.5 million compared to the BDT 285 million it paid for its initial 45% shareholding.
While this is a higher amount per share it is not substantially higher and can reasonably be expected to be a
competitive price for a stake which takes it to a majority holding in the company.

The SIL’s proposal to account for Rupsa as an associate is therefore incorrect.

Accounting for Rupsa as a subsidiary means that 100% of its results, assets and liabilities will be consolidated within the group
financial statement and the 55% share not owned by the group will be accounted for as a non-controlling interest.

The acquisition will have a significant impact on the group statement of cash flows with the investment shown within investing
activities.

Using the share of net assets method to determine goodwill on acquisition and the net asset information provided will give a
goodwill figure of BDT 285 million - (45% of BDT 19 million) = BDT 276.45 million which will be included as an intangible
asset in the group financial statements and will need to be subjected to a review for impairment.

However further consideration needs to be given to whether some / most of this value should be attributed to intangible assets
which are not shown at present on Rupsa’s statement of financial position. In particular, there may well be value in the research
and development project for the new material which appears to have reached the commercial exploitation stage. Thus, this
project should be valued as a separable intangible on acquisition (and subsequently within the consolidated financial statements)

Page 4 of 12
if it could be sold separately from Rupsa and has a stand-alone value. Treatment as a separable intangible will also affect group
accounts in future years as intangibles other than goodwill are amortised through the statement of consolidated profit or loss.

As Rupsa is accounted for as a subsidiary, its loss for the 3 months ending 30 June 2020 will be included in group profit before
taxation (although 55% of it will then be attributed to the non-controlling shareholders) – therefore adjustment required of BDT
28.5 M x 3/12 = BDT 7.125 million.

Given Rupsa’s loss for the year, an impairment review should also be considered.

4. Significant Disposal of Wholly Owned Subsidiary

As a significant interest in Tista is expected to be retained, Tista will be an associate following the part disposal. The loss of
control triggers the need to re-measure goodwill and the retained interest will therefore be valued not at net asset value but at
fair value.
Therefore the SIL’s team is correct in its recommendation of the accounting treatment in this instance however the calculation
of the gain on disposal is incorrect. There is in fact a small loss, calculated as shown below:

BDT million
Proceeds received 570
Fair value of 25% interest retained 95
665
Less:
Net assets of Tista 532
Goodwill 142.5
(674.5)
Loss on disposal in group accounts (9.5)

This loss includes the downward revaluation to fair value of the remaining non-controlling interest, thus explaining why it is
different to the calculation performed by SIL’s finance team.
The full results of Tista will be included in the consolidated statement of profit or loss account up to 30 April 2020. From that
date onwards just the group’s share of Tista’s loss after tax will be included and this will also be deducted from the carrying
value of the investment in Tista in the consolidated statement of financial position.
Tista will be included as an associate rather than a subsidiary for the last two months of the year. This will mean that rather
than a loss of BDT 285m x 2/12 = BDT 47.5m, only a loss of 25% of that amount (BDT 11.875) will be included in profit
before taxation. Therefore, an adjustment of BDT 11.875.
As Tista has been making losses it is possible that it will not succeed under its new owners and the remaining investment in the
company will need to be reviewed for impairment.

5. Impairment Testing for Gomati Ltd.

An impairment adjustment will be required if the carrying amount is lower than the higher of the value in use and the fair value
less selling costs. The value in use is BDT 874 million which is below the carrying amount and therefore an impairment charge
should be recorded. The following calculation assumes that it is correct to use the value in use. If the fair value less costs to sell
the remaining business were higher than that figure should be substituted in the calculations above giving a lower impairment
charge.
The impairment in the overall value of Gomati needs to be allocated between SIL and the non-controlling interest. As the non-
controlling interest is determined using the proportion of net assets method, there needs to be a notional grossing up of goodwill
in order to compare the carrying and recoverable amounts.
The parent company’s goodwill of BDT 380 million needs to be notionally adjusted to include the NCI notional goodwill of
BDT 95 million (20%/80% x BDT 380 million) giving a total goodwill figure of BDT 475 million.
Hence the impairment can be calculated as:

BDT m
Net separable assets 760
Goodwill 475

1,235
Value in use (874)

Impairment 361

Page 5 of 12
Of the total impairment, 80% is allocated to SIL giving a goodwill impairment of BDT 288.8 million to be recorded in the
financial statements which is allocated first to goodwill.

