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2019 - 6!10!107 - KB4-Business Assurance Ethics and Audit June 2019 - English
2019 - 6!10!107 - KB4-Business Assurance Ethics and Audit June 2019 - English
No. of pages: 10
Business Level
Business Assurance, Ethics and Audit
Instructions to candidates
K
(1) Time allowed: Reading and planning ‒ 15 minutes
Writing ‒ 3 hours
B
(3) Answer all questions.
4
(5) Answers should be in the English Language, in the answer
booklet/s given to you.
(6) Begin each answer on a separate page in the answer booklet. Submit
all workings.
JUNE 2019
SECTION 1
All five questions are compulsory.
Total marks for section 1 is 50 marks.
Recommended time for the section is 90 minutes.
Question 01
You are the auditor in–charge of Green Investments PLC (GIP) that provides investment
management services to its clients. Sarath is one of GIP’s customers who had entered into
nearly Rs. 50 million worth of transactions with the company, during the financial year
ended 31 December 2018. Based on the audit procedures performed, you have noted that
Sarath has made all his investments in cash, by depositing 5,000 rupee notes, at the end of
each month.
The customer relationship officer, Nuwan, does not know the exact nature of Sarath’s
business nor the source of his money. Nuwan only knows that Sarath is a highly successful
businessman and Nuwan did not want to ask too many questions because Sarath is GIP’s
largest customer.
As the auditor in–charge you had noted unusual payment in cash. You are aware that such
payment could amount to identified or suspected non-compliance with laws and
regulations.
Required:
(a) Demonstrate four (04) audit procedures that the auditor could perform to
identify whether there is a non-compliance with relevant regulations.
(4 marks)
(b) List two (02) steps you would take, as the auditor in–charge, to report the
matter, if non-compliance with regulations is identified.
(2 marks)
(c) Assess whether your audit firm would be violating any principles of the Code of
Ethics of CA Sri Lanka if the firm reports the non-compliance to a regulatory and
enforcement authority.
(4 marks)
(Total: 10 marks)
You are the audit senior of the audit of Aqua Development PLC (ADP) for the year ended
31 March 2019. ADP is a subsidiary of a large group engaged in the business of property
development. The control environment is assessed as follows.
The group chief executive officer (group CEO) pressurises the CEOs of group
companies including the CEO of ADP to meet aggressive revenue and profit targets.
Inline with the group policy, the performance of senior management at ADP is also
measured in terms of year-on-year profit growth.
Internal audit division of ADP reports directly to its CEO and operates under
restrictive conditions.
The CEO and CFO of ADP insist on attending all meetings of the ADP’s audit
committee when they meet internal and external auditors.
The decisions of ADP’s management team are dominated by the CEO of ADP.
You have also gathered the following information when performing substantive testing
over contract costs.
Required:
(a) Identify two (02) ‘fraud red flags’ that indicate possible fraudulent activities
taking place at ADP.
(4 marks)
(b) Recognise four (04) possible ‘fraud risk factors’ from the above scenario together
with the conditions/factors in the ‘fraud triangle’ for each fraud risk factor.
(6 marks)
(Total: 10 marks)
Printec (Pvt) Ltd (PL) is a retailer of high quality printing machines. You are the audit
senior reviewing documentation of PL’s sales system as part of the audit of the financial
statements for the year ended 31 March 2019.
The sales executive and sales clerk are involved in processing sales and receivables,
at PL.
The sales executive is responsible for taking orders from customers.
Once orders are received, those orders are recorded on a manual order form where
the date, time of the order, the customer name and a reference number are written.
The reference number is based on the month and the customer code.
Thereafter, the sales executive sends the order forms to the warehouse.
The stores clerk dispatches the orders from the warehouse with a dispatch note.
Goods are always collected by the customers, who bring their trucks. They are
allowed to drive out from the warehouse once the goods are loaded.
A copy of the dispatch note is sent to the sales clerk.
The sales clerk prepares the invoice using the details in the copy of the dispatch
note. The copies of the dispatch notes are not retained because filing space is
limited.
The sales clerk sends the invoice to the customer and keeps a copy with him.
Once a week, the sales clerk posts invoices into the sales ledger. Later, he files the
copies of invoices, alphabetically, by customer name.
Required:
(a) Identify four (04) significant weaknesses in the sales and receivables system.
(4 marks)
(b) Outline one (01) improvement each to address the weaknesses identified in (a)
above.
(6 marks)
(Total: 10 marks)
Beta PLC (BP) was listed on the Colombo Stock Exchange in August 2015. Since the listing,
none of the directors have been subjected to re-election by shareholders, at an annual
general meeting (AGM). The last AGM being concluded in April 2019.
Sugath, the chairman of the board of BP believes that it is too costly to hold an AGM since
there is a large number of shareholders. Instead, Sugath has proposed that the board has to
circulate the financial statements and other important papers, to shareholders, via emails.
Sugath is now considering setting-up an audit committee with the finance director, Kumari
and two other non-executive directors. Currently, the decisions relating to the appointment
and remuneration of the external auditors of BP, have been made by Sugath.
Required:
(a) State one (01) of the suggested good governance principles in SLAuS 260,
Communication with those charged with governance, to facilitate the
communication between the audit committee and the auditor.
(1 mark)
(c) Discuss one (01) recommendation each to address the weaknesses identified in
(b) above.
