Question - Analysis Audit and Assurance Application Level

Audit and Assurance-Application Level
Chapter-One: Reintroduction to audit and assurance

Weight Based Group Name- No Group
S.L Questions Answer Marks Year
1 Explain the difference between Audit and Assurance Engagement. AA 4 Dec 10
Manual
Page -4-6
2 Jot down four benefits those could be achieved through financial statements AA 4 Dec 11
being audited. Manual
Page -5
3 What are the elements of an assurance engagement and what benefits can be AA 4 Jun 12
derived from an assurance service? Manual
Page -4&5
4 How do you differentiate Audit and Assurance Engagement? AA 4 Jun 12
Manual Dec 13
Page -4&6

Chapter-Two: Responsibilities
Weight Based Group Name- Legal, ethical and current issues
1 What is money laundering? What is your responsibilities and duty to report, AA 4 Dec 11
as auditor when Manual
Page-33
2 What are the responsibilities of an auditor regarding fraud under BSA 240? AA 4 Jun 12
Manual
Page-26
3 Explain the implications of laws standards and other requirements relating to AA Jun 13
assurance work
Manual
Page-30
4 What is money laundering? What is your responsibilities and duty to report, as AA 4 Jun 13
auditor when you suspect or find any issue of money laundering?
Manual
Page-33
5 Will the auditor be responsible for any breaches by their client of any laws AA 3 Jun 14
and regulations, such as employment legislation, tax laws and other local Manual
laws? Page-29
6 “There is a general expectation by the users that auditors are responsible for AA 5 Jun 14
preparation of accounts, to report all frauds and to certify the financial Manual
statements as correct” Is this expectation correct? If yes, how can this Page-33-
expectation gap be narrowed down?
34

Chapter-Three: Professional Standards
Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group, mozumder@organic-
crop.com Cell-01711-981920
1 What is internal control? Why is it important? AA 6 Dec 10
Manual
Page-54
2 Briefly write on The International Auditing and Assurance Standards Board AA 4 Dec 11
(IAASB) and The International Federation of Accountants (IFAC). Manual
Page-51

Chapter-Four: Professional Ethics
Question No-01:
You have recently come across the following professional issues:
i) During the audit of a listed company on which you were involved, you overheard the finance director on the
telephone to a family friend requesting him to buy shares on his behalf, prior to an announcement about a
new product which you know is likely to increase the share price significantly. The finance director is a
chartered accountant.
ii) One of the audit clients you recently worked on was impressed with your courtesy towards his staff
members that he wanted to make you a gift of tickets to the World Cup football final, along with an
overnight stay in a hotel and dinner.

Requirements:
Set out the problems in each of the above situations and the action that you AA 10 Jun 12
should take. Manual
Self Test
Page-79
Q-2 What are professional and ethical issues that may arise during an assurance AA 4 Dec 13
engagement work?
Manual
Page-65
Q-3 What are the possible professional threats to the statutory auditors and how AA 4 Jun 14
can these be Manual
Page-65-
66

Chapter-Five: Quality Control
Weight Based Group Name- Accepting and managing engagements

Chapter-Six: Accepting Engagements
Weight Based Group Name- Accepting and managing engagements
Question No-01
You are a partner of a Chartered Accountant firm consisting 4 partners. Recently you have been offered by
Platinum Ltd. to act as an auditor of the company and also to provide assistance with the preparation of financial
statements and corporate tax computation.
The principal activity of the Platinum Ltd is the production of different paper based products used in the fast food
shop. It was incorporated on 01 October, 2012 and the financial statements will cover the 15 month- period to 31
December, 2013.
Mr. Tanvir started the business using a combination of money inherited from his grandfather and a bank loan. The
loan agreement includes a covenant specifying that the debt equity should not exceed 1:1. The company‟s bankers
require the annual accounts to be subjected to audit before renewal of the loan facility.
The accounting records are computerized and the company uses software which was developed by IT Systems, an
organization of Mr. Tanvir‟s brother. The software has been customized to integrate inventory control with receivables
and payables. IT Systems also provides support for the computer systems. The accounting records are maintained by Mr.
Rahim, assisted by Mr. Karim who works one day a week and is responsible for payroll processing.

Requirements;
(i) State, with reasons, the matters to be considered and procedures to be AA 4 Jun 14
performed prior to your firm accepting and commencing the audit of Platinum Manual
Ltd. Self Test
Page-122
(ii) Identify from the information provided above, the factors which should be AA 4 Jun 14
taken into account when assessing the risk of misstatement in the financial Manual
statements of Platinum Ltd. and explain why such factors should be taken into
Self Test
account when conducting the audit.
Page-122

Chapter-Seven: Planning
Weight Based Group Name- Planning assurance engagements
Q-1 AA 6 June 13
What is materiality? Explain why there can be difficulties for Manual
auditors regarding materiality Page-135

Chapter-Eight: Understanding the entity and its environments
1 Why is it important to understand the client‟s business? AA 3 Jun 14
Manual
Page-150

Chapter-Nine: Risk Assessment
Question no-01:
st
While planning the audit of Reach Ltd. for the year ending 31 December, 2010 the Finance Director informed you that
the company had introduced an incentive scheme under which the Directors are entitled to a bonus on achieving a
certain level of profit. The bonus will be paid 30 days after audited accounts are available.

Requirements:
Identify the audit risks in respect of the above matter, and state how you AA 7 Dec 11
would address these risks. Interactive 10 June 12
Question-
01, Page-
173
Q-02 Explain the term „audit risk‟ and the three elements of risk that AA 4 June 13
contribute to total audit risk. Manual
Page 169-
171

Chapter-Ten: Audit Approach

Chapter-Eleven: Audits of different types of entity

Chapter-Twelve: Audit Completion
Weight Based Group Name- Concluding and reporting on assurance engagements
Question no-01
Your firm has just been appointed auditors of X Ltd. after the previous auditors were removed following a dispute with
the Directors. This dispute related to certain cost capitalized by the directors, which the auditors believed should have
been written off (the audit report was qualified).

Requirements
State the procedure, you would carry out regarding the opening balances. AA 7 Dec 11
Interactive
Question-
01, Page-
255
Chapter-Thirteen: Reporting
Weight Based Group Name- Concluding and reporting on assurance engagements
Question-1:
Your firm XYZ, Chartered Accountants was appointed as the statutory audit of ABC Company Limited a construction
company, for the year ending 31st December, 2010. Upon completion of audit, your firm have issued the following audit
report:
Auditor’s report to the shareholders of ABC Company Limited
We have audited the accompanying balance sheet of the ABC Company Limited as of December 31, 2010 and the
related profit and loss account and statement of cash flows for the year then ended. These financial statements are the
responsibility of the company‟s management. Our responsibility is to express an opinion on these financial statements
based on our audit.
Scope:
We conducted our audit in accordance with Bangladesh Standards on Auditing (BSA). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
Opinion:
In our opinion, the financial statements prepared in accordance with Bangladesh Financial Reporting Standards
(BFRS), give a true and fair view of the state of the company‟s affairs as of December 31, 2010 and of the results of
its operations and its cash flows for the year then ended and comply with the applicable sections of the Companies Act
1994, the Securities and Exchange Rules 1987 and other applicable laws and regulations.
We also report that:
(a) we have obtained all the information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit and made due verification thereof.
(b) In our opinion, proper books of account as required by law have been kept by the company so far as it appeared
from our examination of those books and (where applicable) proper returns adequate for the purposes of our audit
have been received from branches not visited by us.
(c) The company‟s balance sheet and profit and loss account dealt with by the report are in agreement with the books
of account and returns.
(d) The expenditure incurred was for the purposes of the company‟s business.
XYZ
Chartered Accountants
Requirements:
In the context of the above report, you are to answer the following: AA 8 Jun 11
(a) In your report, your firm have affirmed that the audit Worked
have been conducted in accordance with Bangladesh Example
Standards on Auditing. Describe the procedures you have Page-288
adopted in support of the above affirmation.
(b) Explain the phrases: `material‟ and `reasonable‟ and their implication in AA 5 Jun 11
Audit and Assurance. Worked
Example
Page-288
(c) In your report, your firm have also stated that the AA 8 Jun 11
financial statements have been prepared in accordance Worked
with Bangladesh Financial Reporting Standards. What Example
are the procedures that you have carried out to affirm your Page-288
statement and which of the standards are relevant for your client
company.
(d) In the opinion paragraph, your firm have asserted that the AA 7 Jun 11
financial statements give a `true and fair‟ view of the Worked
state of affairs of the company. Explain what you have Example
meant by the phrase `true and fair‟. Also explain when Page-288
and under what circumstances, the financial statements
give a true and fair view of the state of affairs of the company.
Question-2:
Described below are three situations which have arisen in three audits. The year end in each case is 31st March 2011:
i) Asha Ltd. uses leased motor vehicles which have been accounted for as operating leases. However, you believe that
these leases are finance leases and should have been capitalized at Tk.5,100,000. The current treatment does not comply
with accounting standards which required finance leases, where the user takes on the risks and rewards of ownership, to
be included as non-current assets and capitalized. Profit for the year would then have been reduced by Tk.400,000.
The pre-tax profits of Asha Ltd. for the year ended 31st March 2011 were Tk.60,000,000 and total assets at
31st March 2011 were Tk.540,000,000.
ii) A fire in the warehouse of Alo Ltd. in April 2011 destroyed the inventory sheets, which were the only
records of the company‟s inventory at the year end. The company has included an estimated inventory figure
of Tk.780,000.
The pre-tax profits of Alo Ltd. for the year ended 31st March 2011 were Tk.1.1 million and total assets at
31st March 2011 were Tk.6.5 million.
iii) Diya Ltd. has included a note in the financial statements explaining that 90% of its revenue is derived from a
national retailer with whom it has a three-year renewable contract. This contract is due for renewal in
September 2011. However, the directors require the audit report on the financial statements to be signed on
31st May 2011.

