2023

AUDIT AND ASSURANCE

ICAP ATTEMPTWISE PAST PAPERS

(Updated with Spring-2023 QP)
By the Grace of Almighty Allah, I am pleased to present the attemptwise past
papers of Audit and Assurance for CAF-08.

A U This volume contains;

 ICAP papers of last 44 attempts.
 Suggested Answers by ICAP (Autumn09-Autumn22)
 Examiner Comments (Autumn02-Autumn22)
 Marking plan (Autumn15-Autumn22)

D
 INTRODUCTION

The Directorate of Education and Training is continually endeavoring to assist the students of

Chartered Accountancy to prepare for their examinations through high quality study material and

suggested answers of past ICAP examinations.

The suggested answers are prepared on the principle of hints to answers, rather than detailed

theory and description and are based on International Standards and laws applicable at that time.

The answers are not updated subsequently for any changes in law.

We hope that the students will make the most of these suggested answers and use it as a study aid.

Users are encouraged to provide their feedback to the Directorate to enhance the quality of the

answers. The Directorate may, however, not be able to respond to individual queries from users.

ICAP
 Disclaimer

The suggested answers to examination questions have been developed by the Directorate of Education

and Training of ICAP based on standards, laws, rules, regulations, theories and practice as applicable on

the date of examination, except as stated otherwise. These answers are not meant to provide the

assessment criteria against the particular examination questions. The purpose of these suggested answers

is only to guide the students in their future studies for ICAP’s examinations, without seeking to suggest a

solution for the present incumbents, in any way. However, there are alternative solution(s) to the

questions which are also considered by the Examination Department while marking the answer scripts.

Although reasonable care has been taken to ensure correctness in the preparation of these answers, the

Directorate does not take responsibility for any deviation of views, opinion or answers suggested by any

other person or persons. Similarly, the Council of the Institute of Chartered Accountants of Pakistan

assumes no responsibility for the errors or omissions in the suggested answers. Nevertheless, if any error

or omission is noticed, it should be brought to the notice of the Senior Director Education and Training for

information.

If you are not the intended addressee, you are notified that dissemination, copying, distributing,

commenting or printing of these answers is strictly prohibited.

ICAP
The Institute of Chartered Accountants of Pakistan

Modular Foundation Examinations Autumn 2001

September 07, 2001

AUDITING (MARKS 100)

Module ‘D’ & SM ‘9’ (Paper – D 11) (3 hours)

Q.1 (a) You have been approached by a leasing company for appointment as its first auditor.
List down five “client screening procedures” which you will perform before making a
decision regarding acceptance of the audit. (05)

(b) You have been appointed as auditor of a listed company. Draft a letter which you will
send to the retiring auditors seeking their professional clearance. (05)

Q.2 Engagement letters are sent by the auditors to their clients describing essentially
the following matters:

(a) scope of audit

(b) fraud and irregularities
(c) accounting, taxation and other services
(d) fees

Draft an engagement letter covering all of the above points. (10)

Q.3(a) What is the primary objective of an audit? (04)

(b) Explain the term “reasonable assurance” in the context of audit opinion. (04)

Q.4 You have been assigned to review the payment system of an enterprise. The Finance
Director suspects that some duplicate payments may have been made. List five control
procedures which you would expect to find. (05)

Q.5 Discuss briefly the considerations that you would take into account in developing
the overall audit plan for an audit engagement. (05)

Q.6 You have been asked by your senior to observe the stock count at one of the audit
clients:

(a) What procedures would you perform prior to the physical count to ensure a
smooth stock count? (04)
(b) During the stock count, how would you ensure that the physical inventory
listing provided to you is complete? (04)
(c) How would you ensure proper cut off for purchases and sales? (04)

Q.7(a) Differentiate between tests of controls and substantive procedures. (04)

(b) What tests of controls would you perform while carrying out a review of the payroll
system of a company? (04)
 (02)

Q.8 What is the reporting responsibility of the auditor in the following circumstances:

(a) A major suit has been filed against the client which is pending in the Supreme
Court. The matter has been decided against the company in lower court. The
management has not made any provision against this case and is also refusing
to disclose this case as a contingency. (05)

(b) The company has investment in the shares of a listed company. The market
value is significantly lower than the cost and the company has not made any
provision for diminution in value. However, the market value is properly
disclosed in the financial statements. The contention of the company is that the
investment is long term in nature and the present diminution is temporary. The
effect of diminution in value is material. (05)

(c) The company is using LIFO method for valuation of stocks. The effect of using
the LIFO method is disclosed in the financial statement which is a material
figure. (05)

Q.9(a) What do you understand by a Computer Information System (CIS) environment in an

audit? (02)

(b) What are the nature of the risks and the internal control characteristics that are normally
there in a CIS environment? (05)

Q.10 List down basic elements of a management representation letter. (05)

Q.11 What are various sources of audit evidence available to the auditor? (06)

Q.12 You are asked to devise form and contents of audit working papers. Write a draft letter
to your principal giving your suggestions regarding the form and contents of working
papers in accordance with the relevant International Standard on Auditing. (04)

Q.13 Discuss as to how analytical review procedures are used by auditor to help him
at the completion stage of an audit. (05)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Modular Foundation Examinations Spring 2002

March 08, 2002

AUDITING (MARKS 100)

Paper –D 11, (Module D, SM ‘9’ & ‘4B’) (3 hours)

Q.1 Briefly discuss what is meant by the term ‘true and fair view’ in the context of audit of
financial statements. (05)

Q.2 (a) Describe the procedure prescribed in the Companies Ordinance, 1984 for
removal of auditor of a listed company. (06)
(b) Can auditor of a listed company be removed during the term of his
office? (02)

Q.3 (a) Why adherence to International Standards on Auditing is so important for

auditors? Discuss (05)
(b) What is the scope of an audit? Also discuss as to who is responsible to prepare
financial statements. (07)

Q.4 (a) Define “materiality”. Give two examples of qualitative aspects of materiality. (04)
(b) When does the auditor normally considers materiality during an audit? (03)
(c) What are the responsibilities of auditor in respect of assessing the work of an
expert? (03)

Q.5 (a) What are the objectives of test of control? Give some examples of such tests. (05)
(b) What is a ‘Walkthrough Test’? Under what circumstances it may be treated
as test of control? (02)
(c) What is the relationship between detection risk and combined level of inherent
and control risk? (05)
(d) Describe the term ‘operational audit’. (03)

Q.6 (a) What is meant by sufficient and appropriate audit evidence? Under what
circumstances an auditor can rely on management representation as part of audit
evidence. (05)
(b) What are the basic assertions which the auditor would aim to address while
carrying out verification of fixed assets. (05)

Q.7 (a) Why it is important for the practising audit firms to maintain their quality of
work? (03)
(b) What audit procedures you would devise to audit in CIS environment? (07)
 (2)

Q.8 Distinguish the following between control environment and control procedures:

(a) reporting, reviewing and approving reconciliation;

(b) the function of the board of directors and its committees;
(c) checking the arithmetical accuracy of the records;
(d) maintaining and reviewing control accounts and trial balances;
(e) management’s control system including the internal audit function and
personnel policies and procedures and segregation of duties;
(f) defined and documented code of ethics. (06)

Q.9 Develop a work program for the verification of liabilities against assets subject to
finance lease. (04)

Q.10 An important part of audit of a company is a review of subsequent events and

transactions. How would the following reviews assist you in your audit of the
financial statements:
• review of payments made subsequent to the year end; and (04)
• review of minutes of board/executive committee meeting held after the
balance sheet date (04)

Q.11 What will be responsibility of the auditor in the following situations:

(a) company changes policy for revenue recognition but the new policy is not in
accordance with the requirements of International Accounting Standards. (03)
(b) there are doubts about the ability of the company to continue operating as a
going concern but this issue is properly disclosed in the financial statements. (04)

Q.12 Discuss different types of limitations of scope that may result in a modified
opinion giving suitable examples of each (You are not required to draft
opinion). (05)

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Modular Intermediate Examinations Autumn 2002

September 06, 2002

AUDITING (MARKS 100)

Module D Paper D 11 (3 hours)

Q.1 (a) Rabia is a newly inducted trainee student in the audit firm. She thinks that
auditor should conduct an audit with a detective approach and should look
only for frauds. The principal, Mr. Ahmed tells her that audit has to be
conducted with an approach of professional skepticism. The principal has
asked you to explain the concept of professional skepticism to Rabia. (04)

(b) What do you understand by “Risk based auditing”? State the factors behind
the increasing use of this approach. (05)

(c) Explain auditor’s responsibilities with respect to confidentiality of

information. (03)

Q.2 (a) State the difference between an “Engagement Letter” and a “Professional
Clearance Letter”. (03)
(b) Discuss an incoming auditor’s responsibilities when he has been appointed to
replace the previous auditor who had issued a qualified audit opinion. (03)

Q.3 (a) Describe the advantages of audit work program. What are the factors to be
considered for its preparation? (04)
(b) Describe the procedures normally employed by the principal auditor to obtain
sufficient appropriate evidence that the work of other auditor is adequate for
his purposes. (06)

Q.4 (a) Describe the matters that should be considered by an auditor while evaluating
the adequacy of provision against doubtful debts of a large company. (05)
(b) What do you understand by positive and negative forms of confirmation
request? How an auditor makes a choice between the two? (05)

Q.5 Amjad is on the audit of a large manufacturing company. He has been assigned the
account head of sales for verification. At the initial stages of audit he has to perform
the tests of control. His senior has asked him to prepare an ‘internal control
questionnaire’ for this purpose. What type of questions Amjad should include in the
Questionnaire in respect of the following functions of sales:

(a) Sales order entry (05)

(b) Delivery (05)

Q.6 (a) Can an auditor ignore substantive procedures for a material account balance if
related internal controls are assessed to be very strong? (02)
(b) Discuss some of the factors which influence auditor’s judgment regarding
sample size for tests of control. (05)
(c) State some inherent limitations of internal controls. (03)
 (02)

Q.7 What types of audit opinion should be expressed in the following circumstances:
(a) A listed company has accounted for a finance lease as an operating lease and
accordingly has not recognized the asset and liability in this respect. The
impact of this accounting treatment is significant to the financial statements.
(03)
(b) The appointment of auditors was such that they have not been able to observe
the physical stock count. However, they have satisfied themselves through
alternative audit procedures. (04)
(c) The management has not accounted for the full liability in respect of gratuity.
The management is of the view that it is a deferred liability and not a current
one. The impact is material but not pervasive in relation to the financial
statements. (03)

Q.8 (a) Differentiate between internal and external auditing. (05)

(b) Why auditor needs specialized CIS skills in an audit? (07)
(c) What is the role of International Federation of Accountants (IFAC)? (04)

Q.9 What are the rights of an auditor under the Companies Ordinance, 1984? (06)

Q 10 Your client, a manufacturing company, has carried out revaluation of its plant and
machinery. Revaluation has been carried out through a reputed firm of valuers by
the name of Hamid Associates. The client also intends to reflect the revalued
amounts in the Financial Statements that are to be audited by you. Explain and list
down the audit procedures that you will apply with specific reference to your
possible reliance on the work carried out by Hamid Associates.
(10)

(THE END)
 Auditing Paper D11
General

Overall the performance of the candidates was not satisfactory. The trends indicate that the students are relying
heavily on "Rote" learning of ISAs instead of having an understanding. Further, study of reference books also
appears to be very limited. An analysis of the performance of the candidates in each question is as follows:

Q.1

This question consists of three parts covering very basic knowledge and responsibilities of the auditor. Concept
of professional skepticism as covered in ISA-I although not required to be covered in much detailed was
answered more in detail by majority of candidates covering not only the relevant points but many irrelevant
points such as aspects of fraud, illegal acts and others. Most of the candidates failed to understand the concept
of risk based auditing as asked in part 2 and answered on inherent and control risk assessment. As part (b) has
the most weightage of the question it proved to be a low scoring question for the candidates. Concept of
confidentiality was well answered by most of the candidates.

Q.2

The question comprising of two parts one of them being easier to answered. Extent of the question relating to
ISA was well answered and most of the candidates scored almost full marks. However, remaining part of the
question, which required combination of theoretical and practical knowledge, was poorly answered. Some
candidates were not aware of professional clearance letter and those who were aware of did not mention the
exact purpose of why the letter is written. Part of question relating to engagement letter was answered in much
detail as against the mark allocated to the question, showing poor time allocation on part of candidates.

Part 2 of the question was not understood well by most of the candidates and many simply repeated part (a) of
the question relating to professional clearance in answering this part of the question.

Q.3

A well-balanced question designed to test conceptual knowledge of the candidates. Comprising of two parts the
first was well answered with candidates explaining both advantage and factors to be considered while preparing
audit program. Many candidates scored very good marks to the extent of this part. Surprisingly part two of the
question that was on ISA 5 "Using Work of Another Auditor" was not very well answered except for few one.
Some confused it with work of internal auditors and from the answer of others it was clear that they did not
have the full knowledge and were trying to put in as many points as possible.

Q.4

Question comprises of two parts. Both part required clear understanding of the subject with a mixture of
practical touch. Questions were set in a way that answer required was suppose to be short with no assumption
needed. Candidates appeared to have understood part (a) but failed to deliver the key points required to score
marks. A very few candidates score high marks in question. Since the total mark allocated to both parts was not
high candidates should have scored well by producing few relevant points. Part (b) of the question was relatively
well answered and most of the candidates were successful in scoring good marks.

Q.5

Design of the question was such that candidates without clear concepts of auditing were unable to score good
marks. Two part question requiring short answers. Most of the candidates failed to understand the requirements
of first part of the question and answered test of control relating to sales invoices, which was not required.
Internal Control Questionnaire (ICQ) required for second part was also not answered well. Many candidates
missed out basic elements of ICQs like authorization, segregation of duties and identification of controls put in
place by the management. It can easily be said that performance of candidates did not even reached half of
what was required from them on an overall basis.

Q.6

Question comprised of three part with part two having 50% of the total marks allocated to the question. More
than 90% of the candidates failed to understand the requirements of part B of the question and answered it
correctly. Remaining two parts were well answered and it was evident that candidates have good knowledge and
have memorized the point well.

Q.7

The main objective of this question comprising of three parts was to check the decision making skills of the
candidates where the line between correct and in correct decision was intentionally kept thin. Based on ISA 13
the question helped many candidates to score passing marks in the papers as they score good 70% to 80%
marks of the allocated 10 marks. Similarly some candidates failed to answered correctly and were unfortunate
to bag good marks. Part (a) and (b) were the more tricky one's, specially (b) where the candidates were
confused between scope limitation and para of emphasis. However, in actual it was a clean opinion. Similarly in
part (a) many candidates thought of it being qualified opinion instead of answered being adverse, very much
clear from the question. Part (c) was well answered by most of the candidates. Another point to be noted was
that most of candidates tried to explain the reason why the type of opinion they guessed was being expressed,
whereas the question only asked about the opinion and not the explanation.

Q.8

It was the most highly weightage question in the paper comprising of three parts. It can be safely said that the
reason why many candidates failed to achieve passing marks in the paper was because of this question.
Comprising of 16 marks candidates failed to give it proper time allocation as evident from the answer. Part (a)
and (c) were relatively well answered, specially part (a). However, part (b) comprising of 7 marks was not
attempted well by most of the candidates. However, those candidates who attempted part (b) well scored good
mark in the question.

Candidates failed to mention need of CIS skills in the audit and mostly talked about general things such as
accounting system and nature and extent of testing required. Only few mentioned about CAAT and lack of
transaction trial and explained it well.

Q.9

A high scoring question for most of the candidates. Mainly covering rights of an auditor under the Companies
Ordinance 1984 the replies were good and covered auditors right of inspecting books and records, to receive
information and explanation and matters relating to notices and attendance at annual general meeting. Mark
allocated to the question also helped the candidates in scoring good mark in the paper on an overall basis.

Q.10

Candidates were required to answer what steps an auditor should take to judge the usefulness of work done by
an expert as given in ISA "Using Work of an Expert". To score good mark candidates were only required to
express five to six relevant points shortly. In actual the overall performance of candidates relating to this
question was poor. Many confused the question with treatment of surplus on revolution of fixed assets as given
international accounting standard and Companies Ordinance 1984. Those who guessed the basic concept right
failed to express the relevant points. Explanation of source data and use of assumption was rarely explained by
candidates.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Modular Intermediate Examinations Spring 2003

March 07, 2003

AUDITING (MARKS 100)

Module D Paper D11 (3 hours)

Q.1 (a) In the recent past, the professional firms have developed more advanced level
audit softwares. These softwares have assisted the auditors in various aspects of
audit. There is a viewpoint that these technological developments would
eliminate the element of human judgement in the audit profession in the near
future. Do you agree with this viewpoint? Explain your answer with reasons. (05)
(b) List down the basic elements of an assurance engagement. (03)
(c) What is the difference between an “assurance engagement” and an “audit
engagement”? (02)

Q.2 (a) Is it necessary for an audit firm to issue an engagement letter every year in case
of a recurring audit? What are the factors to be considered in this regard? (04)
(b) Your audit firm has been appointed to conduct a full scope audit of the financial
statements covering a period of three months of Clever Limited. Clever Limited
needs the audit report for obtaining a bank loan. While verifying certain
account heads you identify certain problems for which you are not provided
satisfactory replies by the client. At the same time Clever Limited approaches
you and asks you to change the scope of assignment from a full scope audit to a
review assignment. They give you the reason that they have misunderstood the
scope of assignment earlier. What course of action you would adopt in this
situation? (06)
(c) What do you understand by a ‘Management Letter’? (02)
(d) Mr Akbar is the Chief Executive of Prosperity Limited, a listed company. He is
not pleased with the performance of the current auditors. He is planning to
propose the name of M/s Asghar Saleem & Co. as the new auditors in the
coming AGM after approval of the Board. Mr Asghar a partner in M/s Asghar
Saleem & Co. is the brother of Mr Akbar. Is the arrangement legally
(02)
permissible?

Q.3 (a) The most significant risks in case of payroll and personnel cycles are the
existence of fictitious employees and falsification of hours worked. These risks
are normally mitigated through segregation of duties. Discuss various internal
controls regarding segregation of duties to achieve these objectives.
(05)
(b) Describe the specific risks involved in the audit of a small business. (05)

Q.4 (a) What do you understand by control environment and control procedures? (02)
(b) It is said that during an audit, evaluation of control environment in most of the
cases is more important than the evaluation of the control procedures. What is
the logic behind this? (03)
(c) Materiality and risk are two important concepts in an audit. Describe the
relationship between the two giving some example. (05)
 (2)

Q.5 (a) What do you understand by corroboration of audit evidence? (03)

(b) State the difference between sufficiency and appropriateness of audit evidence. (02)
(c) What is an inherent risk? Give some examples of inherent risk at the financial
statements level. (05)

Q.6 (a) Define the basic types of substantive procedures. (03)

(b) An auditor can not rely solely on the analytical procedures. What are the
factors to be considered while determining the extent of reliance to be placed
on the results of analytical procedures? (04)
(c) Many auditors are preparing and maintaining the working papers on computers
these days. What are the specific factors to be considered regarding retention
of working papers stored on electronic media? (03)

Q.7 Discuss:
i. The differences between sampling risk and non-sampling risk; and (02)
ii. What effect does Sampling Risk have on the tests of control and substantive
procedures performed by an auditor. (04)

Q.8 (a) Develop a positive confirmation request letter to be sent to a trade debtor of a
company. (05)
(b) What do you understand by a cut off test? How an auditor normally performs it
in case of local purchases? (05)

Q.9 (a) State some of the objectives of the review of audit working papers. (03)
(b) Describe different forms of documentation of management representation. (03)
(c) List down some of the procedures that are normally employed by an auditor to
become aware of subsequent events. (04)

Q.10 What types of audit opinions should be expressed in the following circumstances:
(You are not required to draft the opinion paragraphs)

(a) The major production facilities of the Company have been destroyed due to
fire subsequent to the balance sheet date. The plant facilities were not duly
insured. No condition in this regard existed at the balance sheet date. The
management has not made any adjustments in the financial statements.
However, proper disclosure of this fact has been made in the financial
(06)
statements.
(b) The management of the company has not allowed the auditors to send request
letters to the legal advisors. Accordingly, the auditors could not become aware
of the status of all the litigations against the company. On account of their
prior experience, the auditors believe that there are significant claims against
(04)
the Company.

(THE END)
 AUDITING - (Paper D11)

General

 Overall the performance of the candidates could be termed as average.

Generally, the performance is good in case of simple ISA based questions
that require mere "Ratta". However, when it comes to understanding of
basic concepts, generally the performance is below average.
 Normally students lack proper expression when they have to write the
answer at their own instead of simple reproduction of ISA. Students are
advised to think for a while and plan their answers before start writing. It
would enable them to get better marks, as the Examiner is not supposed
to search for the correct thing in unorganized and confused answers. It
should be remembered that 'hit and trail' does not work in professional
exams.
 Students should understand that marks are awarded for what is being
asked in the question and not for what students know otherwise whether it
is correct or not. So, students should carefully read the questions and try
to understand what is being asked in it.

Q.1

(a) The performance of the students was below average in this part. Most of the
students managed to write that the element of human judgment could not be
eliminated from the audit profession. However, very few of them could explain
the reasons in a better way. Many students started writing the CIS characteristics
given in an ISA without linking it to what was asked in the question.
(b) Most of the students failed to answer this part. It is understandable that
students do not have an in-depth knowledge of the subject but they were
expected to have the basic idea at least in the context of the audit.
(c) Most of the students again failed to answer this part in a better way. They
confused the question with engagement letter. Even very few students wrote
correctly about the audit engagement.

Q.2

(a) It was a simple ISA based question and majority of the students managed to
get good marks in this part.
(b) It was a situation-based question that required understanding of ISA. Instead
of analyzing the whole situation and different aspects involved, students usually
addressed any one aspect given in the question and therefore, could not get good
marks. For example, many students managed to understand that the auditors
have faced limitations by the client but they did not discuss the change of scope
aspect.
(c) It was a common question that has already been asked many times in prior
exams. Many students wrote the correct answer. Some students confused the
Management Letter with the Management Representation Letter that was not
asked.
(d) Majority of the students failed to answer this question correctly. This question
required careful study of the Companies Ordinance, 1984.

Q.3

(a) It was not a simple ISA based question and required understanding of internal
controls. Instead of discussing specifically the segregation of duties, students
wrote the general controls in payroll and personnel functions.
(b) It was an ISA based question. However, majority of the students managed to
get just passing marks.

Q.4

(a) Almost all the students get full marks, as it was a simple question.
(b) On the average, most of the students wrote the correct answer. However, in
case of clear expression, students could have scored more marks.
(c) Although it was an ISA based question but the students could not get good
marks. It shows the trend of selected study.

Q.5

(a) The question demanded understanding of concepts. Many students confused

the concept of corroboration of audit evidence with sufficient and appropriateness
of evidence which was not asked.
(b) It was a simple ISA based question and almost all the students managed to
get full marks in this part.
(c) In most of the cases, the definition of inherent risk was written correct.
However, some students instead of giving examples of inherent risk at financial
statements level gave examples of inherent risk at specific account balance level.

Q.6

(a) It was a very simple question. However, majority of the students did not
explain the tests of details of transactions and balances as no specific definition is
given in ISA. Most of the students wrote correctly about the analytical procedures,
the definition of which is given in ISA. It is not an appreciable trend.
(b) The performance of the students was average in this question. The students
who wrote the impact of different factors managed to get better marks.
(c) Certain students instead of discussing the factors relating to retention of
working papers started writing the general EDP factors to be considered during an
audit that was not asked in the question. However, the general performance was
satisfactory.

Q.7

The performance of the candidates in Part (i) and (ii) was just average. Keeping
in view of the fact that it was a simple ISA based question, students were
expected to get more marks in it.

Q.8

(a) The students at Foundation level are supposed to have seen the samples of
various documents/ letters covered in their syllabus. However, it appears that
hardly few students have seen any sample letter. Even the students do not know
that the debtors confirmation letter is either written on client's letterhead or if
written by the auditor then with the specific authority of the client. The language
of the letter in most of the cases was also not professional.
(b) It was a routine question at this level of examinations. However, the
performance of the students was not satisfactory in this part. Instead of
discussing the cut off test at the period end, many students wrote about
verification of transactions occurring throughout the period. Further, purchase
requisition can not solely be used by the auditor for ensuring proper purchase cut
off.
Q.9

(a) Certain students instead of discussing the objectives of review of working

papers discussed the objectives of working papers, which were not asked.
(b) Overall the performance of the students was satisfactory in this question.
(c) It was a simple ISA based question and most of the students managed to get
good marks in it.

Q.10

(a) The situation required analysis on the basis of non-adjusting event and
possible going concern problem. Hardly very few students discussed both these
aspects in a clear-cut way and therefore could not get good marks.
(b) The situation involved limitation of scope placed by the client. Most of the
students wrote correct answer and got good marks.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2003

September 05, 2003

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) Is an auditor responsible for the detection and disclosure of every error and
fraud? Discuss. (06)

(b) In an audit of small trading company, you, as an audit manager, think that (04)
‘Auditing Around the Computer Approach’ would be appropriate. Explain this
approach.

Q.2 (a) It is said that without proper understanding and evaluation of internal controls
the auditor can not properly determine the extent of substantive procedures. Do
you agree? Give two examples in support of your answer. (08)

(b) It is generally stated that internal controls have certain inherent limitations.
Why is it so? Give at least four reasons. (05)

Q.3 You have been assigned, as an audit senior, to supervise the audit of a large
manufacturing company having offices throughout Pakistan. Your audit firm also
has regional offices in all the major cities of the country. You have been asked to
develop an over all audit plan for this engagement. Briefly describe the factors you
would consider in respect of the following:

• Knowledge of business
• Reliance on internal audit
• Delegating work to other offices
• Budgeting and staffing (12)

Q.4 (a) What is the use of performing analytical review procedures at the planning
stage? (04)

(b) Discuss the “materiality” concept in relation to an audit of financial

statements. (06)

Q.5 (a) When is it appropriate to examine the entire population of items that make up
an account balance or class of transactions during the course of substantive
audit procedures? (06)

(b) Under what basis would you decide for the use of statistical or non-statistical
sampling approach? (04)
 (2)

Q.6 (a) Why adherence to International Standards on Auditing is important for the
auditors? Discuss. (05)

(b) Under the Companies Ordinance, 1984 which persons are not qualified for
appointment as auditors of companies? (05)

Q.7 (a) What is meant by sufficient and appropriate audit evidence? Under what
circumstances an auditor can rely on management’s representation as part of
audit evidence? (05)

(b) What are the basic assertions which the auditor would aim to address whilst
carrying out the verification of fixed assets? (05)

(c) Discuss the need and importance of the audit working papers. (05)

Q.8 (a) Discuss briefly some of the procedures that are normally employed by an
auditor to ensure that all the contingent liabilities have been identified. (06)

(b) Due to a major computer breakdown during the year, the accounting records of
the company are no more verifiable. The company does not have proper
manual records. Although the integrity of the management is not in doubt, the
auditor is not in a position to substantiate management’s assertions contained
in the financial statements. What type of opinion should be expressed in these
circumstances? (04)

Q.9 Develop a brief work program for verification of the following:

(a) Stock-in-trade. (05)

(b) Trade creditors. (05)

(THE END)
 AUDITING

General:

 Overall the performance of the candidates could be termed as satisfactory. The paper contained
both ISA based and non-ISA based questions. Good coverage was given to different syllabus areas.
 The performance of the students was satisfactory in case of ISA based questions. However, the
performance was below average in case of questions which required application of knowledge or
expression of concepts in their own words.
 Students who planned their answers got good marks as compared to students who concentrated on
writing more. Students should understand that in professional exams it is "quality" that matters and
not the "quantity". In auditing terms we can say that the answer should not only be sufficient but
should also be appropriate.
 Students are advised to go through the syllabus properly as it has been observed that students
normally concentrate on routine questions and face difficulties when questions are asked from the
areas which were normally not touched in the prior exams.

Q.1
(a)

The performance of the students was just average. Although most of them were aware of the basic answer
but they failed to explain the reasons like inherent limitations of audit, reasonable and not absolute
assurance and due professional care etc. Students who discussed the reasons in an organized manner
managed to get good marks.

(b)

Generally the performance was below average in this part. Very few students knew this term. We think
that students should be taught the basic concepts apart from concentrating on the ISAs as it would be
useful for them in their future.

Q.2
(a)

Most of the students failed to answer this question in a proper way. They failed to discuss how an auditor
during an audit balances these two approaches. Some students forgot to give two examples. Most of the
students hardly managed to get passing marks in this question.

(b)

It was a simple ISA based question and majority of the students managed to get good marks in this part.

Q.3

It was a good question which demanded not only knowledge of ISA but also some application of
knowledge. In case of planning, knowledge of business and reliance on internal audit are clearly discussed
in ISAs. Most of the students got good marks in these parts. However, delegating work to other offices and
budgeting & staffing are not specifically discussed in ISAs although they are covered in the syllabus. The
general performance of the students was poor in these parts. Many students confused the delegation of
work to other offices of the firm with using the work of an expert.

Q.4
(a)
It was a simple question and most of the students got good marks in this part

(b)
Most of the students wrote the definition of materiality. However, the students who managed to explain
the concept and discussed the quantitative and qualitative aspects and use of materiality during the audit
managed to get better marks.
Q.5
(a)
The students in general failed to answer the question correctly. Instead of writing to the point the students
used guess work which does not work in this level of exams.

(b)
This part was also answered poorly. It appears that students have not thoroughly studied the ISA on
sampling.

Q.6
(a)

It was a simple question but the students in general failed to explain the importance of adherence to ISAs
for an auditor. The students could have got more marks if they had spent some time before start writing
the answer of this question.

(b)
It was a simple question based on the Knowledge of Companies Ordinance, 1984 and most of the students
got above average marks in this part.

Q.7
(a)
It was a simple ISA based question and mostly good marks were scored in this part. In fact many students
managed to pass because of question no.7 & 8.

(b)
It was an easy question and most of the students got good marks in it. However, some students instead of
discussing the verification in the context of assertions, discussed the general verification procedures,
which was not asked in the question.

(c)
A simple question which was well answered in most of the cases.

Q.8
(a)
Most of the students got good marks in this part.

(b)

Most of the students got full marks in this part. It shows that students have good knowledge in this part of
syllabus.

Q.9

Overall the performance of the students was average in this part. This is one of the most important topics
at the Foundation level. However, most of the students concentrated on writing more instead of writing
correctly and that's why could not score well in this question. In case of verification of stock in trade, some
students wrote just about the physical verification aspect and did not write anything about other aspects
like valuation and disclosure etc.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2004

March 10, 2004

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) Briefly discuss the term “true and fair view” in the context of an audit. (05)
(b) What are the advantages of an audit to an organization? (05)

Q.2 (a) List down the factors that are normally considered by an auditor before
accepting a new audit client. (05)
(b) State any five principle contents of an audit engagement letter. (05)

Q.3 (a) List down the general ethical principles governing an audit engagement. (04)
(b) Describe the procedure for removal of auditor of a listed company as laid down
in the Companies Ordinance, 1984. (06)

Q.4 (a) What are the uses of analytical procedures? (05)

(b) Can an external auditor use the work of internal auditor for his planning
purposes? What are the factors to be considered by him before doing this? (05)

Q.5 (a) Under what circumstances would an auditor refer to the result of the work of
an expert in the audit report? (04)
(b) Give four examples of reports, opinions and statements of an expert. (06)

Q.6 (a) Why it is important for an auditor to know the source and nature of audit
evidence and what are their impacts on the audit? (04)
(b) What are the factors to be considered by an auditor when he receives
management representations relating to some material item? (04)

Q.7 (a) State the assertions that are normally addressed by an auditor while attending
the physical stock count. (03)
(b) List down some audit procedures for verification of stock held and controlled
by a third party. (04)

Q.8 (a) State the basic objectives of tests of control. (02)

(b) Describe some of the preventive and detective internal control procedures in
connection with duplicate payments to parties. (05)
(c) Describe the effects of a computer information system (CIS) environment on
an audit. (05)

Q.9 (a) Masoom & Co. Chartered Accountants have audited the financial statements of
Cunning Limited. The financial statements have been issued after getting
proper approval of the Board of Directors and audit report signed by the
auditors. After some time, the auditors came to know that a major lawsuit was
decided against the company subsequent to the year-end but before the audit
report was signed by the auditors. The issue existed at the balance sheet date.
 (2)

The outcome of the lawsuit was not brought to the knowledge of the auditors.
Had it been known to the auditors, the financial statements would have
required proper adjustments in this respect. State auditors’ responsibilities in
this situation. Also analyze the situation, if the issue of financial statements for
the following period is imminent. (06)

(b) Which financial statement assertions are fulfilled through following audit
procedures;
• Debtors balance confirmation
• Physical inspection of inventory
• Review of bank reconciliation statements
• Confirmation from the legal advisors
• Verification of title deeds of fixed assets (05)

Q.10 You are the auditor of certain companies, audits of which have been finalized and
audit opinions are expected to be shortly issued. Significant issues concerning these
audits are as follows:

Company A
Subsequent to the year end, a debtor from whom a significant balance is due
initiated winding up proceedings. (04)
Company B
The company is a shipping line with more than 6 ships as its assets.
Subsequent to the year-end, one of its high value ship, carrying huge stock for
other parties, sank in high seas. (04)
Company C
Audit of the year ended 31st December 2003, would need to be finalized by 4th
January 2004.

The credit period for trade receivables is 3 months. You noted that significant
sales were made in late December 2003. You have requested the company to
provide the evidences for such sales, which request has been sent by them to its
field office. However, the company considers that these evidences may not be
timely available by 4 January 2004 due to law and order situation in the area
where the field office is situated. (04)

As an audit engagement partner of above companies, what would be your

suggestions to the companies management regarding the above circumstances on the
financial statements of the companies? Also explain the type of opinion you would
issue, if the companies management do not agree with your suggestions.

(THE END)
 AUDITING
General:

On an overall basis the performance of the students can be termed as below average. It appears that students normally restrict themselves to plain
reading of ISAs and do not try to grasp the underlying concepts. Students are advised to read the question carefully and try to understand what is being
asked from them. In professional exams you can not expect to get passing marks after writing mostly irrelevant things.

Question-wise comments are as under:

Q.1
(a) It was a routine question at this level that was not well answered by the students in general. Most of the students did not define truth and fairness
separately.
(b) It was a basic question that was well answered by the students.

Q.2
(a) It was not an ISA based question. Although students managed to write the basic points but many students also wrote irrelevant points. Certain
students mentioned those points which are normally considered during the audit and not at the client screening level.
(b) A simple ISA based question in which most of the students managed to score passing marks. Some students wrote few points which are not the
basic contents and are not necessarily there in the engagement letter e.g. provision of other services etc.

Q.3
(a) The students in general managed to write the correct answer.
(b) The performance of the students was average in this part. Although the students knew the basic procedure but very few of them covered all the
aspects.

Q.4
(a) It was a simple ISA based question that was well answered in most of the cases.
(b) Most of the students managed to get passing marks in this part, as it was a routine question.

Q.5
(a) The students in general failed to answer this question correctly. Many students instead of writing about qualified and unqualified report scenarios
gave examples of expert's works like actuarial valuation, fixed assets revaluation etc. which was not asked in the question.

(b) Many students wrote the correct answer. However, certain students instead of writing about the reports/opinions of an expert wrote about different
types of opinions of an external auditor.

Q.6
(a) It was a simple question and most of the students managed to get passing marks in it.
(b) The performance of the candidates was above average in this part.

Q.7
(a) It was a simple question however, hardly few students managed to get some marks in it. Instead of writing about existence and condition of stock
almost everyone wrote all the assertions. Students should understand that physical verification has nothing to do with presentation and disclosure
assertion. As the concept was lacking therefore, many students failed to get any mark in this question.
(b) Most of the students hardly managed to get passing marks in this question. Much more was desired to be written.

Q.8
(a) The question required a clear concept of the test of controls as per the relevant ISA. Quite a number of candidates failed to give the right answer as
they seemed confused this concept with the walk-through tests and consequently lost marks.

(b) This was a question which required the candidates to apply their knowledge and understanding. However, generally the students did not score good
marks in this question partly because the students seemed to rely more heavily on their memory and reproduced internal control procedures on
payments to parties instead of the procedures to check duplicate payments and also because they did not read the question clearly enough to
understand the requirement.

(c) This question also required a general understanding of the relevant ISA but a large majority of the students failed to get the requirements right.
They spent lot of time in writing about the effects of CIS and hardly anything was mentioned on the effects of CIS on audit. However, students who had
clearly grasped the requirement of the question were able to score good marks.

Q.9
(a) This was a very good question requiring the application of the knowledge gained through the ISAs. Some of the students gave very pertinent
answers. Some of the students who although knew the relevant ISA failed to earn marks because they did not conclude e.g. they reproduced the
guidance contained in the relevant ISA and did not sum up the scenario. The scenario based questions always test the application of knowledge rather
than the memory of the students. However, quite a number of students did apply their knowledge and gained good marks.

(b) The response for this question was also not very encouraging as candidates wrote assertions against procedures without really giving a serious
thought about them. However as it was an objective type of question students were able to get around 40% to 50% marks.

Q.10
A very good scenario based question testing the application of the guidance contained in the relevant ISAs. From the answers it appeared that the
students started writing answers without understanding the requirement of the question e.g. students wasted their valuable time in discussing
suggestions under the circumstances, which were not quite required. The question specifically required suggestions which related to the financial
statements. Similarly, as per the requirement of the question, students should have explained their opinion instead of just giving the type of opinion
resulting in their losing valuable marks.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2004

September 10, 2004

AUDITING (MARKS 100)

MODULE D (3 hours)

Q.1 (a) What does the term ‘scope of audit’ refer to? How would you describe the
“scope of audit” of a listed company? (04)
(b) What is meant by reasonable assurance? (02)
(c) Why an auditor cannot provide an absolute assurance as a result of audit?
Explain. (03)

Q.2 (a) What is meant by uncertainty? Give any two examples about the
uncertainty relating to the financial statements being audited by you. (03)
(b) What is agreed-upon procedures engagement? Give an example. (06)

Q.3 (a) Which persons are not qualified for appointment as auditor of a company
under the Companies Ordinance, 1984? (05)
(b) Who fixes the auditor’s remuneration under the Companies Ordinance
1984? (02)

Q.4 You are the auditor of Central Chemical Company Limited, a public listed
company which is engaged in the manufacture and sale of Chemicals. The
production is carried out at five different locations throughout Pakistan. The
customers include a number of local as well as foreign buyers.

You are required to explain the action you would take in each of the following
independent situations with respect to audit for the year ended June 30, 2004:
a) On August 10, 2004, a competitor introduced a low cost product which
was a very good replacement of one of the company’s product being
marketed under the brand name “Dello”. The Marketing Manager was of
the view that the company would not be able to sell Dello, unless the price
is reduced to Rs. 40 per kg i.e. 20% below its present cost. While the
management was considering how to reduce the cost, it was decided to
sell all the inventory in hand at Rs. 40. The stock of that product as on
August 10, 2004 was 100,000 kgs, out of which 5000 kgs, had been
produced after the year end. You become aware of the situation on August
11, 2004, when the accounts have already been finalised but prior to the
signing of the audit report. The management is of the view that the matter
need not be disclosed in the financial statements nor any adjustment is
needed. (06)
b) After the audit report has been issued you come to know that one of the
factories have caught fire causing a loss of machinery worth Rs. 250
million. On inquiry you are informed that the loss is covered by insurance
policy but the factory will have to remain closed till the new machinery is
installed. The installation may take six to eight months. The financial
statements have not yet been published or circulated to the shareholders. (08)

c) After the financial statements have been issued, there was a significant
decline in the market value of investments. (03)
 2

Q.5 How is the audit of a small business different from that of a large organization? (05)

Q.6 State internal control procedures in respect of the following functions:

(a) Purchase ordering (05)

(b) Dispatches and invoice preparation for sales (05)

Q.7 (a) What is the auditors’ duty in case of balances for which the management
has requested for not sending the confirmation? (03)
(b) What is the difference between negative and positive confirmation
requests? (02)
(c) What is the duty of the auditor if response of a negative confirmation has
not been received? (02)
(d) When can the negative confirmation request be used to reduce audit risk
to an acceptable level? (03)

Q.8 (a) When should the auditor apply analytical procedures? (01)
(b) List down the factors on which the reliance on the results of analytical
procedures depend. (03)
(c) What factors should the auditor consider when he/she intends to perform
analytical procedures as substantive procedures? (06)

Q.9 What do you understand by general and application EDP controls? Give two
examples of each. (10)

Q.10 (a) List down the basic elements of an audit report. (05)
(b) Analyze the following situations and state under which condition an
auditor would most likely issue a disclaimer of opinion:

(i) Presentation of short term investment as long term.