(6 marks)
(Total: 10 marks)
You are the senior in-charge of the audit of Siscom PLC (SP) for the year ended
31 March 2019. SP is specialised in manufacturing and selling industrial solar panels.
In March 2019, SP was facing a situation of serious loss of capital and the cash flows from
operating activities showed a significant negative trend over the financial year. SP has
incurred material losses due to finance expenses and it has been unable to service the bank
loans as per repayment schedules. The parent company of SP has agreed to invest in the
shares of SP and to provide an interest free loan to SP to service its loans fully. These facts
were adequately disclosed in the draft financial statements of SP.
Despite the above facts, as per the draft financial statements, revenue and trade receivables
had increased significantly during the year. When the audit team was performing audit
procedures over revenue and receivables, the finance director of SP had asked the
engagement manager to give him the list of customers that the audit team has selected to
send confirmation requests to. He had asked for this list in order to determine whether he
will permit the audit team to send confirmation requests to customers.
The financial statements of SP for the year ended 31 March 2018 were audited by another
auditor, who had expressed an unmodified opinion, on 17 July 2018.
Required:
(a) List two (02) audit procedures which should be undertaken to address the
financial statement assertion “occurrence” for the audit of revenue at SP.
(2 marks)
(b) Discuss the auditors' response if the finance director refuses permission for the
audit team to send confirmation requests to customers.
(4 marks)
(c) Analyse the impact on the audit report of SP for the year ended 31 March 2019
based on the information available in the above scenario.
(4 marks)
(Total: 10 marks)
Question 06
You are the audit senior of the audit of Zigma PLC (ZL) for the year ended 31 March 2019.
ZL is engaged in manufacturing and selling telecommunication equipment to
telecommunication (telco) companies. The following information has been documented in
the audit working papers prepared by one of your team members.
During the year ended 31 March 2018, ZL lost its major customer, Fuji Tel (Pvt) Ltd.
Fuji Tel (Pvt) Ltd has closed down its business in Sri Lanka due to the aggressive
competition from other telco companies.
During the year 2019 management of ZL had approached other telco companies in
order to get sales contracts. However, ZL was awarded a few small contracts by some
telco companies. Since the discussions with other telco companies are ongoing, the
management of ZL believes that they will be awarded with large contracts in the future.
The monthly cash flows show a net cash outflow for the last six months of the financial
year and it is forecast that net cash flows will be negative for the quarter ended
30 June 2019 as well. As a result, ZL has defaulted on their payments to suppliers. Some
suppliers have initiated legal action to recover their dues. During the interim audit, the
audit team had found materially significant unrecorded liabilities, due to its practice of
not recording supplier invoices until the payment has been made.
Due to its financial difficulties, ZL had been unable to service its loans on time and, as a
result of this breach in loan agreements, the bank has asked ZL to repay the
Rs. 200 million loan in full, within six months, counting from 31 March 2019. The board
of directors of ZL decided to sell one of its major plants, in the month of August 2019 in
order to settle the bank loan. The directors also decided not to pay dividends for 2019.
The audit team had sent balance confirmation requests for a sample of trade debtors.
No responses had been received from any of those trade debtors.
Accounts payable as at 31 March 2019 amounted to Rs. 879 million. It has been the
practice in prior year’s audits, to select three major suppliers comprising of 75% of the
accounts payable balances, for testing.
Your audit junior Ramal Silva has prepared the following audit working paper:
Required:
(a) Analyse four (04) potential indicators showing that ZL is not a going concern.
(6 marks)
(b) Outline three (03) audit procedures which you should perform, in assessing
whether ZL is a going concern or not.
(3 marks)
(c) Recognise four (04) improvements to the audit working paper given above.
(4 marks)
(d) Analyse the audit work performed on accounts payable balances in the above
scenario. Your answer must include at least three (03) valid points.
(6 marks)
(e) Outline two (02) further audit procedures that you deem necessary to ensure
that accounts payable are fairly stated in the financial statements.
(4 marks)
(f) State two (02) follow-up procedures that the audit team should perform, in
instances where the auditor has not received a response to an accounts
receivable confirmation.
(2 marks)
(Total: 25 marks)
KB4 – June 2019 Page 8 of 10
Question 07
You are an audit senior at D&P Associates (D&P), a firm of chartered accountants. Currently
you are engaged in the audit of Knitwear (Pvt) Ltd (KL) for the year ended 31 March 2019.
KL is in the business of manufacturing and exporting knitted garments for men, women and
children. KL operates over 80 production lines and several leased units with a total
capacity of five million pieces per quarter, while also operating an in-house textile
laboratory and two washing plants.
At the audit planning meeting of KL, your audit manager has briefed you on the following
points;
Wilson Associates, the previous auditors of KL, did not offer themselves for re-election
due to disputes with the finance director of KL. This caused delay in finalising the
appointment of D&P, as KL had expected that Wilson Associates would continue as their
auditors.
Wilson Associates had expressed a qualified opinion on the financial statements for the
year ended 31 March 2018 due to a material misstatement in the valuation of
inventories.
As D&P was appointed after the year end, they had not been able to attend the physical
inventory count that was conducted as at 31 March 2019.
The following information has been extracted from the draft financial statements as at
31 March 2019 and other preliminary notes that your audit team has compiled, for the
audit field work.
Required:
(a) Assess four (04) key audit risks that should be considered when planning the
audit of KL.
(6 marks)
(b) Explain three (03) procedures that the auditor should carry out to confirm the
opening balances of the new audit engagement.
(6 marks)
(c) Outline the impact on the audit report, when the opening inventory balance
contains misstatements.
(5 marks)
(d) Analyse the impact on the audit report (if any), if the auditor was not able to
attend the inventory count.
(4 marks)
(e) Recognise four (04) procedures that the auditor may carry out, to verify the
inventory balance that appears in the financial statements of KL for the year
ended 31 March 2019.
(4 marks)
(Total: 25 marks)