AUDIT & ASSURANCE

Time allowed 3 hours

Total marks 100

[N.B. The figures in the margin indicate full marks. Questions must be answered in English. Examiner will take
account of the quality of language and of the manner in which the answers are presented. Different parts, if any,
of the same question must be answered in one place in order of sequence.]
Marks
1. (a) Alpha Private Limited, a listed company, operates a policy of rotating appointment for its audit
and related services every five years. Following quotations from a number of accounting/audit
firms, the audit committee of Alpha Private Limited recommended that your firm be appointed
to provide the following services.
The statutory audit of the annual financial statements.
An independent review of the interim financial information which will be circulated to
shareholders together with your firms independent review report. The independent review
will be restricted to making enquiries of management, applying analytical procedures to the
financial information and assessing whether the accounting policies and presentation have
been consistently applied unless otherwise disclosed.
Consultancy services in respect of the implementation of a new financial information
technology system.
Your firm has not previously acted for Alpha Private Limited but does act as auditor for one of
its major competitors.
Requirements:
(i) Identify and explain the professional and ethical issues that should have been identified by
your firm in relation to the provision of the services outlined above to Alpha Private
Limited and outline the safeguards that should be in place in order to address these issues. 8
(ii) Comment on the level of assurance provided by the report on the interim financial
information, and explain how and why it differs from the level of assurance provided by the
statutory audit report on the annual financial statements. 4
(b) Fair presentation of financial statements may not be achieved if transactions involving profit or
loss for the company are not properly accounted for when it may constitute a contribution or
return of capital or the payment of dividends. What are the duties of an Auditor in connection
with payment of dividends? 4
(c) You are the audit engagement manager of a listed company that has declared 25% cash
dividend for the year 2016. Subsequently it was revealed that the companys account show
sufficient profits to pay dividend but the cash balance is insufficient to pay the dividend; what
would be your response as auditor? 4

2. Your firm is considering whether to accept the following three unrelated prospective engagements:
Liniaura Ltd. (Liniaura)
Your firm has been the external auditor of Liniaura for a number of years. Liniaura has recently
reduced the number of employees working in its accounts department to save costs. The directors
have asked your firm to accept reappointment as external auditor for the year ending 31 December
2016 and have requested that your firm prepares the year-end financial statements in addition to the
audit. Your firm has not prepared the financial statements in previous years. The engagement
partner has estimated that your firms current fee from Liniaura, of BDT1,600,000, would increase
by 25% as a result of providing the additional service. Your firms gross annual fee income,
excluding amounts received from Liniaura, isBDT 25.60 million.
Sea Resources Ltd. (SR)
SR is a deep sea fishing company. The directors of SR have approached your firm to provide a
second opinion on the application of an accounting standard to SRs financial statements. The audit
opinion on SRs financial statements for the year ended 30June 2016 was modified by SRs
external auditors due to a disagreement over the application of the accounting standard.
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 Toma Construction Ltd. (Toma)
The directors of Toma have requested that your firm accepts an engagement to examine and report
on prospective financial information for the three years ending 30 June 2019, prepared by the
company in support of a loan application. The independent examination and report has been
requested by Tomas bank. Tomas external auditor is currently performing audit work on the
financial statements for the year ended 30 June 2016 but has not been offered the engagement to
examine the prospective financial information.
Requirement:
For each of the three prospective engagements, identify the matters that your firm should consider,
including any professional and ethical issues arising, and any steps it should take before deciding
whether to accept the engagement. 15

3. Your firm has recently been appointed as the external auditor of Project Builders Limited (PBL),
which is your firms largest listed client. You are the senior responsible for planning the external
audit for the year ended 31 December 2016 and the engagement partner has asked you to consider
the following key areas of audit risk:
(1) Work in progress
(2) Trade receivables
PBL undertakes all sort of building works including multi-storied commercial buildings, residential
building, residential accommodations for industrial projects, warehouses & godowns, heavy
structures like silos and jetties, power station, cooling tower, bridges etc.
For each construction project, PBL estimates the cost of construction based on anticipated material
and equipment cost associated to each tasks, average manpower per week, number of people
assigned to specific tasks and project locations. An indicative price is provided to the customer
equal to the estimated cost plus a mark-up of 35%. Actual costs incurred often vary from estimated
costs due to changes in customer requirements during the construction project or unforeseen issues
resulting in higher than expected costs. On completion of each project, the customer is invoiced, in
BDT, for actual costs incurred plus the 35% mark-up. Credit terms are 30 days. PBL employs a
small team of project managers who manage multiple projects. However, the majority of costs
billed by PBL arise from the use of external suppliers and other third parties.
Temporary personnel submit timesheets to local outsourcing agencies which invoice PBL each
month for the total hours worked at rates agreed with PBL. Invoices may include hours relating to
more than one projects. Other suppliers invoice PBL for services at varying points during the
construction period and some overseas suppliers invoice in their local currency. All costs incurred,
including those of PBLs own project managers, are recorded in the job costing system against a
unique code for each project. Any costs recorded for projects not completed at 31 December are
included as work in progress in the year-end financial statements.
PBLs financial controller, Nazmul Hassan, has provided you with the following information:
In July 2016, the directors decided that the job costing system was outdated. A replacement
system was implemented on 10November 2016 and use of the old system ceased immediately. A
delay in training employees on the new system resulted in a backlog of costs to be recorded and
some customers were invoiced before all the costs relating to their projects were included on the
new system. Additional invoices in respect of the omitted costs, plus the 35% mark-up, were sent
to customers in December 2016 or are due to be sent by 30 June 2017.
Ghorasal Power Station (GPS), a customer, is refusing to pay its balance outstanding at
31December 2016 due to a disagreement over the amount invoiced in respect of its newly built
power plant project. The disagreement has arisen due to a significant variation between the
indicative price and the actual amount invoiced. The balance due from GPS at31 December
2016 is BDT 180.00 million. The original indicative price provided was BDT130.00 million.
Nazmul believes all of the additional costs arose due to changes in GPS requirements during the
construction and that the full amount is recoverable.

