1. Padma Textiles Ltd holds CU 6.0 million of its CU 10.0 million inventory in a bonded warehouse run by an independent logistics company. Overall materiality is CU 400,000. Management offers the warehouse operator's own year-end inventory statement, addressed to the company, as sufficient evidence. What should the auditor do?

A) Obtain a written representation from management on the quantities held, because third-party custody means inspection is impracticable
B) Rely on the perpetual inventory records and the storage contract, because goods held by others are outside the company's custody
C) Request direct confirmation of quantities and condition from the operator, and inspect or count the goods if risk warrants it
D) Accept the inventory statement addressed to the company, because it is third-party evidence and the operator has no incentive to misstate

Correct: C difficult ISA 501

Where inventory under the custody of a third party is material, the auditor must obtain sufficient appropriate evidence of its existence and condition, by requesting confirmation from the custodian and/or by inspecting or counting the goods or performing other suitable procedures. The operator's statement was addressed to the company and passed through management, so it is not a direct confirmation to the auditor. At 60% of inventory and well above materiality, records and a representation alone cannot replace third-party evidence, and custody by another party never removes the auditor's responsibility for existence.

2. At the year end Meghna Foods Ltd holds 1,200 partly processed units at a cost to date of CU 300 per unit. Further costs to complete are CU 80 per unit, the estimated selling price is CU 350 and selling costs are CU 20 per unit. What write-down should the auditor expect management to have recorded?

A) CU 36,000, because the selling price less selling costs of CU 330 is CU 30 below total cost of CU 380 per unit
B) CU 60,000, because NRV of CU 250 per unit (350 - 80 - 20) is CU 50 below cost, applied to 1,200 units
C) Nil, because the selling price less selling costs of CU 330 per unit exceeds the cost to date of CU 300 per unit
D) CU 96,000, because the further completion cost of CU 80 per unit is written off against all 1,200 units

Correct: B difficult IAS 2 and ISA 501

For partly completed inventory, net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale, which here is 350 - 80 - 20 = CU 250 per unit. Cost to date of CU 300 exceeds this by CU 50, so the write-down is 1,200 x 50 = CU 60,000. Ignoring completion costs hides the loss entirely, and comparing against total cost of CU 380 or writing off the completion costs mixes up the basis of comparison, because inventory is carried at the lower of cost to date and NRV.

3. While attending the count at Jamuna Steel Ltd, the auditor finds two cut-off errors. Inventory costing CU 60,000 was delivered and counted on 29 December, yet its bill was only entered in the ledger in the new year. Inventory costing CU 25,000 was sent back to a vendor on 30 December and left out of the count, yet the vendor's credit note was entered after the year end. What is the net effect on the year-end figures?

A) Profit overstated by CU 35,000 and trade payables understated by CU 35,000
B) Profit overstated by CU 85,000 and trade payables understated by CU 85,000
C) Profit understated by CU 35,000 and trade payables understated by CU 35,000
D) Profit overstated by CU 35,000 and trade payables overstated by CU 35,000

Correct: A complex ISA 501 and ISA 330

The first error leaves closing inventory including CU 60,000 that was never charged through purchases, so cost of sales is understated, profit is overstated and payables are understated by CU 60,000. In the second error the return is not recorded, so purchases and payables are overstated by CU 25,000 while the goods are correctly excluded from inventory, which understates profit by CU 25,000. Netting gives profit overstated and payables understated by CU 35,000, and adding the two amounts overlooks that the second error works in the opposite direction.

4. Brahmaputra Plastics Ltd depreciates machinery at 10% straight line on cost, by month, from month of purchase to month of disposal. Opening cost at 1 January was CU 5.0 million, including a machine costing CU 0.8 million sold on 30 September. A machine costing CU 1.2 million was bought on 1 April. The company recorded CU 500,000. What is the auditor's conclusion on the year ended 31 December?