Requirements:
a) Discuss briefly each of the situations outlined above, referring to AA Self 12 Jun 12
materiality considerations. For each situation describe the effect on the Test Page-
audit report. 299
b) Describe what is meant by the concept of materiality and true and fair view. AA Self 5 Jun 12
Test Page-
299

Assurance Manual-Knowledge Level
1 What are the limitations, if any, of a financial statement audit? Chapter-1, 4 Dec 10
Page-11
2 What is internal control? Why is it important? Chapter - 6 Dec 10
5, Page-88
& 89
3 Generally a firm is engaged for an audit but may also be Chapter - 4 Jun 12
engaged by management to provide additional non-statutory 1, Page-8
and non-assurance services. Write down at least four non-
assurance jobs, outside audit and assurance, generally performed
by our firms in Bangladesh.

Question Bank
Question-1:
Your firm XYZ, Chartered Accountants was appointed as the statutory audit of ABC Company Limited a construction
company, for the year ending 31st December, 2010. Upon completion of audit, your firm have issued the following audit
report:
Auditor’s report to the shareholders of ABC Company Limited
We have audited the accompanying balance sheet of the ABC Company Limited as of December 31, 2010 and the
related profit and loss account and statement of cash flows for the year then ended. These financial statements are the
responsibility of the company‟s management. Our responsibility is to express an opinion on these financial statements
based on our audit.
Scope:
We conducted our audit in accordance with Bangladesh Standards on Auditing (BSA). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
Opinion:
In our opinion, the financial statements prepared in accordance with Bangladesh Financial Reporting Standards
(BFRS), give a true and fair view of the state of the company‟s affairs as of December 31, 2010 and of the results of
its operations and its cash flows for the year then ended and comply with the applicable sections of the Companies Act
1994, the Securities and Exchange Rules 1987 and other applicable laws and regulations.
We also report that:
(e) we have obtained all the information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit and made due verification thereof.
(f) In our opinion, proper books of account as required by law have been kept by the company so far as it appeared
from our examination of those books and (where applicable) proper returns adequate for the purposes of our audit
have been received from branches not visited by us.
(g) The company‟s balance sheet and profit and loss account dealt with by the report are in agreement with the books
of account and returns.
(h) The expenditure incurred was for the purposes of the company‟s business.
XYZ
Chartered Accountants

Requirements:
In the context of the above report, you are to answer the following: Question 8 Jun 11
(b) In your report, your firm have affirmed that the audit no-41,
have been conducted in accordance with Bangladesh Page-44
Standards on Auditing. Describe the procedures you have
adopted in support of the above affirmation.
(b) Explain the phrases: `material‟ and `reasonable‟ and their implication in Question 5 Jun 11
Audit and Assurance. no-41,
Page-44
c) In your report, your firm have also stated that the Question 8 Jun 11
financial statements have been prepared in accordance no-41,
with Bangladesh Financial Reporting Standards. What Page-44
are the procedures that you have carried out to affirm your
statement and which of the standards are relevant for your client
company.
Question 7 Jun 11
(e) In the opinion paragraph, your firm have asserted that the no-41,
financial statements give a `true and fair‟ view of the Page-44
state of affairs of the company. Explain what you have
meant by the phrase `true and fair‟. Also explain when
and under what circumstances, the financial statements
give a true and fair view of the state of affairs of the company.

ICAEW Past Papers
Question No-01:
Your firm has recently been appointed external audit of Hatil Ltd (Hatil) for the year ending 30 June 2010. The previous
auditor did not seek reappointment. Your firm has also been invited to provide tax planning and compliance work for the
company.
All of the shares in Hatil are owned by the Patwari brothers, Martin and Maruf. They are the only directors and spend
on average three days a week managing Hatil as they have other business interests. The company employs a full‐ time
qualified accountant but does not have a finance director. Matin and Maruf have plans to grow the business and wish
to recruit a finance director. They have asked your firm to assist with the recruitment of a suitable candidate and
advise on the remuneration package.
Hatil‟s principal activity is the manufacture and sale of high quality leather sofas, chairs and other
forms of seating which are sold to the public, clubs, hotels and restaurants. Items are produced by hand
in the company‟s workshop which is located in the North of Dhaka. Customers place their orders by
telephone or over the internet and pay by cheque or credit or debit card. All sales are transacted in
BDT.
The company‟s terms of trade require a 50% deposit with the order. Once the order is completed, the balance must be
paid five days prior to delivery. Typical production time is three to four weeks. Customers are required to check the
items on delivery and have seven working days to return the items if not completely satisfied. All items are sold with a
one year guarantee. At peak times the company uses sub contractors to assist with the manufacture of the seating.
These subcontractors are required to invoice Hatil at the end of each month.
The company does not supply goods from inventory as all items are made to customer order. Finished goods in the
workshop relate to items awaiting dispatch to customers. The company does not have continuous records for raw
materials inventory and undertakes a full count of raw materials at each month end including at the year end. The
quantities are recorded on inventory sheets and are subsequently costed by the company accountant. Matin Patwary
estimates the value of work in progress and finished goods awaiting dispatch.
Raw materials are sourced from number of suppliers based in Bangladesh and overseas. All of the timber used in the
frames for the seating is purchased from Timber Ltd. which is owned by Matin and Maruf‟s mother, Selina Patwary.
There has been steady growth in sales in recent years and, in May 2010, Hatil acquired the premises adjacent to its
existing workshop to allow expansion of its manufacturing capacity. The new premises are not yet in use as they are
currently undergoing extensive refurbishment in order to make them fit for purpose.
The acquisition was funded by a bank loan repayable in quarterly installments over ten years. The
existing workshop, which is owned by the company and included in the financial statements at cost less
accumulated depreciation, was revalued by an external valuer in April 2010. The directors wish to
incorporate the revalued amount in the financial statements for the year ending 30 June 2010.