Other financial reporting issues:

Whether there are other costs which should be provided for? There are likely to be redundancy costs and other costs of closure
/ disposal which should be provided for at the point at which a detailed plan and announcement have been made (IAS 37). It is
not clear from the information given whether this is the case or will be by year end. However, both the amount of the required
provision and the timing of its recognition need further consideration.

(b) Effect on consolidated profit before tax for the year ending 30 June 2020.

BDT M
Projected profit before adjustments 665
Turag – no effect on profit before taxation but will affect the amount of profit attributable to the non-controlling
interest as this will be 20% to 31 March and nil thereafter. 0
Bond issue – effect on profit before taxation will be charge of 3 months interest on the bond. At 8% on BDT
876.72 M BDT ((876.72 M @ 8% x 3/12) – (950M @5% X 3/12)) -5.66
Rupsa – as Rupsa is accounted for as a subsidiary, its loss for the 3 months ending -7.125
31 March will be included in group profit before taxation (although 55% of it will then be attributed to the non-
controlling shareholders) BDT 28.5 M x 3/12 = BDT 7.125 M.

Tista – loss on disposal netted off by previous recognized gain (-9.5 M – 28.5 M) -38
In addition, Tista will be included as an associate rather than a subsidiary for the last two months of the year. This
will mean that rather than a loss of BDT 3m x 2/12 = BDT 500,000, only a loss of 25% of that amount (BDT
125k) will be included in profit before taxation. -11.875
Gomati - Impairment charge -288.8
Adjusted projected profit before taxation 313.54

(C) Group audit procedures required on transactions identified

General points on scope of group audit work

The group auditor’s ability to obtain sufficient evidence will be affected by significant changes in the group such as those for
SIL. Identification of significant components may change as entities are added to the group or sold off or as the relative
materiality of their operations change. The group auditor should be involved in the assessment of risk for all significant
components which will require a full audit using component materiality; and audit of specified balances related to significant
risks.

If work done at significant components does not provide sufficient audit evidence , then some non-significant components will
be selected and additional procedures performed at those rather than the analytical reviews performed in the past. Changes in
the group may mean that such an approach becomes necessary.

In this case, work at the components is performed by other teams from the firm but the group audit partner will still need to be
involved in planning and directing the work of those teams to ensure that sufficient assurance is given at group level.

Turag

- As Turag has been a subsidiary for some time, few additional audit procedures are likely to be required.

- However, the sale by the Chief Executive of his shares does increase his incentive to overstate the results of the company
in the period to 01 April 2020. There is therefore an enhanced risk of management override of controls and fraud. The
subsidiary audit team should be made aware of this and asked to report to the group team on the results of focussed
audit procedures on journal entries and judgemental provisions.

- The results as at 01 April 2020 will determine the entry made to reserves and therefore some additional work may be
required to look at whether an accurate cut off in revenue and costs was achieved at that date. Any unusual trends in the
last 3 months compared to the earlier part of the year should also be thoroughly investigated.

- The sale and purchase agreement for the shares should be reviewed to identify key terms and ascertain any performance
conditions or additional liabilities.

- The entries made to record the new investment and the elimination of the non-controlling interest balance should be
reviewed to ensure that they are accurate.

Page 6 of 12
 Complex Instruments issuance

- The terms of the convertible loan agreement should be reviewed and agreed to the loan agreement document and ensure
that the financial reporting treatment agrees to the terms.

- In particular, the sources for the comparable interest rate should be checked as it is this which drives the split of the
compound instrument for accounting purposes. A higher or lower rate could make a significant difference.

- The bond is above planning materiality and is a complex transaction and requires scrutiny given the lack of experience
of the client’s staff.

Acquisition of 45% share with Call Option for another 20%

- Review purchase agreement and loan agreement to identify key terms and form an independent assessment as to whether
SIL has control over Rupsa and whether there are other key terms which should be considered in forming that assessment
or determining the amounts to be included in the financial statements.