A) Expected charge is CU 540,000, so depreciation is understated by CU 40,000 because it should be 10% of closing cost of CU 5.4 million
B) Expected charge is CU 620,000, so depreciation is understated by CU 120,000 because opening cost plus additions bears a full year
C) Expected charge is CU 510,000, so depreciation is understated by CU 10,000 because the disposed machine should bear no charge this year
D) Expected charge is CU 570,000, so depreciation is understated by CU 70,000 because additions and the disposal were not time-apportioned

Correct: D difficult ISA 330 and ISA 520

The expected charge is 4.2m x 10% = CU 420,000 on unchanged machines, plus CU 60,000 for the disposed machine for nine months (0.8m x 10% x 9/12), plus CU 90,000 on the addition for nine months (1.2m x 10% x 9/12), totalling CU 570,000. Recorded depreciation of CU 500,000 equals 10% of opening cost only, so it is CU 70,000 short. Using closing cost, dropping the disposal period or charging full-year depreciation on the addition each ignores the policy of monthly apportionment.

5. Output on a production line of Meghna Foods Ltd, carrying amount CU 14.0 million, fell 35% after a major customer left. Management concluded there was no impairment, using a five-year forecast with 18% annual revenue growth. Actual growth over the last three years was 4% to 6%, and earlier forecasts were consistently too optimistic. What is the most appropriate audit response?

A) Challenge growth against history and contracts, review the accuracy of past forecasts, and test sensitivity of value in use
B) Accept the forecast because the board approved it, and check only the arithmetic and discounting of the projected cash flows
C) Rely on a written representation that the assumptions are reasonable, because forecasts are matters of management judgement
D) Replace the value-in-use test with the line's replacement cost, because forecasts are unreliable for lines that lost a customer

Correct: A difficult ISA 540 (Revised) and IAS 36

Impairment testing involves an accounting estimate with high estimation uncertainty, so the auditor evaluates the reasonableness of significant assumptions, considers the outcome of prior estimates and looks for indicators of management bias. Growth of 18% against a 4% to 6% track record and a lost customer is an unsupported assumption, and sensitivity testing shows how far value in use falls if growth is realistic. Arithmetic checks, a representation or replacement cost do not address the key judgement, since recoverable amount is the higher of fair value less costs of disposal and value in use.

6. A client's bank statement shows CU 480,000 at 31 December. The reconciliation deducts outstanding cheques of CU 150,000 (including cheque 4417 for CU 90,000) and adds a deposit in transit of CU 60,000, giving a cash book figure of CU 390,000. Cheque 4417 for CU 90,000 was held in the cashier's drawer until 8 January, and the paying-in slip shows the CU 60,000 deposit of customer cheques was received and banked on 3 January. What should year-end cash at bank be?

A) CU 330,000, because the back-dated deposit is removed but the cheque held in the drawer is still treated as paid
B) CU 420,000, because the held cheque is reinstated as unpaid and the back-dated deposit is removed from year-end cash
C) CU 480,000, because the bank statement balance is the third-party figure and reconciling items are disregarded
D) CU 390,000, because the reconciliation agrees to the confirmed bank balance, so the items listed in it need no adjustment

Correct: B difficult ISA 330 and ISA 505

Cheque 4417 was not despatched until after the year end, so it was not a payment at 31 December and outstanding cheques fall to 150,000 - 90,000 = CU 60,000. The deposit relates to receipts of 3 January and must be removed. Cash at bank is therefore 480,000 - 60,000 = CU 420,000, with payables up CU 90,000 and receivables up CU 60,000. Agreeing to the bank confirmation proves only the bank-side figure, and the reconciling items themselves must be tested for cut-off.

7. During the audit of Surma Garments Ltd, the finance manager hands the auditor an envelope containing the bank's signed reply to the confirmation request, saying it arrived at the company's office. The balance agrees to the ledger and the seal appears to have been opened. What should the auditor do?

A) Rely on the bank statements for the same balance instead, because bank confirmations add little when statements are available
B) Treat it as indirect evidence, ask the bank to reply directly to the audit firm, and consider why the reply went to the company
C) Accept it as reliable because the bank signed it and the balance agrees to the ledger, noting that the client forwarded it on
D) Accept it after telephoning the finance manager to confirm that the envelope was not tampered with while at the company

Correct: B difficult ISA 505

The auditor must maintain control over the confirmation process, and a reply passing through the client is not direct evidence because it could have been altered or substituted. The right response is to obtain a reply directly from the bank, using the original request or the electronic platform, and to assess whether the circumstances indicate a risk of fraud. A signed reply that agrees to the ledger or the finance manager's assurance does not cure the loss of control, and statements alone do not confirm other accounts, facilities or security.

