The document discusses several ethical issues and dilemmas faced by an accountant working for a garments manufacturing company. The main issues include: 1) Cash payments being made to major customers for bulk discounts, instead of issuing proper receipts. This could indicate impropriety. 2) Significant delays in paying worker wages and overtime payments, as well as mismatches between production and inventory records. 3) The company submitting tax returns based on fake sales figures and tampered vouchers, raising the risk of penalties. As the professional accountant, the appropriate responses are to investigate the discrepancies independently, ensure workers are paid properly, and advise correcting any fraudulent tax submissions to avoid penalties. Maintaining integrity and

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AUDIT & ASSURANCE
Time allowed – 3 hours
Total marks – 100
[N.B. – The figures in the margin indicate full marks. Question 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 answer in one place in order of sequence.]
Marks
1. (a) You are in charge of audit of Holiday Resort Limited financial statements which is a popular
tourist destination. Your team have completed audit fieldwork. You and your team had a
discussion meeting with General Manager regarding the identified exceptions. At the end of the
discussion, General Manager of the resort (GM) appreciated the audit team for finding all the
improvement areas and thanked the audit team for the hard work. As a token of appreciation, he
offered you and the full team a free stay in the resort including complimentary breakfast and free
access to amenities during any weekend of your choice. You know the resort is very luxurious
and it is very expensive as well as difficult to book the resort during the weekend. What will you
respond to the General Manager? 3
(b) You are engagement manager for the audit of Alpha Technologies Limited (Alpha). During the
audit, your team members has notified you that management of Alpha has decided to dispose
some fully depreciated laptops, desktops and Cars. Most of the times disposed assets are in
workable condition or require minor repair. As per the general practice, Alpha first invites
internal bidding from employees for the assets being disposed. Alpha only calls for public bid if
any asset remains unsold after internal bidding. Accountant of Alpha asked your team whether
they want to participate in the internal bidding. Your team members have expressed their interest
to you and requested your permission to participate in the bidding for laptops and cars. How will
you respond to your team members’ request? 3
(c) Examples of situations when the auditor’s independence may be impaired are:
(1)Providing taxation services to the company and its auditors
(2)Providing accountancy services, including preparing periodic management accounts and
annual financial statements
(3)Providing management consultancy, including advice on new computer systems and systems
of internal control
Requirement:
Describe how each of the situations listed above may compromise auditor’s independence, and
the ways in which an audit firm can minimize the effect which the provision of other services has
on independence. 6
(d) Mesh Apparels Ltd., a well-established garments manufacturing and exporting company where
you have joined recently as financial controller, is owned by Habibur Rahman (40%), Mominur
Rahman (35%) and Rashidul Huq (25%). Upon joining you identified that the company has
documentation lacking specially in revenue and payable segments. The company has various
bank loans amounting to Tk. 180 crore but revenue stream does not match fixed expenses. You
came to know that Mominur Rahman who is the Chairman leads a flamboyant life. A few days
after your joining suddenly Habibur Rahman who was the Managing Director of the company
died of cardiac arrest. After MD’s sudden death Mominur took over all executive authorities of
the company and invited Shafa Habib, who is the widow of Habib and who gave her properties
as mortgage against bank loans, to join the company as MD only as a formality merely to sign
loan related official documents.
In the first week after MD’s demise, the sales director (Chairman’s spouse) brings to you a cheque
in settlement of the account of a major buying house. She explains that the cheque (which appears
to clear the amount due) is in fact an overpayment, as the balance showing on the sales ledger is
before allowing bulk discount (which is calculated retrospectively). The sales director shows you
her calculations and the agreement as authorized by the board. The sales director states that the
buying house’s Managing Director has come to collect the discount in cash. She says that this is
not an unusual occurrence for some of the company’s better parties. It helps to maintain a good
relationship with those parties, which leads to purchasing loyalty. Another benefit of this
arrangement is that it gives the sales director regular face-to-face meetings with the senior staff
of those parties. It also reduces the high charges that the bank makes for handling cash.

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You ask the sales director why the customers prefer to receive a refund in cash, rather than simply
pay the net amount needed to settle the account. She replies that it is not appropriate for her to
question their motives.
In the second week the production manager gave you a panic call that the workers in the factory
started agitation for demand of paying-off their wages and overtimes, which are pending for last
two months. When you talked to the Chairman he advised you to pursue bank to release more
fund to pay the workers. When you talked the bank manager straight forwardly said that no fund
will be released until a trust worthy Accounts Receivables list is submitted to the bank. You also
received a call from warehouse manager who informed you that there is significant mismatch
between production data and actual physical inventory at the warehouse. At this issue your
chairman advised you to launch an investigation against Rashidul Huq, who was salaried factory
in-charge before being taken as shareholder and director.