(ii) There are certain indications that the company may not be a going
concern. However, management has adequate plans to mitigate such
problems.
(iii) Management’s refusal to furnish written representations in respect
of an item for which no other evidence is reasonably expected to
exist.
(iv) The terms and conditions of a long term loan have been incorrectly
disclosed. (08)

(THE END)
 AUDITING

Overall the performance of the students was not satisfactory. Students normally prepare for
routine ISA based questions and their performance is poor in questions which require proper
understanding of the concepts. In certain cases it has been observed that the students try to
write everything they know about a topic if they don’t know the correct and precise answer.
This approach is not advisable because the marks are for the correct answer and the
examiner is not supposed to search for the relevant part in so much irrelevant information. It
is advised that students should think for a while before they start to answer any particular
question. The communication skills are also at times not up to the mark.

Question-wise comments are as under:

Q.1 (a) It was a routine question which was well answered by most of the students. Some
students stated that only Companies Ordinance, 1984 determines the scope of
audit and forgot to mention ISA, IAS, ICAP’s and other
local bodies pronouncement and the terms of audit engagement.

(b) This part was not properly attempted. Majority of candidates just answered that
reasonable assurance means the financial statements are free from material
misstatements. They failed to state that reasonable assurance is a high but not
absolute assurance, expressed positively that the information subject to audit is
free from material misstatement.

(c) This was again an ISA based simple question. The students mostly scored good
marks in it.

Q.2 (a) The students mostly failed to explain the concept of uncertainty. Many students
just wrote about going concern without properly understanding the question.

(b) This question was very poorly attempted. The students were required to define the
agreed upon procedures or give its main characteristics, which are as follows:

- The procedures are of an audit nature

- They are agreed upon between the auditor, the entity being audited and any
appropriate third party.
- The auditor is required to report on factual findings and report is restricted to
interested parties only, as being unaware of the reasons, others may
misinterpret it.

Very few students gave the correct answer. Many students wrote about the
engagement letter of an audit which was not asked. Many others did not attempt
or gave irrelevant answers.

Q.3 (a) The students in general managed to write the correct answer and secured good
marks.
 (b) Almost all the students got full marks in this part.

Q.4 (a) In this part many students failed to point out whether it is an adjusting or non-
adjusting event. Some students discussed only the disagreement with
management and tried to avoid commenting on adjustability or disclosure
requirement. The question was not well answered by most of the students.

(b) This part was again not attempted well by the students. The students generally
failed to identify that as the loss is covered by insurance, it needs no adjustment,
however, it may need disclosure if the event is considered significant in the overall
content. Many students did not discuss the requirement of adjustment or
disclosure properly. However, many students managed to write auditor’s duties
correctly. It appears that the situation was not properly understood by most of the
students and they failed to distinguish whether the event took place before or after
the issuance of audit report.
(c) Many students wrote the correct answer that it was not an adjusting event but
failed to give the reason i.e. because the condition did not exist at the balance
sheet date.
Q.5 It was a simple question but students in general could not get good marks in it. Many
students gave irrelevant information. Majority of the students discussed the weak
internal controls in a small business but did not discuss their impact on the audit.

Q.6 This question simply required internal control procedures in respect of (a) Purchase
ordering and, (b) Dispatch and invoice preparation for sales.

Some of the candidates could not understand the requirement of the question and
presented the answer in the following manner:

 They prepare the audit program along with audit objectives and listed down the
audit procedures in respect of verification of purchase ordering and dispatch and
invoice preparation for sales system.

 Some candidates narrated the whole system in respect of purchase ordering and
dispatch and invoice preparation for sales.

 Some candidates prepared the flow chart of whole system in respect of purchase
ordering and Dispatch and invoice preparation for sales.

 Some students discussed the whole purchase and sales system including payments,
receipts etc., which was not required.

Q.7 (a) It was a simple question which was partly well answered by most of the students.
However, very few of them could point out that the auditor needs to find out or
discuss the reasons why the client does not wish to send confirmation and assess
whether there are valid grounds for such request.
 (b) Most of the students wrote the correct answer. However, certain students confused
positive confirmation with negative confirmation. Accordingly, such students also
gave wrong answers for the subsequent parts.

(c) The students in general managed to get passing marks.

(d) The students on an overall basis wrote the correct answer. However, they did not
discuss all the relevant points.

Q.8 (a) Most of the students got full marks in this part.
(b) Some candidates were confused and answered part (b) in response to part (c) and
vice versa. Some candidates answered part (b) properly but also included answer
of part (b) in the answer of part (c).

Majority of candidates did not list down complete factors in both the parts.

Q.9 This is a very simple question. The question required the understanding of general and
application EDP controls along with two examples of each control. The question was not
properly handled and candidates gave answers in haphazard manner and in general
language. Such as:

 Few candidates described the EDP environment

 Some candidates simply stated that general controls are general while
applications are specific controls
 Some candidates gave irrelevant examples or gave no examples at all.

It was evident that candidates did not have sufficient and precise knowledge about the
subject matter.

Q.10 (a It was a simple ISA based question and most of the students managed to get very
) good marks in this part.

(b Majority of the students managed to identify the correct situation but many of
) them failed to describe the reasons completely.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2005

March 11, 2005

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) What do you understand by ‘governance’? Who is normally charged with
governance in an organization? (03)
(b) Why is the attitude of professional skepticism essential for an effective audit? (05)
(c) Briefly discuss the level of assurance given in the following types of
engagements:

i. Audit
ii. Review
iii. Agreed upon procedures
iv. Compilation (06)

Q.2 (a) Orient Trading Limited was incorporated on October 21, 2004. Ahmad Ali,
the company secretary has approached you on October 31, 2004 for your
appointment as the first statutory auditor of the company. Assuming that you
are eligible for this appointment, explain who should make this appointment
under the provisions of the Companies Ordinance, 1984. (03)
(b) When an external auditor intends to use specific work of internal auditor he is
required to evaluate and test his work to confirm its adequacy for achieving
his audit objectives. Summarize the steps an external auditor should perform
for evaluating the adequacy of specific work of internal auditor. (06)

Q.3 (a) Briefly describe what overall audit plan is and what are its contents? (06)
(b) You are about to start the planning process of an audit engagement. List the
sources from where you can obtain knowledge of the industry and the entity
being audited. (06)

Q.4 (a) How can an auditor reduce sampling and non-sampling risks in case of tests
of control and substantive tests? (05)
(b) Define ‘anomalous error’. How should it be treated at the time of projecting
sample errors to the population? (02)

Q.5 (a) Describe the basic elements of a management representation letter. (05)
(b) What do you understand by ‘points forward’ or ‘points for next year audit’?
Give two examples of them. (05)
(c) What do you understand by cut off test? How an auditor ensures proper cut
off in case of bank payments? (05)
 (2)

Q.6 (a) During the audit you are unable to obtain relevant and sufficient audit
evidence that you consider necessary for obtaining reasonable assurance
about accounts receivable. You have raised this issue with the managing
director of your client and informed him of your intention to issue a qualified
opinion to highlight scope limitation. Managing director, in order to resolve
this issue has suggested for change in the scope of engagement from ‘audit’ to
a ‘review engagement’. Would you agree to such a change in the terms of
engagement? Explain your response. (07)
(b) You, as external auditor, have received a direct communication from the
company’s legal advisor about a claim of significant amount which was
provided for and included in the sundry claims payable accounts last year.
The communication states that the relevant court of law has, subsequent to the
year end, issued judgment in favour of the company. The matter was
discussed with the management but they are not willing to reverse the
provision on the ground that the decision of the court was delivered after the
financial year end. What will be the impact on your audit opinion on
management’s reluctance to reverse the above provision? (07)

Q.7 (a) What are the uses of working papers? (03)

(b) List the matters which affect the form and content of working papers. (03)
(c) What is a permanent audit working papers file? How is it distinct from
current audit files? (03)

Q.8 Briefly discuss the following risks in a Computer information system environment:

• Risks of lack of transaction trails.

• Risk associated with lack of segregation of functions.
• Risk of automatic initiation or execution of transactions. (06)

Q.9 Draft audit programmes for the following:

(a) Accrued expenses (03)

(b) prepayments (03)

Q.10 You are the statutory auditor of Northwest Company (Private) Limited, a
manufacturing concern. The company has used the services of an expert in
valuation of its plant and machinery at the year end. You being the statutory auditor
of the Company, have expressed to the Chief Financial Officer (CFO) of the
company that you intend to evaluate the competence and objectivity of the expert
and his work. The CFO has asked you to explain to him the specific provisions of
applicable Standard on Auditing on the subject. State the relevant requirements of
the Auditing Standard with regard to the above. (08)

(THE END)
 AUDITING

It was an encouraging sign that students appeared to be well prepared in Auditing being the core
subject of their profession. Further improvement, however, is needed in following areas;

- Avoid writing unnecessary/unasked details

- Write answers in logical order

- Express clearly

Question wise comments are as under;

Q.1 (a) Very few students knew the exact definition of the term ‘governance’, that is, act of
supervision, direction and control.

(b) A large number of students restricted their answers to the definition of ‘professional
skepticism’, while the question was specifically on the importance of the concept for
conduct of an audit.

(c) The concept of level of assurance is an important area and a professional accountant is
supposed to be well versed with the level of assurance he gives in various types of
engagement. Students mostly gave too generalized answers. They are advised to
revisit the Standards, as they are expected to be exact in this respect.

Q.2 (a) Provisions of law relating to appointment of first auditor was asked and almost every
student had complete knowledge of the same.

(b) At large, candidates lost valuable marks, as they described the preliminary assessment
of internal audit function, which is done at the planning stage, while the question
required the evaluation of specific work of internal audit.

Q.3 (a) Students had good understanding of the areas relating to planning.

(b) Similar to part (a) students knew the sources from where knowledge of industry and
entity is obtained.

Q.4 (a) Very few answered it to the point and un-necessarily wrote definitions of sampling and
non-sampling risk, while the question was on procedures for reducing the said risks.

(b) Definition and projection of ‘anomalous error’ were well known to almost every
student.

Q.5 (a) Management representation letter is one of the important documents with regard to
audit. Every professional accountant should know the precise and specific use of the
said letter. It was apparent from the answers given by the students that very few
knew the basic contents of the letter as given in the Standard, like, approval of
financial statements and matters where other audit evidence is not expected to be
available.
 (b) ‘Point forward’ or ‘point for next year audit’ is a general concept, well attempted by the
candidates.

(c) Majority could not clearly explain the purpose of cut off test, i.e. to ensure that
transactions pertaining to a certain period are recorded in that period only.

Q.6 (a) Candidates were required to give their opinion in the given situation, whether change
in the scope of engagement from audit to review could be made. Majority answered it
correctly but could not explain the basis of their opinion or discuss the relevant portion
of the International Standard on Auditing.

(b) Students understood the question but were unable to give comprehensive answer as to
the type of opinion the auditor will give on the basis of his judgment of materiality of
the effect. Many were of the view that failure to reverse a provision is not as important
as the failure to make a provision, which is not always true.

Q.7 (a,b, Students were able to state the uses of working paper, matters which affect the
c) contents of working papers and differences between permanent and current audit files,
and secured good marks.

Q.8 Question was aimed to test the understanding of certain risk inherent with the CIS
environment, like, non-existence of transaction trail, complexity of application system,
concentration of controls into CIS system, risk of error due to concentration of controls, lack
of documentation in automated processing of transactions and machine readable
authorization by the management. Only few students could perform well in this question.

Q.9 The audit programs prepared by the candidates were of very poor quality. Very few could
describe the tests and procedures to ensure existence, obligation and valuation of balance,
and appropriateness of disclosure.

Q.10 The question called for evaluation of specific work of an expert, while majority of the students
wrote unnecessary details of planning stage evaluation.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2005

September 09, 2005

AUDITING (MARKS 100)

Module D (3 hours)
Q.1 (a) You have been asked to send your consent to act as the auditor of a listed
company in place of the auditor removed by the company while their audit was
in process. State briefly the course of action you are supposed to follow under
the Code of Ethics prescribed by the Institute of Chartered Accountants of
Pakistan. (05)
(b) Mr. K the partner of an audit firm, in normal course of his investment activities
bought shares of ABC Limited, of which his firm was statutory auditor.
However, he disposed of all these shares within thirty days and immediately
informed the company secretary about the whole transaction. Is the company
secretary required to take any step under the Companies Ordinance, 1984?
Discuss. (04)
(c) What are the ethical requirements governing the auditors professional
responsibilities? Briefly describe any two. (06)

Q.2 (a) The following issues were highlighted in a meeting of the audit committee of
XYZ Limited with regard to financial statements of one of its subsidiaries on
which auditors had issued an unmodified audit report:
(i) The audit procedures were unable to detect a material error in inventory
valuation, because it occurred under exceptional circumstances and the
internal controls established by the management could not prevent and
detect the same.
(ii) The provision for bad debt was insufficient and the impact was material.
It was also evident from the subsequent events, which came into the
knowledge of the auditors before they issued their report.
You are one of the independent members of the audit committee and are
considered an expert on financial reporting issues. The chairman of the audit
committee has asked your comments with regard to the responsibilities of
management and auditors of the above mentioned subsidiary. Give your
comments on each of the above matters. (06)
(b) The financial statements are required to give a true and fair view. List the
principal qualitative characteristics of financial statements that can be termed as
giving ‘true and fair view’ of the financial position and results of operations. (10)

Q.3 (a) What are the audit assertions that cannot be usually addressed by following audit
procedures:
- External confirmation of trade debt
- Physical count of inventory
- Verification of title documents of fixed assets (03)
(b) List the information that is normally requested by the auditor in direct bank
confirmations. (04)
 (2)

Q.4 (a) You had assisted management in strengthening the internal control system for a
medium size limited company about a year ago. The management has recently
pointed out that the occurrences of frauds and errors have reduced significantly,
but could not be eliminated altogether. You are required to offer your comments
on the above situation with reference to limitations of any system of internal
control. (04)
(b) N, a member of external audit team of a consumer goods manufacturing
company, was assigned to verify ‘trade debts’ by the audit in-charge. What are
the internal control activities, which are expected to be in place? (08)

Q.5 What procedures does an auditor of consolidated financial statements of a holding

company perform while using the work of the auditor of the subsidiary company? (07)

Q.6 (a) What audit procedures are necessary in case the analytical procedures identify
relationship that is inconsistent with other evidences available with the auditor? (03)
(b) List components of internal control and briefly describe any two. (07)
(c) Briefly describe the scope and objectives of internal audit. (05)

Q.7 (a) List ten conditions or events that may indicate the risk of existence of material
misstatement. (05)
(b) Briefly describe the procedures for obtaining audit evidence. (06)
(c) Management representations are normally obtained by the auditor in the form of
a letter. What are the other ways of its documentation? (04)

Q.8 (a) List down the situations that may result in limitation on scope of auditor’s work. (04)
(b) Briefly discuss the nature of audit report in case of significant uncertainty other
than going concern problem. (04)
(c) Suggest how would you modify the audit report in the following situations: (05)
(i) A client of your firm has a history of tax contingencies arising out of
appeals pending at various levels. The company has disclosed all such
contingencies along with the estimated amounts in accordance with the
accounting standards. Assume that the aggregate sum of these contingencies
is material.
(ii) You are appointed as the auditor of a company after the year-end i.e. June
30, 2005. Hence, you have not been able to physically observe the counting
of inventories at the year-end. Further, alternative audit procedures could
not be performed due to the nature of the company’s records.

(THE END)
 AUDITING

The paper had a combination of test on theoretical knowledge and practical application. As expected,
candidates did well on the theoretical part but seemed confused while applying their knowledge on
real world examples. Although it is little early at this stage but students are advised to try their best
to visualize the practical applications of rules, regulations and standards they learn.

Question wise comments are as under;

Q.1 (a) Very few students knew the prescribed steps required to be followed under the Code of
Ethics when a practicing member accepts an audit engagement in place of another
member whose audit was in process when removed. A large number of students wrote
about client screening process, which is not an ethical requirement.

(b) Only a few candidates knew the provisions of law dealing with vacancy of the office of
the auditor because of disqualification subsequent to appointment. Quite a number,
without any apparent reason, reproduced the provisions related to disclosure and
disposal of investments in client’s equity, at the time of appointment.

(c) The ethical requirements governing an audit are well known to majority. However,
when it came to explanation, most candidates mixed up the components of ethical
requirements.
Q.2 (a) This question is another example where students responded without looking at the
given facts. Respective responsibilities of management and auditor were asked in case
unmodified audit report was issued inspite of the fact that financial statements
contained material misstatements. Instead, many students wrote the course of action
left with the management and auditors and could not secure any marks.

(b) The principal qualitative characteristics which are necessary to give true and fair view
are understandability, relevance, reliability and comparability. Most students
concentrated on the issue of disclosure requirements and could not mention the
characteristics.

Q.3 (a) Students had good understanding of the audit assertions which are addressed by a
certain procedure and most of them answered the question correctly.

(b) Students had very little idea of contents of direct bank confirmation. They gave
answers based on general understanding and missed many points.

Q.4 (a) This was a simple question, which required listing of inherent limitations of internal
control system due to which, frauds and errors cannot be eliminated altogether.
Majority secured good marks in this part.
(b) Very few students wrote to-the-point answers. Some students mixed up internal
controls with audit verification steps. Few preferred to write general activities rather
than those specific with ‘trade debts’. Some found no difference between control
activities and other components of internal control system.

Q.5 Candidates had good knowledge about the procedure an auditor of consolidated financial
statements of holding company should perform while using the work of the auditor of
subsidiary company. However the answers were un-necessarily lengthy, which were
inappropriate with the marks allocated to this question.
Q.6 (a) This question required steps to be taken in case analytical procedures identify
relationships which are inconsistent with those established through other available
evidence. A good number performed well, however, few of them mentioned definition,
types and uses of analytical procedure which were not required.

(b) This was also an easy question and attempted well by majority of the students. It was
evident that they had given due attention to the newly applicable Auditing Standard
dealing with internal control system.

(c) This was also a students’ favourite theoretical question on scope and objectives of
internal audit and was answered well.

Q.7 (a) A number of students did guess work in replying the question and could only identify
one condition, that is, the weakness of accounting and internal control systems. Some
submitted needless paragraphs on management’s non co-operation and disagreements
as condition that indicates existence of misstatements and errors. Some other
conditions are:

- Going concern and liquidity issues

- Significant changes in key personnel
- Complex transactions
- Huge transaction with related parties.

(b) It was a very easy question and majority obtained good marks.

(c) A good number of students knew about other forms of documenting management’s
representations such as
 A summary of the oral representation written by the auditor.

 A letter from the auditor outlining the auditor’s understanding of management’s

representations duly acknowledged and confirmed by management.

 Relevant minutes of meeting of the board of directors or similar body or a signed

copy of the financial statements.

Q.8 (a) Limitation of scope of auditor’s work is an oft-repeated area. Students were required to
list some of the circumstances which may lead to limitation of scope. Some of these
are as follows:
 When terms of engagement specify that the auditor will not carry out a
necessary audit procedure.

 Entity can impose such limitation by not co-operating with the auditor in
performing necessary audit procedures.

 When auditor is practically unable to perform his necessary audit procedures.

 When entity’s records are inadequate for audit purposes.

(b) Most students had a perception that in all cases of uncertainty other than going
concern, only emphasis of matter paragraph is included in auditors report. They were
unaware that in case of multiple uncertainties or uncertainty which is material and
 pervasive the auditors may go to the extent of issuing a disclaimer of opinion.

(c) Capability to analyze a situation comprehensively was found lacking. Students should
have considered the modification of reports at different levels of materiality and its
effects on financial statements as a whole.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2006

March 10, 2006

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) Discuss briefly the role of the following:

(i) International Federation of Accountants (03)

(ii) International Auditing and Assurance Standards Board (03)

(b) Briefly discuss the authority attaching to International Standards on Auditing

(ISAs) with respect to audit of a limited company in Pakistan. (03)

(c) While accepting an audit client, the auditor takes into account the integrity of
the client. What are the matters that an auditor should consider in this
regard? (04)

Q.2 (a) You have received a letter from the company secretary of ABC Group of
companies on March 04, 2006. The group consists of four public limited
unlisted companies. The secretary requested you to advise him as to who will
have the authority to appoint new auditors in following situations relating to
different companies of the group:

- The auditors of Company A will be retiring in August, 2006 on the

conclusion of the Annual General Meeting of the company.
- The auditors of Company B were removed by the members on March
02, 2006.
- The auditors of Company C became disqualified on February 14, 2006.
- The auditors of Company D resigned on January 28, 2006. (08)

(b) What would be the term of office of new auditors in the cases given above? (02)

Q.3 You, as audit in-charge of Sindh Craft Limited, were assigned the job to perform
preliminary engagement activities for the year 2005-06 soon after the completion of
audit for the year 2004-05. An engagement letter is not sent to this client each
year. You are requested to explain the following to your audit team members:

(a) The activities an auditor performs as preliminary engagement activities. (03)

(b) What does an auditor ensure by performing these activities? (03)
(c) The possible justification for not sending an engagement letter to the client
each year? (06)

Q.4 Pak Tools Limited has a subsidiary in Dubai whose operation is significant to the
company. You, as principle auditor, are responsible to express an opinion on the
company’s consolidated financial statements. The subsidiary was previously being
audited by a local firm. However, the auditors were changed last year, and the
current year’s audit has been performed by a firm, which has been affiliated with
your firm for a long time.
 (2)

(a) What difference do you expect in your audit procedures while using the work
of other auditors in view of the above change? (04)
(b) What basic information would you document in the working papers? (04)

Q.5 Give four examples of the circumstances when manual controls are given
preference over the automated controls. (04)

Q.6 You, being auditor of World Limited were not provided with the management
representation in respect of adjustments based on the fair values of investment in
some listed securities of material amount.

The CFO of the client has requested you to explain:

(a) What are the matters on which International Standard on Auditing prescribes
it necessary to obtain management representation? (05)
(b) What alternate, if any, is available to auditors in the absence of management
representation in the above matter? (03)
(c) What may be the impact on your audit opinion in such situation? (02)

Q.7 Indus Limited has a policy to change their auditors every year. Explain whether the
auditors of Indus Limited should prepare proper working papers, despite the fact
that they would not be appointed for the next term. (03)

Q.8 The reliability of each audit evidence is influenced by its individual circumstances.
However, there are certain factors which are generally taken into consideration to
determine the extent of reliability of audit evidences. Describe such factors briefly. (06)

Q.9 At a client, there are large number of debtors with small balances. The audit
incharge is considering to send negative confirmation request.

(a) What weakness do you see in such kind of confirmations? (03)

(b) Is it appropriate to send negative confirmation request in the given case?
Explain briefly. (04)

Q.10 (a) List down substantive procedures for the verification of ‘liability against
assets subject to finance lease’. Also mention the audit assertions addressed
while performing each suggested procedure. (06)

(b) What do you understand by ‘stratification’? (02)

Q.11 When and what type of audit procedures should be carried out by the auditors to
identify subsequent events? State briefly. (05)

Q.12 While performing audit of Mehran Chemicals Limited you used the work of an
expert for valuation of work-in-process and raw material inventory. Expert’s report
shows substantial differences in valuation of both. You have decided to qualify
your report on the basis of the expert’s opinion. Narrate the important matters that
you should ensure while implementing the above decision. (04)
 (3)

Q.13 You are manager incharge for the audit of Sehwan Marbles Limited. During audit
you noticed that the company was sued for breach of contract by a customer
claiming damages of Rs. 200 million. Based on the lawyer’s opinion (received
through management), the management asserted that there would be no significant
liability at the balance sheet date in respect of the said breach and accordingly, no
provision was made in the financial statements. However, while studying the case
file you found a memorandum from the head of the legal department addressed to
the managing director in which he had opined that the company will have to pay at
least 50% of the damages claimed. You concluded that this note was a strong
evidence indicating the existence of this liability, which should be provided for.
Management considers that such note was nullified by the opinion of the
company’s legal advisor and as such there was no need to make any provision in
respect of this contingent liability that was considered to be remote. Therefore, the
CFO advises you that at the most there may be a disclosure of this contingent
liability in the financial statements or perhaps an emphasis of matter paragraph in
the auditor’s report without qualification.

Required:

Write a memorandum containing your conclusion and recommendation for the

decision of the partner as to the type of opinion that should be issued and why. (10)

(THE END)
AUDITING

General:

Overall, the performance of the candidates in this paper was better. The paper was set in such a way as to
cover a large area of the syllabus. Hence, the students with lack of adequate coverage of the syllabus could not
do well.

Q.1 (a) This part was set to test the knowledge of the candidates about the international bodies IFAC and
IAASB and their roles. IFAC, being the leader of the worldwide accounting profession, is responsible
for developing, promoting and maintaining global professional standards and contributes to the
efficient functioning of international economy by speaking out on public interest issues where
professional expertise is most relevant. IAASB, on the other hand, is responsible for developing and
issuing standards on auditing, related services and quality control. Students had a surface
knowledge of such roles.

(b) This part was designed to test the candidates’ knowledge about the applicability of the ISAs in
Pakistan. It was disappointing to note that none of the candidates were able to give a complete
answer to this part. ICAP, being a member of IFAC and regulator of accountancy profession in
Pakistan, has adopted most of the ISAs. It is mandatory for every practicing member to follow ISAs
while performing audit of a limited company. The format of audit report used in Pakistan also
contains a phrase that the audit is performed in accordance with the auditing standards as
applicable in Pakistan. Very few candidates mentioned the above points.

Q.2 This was one of the easiest questions set in the paper and generally the performance of the candidates
was satisfactory. However, in Part (a), in case of Company D, the students failed to appreciate that the
time frame of filling out casual vacancy by directors has elapsed and authority to appoint auditors then
rested with SECP. Part (b) of this question was well performed by majority with some exceptions where
students related auditors’ term with directors term.

Q.3 This question had three parts. Part (a) and (b) related to preliminary engagement activities which are carried out for recurring audits
and mainly relate to matters like continuance of client, ethical issues etc. A number of students described planning activities
including assessment of internal control, prior years issues and issues relating to nature, timing and extent of audit procedures etc.
which is not done at this stage.

Q.4 The performance of the candidates in part (a) was mostly unsatisfactory. In this part, candidates were
required to enumerate the procedures normally undertaken by the principal auditor while using the work
of other auditor and to specify why the principal auditor does not need to perform all the above referred
procedures if the other auditor is an affiliated firm. The main reason is that in case of an existing
relationship, periodic inter-firm reviews, tests of operating policies and procedures, etc. are routinely
carried out. Therefore such steps may not be required to be performed again. Most candidates
mentioned the audit procedures but failed to specify the difference when the other auditor is an affiliated
firm.

Part (b) was satisfactorily attempted by most candidates. However, very few could mention all the
information required to be documented by the principal auditor and hence, could not gain full marks in
this part.

Q.5 It was required to identify circumstances where manual controls are preferred over automated controls.
Instead many candidates listed the various manual and automated controls. Some answered the
question with reference to audit risk related to both types of controls which was not required.

Q.6 (a) Management representation is an oft-repeated topic but still students often fail to answer with
 specified reference to International Standards.

(b) A number of students had no idea of verification of fair value of securities, thus, a confused
response emerged on paper gaining very few marks.

(c) Those who had no knowledge of verification of fair value of listed securities, obviously could not do
any thing in this part. But most surprisingly those who were able to describe alternate procedures in
Part (b) stated that the auditor in given case had no other alternate available to verify fair values
and was supposed to qualify the audit report.

Q.7 Completely ignoring the marks allocated to the question, a number of candidates replied the answer in
affirmative without offering any reasons. Some of the candidates correctly mentioned that working
papers are necessary as they assist in planning and performance as well as supervision and review of the
audit work. However, very few mentioned that working papers also provide evidence that the audit has
been performed in accordance with the requirements of the ISAs and are necessary to support the audit
opinion. A few candidates even expressed that working papers were not required as it was a one time
engagement.

Q.8 This question on the topic of audit evidence was very easy. Except a few candidates who did not mention all the five factors, the
majority gained full marks.

Q.9 This question was set to test the candidates’ knowledge about negative and positive confirmations. In part (a), most of the candidates
had a ‘field day’ on this question and were able to identify the weaknesses of negative confirmation correctly. However, very few
candidates mentioned that negative confirmations are less reliable than positive confirmations. As a result, they were unable to gain
full marks in this part. In part (b) the candidates correctly identified that negative confirmations will be the right course of action in
this situation but very few were able to enumerate the circumstances when negative confirmations may be sent.

Q.10 The question was attempted satisfactorily by majority of the candidates. The only shortcoming was that
many were not able to correlate the right audit procedure with the right assertion. Some preferred to
ignore assertions altogether and just stated the audit procedure and ended up losing crucial marks.
Others listed down all the assertions first and all audit procedures thereafter. This also resulted in loss of
marks as the requirement was to relate each suggested procedure with audit assertions. Some
submitted the procedure for verification of ‘asset subject to finance lease’ instead of ‘liability’.

Part (b) was a straight forward question and everybody was able to provide accurate and correct
answer. As a result, almost everybody got full marks.

Q.11 By and large, this question was attempted well by a majority of the candidates who, in turn, managed to
score high marks in this question. The question was designed to test the knowledge of candidates
regarding the ISA related to ‘Subsequent Events’. It was observed that most of the candidates did very
well in describing the audit procedures but very few were able to mention that such audit procedures are
normally performed as near as practicable, to the date of the auditor’s report.

Q.12 This question was directed towards identifying the important matters that are considered after the
decision to modify the audit report on the basis of an expert’s opinion has been taken. Many students
ignored this and unnecessarily described the procedure that are performed before taking any such
decision.

Q.13 This question dealing with the auditor’s report was, on an average, handled well by the candidates. Nearly every candidate was able
to identify that a liability / provision was required to be made under the circumstances, however, very few mentioned that an
emphasis of matter paragraph was not appropriate under the given circumstances. Almost everybody was unanimous that it was a
case of disagreement with management. Most of them were able to state that either an adverse or a qualified opinion was
appropriate, however, they did not mention that adverse opinion was suited where the financial effect of the matter was material and
pervasive.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2006

September 08, 2006

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) Analyze the following independent situations with reference to qualification of
statutory auditor:
(i) Mr. Zakir Ali, a practicing chartered accountant, has been offered
appointment in Heera Limited as external auditor. He was an employee of
the company before he started his own practice.
(ii) Diamond Associates (Pvt) Limited, a consultancy company, the majority
of whose directors are chartered accountants, have been offered
appointment as external auditor in Lal (Pvt) Limited whose share capital is
less than Rs. 1.5 million.
(iii) Miss Fatima Khan, a practicing chartered accountant, has been offered
appointment in Neelam Limited as external auditor. She was an employee
of the company’s director two months before the offer.
(iv) Mr. Farid Hussain is a partner of Farid & Company, Chartered
Accountants. The firm has been offered appointment in Feroza Limited as
external auditor. Son of Mr. Farid holds shares of Feroza Limited. (08)

(b) Your assistant has an understanding that under the Companies Ordinance, 1984
only a Chartered Accountant can be appointed as auditor of a limited company.
What is your understanding of the law in this regard? (03)

Q.2 Briefly describe the following:

(a) Entity’s risk assessment process (05)

(b) Monitoring of controls (05)

Q.3 (a) International Federation of Accountants (IFAC) provides leadership to the

worldwide accountancy profession in serving the public interest. What activities
are undertaken by IFAC to achieve this aim? (04)

(b) You have been offered to audit an entity, where management has not made any
decision regarding the applicable financial reporting framework. Explain the
importance of financial reporting framework at the client acceptance level. (03)
 (2)

Q.4 You are audit in-charge of Marble Limited. The company has established an internal
audit function, which is headed by a Chartered Accountant, who has significant internal
audit experience. The head of internal audit also reports functionally to audit committee
and administratively to the Chief Executive. Based on your preliminary review of the
internal audit function, you consider that internal auditing activities are relevant to the
risk assessment, and therefore, you are planning to obtain understanding and perform an
assessment of internal audit. What are the important criteria that you would consider for
assessment of internal audit function? (08)

Q.5 Your audit client Aqeeq Limited, a large manufacturing company that has substantial
investment in plant and machinery, has used the services of Mr. Samad Hussain, a
qualified engineer, for assessing the remaining useful life of a major plant. This plant,
which was installed during the year, is expected to double the production capacity of the
company. The assessment of useful life of the plant will have significant impact on
estimation of depreciation expense for the year. You noted that Mr. Hussain has been in
the employment of the company for the last four years.

Brief your audit team about using the above work of Mr. Hussain. (06)

Q.6 (a) Explain the term ‘error’ with examples. (02)

(b) Fraudulent financial reporting often involves management override of controls.

Describe some techniques that are used by management to override controls. (05)

Q.7 (a) What information is considered material with reference to an audit? (03)

(b) Why does an auditor establish a materiality level? (02)

Q.8 (a) What is meant by sufficient and appropriate audit evidence? (04)

(b) The auditor obtains evidence about the operating effectiveness of internal controls
from tests of controls. What matters he should consider in determining the extent
of such tests? (05)

Q.9 (a) An auditor considers various factors while designing and performing analytical
procedures as substantive procedures. These factors include assessing whether the
expectation is sufficiently precise to identify a material misstatement.

Briefly discuss the matters which the auditor considers while making such
assessment. (05)

(b) How does an auditor use a conclusion drawn from analytical procedures, at the
end of the audit? (03)
 (3)

Q.10 In the course of verification of ‘trade creditors’ of Mirpur Limited, you sent fifteen
positive confirmations to the suppliers. The results have been summarized as under:

(i) Three suppliers confirmed the balance. You came to know that bulk of the
sales of these suppliers is made to Mirpur Limited.
(ii) Five suppliers confirmed the balances over telephone.
(iii) No replies have been received from the remaining suppliers.

Briefly discuss how you would deal with each of the above situations. (09)

Q.11 As audit manager on the audit of Yaqoob Limited, you are supposed to assign the
review of subsequent events to one of the members of the audit team.

(a) Brief your team about the purpose and timing of reviewing events occurring after
the balance sheet date. (04)

(b) Describe some of the procedures that are carried out to identify events which may
require adjustment of or disclosure in financial statements. (05)

Q.12 (a) In what circumstances an auditor expresses the following:

(i) an unqualified opinion
(ii) a qualified opinion (05)

(b) An audit report contains title, addressee, date, auditor’s opinion, auditor’s address
and auditor’s signature. Describe the other essential elements of audit report. (06)

(THE END)
 AUDITING

Overall approach of the paper setter was to test a large portion of the syllabus by way of straight
forward requirements. Nevertheless, few questions also tested practical application of knowledge.
Generally the performance was good, however as in the past, even good answers contained irrelevant
portions which were not required. There is a general tendency in many students to produce as much
information as they know even if only a part of it has been asked for. The students are advised to cut
this tendency, if they really want to succeed in the examinations.

Question-wise comments are as under:

Q.1 Legal provisions regarding appointment of statutory auditor is a topic regularly asked and was
attempted fairly by most students. The general deficiencies noted in the answers were as follows:

 The time lapse after which an ex-employee can become an external auditor was not
mentioned.
 There were many examinees who said that a private limited company having paid up
capital less than rupees three million can appoint, even a body corporate, as its auditors.
 There was a general misconception that an ex-employee of a director also needs a time
lapse of three years for appointment as an external auditor.
 Very few students knew that if shares are held by the minor son of a person, he cannot
accept appointment as an external auditor. There is no such restriction if the son has
attained the age of majority

Q.2 Most of the students did well in this straight forward question. However, those who hadn’t studied
the relevant text, relied on guess work specially in answering part (b) and described the
dictionary meaning of the word ‘monitoring’.

Q.3 (a) Generally the students didn’t seem to have studied this area. Most of them answered using
their general understanding of IFAC and couldn’t secure good marks.

(b) In-depth understanding of importance of financial reporting framework at client acceptance

level was lacking. An auditor is not supposed to accept an assurance engagement unless
management has adopted a reporting framework that serves as a suitable criteria for
preparation and evaluation of financial statements. Some of the students could not
understand the question and tried to explain the importance of International Accounting
Standards.

Q.4 Students did well while describing assessment of internal audit at planning stage and discussed
various criteria such as Status in the Organization, Scope of Functions and Technical Competence
etc. However, some of them could not see the difference between assessment of internal audit
function at planning stage and assessment of specific work performed by the internal auditor.
Thus, mixed and confused thoughts were presented by some of them.

Q.5 Use of expert’s work was another topic where students performed well. However, a number of
students ignored the simple fact that in the given case, the expert’s objectivity has been impaired
as he was an employee of the client. As a result they did not mention the steps that the auditor
may perform in such a situation and lost easy marks.

Q.6 (a) Term ‘error’ is an essential concept of audit and most of the students stated the meaning
correctly. Some overlooked the requirement and didn’t give examples in their answers.

(b) Modern auditing approach gives substantial importance to the possibility of misstatement in
financial statements due to intentional act of the management. Management overrides
controls which are established to reduce the risk of fraudulent financial reporting. Many
students disregarded the requirement of the question and kept on writing every thing they
knew about fraud committed by the management. They were rewarded only for relevant
points related to financial reporting such as fictitious entries, incorrect estimation,
concealment of information etc.

Q.7 Materiality is another term repeatedly used in auditing and examiner expects a profound
 knowledge about the term and its use. An information is material if its omission or misstatement
could influence the economic decision of the users of financial statements. Better answers
contained a brief description of materiality, its due importance and relationship with the particular
circumstances. Some candidates had an incorrect understanding that a quantitative threshold is
blindly taken as materiality level by the auditor without considering the qualitative characteristics
of the items under consideration.

Q.8 (a) This was an easy question. Most of the students were able to mention correctly that
sufficiency is a measure of the quantity of audit evidence where as appropriateness relates
to its quality.

(b) The important matters that an auditor usually considers in determining the extent of tests
of controls to be performed by him are:

 Extent of reliance being placed

 The length of time, in respect of which the reliance is being placed
 Frequency of operation of controls during the period
 Lists of other controls and
 Expected deviation from the control.

Some students started discussing irrelevant things like control environment and risk of
management’s override of controls etc. and wasted lot of time.

Q.9 (a) The auditor considers a number of factors while using analytical procedures as substantive
procedures and the examinees were required to discuss only one such factor i.e.
preciseness of expectation. However, a number of students failed to notice the
requirement. Consequently, some of them just listed all the factors whereas others
discussed each of the factors and wasted lot of time which affected their performance in
other questions.

(b) Concepts of most students regarding analytical procedures were not clear. At the end of
audit, such procedures are usually carried out to corroborate conclusions drawn during the
audit and to identify a previously unrecognized risk of material misstatement. Most of the
students appeared to believe that auditor’s opinion is based on such procedures.

Q.10 Most students did have the knowledge about the topic of external confirmation but were found
unable to apply the same on the given situations. They failed to consider many aspects such as
suppliers’ dependency – case (i), documentation requirement of oral confirmation – case (ii) and
using other means where no response was received – case (iii).

Q.11 (a) Most students were able to write down the purpose of performing review of subsequent
events although a large number of them wrote very lengthy answers which were not
required. Moreover, the fact that these procedures should be performed as near as possible
to the date of auditors’ report was missing from many answers.

(b) Overall performance was good in this part of the question in which the examinees were
required to describe the procedures for review of subsequent events. However, there were
instances where examinees produced unasked details like types of enquiries and
procedures relating to specific matters like going concern and subsequent losses etc.