8. A supplier statement at 31 December shows CU 148,000 owing, but the purchase ledger shows CU 96,000. The difference is explained by two items: a CU 14,000 payment made on 31 December which the supplier recorded on 5 January, and a CU 38,000 invoice for goods received on 29 December, entered by the company in January. What adjustment is needed to the payables balance?

A) Reduce payables by CU 14,000 to CU 82,000, because the payment in transit is a cut-off error against the company
B) Make no adjustment, because both reconciling items are timing differences arising on the supplier's side of the account
C) Increase payables by CU 52,000 to CU 148,000, because the supplier statement is third-party evidence and overrides the ledger
D) Increase payables by CU 38,000 to CU 134,000 for the unrecorded invoice; the payment in transit needs no adjustment

Correct: D difficult ISA 330

The statement of 148,000 less the payment in transit of 14,000 equals 134,000, which also equals the ledger of 96,000 plus the unrecorded invoice of 38,000. The invoice relates to goods received before the year end, so it is a completeness error and payables are understated by CU 38,000. The payment was already recorded by the company, so it needs no adjustment, and adopting the statement balance blindly would double count the payment.

9. Surma Electricals Ltd sold 2,000 units under warranty. Historically 6% need a minor repair costing CU 150 and 3% need a major repair costing CU 900. Management recorded a provision of CU 54,000, covering major repairs only. Performance materiality is CU 12,000. What is the most appropriate conclusion?

A) Expected cost is CU 72,000, so the provision is understated by CU 18,000, above performance materiality, and an adjustment is proposed
B) Expected cost is CU 36 per unit, so the provision is overstated by CU 18,000 because CU 54,000 divided by 2,000 units is CU 27
C) The provision is acceptable at CU 54,000, because major repairs are the most significant claims and minor repairs may be ignored
D) The provision should be CU 162,000, because 9% of units claim and each claim is assumed to cost the major repair amount of CU 900

Correct: A complex ISA 540 (Revised) and IAS 37

For a large population of similar items, the obligation is measured at the expected value: 2,000 x (6% x 150 + 3% x 900) = 2,000 x 36 = CU 72,000. Management's CU 54,000 equals 2,000 x 3% x 900, so it omits minor repairs and is understated by CU 18,000, which is more than performance materiality of CU 12,000. One distractor reverses the direction, since CU 36 per unit is higher than the CU 27 booked, and another assumes every claim is a major repair, which contradicts the history.

10. Teesta Cement Ltd faces a CU 3.2 million claim from a contractor; overall materiality is CU 800,000. Management refuses to let the auditor contact the company's external lawyers, saying the claim is without merit. Reading board minutes and management's own summary gives no further evidence. What is the auditor's best course of action?

A) Resign immediately and issue no report, because refusal to allow contact with lawyers is always grounds for withdrawal
B) Issue an unmodified opinion with an emphasis of matter paragraph on the claim, because management's explanation is plausible here
C) Conclude there is a scope limitation and modify the opinion, because alternative procedures cannot replace the lawyers' evidence
D) Rely on a management representation that the claim is without merit and issue an unmodified opinion on that basis alone

Correct: C difficult ISA 501 and ISA 705

Where litigation could be material, the auditor seeks direct communication with external legal counsel. If management refuses permission and alternative procedures cannot provide sufficient appropriate evidence, the auditor must modify the opinion because of the limitation on scope, as a qualification or disclaimer depending on the pervasiveness of the possible effect. An emphasis of matter or a representation does not substitute for missing evidence, and immediate resignation is not the required response; withdrawal is considered only if the limitation prevents an opinion.

11. Meghna Foods Ltd carries an unquoted 15% shareholding in Padma Packaging Ltd at CU 2.5 million. The share certificate is in the company's safe, and management says the shares are free of any charge. Which procedure provides the strongest evidence of existence and rights and obligations?

A) Inspect the share certificate in the safe, because a physical certificate is conclusive proof of title and the absence of any charge
B) Agree the carrying amount to the investee's latest audited financial statements, which shows the shareholding is correctly stated
C) Confirm the holding with the investee's register of members, and inspect the certificate together with any pledge or charge register
D) Inspect the board minute authorising the purchase, because authorisation by the board establishes legal title to the shares

Correct: C difficult ISA 330 and ISA 505

Existence and ownership of investments are best evidenced by third-party sources, such as confirmation from the investee's register of members or the custodian, together with inspection of the certificate and any charge or pledge records. A certificate alone may be lost, forged or pledged, and a board minute shows authority to buy rather than title. The investee's accounts help with valuation, not with whether the client owns the shares or has pledged them.

