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. MyTel Limited was incorporated in Bangladesh as a private company limited by shares on 19 May
2004 under the Companies Act, 1994. MyTel Limited, a sister concern of Jonogon Group, has
obtained the license for operating PSTN in North West, North East, South West and South East Zones
of Bangladesh. The Company's primary business is to build, own and operate a Public Switched
Telephone Network (PSTN) in Bangladesh. During the year ended December 31, 2005 the company
did not generate any revenue. The management of the company is however confident of the
company's prospects. The paid up capital of the company has been increased to Tk. 1,000 million
during the year ended December 31, 2014.
Your firm conducted audit of MyTel Ltd. for the year ended December 31, 2014 and identified
following anomalies which are susceptible to material misstatement:
Management failed to show source of funds of Share Capital for Tk. 1,000 million and proof of
share money deposit for Tk. 591.36 million. Valid supporting documents of locally supplied Capital
Work In Progress (CWIP) for Tk. 135.87 million were not made available for audit testing. On the
other hand, CWIP Investment on foreign supply and Liabilities against accepted L/C has been
overstated by Tk.35.96 million as Margin on L/C amounting to Tk.35.96 million has been included
under Margin on L/C shown as current assets as well as included under Investment on Foreign
Supply. A sum of Tk. 3.96 million has been brought forward in General Ledger under CWIP on
account of Switch/MTSO that has not been found in the last years audited financial statements. A
sum of Tk. 6.84 million has been found in the financial statements on account of Office Decoration
and Interior Works under Capital Work in Progress (Investment on Local Supply). This amount has
not been supported by documentary evidences and not traced in the General Ledger.
No fixed assets register has been maintained by the company.Only purchase documents of Fixed
Assets for Tk. 16.96 million were made available to the audit team. As per General Ledger, Motor
Vehicle balance representing Tk. 4.27 million (1.80 + 2.47) is not shown in the financial statements
and no documentary evidence was found for Tk. 2.47 million for audit purpose. An adjustment of
Tk.109,219 has been made in the furniture account for which no supporting documents have been
provided to us.
A large amount has been paid as advance to MyTel management, MyTel Employees and Regional
Office (Northeast Zone) without any formal agreement and supporting documents or policies and
procedures.
As per BAS 24 Related Party Disclosures the classification of amounts payable to, and receivable
from, related parties in different categories have not been presented either on the balance sheet or in
the notes.
Miscellaneous Income amounting to Tk. 1.35 million has not been confirmed with documentary
evidence. A sum of Tk. 88,555 has been deducted as Tax Deduction at Source by the bank on
account of bank interest. This advance tax has been shown as expenses instead of showing as
advance tax in the balance sheet. No provisions have been made for audit fee, utilities and salaries.
Documents and break-ups relating to payables to Government and other autonomous bodies were
not made available for audit examination.
Requirements:
a. What are the matters about MyTel Limited to be brought by engagement manager for the
attention of partner for the year ended December 31, 2014?
b. Based on above scenario will you consider issuing unqualified audit report or modified audit
report? Please explain why.
c. Write a full audit report based on your audit finding as mentioned above on financial statements
of MyTel Limited for the year ended December 31, 2014.