Q.12 (a) Students presented a fairly good knowledge about the topic. However, some of them mixed
up qualified opinion with modified opinion ignoring the fact that all modified opinions are
not qualified opinions. Some wrote samples of audit opinions gaining no marks.

(b) In many cases it was noted that the students reproduced the contents already given in the
question. Students are once again advised that marks are not awarded on the basis of
length of the answer. Relevance, accuracy and coverage of the topic is considered while
marking the questions.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2007

March 9, 2007

AUDITING (Marks 100)

Module D (3 hours)

Q.1 (a) “The auditor is responsible to obtain evidence regarding the events occurring after
the date of financial statements.”

Briefly explain the above statement. (02)

(b) The financial statements for the year ended June 30, 200X of Bakers Limited along
with auditor’s report thereon were issued. Subsequently, the auditor became aware
of an error, which resulted in overstatement of sales by a material amount.

(i) What course of action the auditor is supposed to take according to the
applicable standards?
(ii) Under what situation the revision in financial statements may not be
necessary? (08)

Q.2 Cobblers Limited is the holding company of Shoes Limited and Boots Limited. There is
no common directorship as the holding company has nominated different persons as the
directors for each subsidiary. Moreover, there is no inter-company investment among the
subsidiary companies.

The following issues are under consideration of the company secretary:

(i) The directors of Shoes Limited, which had been incorporated eighty three days
back, are considering appointment of Mr. Bright, a chartered accountant, as the first
auditor. Mr. Bright holds a very small number of shares in Boots Limited.

(ii) The members of Cobblers Limited have appointed Mr. Polite, a qualified MBA, as
auditor of the company in their annual general meeting at a fee which is less than
the fee charged by the previous auditor.

In the light of relevant provisions of Companies Ordinance, 1984, provide your response
to the following:

(a) With reference to (i) above, discuss whether Mr. Bright is qualified to be appointed
as auditor of Shoes Limited.

(b) With reference to (ii) above, discuss the validity of appointment of Mr. Polite as
auditor of Cobblers Limited. (05)

Q.3 Primarily, the audit engagement partner is responsible for the overall quality of audit.
Briefly state the responsibilities of engagement partner in respect of:
(i) leadership;
(ii) acceptance and continuance of client relationship;
(iii) assignment of engagement team; and
(iv) engagement quality control review. (08)
 (2)

Q.4 (a) “An unmodified audit report is not a guarantee that the financial statements are free
from material misstatements”. Discuss the rationale of this statement. (06)

(b) In a meeting before the commencement of a large audit engagement, the

engagement partner has emphasized the importance of audit documentation. As an
audit manager, you are required to explain to your team, the characteristics which
make the documentation self explanatory. (03)

Q.5 During the audit of Drapers Limited, following errors were detected by the engagement
team by applying tests of details on audit samples:

- depreciation on various assets has been overcharged by an aggregate amount of

Rs. 250,000; and
- staff gratuity of various employees has been underprovided aggregating Rs. 300,000.

The materiality level was Rs. 600,000. Therefore, the concerned member of the team did
not consider it necessary to discuss them with the management.

In your opinion, what steps should the job in-charge take in the given situation? (04)

Q.6 (a) During the verification of ‘repair and maintenance account’, the auditor noted that a
repair expenditure of material amount was not supported by proper documentary
evidence. According to the management, it was done in haste to avoid an abnormal
shut down of plant. The management has offered to give specific representation in
this regard.

Discuss the appropriateness of management’s representation as audit evidence in

this case. (03)

(b) What are the basic elements of a management representation letter? (03)

Q.7 Green & Company, Chartered Accountants have been asked to audit the financial
statements of Encom Technologies Limited (ETL). ETL’s business is carried out through
various branches in different cities. Two such branches constitute nearly 40% of total
business, significant portion of which is quite complex. Further, the firm has virtually no
experience of auditing the business carried out at these branches, which are audited by
other firms of chartered accountants. Moreover, there are certain doubts as regards the
competence of the auditors of one of the above branches.

What consideration should be given by the firm while accepting the engagement? (08)

Q.8 (a) While applying analytical procedures on an audit, the auditor has predicted direct
material consumption of Rs. 1,500 million. The actual cost of direct material
consumed as per accounts is Rs. 1,570 million. The auditor has emphasized on
production volume and increase in material price, in arriving at the said estimation.
The management believes that general increase in material prices is the reason for
such deviation.

Describe the course of action the auditor should take in dealing with this situation. (06)

(b) An auditor has to rely on various kinds of data while performing analytical
procedures. The reliability of data is influenced by a number of factors. List out the
main factors with examples. (04)
 (3)

Q.9 (a) The outcome of an uncertainty depends on future actions or events not under the
direct control of the entity but it may have a material effect on the financial
statements. Discuss the impact of an uncertainty on the auditor’s report. (03)

(b) The date is an important element of audit report. What date should the auditor put
on the audit report and what does it represent? (03)

Q.10 (a) Briefly describe the responsibilities of the management and the auditors as
described in the audit report of a company given in Form 35A prescribed under the
Companies Ordinance, 1984. (07)

(b) The auditors of Porters Limited had a disagreement with the management on
application of certain accounting policies. The audit adjustments suggested by the
auditors in this respect were refused by the management. Describe with reasons the
possible modifications in the audit report of the company. (06)

Q.11 (a) Briefly state the matters an auditor considers while developing overall audit
strategy and plan of an initial audit engagement. (05)

(b) Discuss the nature and contents of audit plan. (07)

Q.12 (a) What do you understand by:

(i) Statistical sampling; and (02)
(ii) Stratification? (02)

(b) What do you understand by the term “sampling risk”? Briefly describe the two
types of sampling risks and the effect thereof on the audit as a whole. (05)

(THE END)
 INTERMEDIATE EXAMINATIONS SPRING 2007

AUDITING

General:

The paper had a mix of questions testing both the theoretical and practical knowledge of
the students. As expected, candidates did well on the theoretical part but seemed to be
confused while applying their knowledge on scenario based questions. Although it is
little early at this stage but students should try to attempt these questions more
conceptually and should avoid putting too much irrelevant information in the answers.
They should also focus on presentation and try to provide a clear explanation of the point
examined, if they really want to succeed in the examination.

Q.1 (a) This part was really simple. Most students were able to emphasis correctly
that auditor is responsible to perform procedures to evaluate subsequent
event and such procedures should be performed as near as possible to the
date of audit report.

(b) Few students answered this question fully. Most of them spoke about the
impact on the Auditor’s report in case of Management’s acceptance or
refusal to change the Financial Statements. However, most students failed to
express that additional procedures needed to be performed to ascertain the
impact of subsequent events or that users of Financial Statements, or those
already in receipt of previously issued Financial Statements need to be
informed. Some students misunderstood the question and narrated the steps
required to be carried out prior to the issuance of audit report.

Q.2 Legal provisions relating to appointment of auditor is a topic regularly examined

and was fairly attempted. However, some of the students seemed confused and
made the following types of errors:

• Failed to point out that directors can not appoint first auditors after 60 days of
incorporation.
• Emphasised the issue of undercutting but failed to realize that an MBA cannot
be appointed as auditor of a public company.

Q.3 This was a straightforward question, but was not attempted well by most students.
Instead of focusing on the main responsibilities of the engagement partners, most
of the scripts contained very general points which were irrelevant in the given
context. For example, while explaining the responsibilities of engagement partner
as a leader of the engagement team, a large number of students mentioned
qualities which are mentioned in the books on General Management. Such
answers are mostly irrelevant.

Q.4 (a) This part was attempted well by most of the students as they were able to
identify and explain the following as the reasons on account of which the
auditor is unable to give absolute assurance.
• Inherent limitations
• Use of judgment
• Nature of certain transactions and information
 2

(b) It was very surprising to see that students didn’t perform well in this part
where they were asked to specify the characteristics, which make the
working papers self-explanatory. They should know that working papers
are self-explanatory if an experienced auditor without previous exposure to
a particular job is able to determine the following:

• Nature, timing and extent of audit procedures.

• Results of audit procedures and audit evidence obtained.
• Significant matters arising during the audit and the conclusions drawn.

Q.5 Most student failed to pick the requirements. Many of them restricted their
answers to discussing whether the auditor should give a qualified or an adverse
opinion. Generally, in a situation as given in the question, the errors found by the
audit team are projected to the whole population. After comparing the projected
errors with the materiality level, the auditor considers the future course of action
such as applying extended procedures, adjusting financial statements or issuing
modified report.

Q.6 Again an easy and marks gaining question. Majority of the students got good
marks. However, several students incorrectly concluded that management
representation should be accepted as audit evidence in the given situation.

Q.7 This was a difficult question based on a practical situation. It required decision
making with regards to acceptance of audit engagement where the firm had almost
no experience of audit of similar businesses and significant doubts existed about
professional competence of auditors of two of the client’s branches. The important
matters that an auditor should consider in such situations are summarized below:

• Significance of the branches audited by other auditors and risk of material

mis-statement in their financial statements.
• Possibility of hiring an expert or acquisition of relevant knowledge.
• Additional procedures required to be performed in respect of the concerned
branches.
• Whether and how risk can be mitigated.

Most of the students concentrated on the first point only.

Q.8 (a) Most students failed to understand the question and performed badly. A
good approach could have been to determine the amount of acceptable
difference by considering the following:

• materiality level
• required degree of assurance
• aggregate differences in other account balances and
• expected degree of accuracy.

Many of the above are dependent on the nature of the Company’s business,
about which no information was given in the question. The students could
have highlighted this issue in their answers.
 3

(b) Most examinees correctly listed the factors on the basis of which the
reliability of data is assessed such as source comparability, nature and
relevance of information etc. However, many students mixed it up and
discussed the reliability of audit evidence which was not required.

Q.9 (a) The answer had to be given with respect to three different types of
uncertainties i.e. insignificant uncertainty, significant uncertainty and
multiple uncertainties. Very few students were able to mention all three
possibilities and their possible effect on the auditors report.

(b) This question was answered poorly. The main points which were expected
to be emphasised in the answers were as follows:

• The date of audit report should not be earlier than the date on which
auditor obtains sufficient evidence on which his report is based.

• The date of audit report informs the reader that the auditor has
considered the effect of events and transactions upto that date.

Q.10 (a) This was a straightforward question but most of the students failed to gain
good marks. Most of them tried to reproduce the contents of audit report
including the paragraph relating to audit opinion. Very few were able to
restrict their answers to relevant points only and distinguish between
responsibilities of management and those of the auditors.

(b) Most of the students discussed the two possibilities i.e. qualified and
adverse opinion based on the materiality and pervasiveness of the
disagreement. However, while describing the possible modifications very
few could emphasis that in either case the auditor is required to give clear
reasons for modification and quantify the effect of disagreement on the
financial statements.

Q.11 (a) Most candidates forgot that this question wanted to discuss initial audit
engagements and not recurring audits. They did not discuss opening
balances, client positioning and significant audit issues inherited from
previous auditors, contacts with previous auditors with the consent of
management and so on.

(b) Again, majority of the students, tried to solve this question with irrelevant
stuff and on the basis of their general understanding. They failed to address
the essence of an audit plan.

Q.12 Most of the students were able to describe the terms Statistical Sampling,
Stratifiction and Sampling Risk correctly. They also knew that if the auditor
assesses that controls are effective when in fact they are not, it will create a risk
that material mis-statement may remain undetected. However, very few could
identify the reverse situation i.e. if the auditor incorrectly concludes that controls
are in-effective, it will affect the efficiency of the audit.

(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2007

September 03, 2007

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 While carrying out the audit of a client you had found that direct confirmation from a
major customer of the company had not been received. The management of the company
has explained that due to a dispute which arose in the recent past, it is not advisable to
pursue the customer as this would further aggravate the relationship. However, the
management is willing to provide you copies of the statements received from the
customer alongwith the reconciliation to verify the year end balance, which you may
retain in your working papers as audit evidence.

In the given scenario, explain the guiding principles provided by the International
Standards on Auditing. (06)

Q.2 The purpose of audit sampling is to draw conclusions about the entire population. The
auditor adopts different methods to select a representative sample i.e. which has
characteristics typical of the population. Briefly describe the principal methods of
selecting the samples. (09)

Q.3 Describe the criteria given in the International Standards on Auditing, to evaluate the
reliability of audit evidence. (06)

Q.4 List the audit procedures for the verification of fixed assets as appearing in the financial
statements. Also give the related ‘audit assertion’ against each step. (12)

Q.5 (a) An auditor is required to establish overall audit strategy as part of developing the
audit plan. The overall audit strategy sets the scope, timing and direction of the
audit, and guides the development of more detailed audit plan.

Identify the matters, which should generally be considered in establishing the scope
of audit engagement. (07)

(b) The auditor performs risk assessment procedures to obtain an understanding of the
entity and its environment, including its internal controls. Briefly discuss all such
procedures. (09)

Q.6 You are in-charge of a team engaged in the audit of a listed company. The engagement
team is about to hold a meeting to discuss the susceptibility of the company’s financial
statements to material misstatement due to fraud. One of your team members is perplexed
about the auditor’s responsibility towards fraud. You are required to explain the
following:

(a) Auditor’s responsibilities for detecting material misstatements due to fraud; and (04)
(b) The matters that would be considered in the above mentioned meeting. (08)
 (2)

Q.7 Under the Companies Ordinance 1984, while reporting on the financial statements the
auditor has to express an opinion whether the financial statements give a true and fair
view in all material respect.

Briefly state the matters other than the above, on which the auditor is required to express
his opinion as per the requirements of Section 255 of the Companies Ordinance, 1984. (08)

Q.8 (a) In peculiar circumstances the client restricts the auditors from performing certain
audit procedures. Discuss how the auditor should deal with such restrictions if the
same are imposed:

(i) at the time of appointment

(ii) during the audit. (08)

(b) Briefly state the circumstances when the audit report is modified without affecting
the auditor’s opinion. Also state how such modification is dealt with in the audit
report. (08)

Q.9 The auditor of a listed company is required to review the half yearly financial statements.
You are required to explain:

(a) the objectives of such review and how does it differ from audit; and
(b) the procedures that are performed while carrying out such review. (07)

Q.10 While reporting on the consolidated financial statements the principal auditor has to
evaluate the financial statements of the subsidiary company also. At times, such financial
statements are audited by other auditors. The local regulations applicable in such a case
may allow the principal auditor to base his opinion solely on the report issued by the
other auditor.

Describe the effect of such regulation on audit procedures and audit report to be issued by
the principal auditor. (08)

(THE END)
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate - Autumn 2007

Overall observation

On an average candidates performed below satisfactory level as only approximately 30%

candidates managed to get passing marks. The questions were fairly straight forward and
relatively simple and students could have performed well had they read the Auditing
standards in a reasonable depth and approach the questions logically. It is apparent that
besides lack of knowledge, the students also suffer from lack of presentation and
communication skills.

Questions-wise comments are as under:

Q.1 This was a simple question set by the examiner to gauge the knowledge of
candidates about external confirmation when auditor has been restrained to obtain
third party confirmation and alternatively he has been asked to rely on the other
audit evidence. The performance of the candidates remained unsatisfactory. Most
of the answers were restricted to alternate audit procedures and the assessment of
grounds for not allowing direct confirmation requests. Candidates could only
explain the eventual disposition available to the auditor in the form of modifying
the auditors’ report but they failed to appreciate other considerations like
indication on the management’s integrity and doubts regarding the existence of
fraud and errors etc.

Q.2 This was one of the easiest questions set by the examiner and majority of the
candidates performed well as they were able to describe the principal methods of
selecting the samples such as Random Number Tables, Computerized Random
Numbers, Systematic Selection, Haphazard Selection, Block Selection. However,
some students unnecessarily wasted their time in drawing random number tables
or tables for systematic selection which was altogether not required.

Q.3 This was one of the easiest questions set by the examiner and majority of the
candidates performed well and were able to secure full marks.

Q.4 The question tested students knowledge about verification procedures pertaining
to fixed assets together with its related assertions. It was surprising to see that the
question was not well answered. The students didn’t even know all the assertions
and also gave irrelevant information. Some of the students didn’t give the
assertions at all while in many cases the co-relation between audit procedures and
audit assertions was incorrectly made.

Page 1 of 3
 Examiners’ Comments on Auditing – Autumn 2007 examination

Q.5 (a) This question was set by the examiner to test the knowledge of the
candidates about the matters to be considered in establishing the scope of
audit. Very few students could manage to list reasonable number of valid
points. The important considerations include financial reporting framework,
extent of reliance on the work of internal auditors, areas requiring
specialized knowledge and use of experts, use of information technology and
use of information based on previous audits specially the information
relating to risk assessment procedures and tests of controls.

(b) This was again a simple question and majority of the candidates secured
good marks as they correctly explained various risk assessment procedures
such as analytical procedures, inquiries from management, inspections and
observations etc.

Q.6 This was a simple question but surprisingly students could not perform well. In
part (a) majority of the students declared that auditor is not responsible for
detecting fraud. In fact the auditor is required to obtain reasonable assurance that
the financial statements are free from material mis-statement whether caused by
fraud or mistake.

Q.7 This was one of the easiest of questions. Most students were able to list the
matters which are required to be reported in the audit report. However, some
students misunderstood the question and instead of restricting themselves to
matters referred to in Section 255 of the Companies Ordinance 1984, they started
to list and describe matters on the basis of which the audit report is qualified.

Q.8 (a) Most of the students only stated that the auditor should not accept an
assignment if restrictions are placed on performing certain audit procedures,
prior to its acceptance. However, this is not the only available option.
Although the auditor has every right to refuse an assignment, usually he will
refuse to accept the audit only if the restrictions are such that these may
result in a disclaimer of opinion.

However, if such limitations do not have a pervasive effect on the financial

statements the auditor may accept the assignment. In such a case, he may
communicate his concerns through the engagement letter.

The students response was much better in describing the auditors course of
action in case limitations on carrying out audit procedures are imposed
during the audit. Most of them were able to correctly address the following
issues in their answers:

(i) Carrying out alternative audit procedures.

(ii) Possible effects on the audit opinion i.e. qualification, disclaimer etc.
(iii) Matters to be covered in the audit report, in case modification becomes
necessary.

Page 2 of 3
 Examiners’ Comments on Auditing – Autumn 2007 examination

(b) The students were generally able to list the circumstances in which a report
is modified without affecting audit opinion like material uncertainty as
regards going concern, any other significant uncertainty (as opposed to
multiple uncertainties) and where other information attached to the financial
statements is incorrect etc.

While discussing as to how the modification is dealt with in the auditor’s

report, most students restricted their answers to stating that an emphasis of
matter paragraph has to be added. Very few of them could discuss related
issues such as the reference to the relevant note to the financial statements,
placement of the emphasis paragraph in the audit report and the requirement
to clarify that the opinion is not qualified.

Q.9 Poor performance was witnessed in this question. In part (a) students didn’t have a
clear cut idea of the difference between a review engagement and an audit. A
review is performed with the objective of expressing a conclusion (as against
expressing an opinion). Accordingly, in a review of financial statements an
auditor merely expresses that nothing has come to his attention which may cause
him to believe that the financial statements have not been prepared in accordance
with the applicable financial reporting framework. In part (b), while describing the
procedures that are performed in an engagement to review interim financial
statements, most of the students listed the same procedures which are generally
performed in an audit.

Q.10 This question was fairly simple and had the students studied the relevant auditing
standard in reasonable depth they could have performed well. Most of the students
appeared to be confused and narrated the audit procedures which the principal
auditor usually performs before placing reliance on the work of the other auditor.
But the requirement of the question was altogether different. The question dealt
with a situation in which the local regulations allow the auditor of a parent
company to place reliance solely on the report of the auditor of the subsidiary.
The students were required to explain what impact such regulation will have on
the audit procedures and audit report to be issued by the principal auditor.

Many of the students advised that the principal auditor need not perform any
procedures as the local regulation allow him to do so. But this advise is not in
accordance with the International Standards on Auditing ISA-600.

The students are advised to study para 18 of the International Standard on

Auditing - 600 related to ‘using the work of another auditor’ to seek guidance on
this issue.

(THE END)

Page 3 of 3
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2008

March 3, 2008

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 Explain briefly the role of International Auditing and Assurance Standards Board
(IAASB) and the purpose of the pronouncements issued by it. (04)

Q.2 You are the manager on the audit of Nobel Limited, a listed company, which
manufactures automotive parts and air-conditioners for motor vehicle assemblers.
Annual sale of the Company is Rs. 850 million and profit before tax is Rs. 60 million.

Your review of the audit working paper file has disclosed the following outstanding
issues:
(i) The company is facing a potential legal claim from Mehran Motors Limited
(MML) in respect of defective air conditioners supplied to them. A claim for
Rs. 25 million being the cost of replacement of air conditioners and lost
production time has been lodged with the Company by MML. The management
is of the view that the claim is not justified, as the air conditioners were properly
functioning and had been tested for quality and that the defects have arisen
because of the negligence of MML and its technicians. However, a provision of
Rs. 2 million has been made in the financial statements in this respect.

(ii) Depreciation on certain equipment has been charged at 10% per annum on
reducing balance method. This rate is consistent with prior years and the same
rate is being used by most other companies, in the automobile industry.
However, significant losses have recently been recorded on the disposal of
similar equipment.

Management has provided written representations in respect of the above matters.

Required:
What audit evidence will you gather to address the above issues? (10)

Q.3 (a) You are the audit manager on the audit of Indus Limited. The audit senior has
completed the audit of the company for the year ended June 30, 2007 and
submitted a draft audit report for your review. The following paragraphs have
been extracted from the draft audit report:

‘We conducted our audit in accordance with the auditing standards as applicable in
Pakistan. These standards require that we plan and perform the audit to
obtain……. We believe that our audit provides a reasonable basis for our opinion
and, after due verification, we report that:

We did not observe the counting of the physical inventories as of June 30, 2007,
since that date was prior to the time we were initially engaged as auditors of the
Company. Owing to the nature of the Company’s records, we were unable to
satisfy ourselves as to the quantities of inventory by other audit procedures.
 (2)

In our opinion and to the best of our information and according to the explanations
given to us, the balance sheet ……….. so required and respectively give a true and
fair view of the state of the Company’s affairs as at June 30, 2007 and of the loss,
its cash flows and changes in equity for the year then ended.
The Company’s liabilities exceed its assets at June 30, 2007 creating an adverse
situation which management believes is reversible over the coming twelve
months. Management further believes that the Company is capable of continuing
in operation for twelve months from the date of this report.”
Required:
Identify the shortcomings in the above paragraphs extracted from the audit report. (08)
(b) ABC, Chartered Accountants released a qualified audit report on financial
statements of Normal Limited due to a disagreement on tax provisions. Before
issuance of financial statements and audit report to the shareholders, the
management revised the financial statements on the basis of subsequent decisions
announced by the appellate authorities. The adjustment made in revised financial
statements now agrees with the previously suggested audit adjustments. The
revised financial statements have been provided to ABC for fresh audit report.
Required:
List the steps which ABC, Chartered Accountants should take before issuing a
revised (unqualified) audit report. (06)

Q.4 (a) How would you determine the aggregate of uncorrected misstatements? (04)
(b) Discuss the factors that influence the auditor’s judgment as to what constitutes
sufficient appropriate audit evidence? (07)

Q.5 (a) If the auditor plans to rely on controls that have not changed since they were last
tested, the auditor should test the operating effectiveness of such controls at least
once in every third audit. Identify the situations in which the auditor may decide to
test the controls again, in the very next audit. (04)
(b) Briefly describe the components of internal control. (10)

Q.6 The following three entities have approached Alpha & Company, Chartered
Accountants (the firm) for appointment as their statutory auditors. In each case there are
following issues which need to be considered before the firm decides to accept the
assignments.
(i) Client: Safe Bank Limited
Issue: the firm has acquired office equipment from the bank under finance lease
arrangements. In addition, some partners of the firm are also using the bank’s
credit card facility.
(ii) Client: Pride Communication Limited (PCL):
Issue: One of the firm’s partners had remained the director of PCL for many
years, as a nominee of Federal Government.
(iii) Client: Gama Limited
Issue: A partner of the firm holds shares in Beta Limited which is an associated
company of Gama Limited.

Required:
In each case specify the minimum conditions specified by Companies Ordinance, 1984,
which should be fulfilled in order to accept the audit engagement. (09)
 (3)

Q.7 (a) List down the principal contents of an audit engagement letter. (07)
(b) Audit documentation facilitates understanding of the nature, timing and extent of
audit procedures; the results of audit procedures and significant matters arising
during the audit.
Discuss briefly:
(i) What are the “significant matters” which are required to be documented?
(ii) In how many days after the date of auditor’s report, the auditor is required
to complete the assembly of his final audit file? (07)

Q.8 As the manger on the audit of Masoom Limited you want the management to appoint
experts to assist you on certain matters.
Explain the circumstances where auditor may use the work of an expert and the
auditor’s responsibilities in this regard. (07)

Q.9 You are the audit manager on the audit of a listed company DB Limited. During initial
discussion with the management, the General Manger of DB was apprehensive about
various inquiries you made and information and explanation you requested. He feels
that many of them are not relevant to the financial statements and some are confidential
in nature. He is particularly reluctant to provide information about:
(i) industry performance;
(ii) shareholding of the close relatives of the directors in other entities;
(iii) production procedures;
(iv) location of warehouses;
(v) new research carried out;
(vi) qualification of head of internal audit; and
(vii) future plans to recoup the huge losses sustained in prior years.
Required:
Explain the relevance of above inquiries to the management, with reference to the
objective and scope of the audit? (07)

Q.10 You have completed the audit of financial statements of Pride Limited showing profit
before tax and total assets of Rs. 74 million and Rs. 582 million respectively. Following
issues are still unresolved:
(i) Subsequent to year end, an employee left the company without settling a loan of
Rs. 0.5 million. Management has refused to make provision but is ready to give a
disclosure.
(ii) The company imported a plant on deferred payment arrangement. No forward
exchange cover was taken by the company. At year end the liability was valued at
Rs 83.0 million and reported accordingly. However, it was finally settled for Rs.
88.5 million.
(iii) The revenue recognition policy is not consistent with the relevant International
Accounting Standard (IAS). Had it been in accordance with the IAS, the profit
before tax would have been Rs. 79.2 million.
(iv) The contract with a major customer is about to expire after three years. Certain
internal documents show that the company might have to face a very difficult
situation thereafter.
(v) Personal files of many senior executives do not contain any documentary
evidence of their qualification. Salaries paid to such executives are Rs. 24 million.
Required:
Discuss the impact of each of the above matters on your audit report. (10)
(THE END)
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Spring 2008

General:
On an average the candidates performed below satisfactory level though the paper
contained a mix of both theoretical and practical questions and both were quite straight
forward. The students were generally found deficient in the knowledge and understanding
of Auditing Standards. Moreover, many of them could not approach the questions in a
logical manner. Presentation and communication skills also warrant some serious
attention.

Question-wise comments are as under:

Q.1 This was a straight forward question and tested the role of IAASB and the purpose
of pronouncements issued by it. Few students were able to correctly mention
about its activities such as development of International Standards on Auditing,
Review Engagements and Assurance Engagements. The purpose of the
pronouncements issued by it i.e. establishing benchmarks for high quality auditing
and assurance standards, providing guidance to auditors and other professional
accountants were mentioned by very few of the candidates. A sizeable number of
students did not attempt the question at all. Majority of the answers were in the
generalized form and addressed irrelevant matters.

Q.2 A practical question a significant part of which could have been answered using
just common sense plus general understanding of the subject. The candidates were
required to identify audit evidences which they will gather in the specified
situations. Although the situations were simple yet most students were unable to
mention the related audit evidence such as:
In sub-part (i)
• Legal opinion
• Terms and conditions of the contract
• Documentation of the responses of other customers, to whom similar items
have been supplied
• Opinion of independent experts
• Evaluation of the basis of provision and related documentation.
In sub-part (ii)
• Industry standards
• Opinion of independent experts
• The environment (production load, maintenance policies etc.)
• The reasons for sale of equipment (normal or otherwise)

Page 1 of 5
 Examiners’ Comments on Auditing – Spring 2008

An important issue raised in the question i.e. appropriateness of management

representation was not addressed in most of the answers.

Q.3 (a) In this part of the question an audit report was given which contained
emphasis of matter paragraph and also dealt with an issue relating to scope
limitation. The students were required to discuss the shortcomings in the
report. Very few of the students could highlight the following deficiencies:

(i) The auditor failed to amend the scope paragraph and did not mention
therein, the scope limitation caused because of his inability to
observe the physical count of inventory.

(ii) The auditor did not qualify the report nor did he give a disclaimer of
opinion.

(iii) The last paragraph of the report was like an emphasis of matter
paragraph on the issue of going concern, but did not contain the
following:
• Cross-reference to any note to the financial statements; and
• A statement to clarify that the opinion is not being qualified.

(b) The second part required students to list the steps which a firm will have to
take if it wants to issue a revised (unqualified) audit report after the
management had finally agreed to make the necessary adjustments. The
performance in this part was relatively better as many students discussed
the related steps such as reviewing the additional evidence available with
the management on account of which it agreed to revise the financial
statements, reviewing minutes of important meetings, reviewing legal
documentation etc., to verify the appropriateness of adjustments.

Q.4 (a) In this part, majority of the students were able to specify that aggregate of
uncorrected misstatements is the sum of the mis-statements identified by
the auditor and the estimate of other mis-statements which could not be
identified i.e. projected errors.

(b) The students were required to discuss the factors which would influence
auditor’s judgment as to what constitutes sufficient appropriate audit
evidence. However, most of them focused on the factors which affect the
reliability of the audit evidence rather than factors which influence the
auditor’s judgment as regards sufficient and appropriate audit evidence.

The better performing students were able to specify at least the following
factors i.e. effectiveness of management’s response and controls;
persuasiveness of the audit evidence and experience gained during previous
audits.

Page 2 of 5
 Examiners’ Comments on Auditing – Spring 2008

However, very few could identify the following factors which also play an
important part in determining whether a particular audit evidence is
sufficient and appropriate:

ƒ Significance of the potential misstatements and its impact on financial

statements
ƒ Results of audit procedures performed
ƒ The environment of the entity.

Q.5 (a) This was an uncomplicated, easy and bountiful question for the students
and was attempted reasonably. Most of the students correctly identified the
situations where the auditor may decide to test the controls which had also
been tested in the immediately preceding year. Weak control environment,
weak monitoring of controls, change in personnel & circumstances are
logical examples of situations where the auditor takes such a decisions.

(b) The response was good and majority of the students scored good marks as
they were able to identify and explain the components of internal control as
referred to in ISA-315 and appendix 2 of the said ISA.

Q.6 Three situations were given in the question and in each case the students were
required to determine and explain whether the auditor can accept appointment
offered by the prospective clients. Although many students were well prepared for
such questions, a large number also displayed poor knowledge and understanding
of relevant provisions contained in the Companies Ordinance, 1984.

Many students failed to explain the following:

(i) The firm cannot be appointed as auditor of the company unless the lease
agreement is terminated and credit card balance of the partners is reduced
to Rs. 500,000 or less.

(ii) A director can be appointed as external auditor of the company three years
after the date on which he ceases to be a director of the company.
Therefore, it was only possible for the firm to accept the appointment if the
concerned partner resigned from the firm.

(iii) The firm can accept appointment as auditor of a company if a partner of the
firm holds shares in the associated undertaking of that company, provided
he disposes off the shares within ninety days of appointment.

Some of the students gave reasons because of which the firm may not
accept appointment as auditors, but did not explain as to what it should do
if it did want to accept the appointment. Many of the students could not
produce exact answers i.e. in the third situation they explained that the
concerned partners will have to dispose of the shares but did not mention
that such disposal can be made within 90 days of appointment.

Page 3 of 5
 Examiners’ Comments on Auditing – Spring 2008

Q.7 (a) Students performed well in this part and were able to list down the
principal contents of an audit engagement letter enumerated in para 6 of
ISA 210.

(b) Instances were noted where students started listing down all the contents of
audit working papers/evidences instead of restricting their answers to
significant matters only. The significant matters have been described in
para 14 of ISA 230. Students listed the usual components such as planning
documents, third party confirmations, enquiry letters etc. as significant
matters.

The time allowed for completion of audit file i.e. 60 days from the date of
audit report was correctly identified by most of the candidates.

Q.8 The question focused on two issues i.e. (i) circumstances where the auditor may
use the work of an expert and (ii) auditor’s responsibilities in this regard.

Most of the students dealt with the first issue correctly i.e. by explaining that
opinion of an expert may be required on specific matters, (other than accounting
and auditing) such as:

ƒ Valuation of assets like plants, work of art etc

ƒ Determination of quantities such as stockpile, underground minerals etc
ƒ Determination of amount using specialized methods like actuarial valuation
ƒ Measurement of work completed
ƒ Legal opinions.

As regards the second point many candidates discussed the report to be issued by
the auditor instead of describing the responsibilities of the auditor such as:

• Evaluating the professional competence and objectivity of the expert

• Evaluating the adequacy and appropriateness of the scope of the expert’s work
• Resolving inconsistencies, if any, between the expert’s findings and the results
of other audit evidence.

Q.9 The students were required to explain the relevance of specified information to the
objective and scope of audit. Barring few exceptions, the performance was not
satisfactory.

The students were expected to cover the following aspects in their answers:

• Information on industry performance is required to plan and assess risks. It

may also be used for analytical procedures.
• Information about shareholdings of close relatives of the directors in other
entities is required to verify disclosures related to transactions with related
parties.
• Location of warehouses and production procedure is also required for planning
and risk assessment purposes.

Page 4 of 5
 Examiners’ Comments on Auditing – Spring 2008

• Information on new researches gives the auditor an understanding about the

entity’s future plans, business viability and expected changes in the business
environment.
• Qualification of head of internal audit is one of the factors which the auditor
considers in evaluating the degree of reliance which can be placed on the work
of internal audit.
• The auditor is required to evaluate the entity’s ability to continue as a going
concern. In view of huge losses, the auditor is required to review the
effectiveness of the management’s plans to keep the entity operating as a
going concern.

Q.10 This question was designed to test the candidates’ ability to analyze the issues and
their eventual impact on the audit report. Barring few exceptions, incorrect
conclusions were drawn in most situations. The students generally recommended
some sort of qualification in every case without considering the materiality and
adjusting/non-adjusting nature of the events.

Individual situations and the responses thereto are discussed below:

(i) Students could not recognize that the amount involved i.e. Rs. 0.5 million
was immaterial and would not have any impact on audit report.

(ii) There was a general misconception that a subsequent change in foreign

exchange rate is an adjusting event. Therefore, modification is needed in
the audit report. Some of the students were also of the view that the auditor
needs to give an emphasis of matter paragraph as regards management’s
decision of not obtaining a forward exchange cover. They failed to realize
that the decision to take or not to take forward cover is based on the
management’s understanding and assessment of the underlying business
environment and the auditor has no right to interfere unless the matter is
very material and involves an unduly high degree of risk as regards the
viability of the entity.

(iii) Non-compliance with the International Accounting Standards on revenue

recognition is a principle error. The trend among the students to suggest
qualifications in all cases enabled them to secure some marks. However,
very few of them highlighted the fact that the effect of the error was
material i.e. 7% of the net profit before tax.

(iv) The current profitability does not cast any doubt on the company’s ability
to continue as a going concern. Students were unable to focus on this
aspect. They also failed to realize that ample time (three years) was
available with the company to address the issue.

(v) Most of the students were able to clarify that non-availability of documents
in personal file may have some impact on risk assessment but it does not
warrant a modification in the audit report.

(THE END)
Page 5 of 5
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2008

September 1, 2008

AUDITING (MARKS 100)

(3 hours)

Q.1 You are the audit manager on the audit of Gold Limited. During the planning phase of the
audit, the audit senior had a meeting with the CFO of the company. While discussing
matters such as performance of the company, financial ratios and the overall audit strategy
etc., the CFO informed that there were no related party transactions during the year. He
also acknowledged that management is responsible for identification and disclosure of
related parties. In view of the above, the audit senior feels that there is no need to prepare
audit program in respect of related parties.
Required:
(a) Comment on the conclusion drawn by the audit senior and give brief explanation of
the auditor’s responsibility in respect of related party transactions. (04)
(b) What types of transactions may indicate the existence of unidentified related parties? (07)

Q.2 Because of the nature of fraud and the difficulties encountered by the auditors in detecting
material misstatements in the financial statements on account of fraud, the management has
to play a significant role in assisting the auditors in the performance of appropriate audit
procedures. Make a list of representations that the auditor should obtain from the
management in this regard. (07)

Q.3 (a) Explain audit sampling and the risks associated with the use of audit sampling
techniques. (10)
(b) Identify the factors which influence the sample size for:
(i) Tests of controls (ii) Tests of details. (05)

Q.4 Karim & Company, Chartered Accountants are engaged in the review of interim financial
information of Babar Textiles Mills Limited for the half year ended June 30, 2008. The
increase in oil and energy prices and current inflationary trend prevailing in the country has
resulted in substantial losses and the Company’s outlook is negative. Moreover, in view of
recessionary pressures being faced by the US and many of the EU economies, some of the
large customers in those countries have not renewed their orders and many others are
expected to follow. Consequently, the company has decided to lay off 40 percent of its
workforce gradually, over the next few months.

The company’s management acknowledges the severity of the situation but is reluctant to
provide specific details in the interim financial information. However, it has given a note
containing general indications about the future prospects of the company.
Required:
Describe how the auditor should address the above issue and the implications it may have
on the review report of interim financial information. (09)

Q.5 Mr. Mubarak is the audit senior on the audit of Sky Blue Limited. While comparing the
draft financial statements with the previous year, he noted many unusual fluctuations.
Briefly explain the procedure he should follow, in the above situation. (06)
 (2)

Q.6 You are the senior in-charge on the audit of financial statements of Fine Tractors Limited,
for the year ended June 30, 2008. The audit field work has revealed the following issues
which are still unresolved:
(a) The company is not charging depreciation on a building which was constructed
during the year on freehold land belonging to the company, at a cost of Rs. 128
million. The management is of the view that land and building are part of the same
class of assets and no depreciation is required to be charged thereon because the
value of such assets is expected to increase considerably in future.
(b) A customer of the company has filed a suit claiming damages of Rs. 4.6 million, on
account of company’s failure to meet a deadline for supply of certain goods. The
company has filed a counter claim of Rs. 5.5 million, against the same customer on
account of the customer’s failure to fulfil certain conditions regarding payment of
advance. No provision has been made in the books of the company as the company’s
lawyers are not very sure about the outcome of the lawsuit.
You have discussed these matters with your manager who believes that the amounts
involved are material.
Required:
Draft a qualification paragraph that may have to be included in the Audit Report. You may
assume necessary details. (10)

Q.7 Direct confirmations from third parties provide independent audit evidence that certain
account balances and items in the financial statements are properly recorded and disclosed.
Required:
(a) Distinguish between positive and negative confirmations. (02)
(b) Briefly describe the risks associated with each of the above type of confirmation and
the steps that an auditor usually takes to avert such risks. (05)
(c) Explain why and under what circumstances an auditor may decide to use negative
confirmation requests. Also, identify the circumstances where the auditor may use a
combination of positive and negative confirmations. (06)

Q.8 You are the engagement manager on the audit of Chill Limited. During the course of audit,
you have been provided an Actuarial Valuation Report on the Company’s Employees
Retirement Benefits Scheme. You have noted that the report has been prepared by
M/s Saleem and Company which is not well known to you.
Required:
Briefly describe the matters that you would consider before using the report prepared by
Saleem and Company. (05)

Q.9 Azeem and Company have been the auditors of Shahid Corporation Limited, a listed
company, for the past many years. You have been appointed as the audit engagement
manager.
Briefly explain the matters which you would consider while assessing the following:
(a) acceptance and continuance of client relationship. (05)
(b) need to send a new engagement letter. (03)

Q.10 (a) Explain the difference between “The Overall Audit Strategy” and the “Audit Plan”. (04)
(b) Identify the matters which are usually discussed / explained in each of the above
documents. (12)
(THE END)
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Autumn 2008

General:

Whilst fairly high number of candidates answered the paper to a good pass standard, a
significant proportion of candidates who failed to perform adequately, achieved very low
marks in the paper. Here we have the chance to discuss traits of Successful candidates
and Unsuccessful candidates, which emerged from this examination session.

