CMA SEPTEMBER-2022 EXAMINATION INTERMEDIATE LEVEL II
AUDITING
Course Code : AA133 Total Marks : 100
Reading Time : 15 minutes Writing Time : 180 minutes
Instructions to Candidates
You MUST NOT write anything during the reading time.
You should attempt ALLquestions.
Answers should be properly structured and relevant.
Carefully read ALL the requirements and sub-questions before attempting a specific question.
ALL answers must be written in the answer book.
AVOID WRITING/MARKING on the question paper at any time which may cause disciplinary action.
Start answering each question from a fresh sheet.
Answers should be clearly numbered with the sub-question number.
Allowable Materials
Writing Stationaries
Non-programmable Calculator Assessment Structure
Sub-
question Marks Expected Time Required Section
A
Question 1 Multiple Choice Questions 10 10 20 minutes
Question 2 Modified True/False 5 5 10 minutes
Question 3 Matching 5 5 10 minutes
Section B
Question 4 Essay/Computational/Case 2 20 32.50 minutes Question 5 Essay/Computational/Case - 20 32.50 minutes Question 6 Essay/Computational/Case 3 20 32.50 minutes Question 7 Essay/Computational/Case - 20 32.50 minutes
Revision 10 minutes
Total 100 180 minutes
RESTRICTED USE
This paper MUST NOT BE REMOVED from the examination venue Do not turn the page until instructed
SECTION A [20 MARKS]
THERE ARE 3 (THREE) QUESTIONS IN THIS SECTION. ANSWER ALL THE QUESTIONS IN THE ANSWER SCRIPT FOLLOWING THE EXAMPLE PROVIDED FOR THE SPECIFIC QUESTION.
QUESTION 1 [10 × 1 = 10 MARKS]
There are ten (10) multiple-choice questions with five options. Pick the option that best explains the given question. Write your answer on the answer script [DO NOT PUT ANY MARK ON THE QUESTION PAPER]. Follow the example given below in providing your answer.
Example:
(i) ICMAB stands for the –
(a) Institute of Cost Management Accounting of Bangladesh (b) Institute of Cost and Management Accountants of Bangladesh (c) Institute for Cost Managers and Accounting of Bangladesh (d) Institute of Cost Management Accountants of Bangladesh (e) Industrial Cost Management Accountants of Bangladesh Answer: (i) (b)
(i) Major advantage of risk based approach for audit planning is:
a) Audit planning can be communicated to client in advance b) Audit activity can be completed within allotted budget or time c) Use of latest technology for audit activities
d) Appropriate utilization of resources for high risk areas e) To minimize the audit risk
(ii) Risk assessment process is:
a) Subjective b) Objective c) Mathematical d) Statistical e) Quantitative
(iii) The most important factor while evaluating controls is to ensure that the control:
a) Is less costly than risk b) Does not reduce productivity c) Addresses the risk
d) Is automotive e) Is persuasive
(iv) Statistical sampling reduces which of the following risks:
a) Audit risk b) Detection risk c) Inherent risk d) Sampling risk e) Control risk
(v) Which of the following types of audit risk assumes an absence of compensating controls in the area being reviewed?
a) Control risk b) Detection risk c) Inherent risk d) Sampling risk e) Residual risk
(vi) Accounts department of XYZ limited cannot prepare bank reconciliation statement on monthly basis due to shortage of manpower but they do it half yearly basis. Finance Director advised to check or match, at least, the debit amount in bank statement with the counterfoil of cheque book. This is an example of a:
a) Preventive control b) Management control c) Compensating control d) Detective control e) Corrective control
(vii) A Statutory auditor is conducting audit on line items of Balance sheet of a company and considers the assertions. Which of the following assertions are not important or relevant here?
a) Occurrence b) Existence
c) Rights and Obligations d) Valuation and allocation e) Completeness
(viii) Direct confirmation procedures are performed during audit of accounts receivable balances to address following balance sheet assertion:
a) Rights & Obligation b) Valuation
c) Completeness d) Existence e) Cut-off
(ix) For given level of audit risk, acceptable level of detection risk bears ………relationship to assessed risk of material misstatement at assertion level.