Requirements:
(a) Outline the procedures your firm should have undertaken, ICAEW 6 Jun 11
prior to accepting appointment, in order to assess the integrity of Question
Matin and Maruf Patwary. For each procedure describe how it would No-07,
have assisted with your firm‟s assessment of the integrity of Matin Dec-2009
and Maruf.
(b) Explain what is meant by a self‐ review threat in the context of the ICAEW 4 Jun 11
provision of taxation services to Hatil and state the safeguards available to Question
your firm in order to reduce this threat. No-07,
Dec-2009
(c) In respect of the recruitment and remuneration package, ICAEW 6 Jun 11
explain the threats to independence which may arise from Question
the provision of each of these services and discuss how No-07,
your firm might respond to these threats. Dec-2009
ICAEW 20 Jun 11
(d) Identify, from the information provided in the scenario, the Question
principal areas of audit risk in respect of the financial statements
of Hatil for the year ending 30 June 2010. For each risk: No-07,
(i) list the factors which have led you to identify that risk; and Dec-2009
(ii) outline the procedures that should be included in the audit plan in
order to address the risk.
You should present your answer in a two-columnar format using the
headings (i) audit risk and factors; and (ii) procedures to address the risk
Question No-02:
ABC & Co., a firm of Chartered Accountants has been approached by the directors of Amari Coppers Ltd. to quote for
the statutory audit of Amari Coppers Ltd. for the year ending 31 December 2011. Amari Coppers Ltd. is required to
have an statutory audit under the Companies Act 1994 but Amari Coppers Ltd‟s previous statutory auditor is not
seeking reappointment.
Amari Coppers Ltd. is a successful company selling cleaning equipment to hospitals all over Bangladesh. An
increased focus on cleanliness in hospitals has led to Amari Coppers Ltd‟s Bangladesh sales rising significantly.
Amari Coppers Ltd. was incorporated three years ago by Masum Khan, the managing director and
Nasir Ahmed, the finance director. Masum and Nasir previously worked for a competitor company as
sales managers and finance manager respectively. Masum and Nasir invested their own money in
Amari Coppers Ltd. and all of the ordinary shares in the company are held equally between them.
The following is a transcript of a telephone call made by Masum to ABC & Co. on 1 November 2011:
“We are inviting a large number of firms to quote as we want enough competition among the firms to
keep the statutory audit fee low. I don‟t really see that there is any value in Amari Coppers Ltd.
having an statutory audit – Nasir and I are the only shareholders and we know the business very
well.”
“Whoever wins the statutory audit contract will have to keep work to a minimum; we are too busy running the business to
answer lots of questions. I have been told that testing internal controls is an efficient way to conduct an audit so we would want
the successful firm to agree to this audit methodology.”
“Our expansion means we need some business advice on our strategy and we would be very keen that the statutory
auditors help with this and assist us in obtaining some finance for further expansion. We really need the auditor to
be part of the team here at Amari Coppers Ltd. The nature of this work would be much more valuable to us and we
therefore expect to pay a higher fee in respect of this assignment.”
“We also need some help with implementing a new accounting information technology system that
can handle the growth in our business. The current system was bought when we set up Amari
Coppers Ltd. and it is no longer sophisticated enough for our business at present. We would like the
successful firm to advise us as to whether we should purchase an `off-the-shelf accounting package‟
or whether we should have a system designed for us. We would also seek the firm‟s services to
implement the new system, including advice on design of a System if this proves necessary.”
“We think that the business advisory and information technology services that we wish to purchase will mean that it
is worthwhile quoting a lower fee for the statutory audit work.”

Requirements:
a) Outline the case for and against an owner managed business such as Amari
ICAEW 6 Dec 11
Coppers Ltd., being required to undergo an statutory audit. Question
No-08,
Sept 2010
b) Explain any threats to objectivity and independence, and outline any ICAEW 10 Dec 11
appropriate safeguards, that ABC & Co. should consider with respect to: Question
(i) appointment as statutory auditors of Amari Coppers Ltd.; No-08,
(ii) provision of the business advisory services on strategy and
financing; and Sept 2010
(iii) provision of advice on the new accounting information
technology system.
(c) Identify additional factors that ABC & Co. should take into ICAEW 7 Dec 11
consideration before deciding to quote for the statutory audit of Question
Amari Coppers Ltd. Your answer should include any preliminary
No-08,
audit risks identified from the information provided.
Sept 2010
Question No-03:
The directors of Clean & Clear Ltd. (Clean & Clear) are planning to reorganize the business as a result of
recent significant growth in revenue. The reorganization will involve relocation of the business premises,
the acquisition of additional delivery vehicles and an upgrade of the IT infrastructure for which quotes
have been obtained from suppliers. The directors are negotiating with the company‟s bank to fund the
reorganization with a loan and have prepared cash flow forecasts for the three years ending 31 March
2014 in support of the request for funding. The company‟s bank requires the cash flow forecasts to be
examined and reported on by independent accountants and the board of directors has requested that your
firm undertakes this work.
The company‟s principal activity is the sale and distribution of cleaning materials to customers in the retail,
industrial and service sectors. All sales are on a credit basis and Clean & Clear‟s terms of trading require payment
within 30 days of invoice date. However, some of the company‟s smaller customers tend to take longer than this to
pay. Clean & Clear offers an early payment discount but only a few customers take advantage of this facility.
The goods are purchased from a number of suppliers based in Bangladesh and overseas. Two of the
company‟s main suppliers operate a rebate scheme under which Clean & Clear receives a rebate,
which is paid quarterly in arrears, when it purchases a specified volume of products. The significant
growth experienced in the current year is due to Clean & Clear being awarded two three-year
contracts to supply two government bodies with all their cleaning materials. This has resulted in
Clean & Clear having to expand its range of products and increase the level of inventory held at any
point in time. As a result, the company has outgrown its own warehouse facilities and is temporarily
renting additional premises in Tejgaon to supplement its existing facilities. Clean & Clear is required
to give three months‟ notice of its intention to vacate the temporary premises. The directors plan to
sell the warehouse, which the company owns, and move all of Clean & Clear‟s operations to a larger
purpose-built warehousing facility. This is a leasehold property and rent is payable quarterly in
advance. The directors will use the proceeds of the sale of the existing warehouse to pay off the
outstanding loan on that warehouse and reduce the company‟s overdraft.

Requirements:
a) (i) Describe the matters to be included in your firm‟s engagement ICAEW 6 Dec 11
letter for the examination of the cash flow forecasts in respect of Question
 management's responsibilities; No-08,
 the purpose and scope of your firm‟s work; Jun 2010
 limiting your firm‟s liability; and
ii) Explain why these matters should be included. ICAEW 5 Dec 11
Question
No-08,
Jun 2010
(b) From the information provided in the scenario, identify ICAEW 12 Dec 11
the key receipts and payments that you would expect to Question
be included in the cash flow forecasts prepared by the No-08,
directors of Clean & Clear. For each receipt and payment, Jun 2010
identify the specific matters you would consider when
reviewing the reasonableness of the assumptions underlying
that receipt or payment.
Question No-04:
Your firm has recently been appointed external auditor of Eastern Waste Management Ltd. (Eastern) for the year
ended 31 December 2011. The previous auditors, from whom your firm has obtained professional clearance, were
not re-appointed because the Managing Director of Eastern, Arif Chowdhury, who is also the majority shareholder
of the company, believes that your firm has the appropriate expertise to assist with his plan to expand the business.
The expansion plan involves the acquisition of small companies in the same industry sector and Arif
Chowdhury would like your firm to undertake Due Diligence investigations over the next five years
on the target companies. The Due Diligence work will include, among other procedures, a review of
the financial statements of the target companies. Your firm has a number of other clients operating in
the same industry sector. Eastern‟s principal activity is the provision of waste management services
which include the collection, transfer, recycling and disposal of waste materials. The company‟s
activities are overseen by a regulatory body which issues licenses to companies operating waste
management services. The regulatory body has the power to modify, suspend or revoke the licenses
which are granted for periods up to ten years. The licenses set out the operational criteria and the
working practices to be adopted to meet those criteria. Eastern‟s customers include industrial and
retail companies and government bodies. The majority of work is undertaken under renewable
contracts covering periods up to ten years. Payment terms vary from contract to contract, with some
customers paying for services in advance whilst others pay after Eastern has provided the services.
Eastern‟s largest contract expires in July 2012. This contract currently represents 35% of Eastern‟s
revenue. Eastern, along with other companies, has been invited to tender for the new contract. Eastern
is entitled to claim a subsidy from the government based on the volume of waste recycled. The
company is required to submit quarterly returns detailing the volume of waste recycled and the
subsidy is paid 30 days following the end of the period covered by the return. Eastern‟s procedures
and records are subject to periodic inspections by a government auditor to ensure that the claims for
the subsidy are valid.
The company has experienced rapid growth due to an increase in demand for its services. During the year ended 31
December 2011, the company commissioned a number of capital projects including state-of-art sorting lines at all of
its recycling centres and digestion plant. The digestion plant is to be used in Eastern‟s new venture which will
involve the conversion of waste material into biofuel. The sorting lines were assembled from specialist components
sourced from an overseas supplier using a combination of own and sub-contract labour. Those were completed in
December 2010 and came into operation in February 2011. The digestion plant, which is sited on land purchased
from a land development company, Ashulia Lands Ltd. owned by Arif Chowdhury and his wife, was still in the
course of construction. The digestion plant is being built by a construction company under a fixed-price contract
which requires stage payments based on the value of work certified by a surveyor. The capital projects are funded
by a loan repayable in quarterly installments over ten years. In addition to the loan, the company has negotiated an
increase in its overdraft facility in order to meet its working capital requirements which have increased due to the
expansion of the business.
The accounting function is centralized at head office. However, the processing of payroll is outsourced to an HR
Consulting firm, ZN Consultants, which provides Eastern with monthly payroll information. Eastern uses this
information to pay the wages and salaries directly into its employees‟ bank accounts and the relevant payroll taxes
to NBR.