12. Jamuna Steel Ltd has a CU 10 million loan requiring interest cover (profit before interest and tax divided by finance costs) of at least 3.0 at 31 December, failing which the lender may demand repayment. Draft figures are CU 4.2 million and CU 1.2 million. Uncorrected audit adjustments reduce profit before interest and tax by CU 0.7 million; a lender waiver is dated 20 January. How should the loan be treated?

A) Cover is 2.9 so the covenant was breached, but the loan stays non-current because the waiver was obtained before the statements were approved
B) Cover is 2.9 so the covenant was breached at year end; the loan is current because the later waiver does not restore the right to defer
C) Cover is 3.5 so there was no breach; the loan remains non-current because the audit adjustments affect only profit and not the covenant
D) Cover is 2.9 so the covenant was breached; the loan is current but disclosure is unnecessary because the waiver removes the lender's rights

Correct: B complex ISA 570 (Revised) and IAS 1

Adjusted profit before interest and tax is 4.2 - 0.7 = CU 3.5 million, and 3.5 / 1.2 = 2.9, below the required 3.0, so the covenant was breached on the test date. A liability repayable on demand at the reporting date is classified as current, even when the lender agrees after that date not to demand repayment. The cover of 3.5 uses unadjusted figures, and a waiver after the year end is a non-adjusting matter that is disclosed and also affects the going concern assessment.

13. Year end is 31 December; the auditor's report is dated 20 February. Events: (i) on 14 January a CU 240,000 customer went into liquidation, with an expected dividend of 25%; (ii) inventory costing CU 120,000, noted as damaged at the count, was sold on 10 January for CU 85,000 net; (iii) a fire on 5 February destroyed CU 300,000 of inventory; (iv) a CU 500,000 dividend was declared on 20 January. What total adjustment is required?

A) CU 715,000, including the CU 500,000 dividend, because a dividend declared before the report date must be recognised
B) CU 515,000, including the CU 300,000 inventory loss, because the fire destroyed assets that were in the year-end balance
C) CU 180,000, for the receivable only, because the sale of damaged inventory reflects a post year-end fall in market prices here
D) CU 215,000, being CU 180,000 for the receivable and CU 35,000 for inventory, as the fire and dividend are non-adjusting

Correct: D difficult ISA 560 and IAS 10

Events giving further evidence of conditions at the year end are adjusting: the liquidation indicates the receivable was impaired (240,000 x 75% = CU 180,000) and the sale confirms the damaged inventory's NRV was CU 35,000 below cost. The fire arose after the year end and the dividend was declared after it, so both are non-adjusting; they are disclosed if material, not recognised. The total adjustment is therefore CU 215,000, and treating the damaged-inventory sale as a market movement overlooks that the damage existed at the count.

14. Teesta Cement Ltd has a CU 8 million facility expiring four months after the approval date. The lender has issued an indicative term sheet for renewal but nothing is signed. Management's plans are reasonable, and the notes clearly disclose the material uncertainty and the dependence on renewal. What should the auditor's report contain?

A) An unmodified opinion, with a separate section headed Material Uncertainty Related to Going Concern, referring to the note
B) A qualified opinion, because no sufficient evidence exists that the facility will be renewed before it expires, given the doubt
C) An unmodified opinion, with the matter reported as a key audit matter and in an emphasis of matter paragraph instead
D) An adverse opinion, because the financial statements are not properly prepared on the going concern basis used

Correct: A complex ISA 570 (Revised)

Where use of the going concern basis is appropriate but a material uncertainty exists and is adequately disclosed, the opinion is unmodified and the report includes a separate section under the heading Material Uncertainty Related to Going Concern. A qualified or adverse opinion is needed only if the disclosure is inadequate, or if the going concern basis is inappropriate. The matter is not reported as a key audit matter or an emphasis of matter, because those items do not replace the required separate section.