The company received a letter from tax authority claiming huge pending tax and penalty. When
you consulted with the company’s tax retainer for submitting appeal petition, he accepted that
the company’s tax returns were submitted based on fake sales figures and using tampered
vouchers so chances of winning the appeal is bleak.
The above situation led you to seriously confronting with ethical choices and moral dilemmas in
the course of discharging your professional duties.
Requirement:
In given situation above, what are the main ethical issues & the ethical choices and moral
dilemmas you are confronting? What should be your responses to those ethical issues as an
individual professional accountant? 8
2. (a) Paradise Limited is one of the oldest audit clients of your firm. You are engagement manager for
the client and currently preparing for the audit of year end 31 December 2018. You have formed
a team who has previous auditing experience with the client. Before starting any auditing
activities, your team senior has informed you in private that there is a vacancy at accounts
department of Paradise Limited and its management has approached him offering the vacant
position as he had understanding of the business and accounting process of Paradise Limited.
Your team senior has not yet decided whether to accept the position.
Requirement:
Identify and explain the issues that have arisen in the above situation. 2
(b) An accountancy firm has previously used the services of an independent provider to conduct cold
reviews of its completed audit engagements. However, the partners have decided to undertake
in-house all aspects of monitoring the quality of audits carried out.
Requirement:
Set out the objectives of conducting cold reviews which in-house system must achieve. 3
(c) A prospective auditor is required to write to the client's existing auditor to seek information which
could influence his decision as to whether he may accept the auditor appointment. Give examples
of relevant matters which could be within this letter and which would influence the prospective
auditor's decision to accept the audit appointment. If previous auditor informs you that their fees
for last audit engagement remains unpaid, should your firm accept the engagement? 4
(d) You are the engagement manager for the audit of a private commercial bank having a network of
more than 150 branches, across the country. During a recent meeting, a member of the audit
committee referred to an instance of irregularity in a branch, whereby the Branch Manager
had extended credit to a close relative without following the bank’s credit disbursement
procedures. The member criticized the auditors for their failure to detect such instances and bring
it to the notice of management and audit committee. The engagement partner to the audit has
advised you to justify your position in writing to the client.
Requirement:
As an engagement manager, write a letter to the audit committee informing your point of view
with specific references to the International Standards on Auditing, where applicable. 3
(e) Fieldwork for the annual audit of Greentec Textile Mills Limited (GTML) has been completed
and the financial statements and the audit report are due to be signed next week. During the

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concluding meeting with the client, the auditor was informed that a fire has destroyed all the raw
cloth placed in the warehouse at the mill. About 60% of the destroyed cloth was purchased after
the reporting date. However, due to certain defect in the insurance policy, the insurance company
settled the claim by paying 80% of the amount of loss.
Requirement:
State the audit procedures and actions that should be carried out by the auditor in the above
situation. 3
3. (a) Walton Motors, produced by Walton Group was established in 1977. Walton is the first motorcycle
manufacturer of Bangladesh with different models of 80cc to 150cc motorcycle. The company
exports products in different countries of the world. Ruhul Amin, Partner announced that your firm
has just received the audit engagement letter of Walton Motors (WM) and instructed you to officially
start the audit planning phase. You assigned Harun and Lima senior associates of the audit team with
the task to gain an understanding of business of Walton Motors. They are in favor of jump start the
field audit than gaining thorough understanding of the client beforehand. You came to know that the
CFO of WM recently resigned and senior management would release him on satisfactory completion
of financial audit. Thus, there is a pressure from the CFO for quick completion of the audit same as
last year audit and internal control documentation.
Requirement:
In your opinion what is the importance of a formal audit plan and what could go wrong if you do
not plan your audit appropriately? 5
(b) Runner Automobiles Ltd. started its production of motorbikes in 2011 in Bhaluka and currently
employs 888 people. It has more than 200 dealers across the country. It produces 80 per cent of
the motorcycle components except the engine and some electronic parts. The company produces
more than 40,000 units of motorbikes a year and controls more than 11 percent of the domestic
market. The plant makes motorbikes with capacities ranging from 80cc to 150cc at between Tk.
54,000 and Tk. 144,000. Its sales have been growing at 20 percent year-on-year.