Requirements:
a) Explain the self-interest and self-review threats arising from the provision of ICAEW 6 June 12
due diligence services to Eastern and describe how your firm should deal with Question 5 Dec 12
them. No-07,
June 2010
b) Identify, from the information provided in the scenario, the principal areas of ICAEW 16 June 12
audit risk in respect of the financial statements of Eastern for the year ended Question 20 Dec 12
31 December 2012. For each risk:
No-07,
(i) List the factors which have led you to identify that risk; and
(ii) Outline the procedures that should be included in the audit June 2010
plan in order to address the risk.
c) (c) Describe the benefits to: ICAEW 5 Dec 12
(i) clients from having non-audit services provided by their Question
external auditors; and
(ii) firms from providing non-audit services to audit clients and
No-07,
companies who are not audit clients. June 2010
Question No-05:
Your firm is the external auditor of Dunlec Ltd. (Dunlec) for the year ended 31 October 2012.
The company is owned by members of the Dunlop family, none of whom is involved in
running the business. Dunlec’s principal activity is the installation of electrical systems for
customers in the retail, construction and industrial sectors in Bangladesh. The company
operates from premises in Dhaka and six freehold divisional depots throughout Bangladesh.
All contracts are fixed-price. Customers pay 95% of the contract price on completion of the
work and withhold 5% of the contract price for up to six months from the date of completion
in case remedial work is required. The materials and components used by the Dunlec are
bought from Bangladesh suppliers who require payment within 30 days of the invoice date.
Dunlec made an operating loss during the year ended 31 October 2012. This was mainly due to a
substantial bad debt in respect of a company which went into liquidation in July 2012, with insufficient
funds to pay unsecured creditors. As a result, Dunlec experienced severe cash flow problems. In August
2012, to ease its cash flow problems, Dunlec sold its Dhaka freehold premises and leased new premises.
Dunlec used the proceeds to:
  Pay a loan instalment on the due date in September 2012 (final instalment due in September 2013); 
 Pay its overdue tax and related penalties; and 
 Reduce the company’s overdraft. 
During the year ended 31 October 2012, Dunlec suffered a fall in demand for its services in the construction
sector. The directors have undertaken a strategic review of operations and have decided to reduce the
company’s cost base by:
 Closing two of the divisional depots and putting both premises up for sale. Contracts in those regions
will be serviced by the nearest existing depot; and 
 Making 25% of the company’s employees redundant. 
The closures and redundancies were announced on 12 November 2012 and the premises were immediately
put up for sale.
As part of their assessment of the company’s ability to continue as a going concern, the directors have
prepared cash flow forecasts. These show that the company can operate within its current overdraft facility
for the two years ending 31 October 2014.

Requirements:
a) From the information provided in the scenario, identify the ICAEW 8
specific matters you would consider when reviewing the Question Dec 12
assumptions underlying the receipts and payments included in No-09,
the cash flow forecasts for the two years ending on 31 October Dec 2009
2014.
b) Discuss the implications for your firm’s audit report in each of the ICAEW 8
following two circumstances: Question Dec 12
(i) Dunlec is not a going concern; No-09,
(ii) there is a significant uncertainty about the going concern Dec 2009
status of Dunlec.
.
c) Identify the parties to whom your firm may be liable for ICAEW 4 Dec 12
damages if an inappropriate opinion is provided on the Question
financial statements of Dunlec for the year ended 31 No-09,
October 2012 and state the circumstances under which Dec 2009
those parties may be successful in claiming such damages
against your firm.

ACCA F-8 (Study Text & Practice Revision Kit)
Question No-01:
Khelna Toys Co (Khelna) is a manufacturer of children’s building block toys; they have been trading for over
35 years and they sell to a wide variety of customers including large and small toy retailers across the country.
The company’s year end is 31 May 2011. The company has a large manufacturing plant, four large warehouses
and a head office. Upon manufacture, the toys are stored in one of the warehouses until they are despatched to
customers. The company does not have an internal audit department.
Sales ordering, goods despatched and invoicing system.
Each customer has a unique customer account number and this is used to enter sales orders when they are received in writing
from customers. The orders are entered by an order clerk and the system automatically checks that the goods are available and
that the order will not take the customer over their credit limit. For new customers, a sales manager completes a credit
application; this is checked through a credit agency and a credit limit entered into the system by the credit controller. The
company has a price list, which is updated twice a year. Larger customers are entitled to a discount; this is agreed by the sales
director and set up within the customer master file
Once the order is entered an acceptance is automatically sent to the customer by mail/email confirming the
goods ordered and a likely despatch date. The order is then sorted by address of customer. The warehouse
closest to the customer receives the order electronically and a despatch list and sequentially numbered goods
despatch notes (GDNs) are automatically generated. The warehouse team pack the goods from the despatch
list and, before they are sent out, a second member of the team double checks the despatch list to the GDN,
which accompanies the goods.
Once despatched, a copy of the GDN is sent to the accounts team at head office and a sequentially numbered
sales invoice is raised and checked to the GDN. Periodically a computer sequence check is performed for any
missing sales invoice numbers.
Fraud
During the year a material fraud was uncovered. It involved cash/cheque receipts from customers being
diverted into employees’ personal accounts. In order to cover up the fraud, receipts from subsequent unrelated
customers would then be recorded against the earlier outstanding receivable balances and this cycle of fraud
would continue.
The fraud occurred because two members of staff ‘who were related’ colluded. One processed cash receipts
and prepared the weekly bank reconciliation; the other employee recorded customer receipts in the sales
ledger. An unrelated sales ledger clerk was supposed to send out monthly customer statements but this was
not performed. The bank reconciliations had a small unreconciled amount but no-one reviewed the
reconciliations after they were prepared. The fraud was only uncovered when the two employees went on
holiday at the same time and it was discovered that cash receipts from different customers were being applied
to older receivable balances to hide the earlier sums stolen.
Required:
(a) Recommend SIX tests of controls the auditor would normally carry ACCA F- 9 Dec 12
out on the sales system of Khelna, and explain the objective for each 8 Q-68,
test. Page-47
b) Describe substantive procedures the auditor should perform to ACCA F- 10 Dec 12
confirm Khelna’s (i) year end receivables balance, and (ii) Revenue. 8 Q-68,
Page-47
(c) Identify and explain controls Khelna should implement to reduce ACCA F- 6 Dec 12
the risk of fraud occurring again and, for each control, describe how it 8 Q-68,
would mitigate the risk. Page-47
Question No-02:
b) The Jiboner Alo (Charity) was established in 1972. The Charity‟s aim is to provide education and
financial support to children from disadvantaged backgrounds.
Charity has a detailed constitution which explains how the Charity‟s income can be spent. The
constitution also notes that administration expenditure cannot exceed 10% of income in any year.
The Charity‟s income is derived wholly from voluntary donations. Sources of donations include:
  
Cash collected by volunteers asking the public for donations.
  
Donations received from past beneficiaries of the Charity.

Donations from generous individuals. Some of these donations have specific clauses attached to them
cannot be spent and that the income (interest) from the
indicating that the initial amount donated (capital)
donation must be spent on specific activities, for
example, provision of study materials.
The rules regarding the taxation of charities are complicated in certain situations.