15. While testing equity at Padma Textiles Ltd, an audit junior finds that on 28 December a company owned by a director paid CU 3.0 million for new shares. On 11 January CU 2.9 million was advanced as a loan to another entity owned by the same director. There is no board minute and the funds were described as consultancy support. What should the junior do?

A) Report the matter directly to the Financial Reporting Council, because suspicion of fraud overrides the duty of confidentiality for a junior
B) Ask the finance director to explain the loan, and close the point if the answer sounds reasonable, so the client relationship is protected
C) Document the facts and report them promptly to the audit senior, because they suggest a related party and possible window dressing
D) Treat the issue as a disclosure matter and note it on the completeness checklist, since a share issue is valid once the shares are registered

Correct: C difficult ISA 550 and ISA 240

Unusual transactions with related parties, near the year end and lacking proper authorisation, are indicators of possible fraud or manipulation of equity, and must be reported to a senior with the evidence recorded. The senior and engagement partner decide on further procedures, communication with those charged with governance and any reporting duty. Asking the client and closing the point could tip off the parties and relies on unverified explanations, while a direct report by the junior bypasses the engagement structure.

16. The auditor of Jashore Logistics Ltd wants to test the rights and obligations assertion for a delivery van recorded in the non-current asset register. Which set of documents should the auditor vouch to?

A) The asset register, the purchase invoice and the valuation certificate for the van
B) The purchase invoice, registration document and any hire purchase agreement for the van
C) The asset register, the registration document and the depreciation schedule for the van
D) The depreciation schedule, the asset register and the repair invoices for the van

Correct: B difficult ISA 500

To test rights and obligations for a vehicle, the auditor vouches to documents that show who owns it and on what terms: the purchase invoice, the registration document (which shows the registered keeper, who is not necessarily the owner) and any hire purchase agreement. The asset register is the company's own record and does not prove ownership, and valuation and depreciation evidence relates to a different assertion.

17. A telephone bill of CU 90,000 for the three months from 1 November to 31 January arrives in February. The year end of Sunamganj Mills Ltd is 31 December. What accrual should the auditor expect to see in the financial statements?

A) CU 30,000
B) CU 45,000
C) CU 90,000
D) CU 60,000

Correct: D complex ISA 500

The bill covers three months, so each month costs CU 90,000 / 3 = CU 30,000. Two of the three months, November and December, fall before the year end, so the accrual is 2 x CU 30,000 = CU 60,000. Accruing CU 90,000 would include January, which belongs to the next period, and CU 30,000 or CU 45,000 would understate the expense. The audit of accruals focuses on cut-off and completeness.

18. Quickshop plc capitalised the cost of four self-built superstores. Which procedure tests the valuation of the labour costs that were capitalised?

A) Vouch a sample of the capitalised labour costs to the payroll records
B) Obtain architect certificates confirming that each store is complete as built
C) Agree the total capitalised cost to the schedule prepared by the contractor
D) Inspect the stores to confirm that they are open for trading at the year end

Correct: A difficult ISA 500

For self-constructed assets, valuation is tested by vouching a sample of costs to appropriate sources of evidence: labour costs to payroll records or contractor bills, materials costs to purchase invoices or contractor bills, and finance costs to lender statements. Architect certificates and the contractor's schedule provide comfort over completeness, and inspecting trading stores does not test cost.

19. At the year end, Chandpur Ceramics Ltd holds a product at a cost of CU 140,000. It expects to sell it for CU 190,000 after spending a further CU 30,000 to complete it and CU 25,000 on selling costs. At what amount should the product be carried?

A) CU 140,000
B) CU 160,000
C) CU 135,000
D) CU 165,000

Correct: C complex IAS 2

Inventory is valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price less the estimated costs of completion and the costs necessary to make the sale: CU 190,000 - CU 30,000 - CU 25,000 = CU 135,000. This is lower than the cost of CU 140,000, so the product is carried at CU 135,000. CU 160,000 and CU 165,000 each deduct only one of the two costs.

20. The auditor of Kushtia Ceramics Ltd needs a procedure that gives strong evidence of the amount owed on a long-term bank loan at the year end. Which procedure is best?