Successful candidates’ interpreted questions correctly suggesting that due attention was
given towards understanding the requirements of the question. Answers appeared to be
structured, using the question as a framework for the answers and evidence of better
planning was clearly observable. Many attempted their strongest question first to get
them off to a triumphant start.

In a nutshell, successful candidates tended to adopt a focused approach, enabling them to

deal with the varied questions in the time available.

Unsuccessful candidates did not submit specific replies rather tried to answer by making
general comments without making the use of appropriate terminologies which resulted in
a poor expression. Apparent lack of study and revision was noted. Answers submitted by
some of them were extremely brief and lacked any profundity of knowledge of the
relevant areas of the syllabus.

Further, most such candidates started to write whatever they knew about the topic without
comprehending the requirement of the question while a few appeared to devote more than
the required time to the question in hand without keeping in mind that they have to solve
the other questions also. Such candidates therefore should endeavour to manage their
time better by making sure they have sufficient time to deal with all the questions equally
well.

Q.1 (a) This question was primarily a test of candidates’ knowledge of auditors’
responsibility with regard to the related party transactions based on ISA 550.
In this part four marks were assigned for commenting on the audit senior’s
conclusion as regards verification of related party transactions and
identifying the auditor’s responsibility. While many candidates were able to
obtain full marks available, a significant number performed poorly.

Page 1 of 5
 Examiners’ Comments on Auditing – Autumn 2008

Few candidates did not consider it necessary to give comments while some
submitted inconspicuous replies without stating whether the conclusion was
right or wrong. Candidates were expected to narrate that the auditor should
not decide to omit the audit procedures pertaining to related parties simply
on the basis of CFO’s statement and that the auditor is responsible to
perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure of related parties by the
management and as regards the effects of related party transactions that are
material to the financial statements. However, he cannot be expected to
detect all related party transactions.

(b) This part tested candidates' knowledge of describing the type of transactions
which could identify existence of unidentified related parties based on
paragraph 11 of ISA 550. Most candidates answered this satisfactorily while
few of them confused it with the procedures required to be carried out for
identification of related party transactions.

Q.2 It was a straightforward question based on ISA 580 and required listing of
representations that the auditor should obtain from management regarding fraud.
There was a broad range of marks achieved within the candidate population and
many performed very well. However, few candidates conveyed all the elements of
the standard representation letter instead of restricting their reply to the explicit
requirements of the question.

Q.3 Seemingly, a significant number of candidates found it to be the easiest question.

It required explanation of audit sampling, the risks associated with sampling and
the factors which could influence the size of sample for tests of controls and tests
of details.

In part (a) of the question, successful candidates rightly narrated that audit
sampling involves the application of audit procedures to less than 100% of items
within a class of transactions or account balances such that all sampling units have
a chance of selection. It enables the auditor to obtain and evaluate audit evidence
about the selected items for forming a conclusion about the related population.
They also pointed out that audit sampling can use either a statistical or a non-
statistical approach. However, few of them depleted their valuable time by
gratuitously explaining those approaches in detail and in discussing the sample
selection methods.

The majority described “Sampling Risk”, in brief and rightly so. However, here
again many candidates unnecessarily described the “Non Sampling Risk” also.

In part (b) many candidates correctly identified factors influencing sample size for
tests of controls and tests of details based on ISA 530. However, many candidates
simply mentioned the same factors under both headings while there were few who
knew the difference but could not describe it manifestly probably due to poor
command of English.

Page 2 of 5
 Examiners’ Comments on Auditing – Autumn 2008

Q.4 This proved to be the most difficult question for the candidates. Their approach in
addressing the situation indicating potential going concern uncertainty and the
resultant implications on review report of interim financial information left much
to be desired. Only few of the candidates tackled the question in a desired order,
on the following lines:

(i) At the outset the auditor should inquire whether the management has
changed its assessment of the entity’s ability to continue as a going concern.

(ii) If he concludes that the conditions cast significant doubts about the entity’s
ability to continue as a going concern, he should:

• Inquire from the management about their future plans, the feasibility of
these plans and whether management believes that the outcome of such
plans will improve the situation.
• Consider the adequacy of the disclosure of such matters in the financial
information.

(iii) The auditor should consider whether the note given by the management
adequately discloses the uncertainty.

(iv) If he assesses that the note is adequate, the auditor should give an emphasis
of the matter paragraph, otherwise, he should express a qualified or adverse
opinion, as appropriate.

The quality of answers varied a lot. Many candidates scored no marks at all as a
consequence of having only superficial knowledge of the subject, profound
dependence on memorizing the subject as compared to understanding the
substance behind it and lack of satisfactory expression skills.

Q.5 In this question the candidates were required to briefly explain procedures to be
performed in case of unusual fluctuations between financial statements of current
and previous years. ISA 520 has outlined the following steps in this regard:

(i) Making inquiries from the management.

(ii) Corroborating management responses by:
• comparing them with the auditors understanding of the entity; and
• other audit evidence available.
(iii) Consideration of the need to perform other audit procedures if management
is unable to provide adequate explanation.

Many candidates answered accordingly and secured full marks. However, few
candidates got on to the wrong track and produced irrelevant stuff such as
explanation of the term “analytical procedures”.

Page 3 of 5
 Examiners’ Comments on Auditing – Autumn 2008

Q.6 This question examined the ability of the candidates to draft appropriate
qualification paragraphs for inclusion in the auditors’ report based on the given
issues. It was noticeable that many candidates either did not attempt this question
or simply stated irrelevant matters while many others produced the entire auditor’s
report and wasted precious time. There were very few replies that could be
considered complete and relevant. Most of the answers suffered from one or more
of the following discrepancies.

• Whereas the first situation justified a qualified opinion due to disagreement

with the management, the second situation should have been dealt with by
including an emphasis of the matter paragraph. In many cases, a qualification
paragraph was drafted in the second situation also.

• A reference to the concerned note was missing in either case. Since the
question had given clear directions that the candidates may assume necessary
detail, it would have been appropriate to refer to the notes contained in the
financial statements in respect of both the issues. For example the
modification paragraph relating to depreciation could have commenced with
the words “As more fully explained in Note ABC of the financial statements”.

• While referring to the first situation, most of the replies were restricted to
stating that depreciation has been short provided. References to the facts that
accounting policy being followed was not in accordance with the IFRSs was
missing whereas the impact on fixed assets, loss for the year and accumulated
loss was not mentioned either.

• In the emphasis of the matter paragraph, only the suit filed by the customer
amounting to Rs. 4.6 million was mentioned but quite often the reference to
the counter claim filed by the Company was missing.

Q.7 (a) It was a relatively straightforward question based on ISA 505 and many
candidates achieved good marks by clearly distinguishing between positive
external confirmations and negative external confirmations.

(b) Here the candidates were asked to identify the risks associated with each of
the two types of confirmations and necessary steps to be taken by an auditor
to avert such risks. This was also answered well. However, few candidates
wrote lengthy notes on alternative audit procedures for confirming the
balances, to cover the risks, which was not a requirement of the question.

(c) In this part a high number of candidates scored good marks as they were
able to list down the circumstances in which it may be appropriate to send
negative confirmations and also, the situations where a combination of
positive and negative external confirmations may be used in accordance
with the guidance provided by ISA 505.

Page 4 of 5
 Examiners’ Comments on Auditing – Autumn 2008

Q.8 Candidates were required to describe matters to be considered by auditor before

using report of an expert as enumerated in ISA 620. The guidance provided by the
ISA is outlined hereunder:

(i) The auditor should evaluate the professional competence of the expert and
in doing so, he should consider:

• Professional licencing and membership of the expert; and

• Experience and reputation of the expert.

(ii) The auditor should also evaluate the objectivity of the experts and the risk
that it may have been impaired.

While many candidates displayed a high standard of knowledge on this topic, a

large number of answers included spurious points and explanations indicating
unsatisfactory preparation for this examination. Some of the candidates got
confused and listed the matters to be considered before using work of another
auditor.

Q.9 In this question the candidates were required to explain the matters to be
considered while assessing acceptance and continuance of client relationship and
also the need to send a new engagement letter in the case of a recurring audit,
based on ISA 220. While a good proportion of answers submitted were concise
and correct, it was apparent that few candidates did not bother to understand the
exact requirement of the question and drafted a standard engagement letter. Those
who may have done so deliberately because they didn’t know the answer to the
actual question, are advised that such a practice does not benefit them in any way.
In fact it results in wastage of time which could otherwise be utilized in improving
the answers to other questions.

Q.10 (a) The requirement was relatively straightforward i.e. to distinguish between
overall audit strategy and an audit plan and it was encouraging that many
candidates achieved good marks. However, a significant number of
candidates did not recognize the difference between the two.

Good scripts correctly narrated that overall audit strategy sets the scope,
timing and direction of the audit, and guides the development of the more
detailed audit plan whereas an audit plan is more detailed than the overall
audit strategy and includes the nature, timing and extent of audit procedures
to be performed by engagement team members in order to obtain sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level.

(b) In continuation of the topic in part (a), this part required the candidates to
identify the matters which are explained in each of the above i.e. the overall
audit strategy and the audit plan. Most of the candidates answered this
question to a good standard and were able to quote the various matters as
have been discussed in ISA 300. However, few candidates did not consider
the concise requirements of the question and also discussed the importance
of both the documents, which was not required.

(THE END)
Page 5 of 5
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2009

March 2, 2009

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) ICAP’s code of ethics has specified five principles of professional ethics for chartered
accountants. The circumstances in which a chartered accountant operates may give rise
to specific threats to compliance with these principles.

Required:
(i) Briefly describe each of the fundamental principles of professional ethics. (07)
(ii) Briefly describe different categories of the threats to compliance with the
fundamental principles. (05)

(b) Mustansar is the audit manager of a team engaged on the audit of a listed company.
During his initial discussion with the chief executive officer (CEO) of the company, he
was informed that depressed economic conditions have badly affected the company and
its liquidity. Due to uncertainty about the future of the company, certain key employees
have left including several staff members of accounting and finance department.
Consequently, the accounting records are in a bad shape and the management is making
efforts to complete the draft accounts quickly. He therefore requested Mustansir to
carry out necessary accounting work and to help prepare the annual financial statements
at a fee to be agreed mutually.

Required:
Briefly describe the guidelines contained in the ICAP’s Code of Ethics and the extent of
support that can be offered by the auditors, in the above situation. (06)

Q.2 While allocating the audit field work amongst the members of the audit engagement team,
your manager has advised the team members to keep each other informed on audit issues that
may arise during the course of audit and discuss the impact thereof on the entity’s financial
statements and their susceptibility to material misstatement.

Required:
Explain the objective and benefits of such discussions among the team members. (06)

Q.3 The audit field work of STU Limited has been completed and financial statements for the
year ended June 30, 2008 have been initialed for the purpose of identification. Two days
before the board meeting, following matters have come to the knowledge of the audit
manager.

(i) In a pending case, a lower court has delivered its judgment according to which the
company was found guilty and liable for damages of Rs. 10 million.
(ii) The company has received a dividend warrant issued by an investee company. The
dividend was declared by the Board of Directors on June 30, 2008. This amount has
not been recognized in the financial statements.
 (2)

(iii) The company has received a notice that one of its major customers has gone into
liquidation. The amount due from the customer at the balance sheet date has been
treated as good.
(iv) A long term loan has been classified as current liability as loan conditions have been
breached during the period. As per agreement, breach of conditions makes the liability
payable on demand. However, subsequent to balance sheet date, the lender has agreed
not to demand the loan during the next 12 months.

Required:
(a) Evaluate each subsequent event and discuss whether financial statements need to be
adjusted or not.
(b) What would be your action if management is not willing to revise or amend the
financial statements because of time limitation while you consider that revision or
amendment is necessary? (12)

Q.4 Distinguish between absolute and reasonable assurance. Identify the type of assurance that is
expected in an audit of the financial statements, clearly outlining the reasons to justify your
point of view. (08)

Q.5 Shamsuddin a newly qualified chartered accountant has recently established his practice in
the name of Shamsuddin & Co., Chartered Accountants. He is continuously trying to expand
his practice and in this process he came across the following situations:

(i) One of his friends, who is the owner of an advertising agency has offered to provide
significant discount for publicity of his new practice.
(ii) Fashion Limited, a private limited company, which has suffered heavily on account of
recent financial turmoil, has informed him that it is willing to appoint him in the
forthcoming annual general meeting (AGM) of the company in place of the existing
auditors, if he can quote a fee below the existing audit fee.
(iii) Design Limited has contacted Shamsuddin and informed him that they are willing to
appoint him as their external auditor in the next AGM at a fee of Rs. 200,000 if he
completes the audit in a month. However, in case of delay in the audit work the audit
fee will be reduced to Rs.150,000.
(iv) Shamsuddin receives an offer of appointment as auditors from Style Enterprises, a sole
proprietorship, who wants to remove the existing auditors before completion of their
term of office.

Required:
Shamsuddin is inclined to accept the above offers. Discuss the options available with him in
each of the above situations. (10)

Q.6 (a) Analytical procedures are an important part of the audit process and a tool which the
auditor uses during the various phases of an audit.

Required:
(i) Describe the nature and purpose of analytical procedures used during an audit. (06)
(ii) Describe the factors that the auditor needs to consider while designing and
performing analytical procedures as substantive procedures. (04)
(iii) Describe the objectives which an auditor expects to achieve while applying
analytical procedures at the overall review stage of an audit. (04)

(b) Representations by management are considered as audit evidence. Describe the basic
elements of a management representation letter. (04)
 (3)

Q.7 (a) “The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement
and assertion levels.”

(i) Briefly explain what do you understand by the risk of material misstatement at
financial statement level. (04)
(ii) List down the risk assessment procedures as referred above. (02)

(b) “The auditor’s assessment of materiality and audit risk may be different at the time of
initially planning the engagement from at the time of evaluating the results of audit
procedures.”

Briefly describe the reasons which may lead to such a change in the auditor’s
assessment. (03)

(c) Briefly describe the assertions used by the auditors in respect of the following: (07)
(i) account balances
(ii) classes of transactions; and
(iii) presentation and disclosures

Q.8 (a) Describe the situations in which an auditor issues a qualified audit opinion. (07)

(b) List down the information which should be included in the qualification paragraph.
Where such paragraph should be placed, in the audit report? (05)

(THE END)
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination – Spring 2009

General:

Whilst a substantial minority of candidates was undoubtly well prepared for the
examination, the performance of candidates overall was unsatisfactory. A sizeable
minority of candidates had poor preparation and displayed only sparse knowledge of core
areas of the syllabus.

Many displayed inadequate examination technique by inadequate planning and

inadequate layout of their answers. Few candidates appeared to encounter time
management problems.

However, the performance of good achievers was encouraging and reveals that this paper
in itself is not difficult provided the candidates are reasonably well prepared.

Further, the candidates are reminded that questions set in this paper require answers
specific to set scenarios rather than those consisting of general comments. Consequently,
the submitted answers need to be focused towards the issues raised in the questions.
Answers which do not meet this criteria are unlikely to be of a passing standard.

Q.1 (a)(i) This question focused on the fundamental principles of professional ethics
for chartered accountants and offered relatively simple marks for their
identification and description. Many candidates displayed a good standard
of knowledge on this topic and correctly identified and appropriately
described the following fundamental principles:
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional Behaviour
However, a large number of answers included spurious explanations
indicating unsatisfactory preparations and lack of adequate knowledge of
the code of ethics for Chartered Accountants.

(a)(ii) This question tested candidates' knowledge of categories of threats to

compliance with the fundamental principles. Whilst few candidates
correctly identified and described the threats as Self-interest threats, Self-
review threats, Advocacy threats, Familiarity threat & Intimidation threats,
many candidates either did not attempt this part of the question or simply
stated incorrect matter and consequently wasted their valuable time and
effort.
Page 1 of 6
 Examiners’ Comments on Auditing – Spring 2009

(b) Almost all the students were able to specify that under the listing regulations,
auditors of listed companies are not allowed to provide accounting services
and hence the auditor cannot accept the assignment. However, very few of
them touched upon the requirement of specifying the extent of support that
can be offered in the above situation.

Q.2 The question examined candidates’ knowledge of the objectives and benefits of
discussion among the engagement team, about the susceptibility of the entity’s
financial statements to material misstatement, based on ISA 315. The performance
in this question was poor as very few students were able to specify the following
advantages of such a discussion:
• opportunity for more experienced engagement team members to share their
insight based on their knowledge of the entity;
• allows exchange of information about business risks and about how and
where the financial statements might be susceptible to material misstatement
due to fraud and error;
• assist the engagement team members in gaining better understanding of the
potential for material misstatement in the areas assigned to them and how the
results of procedures they perform, may affect other aspects of the audit;
• provides a basis upon which the engagement team members communicate and
share information.
Most of the students wrote general points highlighting the benefits of carrying out
mutual consultation prior to making important decisions and were unable to display
their knowledge of the specific advantages discussed in the relevant auditing
standard.
Q.3 In this question, four different types of subsequent events were given and the
candidates were required to evaluate and discuss their eventual impact on financial
statements and action that need to be taken in case of management’s refusal to carry
out the suggested accounting treatment.
(a) A significant number of students were able to display a sound understanding
of the issues discussed and submitted the relevant outcome. However, an
equally large number, could not obtain pass marks. Many answers were too
brief and specified whether the event is adjusting or not without describing
the reasons thereof whilst others were unfocused, unstructured or
contradictory. Case to case analysis is as follows:
(i) Fairly large number of candidates were able to explain that the financial
statements should be adjusted and a provision of Rs. 10 million should
be recognized because the judgment by a lower court provides sufficient
evidence that an obligation existed at the balance sheet date.
Another opinion which was considered equally valid was that if the
company had filed an appeal to the higher court and is confident that it
will not be found guilty and the company’s lawyers have provided a
confirmation to support the company’s point of view, the financial
statements may not need any adjustment, however, adequate disclosures
would still be required.
Page 2 of 6
 Examiners’ Comments on Auditing – Spring 2009

(ii) Most students correctly determined that dividends declared before the
balance sheet date is a non-adjusting event if shareholders right to
receive dividend is established after the balance sheet date. Hence it
should not be recognized in the balance sheet.

(iii) About half the students were able to assess the situation correctly and
specified that bankruptcy of a customer after the balance sheet date
usually confirms that a loss existed at the balance sheet date and hence
it was an adjusting event.

(iv) When an entity breaches a provision of long term loan, on or before the
end of the reporting period, with the effect that the liability becomes
payable on demand, it classifies the liability as current even if
subsequent to balance sheet date, the lender agrees to recover payment
after 12 months of the end of reporting period. The students were
expected to conclude as above and were required to state that the
treatment was correct and no adjustment was needed. Here again, the
final conclusion given by the majority was correct but the reasoning
was often incomplete and in many cases, was altogether missing.

(b) Answer to this part of the question was quiet simple i.e. if management does
not amend the financial statements the auditor should express a qualified
opinion or an adverse opinion, depending upon the materiality of the item
involved.

Q.4 Seemingly, a significant number of candidates found it to be the easiest question.

This question was set to test the candidate’s knowledge about the concept of
absolute and reasonable assurance and their relevance in audit, and was based on
ISA 200.

Most candidates answered it to a pass standard with an encouraging number

obtaining 7 or more marks.

Q.5 The question offered ten marks for identifying the options available to
Mr. Shamsuddin, a newly qualified chartered accountant against different offers.
This was the least well answered question of the whole paper with a significant
number of students scoring none or only a small fraction of the marks available.

Answers submitted were noticeably weak and it seemed apparent that in general,
candidates had only sparse knowledge of code of ethics. Case to case analysis is as
follows.

(i) As per the Code of Ethics the practicing chartered accountants are not
allowed to publicize their services in a manner as is done by other normal
businesses.
Appropriate newspaper/magazine may be used to inform the public of the
establishment of a new practice. But such announcements should be limited to
a bare statement of fact. Thus, Mr. Shamsuddin can accept a discount offer
provided he ensures compliance to the above.

Page 3 of 6
 Examiners’ Comments on Auditing – Spring 2009

A large number of students simply stated that Mr. Shamsuddin can accept the
discount without deliberating on the issue as regards the extent to which he
may publicize his firm.

(ii) Chartered Accountants in practice should be careful not to quote fee lower
than that charged by their predecessors unless the scope and quantum of work
materially differs from the scope and quantum of work carried out by the
previous auditor. Very few of the students were able to refer to the scope and
quantum of work.

(iii) As per the Code of Ethics, the professional fees should not be contingent
upon the findings or results of such services.

Condition imposed by Design Limited may have impaired the objectivity of

the auditor on account of self interest threat. Therefore, Mr. Shamsuddin
should not have accepted such a proposal.

Very few of the students mentioned the issue of self interest threat and only
managed to specify that such a proposal should not be accepted.

(iv) In the given situation, the existing as well as the proposed auditors should
immediately communicate the fact to ICAP and the proposed auditor should
not accept the offer without clearance from ICAP and the existing auditor.
Very few of the students could reply on the above lines.

Q.6 (a) It was a relatively straightforward question based on ISA 520. In sub part (i)
candidates achieved good marks by explaining the following:

• how and what type of information/relationships are usually

compared/considered while performing analytical procedures; and

• the purpose for which analytical procedures are used i.e. as risk
assessment procedures, as substantive procedures and for overall
review of financial statements.

In part (ii) the answers were not upto the mark. The factors that are generally
considered while designing and performing analytical procedures are:
• suitability of using substantive analytical procedures given the
assertions;
• reliability of the data;
• whether the expectation is sufficiently precise to identify a material
misstatement at the desired level of assurance;
• the acceptable amount of difference between the recorded amounts and
the expected values.
Most of the students were unable to cover the above points in their answers
whereas some of them went into excessive details ignoring the fact that the
question carried four marks only.

Page 4 of 6
 Examiners’ Comments on Auditing – Spring 2009

In sub-part (iii) also, a large majority could not cover/describe the following
objectives of analytical procedures, in their answers:
• to form an overall conclusion about the financial statements;
• corroborate the conclusions drawn through other procedures;
• to identify unusual or unexpected balances (if any).

(b) This part required students to describe the basic elements of management
representation letter. This was a straightforward exercise for most candidates
however a disturbing number clearly had little understanding of the
requirement while few of them confused it with management letter.

Q.7 (a) This part of the question was based on ISA 315, and required students to
describe their understanding of the term risk of material misstatement at the
financial statement level and to list down the risk assessment procedures for
identification and assessment of such risks.

Only few candidates were well versed and obtained a high proportion of the
marks available and correctly described that risks of material misstatement at
the financial statement level refer to risks that relate pervasively to the
financial statements as a whole and potentially affect a number of assertions.
They are not necessarily identifiable with specific assertions at the class of
transactions, account balance, or disclosure level. Rather, they represent
circumstances that may increase the risks of material misstatement at the
assertion level. For example, through management override of internal
control.

The risk assessment procedures mentioned by most students, in response to

sub part (ii), displayed their lack of knowledge as they mentioned dozens of
unrelated procedures also. Only few candidates could correctly list down the
following:

• Inquiries of management and of others within the entity who in the

auditor’s judgment may have information that is likely to assist in
identifying risks of material misstatement.
• Analytical procedures.
• Observation and inspection.

(b) This part required candidates to outline the reason as to why the auditors
assessment of materiality and audit risk at the planning stage may change
later i.e. at the time of evaluating the results of audit procedures.

About half the students correctly identified the following reasons:

• change in circumstances;
• change in auditors knowledge as a result of performing audit
procedures;
• because the auditor may have intentionally set the materiality at a
lower level, to reduce the likelihood of undiscovered misstatement.

Page 5 of 6
 Examiners’ Comments on Auditing – Spring 2009

(c) This was a straightforward question dealing with the assertions used by
auditors in respect of account balances, classes of transactions and
presentation and disclosures. The students are generally well prepared to
answer such questions and accordingly good performances were witnessed.

Q.8 (a) Based on ISA 701, this part of the question offered seven marks for
describing the situations in which an auditor issues a qualified audit opinion.
Most candidates answered to a pass standard with an encouraging number
obtaining full marks. However, many students were unable to concentrate on
the precise requirement of the question and produced excessive details which
were not required.

(b) This part of the question required students to list down the information that
should be included in the qualification paragraph. These include (i) a clear
description of all the substantive reasons for qualification, (ii) unless
impracticable, a quantification of the possible effect(s) on the financial
statements and (iii) may refer to a more extensive discussion contained in a
note to the financial statements.

It proved to be an easy question for the students and most of them were able
to enumerate the above points. However, they were not very sure about the
placement of the qualification paragraph. Some of them tried to draft the
qualification paragraph, which was not required.

(THE END)

Page 6 of 6
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Autumn 2009

September 7, 2009

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 (a) Briefly highlight the management’s responsibilities relating to the financial statements? (07)

(b) During the audit team planning meeting, a member of the audit team passed a comment
that based on past experience with the client, he was confident that the management of
the client was honest and there was no issue as regards management integrity or risk of
fraud in the Company. The audit manager responded that the auditor should always
maintain an attitude of professional skepticism throughout the audit.

Required:
Briefly describe ‘Audit Skepticism’ and elaborate on the response of the audit
manager. (08)

Q.2 During the course of audit an auditor is expected to be vigilant enough to develop
understanding about the propriety of important transactions and to determine whether or not
such transactions have appropriate business rationale.

Required:
Briefly describe the situations in which a transaction is indicative of fraud or an attempt to
conceal fraud or fraudulent reporting. (07)

Q.3 (a) You are the audit manager on a client where an annual sale is Rs. 640 million. During
the course of annual audit the following table was developed by an audit team
member, to categorize the annual sales:
Rs.
Category A 50 sales transactions to different customers 300 million
Category B 100 transactions to different customers 200 million
Category C 500 transactions to different customers 140 million
Total 640 million

Sohail, a team member, is of the view that if verification of all the transactions in
category A is carried out, there is no need to perform further procedures. However,
other team members do not agree and consider that proper sampling should be carried
out from the total population and categorization should be ignored.

Required:
As an audit manager of the job, you are required to:
(i) Explain how audit efficiency could be improved by using the above table.
(ii) List other ways in which the sales population may be categorized and what
precaution should be taken while carrying out such categorization.
(iii) Give your opinion on the views expressed by:
 Sohail
 Other audit team members. (11)
(b) Describe the circumstances in which an auditor may decide to examine entire
population of items that make up an account balance. (03)
 (2)

Q.4 During the audit of PQR Limited you have been assigned the task of evaluating the work
performed by the internal audit department of the company on certain specific areas.

Required:
(a) Describe how would you evaluate the work performed, in order to determine the extent
of reliance that may be placed thereon. (06)

(b) List the important differences between internal and external audit with respect to the
following:
 Independence
 Objectives
 Reporting (08)

Q.5 You work as assistant manager in one of the leading firm of chartered accountants. Your
partner has asked you to prepare a presentation for some of the newly recruited staff. As part
of this presentation, you are required to explain the nature and objectives of maintaining
‘Audit Documentation.’ (10)

Q.6 You are the senior member of the audit engagement team, auditing the financial statements
of a manufacturing company, Hard Stone Limited. List down the primary substantive
procedures, which you would carry out in the verification of:

(a) trade debts (excluding receipts from customers). (06)

(b) stores and spares. (06)

Q.7 Describe the procedures that the auditor may perform, in order to ensure the completeness of
the information provided by the management, about related parties. (06)

Q.8 The auditor’s report as specified in form 35A in the Companies (General Provisions and
Forms) Rules, 1985 includes the auditor’s opinion on certain matters which have not been
specified in the format of auditor’s report given in the International Standards on Auditing.

Required:
List the additional reporting responsibilities of the auditor, as discussed in the preceding
paragraph. (08)

Q.9 Sigma & Company, Chartered Accountants has carried out a review of the financial
statements of Bilal Limited, a listed company, for the half year ended June 30, 2009. The job
in charge has drafted the following review report:

Report on Review of Interim Financial Information

Introduction
We have reviewed the accompanying condensed interim statement of financial position of
Bilal Limited (“the company”) as at June 30, 2009 and 2008, and the related condensed
interim statement of comprehensive income and condensed interim statement of cash flows
together with the notes forming part thereof for the half year then ended in accordance with
International Standards on Auditing applicable to review engagement. Management is
responsible for the preparation and presentation of this condensed interim financial
information in accordance with approved accounting standards as applicable in Pakistan.
 (3)

Scope of Review
A review of interim condensed financial information consists of making inquiries, primarily
of persons responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing and consequently does not enable us to
obtain assurance that we would become aware of all significant matters that might be
identified in an audit.

Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the
accompanying condensed interim financial information as at june 30, 2009 is not presented
fairly in all respects.

Because of the inherent limitations of our review engagement, this report is intended for the
information of management and should not be used for any other purposes.

Emphasis of matter
Without qualifying our conclusion, we draw attention to note X to the financial statements.
Management has informed us that inventory has been stated at cost which is in excess of its
net realizable value. Management’s computation, which we have reviewed, shows that
inventory, if valued at the lower of cost and net realizable value as required by International
Financial Reporting Standards, would have been lower by Rs. 20,000,000/-, and the reported
net income and shareholders’ equity would have decreased by Rs. 18,900,000/-.

Sigma & Company

Chartered Accountants

Required:
Highlight the deficiencies, if any, in the draft review report. (14)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.1 (a) The management’s responsibilities in relation to the financial statements include the following:

 The overall responsibility for the preparation and presentation of the financial statements.
 Identifying the financial reporting framework to be used in the preparation and presentation of
the financial statements.
 Designing, implementing and maintaining internal controls relevant to the preparation and
presentation of financial statements that are free from material misstatement whether due to
fraud or error.
 Selecting and applying appropriate accounting policies.
 Making accounting estimates that are reasonable in the circumstances.

(b) Audit Skepticism

Audit skepticism is an attitude of professional skepticism which means that the auditor should
recognize the fact that circumstances may exist that may cause the financial statements to be
materially misstated. Consequently, he should make a critical assessment with a questioning mind of
the validity of audit evidence obtained. He should remain alert to audit evidence that contradicts or
brings into question the reliability of documents and responses to inquiries and the reliability of
other information obtained from management and those charged with governance.

Elaboration on the response of the audit manager that auditor should always maintain an attitude of
professional skepticism throughout the audit:
Although the auditor cannot be expected to disregard past experience of the honesty and integrity of
the entity’s management and those charged with governance, the auditor’s attitude of professional
skepticism is particularly important in considering the risks of material misstatement on account of
changes in circumstances.

Ans.2 Some of the situations which are indicative of fraud or an attempt to conceal fraud or fraudulent financial
reporting are as follows:

 Significant transaction, that are outside the normal course of business or that otherwise appear to be
unusual.
 Where a transaction appears overly complex.
 Management has not discussed the nature of and accounting for such transactions with those charged
with governance of the entity and there is inadequate documentation.
 Management is placing more emphasis on the need for a particular accounting treatment than on the
underlying economics of the transaction.
 Transactions that involve non-consolidated related parties, including special purpose entities and
have not been properly reviewed or approved by those charged with governance of the entity.
 The transactions involve previously unidentified related parties or parties that do not have the
substance or the financial strength to support the transaction without assistance from the entity under
audit.

Ans.3 (a) (i) Audit efficiency may be improved as the auditor has stratified a population by dividing it into
discrete sub-populations which have an identifying characteristic. The stratification reduces
the variability of items within each stratum and therefore allow sample size to be reduced
without a proportional increase in sampling risk .

(ii) Other ways by which sales population may be stratified are as under:
 By product
 By customers or category of customers
 Geographically
 Terms of sales such as credit, cash, advance etc.

Precaution: sub-categorization/sub-populations need to be carefully defined such that any

sampling unit can only belong to one stratum.
4-Jan-10 10:14:23 AM Page 1 of 4
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2009

(iii) Views expressed by Sohail

His view that if verification of total transaction of category A is carried out than there is no
need to perform further procedures is not correct due to the following reasons:
 The results of audit procedures applied to all the items within category A can only
provide evidence about the items that make up that category(stratum).
 The auditor should obtain sufficient appropriate audit evidence regarding items in
Categories B & C as these are also material.

Views expressed by other audit team members

Their view that proper sampling should be carried out from the total population of 640 million
and categorization should be ignored altogether is not correct because stratification helps in
improving the efficiency of the audit.

(b) Circumstances in which an auditor may decide to examine entire population of items that make up
an account balance.
The auditor may decide to examine the entire population in the following circumstances:

 when the population constitutes a small number of large value items.

 when there is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
 when the repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.

Ans.4 (a) For the purpose of determining the extent of reliance that may be placed on the work of internal
auditor in specified areas, it may be evaluated by:
(i) Inspecting the adequacy of the scope of the work and related programs.
(ii) Determining by means of inspection whether the preliminary assessment of Internal audit
function remains appropriate.
(iii) Obtain evidence that:
 The work is performed by staff having adequate technical training and proficiency as
internal auditors and the work of assistants are properly supervised, reviewed and
documented.
 Sufficient appropriate audit evidence was obtained to serve as a reasonable basis for
conclusions reached.
 Conclusions reached are appropriate in the circumstances and any reports prepared are
consistent with the results of work performed.
 Any exceptions/unusual matters disclosed by internal audit are properly resolved.

(b) Important differences between Internal Audit and the External Audit
Independence
Since internal audit is a part of the entity, no matter how autonomous and objective it is., it cannot
reach the level of independence enjoyed by the external auditors.

Objectives
The objectives of internal audit function vary according to management’s requirements. Whereas,
the primary objective of external auditor is to ascertain whether or not the financial statements are
free of material misstatements.

Reporting
 Report of external auditor is addressed to the members (shareholders) / owners / those charged
with the governance of the entity.
Internal audit reports are addressed to the management and those charged with the governance.

 The reporting requirement of the external auditor is determined by the framework under which
the audit is being carried out and by applicable legal and regulatory requirements.
4-Jan-10 10:14:23 AM Page 2 of 4
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2009

Reporting requirement of internal audit is based on the objectives/scope of work determined by

the management and those charged with governance.
Ans.5 Nature and objectives of maintaining Audit Documentation
Nature:
Audit documentation should provide:
(i) Evidence of the auditor’s basis for a conclusion about the achievement of the overall objective of
the auditor; and
(ii) Evidence that the audit was planned and performed in accordance with ISAs and applicable legal
and regulatory requirements.

Audit documentation serves a number of additional purposes, which include:

 Assisting the engagement team to plan and perform the audit.
 Assisting members of the engagement team responsible for supervision, to direct and supervise the
audit work and to discharge their review responsibilities.
 Enabling the engagement team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of quality control reviews and inspections.
 Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other
requirements.

Ans.6 (a) Substantive procedures for verification of trade debts (excluding receipt from customers)
 Investigate any unexpected or unusual movement/differences between current and prior
period as regards the amounts of trade debts, debtor’s turnover, ageing of receivable and ratio
of debtors to credit sale etc.
 Review of period end reconciliation of subsidiary and general ledger and investigate large and
unusual items.
 Reviewing the period-end bank reconciliation statements with specific reference to the list of
cheques deposited but not credited in the bank.
 Review the following:
 Large or unusual postings in the general ledger.
 Large or unusual balances in subsidiary records including, credit balances, past due
balances and balances exceeding credit limits etc.
 Circularization of confirmations and performance of appropriate follow-up of selected
customer balances at the period end and obtaining and testing reconciliation of balances
confirmed with the book balance.
 Review the ageing schedule and ensure reasonableness of provision based on:
 Discussion with the credit manager.
 Examination of the subsequent collections made.
 Past practice and consistency.

(b) Substantive procedures for verification of stores and spares

(i) Obtain the listing of stores and spares balances at period-end and investigate large or unusual
quantities or amounts.
(ii) Review large or unusual entries in the ledger account.
(iii) Review period end reconciliation of subsidiary and general ledger and investigate large and
unusual items.
(iv) Attend inventory counts at period end and ensure that physical differences are appropriately
recorded and resolved and damaged items if any are identified.
(v) Check valuation of selected items using one or more of the recommended sampling
techniques.
(vi) Identify slow moving items and discuss/determine the impact thereof.

Ans.7 Procedure to identify Related Parties

The auditor may perform the following audit procedures to ensure the completeness of the information
provided by management about related parties:

4-Jan-10 10:14:23 AM Page 3 of 4

 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2009

(i) Review prior year working papers for names of known related parties;
(ii) Review the entity’s procedures for identification of related parties;
(iii) Inquire as to the affiliation of those charged with governance and officers with other entities;
(iv) Review shareholder records to determine the names of principal shareholders or, if appropriate,
obtain a listing of principal share-holders from the share register;
(v) Review minutes of the meetings of shareholders and those charged with governance and other
relevant statutory records such as the register of directors’ interests;
(vi) Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their
knowledge of additional related parties; and
(vii) Review the entity’s income tax returns and other information supplied to regulatory agencies.

Ans.8 The report specified in form 35A in the in the Companies (General Provisions and Forms) Rules, 1985
covers the following additional reporting responsibilities.

(i) that proper books of accounts are being maintained by the company as required by the Companies
Ordinance, 1984.

(ii) that the balance sheet and the profit and loss account together with notes thereonare in conformity
with the Companies Ordinance, 1984 and in agreement with the books of accounts and are further
in accordance with the accounting policies consistently applied.

(iii) Opinion as regards the following:

 whether expenditure incurred during the year was for the purposes of the company’s business
and
 whether the business conducted, investments made and expenditure incurred during the year
were in accordance with the objects of the company.

(iv) Opinion as regards the following:

 whether Zakat deductible at source under the Zakat and Usher Ordinance, 1980; was deducted
and
 whether the zakat deducted (if any) was deposited in the Central Zakat Fund.

Ans.9 Deficiencies in the Review Report

(i) The Report has not been addressed properly.
(ii) Reference to the prior year’s audited financial statements in the first paragraph, is not required.
(iii) A component of the financial statements i.e. Statement of Changes in Equity have not been
identified in the first paragraph.
(iv) Reference to the ISAs, in the first paragraph, is not required.
(v) The auditor’s review responsibilities should follow management’s responsibilities in the first
paragraph.
(vi) There should be a statement in the second (scope) paragraph that the review was conducted in
accordance with ISRE 2410.
(vii) There should be a statement in the second (scope) paragraph that being a review engagement no
audit opinion is being expressed on the financial statements.
(viii) The words “in accordance with approved Accounting Standard as applicable in Pakistan” are
missing from the conclusion paragraph.
(ix) There should be a reference to “material” respect in the Conclusion paragraph.
(x) There should be no restriction on the distribution of the auditors review report as mentioned in the
fourth paragraph.
(xi) Over valuation of inventory should be reported as a qualification instead of emphasis of matter
paragraph.
(xii) Address of the Chartered Accountant needs to be given.
(xiii) The report should be dated.

(THE END)
4-Jan-10 10:14:23 AM Page 4 of 4
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Intermediate Examinations Spring 2010

March 1, 2010

AUDITING (MARKS 100)

Module D (3 hours)

Q.1 Comment on each of the following situations with reference to the appointment of external
auditors in accordance with the requirements of the Companies Ordinance, 1984:

(a) Farrukh & Co., Chartered Accountants, has received an offer to be appointed as the
external auditor of Ebrahim Gas Company. The firm is indebted to the company as it
has not paid the last two months’ bills amounting to Rs. 4,860.
(b) After seventy days of incorporation, the directors of Rahman Limited (RL) decided to
appoint Mr. Shahid as the company’s statutory auditor. Mr. Shahid was employed by
RL before he started his own practice.
(c) The directors of Fazal Limited (FL) have decided to appoint Syed & Company,
Chartered Accountants, as external auditor of the company. One of the partner’s spouse
holds 1,000 shares in the subsidiary of FL.
(d) The directors of Najam (Pvt.) Limited having paid-up capital of Rs. 4.5 million have
appointed Mr. Dawood to act as the external auditor of the company. Mr. Dawood has
been awarded a diploma in International Financial Reporting Standards by the Institute
of Chartered Accountants of Pakistan and has completed the mandatory period of
training from a leading firm of chartered accountants.
(e) All directors of Hussain Associates (Pvt.) Limited are chartered accountants. The
company has recently received an offer for appointment as the external auditor of
Masood (Pvt.) Limited which has a paid-up share capital of Rs. 1,000,000. (10)

Q.2 Direct confirmations of balances due from customers are obtained to satisfy the objective of
ensuring that the customer exists and owes the specified amount to the company at a certain
date.