Required:
ACCA F- 12 June 13
(i) Identify areas of inherent risks in the Charity and explain the 8 Q-45,
effect of each of these risks on the audit approach. Page-29
ACCA F- 4 June 13
(ii) Explain why the control environment may be weak at the 8 Q-45,
Charity. Page-29
Question No-03:
Your firm, Sikder & Co. has been appointed as the auditor of Bengal Electronics Ltd. The Company
sells televisions, DVD players and other musical instruments to electrical retailers.
You are planning the audit for the year ended 30 December 2012. The audit for the year ended 31
December 2011 was carried out by another firm of auditors.
During a recent visit to the company you obtained the following information:
a) The management accounts for the 10 months to 31 October 2012 show a revenue of Tk. 1,300
million and profit before tax of Tk. 40 million. Assume sales and profits accrue evenly
throughout the year. In the year ended 31 December 2011 the company had sales of Tk. 1,100
million and profit before tax of Tk. 80 million.
b) The company installed a new computerized inventory control system which has operated from 1 July
2012. As the inventory control system records inventory movements and current inventory
quantities, the company is proposing:
(i) To use the inventory quantities on the computer to value the inventory at the year-end.
(ii) Not to carry out an inventory count at the year-end.
c) You are aware that there have been reliability problems with the company‟s products, which have
resulted in legal claims being brought against the company by customers, and customers refusing to
pay for the products.
d) The sales increase in the 10 months to 31 October 2012 over the previous year has been achieved by
attracting new customers and by offering extended credit. The new credit arrangements allow
customers three months credit before their debt becomes overdue, rather than the one month credit
period allowed previously. As a result of this change, trade receivables age has increased from 1.6 to
4.1 months.
e) The finance director and purchasing manager were dismissed on 15 July. A replacement purchasing
manager has been appointed but it is not expected that a new finance director will be appointed
before the year end of 31 December 2012. The chief accountant will be responsible for preparing the
financial statements for the audit.
Outsourcing of payroll
For the first time this year the company has outsourced its payroll function to a firm of Accountants
called Karim & Co. Payroll costs form a substantial cost in the statement of comprehensive income.
Karim & Co. prepares the payroll, records and updates it for starters and leavers based on
information provided by the company.
A series of payroll reports are securely e-mailed to the company each month and reviewed by the
appropriate management. Payments are made to employees on the basis of a net pay report provided
and journals are put through to reflect the wages costs and related liabilities.

Required:
a) ACCA F- 5 June 13
Describe Sikder & Co‟s responsibilities in relation to the company‟s 8 Q-38,
opening balances in accordance with BSA 510 and BSA 710. Page-25
b) ACCA F- 5 June 13
8 Q-38,
Explain why it is important for auditors to plan their audit work. Page-25
c) Describe the matters you will consider in planning the further action ACCA F- 10 June 13
you will take concerning the information you obtained during your 8 Q-38,
recent visit to the company. Page-25
d) Describe Sikder & Co‟s responsibilities in relation to obtaining ACCA F- 5 June 13
understanding of the services provided by Karim & Co. when 8 Q-38,
planning the audit. Page-25

Others
1 How does the expanded role of professional accountants affect the accounting 4 Dec 10
profession?
2 Which statutory provisions are aimed at reinforcing auditor's independence? Discuss. 6 Dec 10
Question no-3
Spacemaster Ltd. is a listed public company that manufactures highly sophisticated furniture for local and
export market. Export constitutes 90% of total sales and one foreign customer alone buys 80% of total
sales. The company has a 30 September 2010 year- end and the statutory accounts are due to be signed one
week after the board of directors meeting on 15 January 2011. During the course of the audit, you became
aware that the overseas customer who buys 80% of total production has gone liquidation.
The company has been experiencing cash flow difficulties and has recently applied for a significant
increase to a borrowing facility that is already fully drawn. Management is adamant that the company will
continue to be viable. If necessary, it claims, it can resort to cutbacks in its future capital expenditure
program, seek additional off-balance-sheet financing and/or reschedule existing debit arrangements.
Required:
a) Explain the concept of going concern. Discuss the reporting options open to an auditor 10 Dec 10
when going- concern issues arise.
b) Discuss the potential audit report options in relation to Spacemaster Ltd. 10 Dec 10
Question no-4
Shahana Parvin has been working at Shahana Jesmin & Co., a firm of Chartered Accountants for 3 years.
Shahana and her partner Jesmin are both interested in environmental issue and have participated in
community work concerning the environment. During a pharmaceutical company's annual audit for the
financial year ended 30 June 2010, Shahana notices the company has recently changed its contractor for
waste management to Safedumping Ltd. Shahana is happy to know, through her community activists, that
Safedumping is being investigated by the local council for the level of toxic waste at one of its sites.
The waste management contract between Safedumping and the pharmaceutical company does not specify
damages and has not been signed by Safedumping. The contract is for a substantial amount and is valid for
3 years, and Shahana is concerned about the implications. The local council carries out strict inspections
and imposes heavy fines for toxic dumping.
Shahana raises the issue with Jesmin, the partner in charge of the audit. 'This is reality, Shahana' Jesmin says. 'As far as I am concerned, we
are responsible for the correctness of its financial report, and nothing else. Besides, you do not have the qualification to judge if a company is
good corporate citizen or not. We are not concerned with the business management.' Jesmin asks Shahana not to take this issue too seriously
and told not to raise any fuss in this matter.

Required:
a) Explain the ethical issues involved here. 8 Dec 10
b) Recommend a course of action for Shahana. 10 Dec 10
Question no-5
Your firm has been the auditor of Oceania Supplies Ltd, a listed company, for a number of years. The
engagement partner has asked you to describe the matters you would consider when planning the audit for
the year ending 31 March 2010.
During a recent visit to the company you have obtained the following information;
(i) The management accounts for the 10 months to 30 November 2009 show sales of Tk. 1,300 million and profit before tax Tk.
40 million. Assume that sales and profits accrue evenly throughout the year. In the year ended 31 March 2009, Oceania
Supplies had sales of Tk. l, 1 00 million and profit before tax of Tk. 80 million.
(ii) The company installed a new computerized inventory control system which has operated from 1
June 2009. Given that the inventory control system records inventory movements and current
inventory quantities, the company is proposing:
• to use the inventory quantities on the computer to value the inventory at year-end
• not to carry out an inventory count at year-end.
(ii) You are aware there have been reliability problems with the company's products, which have
resulted in customers making legal claims against the company and refusing to pay for products.
(iii) The sales increase in the 10 months to 30 November 2009 was achieved by attracting new credit
arrangements allowing customers 3 months credit before their debt become overdue, rather than the
1 - month credit period previously allowed. As a result of this change, the receivable age has
increased from 1.6 months to 4.1 months.
(iv) The chief financial officer and the purchasing manager were dismissed on 15 August, 2009. A
replacement purchasing manager has been appointed, but a new chief financial officer is not
expected to be appointed before the year-end of 31 March 2010. The chief accountant will be
responsible for preparing the financial statements for audit.
Required:
a) Describe why it is important that auditors should plan their audit work. 10 Dec 10
b) Describe the matters you will consider in planning the audit and the 10 Dec 10
further action you will take concerning each of the five matters listed
above.
Question no-6
You are a partner with a firm of Chartered Accountant, ABC & Co., that has been invited, by the Board of
Directors, to accept nomination as external auditors of Green Limited. Green Limited operates a number
CNG Stations and CNG Conversion Centres and has grown rapidly over the past two years through an
aggressive take-over strategy.
You are aware that the company was being audited by a small firm and qualified report was issued last
year. During a meeting with a member of your firm's partners, the company's Chief Financial Officer
mentioned that their existing auditors could not cope with the audit of a company of their size and, in
particular, were not equipped to audit the recently installed sophisticated computer accounting system. He
also suggests that they need a firm of your reputation in order to reassure the market as they intend to seek
a public listing within three years.
The existing auditors, in response to your inquiry, advise against accepting the audit on the following grounds:
- Insufficient consideration has been devoted by management for developing the accounting system
in line with the expanding business. In particular there is a lack of concern as to control. They
detected a number of petty employee frauds as a result of control weaknesses. No action was taken
against the employees identified as engaged in fraud. The attitude seems to be to encourage risk
taking employees who, if they make money on the side whilst securing good deals for the company,
that is seen as a legitimate bonus.
- The newly installed computer accounting system is unreasonably complicated. Green Ltd. claims
this is necessary because of the need to maintain records to justify the company's claim for volume
rebates, and bonuses under the complex incentive schemes by which the company reward
consumers.
- They have no evidence of deliberate misrepresentation by the directors but audit staffs were
hindered in their work by a less than helpful attitude by senior management who adopted an
aggressive stance whenever a query was raised. The Chief Financial Officer was constantly on the
phone to the partner claiming the audit staffs were incompetent and accusing them of wasting his
time asking unnecessary questions.
At a partners' meeting a majority of partners accepted the st ory that existing auditors were out of their
depth and that their complaints were merely a n attempt to cover up their own shortcomings. Your firm
accepted nomination and was duly appointed as auditor.