Audit Manager Mijanur Rahman is preparing a report for the engagement partner of RAL. Rahman
has been reviewing certain aspects of RAL’s business dynamics given the change in economic
conditions over the past 12 months. Motorcycle sales year-on-year have risen nearly 25 per cent to
3.50 lakh units in 2017, after the government lowered the supplementary duty on imported parts
and components of two-wheelers from 25 per cent to 20 per cent. The year 2017 was a boom period
for the industry, in which 3.50 lakh units of motorbikes were sold and the forecast is that this will
reach around 4 lakh units at the end of 2018 due to upcoming general election.
Runner Automobiles has beefed up its marketing efforts in Nepal in a bid to capture 15 percent
of the growing motorcycle market in the Himalayan nation in the next five years. To this end,
RAL recently appointed a distributor, Raman Motors, which is a subsidiary of Nepalese
conglomerate Raman General. Raman has already appointed 11 dealers across the country to sell
Runner motorcycles and plans to employ more and introduce after-sales services. During 2017
RAL has shipped 400 motorcycles of seven models to Nepal. Primarily, Runner has a target to
send 3,000 units of motorcycles to Nepal every year.
Requirements:
(i) Identify the issues that potentially have an impact on the audit of Runner Automobiles Ltd. 5
(ii) How do you develop a plan for successful audit by identifying the risks of financial statements
misstatements that require closer examination? 5
(c) Tabassum a senior audit associate has drafted an audit plan for a new client Bangladesh Honda
Private Limited (BHL), a Bangladesh-Japan joint venture company. Honda’s motorcycle
business joint venture in Bangladesh is a new motorcycle factory on its own property in the Abdul
Monem Economic Zone, Gazaria, Munshiganj. It will have an initial annual production capacity
of 100,000 units of motorcycles with some special features like high speed, affordability and low
CO2 emissions, and enhance customers’ satisfaction and efficiency in Bangladesh. In line with
market trends, BHL plans to continue to invest in expanding its production capacity to 200,000
units by 2021, and will build its full-phase factory to accommodate future market growth. Honda
has invested Tk.1.91 Billion in the new factory where its partner Bangladesh Steel and
Engineering Corporation (BSEC) invested Tk.1.08 Billion. Total capital is Tk.3.6 Billion and
Capitalization ratio is 70% Honda Group (Honda Motor Co., Ltd. and Asian Honda Motor Co.,

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Ltd.) and 30% Bangladesh Steel and Engineering Corporation. Its primary business will be
import, production, and sales of motorcycles and parts. Earlier BHL had a small factory at
Sreepur, Gazipur only for assembling the products but not worthy for manufacturing; and it
showed more interest in imports than manufacturing.
Tabassum’s plan shows that audit time is divided to reflect this revenue pattern, i.e. 20 percent
of the audit time will be spent on the import trade business and 80 percent of the time will be
spent on the manufacturing. Tabassum believes that the significance of the revenue activities
should be the only driver of the audit plan though the client has strong related parties but it has a
simple, effective corporate governance structure.
Requirement:
Being the engagement manager of the audit what additional points would you like to see before
accepting the audit plan? 5
4. Your firm has been appointed as the auditor of Fresh Skincare Products Limited (Fresh) for the year
ended 30 June 2018 and will be auditing Fresh for the first time. You have been assigned as the
manager for the engagement. As part of understanding the entity, you have collected following
information about business & operation of Fresh:
Fresh is one of the oldest and largest manufacturers of skincare products in Bangladesh. It has been
operating successfully for more than two decades. It has its registered office in Dhaka and factory in
Gazipur. Fresh has its own distribution channel which currently consists of one central depot annexed
to the factory and 24 regional depots across the country. Business model of Fresh includes importing
different chemical & acids as ingredients and produces skin care products in its own production
facility. Finished goods are transferred to the central depot and subsequently dispatched to the
regional depots. Fresh does not directly sell to the end consumers. It primarily sells to super shops
and retailers who eventually sell to the end consumers with margin set by Fresh.
Fresh has implemented an Enterprise Resource Planning (ERP) software which contains several modules
in order to synchronize and record purchase of raw material, production, movement of inventory,
capturing sales order, generating invoice, recording sales and salary & wages data. ERP system compile
all transactions and information in the form of ledger through accounting & finance module.
Fresh has a large sales promotion team who collects sales order from the retailers and records it the
ERP system through their portable handheld devices or a mobile app. Super shops can directly place
order in the ERP System. ERP system then automatically selects the nearest depot from where goods
will be delivered. If goods are not available in the nearest depot, ERP system notifies the central
depot. Central depot then delivers the good to that depot. However, in the case of emergency, central
depot arranges delivery from the next nearest depot. The depot that is delivering the goods generates
invoice. ERP records the sales against each customer name and updates sales & customer ledger. In
the case of return, Sales promotion team initiates the return process and sales return is recorded in
ERP only when depot receives the returned goods.