Required:
(a) State the circumstances in which an auditor may decide not to circulate the requests for
direct confirmation. (05)
(b) What are the factors that an auditor considers while designing the requests for direct
confirmation? (05)
(c) Describe the alternative audit procedures which may be conducted if the customer does
not reply to a request for confirmation. (06)

Q.3 The management of Zafar Textile Limited (ZTL) has become aware of an error in its audited
financial statements after its issuance to the shareholders. ZTL intends to rectify the error
and have approached the auditor for issuance of a new audit report on the revised financial
statements.

Required:
Describe the procedures which the auditor should adopt in the above circumstances. (08)

Q.4 The preparation of working papers is an integral part of the auditor’s responsibilities.
Identify the factors that the auditor should consider while determining the form, content and
extent of audit working papers. (07)
 (2)

Q.5 (a) Sajjad is the audit senior on the audit of Hameed Limited (HL). Upon his manager’s
instruction Sajjad had determined the acceptable materiality level to be Rs. 10 million at
the initial planning stage. However, at the time of evaluating the results of audit
procedures carried out at the interim stage, he has reduced the materiality level to Rs.
7.5 million.

Required:
(i) Identify the possible causes which motivated Sajjad to reduce the materiality level. (02)
(ii) Discuss the impact of reduction in the materiality level on audit risk and the audit
procedures to be performed. (05)

(b) During the course of an audit, both quantitative as well as qualitative misstatements
need to be considered. Give four examples of qualitative misstatements. (04)

Q.6 (a) The auditor is required to issue an audit report at the end of the audit, which sets out his
opinion on the financial statements. An important element of the audit report is the
statement of auditor’s responsibility.

Required:
Narrate the matters that should be contained in the statement of auditor’s responsibility
as included in an audit report issued under ISA-700 ‘The Independent Auditor’s Report
on a Complete Set of General Purpose Financial Statements’. (08)

(b) Identify the situations in which an auditor may modify his report without affecting his
opinion. Also explain how such a modification should be presented in the audit report. (07)

Q.7 (a) Briefly explain the components of internal control as referred to in the International
Standards on Auditing. (09)

(b) Your firm is the auditor of Shahzad Limited (SL), a listed company, which is a
wholesaler of consumable products. SL records its sale on delivery of goods and
maintains up to date computerised inventory records.

A full inventory count was conducted at the year end. The senior who attended the
physical stocktaking at the central warehouse has observed the following matters:

(i) The inventory count took place on January 1, 2010 under the supervision of the
Inventory Controller. No movement of inventory took place on that day.
(ii) Four counting teams were formed. Each team comprised of two persons. The
floor area was allocated by the teams among themselves.
(iii) Each team was instructed by the Inventory Controller to remember which
inventory had been counted.
(iv) Pre-numbered count sheets were provided to the staff involved in the inventory
count. The count sheets showed the inventory ledger balances, to facilitate
reconciliation.
(v) Old, slow-moving or already sold inventories were highlighted on the count
sheets at the time of counting.
(vi) Items not located on the pre-numbered inventory sheets were recorded on
separate sheets which were numbered by the staff.
(vii) At the end of the count, all inventories against which advances from customers
had been received were removed from the physical inventory on the instruction
of the Inventory Controller.

Required:
Identify the weaknesses in the system of inventory count. Give appropriate
explanations to support your point of view. (09)
 (3)

Q.8 (a) A prestigious company has approached your firm to accept appointment as its external
auditor. State the matters that your firm should consider before accepting the
engagement. (04)

(b) The auditor of a parent company is also the auditor of its subsidiary. List the factors
that the auditor should take into account while deciding whether a separate engagement
letter should be sent to the subsidiary. (03)

(c) Your firm has been the auditor of Mujahid Limited (ML) for many years. Before the
commencement of the current year’s audit ML has requested that some changes be
made in the terms of engagement.

Required:
(i) What are the circumstances which may lead to changes in the terms of
engagement? (03)
(ii) Discuss the important points which should be considered before accepting the
changes in the terms of engagement. (05)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations - Spring 2010
A.1 (a) The appointment of Farrukh & Co. will be in order because the firm would not be considered
indebted to the company as the period for which the utility dues are unpaid does not exceed 90 days.

(b) Mr. Shahid cannot be appointed as statutory auditor of Rehman Limited because of the following:
(i) Mr. Shahid is not eligible for appointment as statutory auditor since only 70 days have passed
since the company’s incorporation and therefore obviously less than three years have elapsed
since he left the employment of the company.
(ii) Directors have lost their authority to appoint external auditors after the expiry of 60 days from
date of incorporation.

(c) Syed & Co. shall not be appointed as auditor of the company because his spouse holds shares in its
associated company. However, the firm can be appointed as auditor of Fazal Limited if the spouse of
the partner disinvests the shares within 90 days of appointment.

(d) Mr. Dawood’s appointment shall be void because only a chartered accountant can be appointed as
auditor of a private limited company having share capital of Rs. 3 million or more.

(e) Hussain Associates (Pvt.) Ltd. being a body corporate cannot be appointed as external auditor of any
company.

A.2 (a) The auditor may consider not to circulate the direct confirmation to the customers where:
(i) accounts receivables are immaterial to the financial statements; or
(ii) the response rate is not expected to be adequate; or
(iii) the responses are not expected to be reliable; or
(iv) inherent and control risk in aggregate are assessed at low level.
(v) audit evidence expected to be gathered through other substantive procedures (e.g. analytical
procedures) is sufficient to reduce the audit risk to an acceptable level.
vi) management requests not to send the confirmation and auditor after satisfying himself from the
reason and explanation given by the management.

(b) While designing the confirmation request, the auditor considers the following factors:
(i) Assertions being addressed through the direct confirmation.
(ii) Form of the external confirmation requests (i.e. positive or negative or combination of both)
(iii) Prior experience on the audit of similar engagements.
(iv) The nature of the information being confirmed.
v) The intended respondent.
vi) Type of information respondents will be able to confirm readily.

(c) The auditor may perform one or more of the following steps:
(i) Check receipt from customers after balance sheet date.
(ii) When there is no receipt from customers after balance sheet date, the auditor should consider
the following audit procedures:
 Verify validity of purchase orders, if any.
 Verify goods dispatched note other documents duly acknowledged by the customers.
iii) Obtain explanations for invoices remaining unpaid, if any, after subsequent one have been
paid.
iv) Examine sales near the period end to provide audit evidence about cutoff assertion.

A.3 When management revises the financial statements, the auditor should undertake the following audit
procedures.

(a) Carry out the audit procedures necessary in the circumstances.

Page 1 of 5
Dure nayab 5-Apr-10 - 9:55:31 AM
 AUDITING
Suggested Answers
Intermediate Examinations - Spring 2010

(b) The audit procedures should be designed to obtain sufficient appropriate audit evidence that all events
up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial
statements have been identified.

(c) Review the steps taken by management to ensure that anyone in receipt of the previously issued
financial statements together with the auditors’ report thereon is informed of the situation

(d) Issue a new report on the revised financial statements. The new auditors’ report should include an
emphasis of a matter paragraph referring to a note to the financial statements that more extensively
discusses the reason for the revision of the previously issued financial statements and to the earlier
report issued by the auditor.

(e) The new audit report should be dated not earlier than the date of approval of the revised financial
statements.

(f) If the auditor is unable to obtain sufficient, appropriate audit evidence or if he is not satisfied with the
steps taken by the management, he shall seek a legal opinion.

A.4 The auditor should consider the following factors while determining the form, content and extent of audit
working papers.

(i) The nature of the audit procedures to be performed;

(ii) The identified risks of material misstatement;
(iii) The extent of judgment required in performing the work and evaluating the results;
(iv) The significance of the audit evidence obtained;
(v) The nature and extent of exceptions identified;
(vi) The need to document a conclusion or the basis for a conclusion not readily determinable from the
documentation of the work performed or audit evidence obtained; and
(vii) The audit methodology and tools used.

A.5 (a) (i) Sajjad may have decided to change the level of materiality because of any of the following
causes:

 a change in circumstances; or
 a change in the auditor’s knowledge as a result of performing audit procedures.

(ii) There is an inverse relationship between materiality and the level of audit risk. This relationship
is considered by an auditor in determining the nature, timing and extent of audit procedures.

Mr. Sajjad reduced the materiality level which resulted in increase in audit risk. Therefore, in
order to compensate the effect of increased audit risk, he should either:

 reduce the assessed risk of material misstatement, where this is possible by carrying out
extended or additional tests of control; or
 reduce the detection risk by modifying the nature, timing and extent of planned substantive
procedures.

(b) Examples of qualitative misstatements would include the following:

(i) Inadequate or improper description of an accounting policy when it is likely that a user of the
financial statements would be misled by the description.
(ii) Failure to disclose the breach of regulatory requirements when it is likely that the consequent
imposition of regulatory restrictions will significantly impair operating capability.
Page 2 of 5
Dure nayab 5-Apr-10 - 9:55:31 AM
 AUDITING
Suggested Answers
Intermediate Examinations - Spring 2010
(iii) Non disclosure of directors personal expenses, charged to the company even if they are
insignificant.
(iv) Non disclosure of failure to meet debt covenant requirements.
(v) Illegal payments which may not be material but if revealed may have severe repercussions.

A.6 (a) The statement of responsibility should state the following:

(i) It is the responsibility of the auditor to express an opinion on the financial statements.
(ii) The audit was conducted in accordance with International Standards on Auditing.
(iii) Those standards require that :
 the auditor complies with ethical requirements.
 the auditor plans and performs the audit to obtain reasonable assurance whether the
financial statements are free from material misstatement.
(iv) That an audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements.
(v) That while selecting the procedures to be performed the auditor exercises judgment, including
the assessment of risks of material misstatements and whether due to fraud or error.
(vi) In making the risk assessment the auditor considers internal controls relevant to fair
presentation of financial statements in order to design audit procedures that are appropriate in
the circumstances but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control.
(vii) That an audit includes evaluation of the appropriateness of the accounting policies used, the
reasonableness of estimates and the overall presentation of information in the financial
statements.
(viii) The auditor believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.

(b) The situations in which a report is modified without affecting the auditor’s opinion are as follows:

(i) If the use of going concern assumption is appropriate but a material uncertainty exists which
was adequately disclosed in the financial statements.
(ii) If there is a significant uncertainty (other than going concern or multiple uncertainties), the
resolution of which is dependent upon future events and which may affect the financial
statements.
(iii) In case, other information attached with the financial statements are inconsistent with the
information in the financial statements.

How modification is presented:

(i) By adding an emphasis of matter paragraph to highlight an important matter affecting the
financial statements.
(ii) The above paragraph is required to refer to the note to the financial statements that more
extensively discusses the matter.
(iii) The paragraph should preferably be included after the paragraph containing the auditor’s
opinion but before the section on any other reporting responsibilities.
(iv) The emphasis of matter paragraph should ordinarily refer to the fact that the auditor’s opinion
is not qualified in this respect.

Q.7 (a) The components of internal controls are as follows:

(i) Control environment:

The control environment includes the attitudes, awareness and actions of management and those
charged with governance concerning the entity’s internal control and their importance in the
entity.

Page 3 of 5
Dure nayab 5-Apr-10 - 9:55:31 AM
 AUDITING
Suggested Answers
Intermediate Examinations - Spring 2010

(ii) Entity’s risk assessment process:

It is the entity’s process for identifying business risks relevant to financial reporting objectives
and deciding about actions to address those risks, and the results thereof.

(iii) Information system, including the related business processes, relevant to financial reporting,
and communication.

(iv) Control activities:

These are the policies and procedures that help ensure that management’s directives are carried
out.

(v) Monitoring of controls:

It is a process of assessing the design and operation of controls on a timely basis and taking
necessary corrective actions on account of change in conditions.

(b) Following weaknesses in inventory count are identified from audit senior’s observations:
(i) Lack of segregation of duties
The Inventory Controller is responsible for the physical control of the inventory and is also
supervising the stock count.

(ii) Non availability of detailed plan

Allocation of counting area by the teams themselves indicates non availability of detailed plan
which may lead to certain inventory items being counted more than once while some items
may not be counted at all.

(iii) No system of marking on counted items

This again may lead to double counting or omission completely.

(iv) Perpetual inventory records available on count sheets

The person responsible for counting may try to match the numbers provided instead of
carrying out an independent count.

(v) Additional count sheets are not pre-numbered

If the separate sheets are numbered as they are used, there is no means of identifying that all
sheets issued have been returned and the last count sheet(s) may go unnoticed.

A.8 (a) Before accepting the audit, our firm should consider the following:

(i) Whether the firm is technically competent to act as auditors?

(ii) Does it possess the resources necessary to carry out the engagement?
(iii) Could there be any self interest threat involved?
(iv) Are there any professional reasons for not accepting the engagement?

(b) When the auditor of a parent entity is also the auditor of its subsidiary, the factors that influence the
decision whether to send a separate engagement letter to the subsidiary include the following:

(i) Who appoints the auditor of the subsidiary?

(ii) Whether a separate auditor’s report is to be issued on the subsidiary.
(iii) Legal requirements.
(iv) The extent of work performed by other auditors, if any.
(v) Degree of ownership by parent.
(vi) Degree of independence of the subsidiary’s management.
Page 4 of 5
Dure nayab 5-Apr-10 - 9:55:31 AM
 AUDITING
Suggested Answers
Intermediate Examinations - Spring 2010
(c) (i) The change in the terms of engagement may result from:

I) a change in circumstances affecting the need for the service.

II) a misunderstanding as to the nature of the audit or of the related service originally
requested.
III) a restriction on the scope of the engagement, whether imposed by management or caused
by circumstances.

(ii) In response to the request for change in the terms of the engagement the firm should consider
the following:

 Appropriateness of such a request for change by considering carefully the reason given by
Mujahid Limited.
 in case the change results in restriction on the scope of the engagement, the firm should
assess whether or not it would be able to able to meet its statutory responsibility after the
impositions of such restriction.

 A change in circumstances or a misunderstanding concerning the nature of service

originally requested would ordinarily be considered a reasonable basis for requesting a
change. A change would not be considered reasonable if it appears that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory.
 Before agreeing to change the terms of engagement the auditor should consider any legal or
contractual implications of the change to assess whether it would still be possible to carry
out the audit in accordance with ISAs.

(THE END)

Page 5 of 5
Dure nayab 5-Apr-10 - 9:55:31 AM
 The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examinations – Autumn 2010 August 30, 2010
Module D 100 marks - 3 hours

Q.1 You are the Audit Manager on the audit of Al-Salam Pakistan Limited (ASPL) for the year ended
June 30, 2010. ASPL is engaged in the manufacture of a wide range of plastic products. While
reviewing the initial work performed by the audit team, the following matters have come to your
notice:

(i) The quantity of material scrapped during the year is materially different from the quantity of
scrap sold. The company’s records show nil balance both at the beginning and at the close of
the year. No reconciliation for the difference has been provided by the company.

(ii) Sales for the year have increased by 7% over the previous year. However, it has been noted
that sales in the last two weeks of June 2010 have been exceptionally high and represent 15%
of the annual sales. The audit working papers carry the following observations in respect of
the above:
 70% of the sales in the last two weeks of June were made to two new customers whose
credit assessment has not been formally documented;
 a significant portion of the goods sold to the above referred customers were returned in the
first week of July 2010; and
 management bonuses are linked to the operating performance of the company.

(iii) During the year, ASPL purchased a machine for Rs. 25 million. The payment voucher is duly
supported by the invoice from the supplier. However, the fixed assets schedule provided by
the client shows the amount capitalized as Rs. 2.5 million. Depreciation has been charged on
this amount. The difference of Rs. 22.5 million is appearing in the Bank Reconciliation
Statement.

Required:
(a) Analyze each of the above situations and assess whether it represents a fraud or an error.
(06 marks)
(b) What action would you take to deal with the above matters? (09 marks)

Q.2 During the course of the audit, effective consultation helps to address the difficult or contentious
matters that may arise within the engagement team or between the engagement team and others,
within or outside the firm.

Required:
(a) What are the responsibilities of an audit engagement partner in this regard? (04 marks)
(b) How can an auditor ensure that consultations involving difficult or contentious matters have
been appropriately documented? (03 marks)

Q.3 The analytical procedures which are carried out near the end of the audit usually assist the auditor
in forming an overall conclusion on the financial statements.

Required:
(a) State the objectives which an auditor expects to achieve while applying analytical procedures
at the end of an audit. (04 marks)
(b) Discuss the course of action an auditor should adopt when results of analytical procedures
identify inconsistent relationships or differ from expected values by significant amounts.
(04 marks)
 Auditing Page 2 of 3

Q.4 Al-Shams Limited is an unquoted public company. A large part of its business is carried out with
persons / organisations who are related to the management or the shareholders.

Required:
(a) State any eight procedures which an auditor may perform for determining the existence of
related parties or related party transactions. (08 marks)
(b) Give four examples of situations that may be indicative of dominant influence exerted by a
related party. (04 marks)

Q.5 Al-Madad Foundation (AMF) is a charitable organization. It receives donations which are utilized
to help the destitute persons in accordance with the rules and regulations prescribed by the AMF’s
Trust Deed.

The donations are received from the following sources:

(i) Cash collected from the general public through charity boxes placed at key points in
hospitals, airports, superstores etc.,
(ii) cash and cheques received from individuals and institutions at AMF’s office; and
(iii) cash from generous individuals who prefer to remain anonymous.

Donations received in case of (ii) and (iii) above, often contain specific instructions for utilisation
of the donated amount for specific purposes e.g. for education of orphan children.

Required:
(a) Identify the inherent risks in the operations of AMF. (03 marks)
(b) Briefly discuss the effect of each of these risks on the audit of AMF. (03 marks)

Q.6 (a) What is the difference between audit strategy and audit plan? (04 marks)

(b) You have been appointed as the auditor of a company which was previously audited by
another auditor. Being a new client, what additional considerations would you take into
account while performing the preliminary engagement activities prior to commencement of
the audit? (05 marks)

Q.7 (a) Explain the term “Sufficient and Appropriate Audit Evidence”. (04 marks)

(b) You are the Audit Senior on the audit of Al-Haq Limited. The company is a trading concern
and 70% of its business relates to imported goods. The chief accountant has provided you the
bank reconciliation statements of all the bank accounts alongwith the bank statements.

Required:
(i) State the substantive procedures that you would carry out for the verification of bank
balances. (06 marks)
(ii) Identify any eight types of information which you would verify from the confirmations
received directly from the bank. (08 marks)

Q.8 When expertise in a field other than accounting or auditing is necessary to obtain sufficient
appropriate audit evidence, the auditor has to determine whether to use the work of an auditor’s
expert.

Required:
List down the sources from where the auditor may get the information regarding the expert’s
competence, capabilities and objectivity. (06 marks)
 Auditing Page 3 of 3

Q.9 In the light of ISA-700 “Forming an opinion and reporting on financial statements”, discuss the
auditor’s responsibilities with regard to un-audited supplementary information presented with the
audited financial statements. (07 marks)

Q.10 Al-Badr & Company, Chartered Accountants, have conducted the statutory audit of the financial
statements of Al-Qasim Limited, a listed company, for the year ended June 30, 2010 under the
requirements of the Companies Ordinance, 1984. The job in charge has drafted the following audit
report:

Auditors’ Report to the Directors

We have audited the annexed balance sheet of Al-Qasim Limited as at June 30, 2010 and the
related profit and loss account and statement of changes in equity together with the notes forming
part thereof, for the year then ended and we state that we have obtained all the information and
explanations which, to the best of our knowledge and belief, were necessary for the purposes of our
audit.

We conducted our audit in accordance with the auditing standards. These standards require that
we plan and perform the audit to obtain reasonable assurance about whether the above said
statements are free of any material misstatement. An audit includes examining evidence supporting
the amounts and disclosures in the above said statements. An audit also includes assessing the
accounting policies and all estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit provides a reasonable basis for
our opinion and, after due verification, we report that:

(a) in our opinion:

(i) the balance sheet and profit and loss account together with the notes thereon have been
drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with
the books of account and further in agreement with accounting policies consistently
applied;
(ii) the expenditure incurred during the year was for the purpose of the company’s business;
and
(iii) the business conducted, investments made and the expenditure incurred during the year
were in accordance with the objects of the company;

(b) in our opinion and to the best of our information and according to the explanations given to
us, the balance sheet, profit and loss account and statement of changes in equity together with
the notes forming part thereof conform with International Financial Reporting Standards, and
give the information required by the Companies Ordinance, 1984, in the manner so required
and respectively give a true and fair view of the state of the company’s affairs as at June 30,
2010 and of the profit and changes in equity for the year then ended; and

(c) in our opinion, no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980
(XVIII of 1980).

Al-Badr & Company

Chartered Accountants
Karachi
Dated: September xx, 2010

Required:
Identify and explain (where necessary) the errors in the above audit report.
(Note: You are not required to redraft the report.) (12 marks)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2010

A.1 (a) (i) In the absence of any valid explanations from the management, it would be considered
as misappropriation of assets i.e. fraud as it seems to involve the theft of an entity's
assets.

(ii) It is a case of fraudulent financial reporting as it seems that management has tried to
inflate the sales in order to deceive financial statement users. An apparent intention
behind this action is the management bonuses which are linked to the operating
performance of the company.

(iii) It is an error on the part of accountant. The underlying records such as the invoice etc
have not been altered and even the voucher has been prepared with the correct amount
which shows that it is an unintentional misstatement.

(b) (i) If we have identified a fraud or has obtained information that indicate that a fraud may
& exist, we should communicate these matters on a timely basis to the appropriate level of
(ii) management. This is so even if the matter might be considered immaterial.

We should consider whether there are matters related to fraud to be discussed with
those charged with governance of the entity. Matters may include:

 Concerns about the nature, extent and frequency of management's assessments of the
controls in place to prevent and detect fraud and of the risk that the financial
statements may be misstated.
 A failure by management to appropriately address identified significant deficiencies
in internal control, or to appropriately respond to an identified fraud.
 Our evaluation of ASPL’s control environment, including questions regarding the
competence and integrity of management.
 Actions by management that may be indicative of fraudulent financial reporting, such
as management's effort to manage earnings in order to deceive financial statement
users by influencing their perceptions as to the entity's performance and
profitability.
 Concerns about the adequacy and completeness of the authorization of transactions
that appear to be outside the normal course of business.

Based on the discussion and our overall understanding of the matter, we should:
 ask the management to reverse the sales made;
 revise its risk assessment of the entity’s control environment and modify the further
planned audit procedures accordingly.
 Consider the impact on audit report.

(iii) Since this seems to be an error, the appropriate level of management should be informed
about it and the relevant adjustments in fixed assets and depreciation account should be
made.

A.2 (a) The engagement partner should:

(i) take responsibility for the engagement team undertaking appropriate consultation on
difficult or contentious matters.
(ii) be satisfied that members of engagement team have undertaken appropriate consultation
during the course of the engagement.
(iii) be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are agreed with the party consulted and
(iv) determine that conclusions resulting from such consultations have been implemented.

Page 1 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2010

(b) Appropriateness of the documentation can be ensured from the following:

(i) It should be sufficiently complete.
(ii) It provides an understanding of the issue on which consultation was sought; and
(iii) It provides an understanding of the results of the consultation, including
 any decisions taken,
 the basis for those decisions and
 how they were implemented.

A.3 (a) The auditor should apply analytical procedures at or near the end of the audit in order to
(i) Form an overall conclusion as to whether the financial statements as a whole are
consistent with the auditor’s understanding of the entity.
(ii) Corroborate the conclusions formed through other procedures performed during the
audit of individual components or elements of the financial statements.
(iii) Identify previously unrecognized risk of material misstatement. In such circumstances,
the auditor may:
 revise the auditor’s assessment of the risk of material misstatement; and
 modify the further planned audit procedures accordingly.

(b) When analytical procedures identify significant fluctuations or relationships, the auditor shall
investigate such differences. Fluctuations can be investigated in the following manner:

(i) Inquiring of management and obtaining appropriate audit evidence relevant to

management responses. These audit evidence may be obtained by taking into account:
 the auditor’s understanding of the entity and its environment; and
 with other audit evidence obtained during the course of the audit.
(ii) Performing other audit procedures when:
 management is unable to provide an explanation, or
 the explanation together with the audit evidence obtained is not considered adequate.

A.4 (a) (i) Evaluate the company’s procedures for identifying and for properly accounting for
related-party transactions.
(ii) Inquire of management regarding:
 the identity of the entity’s related parties, including changes from prior period;
 the nature of relationship between the entity and these related parties; and
 whether entity entered into any transaction with these related parties during the
period and, if so, the type and purpose of the transactions.
(iii) Inspect information supplied by the entity to regulatory authorities (e.g. SECP, FBR, SBP,
etc.)
(iv) Identify all employee benefit plans and the names of the officers and trustees thereof.
(v) Review shareholder registers to identity the entity’s principal shareholders.
(vi) Review material investment transactions during the audit period to determine whether
the nature and extent of investments during the period create related parties.
(vii) Review contracts and agreements with key management or those charged with
governance.
(viii) Review significant contracts re-negotiated by the entity during the period.
(ix) Review significant contracts and agreements not in the entity’s ordinary course of
business.
(x) Review of internal auditor’s report
(xi) Review of third party confirmations obtained by the auditor
(xii) Minutes of meetings of shareholders and of those charged with governance.

Page 2 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2010

(b) Indicators of dominant influence exerted by a related party include the following:
(i) Significant transactions are referred to the related party for final approval.
(ii) There is little or no debate among management and those charged with governance
regarding business proposals initiated by the related party.
(iii) Transactions involving the related party (or a close family member of the related party)
are rarely independently reviewed and approved.
(iv) The related party has vetoed significant business decisions taken by management or
those charged with governance.

A.5 (a) Areas of Inherent Risk

(i) Donations
 Donations may fall, especially where donors’ own income is limited or declining, or
there is a change in the circumstances.
 No control over the completeness of donations (especially over the cash donations).
(ii) Expenses
 Donations are spent outside the aims and objectives of AMF.
 Donations are not spent in accordance with donors’ instructions.

(b) Effect on the audit approach

(i) It is difficult to estimate that income in the future will be sufficient to meet the
expenditure of the AMF. Audit of the going concern concept (as in ensuring that the AMF
can still operate) will therefore be quite difficult.
(ii) Audit tests are unlikely to be effective to meet the assertion of completeness. The audit
report may need to be modified and qualified to explain the lack of evidence stating that
completeness of income cannot be confirmed.
(iii) Careful review of expenditure will be necessary to ensure that expenditure is not ‘ultra
vires’ the objectives of the AMF. The auditor will need to review the trust deed and other
documents of the AMF carefully in this respect.
(iv) The use of donations received for specific purposes would have to be checked to ensure
that instruction of donors has been followed.

A.6 (a) The audit strategy sets the scope, timing and direction of the audit. It also provides guidance
for the development of audit plan.

The audit plan is more detailed than the audit strategy and it includes the nature, timing and
extent of audit procedures to be performed by the engagement team members. The planning
for these audit procedures takes place over the course of audit as the audit plan for the
engagement develops.

(b) The auditor should perform the following activities prior to starting an initial audit
engagement:
(i) Performing procedures regarding the acceptance of the client relationship and the
specific audit engagement.
(ii) Unless prohibited by law, arrangements to be made with the predecessor auditor, for
example, to review the predecessor auditor’s working papers.
(iii) Any major issues discussed with management in connection with the initial selection as
auditor, the communication of these matters to those charged with governance, and how
these matters affect the audit strategy and audit plan.
(iv) The audit procedures necessary to obtain sufficient appropriate audit evidence regarding
opening balances.
(v) Other procedures required by the firm’s system of quality control for initial audit
engagements.

Page 3 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2010

A.7 (a) (i) The sufficiency and appropriateness of audit evidence are interrelated.
(ii) Sufficiency is the measure of the quantity of audit evidence. The quantity of audit
evidence needed is affected by the auditor’s assessment of the risks of misstatement (the
higher the assessed risks, the more audit evidence is likely to be required) and also by
the quality of such audit evidence (the higher the quality, the less may be required).
(iii) Appropriateness is the measure of the quality of audit evidence; that is, its relevance and
its reliability in providing support for the conclusions on which the auditor’s opinion is
based.

(b) (i) Substantive procedures for bank balance verification

(Following procedures apply individually to all bank accounts)
 Obtain bank confirmation from the company’s bank and agree the balances per the
bank confirmation to the company’s bank reconciliations.
 Check arithmetic accuracy of bank reconciliation.
 Perform cut-off procedures.
 Agree the balance per the bank books to the bank reconciliation and to the financial
statements and the ledger.
 Trace outstanding cheques per the bank reconciliation to the cash book and to after-
date bank statements.
 Agree any un-cleared banking have been paid in prior to the year-end date by
examination of paying-in slips.
 Scrutinise the cashbook and bank statements before and after the balance sheet date
for exceptional entries to transfers which have a material effect on the balance
shown to be on hand.
 Determine whether the bank account is subject to any restrictions.

(ii) Types of Information

 Full titles of all accounts together with the account numbers and balances thereon,
including NIL balances:
 Where the amount is subject to any restriction or exchange control considerations
this information should be stated.
 Full titles and dates of closure of all accounts closed during the period.
 The separate amounts accrued but not charged or credited as at the above date.
 Mark up/interest and provisional charges (including commitment fees).
 The amount of interest charged during the period if not specified separately in the
customer’s statement of account.
 Particulars of any written acknowledgment of set-off, either by specific letter of set-
off, or incorporated in some other document or security.
 Details of loans, overdraft cash credits and facilities, specifying agreed limits and in
the case of term loans, date of repayment or review.
 A list of other banks, or branches of your bank where you are aware that the
relationship has been established during the period.

Security
 Details of any security formally charged to the bank including the date and type of
charge, (e.g. pledge, hypothecation etc.)
 Particulars of any undertaking to assign to the bank any assets.
 If a security is limited to any borrowing, or if there is a prior, equal or subordinate
charge.
 Investments, bills of exchange, documents of title or other assets held but not
charged.

Page 4 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2010

Contingent Liabilities
 Total of bills discounted for your customer, with recourse;
 Details of any guarantees, bonds or indemnities given to you by the customer in
favour of third parties.
 Details of any guarantees, bonds or indemnities given by you, on your customer’s
behalf, stating where there is recourse to your customer and / or to its holding,
parent or any other company within the group;
 Total of acceptances;
 Total of forward exchange contracts;
 Total of outstanding liabilities under documentary credits;

A.8 Information regarding the competence, capabilities and objectivity of an auditor’s expert may come
from a variety of sources, such as:

(a) Personal experience with previous work of that expert.

(b) Discussions with that expert.
(c) Discussions with other auditors or others who are familiar with that expert’s work.
(d) Knowledge of the expert’s qualifications, membership of a professional body or industry
association, license to practice or other forms of external recognition.
(e) Published papers or books written by that expert.
(f) The auditor’s firm’s quality control policies and procedures.

A.9 (i) If supplementary information that is not required by the applicable financial reporting
framework is presented with the audited financial statements, the auditor shall evaluate
whether such supplementary information is clearly differentiated from the audited financial
statements.

(ii) If such supplementary information is not clearly differentiated from the audited financial
statements, the auditor shall ask management to change the presentation of supplementary
information by:

 Removing any cross references from the financial statements to unaudited supplementary
schedules or unaudited notes so that the demarcation between the audited information is
sufficiently clear.
 Placing the unaudited supplementary information outside of the financial statements or, if
that is not possible in the circumstances, at a minimum place the unaudited notes together
at the end of the required notes to the financial statements and clearly label them as
unaudited.

(iii) If management refuses to do so, the auditor shall explain in the auditor’s report that such
supplementary information has not been audited.
(iv) The fact of supplementary information is unaudited does not relieve the auditor of the
responsibility to read that information to identify material inconsistencies with the audited
financial statements.
(v) Supplementary information that is not required by the applicable financial reporting
framework but is nevertheless an integral part of the financial statements because it cannot
be clearly differentiated from the audited financial statements due to its nature how it is
presented shall be covered by the auditor’s opinion.

Page 5 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2010

A.10 (i) Audit report should be addressed to the members of the company instead of directors.
(ii) In the introductory paragraph and opinion paragraph, the word “cash flow statement” has
been omitted.
(iii) In the opinion paragraph, the words “its cash flows” have been omitted.
(iv) The paragraph explaining the responsibilities of management and auditors has been omitted.
This paragraph should come after the introductory paragraph.
(v) After the statement “We conducted our audit in accordance with the auditing standards” in
the audit responsibility paragraph, the words “as applicable in Pakistan” have been omitted.
(vi) In the auditor’s responsibility paragraph, the words “on test basis” have been omitted.
(vii) In the auditor’s responsibility paragraph, the word “all estimates....” should be replaced with
the words “significant estimates”.
(viii) The opinion paragraph whether proper books of account have been kept by the company as
required under the Companies Ordinance, 1984, has been omitted.
(ix) In paragraph (b) of the opinion, the financial statements have incorrectly been referred to
have been drawn up in accordance with International Financial Reporting Standards instead
of the requirement i.e. approved accounting standards as applicable in Pakistan.
(x) Name of the engagement partner has not been mentioned.

(THE END)

Page 6 of 6
 The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examination – Spring 2011 March 7, 2011
Module D 100 marks - 3 hours

Q.1 Strawberry Pakistan Limited (SPL) was incorporated on March 1, 2011. The directors of SPL are in
the process of appointing the first statutory auditor of the company. They have requested your firm
to submit a proposal for the statutory audit assignment. A partner of your firm has asked you to
draft the proposal after assessing whether the preconditions for the audit exist.

Required:
(a) Briefly discuss the term ‘preconditions for an audit’.
(b) What are the steps that you would perform in order to ensure that preconditions for the audit
exist?
(c) Discuss whether your firm may or may not accept the assignment if one of the preconditions for
the audit is not present. (15 marks)

Q.2 One of the objectives of obtaining a written representation from management is to ensure that the
management knows and acknowledges its responsibility for the preparation of the financial
statements and for the completeness of the information provided to the auditor.

Required:
Specify the situations which may create doubts as to the reliability of written representations. What
course of action would the auditor take in such a situation? (07 marks)

Q.3 (a) Differentiate between the following:

(i) Statistical and non-statistical sampling
(ii) Sampling and non-sampling risk (05 marks)

(b) You are the audit manager on Apple Distribution Limited (ADL). While reviewing the audit
planning documentation, you found that the audit team has selected 100 out of a total of 2,550
debtors for balance confirmation. The details are as follows:
ƒ 50 largest debtors constitute approximately 40% of total debtors. Out of these, 10 have been
selected.
ƒ 90 other debtors were selected through haphazard sampling.
ƒ All debtors below Rs. 5,000 were ignored as immaterial.
ƒ Balances due from government and some of the related parties were ignored as prior years
working papers showed that they never responded to requests for confirmation.

Required:
(i) Comment on the sampling approach adopted by the audit team.
(ii) Suggest alternative means of selecting the sample in which the material balances have a
greater probability of selection. (08 marks)

Q.4 A chartered accountant is required to comply with five fundamental principles specified by ICAP’s
Code of Ethics. However, compliance with the fundamental principles may potentially be
threatened by a broad range of circumstances.

Required:
Briefly describe the categories of threats that may potentially affect compliance with the
fundamental principles. Give two examples for each category. (10 marks)
 Auditing Page 2 of 2

Q.5 The auditor should obtain sufficient appropriate audit evidence in order to be able to form an audit
opinion.

Required:
(a) Identify the situations which restrict the auditor’s ability to obtain sufficient appropriate audit
evidence. Give two examples for each situation. (09 marks)
(b) List three reasons why audit evidence is considered to be persuasive rather than conclusive.
(03 marks)

Q.6 You are the training manager at Guava & Co., Chartered Accountants. Some trainees in the firm
have requested you to clarify the following issues:

(a) Can the auditor discard any audit document, forming part of his opinion, after the issuance of
the auditor’s report?
(b) The changes that can be incorporated during the final file assembly process citing three such
examples.
(c) The circumstances under which it becomes necessary to modify the existing audit documents or
add new audit documents after the issuance of the auditor’s report and the matters that should
be documented in such a situation.

Required:
Offer appropriate explanations for each of the above issues. (11 marks)

Q.7 Direct communication with an entity’s external legal counsel assists the auditor in obtaining
sufficient appropriate audit evidence regarding ‘potentially material litigations and claims’ and in
assessing the management’s estimates of the financial implications thereof.

Required:
Explain the different manners in which an auditor may communicate with the entity’s external legal
counsel. (08 marks)

Q.8 (a) Briefly explain the term ‘pervasive effects on the financial statements’. (04 marks)

(b) As the engagement partner, you have reviewed the audit working papers of Apricot
Engineering Limited (AEL). The audit team has highlighted the following matters in the
working papers.
(i) The company has issued a bank guarantee to one of its related parties after the balance
sheet date. No disclosure in this regard has been made in the draft financial statements.
(ii) AEL has paid a dividend after many years. Zakat has been appropriately deducted and
deposited in the Central Zakat Fund.
(iii) Subsequent to the year end, a major debtor has declared bankruptcy. The company
expects to recover only 20% of the outstanding amount. The management has refused to
make a provision but is ready to disclose the fact by way of a note.
(iv) With effect from January 1, 2010, AEL has:
ƒ Changed the method of charging depreciation on its fixed assets from the ‘straight
line’ to the ‘diminishing balance’; and
ƒ revised its estimate of useful lives of vehicles from 6 years to 4 years.

Required:
Discuss the impact of each of the above matters on your audit report. (10 marks)

Q.9 The auditor should have an understanding of the entity and its environment to enable him to plan
the engagement and select the inquiries, analytical and other review procedures.

Required:
State the procedures which an auditor may perform, to update his understanding of the entity and its
environment, while carrying out an engagement to review interim financial information. (10 marks)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

A.1 (a) Preconditions for an audit are as follows:

(i) An acceptable financial reporting framework has been used by the

management in the preparation of the financial statements; and
(ii) the management and, where appropriate, those charged with governance
agreed on the premise on which the audit is to be conducted.

(b) In order to establish whether the preconditions for an audit are present, we will:

(i) determine whether the financial reporting framework to be applied in the

preparation of financial statements is acceptable;
(ii) obtain the agreement of management that it acknowledges and understands its
responsibility:
 for the preparation of the financial statements in accordance with the
applicable financial reporting framework.
 for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
 to provide us with
 access to all information of which management is aware, that may be
relevant to the preparation of the financial statements;
 additional information that the auditor may request from management
for the purpose of the audit; and
 unrestricted access to persons within the entity from whom the auditor
determine it necessary to obtain audit evidence.

(c) If a precondition for an audit is not present, the matter would be discussed with the
management. Unless required by law or regulation to do so, we will not accept the
proposed audit engagement, if the pre-conditions are not met.

However, if the financial reporting framework is prescribed by law or regulation and

it would have been unacceptable but for the fact that it is prescribed by law or
regulation, the audit engagement will be accepted only if the following conditions are
met:

(i) Management agrees to provide additional disclosures in the financial

statements to avoid the financial statements being misleading;

(ii) It is recognized in the terms of the audit engagement that:

 Our report on the financial statements will incorporate an Emphasis of Matter
paragraph, drawing users' attention to the additional disclosures.
 Our opinion on the financial statements will not include such phrases as
"present fairly, in all material respects," or "give a true and fair view" unless it
is expressively required to be stated under the law or regulation.

If the above conditions are not present and still we are required by law or regulation
to undertake the audit engagement, we shall:

(i) evaluate the effect of the misleading nature of the financial statements on
report; and
(ii) include appropriate reference to this matter in the terms of the audit
engagement.

Page 1 of 7
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

A.2 Under the following situations, the auditor would have doubt as to the reliability of written
representation:

(a) When the auditor has concerns about the competence, integrity, ethical values or
diligence of management, or about its commitment to or enforcement of these.
(b) When written representations are inconsistent with other audit evidence obtained.

