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THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH CMA JUNE, 2018 EXAMINATION
STRATEGIC LEVEL
SUBJECT: R3. FINANCIAL COST AND MANAGEMENT AUDIT
Time: Three hours Full Marks: 100
All questions are to be attempted.
Show computations, where necessary.
Answer must be brief, relevant, neat and clean.
Start answering each question from a fresh sheet.
PART – A : FINANCIAL AUDIT Q. No. 1
(a) What is the difference between audit and assurance engagement? What is the objective of an audit?
(b) What are the factors an assurance provider must consider before accepting an assurance engagement?
(c) BSA 300 “Planning an Audit of Financial Statement” provides guidance to auditors.
Planning an audit involves establishing the overall audit strategy for the engagement and developing of an audit plan. Explain the importance of audit planning.
[Marks: (5+5+5) = 15]
Q. No. 2
(a) ISA 200 Overall Objectives of The Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing sets out the purpose of an audit as follows:
'’The purpose of an audit is to enhance the degree of confidence of intended user s in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.'’
You are required to spell out some limitations of the above statements.
(b) During your firm’s external audit of the financial statements of PAPER Ltd, the audit team has identified a number of misstatements. No individual misstatement is material.
Outline the actions that should be taken in respect of these misstatements before the auditor’s report is signed.
(c) You are the audit manager responsible for the external audit of Dhaka Ltd. During your annual performance review, Mr. Nazim, the engagement partner, set you a target of selling BDT 100,000 of non-audit services to Dhaka Ltd. during the year ending 31 December 2017. He proposed that if this target was met, a bonus payment of 20% of your salary would be made and that your progression within the firm would be accelerated.
Identify and explain the threat to your objectivity presented by Mr. Nazim’s proposal and state, with reasons, whether or not it is appropriate.
[Marks: (6+4+5) = 15) Q. No. 3
Described below are situations which have arisen at four unrelated clients of your firm. The year end in each case is 31 December 2017.
Artisti Ltd (Artisti)
Your firm is the external auditor of Artisti. Your firm attended the inventory count at Artisti’s warehouse on 31 December 2017, but was unaware that Artisti also owned inventory held at a third party’s premises on this date. Neither Artisti nor the third party has retained any count records in respect of this inventory. Your firm has concluded that there are no other records from which the amount of inventory held by the third party can be substantiated. Artisti’s directors wish to include the inventory held at the third party’s premises in the year-end financial statements at BDT 550,000. The draft financial statements show that Artisti’s profit before tax is BDT 5.2 million and total assets are BDT 21.7 million.
Page 2 of 3 CMA JUNE, 2018 EXAMINATION
STRATEGIC LEVEL
SUBJECT: R3. FINANCIAL COST AND MANAGEMENT AUDIT
Q. No. 3(cont’d...)
EY Ltd (EY)
Your firm is the external auditor of EY. A competitor has alleged that EY has infringed patent rights and the competitor is threatening to claim damages of BDT 5.0 million. EY’s independent legal advice is that the competitor’s case is weak and, if the matter is pursued by the competitor, the case is unlikely to come to court for at least three years. For these reasons, no provision for any liability that may result has been made in the financial statements. EY has made relevant disclosures in the financial statements. The engagement partner agrees with the accounting treatment and is satisfied that the note includes all the necessary information for the users of the financial statements to understand the situation. The draft financial statements show that EY’s profit before tax is BDT 2.5 million.
RK plc (RK)
During the external audit of RK, a listed company, you read the strategic report to be included in RK's annual report. The strategic report contains a statement that “the company’s expansion into China has been a success and is responsible for generating 20% of revenue”. However, the notes to the financial statements disclose that only 10% of revenue originated from China.
You are satisfied that the error is in the strategic report and not the financial statements. The directors have refused to amend the strategic report.
In addition, RK has not disclosed in the financial statements that one of its lenders has a floating charge over all of the company’s assets as security for a long-term loan. Assume that The Corporate Governance Guideline 2012 requires this disclosure to be made.
Stand Ltd (Stand)
Your firm has completed an engagement to review and provide an assurance report on Stand’s consolidated financial statements. This assurance engagement was requested by Stand’s directors to support the acquisition of funding to grow the business. Stand has recently acquired a subsidiary Fleet Ltd (Fleet). Stand has not consolidated the financial statements of Fleet but has included it as an investment, at cost, in the consolidated financial statements. This accounting treatment is not in compliance with International Financial Reporting Standards.
Had Fleet been consolidated, many elements in the financial statements would have been materially affected.
Required:
(i) For each of the situations described above, state, with reasons, the implications for your firm’s audit or assurance reports.
(ii) Describe the differences between the conclusion expressed following an engagement to review financial statements and the opinion expressed in an external auditor’s report on financial statements. Give reasons for these differences.
(iii) List three items of additional information to be included in the extended auditor's report on financial statements of listed companies.
[Marks: (13+4+3) = 20]
PART – B : COST AND MANAGEMENT AUDIT Q. No. 4
(a) What procedures are to be followed for appointment of a Cost Auditor?
(b) In planning to conduct a Cost Audit of an organization what documents and information should a Cost Auditor need to collect?
(c) What is the difference between a Cost Audit report and a statutory Audit report?
[Marks: (5+5+5) = 15]
Page 3 of 3 CMA JUNE, 2018 EXAMINATION
STRATEGIC LEVEL
SUBJECT: R3. FINANCIAL COST AND MANAGEMENT AUDIT
Q. No. 5
(a) What is Management Audit? How would you distinguish Management Audit from Cost Audit? Explain.
(b) As per Bangladesh Cost Accounting standard (BCAS)-22, it is important to follow some step to implement ERP in an organization. Write down the procedure to be followed for implementing ERP.
(c) Value chain analysis is one of the major objective of Bangladesh Cost Accounting standard (BCAS)-23. Write down the primary and supporting activities of value chain.
[Marks: (5+5+5) = 15]
Q. No. 6
Described below are situations which have arisen at four unrelated clients of your firm. The year end in each case is 31 March 2018.
Horizon Ltd.
Your firm has completed an engagement to cost audit and provide a report on Horizon’s consolidated Cost of goods sold. This cost audit engagement was awarded by Horizon’s directors. During the audit you find that no separate calculation is kept for locally sourced raw material but it should have been maintained as per ‘’Cost Accounting Record Rules for Fuel and Power industries’’.
Lara Cotton Mills Ltd. (Lara)
Your firm is the cost auditor of Lara and you are the audit manager and you found that Lara is recording all the salary and wages of factory as a part of cost of goods sold and no separate books are maintained for direct and indirect wages and salary which is mandatory for cotton industry as per Cost Accounting Record Rules for Cotton industries (para 4). Lara does not make relevant disclosures in the note of cost of goods sold. The engagement partner agrees with the accounting treatment and is satisfied that the Net profit is correctly determined and the users of the financial statements will not be misled. The draft financial statements show that Lara’s profit before tax is BDT 2.5 million, Gross profit BDT 5 million and sales BDT 12 million.
Required:
For each of the situations described above, state, with reasons, the implications for your firm’s cost audit reports.
[Marks: (4X2) = 8]
Q. No. 7
You have been appointed as an Assistant Management Accountant of a large manufacturing company. You are asked to establish internal control system of the organization. Prepare a checklist along with a description on how you would implement the internal control system for the following:
(i) Procurement of Raw material;
(ii) Party bills payment through cheque;
(iii) Order to Cash (O2C); and
(iv) Inventory Management with automated System/ERP.
[Marks: (3X4) = 12]
= THE END =