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2. You are an audit manager in MMH & Co Chartered Accountants and are reviewing three situations
which have recently arisen with respect to potential and existing audit clients of your firm.
Situation - 1
Excellence Finance Ltds managing director, Mr. AB Siddiq, has approached MMH & Co.,
Chartered Accountants, to act as statutory auditor of the company. Excellence Finance Ltd is a
NBFI providing financial services including services such as Home Loan, Car Loan and Credit
Cards etc. The companys previous auditors recently resigned. Mr. AB Siddiq states that this was
due to a disagreement on the accounting treatment of commission earned, and because they
thought our controls were not very good. You are aware that Excellence Finance Ltd has been
investigated by the Bangladesh Bank Audit & Investigation team for alleged non-compliance with
its regulations.
As well as performing the audit, Mr. Siddiq would also require business advisory services from
MMH & Co.
Situation 2
The audit of Royal Bengal Ltd. financial statements for the year ended 30 November 2015 will
commence shortly. You are aware that the company is in financial difficulties. Royal Bengal Ltd.
managing director, Mr. Mostofa, has requested that the audit engagement partner accompanies him
to a meeting with the bank where a new loan will be discussed, and the draft financial statements
reviewed. Mr. Mostofa has hinted that if the partner does not accompany him to the meeting, he
will change the auditor. In addition, an invoice relating to interim audit work performed in August
2015 has not yet been paid.
Situation 3
BB Ltd is a listed entity, and its audit committee has asked MMH & Co to perform an actuarial
valuation on the companys defined benefit pension plan. One of the audit partners is a qualified
actuary and has the necessary skills and expertise to perform the service. BB Ltd has a year ending
as on 28 February 2016, and the audit planning is due to commence next week. The audit report on
its financial statements for the year ended 28 February 2015 was unmodified and included total
assets of Tk.35 million and a pension liability of Tk.105,000.
Requirements:
Identify and discuss the ethical and other professional issues raised, and recommend any actions
that should be taken in respect of:
(a) Excellence Finance Ltd;
(b) Royal Bengal Ltd; and
(c) BB Ltd.

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3. The directors of Ad-Valley Ltd. has recently approached your firm with an offer to appoint you as
the firms external auditor for the year ending June 30, 2016 as the unqualified audit report will
help them release a large fund from XY Bank Ltd. for their upcoming project. As part of
environment analysis the managing partner has asked you to gather information about Ad-Valley
and its directors. Based on outcome of your analysis he will decide whether to accept the
appointment. Accordingly, you have collated following information that could be relevant to the
decision making process:
Ad-Valley is a new ad firm incorporated just one year back and works as the sole mandated
subcontractor of Asiatic in the laters USAID funded countrywide mega project (under Govt.
collaboration) to produce a series of documentary films and cartoons focusing on educational, child
marriage and child labor issues, which will be broadcasted by all government and private TV
channels through-out the country. Before being incorporated as a limited company it was a
partnership firm between two friends Kamal and Kasem who are now the only directors and
shareholders of Ad-Valley Ltd. They sold their trade license and assets of partnership in exchange
of shares of Ad-Valley. The value of the shares issued by Ad-Valley Ltd. exceeded the value of the
assets by Tk. 30 million and this has been included as goodwill in the financial statements of AdValley.
Kamal and Kasem previously worked at Filmdom where they were marketing managers. They
formed their business partnership in June 2014 to produce ads, documentary films and cartoons for
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Asiatic which was previously a customer of Filmdom. Noteworthy that Kamal who still works at
Filmdom persuaded Asiatics program director to move Filmdoms business to them by
undercutting the price of Filmdom.
Ad-Valley stroke the deal in July 2015 as sole mandated subcontractor for the aforementioned
USAID project of Asiatic. The contract specifies situations in which Asiatic may terminate the
contract early, which include poor quality and failure to timely delivery of films. Ad-Valley has
also won a few smaller contracts but supplies to Asiatic are expected to account for at least 70% of
Ad-Valleys revenue whilst the contract is in force.
The Work Order of Ad-Valley has been financed by a bank loan from XY Bank. The loan
covenants among other requires Ad-Valley to maintain a current ratio of 1.75:1 and 2% penal
interest would be imposed in case of overdue situation. Recently Ad-Valley has received a warning
letter from Govt. Regulator for poor quality of films and use of abusive language. Ad-Valley has
been instructed to upgrade film quality and use language suitable for minors before the end of first
quarter 2016.
Ad-Valley maintains its books of account in spreadsheet under the active supervision of Kamal and
no professional accountant has been appointed to do the accounting jobs including preparation of
financial statements. In a meeting held on April 10, 2016 the Directors have admitted that these
have become increasingly difficult due to the size of the business. They have also hinted that due to
misunderstanding about profit sharing they have decided to split their long association and Kamal
will sell all his shares to Kasem.
The directors of Ad-Valley have also requested that your firm undertakes a non-audit engagement
to advise on an appropriate valuation of Kamals shares in Ad-Valley.
Requirements:
a. Being senior manager of the audit firm you have been asked to point matters which are
relevant for accepting or not accepting the appointment by your firm as Ad-Valleys external
auditor for the year ending June 30, 2016. Explain each point with your justification.
b. Assuming your firm accepts appointment as external auditor of Ad-Valley, explain the conflict
of interest and self-interest threat which may arise if it also accepts the non- audit engagement
requested by the directors. Outline the safeguards, if any, which should be put in place to
mitigate those threats.
4. Malevich & Co is a firm of Chartered Accountants offering audit and assurance services to a large
portfolio of clients. You are a manager in the audit department responsible for the audit of
Kandinsky Co. which has financial year end on 31 October 2015. The audit is near to completion
and you are reviewing issues which have been raised by the audit seniors.
Kandinsky Co is a manufacturer of luxury food items including chocolate and other confectionery
which are often sold as gift items individually or in hampers containing a selection of expensive
items from the range of products. Due to an economic recession sales of products have fallen
sharply this year, and measures have been implemented to support the companys cash flow. You
are aware that the company only has Tk.150,000 in cash at the year end.
Extracts from the draft financial statements and other relevant information are given below.
Note