Course of action in situation (a)

(i) The auditor shall determine the effect that such concerns may have on the reliability
of representations and audit evidence in general.
(ii) If the auditor concludes that the risks related to management representations on the
financial statements is such that an audit cannot be conducted, the auditor may
consider withdrawing from the engagement

Course of action in situation (b)

(i) The auditor may consider whether the risk assessment remains appropriate and, if
not, revise the risk assessment and determine the nature, timing and extent of further
audit procedures to respond to the assessed risks.
(ii) If the matter remains unresolved, the auditor shall reconsider the assessment of the
competence, integrity, ethical values or diligence of management, or of its
commitment to or enforcement of these, and shall determine the effect that this may
have on the reliability of other representations and audit evidence in general.
(iii) If the auditor concludes that the written representations are not reliable, the auditor
shall take appropriate actions, including determining the possible effect on the
opinion in the auditor’s report.

A.3 (a) (i) Statistical and non-statistical sampling

An approach to sampling that has the following characteristics is called
statistical sampling:
 Random selection of the sample items; and
 The use of probability theory to evaluate sample results, including
measurement of sampling risk.

A sampling approach that does not have above characteristics is considered

non-statistical sampling.

(ii) Sampling and non-sampling risk

Sampling risk is the risk that the auditor’s conclusion based on a sample may be
different from the conclusion if the entire population were subjected to the
same audit procedure.

Non sampling risk is the risk that the auditor may reach an erroneous
conclusion for any reason not related to sampling risk.

(b) (i) The following shortcomings have been observed in the approach adopted by
the Audit Team:
 By ignoring less than Rs. 5,000 debtors, the government debtors and some of
the related parties, for the purpose of sampling, the following important
principles have not been complied with.
 That the auditor should consider the risk of material misstatement on the
entire population.
 That the auditor should attempt to ensure that all items in the population
have a chance of selection.
Page 2 of 7
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

 In stratification, the audit efforts are directed towards larger value items.
However, the audit planning documentation should explain why the only 10
debtors out of 50 largest debtors were selected.

(ii) Alternative means of sampling material balances are as follows:

Stratification
This would involve dividing the sample into discrete sub-populations (stratum)
which have an identifying characteristic. In our case, the population may be
stratified by monetary value. For example, following strata may be created:
 Above Rs. 1,000,000
 Between Rs. 500,000 and Rs. 1,000,000
 Below Rs. 500,000

The sample may be made from each strata allowing effort to be directed to the
larger value items.

Value weighted selection (Monetary unit sampling)

When performing test of details, it may be efficient to identify sampling as the
individual monetary units that make up the population. In this method, each
monetary unit in a population has an equal chance of being selected for testing.
Audit effort is directed to the larger value items because they have a greater
chance of selection, and can result in smaller sample sizes.

A.4 Following are the categories of threats that may potentially affect the fundamental
principles:

(i) Self-interest threats

This may occur as a result of the financial or other interests of a chartered accountant
or of an immediate or close family member.

 A financial interest in a client or jointly holding a financial interest with a client.

 Undue dependence on total fees from a client.
 Having a close business relationship with a client.
 Concern about the possibility of losing a client.
 Potential employment with a client.
 Contingent fees relating to an assurance engagement.
 A loan to or from an assurance client or any of its directors or officers.

(ii) Self-review threat

This may occur when a previous judgment needs to be re-evaluated by the chartered
accountant responsible for that judgment.

 The discovery of a significant error during a re-evaluation of the work of the

chartered accountant in practice.
 Reporting on the operation of financial systems after being involved in their design
or implementation.
 Having prepared the original data used to generate records that are the subject
matter of the engagement.
 A member of the assurance team being, or having recently been, a director or
officer of that client.
 A member of the assurance team being, or having recently been, employed by the
client in a position to exert direct and significant influence over the subject matter
of the engagement.
Page 3 of 7
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

 Performing a service for a client that directly affects the subject matter of the
assurance engagement.

(iii) Advocacy threats

This may occur when a chartered accountant promotes a position or opinion to the
point that subsequent objectivity may be compromised.

 Promoting shares in a listed entity when that entity is a financial statement audit
client.
 Acting as an advocate on behalf of an assurance client in litigation or disputes with
third parties.

(iv) Familiarity threats

This may occur when, because of a close relationship, a chartered accountant becomes
too sympathetic to the interests of others.

 A member of the engagement team having a close or immediate family relationship

with a director or officer of the client
 A member of the engagement team having a close or immediate family relationship
with an employee of the client who is in a position to exert direct and significant
influence over the subject matter of the engagement.
 A former partner of the firm being a director or officer of the client or an employee
in a position to exert direct and significant influence over the subject matter of the
engagement.
 Accepting gifts or preferential treatment from a client, unless the value is clearly
insignificant.
 Long association of senior personnel with the assurance client.

(v) Intimidation threats

This may occur when a chartered accountant may be deterred from action objectively
by threats, actual or perceived.

 Being threatened with dismissal or replacement in relation to a client engagement.

 Being threatened with litigation.
 Being pressured to reduce inappropriately the extent of work performed in order
to reduce fees.

A.5 (a) The auditor's inability to obtain sufficient appropriate audit evidence may arise from:
(i) Circumstances beyond the control of the entity
(ii) Circumstances relating to the nature or timing of the auditor's work
(iii) Limitations imposed by management

Examples of factors identified

Circumstances beyond the control of the entity
(i) The entity's accounting records have been destroyed.
(ii) The accounting records of a significant component have been seized
indefinitely by governmental authorities

Circumstances relating to the nature or timing of the auditor's work

(i) The timing of the auditor's appointment is such that the auditor is unable to
observe the counting of the physical inventories.
(ii) The auditor determines that performing substantive procedures alone is not
sufficient, but the entity's controls are not effective.
Page 4 of 7
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

(iii) The entity is required to use the equity method of accounting for an associated
entity, and the auditor is unable to obtain sufficient appropriate audit evidence
about the latter's financial information to evaluate whether the equity method
has been appropriately applied.

Limitations imposed by management

(i) Management prevents the auditor from observing the counting of the physical
inventory.
(ii) Management prevents the auditor from requesting external confirmation of
specific account balances.

(b) Audit evidence is persuasive rather than conclusive because of the following reasons:

(i) The auditor gathers evidence on a test basis (the sample may or may not be
representative).
(ii) People make mistakes (both client and auditor).
(iii) Documents could be forged (increasingly easy with digital technology)
(iv) The client’s personnel may not always tell the truth.

A.6 (a) After the assembly of the final audit file has been completed, the auditor shall not
delete or discard audit documentation of any nature before the end of the retention
period.

The firm should establish its own policies and procedures for the retention of
engagement documentation. The retention period for audit engagement ordinarily is
no shorter than five years from the date of auditor’s report.

(b) Changes in the audit documentation during the final file assembly process may only be
made if they are administrative in nature. Examples of such changes include:

(i) Deleting or discarding superseded documentation;

(ii) Sorting, collating and cross referencing working papers;
(iii) Signing off on completion checklist relating to file assembly process;
(iv) Documenting audit evidence that the auditor has obtained, discussed and
agreed with the relevant members of the engagement team before the date of
the auditor’s report.

(c) Under exceptional circumstances, the auditor performs new or additional procedures
or draws new conclusions after the date of the Auditor’s report. In this relation the
auditor should document:

(i) The circumstances encountered.

(ii) The new or additional audit procedures performed, audit evidence obtained,
and conclusion reached, and their effect on the auditor’s report.
(iii) When and by whom the resulting changes to audit documentation were made
and reviewed.

Page 5 of 7
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

A.7 Following modes of communication are available to the auditor with the legal counsel:

Letter of general inquiry

Under this method, a letter of general inquiry requests the entity’s legal counsel to inform
the auditor:

(a) of any litigation and claims that the counsel is aware of,
(b) together with an assessment of the outcome of the litigation and claims, and
(c) an estimate of the financial implications, including costs involved.

Letter of specific inquiry

This method is used when it is unlikely that the entity’s external legal counsel will respond
appropriately to a letter of general inquiry. A letter of specific inquiry includes:

(a) a list of litigations and claims;

(b) where available, management’s assessment of the outcome of each of the identified
litigation and claims and its estimate of the financial implications, including costs
involved; and

(c) a request that the entity’s external legal counsel to:

(i) confirm the reasonableness of management’s assessments and
(ii) provide the auditor with further information if the list is considered by the
entity’s external counsel to be incomplete or incorrect.

Meeting with legal counsel

In certain circumstances, the auditor also may judge it necessary to meet with the entity’s
external legal counsel to discuss the likely outcome of the litigation or claims. This may be
the case where:

(a) the auditor determines that the matter is a significant risk

(b) the matter is complex
(c) there is disagreement between management and the entity’s external legal counsel.

Ordinarily such meetings require management’s permission and are held with a
representative of management in attendance.

A.8 (a) Pervasive is a term used to describe the effects of misstatement on the financial
statements or the possible effects thereon if any misstatement remains undetected
due to the auditor’s inability to obtain sufficient appropriate audit evidence.

Pervasive effects on the financial statements are those that, in the auditor’s
judgments:

(i) are not confined to specific elements, account or items of the financial
statements,
(ii) if so confined, represent or could represent a substantial proportion of the
financial statements or
(iii) in relation to disclosures, are fundamental to user’s understanding of the
financial statements.

Page 6 of 7
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2011

(b) (i) Issuance of bank guarantee after the year end does not require any adjustment
or disclosure. Therefore, there will be no effect on the audit report on this issue.
(ii) The audit report shall state that “Zakat deductible at source under the Zakat &
Ushr Ordinance, 1980, was deducted and deposited in the Central Zakat Fund
established under section 7 of that Ordinance”.
(iii) The auditor should consider the materiality of the amount. If the amount is
material, the auditor should express a qualified or adverse opinion.
(iv)  The audit report shall mention the exception to the consistent application of
accounting policies and whether the auditor concurs with it or not.
 The financial statements shall be adjusted accordingly and the effect of
change in estimate shall be disclosed in the notes to the financial statements
unless the differences are material and auditor has reasons to differ with the
reviewed estimate. There would be no impact on the audit report on this
issue.

A.9 Procedures which an auditor may perform to update the understanding of the entity and its
environment for an engagement to review interim financial information includes the
following:

(a) Reading the documentation, to the extent necessary, of the preceding year’s audit and
reviews of prior interim period(s) of the current year and corresponding interim
period(s) of the prior year, to enable the auditor to identify matters that may affect
the current-period interim financial information.
(b) Considering any significant risks, including the risk of management override of
controls that were identified in the audit of the prior year’s financial statements.
(c) Reading the most recent annual and comparable prior period interim financial
information.
(d) Considering materiality with reference to the applicable financial reporting
framework as it relates to interim financial information to assist in determining the
nature and extent of the procedures to be performed and evaluating the effect of
misstatements.
(e) Considering the nature of any corrected material misstatements and any identified
uncorrected immaterial misstatements in the prior year’s financial statements.
(f) Considering significant financial accounting and reporting matters that may be of
continuing significance such as material weaknesses in internal control.
(g) Considering the results of any audit procedures performed with respect to the current
year’s financial statements.
(h) Considering the results of any internal audit performed and the subsequent actions
taken by management.
(i) Inquiring of management about the results of management’s assessment of the risk
that the interim financial information may be materially misstated as a result of fraud.
(j) Inquiring of management about the effect of changes in the entity’s business activities.
(k) Inquiring of management about any significant changes in internal control and the
potential effect of any such changes on the preparation of interim financial
information.
(l) Inquiring of management of the process by which the interim financial information
has been prepared and the reliability of the underlying accounting records to which
the interim financial information is agreed or reconciled.

(THE END)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Spring 2011

General:

In general, the candidates extended an average performance and several amongst them
did not deliver the quality output as is desired from a student pursuing professional
career/studies. It transpired that performance of various candidates got affected due to
insufficient preparation, lack of presentation skills, and limited grasp on Auditing
standards. The candidates continued to repeat the mistake of writing all they know about
a topic without appreciating the specific requirement of the question for which marks are
awarded.

Q.1 (a) Most of the candidates identified the appropriate preconditions for audit and
started well in the question. However, due to lack of grip over auditing
standards many students were found deviating from the preconditions listed
in ISA-210.
(b) The overall performance of a large number of students was good. However,
most of them were confused between ‘acceptable’ and ‘applicable’ financial
reporting framework.
(c) Most students said that if a precondition for an audit is not present, the
auditor should not accept the assignment. Consequently, very few students
could explain as to what the auditor should do if he has to accept the audit on
account of application of any law or regulation.

Q.2 The question was poorly answered by most students. Generally they failed to
identify that the auditor doubts the reliability of written representation where he has
concerns about the competence, integrity, ethical values or diligence of
management or about its commitment for enforcement of controls or when the
representations is inconsistent with other audit evidence. The answer to latter part
of the question was even worse as very few could describe the course of action that
the auditor takes in such situations.

Q.3 (a) Good performance was witnessed from majority of the students as they
correctly elaborated the difference between statistical and non-statistical
sampling and between sampling and non-sampling risk. However those who
had opted for a cursory study were easily exposed as their response was
restricted to general discussion only.

(b) The candidates appeared to be confused in identifying deficiencies in the

sample and the best possible alternate method of sampling in the given
scenario. A significant number of students preferred discussing every thing
they knew about sampling and suggested varied options but could not focus
on the guidelines envisaged in the standards and in appendix to the related
standard.
Page 1 of 3
 Examiners’ Comments on Auditing – Spring 2011

Q.4 This question was generally well attempted though quite a few students could not
identify the threats and instead, delved upon lack of independence, integrity,
confidentiality, technical competence, professional behaviour of the auditor, etc.
Some students thought it fit to prefix ‘self’ with every threat eg ‘self advocacy
threat’, ‘self intimidation threat’! A fairly large number of candidates gave
incorrect examples also.

Q.5 (a) The part was generally well attempted. However, those who had not prepared
well, produced the following types of irrelevant points in their answers:

• Source information not reliable

• Controls over preparation of financial statements are weak
• Third parties refuse to provide relevant information
• Non-cooperation of staff, etc.

(b) To support their argument that audit evidence is persuasive rather than
conclusive, students generally stated the inherent limitations of audit and
system of internal control and very few candidates mentioned the following
points:

(i) People make mistakes (both clients and auditor).

(ii) Documents could be forged (increasingly easy with digital technology).
(iii) The client’s personnel may not always tell the truth.

Q.6 (a) This part was well attempted except that few candidates mentioned the
minimum retention period of six or ten years instead of five years. However,
a large number of students could not state that each firm should establish its
own policies and procedures for retention of engagement document, subject
to the above limitation.

(b) Very few candidates seemed to have exact knowledge of what was required.
Very few of them could quote appropriate examples such as
deleting/discarding of superseded documents, cross referencing and signing
off etc.

(c) Some candidates listed the new audit documents that could be added to audit
files but could not mention the circumstances which may necessitate the
modification of existing audit documents or adding of new audit documents
after the issuance of the auditor’s report.

Q.7 This question was not appropriately attended by most of the students. Several
candidates had their focus on positive and negative confirmation without
appreciating the requirement of the question. Similarly, many students wrote about
verification of litigations and claims.

Page 2 of 3
 Examiners’ Comments on Auditing – Spring 2011

Q.8 (a) This part was straightforward and on an average, the students performed well
and were able to describe the term “pervasive effects on financial statements”
in line with para 5 of ISA-700.

(b) The performance in this part was very poor as most students failed to analyse
the given situations. Without going into the merit of the case and related
guidance available in ISAs, the students kept on mentioning that auditor
should qualify or add an emphasis of a matter paragraph. Most of the
candidates failed to appreciate that issuance of bank guarantee to related party
after balance sheet date did not warrant any disclosure and no action was
required in this respect. Likewise, payment of dividend after several years did
not warrant any modification to the report. Several candidates could not
specify the reference to be made in the audit report for deduction and deposit
of Zakat.

Q.9 This question was not appropriately understood by many candidates. The question
focused on updating auditors information for review of interim financial statements
whereas most of the candidates structured their response with reference to client
acceptance procedures or the procedures for understanding the client’s business.

(THE END)

Page 3 of 3
 The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examination 5 September 2011
Autumn 2011 100 marks – 3 hours
Module D Additional reading time – 15 minutes

(All questions are compulsory)

Q.1 You are the Manager on the audit of Ghazi Power Limited (GPL), a gas transmission and
distribution company, for the year ending 31 October 2011. On the company’s request, your firm
has agreed to complete the audit by 20 November 2011.

In order to meet the audit deadline, you are considering various measures which include sending
requests for negative confirmations related to balances due on 31 August 2011. On 31 August
2011, total debtors aggregated Rs. 45 Million. 50% of the amount is due from 15 major debtors,
whereas the total number of debtors is 2,450.

Moreover, GPL’s management is not allowing you to send a request for confirmation of balance
to SSO Ltd, which is among one of the 15 major debtors, because of certain ongoing legal
disputes.

Your previous experience with the client and the results of initial risk assessment procedures
suggest that the risk of material misstatement is low.

Required:
(a) Discuss whether it would be appropriate to use the negative confirmations procedure in the
above situation. (06 marks)
(b) What audit procedures should be performed at the year end, if requests for confirmation of
balances are sent on 31 August 2011? (07 marks)
(c) List the procedures that should be adopted due to management’s refusal to send a request for
confirmation of balance to SSO Ltd. (06 marks)

Q.2 (a) Differentiate between the following:

(i) An ‘emphasis of matter’ paragraph and an ‘other matter’ paragraph.
(ii) ‘Applicable financial reporting framework’ and a ‘general purpose framework.’
(08 marks)

(b) Give three examples each of circumstances which may necessitate the inclusion of the
following in the auditor’s report:
(i) An ‘emphasis of matter’ paragraph; and
(ii) an ‘other matter’ paragraph. (06 marks)

Q.3 Fieldwork for the annual audit of Peach Textile Mills Limited (PTML) has been completed and
the financial statements and the audit report are due to be signed next week. During the
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.

Required:
Explain the auditor’s responsibility and the audit procedures and actions that should be carried
out by the auditor in the above situation. (05 marks)
 Auditing Page 2 of 3

Q.4 Comment on each of the following independent situations in respect of appointment of auditors,
with reference to the applicable rules and regulations:

(a) Guava and Company, Chartered Accountants, have received a request for appointment as
auditor of Orange Bank Limited (OBL). Most of the partners of Guava and Company
maintain their accounts with OBL and are enjoying credit card facilities from them. The
maximum outstanding balance on the credit card facility, due from any partner is Rs.
399,000.
(b) Apricot and Company, Chartered Accountants, have received an offer for appointment as
auditor of Banana Limited. Mr. Pumpkin who is a nominee director of the Government on
the Board of Directors of Banana Limited holds 25% shares in Water Melon Limited. The
spouse of a partner also holds shares in Water Melon Limited.
(c) Mr. Zaheer, a legal practitioner, has received an offer for appointment as external auditor of
Lychee (Private) Limited (LPL). The paid up capital of LPL is Rs. 1,500,000 of which 40%
is owned by Blue Black Limited, a listed company.
(d) Walnut and Company, Chartered Accountants, have received an offer for appointment as
external auditors of Wasim (Private) Limited (WPL), in place of the previous auditors, who
were removed before the completion of their term. You may assume that WPL has
completed all the legal formalities before removing the previous auditors.
(e) Mr. Sadiq has recently joined your firm as a partner. He has served on the Board of
Directors of Strawberry Limited (SL) until 30 June 2009, as a Government nominee. In the
Annual General Meeting of SL held on 31 August 2011, a shareholder has proposed the
name of your firm for appointment as the external auditors for the year ending 30 June 2012.
(11 marks)

Q.5 As the auditor of a listed company with a number of related parties, what steps would you
consider as part of your audit planning to ensure that all related party relationships and
transactions are identified and disclosed in the financial statements. (13 marks)

Q.6 You are a part of the team on the audit of Fresh Meat (Private) Limited which sells fresh meat
products through 25 retail outlets. Each outlet holds cash at the year end. Sales are made on cash
as well as against credit cards. All the accounting records are maintained at the outlets and
balances with the Head Office are reconciled on a monthly basis.

Required:
List the audit assertions relevant to the audit of cash in hand and state how you would obtain
audit evidence to support those assertions. (06 marks)

Q.7 (a) List the benefits associated with holding timely discussion among the team members in
respect of matters susceptible to material misstatements. (05 marks)

(b) Quite often, the risk of material misstatement is greater in case of non-routine transactions
and judgmental matters.

Required:
(i) What do you understand by non-routine transactions and judgmental matters?
(ii) State the reasons on account of which risk of material misstatement is increased in case
of:

Non-routine transactions

Judgmental matters (06 marks)
 Auditing Page 3 of 3

Q.8 You are the audit manager of MM Electronics (Private) Limited. The company markets its
products through retail outlets in nine major cities. The draft financial statements for the year
ended 30 June 2011 show a profit after tax of Rs. 20 million and net assets of Rs. 150 million.
The audit team has noted the following matters for your consideration:

(a) During the year the company has changed its policy of valuation of property, plant and
equipment from historical cost to revalued amount. For this purpose, the services of
Professional Valuers (Private) Limited were hired. They have issued valuation reports of
three outlets indicating a revaluation surplus of Rs. 10 million, which has been recognised in
the financial statements. The management has informed you that the valuation reports of the
remaining properties are expected to be issued in December 2011.
(b) The company was sued for breach of contract by a customer claiming damages of Rs. 10
million. The legal advisor has confirmed the management’s assertion that no liability existed
at the balance sheet date. However, while reviewing the customers’ files, you found an email
from the Manager (Legal Department) addressed to the Chief Executive in which he has
opined that the company will have to pay atleast 50% of the damages claimed.
(c) With effect from 01 July 2010, the company has introduced a policy of providing one year
warranty on its television sets. No warranty is provided on the other products. Sales of
television sets aggregated Rs. 20 million, whereas the total sales for the year amounted to
Rs. 80 million.
The company has a customer support department which provides after sales services on all
products. For defects not covered under the warranty, the company bills the customers at
25% above cost. The management has included a note in the draft financial statements
stating that no provision has been made in respect of the warranty, as the amount cannot be
measured reliably.

(d) The directors have decided not to disclose earnings per share as the same had reduced
significantly on account of issuance of 100% bonus shares. The disclosure was however
made in all previous financial statements.

Required:
Express your views on each of the above situations and discuss the impact thereof on the audit
report. (14 marks)

Q.9 List the circumstances in which it may become necessary to revise the terms of audit engagement
for a recurring audit. (07 marks)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2011

Ans.1 (a) Certain conditions are required to be met before an auditor can decide to use
negative confirmation as a sole substantive procedure, these conditions include:

(i) The auditor has assessed the risk of material misstatement as low and has
obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertions;
(ii) The population of items subject to negative confirmation procedure
comprises a large number of small, homogeneous account balances,
transactions or conditions;
(iii) A very low exception rate is expected; and
(iv) The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests.

In the given situation, condition # (i) and (ii), are met; the fact that risk of material
misstatement is low suggests that condition # (iii) is also being met. Therefore it
would be appropriate to use negative confirmation provided that the fourth
condition is met.

For 15 major debtors, it would be appropriate to use positive confirmation as their

population consists of small number of large balances.

(b) Audit Procedures:

(i) Prepare or obtain a client roll forward schedule from 31 August 2011, to 31
October 2011.
(ii) Agree Individual entries for 31 October 2011, with the sales ledger and
debtors control accounts.
(iii) Note and obtain explanation for any unusual journal adjustments.
(iv) Vouch material sales or receipts with supporting documents.
(v) Select a sample of receipts and sales and perform tests of controls to ensure
that system of internal controls continued to operate effectively.
(vi) Re-perform cutoff test at year end.
(vii) Perform analytical procedures by comparing the balances of debtors on 31
August 2011, to Debtors on 31 October 2011, and ascertain reasons for
major variances, if any.
(viii) Check subsequent recovery of year end balances.

(c) If Management refuses to allow the auditor to send a confirmation request, the
auditor shall:

(i) Inquire as to management’s reason for the refusal, and seek audit evidence as
to their validity and reasonableness;

(ii) Evaluate the implications of management’s refusal on the auditor’s

assessment of the relevant risks of material misstatement, including the risk
of fraud , and on the nature, timing and extent of other audit procedures; and

(iii) Perform alternative audit procedures designed to obtain relevant and

reliable audit evidence.

(iv) If the auditor concludes that

 Management’s refusal to allow the auditor to send a confirmation request
is unreasonable; or
 the auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures

Page 1 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2011

the auditor shall communicate with those charged with governance and the
auditor shall also determine the implications of the results of procedures
carried out above on the audit and the auditor’s opinion.

Ans.2 (a) (i) Emphasis of Matter Paragraph and Other Matter Paragraph:
Emphasis of matter paragraph is a paragraph that is included in the auditor’s
report that refers to a matter appropriately presented or disclosed in the
financial statements that, in the auditor’s judgment, is of such importance that
it is fundamental to users’ understanding of the financial statements.

Other Matter paragraph is a paragraph that is included in the auditor’s report

that refers to a matter other than those presented or disclosed in the financial
statements that, in the auditor’s judgment, is relevant to the users’
understanding of the audit, the auditor’s responsibilities or the auditor’s
report.

(ii) Applicable financial reporting framework and General purpose framework.

The applicable financial reporting framework refers to the financial reporting
framework adopted by the management and, where appropriate, those
charged with governance in the preparation of the financial statements that is
acceptable in view of the nature of the entity and the objective of the financial
statements or that is required by law or regulation.

The General purpose framework refers to a financial reporting framework

designed to meet the common financial information needs of a wide range of
users.

(b) (i) Examples of circumstances which necessitate the inclusion of emphasis of

matter paragraph:

 An uncertainty relating to the future outcome of exceptional litigation or

regulatory action.
 Early application (where permitted) of a new accounting standard (for
example, a new International Financial Reporting Standard) that has a
pervasive effect on the financial statements in advance of its effective
date.
 A major catastrophe that has had, or continues to have, a significant effect
on the entity’s financial position.
 The existence of material uncertainty relating to the event or condition
that may cast significant doubt on the entity’s ability to continue as a
going concern but has been appropriately disclosed.

(ii) Examples of circumstances which necessitate the inclusion of Other matter

paragraph:
 Any matter which in the auditor’s opinion is relevant to user’s
understanding of the Audit
 Any matter which in the auditor’s opinion is relevant to User’s
Understanding of the Auditor’s responsibilities or the Auditor’s Report
 When the auditor is required to report on more than one set of financial
statements.
 When there is restriction on distribution or use of the auditor’s report.

Page 2 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2011

Ans.3 Auditor’s responsibility and the audit procedures and actions that should be carried out
The auditor is responsible to consider the impact on the financial statements, of all events
that take place before the signing of the audit report.

The loss due to fire is a non-adjusting event as it is indicative of conditions that arose
after the reporting period. Therefore in the above situation the auditor will need to carry
out the following audit procedures:

(a) Assess the financial impact of the damage as may have been determined by the
management by reviewing the accounting documents, board minutes, surveyor’s
report etc.
(b) If the event needs to be disclosed in the financial statements, because of its
materiality, advise the management to make appropriate disclosure.
(c) If appropriate disclosure is not made or the disclosure is inappropriate, consider
modification of the audit report.

Ans.4 (a) (i) The appointment of Guava and Company, Chartered Accountants, will be in
order.
(ii) The firm would not be deemed indebted to the company as the amount of debt
is not exceeding Rs. 500,000.

(b) (i) The Appointment of Apricot and Company, Chartered Accountants will be in
order.
(ii) Banana Limited and Water Melon Limited are not associated companies as the
common director is a Government nominee.

(c) (i) Mr. Zaheer can be appointed as the Auditor of Lychee (Private) Limited
(ii) There is no specific qualification requirement for auditors of companies having
paid-up capital of less than Rs. 3 million.
(iii) The fact that 40% of the shareholding is owned by Blue Black Limited does not
disqualify Mr. Zaheer as the auditor of LPL.

(d) Before accepting the offer Wallnut and Company, Chartered Accountants, apart from
obtaining professional clearance from the existing auditor is also required to inform
the ICAP (Institute) and obtain prior clearance from the Institute.

(e) (i) Since the three year period has not been lapsed,
(ii) Our firm cannot be appointed as the auditor of Strawberry Limited,
(iii) The fact that Mr. Sadiq was serving on the board as a Government nominee
does not make any difference, in this case.

Ans.5 The steps that I as an auditor would consider as part of the audit planning to ensure that
all related party relationships and transactions are identified and disclosed in the
financial statements are as follows:

(a) Obtaining an understanding of the controls, if any, that management has established
to identify, account for, and disclose related party relationships and transactions in
accordance with the applicable financial reporting framework.

(b) Inquiring of the management regarding:

(i) The identity of the entity’s related parties, including changes from the prior
period;
(ii) The nature of relationships between the entity and these related parties; and
(iii) Whether the entity entered into any transactions with these related parties
during the period and, if so, the type and purpose of the transactions.
Page 3 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2011

(c) Inspecting the following documents for indications of the existence of related party
relationships or transactions that management has not previously identified or
disclosed:

(i) Bank and legal confirmations

(ii) Minutes of meetings of shareholders and of those charged with governance; and
(iii) Any other records or documents as the auditor considers necessary (e.g. Form
A, Form 29, Register of members etc).

(d) Reviewing the extent and nature of business transacted with major customers,
suppliers, borrowers and lenders for indications of previously undisclosed
relationships.

(e) Reviewing the significant transactions outside the normal course of business, paying
particular attention to the transaction recognized at or near end of the reporting
period and inquire of management:

 The nature of these transactions

 Whether related parties are involved in these transactions

(f) Once related parties have been identified, the client should provide the details of
transactions with such parties. I as auditor would ensure that these transactions are
disclosed appropriately in the financial statements as per applicable financial
reporting framework.

Ans.6 (a) Audit Assertions

The key audit objectives in the audit of cash are to verify the assertions of:

(i) Existence
(ii) Completeness
(iii) Rights and obligations
(iv) Presentation and disclosure

(b) Audit Procedures

(i) Existence
 Carry out cash count and reconcile it with the accounting records.
 Any unusual items such as IOU should be investigated thoroughly.

(ii) Completeness
 Perform cutoff procedures to ensure that there is no unrecorded cash or cash
in transit is not missed.
 Check the reconciliation between Cash as per Head Office records with the
Cash at the outlets.

(iii) Rights and obligations

 Ensuring that Company owns the cash in hand and none of the cash is held
on behalf of any third party.

(iv) Presentation and Disclosure

Ensure that cash and balances have been disclosed, classified and described in
accordance with applicable financial reporting framework.

Page 4 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2011

Ans.7 (a) Benefits of discussion among the engagement team about the susceptibility of the
entity’s financial statements to material misstatement are as follows:

(i) Provides an opportunity for more experienced engagement team members to

share their insights based on their knowledge of the entity.
(ii) Allows the engagement team members to exchange information about the
business risks to which the entity is subject to and about how and where the
financial statements might be susceptible to material misstatement, due to
fraud or error.
(iii) Assists the engagement team members to gain a better understanding of the
potential for material misstatement in the areas assigned to them.
(iv) Develop an understanding; about the results of the audit procedures that they
perform on specific areas may affect other aspects of the audit including the
decisions about the nature, timing and extent of further audit procedures.
(v) Provides a basis upon which engagement team members communicate and
share new information obtained throughout the audit that may affect the
assessment of risks of material misstatement or the audit procedures
performed to address these risks.

(b) (i) Non routine transactions:

Non-routine transactions are transactions that are unusual, due to either size or
nature, and that therefore occur infrequently.

Judgmental matters:
Judgmental matters may include the development of accounting estimates for
which there is significant measurement uncertainty.

(ii) Reasons on account of which risk of material misstatement is increased on

account of Non routine transactions:

(1) Greater management intervention to specify the accounting treatment.

(2) Greater manual intervention for data collection and processing.
(3) Complex calculations or accounting principles.
(4) The nature of non-routine transactions, which may make it difficult for
the entity to implement effective controls over the risks.

Reasons on account of which risk of material misstatement is increased on

account of Judgmental matters:

(1) Accounting principles for accounting estimates or revenue recognition

may be subject to differing interpretation.
(2) Required judgment may be subjective or complex, or require assumptions
about the effects of future events, for example, judgment about fair value.

Ans.8 (a) Revaluation of Properties:

(i) In accordance with IAS 16, Property, Plant and Equipment, if a policy of
revaluation is to be applied, it should be applied to all the non current assets in
a particular class of assets.
(ii) Since compliance with (i) above is not possible, the auditor should advise the
client to not to change the accounting policy and state the values of the
property at cost.
(iii) In case of disagreement the auditor may consider issuing a qualified report.

Page 5 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2011

(b) Suit for damages:

(i) The reliability of audit evidence provided by the legal advisor is high because it
has been obtained from an independent source outside the entity. As
management is also of the view that no liability exists at the balance sheet date,
therefore in the presence of legal advisor’s confirmation a conclusion should
not be drawn on the basis of manager’s legal email.

(ii) However, since there is inconsistency in audit evidence obtained and the
auditor is unaware of the context in which the manager (legal) sent the email,
he shall investigate the reasons thereof and may need modification or addition
to the audit procedures.
(iii) The auditor should analyze the situation, in the light of IAS 37, Provisions,
Contingent Liabilities and Contingent Assets, and assess whether a disclosure of
the event as a contingent liability is required or not.
(iv) If disclosure of contingent liability is required, and the client disagrees the audit
report may be qualified.

(c) Warranty Provision:

(i) The management’s claim that the amount cannot be measured reliably is not
correct because they were charging the customers at 25% above cost prior to
July 01, 2010 i.e. when there was no warranty on the sale of television sets and
hence they must be in a position to make a reliable estimate based on their past
experience and records available with them.
(ii) If a provision is not made for the warranty then if the amount of provision is
material to the financial statements then the audit report should be qualified

(d) Non Disclosure of Earnings per share in the financial statements:

International Accounting Standards 33, Earnings per share does not apply to non
listed entities; therefore there is no requirement of disclosing earnings per share in
the financial statements.

Ans.9 The following factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms:

(a) Any indication that the entity misunderstands the objective and scope of the audit.
(b) Any revised or special terms of the audit engagement.
(c) A significant change in the ownership.
(d) A significant change in nature and size of the entity’s business.
(e) A change in legal or regulatory requirements.
(f) A change in the financial reporting framework adopted in the preparation of the
financial statements.
(g) A change in other reporting requirements.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Autumn 2011

General:

The overall performance of the candidates was average. Primary reasons contributing to
marginal performances appeared to be lack of preparation and presentation skills
combined with cursory reading of auditing standards. In addition, it was quite obvious
from a large number of scripts that candidates scored good marks in theoretical
components but failed to handle questions involving practical approach. It was also
observed that while dealing with practical situations most of the students quickly
concluded on extending qualified opinion without appreciating that it is neither a
substitute for further audit procedures nor it is to be intermittently used.

Q.1 (a) The question was fairly well answered as majority of the students were able
to describe the circumstances in which the auditor may decide to use negative
confirmations. However, many of them were unable to relate the academic
knowledge to the given scenario.

(b) Most students failed to clearly describe the roll over procedures to be
performed at year end since the confirmations were sent on an earlier date.
Instead of focusing on the remaining two months’ transactions, the students
narrated all the procedures related to verification of debtor balances.

(c) The students were required to list the procedures that the auditor would be
required to perform in the situation when management had refused to send a
confirmation request to a particular customer. Majority of the students
answered correctly in the light of the relevant auditing standards but many of
them started discussing whether the audit report should be qualified, which
was irrelevant.

Q.2 This was a conceptual question. Students were able to differentiate between
emphasis of matter and other matter paragraph but could not differentiate clearly
between applicable financial reporting framework and general purpose framework.
The examples warranting inclusion of emphasis of matter paragraph were
reasonably presented. However, the examples of situations requiring inclusion of
other matter paragraph were not extended in a convincing manner.

Q.3 The performance in this question was quite poor as most of the students were not
able to evaluate the situation. The students were expected to identify that:

• It is a non-adjustable event.
• The auditor is responsible to assess whether the impact of the event on the
financial statements is material.

Page 1 of 3
 Examiners’ Comments on Auditing – Autumn 2011

• In case the auditor determines that the impact is material, he should ask the
management to give appropriate disclosure and in case the management does
not agree, the auditor should consider appropriate modification of the audit
report.
However, majority of the students produced all sorts of irrelevant stuff and mainly
delved on the following issues:
• Management’s failure to properly insure the goods.
• Procedures to be adopted for revision of audit report although it was clearly
mentioned in the question that the audit report had not been signed.
• How the information should be presented in the audited financial statements.

Q.4 In this question the students were supposed to give their views on five different
situations with reference to appointment of auditor. Most of the students seemed to
have studied the related guidelines and scored high marks. The errors were mostly
in respect of the following:

• Some students gave the decision without any reasoning.

• In part (d), many students did not specify that in the given situation the
incoming auditor was also required to obtain prior clearance from the Institute
of Chartered Accountants of Pakistan.
• Only few students knew that there is no specific qualification for auditors of
private companies having paid-up capital of less than Rs. 3 million.

Q.5 This could have been a high scoring question but the majority of students could
secure average marks only.

A large number of students listed irrelevant steps not considering that the
requirement of the question was to list the procedures which would ensure that all
related parties and related party transactions are identified. Many of them seemed
to believe that existence of /reference to related party always means existence of
fraud and malpractices and emphasized on this aspect only.

Most of the students mentioned some of the easier points like inquiries from
management, review of minutes of meetings and register of members etc.
However, they emphasized on verification of known related party transactions
instead of mentioning steps aimed at identification of undisclosed related party
transactions.

Q.6 This question provided an opportunity to the students to secure high marks but
probably most of them were not expecting such an easy question. Many irrelevant
steps were listed whereas some important steps were missed out. Some of the
common mistakes were as follows:

• While mentioning the audit assertions there was a tendency to mention all the
possible assertions without considering whether they were relevant or not.
• Cut off procedures were rarely mentioned.
• Procedures related to bank reconciliations were mentioned by many students.
• Sales through credit cards were often presumed as credit sales.
Page 2 of 3
 Examiners’ Comments on Auditing – Autumn 2011

Q.7 (a) In general the students had an idea that appropriate and effective discussion
should take place amongst team members. However, about half the students
produced to the point and relevant material whereas the rest relied on general
discussion which contained few of the relevant points with a lot of repetition
as well as irrelevant material also.

(b) Most of the students were able to describe non-routine transactions as well as
judgmental matters. However, some of them described judgmental matters as
“Judgments taken by the auditor”.

While explaining the reasons on account of which risk of misstatement was

high in these transactions, the majority could identify the subjectivity
involved in dealing with judgmental matters. The reasons for higher risk in
non-routine transactions could not be specified correctly as majority of the
students tried to come out with lengthy answers mostly based on their
general understanding instead of relevant material from the Auditing
Standards.

Q.8 (a) Most of the candidates failed to comprehend the key issue i.e. the fact that
the policy of revaluation has to be applied on all the assets in a particular
class of assets. Consequently, they could not produce appropriate replies.

(b) Many candidates failed to identify that it was a non-adjusting event.

Candidates did highlight the significance of the confirmation from an
independent source; however, very few could point out that the difference
between the opinion of the internal and the external source also needed to be
sorted out.

(c) Very few candidates could identify that the management’s contention that
the amount of warranty claims cannot be measured reliably was not correct
as it could have been reliably estimated on the basis of prior years’ data.

(d) Only about 10% of the students could highlight the fact that the requirement
to disclose earnings per share does not apply to non-listed entities.

Q.9 This proved to be an easy question. A large number of students seemed well
prepared on this topic and were able to narrate the relevant points correctly.

(THE END)

Page 3 of 3
 The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examination 5 March 2012
Spring 2012 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 Platinum Limited (PL) is a key supplier of raw materials to Zinc Limited (ZL). PL has filed a suit
against ZL for breach of terms of an agreement. The amount claimed by PL is Rs. 10 million. ZL
has disclosed it as a contingent liability in the draft financial statements for the year ended 31
December 2011. However, ZL is striving for an out of court settlement and recent correspondence
indicates that PL is likely to agree and settle the dispute for 50% of the amount claimed by them.