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 PBLs previous auditors did not seek reappointment after completing the external audit for the
year ended 31 December 2015. During that audit, reliance was placed on the controls over the job
costing system. Nazmul requested that your firm also relies on those controls as he believes this
will ensure the audit is conducted efficiently.
Nazmul also provided you with the following extracts from the financial statements of PBL to use
as part of your consideration of the key audit risks:
Statement of profit or loss for the year ended 31December
2016 2015
(draft) (audited)
BDT000 BDT000
Revenue 10,600,466 10,485,084
Cost of sales (7,858,892) (7,948,110)
Gross profit 2,741,574 2,536,974

2016 2015
(draft) (audited)
BDT000 BDT000
Work in progress 1,488,349 1,331,823
Trade receivables 1,144,884 1,024,479

Your discussion with Nazmul also revealed the following internal control deficiencies:
(i) Customers are not required to provide written confirmation of changes to their requirements
arising during a construction project.
(ii) Project managers do not monitor actual costs incurred to date compared with the estimated cost
of each project.
Requirements:
(a) List the matters your firm should consider and the procedures it should perform before
accepting appointment as external auditor of PBL. 10
(b) Justify why work in progress and trade receivables have been identified as key areas of audit
risk and, for each one, describe the procedures that should be included in the audit plan in order
to address those risks. You should present your answer in a tabular format using the headings:
(i) Justification; and (ii) Procedures to address each risk. 16
(c) Explain why reliance on controls over the job costing system, requested by Nazmul, is unlikely
to be appropriate in respect of the audit for the year ended 31 December 2016. 5
(d) For each internal control deficiency listed as (i) and (ii) in the scenario, draft points for
inclusion in your firm's report to those charged with governance and management at PBL. For
each deficiency, you should outline the possible consequence(s) of the deficiency and provide
recommendations to address it. 9

4. You are the manager responsible for the audit of ABC Co, a manufacturing company which
supplies stainless steel components to a wide range of industries. The companys financial year
ended on 31 December 2016 and you are reviewing the audit work which has been completed on a
number of material balances and transactions: assets held for sale, capital expenditure, and payroll
expenses. A summary of the work which has been performed is given below and in each case the
description of the audit work indicates the full extent of the audit procedures carried out by the
audit team.
(a) Assets held for sale
Due to the planned disposal of one of ABC Cos factory sites, the property and associated assets
have been classified as held for sale in the financial statements. A manual journal has been posted
by the finance director to reclassify the assets as current assets and to adjust the value of the assets
for impairment and reversal of depreciation charged from the date at which the assets met the
criteria to be classified as held for sale. The finance director asked the audit senior to check the
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journal before it was posted on the basis of there being no one with relevant knowledge to do this at
ABC Co.
The planned disposal was discussed with management. A brief note has been put in the audit
working papers stating that in the managements opinion the accounting treatment to classify the
factory as held for sale is correct. The manual journal has been arithmetically checked by a different
member of the audit team, and the amounts agreed back to the non-current asset register.
(b) Capital expenditure
When auditing the companys capital expenditure, the audit team selected a material transaction to
test and found that key internal controls over capital expenditure were not operating effectively.
Authorization had not been obtained for an order placed for several vehicles, and appropriate
segregation of duties over initiating and processing the transaction was not maintained.
The audit team noted details of the internal control deficiencies and updated the systems notes on
the permanent audit file to reflect the deficiencies. The audit work completed on this order was to
agree the purchase of the vehicles to purchase invoices and to the cash book and bank statement.
The rest of the audit work on capital expenditure was completed in accordance with the audit
programme.
(c) Payroll expenses
The payroll function is outsourced to Dell Co, a service organization which processes all of ABC
Cos salary expenses. The payroll expenses recognized in the financial statements have been traced
back to year end reports issued by Dell Co. The audit team has had no direct contact with Dell Co,
as the year end reports were sent to ABC Cos finance director who then passed them to the audit
team.
ABC Co employs a few casual workers who are paid in cash at the end of each month and are not
entered into the payroll system. The audit team has agreed the cash payment made back to the petty
cash records and the amounts involved are considered immaterial.
Requirements:
In respect of each of the three matters discussed above:
(i) Comment on the sufficiency and appropriateness of the audit evidence obtained; 6
(ii) Recommend further audit procedures to be performed by the audit team; 6
(iii) Explain the matters which should be included in a report in accordance with BSA 265
Communicating Deficiencies in Internal Controls to Those Charged with Governance and
Management; and 6
(iv) In the context of reporting matters, what additional matters should be reported to those charged
with Governance in accordance with BSA 260 Communication of Audit Matters with Those
Charged with Governance? 7

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