A) Inspect the loan schedule prepared by the client accountant at the end of the year under audit
B) Direct confirmation from the lender of the amount owed, accrued interest and security
C) Read the board minutes that approved the borrowing in the previous financial year of the company
D) Trace the repayments to the entries in the cash at bank nominal ledger account of the company

Correct: B difficult ISA 505

Evidence from a third party is stronger than client-prepared evidence. For long-term liabilities, direct confirmation from lenders of the amounts outstanding, accrued interest and the security they hold is the strongest source, along with loan agreements and statutory books. Client schedules, board minutes and the company's own ledger entries are internal evidence and are not as strong.

21. The auditor of a manufacturer is looking for a procedure that tests the cut-off of inventory at the year end. Which procedure is appropriate?

A) Agree the cost of a sample of raw materials to the purchase invoices held on the files
B) Send a confirmation letter to the customer that stores goods at the premises of the company
C) Trace a sample of items from the final inventory sheets back to the original count sheets
D) Trace goods inward and outward notes either side of year end to invoices, ledgers and sheets

Correct: D difficult ISA 501

A cut-off test ensures that year-end deliveries and sales have been neither double counted nor omitted. The auditor selects the goods inwards and outwards notes on either side of the year end and traces them to invoices, ledgers and the inventory sheets to ensure they are recorded in the correct period. The other procedures address cost, third party stock and accuracy of the final sheets.

22. Argus keeps a store of approved inventory at the premises of Icket Ltd. Which procedure best addresses the risk that Argus's inventory is wrongly included in Icket's financial statements?

A) Ask Argus to confirm the inventory held at Icket at year end and reconcile the reply to records
B) Count the inventory held in the retail outlet of Icket Ltd at the year end for the audit
C) Trace a sample of Icket own purchase invoices to the final inventory sheets of the company
D) Compare the cost of finished goods with post year-end selling prices of those goods sold

Correct: A difficult ISA 501

For the rights and obligations assertion, the auditor sends a confirmation letter to Argus asking it to confirm the inventory it holds at Icket at the year end, compares the reply to Icket's records and reconciles any differences. The auditor also follows up Argus items seen at the count to make sure they are excluded from the final inventory sheets. The other procedures address existence in the outlet, cost and net realisable value.

23. In which circumstances is the negative method of external confirmation of receivables appropriate for Rangpur Retail Ltd?

A) A small number of large balances, with a high risk of material misstatement in the ledger
B) The auditor expects customers not to reply, since silence is then treated as evidence of agreement
C) Low assessed risk, effective controls, many small balances and few errors expected
D) The client's staff despatch the requests, to speed up the replies from the customers

Correct: C difficult ISA 505

The negative method, where customers reply only if they disagree, should be used only when the assessed risk of material misstatement is low, the relevant controls are operating effectively, a large number of small balances is involved, a substantial number of errors is not expected, and the auditor has no reason to believe that customers will disregard the request. The auditor must also keep strict control over the despatch of requests.

24. Which precautions should the auditor of Bhola Seafoods Ltd take when despatching receivables confirmation requests prepared by the client's staff?

A) Let the client post the requests and collect the replies so that the finance team can reconcile differences
B) Ask for replies direct to the auditor, and undelivered items returned to the auditor office
C) Have undelivered requests returned to the client's accounts department so that addresses can be corrected
D) Send requests only to customers with large balances, leaving out nil, credit and written-off accounts

Correct: B difficult ISA 505

The auditor must maintain strict control over the checking and despatch of the requests, specify that customers return replies directly to the auditor, and ensure that undelivered items are returned to the auditor's own office for follow up and not to the client. Sample construction should also give attention to old unpaid accounts, accounts written off, credit balances and round sum payments, and should not overlook nil balances.

25. Sajeeda sent 56 receivables confirmations for General Stationery plc and received 54 replies. Of these, 30 agreed the balance and 24 disputed it. Ten of the disputes were timing differences on receipts, and 14 were real differences. What percentage of the replies showed real differences (to one decimal place)?

A) 44.4%
B) 18.5%
C) 55.6%
D) 25.9%

Correct: D complex ISA 505

The number of real differences is 14 out of 54 replies, which is 14 / 54 = 25.9%. The figure of 44.4% (24 / 54) includes the timing differences, 18.5% (10 / 54) is the proportion that were timing differences, and 55.6% (30 / 54) is the proportion of replies that agreed. Timing differences normally need no adjustment, but the real differences require follow-up.