Revenue
Operating expenses
Finance charge
(Loss)/profit before tax
Total assets
Long-term liabilities bank loan
Short-term liabilities trade payables

1
2

Disclosed in notes to financial statements:

Undrawn borrowing facilities
Contingent liability

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October 2015
(Draft)
Tk.
2,440
(2,100)
( 520)
( 180)
10,400
3,500
900
500
120

October 2014
(Actual)
Tk.
3,950
(2,800)
(500)
650
13,500
3,000
650
1,000

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Notes:
1. The bank loan was extended in June 2015 by drawing on the borrowing facilities offered by the
bank. The loan carries a fixed interest rate and is secured on the companys property including
the head office and manufacturing site. The first repayment of loan capital is due on 30
September 2016 when Tk.350,000 is due to be paid.
2. Kandinsky Co. renegotiated its terms of trade with its main supplier of cocoa beans, and
extended payment terms from 50 days to 80 days in order to improve working capital.
3. The borrowing facilities are due to be reviewed by the bank in July 2016 and contain covenants
including that interest cover is maintained at 2, and the ratio of bank loan to operating profit
does not exceed 4:1.
4. The contingent liability relates to a letter of support which Kandinsky Co has provided to its
main supplier of cane sugar which is facing difficult trading conditions.
Requirements:
In respect of the audit of Kandinsky Co:
(i) Identify and explain the matters which may cast significant doubt on the companys ability to
continue as a going concern; and
(ii) Recommend the audit procedures to be performed in relation to the going concern matters
identified.
5.

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a. Future Buildings is a developer company which constructs private apartment buildings and
commercial complexes. Apart from its own projects it also bids for government construction
contracts for multistoried building projects. Recently they are at the final stage of gaining a
government contract for constructing an apartment block at the suburb of Dhaka City consisting
of 30 energy-efficient 6 storied buildings. You are the auditor of Future Buildings for the last
two years and your firm issued unqualified opinion in both the preceding years as the books of
account were always in order. This year you are requested to give your audit report the next day
as it is required by the company to secure the government contract. You do not have any time
to conduct the audit. You are advised by the engagement partner to give an unqualified audit
report as in the past and carry on the normal audit procedure afterwards. You are not ready to
issue any opinion without carrying out full scale audit.
Taking above facts into consideration how would you handle the situation?
(Your answer should be based on relevant auditing standards.)

b. Describe the fraud risk factors relating to misstatement resulting from fraudulent financial
reporting as per Bangladesh Standards on Auditing.

c. As per Bangladesh Standards on Auditing what should an auditor do if it is not possible to

continue an audit as a result of misstatement resulting from fraud or suspected fraud?

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