Required:
Describe the audit procedures that ZL’s auditor should perform in the above situation. Also
discuss the impact, if any, of the above procedures on the audit report. (07 marks)

Q.2 In the planning phase of the audit of Dynamic Limited for the year ending 30 June 2012, you have
calculated the following ratios from the management accounts of the company for the eight
months ended 29 February 2012:

Eight months
Year ended Year ended
period ended
30 June 2011 30 June 2010
29 February 2012
Gross profit percentage 35% 40% 40%
Inventory turnover days 120 105 78
Current ratio 1.5 2.3 2.6
Quick asset ratio 0.78 1.6 1.7
Times interest earned 0.91 1.67 2.1
Debtors turnover days 132 86 68

Required:
Identify the prospective audit risks which the auditor should consider while planning the audit.
(09 marks)

Q.3 An auditor may agree to a change in the terms of engagement provided there is a reasonable
justification for doing so.

Required:
(a) List the circumstances in which the management may request the auditor to change the terms
of an audit engagement.
(b) What factors should be considered by the auditor before accepting a change in the terms of the
engagement?
(c) List the steps that the auditor should consider, if he is unable to agree to a change in the terms
of engagement. (09 marks)

Q.4 List the substantive procedures that may be performed by the auditor to verify the amount of
inventories as appearing in the financial statements of a manufacturing concern. (15 marks)
 Auditing Page 2 of 3

Q.5 (a) You are the audit manager in a firm of Chartered Accountants. The audit seniors on various
jobs have sought your advice in respect of the following independent situations:

(i) The expected rate of deviation based on the auditor’s understanding of controls has
increased to an extent which is unacceptably high.
(ii) Number of debtors has increased from 4,500 to 5,000 and the amount of debtors as a
percentage of total assets has also increased.
(iii) The expected amount of mis-statement has decreased from Rs. 300,000 to Rs. 200,000
whereas the monetary amount in respect of which an appropriate level of assurance is
required has increased by Rs. 50,000.

Required:
State with reasons, the effect of each of the above issues on the sample size of:
(i) Tests of controls; and
(ii) substantive procedures. (07 marks)

(b) While determining the sample size for tests of controls, the auditor takes into account the
expected rate of deviation. State the factors that are relevant to the auditor’s consideration of
the expected rate of deviation. (04 marks)

(c) Differentiate between the following:

(i) Fair presentation framework and compliance framework
(ii) Tolerable mis-statement and performance materiality (09 marks)

Q.6 Comment on each of the following independent situations with reference to the applicable rules
and regulations.

(a) Waqar is a partner in Sohail and Company, Chartered Accountants, who are the auditors of
Wasim Limited for the year 2011. Aqib who was a partner of Waqar in 2008 in his food
business, has recently been appointed as a Director of Wasim Limited. (02 marks)
(b) Aleem, Asif and Company (AAC), Chartered Accountants, has accepted an offer for
appointment as auditors of Gul Limited (GL). Kamal who is a partner in AAC, held 5000
shares in GL. Within thirty days of acceptance, he gifted the shares to his son Kamran, who is
a manager in AAC. (06 marks)
(c) Sajid, Hameed and Company (SHC), Chartered Accountants, are the auditors of Mir Hasan
Limited (MHL). Kashif is a senior manager in SHC and is being promoted as a partner. He
teaches auditing in a college. The college is owned by a trust whose trustees include two
directors of MHL. (02 marks)
(d) You have recently signed the audit report of Sadiq Limited. The management has approached
you for reduction in audit fee for the next year because the company has been suffering losses
for the past three years. (03 marks)
(e) Saleem is a partner in Orange and Company, Chartered Accountants. He also practices as a
sole proprietor and has received an offer for appointment as auditor of ABC Financial
Services Limited which is a subsidiary of DEF Bank Limited. The balance outstanding against
the credit card issued by DEF Bank Limited to a partner of Orange and Company is
Rs. 510,500. (02 marks)

Q.7 As part of the audit process, the management provides written representations to confirm certain
matters in connection with the audit.

Required:
(a) State the matters that you will consider as an auditor while assessing the reliability of
representations made by the management. (05 marks)
(b) Describe the course of action available to an auditor if the management refuses to provide
representation on a particular issue. (05 marks)
 Auditing Page 3 of 3

Q.8 The following situations have arisen on different clients being audited by your firm. The year end
in each instance is 31 December 2011.

(a) The management of Dir Limited intends to present certain unaudited supplementary
information, with the audited financial statements, in order to comply with the requirements
of the parent company. Before signing the audit report, it has been determined that some of
the information is inconsistent with the information in the draft financial statements.
(07 marks)

(b) Malakand Industries Limited (MIL) is engaged in the supply of customised machinery to
textile manufacturers. On 18 February 2012 one of its customers, who owed Rs. 9.6 million,
went into voluntary liquidation. In addition to the above amount, a job was in progress on
behalf of that customer and on which MIL had already spent Rs. 13.9 million.

The directors have refused to make a provision against the debt on the grounds that the
liquidator was appointed after the balance sheet date. They have also refused to make any
provision in respect of the work in process as they are planning to sell the machinery being
manufactured to another customer for Rs. 15.7 million.

The profit after tax of MIL is Rs. 85 million. The materiality level is 10% of profit after tax.
(05 marks)

(c) Swat Limited has invested Rs. 150 million in a business which is not mentioned in the object
clause of its Memorandum of Association. However, the object clause was amended a week
before the signing of the audit report. (03 marks)

Required:
In the light of the relevant requirements, discuss how should the auditor deal with the above
situations and describe the impact thereof on the audit report.

(THE END)
 AUDITING
Suggested Answers
Intermediate Examination - Spring 2012

A.1 The following audit procedures should be applied to assess whether an adjustment is required:

(i) Obtain direct confirmation from the company’s lawyers seeking their opinion as to whether
the settlement is probable and whether Rs. 5 million is the likely amount.
(ii) Review the correspondence with PL to confirm that the amount they are willing to accept is in
fact Rs. 5 million.
(iii) Discuss with management as to whether they intend to accept PL’s offer and obtain a written
representation.

If on the basis of the above procedures the auditor concludes that a settlement at 50% of the
amount claimed is likely, he shall ask the management to make a provision.

In case the management refuses to provide for the amount then a qualified opinion may be
given, if the amount of Rs. 5 million is considered material.

A.2 The prospective audit risks are as follows:

Overstatement of Debtors:
Average period for outstanding debtors has reached to four months which is indicative of a risk of
inadequate provision against doubtful debts.

Overstatement/ Understatement of Inventories:

The inventories turnover rate has decreased to 3 times per year from 5 times in 2010. It is
indicative of the following types of risks:
(a) Obsolescence of inventories.
(b) Improper valuation of inventories.

Overstating of income as well as understating of expenses:

The income position has weakened and the company has suffered losses as the interest coverage
has moved below 1.0. In such a situation there is a risk that the management may like to overstate
its revenue, and understate its expenses.

Liquidity Problems:
The company is experiencing liquidity problems as are evidenced from the decline in current ratio
and quick asset ratio.

Decline in Gross Profit %:

The decline in GP % needs to be justified. The absence of an appropriate explanation may be
indicative of:

(a) Improper pricing and discounting policies

(b) Improper purchasing policies
(c) Other irregularities like unauthorized spending, intentional manipulation of profitability etc.

Going Concern:
Losses/significant decline in profitability and fast deteriorating liquidity position are financial
indicators of going concern issues, which should not be overlooked.

A.3 (a) Circumstances in which the management can request the auditor to change the terms of audit
engagement:
(i) Change in circumstances affecting the need for the service.
(ii) A misunderstanding as to the nature of an audit as originally requested.
(iii) A restriction on the scope of an audit engagement, whether caused by management or
caused by other circumstances.
Page 1 of 6
 AUDITING
Suggested Answers
Intermediate Examination - Spring 2012

(b) Factors that are to be considered by the auditor before accepting the change in terms of
engagement:
(i) Justification provided for changing the terms of engagement.
(ii) The information in respect of which the change is requested by the management.
(iii) Legal or contractual implications of the change.

(c) Steps that the auditor can take, if he is unable to agree to a change in terms of engagement:
If the auditor is unable to agree to a change in the terms of the audit engagement and is not
permitted by management to continue the original engagement, the auditor shall:

(i) Withdraw from the audit engagement where possible under applicable law or regulation;
and
(ii) Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or
regulators.

A.4 Substantive Procedures

(a) Physical verification:
(i) Evaluate the client’s physical inventory taking instructions and procedures to their staff.
(ii) Attend physical inventory count to observe the inventory count procedures.
(iii) Ascertain whether the staff members are carrying out the physical inventory count as
per approved instructions issued to them.
(iv) Perform test counts to ensure the efficiency and effectiveness of the physical count
procedures.
(v) Observe the physical inventory count and identify the matters for appropriate follow-up
during the audit. These matters may include the following:

 Excess/ Shortages found in test count performed by the auditors.

 Items of inventory identified as obsolete, slow moving, damaged or defective.
 Details of instances where the approved inventory count procedures are not
followed by the staff members of the client.
 Instances where the stock records (bin cards, stock and stores ledger etc) do not
contain adequate details relating to balance of inventory in hand, minimum level,
maximum level, ordering level, specification of inventory and location of inventory
etc.
 Cut-off procedures and adherence thereto.

(vi) Check that the adjustments arising out of the physical count have been made in the stock
count sheets.
(vii) Check final stock sheets for quantity, pricing, extensions, casting, summarization, and
signatures of the stock taking staff.

(b) Finished Goods:

(i) Obtain a list of items (schedule) shown as finished goods, with full particulars, quantity
and value
(ii) Compare the list with physical count sheet balances and with stock ledger balances
(iii) On test basis check the items and quantities in the stock ledger with the bin card.
(iv) With regard to cut-off procedures performed during the attendance at the physical
inventory count, check the ‘goods outward book’ or ‘delivery challans’ book for the last
few days of the year, and early few days of the succeeding financial year.
(v) If goods are sold on consignment, check the closing stock with the consignment account.

Page 2 of 6
 AUDITING
Suggested Answers
Intermediate Examination - Spring 2012

(c) Work in Process:

(i) Obtain a list of items shown as work in progress, with full particulars, quantity and
value.
(ii) Compare the list with physical count sheet balances and with stock ledger balances
(iii) Check the quantity and items included in the list with the production reports and job
cards etc.
(iv) Check records showing the work in progress opening balances, raw material and other
material issued and labour and overheads charged to production and closing balance of
work in process.
(v) Where it is not possible to quantify or value the work in process for technical reasons,
the auditor should consider to use an expert.

(d) Raw material:

(i) Obtain a list of items shown as Raw material, with full particulars, quantity and value.
(ii) Compare the list with physical count sheet balances and with stock ledger balances.
(iii) Verify the cost of raw material appearing in the financial statements by matching with
them with the purchase invoices etc.

(e) Valuation of Inventories:

(i) Ensure that stock has been valued in accordance with the valuation policy.
(ii) Ensure that inventories have been valued at the lower of cost and net realizable value.
(iii) Ensure that the cost of inventories comprise of purchase price, cost of conversion and
other costs incurred in bringing the inventories to their present location and condition.
(iv) Check that the following costs have not been included in the cost of inventories:

 Abnormal wastes in labour, material or other production overheads.

 Storage costs unless considered necessary for the production process/ inventory.
 Administrative overheads
 Selling and distribution costs
 Financial charges

(v) Examine and perform test checks to verify the proper allocation of overheads is in
accordance with the requirements of IAS 2.
(vi) Where the inventories are valued at net realizable value, check that valuation is correct
and is based on the most reliable evidence.
(vii) Check that the cost of obsolete and damaged items is properly written down.
(viii) Test arithmetical accuracy of the calculation of the stock sheets.

(f) Disclosure:
Ensure that inventories have been disclosed in accordance with the requirements of
International Financial Reporting Standards and the Companies Ordinance, 1984.

(g) General:
(i) Trace opening balance from last years working papers.
(ii) Agree closing balance appearing in the financial statements with books of accounts.
(iii) Ensure that inventories have been appropriately classified.
(iv) Obtain direct confirmation for stocks held by third parties.
(v) Check reconciliations of opening and closing balances with production/ sale records,
wherever possible.

Page 3 of 6
 AUDITING
Suggested Answers
Intermediate Examination - Spring 2012

A.5 (a) Effect on sample size of Effect on sample size of tests of

Factor
Tests of controls details
(i) The expected rate of If the expected rate of No effect, as the factor is not
deviation has deviation is unacceptably related to test of details.
increased such that high, it means that controls
this increase is are not operating
unacceptable to you as effectively and the auditor
an auditor. cannot place reliance on
test of controls, accordingly
the auditor do not perform
the test of controls

(ii) Number of debtors has Negligible effect, as for large Negligible effect, as for large
increased from 4,500 population, the actual size of population, the actual size of the
to 5,000. the population has little, if population has little, if any, effect
any, effect on sample size. on sample size.

(iii) You expect that the No effect, as the factor is A decrease in the amount of
amount of not related to test of misstatements and increase in the
misstatements has controls. monetary amount in respect of
decreased from Rs. which the auditor requires an
300,000, to Rs. 200,000, appropriate level of assurance will
whereas the monetary decrease the sample size as both
amount in respect of the factor will reduce the audit
which you need an risk. Hence the sample size of the
appropriate level of test of details will decrease.
assurance is increased
by Rs. 50,000.

(b) Following factors are relevant to the auditor’s consideration of the expected rate of deviation:

(i) Auditor’s understanding of the business, in particular, risk assessment procedures

undertaken to obtain an understanding of internal control.
(ii) Changes in personnel or in internal controls
(iii) The results of audit procedures applied in prior periods and
(iv) The results of other audit procedures

(c) (i) Fair presentation framework and compliance framework:

The term fair presentation framework is used to refer to a financial reporting framework
that requires compliance with the requirements of the framework and:
 Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework; or
 Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements.
Such departures are expected to be necessary only in rare circumstances.

The term ‘compliance framework’ is used to refer to a financial reporting framework that
requires compliance with the requirements of the framework, but does not contain the
acknowledgements of fair presentation framework.
Page 4 of 6
 AUDITING
Suggested Answers
Intermediate Examination - Spring 2012

(ii) Tolerable misstatement and performance materiality

A Tolerable misstatement is a monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount set by
the auditor is not exceeded by the actual misstatement in the population.

Performance materiality means the amount or amounts set by the auditor at less than
materiality for the financial statements as a whole to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality for the financial statements as a whole. Performance materiality also refers to
the amount or amounts set by the auditor at less than the materiality level or levels for
particular classes of transactions, account balances or disclosures.

A.6 (a) Sohail and Company can continue to be the auditor of Wasim Limited.Waqar was a partner of
Aqib, two years back, whereas the Companies Ordinance, 1984 restricts only a present partner
or the director of a company, from becoming the auditor of that company.

(b) According to the Companies Ordinance, 1984, Kamal should disclose the fact that he holds
shares in GL at the time of appointment. His decision to disinvest shares of GL within thirty
days is in accordance with the requirements of the Companies Ordinance, 1984.

Disposal of shares to his son who is the manager in AAC, does not attract any contravention of
the Companies Ordinance, 1984 because there is a bar on the holding of shares by the auditor,
his spouse and minor children, however there is no bar on holding of shares by his son Kamran
who has attained the age of majority. Moreover, the Companies ordinance, 1984 and the Code
of Ethics does not restrict the Manager of the Audit firm from holding shares in the Company.
Hence the appointment of AAC as an auditor of GL is in order.

(c) The appointment of Sajid, Hameed and Company (SHC), Chartered Accountants is in order as
Kashif is not the employee of any director of the company. He is employed by the trust in which
the directors are the trustees.

(d) According to the Code of Ethics a chartered accountant in practice may quote whatever fee is
deemed to be appropriate commensurate with the nature and service to be rendered.

The Code of Ethics restricts the auditor from quoting lower fees than that charged by the
previous auditor. However, there is no restriction as regards reduction in audit fees by the
existing auditors.

(e) Orange and Company is not qualified for appointment as the auditor of ABC Financial Services
as the credit card balance of a partner exceeds the threshold limit of Rs. 500,000, set by the
Companies Ordinance, 1984. However, there is no restriction on the appointment of Saleem, in
his sole capacity, as an auditor of ABC Financial Services Limited as Orange and Company and
his Sole Proprietorship firm are separate entities.

A.7 (a) Matters that will be considered as an Auditor while assessing the reliability of representation
made by the management:
When the representations relate to matters material to the financial statements:
(i) Whether the representations appear reasonable and consistent with other audit evidence
obtained.
(ii) Whether the individuals making them can be expected to be well informed on such
matters.
(iii) Integrity of those making the representations.
(iv) Accuracy of representations made in the past.
(v) Corroborate audit evidence from sources inside or outside the entity.
Page 5 of 6
 AUDITING
Suggested Answers
Intermediate Examination - Spring 2012

(b) Auditor’s course of action if management refuse to provide you with a management
representation on a particular issue:
If management does not provide one or more of the requested written representations, the
auditor shall:
(i) Evaluate whether sufficient, appropriate audit evidence can be obtained from other
sources;
(ii) If sufficient appropriate audit evidence cannot be obtained from other sources than this
will constitute a scope limitation and the auditor should express a qualified opinion or
disclaimer of opinion.
(iii) Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
(iv) Consider possible implications that the refusal may have on the auditor’s report.
(v) Re-assess the continuation of engagement with the audit client

A.8 (a) (i) If there are material inconsistencies in the additional disclosures the auditor should
discuss the reasons thereof with the management and ask them to revise the other
information or the financial statements, as may be appropriate.
(ii) If the revision of other information is necessary and the management refuses to revise the
same, the auditor shall communicate the matter to those charged with governance and;
(iii) Include in the auditor’s report an ‘other matter paragraph’ describing the material
inconsistencies, if they persist.
(iv) If the revision of the draft financial statements is necessary and management refuses to
make the revision, the auditor shall consider giving a qualified opinion or adverse opinion
as may be appropriate.
(v) The auditor should also consider that whether the supplementary information that is not
required by the applicable financial reporting framework, is clearly differentiated from the
audited financial statements.
(vi) If it is not clearly differentiated, he shall ask the management to change the way in which
the unaudited supplementary information has been presented.
(vii) In case of disagreement in respect of the above, the auditor shall explain in the auditor’s
report that such supplementary information has not been audited.

(b) (i) The amount of Rs. 9.6 million which is due from MIL is material to the financial statements.
(ii) With respect to job in progress ,if the auditor can satisfy himself that management would
be able to recover the cost of work in process from another customer, he may conclude
that a provision is not required in this respect.
(iii) In making the above decision the auditor should also consider the expenses that are
required to be incurred on the job, subsequent to year end.
(iv) The auditor should ask the management to provide for the loss of Rs. 9.6 million or any
part thereof depending upon the estimated amount of default, plus any further provision
that may be necessary in respect of the work in process. In case of management’s refusal,
the auditor shall qualify his report.

(c) The auditor shall qualify the audit report by mentioning that investment of Rs. 150 million was
not in accordance with the objects of the company with a clarification that the object clause was
amended a week before the issuance of audit report, to include the said objective.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Spring 2012

General:

Most of the candidates lacked the precision and clarity of expression that a student of
professional studies should possess. Furthermore, many candidates did not depict
reasonable command over standards on auditing. Most of the answer scripts lacked
structured and focused approach which suggests that the additional reading time of 15
minutes is not being appropriately utilized.

Question-wise comments are as under:

Q.1 The question was based on a commonly arising situation whereby a suit for
damages had been filed but efforts to reach an out of court settlement were also
continuing. Most of the students restricted their views to obtaining lawyer’s
opinion and making own assessment of the case. Only few students mentioned the
point relating to the review of correspondence to ascertain the amount which is
likely to be accepted by both parties. Moreover, obtaining written representation is
a key step in such situations but was missed by the majority of the students. As for
the impact on the audit report it was observed that many students simply
mentioned that the report would be modified without considering that
modification would only be required if there is a disagreement and the amount is
considered material.

Q.2 It was a very poorly attempted question. Very general answers were given. Hardly
any student analyzed the question in its right context. The students were supposed
to give their views on various ratios given in the question and to identify the
prospective audit risks which the auditor should consider while planning the audit.
Students generally lacked the ability to properly frame and compartmentalize their
responses. While they did mention about possibility of bad debts and obsolete
inventories, they hardly mentioned about improper valuation, overstatement of
income or understatement of expenses or:

(a) Improper pricing and discounting policies, or

(b) Improper purchasing policies.

Some students didn’t understand the exact requirement and wasted their time on
writing the definition of Inherent risk, Control risk and Detection risk which were
not required at all. Some students dwelled on the general audit risks without
analyzing the financial position of the Company as given in the question.

Page 1 of 4
 Examiners’ Comments on Auditing – Spring 2012

Q.3 This was a knowledge based question on engagement letter and the answer was
straight from the Auditing Standards. The approach to the question was more or
less correct however, very few students mentioned all the points. Most students
did not seem to have adequate knowledge of the Auditing Standard. In part (a)
there was too much elaboration of change in circumstances, like change in
management, ownership and/or business whereas following factors were rarely
mentioned:

• Misunderstanding about the original assignment.

• Restriction on the scope of an audit engagement, whether caused by
management or caused by other circumstances.

Part (b) required identification of the factors that should be considered by an

auditor before accepting a change in the terms of engagement. The following
points were hardly mentioned:

(i) The information in respect of which the change is requested by the

management.
(ii) Legal or contractual implication of the change.

The performance in Part (c) was much better and most students were able to
mention that if a change in terms of engagement is not acceptable to the auditor he
may consider withdrawing from the engagement or to report the matter to those
charged with governance or to the regulator.

Q.4 This question required substantive procedures for verification of inventories. At

this level, high marks should have been scored by all the students in this question.
However, very few of the audit steps were mentioned by the students. Many of
them tried to deal in detail with situations such as when stock check is carried out
before or after the closing date. On the other hand, simple points were missing.
For example, majority of the students didn’t consider that it was a manufacturing
concern and consequently ignored all steps related to raw materials, conversion
costs, WIP etc. Students should remain focused on the specific requirement of the
question and should not try to make unnecessary assumptions. Many students
discussed physical verification but laid very little emphasis on valuation and
NRV.

In such questions the students should try to follow an appropriate sequence of

steps. Although they get marks for all steps they write, no matter what the
sequence may be, but writing points in a haphazard manner results in important
points being missed out and many points being duplicated. Lot of duplications
were witnessed in the students responses which were a sheer waste of precious
time which could have been better utilized in thinking and writing the missing
points (procedures).

Page 2 of 4
 Examiners’ Comments on Auditing – Spring 2012

Q.5 (a) This part of the question on sampling was not appropriately attended to by
the majority. It appeared that most of the students had not thoroughly
studied the related auditing standard and were not able to appropriately
structure their answers. The main errors were as follows:

• Very few students could comprehend that when expected rate of

deviation is so high that it becomes unacceptable to the auditor, the
auditor does not perform tests of controls as he cannot rely on them.

• Many students incorrectly declared that since number of debtors has

increased by 11%, the size of the sample should be increased
accordingly. In fact, in a large population, such an increase does not
affect the sample size.

(b) This was a knowledge based question direct from the Auditing Standards.
However, only few students were able to mention all the factors that are
relevant to the auditor’s consideration of the expected rate of deviation.

(c) This was fairly well answered by the majority of students.

Q.6 This question was designed to test the knowledge of students on appointment of
auditors with reference to the provisions contained in the Code of Ethics and
Companies Ordinance, 1984. The students were required to comment on different
situations with reference to the applicable rules and regulations. However, the
overall performance was quite poor. All the five parts of the question required a
very close review of the given situations to really put forward an appropriate
reply. Most students seemed to adopt a casual approach and did not view the
situations from all angles and therefore arrived at incorrect conclusions. As
always, many students gave the verdict without reasoning whereas some produced
the correct opinion but gave incorrect reasons.

Q.7 This question was based on the requirements of ISA on Management

Representations. Both parts were easy and did not involve any complication. Had
the students studied the relevant ISA thoroughly, they could have secured high
marks. However, the overall performance of the students was average. Only few
of them were able to mention all the points. Some of their answers were casual
and mentioned points such as:

• Representation must be made for the whole period.

• Ensure that representation is made under common seal of the company.
• There must be disclosure of unusual items.

Q.8 (a) Students by and large did not cover the materiality aspect. Rest of the points
were invariably covered though not in a systematic order. Some enthusiastic
candidates talked about qualifying the report without even discussing the
issue with the management. Some students could not distinguish between
“emphasis of matter paragraph” and “other matter paragraph”.

Page 3 of 4
 Examiners’ Comments on Auditing – Spring 2012

(b) This part was reasonably attempted. Most of the candidates understood that
the amount of Rs.9.6 million is material to the financial statements and if the
auditor is not satisfied about its recoverability, it may lead to a qualified
opinion. However, a large number of candidates did not address the area of
work in process. Moreover only few amongst those who did discuss work in
process, could highlight the importance of costs to be incurred subsequent to
year end.

(c) A significant number of students did not recognize the importance of object
clause and failed to recognize that its violation may result in a modified
opinion.

(THE END)

Page 4 of 4
 The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examination 5 September 2012
Autumn 2012 100 marks - 3 hours
Module D Additional reading time – 15 minutes

Q.1 Shahrukh and Company, Chartered Accountants, have conducted the statutory audit of the
financial statements of Karim Limited, a listed company, for the year ended 30 June 2012 under
the Companies Ordinance, 1984. The job incharge has drafted the following audit report:

Auditors’ Report to the Members

We have audited the annexed balance sheet of Karim Limited (the Company) as at 30 June 2012,
and the related Income and Expenditure Account, Statement of Comprehensive Income, Cash
Flow Statement and Statement of Changes in Equity together with the notes forming part thereof,
for the year then ended and we state that we have obtained all the information and explanations
which were necessary for the purposes of our audit.
It is the responsibility of the company’s management to establish and maintain a system of internal
control and prepare and present the above said statements in conformity with the approved
auditing standards and the requirements of the fourth schedule to the Companies Ordinance, 1984.
Our responsibility is to audit these statements.
We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These
standards require that we plan and perform the audit to obtain reasonable and limited assurance
about whether the above statements are free of any misstatement. An audit includes examining
evidence supporting the amounts and disclosures in the above said statements. An audit also
includes assessing the accounting policies and significant estimates made by management, as well
as, evaluating the overall presentation of the above said statements. We believe that our audit
provides a reasonable basis for our opinion and, after due verification, we report that:
(a) in our opinion, proper books of accounts have been kept by the company.
(b) in our opinion:
(i) the balance sheet and profit and loss account together with the notes thereon have been
drawn up in conformity with the Companies Ordinance 1984, and are in agreement
with the books of account and are further in accordance with accounting policies
consistently applied;
(ii) the expenditure incurred during the year was in accordance with the objects of the
Company; and
(iii) the business conducted, investments made and the expenditure incurred during the year
were for the purpose of the Company’s business;
(c) in our opinion and to the best of our information and according to the explanations given to
us, the balance sheet, profit and loss account, statement of comprehensive income, cash flow
statement and statement of changes in equity together with the notes forming part thereof,
conform with the approved accounting standards as applicable in Pakistan and give the
information required by the Companies Ordinance, 1984, in the manner so required and
respectively give a true and fair view of the state of the Company’s affairs as at 30 June 2012;
and
(d) in our opinion, no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.
Chartered Accountants
Date: 01 September 2012

Required:
Identify the errors in the above report vis-à-vis a standard statutory audit report. (12 marks)
(Note: You are not required to redraft the report.)
 Auditing Page 2 of 3

Q.2 As the engagement partner, you have reviewed the audit working papers of Samarkand Limited
(SL). The audit team has highlighted the following matters in the working papers.

(a) Twenty percent of the company’s recorded turnover (revenue) comprises of cash sales.
Proper records of cash sales have not been maintained. Consequently, the audit team was
unable to design audit procedures to verify the cash sales.
(b) During the current year, the company changed the method of charging depreciation on its
fixed assets from the straight line to the diminishing balance method. However, all the
required disclosures have been included in the notes to the financial statements.
(c) The previous year’s financial statements were audited by another firm of chartered
accountants which has issued an un-modified opinion on those financial statements.

Required:
Discuss the impact of each of the above matters on your audit report. (10 marks)

Q.3 You are currently in the planning phase of the audit of Mineral Water Limited (MWL) for the year
ended 30 June 2012. The following information is available to you:

Balance 10 10-20 21-30 31-90 > 90

No. of
Customer Segment outstanding days days days days days
Customers
………………………Rs. in thousand………………………..
Super markets 12 20,014 8,125 5,053 6,396 311 129
Wholesalers 65 14,910 5,078 6,019 3,150 454 209
Retailers 553 4,743 1,756 1,798 724 278 187
Five star hotels 7 7,694 2,805 2,793 1,784 201 111
47,361 17,764 15,663 12,054 1,244 636

50% provision for doubtful debts has been made by MWL against balances outstanding for more
than 30 days whereas the balances outstanding for more than 90 days have been fully provided.

Required:
(a) Indicate what would be the basis for selecting debtors for circularising positive and negative
requests for confirmations. (06 mark)
(b) Briefly explain as to how would you deal with a situation where a debtor confirms a balance
which is different from the amount appearing in the confirmation request. (08 mark)

Q.4 (a) Classification of certain items reported in the financial statements is based on the
management’s intentions. In such a situation the auditor has to rely on management
representations.

Required:
List the factors that the auditor should consider in evaluating the management’s intentions
with regard to their future course of action, as stated in their written representations.
(04 mark)

(b) Briefly discuss how the auditor would deal with a situation where he is in doubt regarding the
reliability of the written representations provided by the management of the company.
(05 mark)

Q.5 List the substantive procedures that may be performed by an auditor to verify the following:

(a) Bank reconciliation statements (06 marks)

(b) Payroll (08 marks)
(c) Raw material purchases (06 marks)
 Auditing Page 3 of 3

Q.6 List the audit procedures that may be performed by the auditor in order to ensure that all events
occurring between the date of the financial statements and the date of the auditor’s report that
require adjustment of, or disclosure in, the financial statements are identified and appropriately
reflected in the financial statements. (10 marks)

Q.7 Discuss the categories of threats that may be involved in each of the following independent
situations and advise the partners of the concerned firm with regard to the possible course of action
that may be followed, in each case.

(a) Burewala Bank Limited (BBL) is a listed audit client of Umer and Company, Chartered
Accountants (UCC). BBL has granted a house loan of Rs. 5 million to a partner in UCC.
(04 marks)

(b) Kamal was the audit manager during the last year’s annual audit of Faisalabad Textile Mills
Limited (FTML). He has joined FTML as their Manager Finance, prior to the
commencement of the current year’s audit. (08 marks)

Q.8 Comment on each of the following independent situations with reference to the applicable rules
and regulations.

(a) Zaman is a partner in a firm of Chartered Accountants and holds 5,000 shares in Mardan
Limited (ML). His firm has received an offer for appointment as auditors of Khanewal
Limited (KL). ML and KL are subsidiaries of Dera Khan Limited (DKL). (03 marks)

(b) Bilal and Company has received an offer for appointment as auditors of IJK Limited. The
total paid up capital of the company is Rs. 990 million whereas its ordinary share capital is
Rs. 130 million.

Faryal, the wife of a partner in Bilal and Company, is a director in LMN Limited which
holds 50 million non-voting preference shares and 2 million ordinary shares in IJK Limited.
Faryal also holds 10,000 shares in LMN Limited. The par value of both types of shares is Rs.
10 each. (04 marks)

Q.9 List the important matters that are required to be included in an audit engagement letter.
(06 marks)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2012

A.1 (i) In the introductory paragraph the word “Income and expenditure account” should be
replaced with “profit and loss account".
(ii) In the introductory paragraph the phrase “to the best of our knowledge and belief” is to be
inserted before the phrase “were necessary for the purpose of an audit”.
(iii) In the responsibility paragraph the word “auditing standard” is to be replaced with
“accounting standard”.
(iv) In the responsibility paragraph the phrase “of the fourth schedule” is to be omitted.
(v) At the end of responsibility paragraph the phrase; “Our responsibility is to audit these
statements” is to be replaced with the phrase “Our responsibility is to express an opinion on
these statements based on our audit”.
(vi) In the scope paragraph the phrase “and limited” is incorrect and be omitted.
(vii) In the scope paragraph the word “material” be added before the word misstatement.
(viii) In the scope paragraph the phrase “on a test basis” should be added before the phrase
“evidence supporting the amounts and disclosures in the above said statements”.
(ix) In point (a) the phrase “as required by the Companies Ordinance 1984” be added.
(x) In para (b) point (ii) the phrase “was in accordance with the objects of the Company” be
replaced with “was for the purpose of the Company’s business”
(xi) In para (b) point (iii) the phrase “was for the purpose of the Company’s business” be replaced
with “were in accordance with the objects of the Company”
(xii) In para (c) the phrase “of the profit or loss, its cash flows and changes in equity for the year
then ended”; be added at the end.
(xiii) The place of signing of accounts is to be mentioned after the signature of the firm
(xiv) Name of the engagement partner has not been mentioned.

A.2 (a)  The audit report will be modified on ground of limitation of scope.
 Either a qualified or disclaimer of opinion will be given depending upon the materiality
and pervasiveness of the matter.
 We may have to mention that “proper books of accounts as required by the Companies
Ordinance 1984 have not been kept by the Company”.

(b) There will be no impact on the audit report as the change of depreciation method is a change
in accounting estimate.

(c) The auditor will include an other matter paragraph in the auditor’s report, referring to the
fact that the financial statements of Samarkand Limited for the Previous year, were audited
by another auditor, who expressed an un-modified opinion on those financial statements.

A.3 (a) Selection of Accounts Receivable for circulation at year-end

(i) The debtors listing will be stratified in accordance with the different market segments
(Super markets, whole sellers, retailers and five star hotels)
(ii) For positive circulation the selection may be as follows:
 All twelve super markets, as well as the seven five star hotels will be purposely
selected (56% of the total debtors balance will be covered in this manner).
 Whole sellers and retailers will be stratified further according to value and days
outstanding. A sample will be made from the above-mentioned sub-populations,
with greater focus on the high value and long-outstanding populations.
 Debtors with nil and credit balances, as well as overdue debtors should also be
selected.
(iii) A negative circulation of non-selected debtors may be considered on sample basis.

Page 1 of 5
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2012

(b) Situation where a debtor confirms a balance which is different from the amount appearing
in the confirmation request:

A response that indicates a difference between information requested to be confirmed and

information provided by the confirming party is termed as exception. The exception may be
on account of:

(i) Timing difference

(ii) Misstatement

 In case of timing differences, the auditor will need to reconcile the amount confirmed
by the confirming party and the amount sent for confirmation.
 If the amount cannot be reconciled, the auditor is required to evaluate whether it is
indicative of a fraud or deficiency or deficiencies in the entity’s internal control over
financial reporting.
 In either case, the auditor will consider whether he needs to revise his risk assessment
and audit procedures.

A.4 (a) Factors that the auditor would consider when obtaining evidences about or evaluating the
intentions of the management:

When obtaining evidence about, or evaluating, judgments and intentions, the auditor may
consider one or more of the following:

 The entity’s past history in carrying out its stated intentions.

 The entity’s reasons for choosing a particular course of action
 The entity’s ability to pursue a specific course of action.
 The existence or lack of any other information obtained during the course of the audit
that may be inconsistent with management’s judgment or intent.

(b) How the auditor would deal with a situation where he is in doubt as regards the
reliability of the written representation provided by the management of the company:

The doubt as regards management’s representation can be on account of several different

reasons. Auditor’s response in each situation is described below:

 If there is inconsistency between one or more written representations and audit

evidence is obtained from another source, the auditor may consider whether the risk
assessment remains appropriate and, if not, revise the risk assessment and the nature,
timing and extent of further audit procedures to respond to the assessed risk.
 If the matters relates to the competence, integrity, ethical values, diligence and
commitment of management, the auditor may conclude that the audit cannot be
conducted. In such a situation, the auditor may consider withdrawing from the
engagement and if withdrawal is not possible, he may disclaim an opinion.

A.5 (a) Substantive Procedures for verification of Bank reconciliation statements:

 Trace and agree balances per books of accounts (ledger or bank book) as appearing in
the bank reconciliation statement with the general ledger/ bank book.
 Trace and agree balances per bank statement as appearing in the bank reconciliation
statement with the bank statements.
Page 2 of 5
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2012

 Trace reconciling items appearing in the previous months bank reconciliation into
current month’s ledger/ bank statement/ bank reconciliation statement.
 Check subsequent clearance of current months reconciling items.
 Review and discuss long outstanding items appearing in the bank reconciliation
statement.
 Ensure that all outstanding items requiring adjustments are properly accounted for in
the books of accounts.
 Check arithmetical accuracy of reconciliation statements.

(b) Substantive Procedures for Payroll:

 From the payroll record:

 Select a sample of newly appointed staff and check their salaries with the
appointment letter.
 Select a sample of other staff (appointed in previous years) and check their salaries
with the increment letter.
 In both the above cases check that allowances and deductions are in accordance
with the company’s policies or the relevant legal requirements.

 Select a sample of payroll summaries and:

 Check that payroll summary has been approved by an appropriate authority.

 Trace totals of payroll summaries to appropriate general ledger accounts.
 Check allocation of payroll to cost of sales and operating expenses.
 Compare net payroll after deductions with transfer letter issued to the bank.

 Carryout analytical review by comparing the monthly and annual payroll and inquire
reasons for significant fluctuations.
 Ensure that payroll costs have been properly disclosed in the financial statements.

(c) Substantive Procedures for Raw material purchases:

 Select a sample of transactions and carryout the following tests.

 Check weather appropriate measures have been taken as per the company’s policy
to ensure that purchases are made from most competitive sources.
 Check the relevant invoices.
 Match invoices with goods receiving notes to ensure that goods have been received
for all billings made by supplier.

 Match supplier’s invoices with purchase orders to ensure that:

• Purchases were duly authorized.

• Rates and quantities mentioned on the invoice are same as those mentioned on
the purchase order.

 Check posting of supplier’s invoices to creditor’s accounts/ general ledger.

 Perform cut-off procedures on purchases.

 Perform analytical procedures on purchases made during the year by comparing current
year purchases with the last year and investigate significant differences, if any.

Page 3 of 5
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2012

A.6 Audit Procedure – Subsequent Events

The following procedures will help the auditor in identifying ‘subsequent events’ that require either
adjustment or disclosure in the financial statements. :

(i) Review existing procedures (if any) laid down by the management to identify these events.
(ii) Study minutes of the meetings of the Members, Board of the directors and other important
executive committees (if any) held after the balance sheet date and enquire about the matters
which may be relevant in this regard.
(iii) Discuss with key officials on matters such as company’s policy on marketing of new
products, price structure, major sales order booked or cancellation of sales orders and loss of
major customers, if any, new borrowings, capital commitments, fresh guarantees, outcome of
pending law suits and any change in accounting policies etc.
(iv) Ascertain the status of litigations, claims etc. against the company from its legal advisors.
(v) Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning
litigation and claims
(vi) Read the entity’s latest available budgets, cash flow forecasts and other related management
reports for periods after the date of the financial statements.
(vii) Obtain written representation from the management that all relevant events have been
appropriately accounted for/dealt with.
(viii) Obtain an assurance from management about the :

 Current status of items that were accounted for on the basis of estimates or inconclusive
data.
 Any events occurred or likely to occur which will require change in the existing
accounting policies.
 Any events which may cast doubts about the validity of entities ‘going concern’
assumption. For this purpose, the auditor should remain alert for the circumstances
which may cast significant doubt on the company’s ability to continue as a going
concern.

A.7 (a) Burewala Bank Limited:

Threats
(i) A threat to independence may be created if the loan is made under abnormal lending
procedures, terms and requirements and the loan is material to both the firm and the
BBL.
(ii) A self interest threat may be created if the loan amount is material to the firm/ partner.