a) Direct b) Indirect c) Inverse
d) Either (a) or (b) e) None of the above
(x) Access control in a server room of a company is administered by automated biometric device at the entrance and a manual register. An employee of IT division having no biometric ID in that device or related software is trying to enter into the server room although it was clearly mentioned at a conspicuous place before the entrance gate that authorized biometric ID is required for entrance. Which of the following is correct in above scenario in respect to notice at a conspicuous place?
a) Preventive Control, b) Detective Control c) Compensating Control d) Corrective control e) Deterrent Control
QUESTION 2 [5 × 1 = 5 MARKS]
There are five (5) statements given under the question. Identify the statements as True or False. If the statement is false, rewrite the statement on the answer script to make it ‘True’. Reasoning is NOT required. Follow the example given below in providing your answer.
Example:
(a) ICMAB stands for the Industrial Cost Management and Accounting of Bangladesh.
Answer:
(a) False. ICMAB stands for the Institute of Cost and Management Accountants of Bangladesh.
Note:
You will not get any mark if you simply rewrite as ICMAB does not stand for the Industrial Cost Management Accountants of Bangladesh.
If the statement is true, you need NOT to rewrite the statement rather only mention that the statement is True.
(a) Result of substantive testing will be the basis for planning of compliance or control testing.
(b) A lower level of evidence will be obtained for a limited assurance engagement (c) Reasonable assurance means a moderate but qualified level of assurance (d) Physical verification of fixed asset is the primary responsibility of the auditor
(e) The auditor shall obtain confirmation from those charged with governance whether they believe significant assumptions used in making accounting estimates are reasonable.
QUESTION 3 [5 × 1 = 5 MARKS]
Match the items of column A with the most suitable items of column B. Match only one item of column A with one item of column B. Write your answer on the answer script. Follow the example given below in providing your answer.
Example:
Column A Column B
i) ICMAB (a) Professional accountancy body
(b) University Answer: i) (a)
Column A Column B
i) Corresponding figure (a) the audit opinion should be qualified
ii) Comparative Information (b) who at the request of the group engagement team, performs work on financial information related to a component for the group audit
iii) In case of material misstatement and effect is pervasive
(c) discuss the reason of withdrawal with the appropriate level of management and those charged with governance
iv) Component auditor (d) is engaged and performs work at the request of component management
v) If the auditors need to withdraw from engagement
(e) comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements
(f) the audit opinion should be adverse
(g) the amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable financial reporting framework.
END OF SECTION A
SECTION B [80 MARKS]
THERE ARE 4 (FOUR) QUESTIONS IN THIS SECTION. ANSWER ALL THE QUESTIONS IN THE ANSWER SCRIPT. SHOW ALL RELEVANT COMPUTATION.
QUESTION 4 [10 + 10 = 20 MARKS]
(a) ABC private Limited is engaged in business of manufacturing of Fabrics is experiencing significant increase in turnover year on year. During the financial year ended 30th June 2021, the company carried out a detailed physical verification of its inventory and property, plant &
Equipment. You are the auditor of RIM Private Ltd. The inventory as at the end of the year was ` BDT. 47.50 million. You are the existing statutory auditor of the company. Due to unavoidable circumstances, you or your representative could not be present at the time of annual physical verification.
Required:
Under the above circumstances how will you get reliable appropriate evidence and get reasonable assurance on the inventory value shown in the Financial Statements- describe with relevant provision of appropriate auditing standard.
