Certificate in Accounting and Finance Stage Examination

20 November 2024
90 minutes – 45 marks
Additional reading time – None

CAF 8 – AUDIT AND ASSURANCE [TERM TEST – 1]

Syllabus [Chapter 1 – 7]

Instructions for Candidates

1. Answer ALL SIX questions, in BLACK pen only.
2. After attempting, convert your answer script to PDF using CamScanner and upload on your LMS.
3. Take CLEAR pictures, in sequence i.e. first Q. 1 then Q. 2. First part a then part b.
4. To maintain proper record of your test performance, please name your PDF file as follows:
“CRN + Subject + Test No.” e.g. “15472 CAF 08 Term Test 1”

Q. 1 State, with reasons, whether following situations cause violation of requirements of Companies Act, 2017?
(a) While appointing you as auditor against a casual vacancy, the board of directors states that you will
not be entitled to audit certain major payments stated to be commission on sales.

(b) You have been appointed as auditor of A Ltd, at its annual general meeting held on July 19, 2018.
The company closes its accounts on March 31 every year. When your assistant goes for a surprise
check of cash on September 30, 2018, he is not allowed to do so by the finance director who tells
him that audit can be conducted only after the financial statements for the year are ready.

(c) The sales manager of A Ltd., of which you are the auditor, does no reply to a query raised by you
regarding a sales contract. He argues that he is in no way concerned with preparation of accounts
and, therefore, you should seek replies to all your questions from the account manager.

(d) You wish to make a qualification in your report regarding material discrepancies noticed between
the book balance of inventory and physical balance. The management advises you to make these
observations orally at the annual general meeting instead of qualifying the report, on the ground that
the shareholders would better appreciate the situation if it is explained to them orally at the meeting.

(e) Your father-in-law holds 30% shares and is also a director of F Ltd, of which you are the auditor.
You wish to disclose this fact in your audit report. The chief accountant of the company argues that
there is no need to do so since you are not directly interested in the company.

(f) The board of directors of the company states that it will authenticate the accounts only when the
auditors have signed the same, as this will give them an assurance that the financial statements have
been prepared properly by the accounts department. (11)

Q. 2 Mr. Ali, ACA was working with Galaxy Limited as director till March 31, 2011. He joined the ABC &
Company Chartered Accountants w.e.f. April 1, 2011 as senior manager. Because of his good relations at
Galaxy Limited, he has been able to convince the management of Galaxy Limited to appoint ABC &
Company as external auditor for the year ended December 31, 2011. Consequently, a proposal has been
sent to the firm. Mr. Ali is confident that if proposal is accepted, he will be able to finalize the engagement
very efficiently and economically as he is aware of whole business and accounting practices of the company.

You are required to briefly explain:

(i) Can firm be appointed as external auditor keeping in view legal requirements?
(ii) What are the threats involved, if firm accepts the engagement?
(iii) What safeguards should be applied, if firm accepts the engagement? (04)
 Audit and Assurance Page 2 of 2

Q. 3 Describe the following methods used to obtain audit evidence.

(i) Tests of controls (02)
(ii) Substantive procedures (02)

Q. 4 Your firm is currently completing the audit of Richards Ltd (Richards) for the year ended 30 June 2008.

(a) In the early hours of 1 July 2008, there was a fire at Richards’ factory which resulted in the
destruction of both a substantial quantity of inventory and the computer system which was used to
maintain the company’s perpetual inventory records. This has resulted in the loss of the company’s
inventory records. You were due to attend the inventory count at the factory later that day. The
company’s finance director has estimated a figure for the destroyed inventory of £230,000, and he
has included this figure in the financial statements at 30 June 2008.

(b) On 27 July 2008, Richards was notified that a liquidator had been appointed at Watts Ltd (Watts), a
major customer of Richards. Sales to Watts in the year ended 30 June 2008 amounted to 40% of the
company’s revenue and the balance due from Watts at 30 June 2008 was £175,000, of which
£50,000 had been received by Richards as at 27 July 2008. The liquidator has not yet given a firm
indication of the likely future prospects for Watts.

Richards’ unadjusted pre-tax profit for the year ended 30 June 2008 was £700,000 and its total assets at that
date were £1.8 million.

Requirements
Explain the possible effects of the situations described above on the financial statements of Richards for the
year ended 30 June 2008 and discuss whether this will give rise to a modification to its associated audit
report. (10)

Q. 5 (a) Explain what 'reperformance' is. (02)

(b) Give four occasions when the NRV of inventory is likely to fall below cost. (02)

Q. 6 List the categories of threats that may be involved in each of the following independent situations:
(i) If a gift from a client is accepted
(ii) Holding a financial interest in an audit client
(iii) Loan (or guarantee of loan) is obtained from assurance client or is given to assurance client
(iv) Close business relationship between firm/team member and client/management
(v) Purchase of goods and services from an audit client by the firm/team member
(vi) Family and personal relationships between a member of the audit team and a director or officer or
certain employees
(vii) A former member of the firm joins client as director, officer etc.
(viii) A member of the audit team is planning to join the client some time in the future.
(ix) The lending of staff by a firm to an audit client
(x) A member of the audit team has recently served as a director, officer, or employee of the audit client
(xi) Using the same senior personnel on an audit engagement over a long period of time
(xii) Firm provides accounting services to assurance client.
[Note: Explanation of threats or safeguards are not required] (12)

(THE END)