Procurement deportment issues purchase order based on the sales trend and forecast. Purchase orders
and goods receipts are recorded through the ERP system. Purchase is recognized when goods are
received at factory premises. Based on the information entered by the procurement team, ERP system
records inventory purchase and updates inventory and supplier ledger. In the case of return of
purchased goods, return is recorded when goods are returned by the procurement department.
At the time of production in factory, production department records raw material issues, production
related expenses and quantity of finished goods. They manually allocate the overheads and assign
cost per unit of finished goods. All these are then recorded in the ERP.
At the end of each month HR department accumulates monthly salary & wages payable and records
in the ERP system. ERP system then updates the salary & wages expanse and payable ledger. Finance
department then disburses the salary & wages and records the payment in ERP.
Accounts department then posts journals related to depreciation, expense provisions and finalizes the
ledgers. A trial balance is generated by the ERP based on which accounts department prepares
financial statements of the company.
None of the departments are aware of the information posted in ERP by another departments.
Department heads are responsible for monitoring information entered by the employees of that
department. All employees of the departments can access the ERP module related to their department.

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Requirements:
(a) Explain why it is important for you and your team to have an understanding of the ERP system
used by Fresh and take the ERP system into consideration during the audit? 2
(b) How the ERP system will impact in your audit strategy? Describe the procedures your team
should perform related to the EPR system. 3
(c) Based on your understanding of the business, identify and explain the risks involving ERP System
used by Fresh. Design procedures you will perform in response to the risks you have identified. 10
(d) Suggest the controls which Fresh should implement to reduce/ eliminate the risks you have
identified. 5
5. (a) How will you evaluate audit evidence obtained to prepare the auditor’s report? What are the
matters to be communicated with those charged with governance? 4
(b) Write appropriate audit opinions based on the following scenarios: 6
(i) As explained in Note 13, the company has not consolidated the financial statements of subsidiary
XYZ Company it acquired during 2017, because it has not yet been able to ascertain the fair values
of certain material assets and liabilities at the acquisition date. This investment is therefore accounted
for on a cost basis. Under International Financial Reporting Standards, the subsidiary should have
been consolidated, because it is controlled by the company. Had XYZ been consolidated, many
elements in the accompanying financial statements would have been materially affected. The effects
on the financial statements of the failure to consolidate have not been determined.
(ii) We were not able to observe all physical inventories and confirm accounts receivable due to
limitations placed on the scope of our work by the Company. We were unable to satisfy ourselves
by alternative means concerning the inventory quantities and accounts receivable held at
December 31, 2017, which are stated in the balance sheet at Tk. 25.00 crore and Tk. 30.00 crore
respectively. As a result of these matters, we were unable to determine whether any adjustments
might have been found necessary in respect of recorded or unrecorded inventories and accounts
receivable, and the elements making up the income statement, statement of changes in equity,
and cash-flow statement balance.
(c) You are manager of Shovon & Co. Chartered Accountants (SC). Following issues have arisen in
three of your clients which are unrelated to each other.
Aquatic Limited
Aquatic Limited (Aquatic) is a beverage company engaged in selling bottled drinking water. Its
board of directors consists of 1 chairman, 6 directors and 3 independent directors. Aquatic is a
subsidiary of Ocean Limited and Widespread Limited is a subsidiary of Aquatic. Ocean limited
manufactures the bottled water for Aquatic and Widespread distributes the bottles across the
country. Marketing director of Aquatic owns Bottle Label Limited which supplies bottle cap and
label to Ocean Limited. In the financial statements, no disclosure has been made.
Orbit Limited
Orbit Limited (Orbit) is a new client of your firm. You are auditing the financial statements of
first year after incorporation. At the end of your audit. Your team has requested management to
issue management representation. However, management of the company refuses to sign the
management representation letter.
Blaze Limited
Blaze Limited (Blaze) has reported purchase of a land in its financial statements under property,
plant and equipment. Value of land is material for Blaze. While your team was going through the
land purchase documents, your team members noticed that the land has been registered under the
name of company owner Mr. Mamun instead of Blaze. In response to inquiry of your team,
management has explained that it is not a big issue as Mr. Mamun owns the company and
company will be using the land for constructing its factory.
Requirements:
(i) Identify related parties of Aquatic Limited that should be reported in its financial statements.
What additional information should be disclosed? 3
(ii) Help your team to identify risks from the above situations and design appropriate audit
procedures to mitigate the risks. 9
(iii)What will be the audit opinion in respect of each of the items after completing your audit
procedures? 3