- Assess the date at which control passed and ensure that Rupsa’s results and cash flows have been consolidated from that
date. Given the immateriality of Rupsa’s results to the group, detailed audit work at the subsidiary level is unlikely to
be required, although consideration should be given to the total level of costs incurred and whether any material amounts
should have been capitalised as R&D – this is unlikely in current year as total loss only expected to be BDT 28.5 million
and this is likely to equate to the costs as no significant revenue expected in start-up phase.

- Ensure that the investment balance held in the holding company has been eliminated on consolidation and that the
goodwill shown has been correctly calculated and disclosed. Check that the investment is correctly included in the group
cash flow statement as an investing cash flow.

- Obtain details of the fair values attributed to assets and liabilities at the date of acquisition. For each significant item
(tangible assets and net current assets are unlikely to be significant based on information provided), consider the basis
for the fair value and assess the reliability of any valuations provided by external experts. This is most likely to be
relevant for separable intangibles such as R&D.

- Ensure that we have sufficient understanding of Rupsa’s operations and commitments to be able to assess whether the
assets and liabilities at the acquisition date are reasonable and complete as it is possible that liabilities may have been
missed or that the identification of separable intangible assets is incomplete. Consider the monitoring controls which
SIL exercises over Rupsa and discuss plans for the company with the SIL nominated Rupsa directors.

- Review Rupsa’s business plans and consider whether there is any indication that the goodwill and / or intangibles are
impaired. There will inevitably be significant judgement involved in the valuation of a research company and the
assessment performed at the time of the acquisition and basis for the offer of BDT 285 million should be relevant in
making this assessment. While significant change would not normally be expected in just a few months it is possible
that a research breakthrough or developments made by a competitor could have a significant effect on the prospects of
New Material project and Rupsa and we need to make enquiries as to whether this is the case. A change in key personnel,
particularly those developing the project, would also be significant.

Tista

- Review sale agreement and ensure in particular that all costs have been recognised and that consideration has been given
to any liabilities or contingent liabilities arising from guarantees or warranties given to the purchaser.
- Consider the terms of the agreement with the new majority shareholder and assess whether SIL’s finance team is correct
in saying that SIL retains significant interest and should therefore account for Tista as an associate.
- Review the accuracy of the accounting entries made to reflect the disposal.
- Consider the extent of procedures required at Tista to provide assurance on the results consolidated for 10 months (which
may still mean it is a significant component) and also whether additional audit procedures are required at the disposal
date at Tista to verify the accuracy of the net asset balance used in the disposal calculation and the split of results between
the period when Tista was a wholly owned subsidiary and that when it is an associate. In considering the level of work
required we should take into account any due diligence procedures undertaken by the acquirer (although we are unlikely
to be given access to these) and whether a closing date audit is planned on which we may be able to rely.
- Consider whether the inclusion of Tista as an associate changes our overall assessment of the work required on the
associate balances – Tista was considered significant when a subsidiary. It may be that in the future it is audited by a
different component auditor and that will give rise to the need to assess that auditor and determine the level of assurance
gained from their work.

Page 7 of 12
Gomoti

- The key judgement in the impairment calculation is the amount of the value in use. Obtain detailed projections
supporting the value of BDT 874 million and subject both cash flows and discount rate to scrutiny comparing cash flows
to past results, sales order levels etc. and reviewing / performing sensitivity analysis for the key assumptions made.
- There may also be going concern indications and a going concern review should be considered.
- The amounts to be included in the consolidated statement of financial position for Gomoti will be lower than in the prior
year (as will its contribution to profit and revenue as business is declining). Need to consider therefore whether Gomoti
is still a significant subsidiary entity (although it seems likely that this is the case given the size of its remaining value
in use).
- Also need to consider whether, given Gomoti’s diminishing contribution and also the disposal of Gomoti, work will be
required at some of the subsidiaries previously considered insignificant in order to obtain sufficient coverage of key
balances across the group.