(b) You are the auditor of Quality Food Services (QFS) Ltd. which is in the business of supplying food products to various airline companies operating aircrafts in domestic circle only. As per terms of agreement with airlines, the company needs to stock various non- perishable food items for coming one month (average holding of inventory to the tune of BDT 35 million). Also the payment terms have been settled and the company receives payment in 50 days after the supply of goods for which company availed invoice discounting facility with a Bank. Everything was going-on well till the end of March 2020 when pandemic Covid hit the world and everything came to a standstill. Aviation sector was hit hard and there were no flights from July 15, 2020 onwards. Consequently, the business of QFS Ltd also got severely affected and the scheduled supplies of goods to airlines also were not made. Also, the liquidity position of airline companies got hit and the scheduled payments were also not received on due dates.
Required:
As the auditor of QFS Ltd. what will you do to get the reasonable assurance that financial statements for the year ended June 30, 2020 represent true and fair view?
QUESTION 5 [(6+7+7) = 20 MARKS]
You have been assigned the role of audit manager for the external audit of Constructa Ltd (Constructa) for the year ended 31 May 2012. You have replaced Edward Hale who was the audit manager for the previous three years until he joined Constructa as finance director in January 2012. You have not previously worked on the Constructa audit. Hannah Pearson is the engagement partner and has been responsible for the audit of Constructa since it became a client of your firm ten years ago.
Hannah has asked you to consider the following key areas of audit risk as part of your audit planning:
(1) Going concern (2) Work in progress (3) Freehold premises
On reading the background information you ascertain the following:
The principal activity of the company is the provision of restoration services in respect of residential and commercial properties which have been damaged by fire, flood or subsidence. The majority of the work undertaken by Constructa is commissioned by insurance companies, which require Constructa to quote a fixed fee for each restoration contract. Once the work has been completed and signed off by the property owner as being satisfactory, Constructa issues an invoice to the insurance company. Insurance companies’ payment policies vary – some pay within 30 days of invoice date; others pay within 60 days and one insurance company pays within 90 days.
All direct costs (labour and materials) relating to each contract are recorded in Constructa’s job costing system which is integrated with the purchases and payroll systems. The job costing system is used to estimate the value of work in progress for the monthly management accounts and for the year-end financial statements. For the work in progress valuation, a percentage is added to the direct costs to cover overheads. The percentage is determined by taking attributable overheads in the management accounts as a percentage of direct costs in the management accounts.
At a meeting with Edward, he informed you of the following:
In April 2012, Constructa obtained a bank loan which is repayable over five years with interest payable quarterly in arrears. The loan is secured on the company’s freehold premises which were valued by an external valuer in April 2012. The premises are currently included in the accounting records at cost less accumulated depreciation which is lower than the revalued amount. The directors wish to recognise the revalued amount in the financial statements for the year ended 31 May 2012.
The company has grown rapidly during the past year and consequently exceeded its overdraft limit on a number of occasions. The overdraft is due to be reviewed in September 2012 and the company’s bank has requested that the audited financial statements are available for this review.
The company has managed to pay its trade suppliers on time by delaying payments of VAT and payroll taxes to authority. Edward has recently agreed a deferred payment plan with authority in order to pay the arrears of tax over the next four months.
The company has made a loss for the year ended 31 May 2012 due to the costs incurred on a number of contracts exceeding the fixed fee. This was due to the former operations manager, Jason Henson, failing to control direct labour costs. Historically, the direct labour costs have been 60% of revenue but during the year ended 31 May 2012, they rose to 70% of revenue. Jason also failed to monitor the progress of contracts resulting in a delay in obtaining the property owners’ confirmation of satisfactory completion of the work and consequently a delay in the issue of invoices to insurance companies. Jason resigned in April 2012 and has set up his own company, Restore Ltd (Restore), providing similar restoration services in respect of damaged properties. A replacement operations manager, Nina Patel, has been recruited. She is focusing on reducing the direct labour percentage and monitoring the progress of contracts to ensure they are signed off as soon as the work is completed to the property owners’ satisfaction.
Required:
(i) Explain what is meant by the ‘familiarity threat’ in the context of the external audit of Constructa and discuss the safeguards available to your firm in order to mitigate this threat.
