Uploaded by Mohsina Akther

KL assurance nov dec 2016(2)

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ASSURANCE
Time allowed - 2 hours
Total marks - 100
[N. B. –The figures in the margin indicate full marks. Questions must be answered in English. Examiner will
take account of the quality of language and of the manner in which the answers are presented.
Different parts, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. a. Define 'expectations gap’ and give three examples of misunderstandings which contribute to the
expectations gap.
3
b. The key benefit of assurance is the independent professional verification being given to the
users. In addition, assurance gives some subsidiary benefits. What are those subsidiary
benefits?
5
c. The content of the audit report is regulated by BSA 700 and also by relevant Bangladeshi law.
In this context, what are the basic elements of an audit report? Write sequentially.
6
d. ICAB and IFAC Code of ethics set out the rules under which auditors should accept new
appointment.
What procedures should the new auditors follow to comply with the above set of rules?
6
2. Internal control is the collection of policies and procedures that are followed by the organizations
while performing the activities required to attain their goals. It facilitates the organizations to stay
in the right path and to mitigate the risks they face on a day to day basis. A good internal control
system enhances the efficiency and effectiveness of the organizations as well. It provides signals
about the deviations of operations and thus organizations can take appropriate measures to
overcome those situations.
a. What is the difference between policies and procedures?
4
b. Define the term control activities. Briefly discuss the types of control activities that are
introduced by the organizations in designing a good internal control system.
2+6
c. ABC Limited is a newly established private limited company where you work as a financial
advisor. The company is in the process of allocating duties and responsibilities among their
staff in such a manner that will help them to mitigate the risks of fraud and error. As a financial
advisor develop a list of activities that should be assigned to different employees for the sake of
adequate separation of duties.
4
d. Suppose proper segregation of duties is not possible due to the limited number of staff. In this
case, what should management do to enhance control?
3
e. Briefly explain three methods of documenting the understanding of internal control by external
auditors.
6
3. a. BSA 530 “Audit Sampling” states that 'when designing audit procedures, the auditor should
determine appropriate means for selecting items for testing so as to gather sufficient appropriate
audit evidence to meet the objectives of the audit procedures'.
In this context what do you understand by “Audit Sampling”? Some testing procedures do not
involve sampling. Explain.
3+4
b. What are the general matters that BSA 580 requires auditors to confirm in writing? What are
the auditors’ duties if management does not provide one or more of the requested written
representations?
4+4
Page 1 of 2
4. As part of the analytical procedures of XYZ Limited, you performed calculations of the following
ratios:
Ratios
Gross profit ratio
EBIT to sales ratio
Current ratio
Days to collect receivable
Days to sell Inventory
Interest coverage ratio
Earnings per share
2015
25%
11%
1.55
108
96
4.2
Taka 8.5
2014
29%
10.8%
1.85
85
95
5.5
Taka 8.6
a. Based on the above ratios, which two aspects of the company, you believe, should receive
special attention in the audit.
4
b. State five possible reasons behind decreasing gross profit ratio to 25% in 2015 from 29% in
2014.
4
5. An increasing number of business enterprises have automated their internal control system with
advancement in the use of technology. An auditor needs to test the controls contained within the
computer programs.
How will an auditor test the application controls under an automated internal control system?
12
6. a. Why is independence so important to the external auditor? Why does lack of independence in
appearance jeopardise auditor’s independence in fact?
3+3
b. Explain the terms “Threats” and “Safeguards” with reference to maintaining professional
Objectivity and Independence. What is acceptable threat?
4+2
c. Under each of the following circumstances what kind of threats auditor may encounter and
what should be the safeguards to maintain professional objectivity and independence?
2x4
i. Mr. Zaman, an audit staff of Zara & Co, Chartered Accountants, is working in a client as
audit supervisor. On the occasion of Eidul-Fitr, the client sent him a gift box of their
products valuing Taka 10,000.
ii. Lara & Co, Chartered Accountants, is the external auditor of PK Limited. Mrs. Kelly, a
senior audit staff of Lara & Co, is a daughter of Marketing Director of PK Limited. The
engagement partner of the audit firm is planning to depute Mrs. Kelly to PK Limited to lead
the field work of the audit.
iii. Farah & Co, Chartered Accountants, is the auditor of KYC Limited. The company has
decided to go for IPO next year to raise money from public to finance their future
expansions. Recently they asked Farah & Co to prepare their financial statements alongwith
continuing to act in the capacity as external auditor.
iv. Sara & Co, Chartered Accountants has received an offer from MM Limited to conduct their
audit on the fees which is 12% of profit before tax.
Page 2 of 2
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