MARKING CRITERIA Max. Number

a) Financial Reporting Issues 20
Turag 3
Convertible Bond 3
Rupsa 6
Tista 4
Gomoti 4
b) Consolidated Financial Statements 5
c) Audit Procedures (3 for each transaction) (3 X 5) 12
TOTAL MARKS 37

Answer to the Question # 3

Requirement (a):
Calculation of Expected Credit Loss:
According to IFRS 9, lifetime expected credit loss of financial asset need to calculate. According to IFRS 9, Expected
credit loss should be calculated as
ECL = Amount x Probability of default x loss given default.
Therefore, lifetime expected credit loss would be
Amount Overdue Probability of default Loss given default Expected Credit Loss
(A) (B) (C) (D = A x B x C)
3,000,000 - 2.00% 10% 6,000
1,400,000 1-30 days 4.00% 30% 16,800
600,000 31-60 days 8.70% 55% 28,710
230,000 61-90 days 25.00% 75% 43,125
50,000 91+ days 100.00% 100% 50,000
144,635

Total Expected credit loss allowance to be provided is BDT 144,635. As ECL allowance of BDT 95,000 already provided
for in prior year, incremental amount of (144,635 – 95,000) = BDT 49,635 need to be recognized in the current year
financial statements.
Journal entry to be passed:
Expenses for expected credit loss Dr 49,635
Allowance for Expected credit loss Cr 49,635

Calculation of Share Option:

ETL has provided each of its three department heads with 2,500 share options on 01 July 2018 which will vest on 30 June
2021. ETL has not posted any entries for these share options. IFRS 2 deals with share-based payment. As per IFRS 2 value
of the share option will be recognized as expenses over the vesting period. Based on the information provided in the
question, Value at each reporting period would be:

Date Share Eligible Fair Vesting Period Accumulated Incremental

option persons Value Period Completed Expenses Expenses
at the
date of
grant
1-Jul-18 2500 3 120 3 0 0 0
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 30-Jun-19 2500 3 120 3 1 300,000 300,000
30-Jun-20 2500 3 120 3 2 600,000 300,000
30-Jun-21 2500 3 120 3 3 900,000 300,000

Based on the calculation, on 30 June 2019, expenses should have been recognized at BDT 300,000 and the same amount
should be booked for the year ended on 30 June 2020 and 30 June 2021.

Journal entry to be passed:

For recording remuneration expenses related to prior year
Remuneration expensess Dr 300,000Share to be issued Cr 300,000

The aforementioned treatment will require restatement of financial statement for the year ended on 30 June 2019.
For recording remuneration expenses related to current year
Remuneration expenses Dr 300,000
Share to be issued Cr 300,000

Requirement (b):

Expected Credit Loss:

For audit of expected credit losses, following procedures and evidences to be collected.
Procedures to be performed
 Assess whether entity’s policies and governance framework establish standards that include how the it determined
to select the drivers of credit losses it forecasts and links to ECL.
 Assess whether disclosures made by the entity facilitates understanding entity’s approach to estimating ECL and
highlight the differences from previous allowance estimate approaches.
 Testing the controls related to ECL.
 Assess whether there are any deficiencies in model design that are identified and their impact on the audit work.
 Identify where the ETL has exercised any judgements in the development and use of its models.
 Develop procedures to challenge and evaluate the judgements used.
 Inquire internal auditor `whether there is an independent assessment of the model governance and control process
and evaluate such an assessment.
 Assess the documentation and process implemented for the definition of the scenario(s) adopted in connection with
the calculation of ECL.
 Testing for accuracy and consistency for information used in calculating probability of default and loan given
default.
 Assess historical data supporting the relationships between the macroeconomic variables and the resulting credit
losses used to model the forward-looking estimates.
 Assess whether the model appropriately captures when a significant increase in credit risk has occurred and duly
impacts the measurement of the ECL.
 Consider whether the models are appropriately updated or adjusted on a timely basis for changes identified as
necessary.
 Consider whether there are appropriate change-control policies over the model.
 Confirm the outstanding balances.

Evidence to be collected:

 ETL’s policies and governance framework that include how the it determined to select the drivers of credit losses
it forecasts and links to ECL.
 Documentations of process on ECL model.
 Summary of controls developed for ECL models.
 Results from testing of control for ECL Model.
 Results from testing for accuracy and consistency for information used in calculating probability of default and loan
given default.
 Historical data used in ECL calculation.
 Basis used for developing probability of default and loss given default.
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  Results from inquiry made to the internal auditors.
 Third party confirmations for the outstanding balances.
 ECL Calculation prepared by the management.

Audit of Share options:

For audit of share options, following procedures and evidences to be collected.