(ii) Justify why the items listed in (1) to (3) in the scenario have been identified as key areas of audit risk.
(iii) Explain the conflict of interest which would arise if Jason Henson approached your firm to act as professional advisor to Restore and list the safeguards that could be implemented by your firm.
QUESTION 6 [(5+7+8) = 20 MARKS]
(a) Briefly explain the components of internal control as referred to in the International Standards on Auditing.
(b) Certain weaknesses in the internal control procedure in the payment of wages in a large construction company were noticed by the statutory auditor who in turn brought the same to the knowledge of the Managing Director of the company. In the subsequent year huge defalcation came to the notice of the management. The origin of the same was traced to the earlier year. The management wants to sue the auditor for negligence and also plans to file a complaint with the Professional Institute regulating the Auditor.
Required:
Indicate the precise nature of auditor's liability in the above situations defining significant deficiencies in internal control in line with appropriate standard of BSA, if any.
(c) You are the Audit Manager on the audit of ABC Limited (ABCL) for the year ended June 30, 2022. ABCL is engaged in the manufacture of a wide range of plastic products. While reviewing the initial work performed by the audit team, the following matters have come to your notice:
(1) The quantity of material scrapped during the year is materially different from the quantity of scrap sold. The company’s records show nil balance both at the beginning and at the close of the year. No reconciliation for the difference has been provided by the company.
(2) Sales for the year have increased by 7% over the previous year. However, it has been noted that sales in the last two weeks of June 2022 have been exceptionally high and represent 15% of the annual sales. The audit working papers carry the following observations in respect of the above:
70% of the sales in the last two weeks of June were made to two new customers whose credit assessment has not been formally documented;
a significant portion of the goods sold to the above referred customers were returned in the first week of July 2022; and
Management bonuses are linked to the operating performance of the company.
(3) During the year ABCLimited (ABCL) purchased a machine for BDT. 25 million. The payment voucher is duly supported by the invoicefrom the supplier. However, the fixed assets schedule provided by the client shows the amount capitalized as BDT. 2.5 million. Depreciation has been charged on this amount. The difference of BDT. 22.5 million is appearing in the Bank Reconciliation Statement.
Required:
(ii) Analyze each of the above situations and assess whether it represents a fraud or an error.
(ii) What action would you take to deal with the above matters.
QUESTION 7 [(5+3+12) = 20 MARKS]
You are the manager in charge of the audit of Multimode limited, a listed company which manufactures specialist cars and other motor vehicles for use in films. Audited revenue is BDT.
140 million with profit before tax of BDT. 7.5 million.
All audit works up to, but not including, the obtaining of written representations has been completed. A review of the audit file disclosed the following outstanding points:
Raj-Laxmi Flim
The company is facing a potential legal claim from the Raj-Laxmi Film Company in respect of a defective vehicle that was supplied for one of their films. Raj-Laxmi Film maintains that the vehicle was not built strongly enough while the directors of Multimodeargue that the specification was not sufficiently detailed. Dropping a vehicle 50 meters into the river and expecting it to continue to remain in working condition would be unusual, but thisis what Raj-Laxmi Film expected. Solicitors are unable to determine liability at the present time. A claim for BDT.4 million being the cost of a replacement vehicle and lost production time has been received by Multimode from Raj-Laxmi Film. The directors’ opinion is that the claim is not justified.
Depreciation
Depreciation of specialist production equipment has been included in the financial statements at the amount of 10% pa based on reducing balance. However, the treatment is consistent with prior accounting periods (which received an unmodified auditors’ report) and the companies in the same industry and sales of old equipment show negligible profit or loss on sale. The audit senior, who is new to the audit, feels that depreciation is being undercharged in the financial statements.
Required:
(a) Explain the purpose of a written representation letter.
(b) For each of the above matters:
(i) Discuss whether or not a paragraph is required in the representation letter; and (ii) If appropriate, draft the paragraph for inclusion in the representation letter.
END OF SECTION B