Required:
a) State factors the partners should have considered for and against 6 Dec 10
accepting nomination.
b) Detail the matters to which you would pay particular attention in 6 Dec 10
obtaining the required knowledge of the business and in developing
your audit plan.
c) During the first audit, your firm discovers that the reason for the 6 Dec 10
complexity of the computer system is to falsify records in order to
reduce the amount of tax payable to the Government. Describe the
action you would take on discovery of the fraud.
Question no-7
Consider the following independent situations, which all relate to the year ended 30 June 2010:
(i) Karim is the sole proprietor of Karim‟s Gift Shop (KGS). KGS leases premises in a large shopping complex in
Dhaka. Karim received a preliminary notice in May 2010 that the complex owners were planning a major
redevelopment commencing later in the year. Karim‟s lease would be terminated around October 2010 and at this
stage it appears that no alternative premises will be offered. All necessary approvals have been obtained for the
redevelopment project.
(ii) Ms Sulekha runs a beauty parlour in a shopping arcade in the suburbs of Dhaka. The lease runs out on 31 December
2010. Ms Sulekha informed you at the planning stage of the audit that she does not intend to renew her lease. She
will simply close the shop, sell what equipment she can, pay her outstanding accounts and retire.
(iii) ZX Limited is a subsidiary of an overseas electronic giant, ZY Limited. ZX has always made a loss and has always
been financially supported by ZY. Each year, ZY signs a letter of support stating they will provide financial support
for ZX in the next twelve months. You have such a letter on file this year. However, recent articles in the financial
press suggest that ZY is in financial difficulties and may be subject to a hostile takeover bid.

Requirements:
a) Discuss whether there is a potential going concern issue in each situation. 6 Jun 11
b) Describe the additional procedures that you would perform (if any) in each 6 Jun 11
situation.
Question no-8
You have completed your audit of Bangla Limited, a listed company for the year ended 30 June 2010. As at this date,
Bangla reported net assets of Tk.35 crore and sales revenue of Tk.42 crore. Materiality for the audit was set at Tk.3 crore.
During the audit you made note of the following potential management letter points:
(i) Invoice number 697, issued on 1 May 2010, contained incorrect prices. This resulted in the invoice being
understated by Tk.1,75,000.
(ii) Inventory held at a third‐ party warehouse was found to be damaged and unsaleable; however, it was not written off. It is
currently shown in the accounting records at its original cost of Tk.17,50,000.
(iii) High turnover in the head office accounts department resulted in the bank account remaining
unreconciled for three months. The problem was only resolved several weeks after the year end.
(iv) A fraud was perpetrated by warehouse staff, who acted in collusion with the stock controller to steal
approximately Tk.700,000 of stock during a six‐ month period. All employees involved in the fraud have since
left the company. Additional controls have been put in place to prevent recurrence of the problem.
(v) Unrecorded liabilities amounting to Tk.392,000 were discovered during the examination of cash payments made
post balance date.
(vi) Two laser printers purchased by the marketing department were mistakenly posted to repairs and maintenance
expense rather than fixed assets. The printers cost Tk.5,60,000 and depreciation of Tk.1,40,000 should have been
charged in the year ending 30 June 2010.
(vii) During testing of controls performed on payroll, it was noted that staff at one branch were verbally advising
management of their annual leave requirements rather than completing the appropriate form.
(viii) During the review of prepayments, it was noted that Bangla‟s lease for its office premises expired in March 2010
and has not yet been renewed.
At the end of the audit the chairman of the board approached you and said: `And another thing, don‟t
waste the board‟s time by including all those trivial issues in the management letter. We only want to
know about important things that may have a real impact on our operations, not irrelevant matters.‟

Requirements:
a) Explain the risks of complying with chairman‟s request. Describe how you could 6 Jun 11
accommodate the chairman‟s request while minimizing the risks for your firm of
not reporting issues to the board.
b) Assume each of the above items warrants disclosure in your management letter to 8 Jun 11
Bangla. Draft the management letter to the board.
Question no-9
Described below are situations which have arisen at two unrelated external audit clients of your firm. The year‐ end in
each case is 30 June 2010
Dhaka Ltd. (Dhaka)
The management of Dhaka has refused to provide written representations that:
• it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable
financial reporting framework;
• it has provided the auditor with all relevant information and access as agreed in the terms of engagement; and
• all transactions have been recorded and are reflected in the financial statements.
Eastern Ltd. (Eastern)
Eastern maintains continuous inventory records and consequently the company does not perform a physical count at
the year end. On 5 May 2010, a fire in the office at Eastern‟s warehouse destroyed the company‟s inventory records
and dispatch records. The physical inventory was not damaged. There were no satisfactory alternative audit
procedures which could be performed. The company has included an estimated closing inventory figure of
Tk.7,00,00,000 in the financial statements. This estimate represents 5% of Eastern‟s total assets and 20% of profit
before tax.

Requirements:
In each of the two situations outlined above, state whether you would modify the 10 Jun 11
audit report. Give reasons for your conclusions and outline the modifications, if
any, to each audit report.
Q-10 Explain the purpose of laws, standards and other requirements relating to 4 Dec 11
assurance work.
Question no-11
Farzana Huq is employed as an audit manager in a firm of chartered accountants. As part of the planning of the external
audit of Rahman Foods Ltd., for the year ending 30 June 2011, Farzana met with the Finance Director. At the end of the
meeting, the Finance Director informed Farzana that he is retiring in October 2011 and the directors of Rahman Foods
Ltd. would like to offer her the post of Finance Director. Farzana is very much interested and has agreed to meet the board
of directors to discuss the offer in more detail.
Requirements:
State, with reasons, how Farzana and her firm should respond to this offer, 10 Dec 11
including any actions to be taken by the firm if Farzana accepts the offer.
Question no-12
During the statutory audit of Dhaka Metal Ltd., an official of the company informed the audit manager that the managing
director of Dhaka Metal had instructed the official not to record a transaction in the accounting records as it had nothing
to do with Dhaka Metal‟s business. The transaction involved a cash deposit which was paid into the company‟s bank
account and a week later the same amount was directly transferred, into a bank account in the name of Salman
Chowdhury, a friend of the managing director. The amount is not material in the context of any of the key figures in the
financial statements
Requirements:
State, with reasons, how the audit manager should deal with this matter. 10 Dec 11
Question no-13
During the external audit of Purbachal Ltd. you discovered that the directors have accounted for research &
development costs inappropriately resulting in a material misstatement in Purbachal‟s financial statements.
Your firm plans to issue a modified audit opinion if the misstatement is not corrected as per your firm‟s
request. During a conversation with your firm‟s audit partner, Purbachal‟s Managing Director, Reaz
Ahmed, indicated that it is the directors‟ intention to seek the removal of your firm as external auditors
if your firm issues a modified audit opinion in respect of this matter.

Requirements:
What appropriate actions your firm should consider under the above 10 Jun 12
circumstances?
Question no-14
Mr. Ibrahim, the managing director of your client Bashundhara Ltd., a real estate development
company, has written to you saying that during the last 5 years there has been a sharp growth in the
company‟s operating activities. He has been considering setting up of an internal audit department
to overview the operational activities with greater focus on internal control. But he heard from his
brother, who is also a director of the company, that the company would be better off abandoning this
idea and getting the external auditor to do some assurance work instead.

Requirements:
Advise Mr. Ibrahim explaining the objectives, characteristics and responsibilities 15 Jun 12
of internal audit, external audit and assurance.
Question no-15
Your firm has been approached by Snipe Ltd. to accept appointment as external auditor for the
year ending 30 June 2012. In the auditor’s report on the financial statements for the year ended
30 June 2011, the previous auditor issued a qualified opinion due to disagreement over the
accounting policy for inventory valuation. This matter was cited by the previous auditor in
response to your firm’s letter requesting information that might influence your firm’s decision as
to whether to accept the engagement. In addition, the previous auditor stated that the audit fees
due for the year ended 30 June 2011 remain unpaid.
Requirements:
Identify and explain the ethical issues arising from the above and identify 4 Dec 12
any actions your firm should take in respect of this matter before deciding
whether it should accept the appointment as external auditor.
Question no-16
Airship plc (Airship) provides transport and warehousing services to the grocery industry. Your firm is the external auditor
of Airship for the year ended 31 December 2011. During the course of the audit work the audit senior discovered that, in
order to meet delivery schedules, the transport manager has authorised false overtime payments for the lorry drivers.
Requirements:
Explain why this matter should be considered by the external auditor and 4 Dec 12
state the actions that your firm should take.
Question no-17
Your firm is the external auditor of GR Ltd. (GR) for the year ending 31 March 2012. On 15 March 2012 the
directors of GR engaged a firm of expert property valuers to provide an independent valuation of the
company’s freehold land and buildings. The directors intend to recognize freehold land and buildings at this
valuation in the financial statements for the year ended 31 March 2012.