Procedures to be performed

 View documentation to verify option terms such as exercise price and term to vesting date.
 Ensure relevant heads of departments are still employed.
 Investigate whether there was any indication that they might leave in the past as this could affect estimation basis
of the prior period adjustment.
 Determine the basis on which the fair value of the options has been calculated- should be based on appropriate
valuation based on marker prices wherever possible. If an option pricing model has been used, determine which
method has been adopted an whether it is appropriate and reflects the nature of the options.
 Confirm that the fair value is calculated as at the rant date and that this is when offer and acceptance has taken place.
 Recalculate the fair value using the same inputs and consider obtaining expert advice if applicable.
 Check volatility to published statistics.
 Agree share price at issue to market price on that date.
 Agree risk free rate appropriate at the time of granting options.
 Assess whether there are any terms of the share options which five the head of departments a choice of exercise
through cash receipt as opposed to exercising the share options.
 Recalculate the expenses spread over the vesting period.
 Obtain written representations from management confirming their view that any assumptions they have used in
measuring fair value are reasonable and that there are no further share-based payment schemes in existence that
have not been disclosed.
 Check disclosure is in accordance with IFRS 2.

Evidence to be collected:

 Copy of the offer made to the head of departments.

 Obtain board minutes related to issuance of share options to the board of directors.
 Documents supporting continuing employment of head of departments during vesting period.
 Documents supporting basis for fair value calculation of share options.
 Communication from management related to assumption used in fair value calculation.
 Document showing agreements of share price with market price.
 Published statistics used.
 Management representation letter.

Answer to the Question # 4

Requirement (a):
Analysis of the financial Position:
Key ratios:
2020 2019 % change
Short term solvency ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio 0.55 .35 59.7%
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ & 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑣𝑎𝑙𝑒𝑛𝑡𝑠
Cash ratio 0.22 0.28 -21.2%
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝑒𝑡 𝐷𝑒𝑏𝑡
Gearing Ratio 5.24 3.10 68.7%
𝐸𝑞𝑢𝑖𝑡𝑦
Performance ratio
Return on capital 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
-56.2% -57.4% 1.2%
employed 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
Return on assets -9% -14% 4.97%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Efficiency Ratio
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Asset turnover 0.25 0.54 -28.6
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
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 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Net asset turnover 1.57 2.20 -63.6%
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Commentary from ratio analysis:

Solvency of the entity:
Analysis of financial position of Pearl Limited indicates that Company is in distress and in liquidity crisis. It has current ratio
of only 0.55 whereas current ratio 2 is considered to be standard. This indicates Pearl Limited doesn’t have sufficient capacity
of paying off the current liabilities from its current assets. Furthermore, cash ratio for Pearl Limited is 0.22 which is very low.
This indicates that Pearl need to find a source for accessing cash. Overall solvency of the company is in distress.

Requirement (b):

The CFO should be persuaded that professional ethics are an inherent part of the accounting profession. Professional ethics
are a set of moral standards applicable to all professionals. Each professional body has its own ethical code which requires
its members to adhere to a set of fundamental principles in the course of their professional duty, such as confidentiality,
objectivity, professional behaviour, integrity and professional competence and due care.

Often there may be ethical principles which conflict with the profit motive and it may be difficult to decide on a course of
action. An accountant has an ethical obligation to encourage the board of directors to operate within certain boundaries
when determining the profit figure. Users are becoming reactive to unethical behaviour by directors. This is leading to
greater investment in ethical companies with the result that unethical practices can have a greater impact on the value of
an entity than the reporting of a smaller profit figure. Ethical issues are becoming more and more complex and it critical
to have an underlying structure of ethical reasoning, and not purely be driven by the profit motive.

