Advanced Audit and Assurance

Section:01
Total marks:30 marks
Last Date of Submission:31/05/2020
Student Name: Mamunur Rashid Student ID: 2019110004037
Answer to the following questions:

QUESTION NO.:1
MQR is the external auditor of UBL Ltd, a FMCG company. The managing partner has been
called to a meeting with the board of directors of UBL. At that meeting the firm has been asked
if it can provide the following non-audit services.
UBL wish to implement a new sales system. They have asked MQR to take on a
consultancyprojectwherebythefirmwillevaluateseveralpossiblesystems,adviseon which system
should be selected, and oversee the installation of the newsystem.

Being the senior manager of MQR you have to advise the managing partner on the following:
i. Should MQR accept the engagement? Why?
Answer: Yes, Because of the emergence of professional service firms in recent years has
resulted from a growing demand from businesses for specialist advice to help them achieve
business advantage in an increasingly competitive market place. Much of this advice is requested
from audit firms, first because auditors are trained to understand the dynamics of a business from
an external perspective and also because independent viewpoint can often shed light on problems
that may appear intractable from within an organization.

 Regulatory returns e.g. to the Prudential Regulation Authority

 Legal requirements to report on matters such as share issues for non-cash
consideration, expenditure for grant application purposes, etc.
 Contractual requirements, for example to report to lenders or vendors on net
assets, covenant requirements, etc.
 Services such as those listed in category (1) above that the auditors are not
required by law to undertake, but where the information largely derives from the
audited financial records
  Tax compliance, where much of the information derives from the audited
financial records
 'Short form' or other reports in acquisition or reorganization situations where
completion is necessary in a very short time.
ii.What are the threats that would arise from the above scenario, if the engagement is accepted
byMQR?
Answer: First, the Institute's ethical code forbids auditors to provide non-audit services to audit
clients if that would present a threat to independence for which no adequate safeguards are
available. In such circumstances, the firm must either resign as auditor or refuse to supply the
non-audit services. The code includes examples of specific activities where no acceptable
safeguards are available - for example the promotion of the shares of audit clients - which are
therefore effectively prohibited.

Second, under the provisions of the Combined Code of corporate governance, the audit
committee, as representative of the shareholders, is required to oversee the relationship with the
auditors and keep the nature and extent of non-audit services under review. The audit committee
must satisfy itself that the independence and objectivity of the auditor are not compromised. This
important task is underpinned by United Kingdom Auditing Standards, which specifically
require that, for listed companies, audit engagement partners in the firm who are responsible for
a company's audit.

Third, we believe the distinction between the values of income from different sources is
artificial. The ethical code specifies that an audit appointment should not be accepted if the client
provides, for whatever work, an unduly large proportion of a firm's gross practice income. That
approach limits undue financial dependency on any client without irrelevant restrictions on the
balance between different types of income. In practice, auditors of listed companies are well
within this limit.
 Question No.:2

Recently you met one of your school friends after a very long time. You two had dinner at a
fancy restaurant. During the conversation at dinner, you came to know that your friend is going
to invest a significant amount in a company which you are currently auditing and ask for your
advice, if any. Your friend is not aware of the fact that you are currently auditing the company.
You know from your audit that the company is currently incurring significant loss. How will you
respond to this conversation?
Answer: Professional Accountants are not allowed to give investment advice or conduct
investment business unless they are authorized to do so by their professional body under the
Financial Services Act 1986.
Auditor become privy to all sorts of information in the course of their work. I well remember
being surprised at the very large investment account of friend in the company which I have
auditing. Similarly i was interested to discover the amount paid by a friend and his method of
financing it when i audited a firm of solicitor’s .Auditor and their stuffs must regard all such
information as totally privileged and not disclose it to third parties except on circumstance where
there is a legal right or duty to disclose it. They may not be also use such information for
personal gains. Partners and staff of audit firms can become so familiar with the management or
staff of a client company that they lose their objectivity. This must be avoided perhaps by
rotating the partners and staff involved.
 Question No.:3

Right Spinning Mills Limited (RSML), a public limited company since November 15, 2006, is
located in Chittagong. The main activity of the company is to manufacture and sell high quality
cotton yarn of all qualities and all other textile products. The company started commercial
production of 100% cotton yarn like Knit (combed, carded) and Open-end yarn with an
approved annual capacity of 5,680 MT at Ring Unit and 3,550 M. Ton at Rotor Unit. Currently
the company is utilizing around 80% of its total capacity. The total number of employees of
RSML is around 1200. The company intends to raise Tk. 2,000 million in the form of local
currency corporate bond. RSML Management has approached your firm to carry-out an audit
assignment before going to market. The engagement partner has asked you, being a senior
manager, to prepare an audit plan based on analytical review procedure.
Requirement:
Identify what are the benefits of analytical procedure? What are the limitations of analytical
Procedure in planning of audit of Right Spinning Mills?
Answer: The benefits of analytical procedure: Benefits of Analytical procedures is given
below:
 The principal advantage of analytical procedures is that they can be applied at all stages
of the audit to inquire into the absolute amounts to be reflected in the financial
statements, and into the relationships between those amounts.
 These procedures are a good test for the overall reasonableness of an amount. They can
be applied on a universal basis, and they can be broken down into
their individual elements.
 Analytical procedures help the auditor to make comparisons on a regular basis, taking
prior years into consideration, and providing the auditor with a better understanding of
both the business as a whole, and of individual account areas.

