Financial Reporting And Professional Issues-p Iii- Nov 08

Financial Reporting and Professional Issues 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 way in which the answers are presented. Separate answer books should be used for each section. Different parts, if any, of the same question must be answered in one place in order of sequence.] Section I Marks-50 Marks 1. IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ was issued in 1998. The standard sets out the principles of accounting for these items and clarifies when provisions should and should not be made. (a) (b)

2. (a)

Describe the nature of provisions and their accounting requirements contained in IAS 37. Explain why there is a need for an accounting standard in this area. Illustrate your answer with three practical examples of how the standard addresses controversial issues.

6 6

(i) IAS 12 ‘Income Taxes’ issued in 1996 and revised in 2000 deals with the accounting treatment of deferred tax. You are required to outline the necessity for provision of deferred tax and briefly discuss the principles of accounting for deferred tax contained in IAS 12.

6

(ii) Rupshi Ltd. purchased an item of plant for Tk. 20,000,000 on 1 October 2005. It had an estimated life of eight years and an estimated residual value of Tk. 4,000,000. The plant is depreciated on a straight-line basis. The tax authority does not allow this depreciation as a deductible expense. However, the tax authority allows an expense of 20% of cost per annum on a reducing balance basis. The rate of income tax can be taken as 40%. You are required to calculate the deferred tax in Rupshi’s income statement for the year to 30 September 2008 and the deferred tax balance in the balance sheet at that date.

7

3. Related party relationships are a common feature of commercial life. The objective of IAS 24 Related Party Disclosures is to ensure that financial statements contain the necessary disclosures to make users aware of the possibility that financial statements may have been affected by the existence of related parties. Required: (a) Describe the main circumstances that give rise to related parties. (b) Explain why the disclosure of related party relationships and transactions may be important. (c) Highway Ltd. is a publicly listed company that owns two subsidiary company investments. It own 100% of the equity shares of Benedict and 55% of the equity shares of Depret. During the year ended 30 September 2008 Depret made several sales of goods to Benedict. These sales totaled Tk.15 million and had cost Depret Tk.14 million to manufacture. Depret made these sales on the instruction of the Board of Highway. It is known that one of the directors of Depret, who is not a Director of Highway, is unhappy with the parent company’s instruction as he believes the goods could have been sold to other companies outside the group at the higher price of Tk.20 million. All directors within the group benefit from a profit sharing scheme. Required: Describe the financial effect that Highway’s instruction may have on the financial statements of the companies within the group and the implications this may have for other interested parties. Please turn over

3 4

6

–2– 4. Fair value concept has been used quite frequently in many IASs and IFRSs. (a) Define the concept of fair value. (b) Explain the importance of it while valuing financial instruments for reporting purpose. (c) Why the concept has been made partially responsible for the recent financial meltdown in the US and across Europe?

2 5 5

Section II Marks-50 1. (a) (b)

There is framework to test the auditors’ independence in appearance but none for listing independence in mind. How can the mental or moral independence of auditors be measured?

6

Kamal & Co. a CA firm in Dhaka, accepted an audit engagement of Jesson Ltd. for the year ending 31 December 2007 and started audit work without obtaining professional clearance from the retiring auditors. Before signing of the final audit report by Kamal & Co., the retiring auditors lodged a complain to ICAB against Kamal & Co. Upon initial inquiry of ICAB, Kamal & Co. plainly denied their acceptance of the audit engagement. How do you suggest ICAB to proceed with the issue of professional misconduct, if any, of Kamal & Co. and what punishment should follow in the event the misconduct of Kamal & Co. is established?

6

2. State the various steps you as a Chartered Accountant in practice will take to avoid professional misconduct in each of the following cases: (a) (b) (c) (d) 3. (a)

When you are appointed as the sole Auditor, where you were one of the joint auditors of the company for the immediately previous year and the other joint auditor is not reappointed. When you are appointed as the first Auditor of the company. When you are appointed in place of the present auditor who has resigned in middle of the year but before commencing the audit. When you are appointed by removing the present auditor before the expiry of his term.

5 3 2 2

A firm of Chartered Accountants have been engaged in assisting a financial statement audit client in matters such as preparing accounting records or financial statements. What kind of threat such an engagement may create? What safeguards may be taken to reduce the threat to an acceptance level, if: (i) (ii)

(b) 4. (a)

the client is a non-listed entity; the client is a listed entity?

Discuss in the light of the IFAC Code of Ethics for Professional Accountants.

8

Suggest how a conflict of loyalty between the duty a professional accountant has to his employer and the duty he has to his profession could be resolved.

4

The firm of Rahim & Karim, Chartered Accountants, has audited the consolidated financial statements of BGI Holdings Ltd. Rahim & Karim performed the examination of the parent company and all subsidiaries except for BGI Western Ltd., which was audited by the firm of Rajen & Rajen, Chartered Accountants. BGI Western constituted approximately 10% of the consolidated assets and 6% of the consolidated revenue. Rajen & Rajen, Chartered Accountants, issued an unqualified opinion on the financial statements of BGI Western. Rahim & Karim, Chartered Accountants, will be issuing an unqualified opinion on the consolidated financial statements of BGI.

Please turn over

–3– Required: What procedures should Rahim & Karim, Chartered Accountants, consider performing with respect to Rajen & Rajen’s examination of BGI Western’s financial statements that will be appropriate whether or not reference is to be made to the other auditors? (b)

8

An autonomous organization in Dhaka recently advertised for bidders from CA firms asking inter-alia audit fee quotation and also deposit of Tk.2,000 as earnest money. Mr. Khan FCA, proprietor of Khan & Co., a CA firm submitted his proposal quoting the audit fee and depositing the required earnest money. Has Mr. Khan committed any professional fault? If so, what consequences he should face? Would your answer be different if the bid is for performance audit where economists, engineers or social scientists can also participate?

– The End –

6