Answer to the Question # 5

(a) A list of potential COVID-19 impacts on audit with reference to the related international standards on auditing are given
below:
i) Identifying new risks from COVID-19 related impact and re-assessments of the initial Risk of Material Misstatement
(RMM) and Materiality in line with ‘ISA 315 (Revised) Identifying and Assessing the Risks of Material
Misstatement Trough Understanding the Entity and its Environment’ and ‘ISA 320 Materiality in planning and
Performing an Audit’.
ii) Evaluating applicability of going concern assumption used by management for the preparation of the financial
statements in line with ‘ISA 570 (Revised) Going Concern’.
iii) Considering all subsequent events from the date of year-end to the date signing audit report and assessing whether
these are adjusting or non-adjusting events requiring recognition and disclosure in the financial statements
respectively and auditors obligation in accordance with ‘ISA 560 Subsequent Events’.
iv) Obtaining specific representations from management especially on any estimates and judgments applied related to
COVID-19 related impact in line with ‘ISA 580 Written Representations’.
v) Formulation of Auditor’s Opinion in accordance with ‘ISA 700 (Revised) Forming an Opinion and Reporting on
Financial Statements’, ‘ISA 705 (Revised) Modifications to the Opinion in the Independent Auditor’s Report’, ‘ISA
706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report’.
vi) Due to COVID-19 related impact if any changes is required in Key Audit Matters (KAM) previously communicated
to TCWG, updated KAM should be discussed with Management and TCWG in accordance with ‘ISA 701
Communicating Key Audit Matters in the Independent Auditor’s Report’.
vii) Risk of material misstatements in financial statements due to fraud including fraud risk factors identified previously
may require re-assessment due to pervasive changes in economic environment from COVID-19 related impact and
hence the auditor should consider this matter in audit in accordance with ‘ISA 240 The Auditor’s Responsibilities
Relating to Fraud in an Audit of Financial Statements’.
viii) All listed entities in Bangladesh are required to publish annual reports and most likely there would be comments
about COVID-19 and its impact on those entities in their annual reports. The auditor now has an added responsibility
to read and comment on other information published along with the financial statements such as contents in annual
report. Accordingly, the auditor should read such disclosure in the annual report and follow the steps prescribed in
‘ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other Information’.

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(b) Extract of audit report:
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Description of Key Audit Matters
Revenue recognition
At year end the Company reported total revenue of BDT[x]
Revenue is measured net of discounts, incentives and
rebates earned by customers on the Company’s sales.
Within a number of the Company’s markets, the estimation
of discounts, incentives and rebates recognized based on
sales made during the year is material and considered to be
complex and judgmental. Therefore, there is a risk of
revenue being misstated as a result of faulty estimations
over discounts, incentives and rebates.
There is also a risk that revenue may be overstated due to
fraud through manipulation of the discounts, incentives and
rebates recognized resulting from the pressure local
management may feel to achieve performance targets.
IT Systems and Controls
Our audit procedures have a focus on information
technology systems and controls due to the pervasive
nature and complexity of the IT environment, the large
volume of transactions processed in numerous locations
daily and the reliance on automated and IT dependent
manual controls.
Our areas of audit focus included user access management,
developer access to the production environment and
changes to the IT environment. There are key to ensuring
that IT dependent and application based controls are
operating effectively.
---The End---
Our response to Key Audit Matters
We have tested the design and operating effectiveness of
key controls focusing on the following:
 Calculation of discounts, incentives and rebates;
 Segregation of duties in invoice creation and
modification; and
 Timing of revenue recognition.
Our substantive procedures in relation to the revenue
recognition comprises the following:
 Obtaining supporting documentation for sales
transactions recorded either side of year-end as
well as credit notes issued after the year-end date
to determine whether revenue was recognized in
the correct period;
 Within a number of Company’s markets,
comparing current year rebate accruals to the
prior year and, where relevant, completing further
inquiries and testing;
 Agreeing a sample of claims and rebate accruals
to supporting documentation;
 Critically assessing manual journals posted to
revenue to identify unusual or irregular items; and
 Finally assessing the appropriateness and
presentation of disclosures against relevant
accounting standards.
We tested the design and operating effectiveness of the
Company’s IT access controls over the information
systems that are critical to financial reporting. We tested IT
general controls (logical access, changes management and
aspects of IT operational controls). This included testing
that requests for access to systems were appropriately
reviewed and authorized.
We tested the Company’s periodic review of access rights.
We inspected requests of changes to systems for
appropriate approval and authorization. We considered the
control environment relating to various interfaces,
configuration and other application layer controls
identified as key to our audit.
Where deficiencies were identified, we tested
compensating controls or performed alternate procedures.
In addition, we understood where relevant, changes were
made to the IT landscape during the audit period and tested
those changes that had a significant impact on financial
reporting.
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