The limitations of analytical Procedure in planning of audit of Right Spinning Mills is

given below:
The decision about which type to use depends on auditor’s judgment whether available audit
procedures will reduce the audit risk to an acceptably low level efficiently or effectively. But
some limitations are not reduce of analytical Procedure in planning of audit of Right Spinning
Mills is given below:

1. Considering the results of risk assessment and test of details.

2. Appropriateness of analytical procedures.
3. Considering Reliability of information is assessed.
4. The predictability of expected results and the accuracy of such predictions.
5. Materiality determines the amount of difference from expected results can be accepted
without further examination of the matter.

Question No.:4

BTL Ltd. was incorporated in Bangladesh in 1995. The company has one of the most modern
composite mills in the region, with an installed capacity of 288 high-speed air-jet looms in its
weaving section and a high-tech dyeing and finishing section with a capacity of 100,000 yards
of finished fabric per day. This company is located at the BTL Industrial Park.
Needs of high-quality knit garments exporters in Bangladesh. The project was set up as a state
of the art knit fabric knitting, dyeing and finishing facility. BTL Ltd. also has a cotton and
polyester blended yarn-spinning mill, with 122,000 spindles, which is one of the largest
spinning mills of the country. The mill was set up to feed the country's export oriented
industries. BTL Ltd. produces specialized finished denim cloth for export in finished product as
well as intermediate cloth form.
The company ventured into the retail arena initially through wholesaling of fashion clothing to
retailers on credit basis. However, in 2004, the company diversified in to retailing with the
opening of its retail outlets under the name of “Green”, a new chain of exclusive fashion shops
in Bangladesh and abroad for the general public. No credit facilities are granted to customers of
the retail outlets.
You have been entrusted with planning the audit of Green retail operations. During your
planning meeting with the finance director, the following matters were highlighted as the
major changes since the last audit.
Expansion of retailing operations
As a result of the success of the retailing business, the company expanded its operations and
opened ten additional retail outlets during the year ending 31 December 2017. The
management accounts indicate that the retail operations will amount to at least 20% of the
company's revenue for the year ending 31 December 2017.
Increase in overdraft facility
The overdraft facility was increased to help fund the expansion. The company is currently
trading at its overdraft limit as a result of the increased volume of business. The directors are
seeking to increase the facility and are negotiating with the company's bankers.
New computer system
During the year, the company replaced its computer system to accommodate the retailing
activities. It installed a central computer at head office linked to terminals at its warehouses
and retail outlets. The software is an integrated standard package, which includes an inventory
control system, modified by the supplier to the company's requirements.
Requirements:
Identify, from the circumstances described above, the audit risks, and for each risk outline
The audit work you would perform in that risk area.
Answer: Risk assessment is the foundation of an audit. For auditors, it is how we come to
understand your company and plan our audit procedures to provide the most reliable information
for you and the users of your financial statements. What is risk assessment? I will help you
understand what is involved and make the audit risk assessment procedures run as parallel as
possible with your daily responsibilities.

Audit risk assessment procedures are performed to obtain an understanding of your company and
its environment, including your company’s internal control, to identify and assess the risks of
material misstatement of the financial statements, whether due to fraud or error. These
procedures usually take place before your fiscal year has been completed and include various
procedures, such as inquiries with management and other selected employees, analytical
procedures, observations of controls in operation and inspection of documents to show controls
have been implemented.
While obtaining an understanding of your company is self-explanatory, our goal in
understanding your company’s internal control is to evaluate whether you (management), with
the oversight of those charged with governance, have created and maintained a culture of honest
and ethical behavior, as well as assessing whether the control environment contains any
deficiencies in established processes. We also look to identify company risks relevant to
financial reporting, in addition to estimating the significance of those risks and their likelihood of
occurring, to help decide what audit procedures need to take place to address those risks.

While our inquiries with management help us get an understanding of internal controls, we also
need to see examples of these being performed. Walkthroughs are performed, with the help of
your company personnel, to observe segregation of duties along with inspecting certain
documents (invoices, purchase orders, etc.) that are used as supporting evidence for the operation
of key controls that impact financial reporting.

Analytical procedures are also performed, which are comparisons (usually multiple-year) of
significant financial statement line items (revenues, payables, etc.), and financial ratios derived
from those line items. These are compared to our expectations based upon discussions with key
management personnel and other available industry information to identify any other areas of
risk related to the financial statements that may impact the audit.

In summary, if an audit is the main course, then risk assessment is the appetizer. It provides us
with information that is used not only for the year under audit, but future years to come. Audit
risk assessment procedures are a vital part to any audit and treated as such by us and,
hopefully, your company as well.
 Question No.:5

A. Define 'expectations gap’ and give three examples of misunderstandings which contribute
to the expectations gap?

B. The key benefit of assurance is the independent professional verification being given to
theusers. In addition, assurance gives some subsidiary benefits. What are those subsidiary
benefits?

Ans to question no.:5 (a)

The 'expectations gap' is defined as the difference between the apparent public perceptions about
responsibilities of auditors and the legal and professional in reality.

Three examples of misunderstandings which contribute to the expectations gap are:

1. The responsibility of preparation of financial statements

2. The type and extent of work undertaken by auditors
3. The level of assurance given by auditors.

Ans to question no.:5 (b)

Key benefit of assurance is the independent, professional verification being given to the users.
In addition, assurance may have subsidiary benefits. Those are:
 Although an assurance report may only be addressed to one set of people, it may give
additional confidenceto other parties in a way that benefits the business.
For example, audit reports are addressed to shareholders, but the existence of
anunqualified audit report might give the bank more confidence to lend money to that
business, in other words, it enhances the credibility of the information.
 The existence of an independent check might help prevent errors or frauds being made
and reduce the risk of management.
 Where problems exist within information, the existence of an assurance report draws
attention to the deficiencies in that information, so that users know what those
deficiencies are.
 Assurance is also important in more general terms. It helps to ensure that high Quality,
reliable information exists, leading to effective markets that investors have faith in and
trust.