Requirements:
State the audit procedures that your firm should plan to undertake in 3 Dec 12
order to place reliance on the valuation provided by the firm of expert
property valuers.
Question no-18
BSA 265 – Communicating deficiencies in internal control to those charged with governance and management requires
external auditors to communicate significant deficiencies in internal controls identified during the audit to those charged
with governance.

Requirements:
Identify and explain the attributes that are required to make such 4 Dec 12
communications effective.
Question no-19
You are the audit senior on the external audit of Dug Ltd. (Dug) for the year ended 31 January
2012. In January 2012 Dug sold some office equipment to the wife of Dug’s Managing Director.
The audit junior has noted that the sale has not been disclosed in the note to the financial
statements detailing related party transactions and has suggested the inclusion of an emphasis of
matter paragraph in the audit report to highlight this issue.

Requirements:
Comment on the suitability or otherwise of the audit junior’s suggestion. 4 Dec 12
Question no-20
During the external audit of Tuna Ltd. for the year ended 31 March 2012, the following matters were discovered:
(i) cash receipts from customers, listed as outstanding lodgements in the bank reconciliation at the year
end, were cleared through the bank on 21 April 2012; and
(ii) a sales credit note, relating to a pre-year-end delivery of inventory, was issued to a major customer
on 20 April 2012.

Requirements:
Explain why these matters should be investigated further. 6 Dec 12
Question no-21:
Your firm has been invited to submit proposal for the audit of Comfort Ltd. which is engaged in trading of
certain brand of medical equipment in Bangladesh. Your firm is the current auditors of Easy Ltd., a company
doing the same business of supply of similar brand of medical equipment in Bangladesh.
Requirements:
Identify and explain the principal ethical issue that you may need to 4 June
consider when deciding whether or not to propose for the audit of 13
Comfort Ltd., and state the procedures you may
Question no-22:
Your firm has issued unqualified opinion on completion of audit of a private limited company.
Managing Director of the company asked the reason for using the words “true and fair” rather than
“correct” given that the audit team spent one month in examining all the accounting records of the
company.

Requirements:
4 June
Explain the situation. 13
Question no-23
Your firm has been appointed as the external auditor of ABC Ltd. for the year ended 31 December 2012.Its
principal activity is to manufacture and sell of textile chemicals. BD Textile Mills Ltd. was the major
customer of ABC Ltd. Sales to BD Textile Mills Ltd. during the previous year 2011 amounted to
Tk.90,000,000 which was around 60% of the total sales of ABC Ltd. during the previous year. BD Textile
Mills Ltd. lost its major overseas customers in 2012. Sales of BD Textile Mills Ltd. dropped significantly
during the year 2012.
The company made a loss for the year ended 31 December 2012, but the profit forecast indicates a return
to profitability for the year ended 31 December 2013. The loss in 2012 was due to redundancy and sudden
loss of its major customer, BD Textile Mills Ltd. The company is now focusing on cost reduction through
using alternative raw materials and obtaining other potential customers. There are plans to develop
product, market and to expand the customer base, and contracts have recently been agreed with several
new customers. The company has also negotiated a new contract with major supplier, which has resulted in
reduced prices in return for committed monthly purchases.
During the year ended 31 December 2012 the company suffered severe negative cash flow but managed to
stay within the overdraft facility by delaying payments to trade payables and VAT Authority. The
company has a bank loan which is due for repayment in April 2013 and is negotiating with its bankers for a
replacement loan required to repay the present loan.

Required:
(i) Explain what is meant by the `going concern‟ concept and why the 7 Jun 13
auditor should consider whether a company is a going concern in the
light of BSA 570. Describe the procedures that an auditor would
undertake to satisfy himself on the statement of going concern.
(ii) Identify the matters to be considered when reviewing the profit and 8 Jun 13
cash flow forecasts prepared by the company including other
considerations, in order to assess whether the company is a going
concern.
(iii) Discuss the implications for the audit report of ABC Ltd. in respect 5 Jun 13
of the financial statement for the year ended 31 December 2012, if the
negotiations for the replacement loan are not completed by the time the
audit report is signed.
Q-24 “A public sector audit covers not only the audit of financial statements 7 Jun 13
and internal control systems, but also covers the issues of „regularity‟,
„propriety‟ and „value for money.‟ Explain the statement defining the
terminology (i) regularity, (ii) propriety, (iii) value for money.
Q-25 List and explain four factors that will influence the auditor‟s judgment 4 Jun 13
regarding the sufficiency of the evidence obtained.
Q-26 ISA 580 Written Representations provides guidance on the use of 3 Jun 13
written representations as audit evidence. List six items that could be
included in a representation letter.
Q-27 After performing tests of controls, the auditor is of the opinion 3 Jun 13
that audit evidence is not sufficient to support the audit opinion;
in other words many control errors were found. Explain three
actions that the auditor may now take in response to this problem.
Q-28 You are the audit manager of an audit engagement. During the 4 Jun 13
year under audit you have noted that in the comprehensive
income statement of your client legal expenses amounting to
Tk.15,000 was charged. Your audit team leader has not
performed any audit procedure on the same as the amount is
insignificant. As the audit manager do you agree with the view of
your audit junior? If not explain the reason for disagreement and
advise the courses of actions to be taken in the situation.
Q-29 You are the audit senior with responsibility for directing, supervising and 4 Jun 13
reviewing the work of your team members during the external audit of Golden
Co. Ltd. Explain how you would discharge these responsibilities before and
during the audit assignment.
Q-30 Why the level of assurance provided by a report on profit and cashflow 4 Jun 13
forecasts differs from the level of assurance provided by an audit report on
financial statement?
Question no-31:
You are the Senior-in-Charge of the audit of Coral Garments Limited for the year ended
31 December 2012. During the year under review the management of the company had been
changed. You also observe that the bin cards in the Raw Material Stores were not updated during
the last nine months. Further, Finished Goods were piled up in the factory as well as in the
Finished Goods Stores. New Management had informed you that due to the work load at the time
of management change the staff could not carry out their normal day to day work. Further, due to
these reasons a physical verification of stocks was not carried out at the end of the year.
Requirements:
(i) List the possible risks that can be identified in the above circumstances 6 Dec 13
(ii) List the audit procedures you need to carry out to mitigate one of the above 6 Dec 13
identified risks.
Question no-32:
You are the Team Leader of the Audit Team of Butterfly (Pvt.) Limited. When performing audit procedures you found that there are
several unidentified balances in the bank reconciliations provided by the Accountant. You also found that the debtors schedule has
not been agreed to the ledger and the client has not reconciled these amounts as of the year end. The debtor confirmations
received during the year did not agree with the ledger balances, and the Accountant claims it is the debtors’ records that are in
error. The audit partner is being pressurized by Finance Manager to finalize the audit procedures within a very short period
compared to last year, due to the budgeting process that is scheduled to commence in a couple of weeks.

