ADVANCED 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 way 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) Recently the role of the auditor has come increasingly under the spotlight following recent stock market turbulence in Bangladesh. This requires the accounting profession to enhance audit quality, confidence and innovation as part of a wider scheme of reforms to capital markets and the financial system. In the above backdrop, answer the following: i)
Do you believe that audits should provide comfort on the financial health of companies? Are audits fit for such a purpose? Discuss. 4 ii) To bridge the expectation gap and in order to clarify the role of audits, should the audit methodology employed be better explained to users? Discuss. 4 iii) Should the continuous engagement of audit firms be limited in time? If so, what should be the maximum length of an audit firm engagement? Discuss. 4 (b) Decisions compliant with the law will always result in ethical decisions. Discuss. 3 (c) You are asked to audit a client where investment transactions are executed by your firm on behalf of the client. Is there a threat to your independence? Apply the conceptual approach of the IFAC Code of Ethics for Professional Accountants in answering this question. 4 2. (a) Why is disclosure of central importance to the integrity of equity markets? In your answer, also address what occurs when information is monopolized by privileged groups. 3 (b) In light of the global financial crisis and corporate scandals, is there a danger of over‐regulation restricting the entrepreneurial and innovative spirit which is at the heart of market systems and corporate success? 4 (c) Outline the principal corporate governance failures which occurred in Enron. 4 (d) Identify five corporate governance policies that you consider could act to enhance an organization’s social and environmental performance. 5 3. (a) What distinguishes management fraud from a defalcation? 3 (b) Discuss, in the light of BSA 240, the audit procedures that may be followed to address the assessed risks of material misstatement due to fraud resulting from fraudulent financial reporting in the case of following areas: i) Revenue Recognition 5 ii) Inventory Quantities. 5 4. (a) Sampling for attributes is often used to allow an auditor to reach a conclusion concerning a rate of occurrence in a population. A common use in auditing is to test the rate of deviation. From a prescribed internal control procedure to determine whether the planned assessed level of control risk is appropriate. i)
When an auditor samples for attributes, identify the factors that should influence the auditor’s judgement concerning the determination of: 4 (1) Acceptance level of risk of assessing control risk too low. (2) Tolerable deviation rate, and (3) Expected population deviation rate. [Please turn over] – 2 – ii) Evaluate the sample results of a test for attributes if authorizations are found to be missing on 7 cheque requests out of a sample of 100 tested. The population consists of 2,500 cheque requests, the tolerable deviation rate is 8%, and the acceptable level of risk of assessing control risk too low is considered to be low. 3 iii) How may the use of statistical sampling assist the auditor in evaluating the sample results described in (ii) above? 2 (b) Kamal, FCA, is auditing the financial statements of Big Z Wholesaler Ltd., a continuing audit client, for the year ended December 31, 2010. On December 5, 2010, Kamal observed the tagging and counting of Big Z’s physical inventory and made appropriate test counts. These test counts have been recorded on a computer file. As in prior years, Big Z gave Kamal two computer files. One file represents the perpetual inventory (FIFO) records for the year ended December 31, 2010. The other file represents the December 5 physical inventory count. Assume: • Kamal issued an unqualified opinion on the prior year’s financial statements. • All inventory is purchased for resale and located in a single warehouse. • Kamal has appropriate computerized audit software. • The perpetual inventory file contains the following information in item number sequence: * Beginning balances at January 1, 2010: Item number, item description, total quantity, and prices. * For each item purchased during the year: Date received, receiving report number, vendor, item number, item description, quantity, and total Taka amount. * For each item sold during the year: Date shipped, invoice number, item number, item description, quantity shipped, and Taka amount of the cost removed from inventory. * For each item adjusted for physical inventory count differences: Date, item number, item description, quantity, and Taka amount. •
The physical inventory file contains the following information in item number sequence: Tag number, item number, item description, and count quantity. Required: Describe the substantive auditing procedures Kamal may consider performing with computerized audit software using Big Z’s two computer files and Kamal’s computer file of test counts. The substantive auditing procedures described may indicate out for Kamal’s follow‐up by subsequent application of manual procedures. Do not describe subsequent manual auditing procedures. Group the procedures by those using (i) the perpetual inventory file and (ii) the physical inventory and test count files. 8 5. (a) On September 30, 2010 Wasi & Co., Chartered Accountants, was engaged to audit the consolidated financial statements of National Motors Ltd. for the year ended December 31, 2010. The consolidated financial statements of National had not been audited the prior year. National’s inadequate inventory records precluded Wasi from forming an opinion as to the proper application of Bangladesh Accounting Standards to inventory balances on January 1, 2010. Therefore, Wasi decided not be express an opinion on the results of operations for the year ended December 31, 2010. National decided not to present comparative financial statements. Rapid Parts Ltd., a consolidated subsidiary of National, was audited for the year ended December 31, 2010 by Hasan & Co., Chartered Accountants. Hasan completed its fieldwork on February 28, 2011, and submitted an unqualified opinion on Rapid’s financial statements on March 7, 2011. Rapid’s statements reflect total assets and revenues constituting Tk.7 crore and Tk.20 crore, respectively, of the consolidated totals of National. Wasi decided not to assume responsibility for the work of Hasan. Hasan’s report on Rapid does not accompany National’s consolidated statements. [Please turn over] – 3 – Wasi completed its fieldwork on March 28, 2011, and submitted its auditor’s report to National on April 4, 2011. Required: Prepare Wasi & Co’s auditor’s report on the consolidated financial statements of National Motors Ltd. (b) List four assertions associated with account balances. (c) List two reasons why audit evidence is likely to be persuasive rather than conclusive. (d) The auditor of Khan Ltd. requested written representations from management in the form of a representation letter. (i) What will the auditor do if the requested letter is not provided? (ii) What will the auditor do if he has doubt as to the reliability of written representations provided in the letter? 10 2 2 3 5 6. (a) What special measures the auditor should take to minimize the risk where the possibility of creative accounting exists? 3 (b) In what ways, a financial due diligence review differs from a statutory audit? 3 (c) Mr. Alam, partner of a C.A. firm has been auditing Goldstar Ltd. a real estate developer operating in Dhaka for the last several years. The MD of the company maintains close relationship with Mr. Alam and every year he takes Mr. Alam to his pleasure trips abroad. He also presents valuable gifts to Mr. Alam while on trips. Besides, Mr. Alam bought a flat from the company at a substantially reduced price. All the expenses of the trips normally are charged to the company as business development expenses. This year while auditing the accounts of the company, you as audit manager raised the points to Mr. Alam and he suggested you to overlook the issues. Later on you also found that the company substantially under declared VAT liability. Here also Mr. Alam advised you to overlook the matter. Explain what and where ethical faults have been committed by Mr. Alam and what should be the consequences of such lapses on the part of the auditor. 7 – The End –