Requirements:
(i) Identify the factors that indicate possible frauds in the above scenario 6 Dec 13
(ii) The audit manager has identified debtors as an area prone to fraud in the 6 Dec 13
entity. List the procedures you may perfor m to address the fraud risk
relating to debtors.
(iii) “An audit may act as a deterrent to fraud but does not certify that one has not 3 Dec 13
occurred”. Explain
Question no-33:
Habib Brothers Ltd. has been in the business of manufacturing Electrical Appliances for last 25 years. The company has
grown rapidly over the past eight years and this is due partly to the warranties that the company gives to its customers.
It guarantees its products for five years and if problems arise in this period it undertakes to repair them, or replace the
product.
You are the manager responsible for the audit of Habib and you are performing the final review stage of the audit and
have come across the following two issues:
Receivable balance Khan & Sons.
Habib has material receivable balance owing from its customer, Khan. During the year-end audit, your team reviewed
the ageing of this balance and found that no payments had been received from Khan over six months, and Habib would
not allow this balance to be circularized. Instead management has assured your team that they will provide a written
representation confirming that the balance is recoverable.
Warranty provision
The warranty provision included within the statement of financial position is material. The audit team has performed testing
over the calculations and assumptions which are consistent with prior years. The team has requested a written representation
from management confirming the basis and amount of the provision are reasonable. Management has yet to confirm
acceptance of this representation.
Required:
a) Describe the audit procedures required in respect of accounting estimates. 5 Dec 13
b) For each of the two issues above: 5 Dec 13
i) Discuss the appropriateness of written representations as a form of audit
evidence; and
ii) Describe additional procedures the auditor should now perform in order to
reach a conclusion on the balance to be included in the financial
statements.
c) The directors of Habib have decided not to provide the audit firm with the written 5 Dec 13
representation for the warranty provision as they feel it is unnecessary. Explain the
steps the auditor should now take and the impact on the audit report in relation to
the refusal to provide written representation
Q-34 While planning the audit of Rolex Limited, you realized that part of the work 3 Dec 13
you plan to carry out has already been performed by the internal audit division
of the company. Identify three factors that may affect the external auditor’s
determination of whether the work of internal auditors is
likely to be adequate for the purpose of the audit.
Q-35 Explain the meaning of the following terms with reference to BAS-505, 4 Dec 13
External Confirmations.
(i) Positive confirmation request.
(ii) Negative confirmation request.
Q-36 When management has used a management’s expertise in preparing the 3 Dec 13
financial statements, the auditor needs to decide whether to use an auditor’s
expertise to assist in obtaining sufficient
appropriate audit evidence. State the factors that may affect auditor’s
decision to use an auditor’s expertise to obtain sufficient appropriate
audit evidence on items shown in the financial statements.
Q-37 Rolex Limited operates a chain of small retail counters in large shopping 3 Dec 13
complexes in Dhaka and Chittagong for direct selling of their products to
customers. This is done in addition to its normal wholesale distribution network
that covers the entire country. Each retail counter is operated by one employee.
These employees are provided with a limited stock. Sales are on cash basis. A
cash collector visits these counters to collect the cash for banking once a day.
State three controls that should be in place at
Rolex Limited for the auditor to rely on the system that all retail
sales are properly recorded and all cash collected is promptly banked.
Q-38 You are required to draft an Audit Report with qualified opinion arising from 10 Dec 13
disagreement over accounting treatment (revenue recognition of the
company) with reasons for such qualified
opinion. Please use hypothetical name and address.
Q-39 Outline why you being the auditor of parent company, would wish to review 10 Dec 13
the work of the other auditors of subsidiaries not audited by your firm and
state briefly the work you would carryout in that review as per BSA 600.
Question no-40:
(b) You are an audit Manager of a firm of Chartered Accountants. A meeting has been organised with the audit client
where the engagement partner will be present to settle the following issues:
(i) Your client inadvertently filed an incorrect tax return for last year showing a material understatement of its
corporate tax liability for that year and therefore the payment of tax has been significantly less than what it
should have been. Your firm is not a tax advisor. The directors are refusing to inform the tax authority of the
under payment as they say that it relates to the past period.
(ii) In verification of the non-current assets, it was observed that one non-current assets, a Volvo luxury air condition
coach, was not available in the garage. There is no travel record for that coach for the last six months. Traffic
manager informed that the coach has been remaining out of order for the last six months at Cox‟s Bazar coach
station. They offered
that they will arrange the air ticket and other expenses for Cox‟s Bazar trip if the audit firm wishes to
physically verify the non-current asset.
(iii)Subsequent to the accounting period, the client‟s sales ledger has been corrupted by computer virus. The financial
statements were prepared prior to this occurrence. The audit team was unable to access the sales ledger and to verify
the revenue and the year end receivables. All other accounting records are unaffected and there are no backup of sales
ledger. The company‟s revenue was Tk. 15 million, receivables Tk.4.5 million and profit before tax Tk. 3 million
Required:
Write a note for the engagement partner explaining how each of these issues 9 Jun14
should be resolved with the audit client.
Question no-41:
(b) You are an audit senior of A. Karim & Co., Chartered Accountants. M/S Bengal Scientific Services Ltd. (BSSL)
is an audit client of your firm. BSSL provides testing and forensic analysis services to different agencies/clients
including law enforcing agencies.
During the audit you observed that BSSL is having financial difficulties. Income has fallen due to the adverse
effect of two high profile court cases, where BSSL services to assist the prosecution were found to be in error.
Not only did this provide adverse publicity for BSSL, but a number of clients withdrew their contract. A senior
employee then left BSSL stating that the lack of investment in new testing machines was increasing the risk of
incorrect report being provided by the company.
A cash flow forecast prepared internally shows BSSL requires significant additional cash within the next 12 months to
maintain even the current level of services. BSSL has asked its auditors (A. Karim) to provide a negative assurance report on
this forecast.
Requirements:
i) State the audit procedures that may be carried out to try to determine whether or 4 Jun14
not BSSL is a going concern.
ii) In the context of cash flow forecast, define the term „negative assurance‟ and 4 Jun14
explain how this differs from the assurance provided by a statutory audit report on
financial statements.
Q-42 If a subsidiary has a going concern issue and is reliant upon the parent for support, 7 Jun14
will a letter of support from the parent, on its own, constitute sufficient appropriate
audit evidence on going concern? Can a component auditor request the parent
auditor to carry out any necessary audit work required? Discuss
Q-43 You have been appointed as auditor of Rahman Ltd. When you asked for a 3 Jun14
formal signed engagement letter, the Managing Director was reluctant to do
that. Write a brief note to the managing director explaining the need for a letter
of engagement.
Q-44 What are the legal and ethical issues to be considered before accepting an audit 3 Jun14
engagement?
Q-45 Auditors of small entities need to understand the design and implementation of 9 Jun14
internal controls even when they take a fully substantive approach to risk
assessment. Why is work on internal control necessary when auditors take a
substantive approach? Which controls do auditors need to understand?
Q-46 BSA 500 Audit Evidence requires auditors to obtain sufficient and appropriate 3 Jun14
audit evidence.
Appropriateness is a measure of the quality of audit evidence, that is, its relevance
and its reliability. Identify and explain THREE factors which influence the
reliability of audit evidence.
Q-47 Auditors are required to perform an overall review of the financial statements 5 Jun14
before they provide their audit opinion. Explain THREE procedures an auditor
should perform in conducting their overall review of the financial statements
Q-48 BSA 530 Audit Sampling provides guidance on methods for selecting a sample of 3 Jun14
items for testing. Identify and explain THREE methods of selecting a sample
Q-49 Write a memorandum to the audit–in-charge describing the risk of “auditing 4 Jun14
around the computer.”
Q-50 An auditor conducting an audit in accordance with BSAs in Bangladesh is 9 Jun14
responsible for obtaining reasonable assurance that the financial statements taken
as a whole are free from material misstatement, caused by fraud or error. Discuss
about the audit work that needs to be done in this respect.
Q-51 BSA 260 Communication of Audit matters to those charged with Governance: 4 Jun14
which says the auditors should communicate audit matters of governance interest
arising from the audit of financial statements with those charged with governance
of an entity.
Identify the relevant persons and the relevant matters to be reported for the
governance report
Question no-52:
You are the audit senior of a Chartered Accountant firm. Your audit is almost complete but report is not yet signed. Revenue
for the year is Tk. 50 million and profit before taxation is Tk. 8 million. Following issues were detected:
(i) The year end is 30 June 2013. On July 5, it was detected that a batch of product produced in June was defective.
The cost of the batch is Tk.1.5 million. In its current condition it can be sold at Tk. 0.5 million. The cost of
correcting the defect is TK. 1.5 million.
(ii) An explosion occurred on 20 July in one of stores which caused damage to inventory, property and equipment.
The management has investigated the cause and believes that there is little possibility to receive insurance claim.
The management estimated the loss amount to Tk. 2 million.
(iii) The client has advanced Tk. 5.00 crore for purchasing a land at Gulshan, Dhaka in 2010 and executed a bainanama
with Mr. Zahedur Raman. Since then the amount is shown as advance for land purchase. Subsequently it was found
that the land is owned by 7 persons. Other owners are not interested to sell the land. Litigation is going on with the
parties and the outcome is still uncertain. There is little chance of recovery of the amount. Management of the client is
not in agreement to report the matter in the financial statements.

Requirements:
i) Explain how these issues will be treated in accounts/financial statements 6 Jun14
ii) If the directors do not wish to make any amendment or disclosure to the financial 4 Jun14
statements, what should you do?

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Audit and Assurance-Application Level

Chapter-One: Reintroduction to audit and assurance

Audit and Assurance-Application Level

Audit and Assurance-Application Level

Audit and Assurance-Application Level

S.L Questions Answer Marks Year

Audit and Assurance-Application Level

Audit and Assurance-Application Level

S.L Questions Answer Marks Year

Audit and Assurance-Application Level

Audit and Assurance-Application Level

Audit and Assurance-Application Level

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Audit and Assurance-Application Level

Audit and Assurance-Application Level

Audit and Assurance-Application Level

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S.L Questions Answer Marks Year

Audit and Assurance-Application Level

Audit and Assurance-Application Level

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Audit and Assurance-Application Level

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Audit and Assurance-Application Level

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Audit and Assurance-Application Level

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