Safeguards:
As the Companies Ordinance, 1984, restricts a person who is indebted to the company from
being auditor of the said company, therefore the course of action available to the partners of
UCC is to withdraw from the engagement or repayment of the loan by the partner
concerned.

(b) Faisalabad Textile Mills Limited:

Threats:
It has created self interest, familiarity and intimidation threats.

The assurance team’s independence is threatened, on account of the fact that Kamal is in a
position to exert direct and significant influence over the assurance engagement as Kamal
was a member of the assurance team during the previous year audit.
Page 4 of 5
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2012

Safeguards:
The safeguards might include:

(i) Consider the appropriateness or necessity of modifying the assurance plan for the
assurance engagement;
(ii) Assigning an assurance team that is of sufficient experience in relation to the
individual who has joined the assurance client;
(iii) Involve an additional chartered accountant who was not a member of the assurance
team to review the work or advise as necessary; or
(iv) Quality control review of the assurance engagement.
(v) Ensuring that the individual concerned is not entitled to any benefits or payments from
the firm unless these are made in accordance with fixed pre-determined arrangements.
In addition, any amount owed to the individual should not be of such significance to
threaten the firm’s independence.
(vi) Ensuring that the individual does not continue to participate or appear to participate in
the firm’s business or professional activities.

A.8 (a)  As per the Companies Ordinance, 1984 a person shall not be appointed as auditor of a
company, if he is disqualified for appointment of any other company, which is that
company’s subsidiary or a holding company or a subsidiary of that holding company.
 Therefore, the firm cannot be appointed as an auditor of of KL as Mr. Zaman holds
5,000 shares in ML which together with KL is a subsidiary of DKL.
 For appointment as the auditor of the company, Mr .Zaman is required to dispose off
the shares in ML.

(b)  Bilal and Company, Chartered Accountants are eligible to act as the auditor of IJK
Limited.
 IJK Limited is not an associated company of LMN Limited as LMN Limited holds
15.4% shares of IJK Limited. Therefore the wife of the partner is not required to dispose
of the shares in LMN Limited.
 Holding of non-voting shares is not relevant in determining the status of the company.

A.9 Key Components of Audit engagement letter:

 The objective and scope of the audit of financial statements;

 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the applicable financial reporting framework for the preparation of the
financial statements;
 Reference to the expected form and content of any reports to be issued by the auditor
and;
 A statement that there may be circumstances in which a report may differ from its
expected form and content.

(THE END)

Page 5 of 5
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination – Autumn 2012

General:

A common feature that is being repeatedly observed is that candidates do not possess a
good command over the Auditing standards. Much more is expected of a student of
professional studies than a cursory reading of the standards. A candidate should be well
versed and have in depth knowledge of standards which he would be required to follow
once he enters the practical world. Further, a significant number of students who seem to
possess reasonable knowledge of the relevant ISAs, could not perform well as they were
unable to mould some of their answers in line with the exact requirement of the question.
It is therefore emphasised that the students need to identify the relevance of the
information provided in the question while answering the questions.

Question-wise comments are as under:

Q.1 This question was an easy one. The students were asked to identify the errors in
the given report in comparison with a standard statutory audit report. Majority of
the students were able to identify the errors correctly and scored good marks.
Many students were able to gain full marks also. However, some students
produced the whole report (after making the corrections) or extracts of the Report
instead of highlighting the errors in the report. Although they secured appropriate
marks but a lot of their valuable time was wasted.

Q.2 This question intended to test the knowledge of the candidates about impact on
Auditors Report in the given three situations. The performance of the candidates
was rather poor. Each situation is discussed below:

(a) Students were required to frame the impact of non-verifiable cash sales on
audit report. Although most of the candidates managed to identify that the
situation involves scope limitation, majority of them could not make out that
besides scope limitation the Report also required a modification because the
company has not maintained proper books of account (with respect to Cash
Sales) as required under the Companies Ordinance, 1984.

(b) Many students were of the incorrect opinion that a change in depreciation
method is a change in accounting policy and the auditor needs to mention in
the audit report whether he concurs with it or not. In fact, a change in
depreciation method is a change in accounting estimate and not a change in
accounting policy.

Page 1 of 3
 Examiners’ Comments on Auditing – Autumn 2012
(c) Majority of the students did not know that the auditor will need to include an
other matter paragraph and state therein that the financial statements for the
previous year were audited by another auditor who had expressed an
unmodified opinion on those financial statements.

Q.3 (a) Majority of the students preferred to discuss the theoretical aspects of
sampling only without considering the given scenario. Most students wrote
all they knew about positive and negative confirmations but avoided
discussing the debtors to whom negative confirmation may be given. Some
of them were of the opinion that negative confirmation should be sent to the
retailers but did not provide any reasons to support their point of view.

(b) This was a simple question and the students were required to state how they
would deal with a situation where a debtor confirms a different balance.
Majority of the students were able to specify that the auditor will ask the
client to reconcile the difference. However, very few were able to explain
correctly the steps that would be required to be taken by the auditor if the
difference cannot be reconciled.

Q.4 (a) It was a simple question and has been asked in a variety of ways in various
attempts. Majority of the students performed well and were able to identify
the factors which the auditor considers while evaluating the reliability of
management representation.

(b) Only few students were able to specify that doubt as regards management
representation is generally on account of the following reasons:

• Where there is an inconsistency between one or more written

representations.
• Where management’s integrity and competence is in doubt.

Good students were generally able to identify the above situations but most
others laid emphasis on the second point only. Very few students were able
to specify the difference between the auditor’s approach while dealing with
those situations.

Q.5 Substantive procedures for verification of three different items were required.
Since all the three areas were quite easy, almost all students were able to score
good marks. However, apparently most students just started writing whatever
steps they could think without planning their answers and consequently, a number
of points were missed whereas a number of steps were repeated more than once.

Poor writing skill and lack of conceptual understanding was also noticed in many
cases. For example, a significant number of students wrote that bank
confirmations are obtained to verify bank reconciliation or that confirmation
requests are circulated to the creditors to verify raw materials. A casual selection
of words was observed and it seemed that students did not know with clarity, the
difference between “verify”, “inspect” and “ensure” etc. Many students wrote
audit assertions instead of substantive procedures.

Page 2 of 3
 Examiners’ Comments on Auditing – Autumn 2012
Q.6 The requirement in this question was to specify the steps that an auditor needs to
take to ensure that all events occurring between the date of the financial
statements and the date of the auditor’s report, which affect the financial
statements, are identified and appropriately reflected in the financial statements.

The question was generally attempted well; however, some students extended the
procedures and wasted time in discussing events occurring after the issuance of
financial statements which was beyond the requirement of the question. Similarly,
many students also discussed different types of disagreements with the
management, which were not relevant.

Q.7 In this question the students were asked to identify the categories of threats
involved in two different situations and to suggest appropriate safeguards.

(a) Most students were able to identify the two threats i.e. threat to independence
and self interest threat. However, very few students knew that under the
Companies Ordinance 1984, a person cannot become the auditor of a
company to whom he/she is indebted and hence the options available in the
given situation was re-payment of debt or withdrawl from the assignment.

(b) It was quite apparent that most of the students had not studied the relevant
part of the Auditing Standard as very few of them were able to identify the
relevant threats or the necessary safeguards. Many students mis-understood
the situation as they construed that Kamal was still in the employment of the
audit firm.

Q.8 In this question, the candidates were required to comment on two independent
situations pertaining to appointment of auditors.

(a) The key issue to identify was that a person cannot be appointed as the auditor
if he is disqualified from being appointed as the auditor of that company’s
holding company, subsidiary company or the subsidiary of its holding
company. Generally, the students answered well. However, some of them
mentioned different types of safeguards which were not relevant in the given
situation as the only remedy available in such a situation is to dispose of the
shares of the subsidiary or to decline the offer of appointment as auditors.

(b) The key issue which was tested in this part of the question was whether
holding of non–voting shares is relevant in determining that the two
companies are associated companies or not. Majority of the students did not
seem to know the answer and tried to avoid this point.

Q.9 This was an easy question and the students were able to fulfill the requirement of
the question which was to list the important matters required to be included in an
audit engagement letter. However, some students wasted time in writing the entire
engagement letter or giving further details about each key component.

(THE END)

Page 3 of 3
 The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examination 6 March 2013
Spring 2013 100 marks - 3 hours
Module D Additional reading time – 15 minutes

Q.1 Briefly describe the meaning of professional judgment. Explain its importance in the context of an
audit and identify the key decisions/areas where an auditor may need to apply professional
judgment. (08)

Q.2 You are the manager responsible for the audit of Park Hotels Limited (PHL), which operates three
hotels in Pakistan. PHL has adopted the revaluation model for the valuation of buildings. In the
current year, revaluation has been carried out by a new firm, Farhan Associates (FA). PHL has
incorporated the effects of revaluation in the financial statements accordingly.

Required:
(a) Briefly describe the matters that you would consider before using the report prepared by FA. (04)
(b) Identify and explain the principal audit procedures to be performed on the valuation of the
hotel’s buildings. (06)

Q.3 Comment on each of the following independent situations with reference to the applicable
requirements of the Companies Ordinance, 1984.

(a) Jahangir (Private) Limited (JPL) has a paid-up capital of Rs. 2.5 million. Till recently, it was
a wholly owned subsidiary of Malik Limited (ML). Recently ML has disposed of 60% of its
holding in JPL to Zubair Enterprises (ZE), a partnership firm. All the partners in ZE are on
the Board of Directors of ML. JPL intends to appoint Mr. Ahsan as its auditor. Mr. Ahsan is
an MBA and his brother is also a partner in ZE. (03)

(b) A notice for appointment of Kashif and Company, Chartered Accountants (KCC) was
received by Khanewal Limited (KL), fourteen days before the AGM. The notice was served
by Mr. Iqbal, who is a holder of 500,000 non-voting preference shares. (02)

(c) Mr. Khan is a partner in a firm of Chartered Accountants. He also holds 70% shares in Khan
Limited, (KL). Construction Bank Limited (CBL) has granted a loan of Rs. 10 million to KL.
Mr. Khan’s firm has received an offer for appointment as auditor of CBL. (02)

Q.4 Discuss with reasons, the appropriateness or otherwise of the following decisions taken by the audit
seniors, on different assignments.

(a) Sample size of tests of controls was decreased due to increase in the expected rate of
deviation. (02)
(b) In view of the increase in the auditor’s desired level of assurance that tolerable misstatement
is not exceeded by actual misstatement in the population, the audit senior increased the
sample size of test of details. (02)
(c) Sample size of tests of controls was decreased because the sampling was done after
stratification of data. (02)
(d) Sample size of tests of details was increased due to increase in the tolerable rate of deviation. (02)
(e) As the expected rate of deviation was unacceptably high, the audit senior decided not to
perform tests of controls and carried out tests of details on 100% items. (03)
 Auditing Page 2 of 3

Q.5 Strong Vehicles Limited (SVL) manufactures heavy vehicles. As the job incharge on SVL’s audit ,
you have come across the following situations:

(a) The management had provided you with a representation that they had disclosed all the
related party transactions and relationships of which they were aware. However, before
finalization of the audit, you found that subsequent to the year-end, a payment of Rs. 100
million has been made to Strong Engines Plc (SEP), a company incorporated in a foreign
country. On your query, the management has advised you that SEP is a foreign subsidiary of
SVL and its name was not disclosed inadvertently because it had been non-operational for the
last many years. (05)

(b) The management has provided you with written representation that lives of fixed assets are
realistically estimated. Similar representation was also provided in the prior years. However,
SVL has incurred losses on disposal of fixed assets during the year, because of which you are
now of the view that the useful lives of fixed assets were not realistically estimated. (04)

Required:
Analyse each of the above situations and briefly describe your course of action.

Q.6 Sher Khan Limited (SKL) had announced a major restructuring in the year 2011 and a provision of
Rs. 120 million was made against the cost of restructuring and redundancies. During 2012 all
known claims and liabilities relating to the restructuring were settled for Rs. 90 million.

However, as a matter of prudence, the company has not written back the excess amount of
provision in view of a suit filed by certain staff members against termination of their employment.
SKL’s legal counsel is of the view that the possibility of an adverse decision against the company in
this matter is remote.

The audit senior does not agree with the management’s contention and has drafted the following
modification in the audit report:

“An amount of Rs. 30 million has been provided in respect of the expected amount which the
company may be required to pay to the employees whose employment was terminated during
the year. The management is of the view that in case the company is required to pay the
amount to those employees, the said provision would be utilized. In our opinion, the
company’s decision to make the above provision is not in accordance with International
Accounting Standards. Had the liabilities been recognized correctly the profit for the year
would have increased by Rs. 30 million. Because of the effects of the matters discussed above,
the financial statements do not give a true and fair view of the financial position of the
company as at 30 September 2012.”

Profit before taxation and net assets of SKL are Rs. 145 million and Rs. 350 million respectively.

Required:
Comment on the decision of the audit senior and identify the shortcomings, if any, in the
modification drafted by him. (08)

Q.7 Analytical procedures are an important audit tool for the auditor at the planning stage as well as at
the time of finalization.

Required:
(a) Give four examples of different types of analytical procedures. (04)
(b) State with examples the factors that are relevant in assessing the reliability of data for the
purposes of designing substantive analytical procedures. (04)
(c) Specify the procedures that an auditor may undertake if analytical procedures identify
inconsistencies with other information. (02)
 Auditing Page 3 of 3

Q.8 Discuss the categories of threats that may be involved in each of the following mutually exclusive
situations and advise the partners of the concerned firms with regard to the possible course of action
that may be adopted in each case:

(a) Muneer is a Chartered Accountant and employed as a manager in a firm of Chartered

Accountants. He has informed the engagement partner that his close relative holds 50,000
shares of a listed company whose audit is to be supervised by Muneer.

(b) Danial is employed in a firm of Chartered Accountants. He has been a member of the audit
team of Malakand Limited for the last few years. (10)

Q.9 You were the engagement partner on the audit of Bhurban Limited (BL) for the year ended
30 September 2012.

A few days after the issuance of the audited financial statements, the job senior informed you that a
long outstanding suit for recovery of Rs. 140 million has been decided in favour of BL and the
amount has been recovered. The profit before taxation, as reported in the financial statements for
the year ended 30 September 2012 was Rs. 178 million and the above debt had been fully provided
for in those financial statements.

Required:
Describe what actions you would need to take in this regard. (12)

Q.10 The following situations have arisen on different clients of your firm. The year end in each instance
is 31 December 2012.

(a) In November 2012, Wazir Limited (WL) entered into a five year contract with Safeer
Limited (SL), for supply of specific parts. The supply was to commence on 1 April 2013. In
December 2012 WL purchased plant and machinery specifically for the contract with SL at a
price of Rs. 150 million with useful life of five years. However, in January 2013 SL incurred
heavy losses in a natural disaster and went into liquidation.

During 2012 sale to SL amounted to Rs. 5 million and the amount receivable from SL at the
year end was Rs. 450,000.

For the year ended 31 December 2012, WL had earned profit before taxation of Rs. 125
million. The turnover for the year was Rs. 900 million and the net assets as of that date were
Rs. 1.2 billion. (07)

(b) As the auditor of Mianwali Tracking Company Limited (MTCL), you have noticed that
proper cash book has not been maintained by the company due to shortage of staff. However,
MTCL has provided you with summaries showing party-wise receipts and payments and you
have been able to trace them to the company’s bank statements. (05)

(c) During the year, Jhelum Limited (JL) paid 10% dividend to the shareholders. On account of
an error, Zakat could not be deducted from some of the shareholders. The amount involved
was Rs. 22,000 which was deposited by JL in the Central Zakat Fund and charged as other
expenses. (03)

Required:
Discuss the impact of each of the above matters on your audit report.

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2013

Ans.1 Professional Judgment:

It means making informed decisions by a professional accountant about the courses of
actions that are appropriate in the circumstances during an audit engagement, in the
context of auditing, accounting and ethical standards and by applying the relevant
training, knowledge and experience.

Why Professional Judgment is necessary;

Professional judgment is essential to the proper conduct of an audit. This is because
interpretation of relevant ethical requirements and the ISAs and the informed decisions
required throughout the audit cannot be made without the application of relevant
knowledge and experience to the facts and circumstances.

Professional judgment is necessary in particular when taking decisions about:

 Materiality and audit risk

 The nature, timing and extent of audit procedures used to meet the requirements of
the ISAs and gather audit evidence.
 Evaluating whether sufficient appropriate audit evidence has been obtained to
achieve the objectives of the auditor.
 The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework and accounting policies.
 The drawing of conclusions based on the audit evidence obtained, for example,
assessing the reasonableness of the estimates made by the management in preparing
the financial statements.

Ans.2 (a) When planning to use the report of FA (the valuer) the auditor should:
 Evaluate the competence, capabilities and objectivity of FA.
 Obtain an understanding of the work carried out by FA; and
 Evaluate the appropriateness of FA’s work as audit evidence for the relevant
assertion.

(b)  Inspect written instructions given to FA by PHL, which should include the
objectives and scope of the work, the intended use of the work to be performed
by FA and the extent of the valuer’s access to records and files.
 Consider the assumptions and methods used by the valuer to ensure they are
reasonable based on other audit evidence and the auditor’s previous knowledge
of PHL.
 Evaluate the method used to measure fair value to ensure consistency.
 Examine the valuation report to ensure each property has been valued
consistently and that the date of valuation is reasonably close to year-end.
 Inspect the buildings physically to ensure their condition is the same as
described in valuation report.
 Obtain written representations from management regarding reasonableness of
any assumptions used in determining the fair value.

Ans.3 (a)  There is no specific requirement as regards qualification of auditor of a private

company where paid up capital is less than Rs. 3 million provided it is not a
subsidiary of a public company.
 Holding of interest by brother of Mr. Ahsan or his brother being a director of
ML, does not make Mr. Ahsan ineligible for becoming the auditor of JPL.
 Hence appointment of Mr. Ahsan, as an auditor of JPL is in order.

Page 1 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2013

(b)  A notice for appointment of auditor is required to be served by a member of the

company but Mr. Iqbal is not a member of the company as he only holds non-
voting shares.
 Hence, the notice served by him is not in order.

(c) Appointment of Mr. Khan’s firm is in order as Mr. Khan and KL are separate
persons and indebtedness of KL cannot be termed as indebtedness of Mr. Khan.

Ans.4 (a) The higher the expected rate of deviation, the larger the sample size needs to be so
that the auditor is in a position to make a reasonable estimate of the actual rate of
deviation. Hence, the decision to decrease the sample size of test of control on
account of increase in the expected rate of deviation is not appropriate.

(b) The decision to increase the sample size of test of details is appropriate because the
greater the amount of misstatement the auditor expects to find in the population, the
larger the sample size needs to be in order to make a reasonable estimate of the
actual amount of misstatement in the population.

(c) The decision to decrease the sample size of tests of controls is not appropriate as
stratification relates to tests of details and not to the tests of controls.

(d) The decision to increase the sample size of tests of details is not relevant as the
tolerable rate of deviation is not related to test of details but to the tests of controls.

(e) The decision of not performing tests of controls is appropriate as the expected rate of
deviation is unacceptably high, but the decision to test 100% items in test of details
cannot be taken on the basis of expected rate of deviation.

Ans.5 (a)  Non disclosure of the name of a subsidiary raises concerns relating to
competence, integrity, ethics and diligence of management.
.  We shall determine the possible effects of such concerns on the reliability of
other representations provided to us and audit evidence in general. We shall
perform the following procedures:

1. Promptly communicate the other members of the engagement team that

Strong Engine Plc of Strong Vehicles Ltd., which was not identified bt the
management.

2. As IFRS requires certain disclosures and treatment of related party and

transactions, we would:

(i) Request management to identify all transactions with the SEP for our
further evaluation; and

(ii) Inquire as to why the entity’s controls over related party relationships and
transactions failed to enable the identification or disclosure of SEP and
transactions;

3. Perform appropriate substantive audit procedures relating to SEP and

significant related party transactions;

4. Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or
Page 2 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2013

disclosed to the auditor, and perform additional audit procedures as

necessary; and
5. If the non-disclosure by management appears intentional (and therefore
indicative of a risk of material misstatement due to fraud), evaluate the
implications for the audit

(b)  The representation provided by management that useful lives of fixed assets are
realistically estimated seems inconsistent with the audit evidence related to the
losses on disposal of fixed assets.
 However, since the matter pertains to future estimates, the error does not seem
to render other management representations unreliable.
 The auditor shall discuss the matter with the management to attempt to resolve
the matter.

 If after discussion with the management, the matter remains unresolved, the
auditor may:

 Consider whether the risk assessment remains appropriate and, if not,

revise the risk assessment and determine the nature, timing and extent of
further audit procedures.
 Ask the management to reassess the estimated useful lives of fixed assets.

Ans.6 The 2012 statement of financial position shows provisions of Rs. 30 million. Since all
known liabilities and claims have been settled, and according to the legal advisor as well
as the company’s management, the chances of payment are remote, hence inclusion of a
provision for liabilities is inappropriate.

Materiality
The amount of Rs. 30 million is material, as it is 8.57% of net assets and 20.69 % of profit
before taxation.

However, the auditor’s report for 2012 gives an adverse opinion which is inappropriate
because the impact of the misstatement is material but not pervasive. Hence, a qualified
opinion would be appropriate.

Short Comings in Modification paragraphs

 The paragraph does not mention the note reference, where the details relating to the
Provision can be found in the financial statements.
 There is no need to mention the management’s point of view in the report.
Managements view point should be disclosed in the relevant notes to the financial
statements.
 The draft audit opinion is not in accordance with the form recommended by ISA, as
the basis of modification paragraph has been merged with the opinion paragraph.
The two paragraphs should be separated and contain appropriate headings also.
Moreover, the phrase “In our opinion” should be used at the beginning of the
opinion paragraph and a qualified opinion should be given as has been discussed
above.

Ans.7 (a) Examples of analytical procedures:

 Comparison of the entity’s financial information with comparable information for

prior periods.
Page 3 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2013

 Comparison of the entity’s financial information with anticipated results of the

entity, such as budgets or forecasts, or expectations of the auditor, such as an
estimation of depreciation.
 Comparison of the entity’s financial information with similar industry information,
such as a comparison of the entity’s ratio of sales to accounts receivable with
industry averages or with other entities of comparable size in the same industry.
 Consideration of relationships among elements of financial information that would
be expected to conform to a predictable pattern based on the entity’s experience,
such as gross margin percentages.
 Consideration of relationships between financial information and relevant non-
financial information, such as payroll costs to number of employees

(b) The following factors are relevant in determining the reliability of data while
designing substantive analytical procedures:

 Source of the information available. For example, information may be more

reliable when it is obtained from independent sources outside the entity;
 Comparability of the information available. For example, broad industry data
may need to be supplemented to be comparable to that of an entity that
produces and sells specialized products;
 Nature and relevance of the information available. For example, whether
budgets have been established as results to be expected rather than as goals to be
achieved; and
 Controls over the preparation of the information that are designed to ensure its
completeness, accuracy and validity. For example, controls over the
preparation, review and maintenance of budgets.

(c) If analytical procedures identify fluctuations or relationships that are inconsistent

with other relevant information, the auditor shall investigate such differences by:
 Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses; and
 Performing other audit procedures as necessary in the circumstances.

Ans.8 (a) Holding of 50,000 shares by close relative of Muneer (Manager of CA Firm) in the
listed company, may create a self interest threat as Muneer is to supervise the audit
of the company.

The significance of threat will depend on the nature of relationship between Muneer
and his close relative and the materiality of the financial interest.

After determination of significance of threat involved, possible courses of actions

that can be followed are as follows:

 Disposal of all the shares by Muneer’s close relative.

 Discussion of the matter with those charged with governance, such as audit
committee.
 Involving an additional chartered accountant who did not take part in the audit
of the listed company, to review the work done by Muneer, or otherwise advise
as necessary
 Removing Muneer from the audit team.

Page 4 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2013

(b) Using the same senior personnel on an assurance engagement over a long period of
time may create a familiarity threat. The significance of threat will depend upon
factors such as:
 The length of time Danial has been a member of the audit team;
 The role of Danial in the audit team; and
 The structure of the firm

If the threat is clearly other than clearly insignificant, possible safeguards that can be
adopted are as follows:
 Rotating the senior personnel off the assurance team;
 Independent internal quality reviews.

Ans.9 The decision given by the court confirms the existence of debtor which is material to the
financial statements, therefore audit report issued on the basis of provision against debtor
does not hold good and therefore the auditor needs to amend the report.

In view of the above, the auditor needs to take the following steps:

 Discuss the matter with management and, where appropriate, those charged with
governance.
 Inquire how management intends to address the matter in the financial statements.
 If management amends the financial statements, the auditor shall:

— Carryout the audit procedures (as may be necessary under the circumstances)
on the amendment.
— Review the steps taken by management to ensure that anyone in receipt of the
previously issued financial statements together with the auditor’s report thereon
is informed of the situation.

— Extend the audit procedures on subsequent events to the date of the new
auditor’s report and date the new auditor’s report no earlier than the date
of approval of the amended financial statements; and .
— Provide a new auditor’s report on the amended financial statements.

— Where law, regulation or the financial reporting framework does not

prohibit management from restricting the amendment of the financial
statements to the effects of the subsequent event or events causing that
amendment and those responsible for approving the financial statements
are not prohibited from restricting their approval to that amendment, the
auditor is permitted to restrict the audit procedures on subsequent events
to the amendment and in such case the auditor shall:
 Amend the auditor’s report to include an additional date restricted
to that amendment that thereby indicates that the auditor’s
procedures on subsequent events are restricted solely to the
amendment of the financial statements described in the relevant
note to the financial statements; or
 Provide a new or amended auditor’s report that includes a statement
in an emphasis of matter paragraph or other matter paragraph that
conveys that the auditor’s procedures on subsequent events are
restricted solely to the amendment of the financial statements as
described in the relevant note to the financial statements; and

Page 5 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2013

— The emphasis of matter paragraph or other matter paragraph included in the

new or amended auditor’s report shall refer to a note to the financial statements
that more extensively discusses the reason for the amendment of the previously
issued financial statements and to the earlier report provided.
 If the management does not take the necessary steps to ensure that anyone in receipt
of the previously issued financial statements is informed of the situation, the auditor
shall notify management and where appropriate, those charged with governance,
that the auditor will seek to prevent reliance on the auditor’s report . If despite such
notification, management or those charged with governance do not take necessary
steps, the auditor shall take appropriate action to seek to prevent reliance on the
auditor’s report.

Ans.10 (a) The liquidation of SL is a non adjusting event. However, the amount due from SL is
only 0.36% of profit before tax and is not material to the financial statements
therefore the disclosure relating to uncollectability of amount due from SL is not
required.

The cost of plant is 120% of the profit before taxation and 12.5% of the net assets of
the company and it is material to the financial statements.

Since plant was purchased exclusively for the production of items to be supplied to
SL, an impairment review under IAS 36 must be carried out.

If material impairment is eminent then a disclosure would be required as it is a non

adjusting event. In case of non disclosure, a qualified opinion would be given as the
matter is material to the financial statements.

(b) Under the requirements of the Companies Ordinance, 1984 every company is
required to keep a record of sums of money received and expended by the company
and the matters in respect of which the receipts and expenditure takes place.

By tracing the receipts and payments mentioned in the party wise summaries with
the bank statement, the matter in respect of which these receipts and payment took
place cannot be verified.

Unless the information relating to the matters in respect of which receipt and
expenditure takes place is available elsewhere, the audit opinion regarding proper
books of accounts as required under the Companies Ordinance 1984 shall be
qualified .

(c) It will be mentioned in the auditor’s report that “In our opinion, Zakat of Rs. 22,000
was deductible at source under the Zakat and Ushr Ordinance, 1980, but was not
deducted by the Company. However, an equivalent amount was deposited by the
Company in the Central Zakat Fund and is included in other expenses”.

(The End)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Spring 2013

General:

32.99.% candidates passed this paper which was quite a good performance as compared
to last many attempts. The candidates displayed much better understanding of the
auditing concepts and the auditing standards. However, further improvement could have
been achieved by addressing the following issues:

• Generally, the students do not seem to read the requirement of the question carefully.
Consequently they end up giving irrelevant answers. This trend is more common in
scenario-based question.

• When data is given to enable the students to exercise judgment such as whether or not
the item is material, the students should answer accordingly. However, where data is
not given, the students should discuss the situation under either option i.e. when the
item is material and where it is immaterial.

Question 1

It was a straightforward question requiring candidates to describe the meaning of

professional judgment and to state the key areas of its application. Although only few
candidates scored full marks, a significant number managed to do well. Whilst describing
the meaning though, most candidates only talked about application of knowledge and
experience to make decisions. The fact that such informed decisions are made in the
context of auditing, accounting and ethical standards that may be relevant in the
circumstances, was quite often ignored.

Further, instead of stating the “key” areas, some candidates wasted time in mentioning
various auditing techniques such as sampling and also discussed auditing procedures,
which were not relevant.

Question 2

There seemed to be some confusion amongst candidates as to what exactly was required
of them in this question. A significant number of them gave the answers to part (a) in part
(b) of this question and vice versa.

Page 1 of 5
 Examiners’ Comments on Auditing – Spring 2013
Question 2 (a)

This part related to obtaining an understanding of the managements expert and factors to
be considered “before” using the report prepared by the expert. The majority answered
well. However, quite a few candidates went into unnecessary details regarding valuations
techniques, policies and procedures involved therein, as opposed to an assessment of the
factors to be considered before using the experts work such as objectivity and
competence of the expert and obtaining an understanding of the work carried out and its
appropriateness as audit evidence.

Question 2 (b)

It was stated in the question that a valuation had already been carried out by the expert,
hence, what was required was an explanation of the procedures required to ensure that
such valuation was appropriate. However, candidates went into details regarding the
accounting techniques, policies, presentation and disclosure requirements instead of
explaining the principal auditing procedures to be carried out.

Question 3 (a)

The question was generally well attempted. It seemed that all those who read the question
carefully and tried to understand the situation before moving on to write their answers,
were able to do well. However, a number of candidates did not specify that being the
brother of a director does not invalidate a person’s appointment as auditor. Most of the
students knew that it is not necessary for a private company to have a Chartered
Accountant as its auditor if the company’s paid-up capital is less than Rs. 3 millions.
However, they did not realize that Jehangir (Private) Limited is no more a subsidiary of
Malik Limited.

Question 3 (b)

Candidates did well on this question although some went into details regarding the
number of days required for serving of a notice instead of clarifying that the notice was
given by a non-voting preference shareholder and hence was invalid.

Question 3 (c)

Most candidates seemed confused in this question. They were unable to identify that a
company is a separate legal entity as against its shareholders irrespective of the number
of shares held by a shareholder. Many of them went into details regarding associated
undertakings and shareholdings, etc., which was not required.

Question 4

This question had a varied response as some candidates managed to score their highest
marks from this question, whereas some were not able to answer correctly. Candidates
should remember that in such questions, they must state whether they agree or not with
the decisions of the audit team member, before explaining their reasons. Quite a few
candidates wrote details regarding the correct procedure but did not specify whether the
audit senior’s actions were approprite or not.

Page 2 of 5
 Examiners’ Comments on Auditing – Spring 2013

Most candidates managed to answer parts (a) and (b) correctly, stating that the sample
size needed to be increased and displayed understanding of the underlying reasons.
In parts (c) and (d) most candidates were unable to produce an appropriate response. For
example, they could not identify that stratification relates to test of details and not test of
controls, whereas tolerable rate of deviation relates to test of controls and not test of
details.
In part (e) most students correctly identified that not performing test of controls is
appropriate when the expected rate of deviation is unacceptably high. However, instead
of stating that the decision to test 100 % items in test of details cannot be taken on the
basis of expected rate of deviation, candidates went into details about which scenarios
support 100% testing.

Question 5 (a)

Most of the candidates were unable to comprehend the whole situation. Consequently,
they tended to produce general comments on the severity of the situation when
management representation is found to be incorrect. Most of the following issues which
should have been discussed were missing in majority of the cases:

• Concerns about the competence and integrity of management due to non-disclosure of

the subsidiary.

• Effects of such concerns on the reliability of other representations provided by the

management and the audit evidence in general.
• The effect of the above on the audit opinion.

• Need to document the auditors’ finding and basis of his decision.

Question 5 (b)

Most students discussed issues such as management’s integrity, impact of fraud and
modification of the opinion without appreciating that at most, it was a case of error of
judgment. Many students stated various audit assertions which had no relevance.

Question 6

A mixed response was seen in this question. The students were generally able to point out
some of the apparent issues in the modification paragraph but very few could identify the
relatively more technical issues such as presentation of basis of modification and the
opinion in the same paragraph and that qualified opinion was more appropriate in the
given situation as against an adverse opinion appearing in the draft modification.

Question 7 (a)

This was a straightforward question requiring the candidates to state examples of various
analytical procedures. A significant number of candidates answered correctly and scored
high marks and many among them secured full marks as well. However, few candidates
gave incorrect examples i.e. they mentioned auditing procedures other than “analytical
procedures”.
Page 3 of 5
 Examiners’ Comments on Auditing – Spring 2013

Question 7 (b)

There was a mix response to this question. About half the candidates mentioned the
correct factors that are relevant in assessing the reliability of data, such as, source of
data, comparability, nature and relevance of the information available and controls over
the preparation of information. However, many among them, could not give appropriate
examples.

Question 7 (c)

In this question the candidates were required to specify the procedures that the auditor
may undertake if analytical procedures identify relationships that are inconsistent with
other relevant information. It was generally well answered as most candidates were able
to specify that in such a situation, the auditor would inquire of management, obtain audit
evidence relevant to management’s responses and perform other audit procedures as may
be necessary, in the specific circumstances.

Question 8

This question was designed to test the knowledge of the candidates on identifying
independence threats and suggesting possible safeguards. The performance of the
candidates remained average. The important aspects of the performance are as follows:

• Most candidates identified the threats correctly. However, some candidates tried to
mention as many threats as they could think of. This is a most inappropriate way of
answering the question and gives a clear indication that the candidate is not aware of
the correct answer.

• While discussing the possible safeguards, many students mentioned “ensure proper
safeguards” or “adopt safeguards in accordance with Firm’s policies and procedures”.
Such answers are not acceptable as the students need to be very specific while putting
forward their recommendations.

Question 9

Most candidates did very well and the majority obtained their highest marks from this
question. Some candidates did not appear to have read the question properly and failed to
notice that the financial statements had already been issued and the requirement was to
state whether the financial statements required amendment and to describe the actions
that were required to be taken thereafter. Such candidates ended up giving two scenarios,
one where the financial statements had not been issued as yet and the other where they
had been issued, which resulted in wastge of time.

Moreover, though it was clearly mentioned in the question that the amount has been
recovered, many candidates still mentioned steps such as:
• check whether the amount has been received
• obtain confirmation from the entity’s lawyer about the status of the case.

Page 4 of 5
 Examiners’ Comments on Auditing – Spring 2013
Question 10 (a)

Candidates seemingly found this question difficult. Many of them did not read the
question carefully and considered it to be a situation relating to going concern
assumption. Probably, they failed to realize that the company which has gone into
liquidation was Safeer Limited whereas the company which was being audited was Wazir
Limited. The other key issues were as follows:

• Barring very few exceptions, students did not appreciate that the heavy losses
suffered by the company owing to the natural disaster is in fact a non-adjusting event
and does not require adjustments in the financial statements.

• As regards the impairment of the machine, the auditor needed to inquire from
management whether the plant and machinery purchased had any future use or not
and whether an impairment review under IAS 36 was required. They also had to
identify that the amount was material and, hence, if the related impairment was also
material, disclosure would be required, failing which a qualified opinion would be
given. Many students could not cover this aspect in a proper manner.

Question 10 (b)

Responses were generally off the mark. Most of the students commented that there is no
issue if the auditor secures evidence from alternate source and suggested that auditor
should consider giving emphasis paragraph or other matter paragraph to highlight the
issue related to non-maintenance of proper cash book. Few candidates could identify that
companies are required to maintain records of sums of money received and expended by
the company, under the Companies Ordinance, 1984 and also the matters in respect of
which these receipts and expenditures take place. Consequently, the auditor would have
to qualify the audit report as proper books of accounts have not been kept by the
company as required by Companies Ordinance 1984. Moreover, very few could specify
the fact that the auditor may also give a qualified or a disclaimer of opinion because non-
availability of appropriate record may result in scope limitation.

Question 10 (c)

Majority of the candidates mentioned that the amount is immaterial and hence would not
have any impact on the audit report. However, this conclusion was not appropriate as the
auditor has to report whether zakat deductible under the Zakat and Ushr Ordinance, 1980
had been deducted or not. Hence, the audit report would need to be qualified in this
regard.

(THE END)

Page 5 of 5
 Auditing
Intermediate Examination 4 September 2013
Autumn 2013 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Briefly describe the steps that an auditor should take in order to establish whether
preconditions of an audit are present. (06)
(b) Briefly explain any six methods for collecting audit evidence. (12)

Q.2 (a) Hashim Industries Limited (HIL) is a manufacturer of household appliances. Its
products are popular in the market mainly because the company provides a
replacement warranty for three years.
HIL’s auditor has verified that the basis of arriving at the warranty provision is same as
in the previous year. However, the auditor has requested a written representation from
the management that there is no significant change in circumstances necessitating a
change in the basis of arriving at the amount of warranty provision. The management
has yet to confirm acceptance of this representation.
Required:
Discuss the importance of written representation in the above situation and list the
steps that the auditor should take and the possible impact on the audit report, if the
management is not willing to provide the required written representation. (11)
(b) NCCL is a subsidiary of HIL. HIL’s auditor has now been appointed as the auditor of
NCCL also.
Required:
State the factors that HIL’s auditor would consider in determining whether a separate
engagement letter should be sent to NCCL. (05)

Q.3 Saleem is an audit manager in a firm of Chartered Accountants. He is faced with the
following situations at two different clients.
(a) PNTL Limited is a listed company where most of the managerial powers are exercised
by two of its Senior Managers who are closely related. The company pays handsome
bonuses based on profitability.
PNTL’s management has requested Saleem not to send a request for confirmation of
balance to GL who owed Rs. 40 million to PNTL, as that amount has been recovered
subsequent to the year-end. (06)
(b) In response to a request for confirmation, a bank has reported a saving account in the
name of ABC Limited with a zero balance at the year-end. On inquiry, the client has
advised that during the year, an amount of Rs. 5,000 was deposited in that saving
account which was subsequently withdrawn. However, due to the negligence of a staff
member, this transaction was not recorded. (04)
Required:
Briefly explain how Saleem should address each of the above situations.

Q.4 (a) Briefly describe the extent of auditor’s responsibility relating to subsequent events
occurring between the date of the financial statements and the auditor’s report. (03)
(b) Identify any five procedures that the auditor may undertake to fulfill the responsibility
as discussed in (a) above. (05)
Continued on next page....
 Auditing Page 2 of 2

Q.5 Comment on each of the following independent situations in the light of the requirements of
the Companies Ordinance, 1984:
(a) Khan and Company, Chartered Accountants has received an offer for appointment as
auditors of Good Bank Limited (GBL). Shahid is a partner in Khan and Company. He
has obtained a personal finance of Rs. 450,000 from GBL and also holds GBL’s credit
card. The outstanding balance on his credit card is Rs. 100,000. (03)
(b) Abid is a partner in AFL & Company, Chartered Accountants. AFL has accepted an
offer for appointment as auditors of Saima Limited (SL). Saima, the wife of Abid,
owned 11% shares in SL. She also works as SL’s General Manager Marketing. Saima
disposed of the shares held by her to Abid’s father, within 30 days of the appointment
of AFL but continues to remain employed in SL. (03)

Q.6 State the key differences between an unmodified audit report issued in accordance with
ISA 700 ‘Forming an Opinion and Reporting on Financial Statements’ and the audit report
issued under the Companies Ordinance, 1984. (13)

Q.7 (a) Narrate the circumstances under which the auditor would resort to the following
techniques while selecting items for tests of details and controls:
(i) Selecting all items of a population. (03)
(ii) Selecting specific items from a population. (05)
(b) List the factors that may be relevant for the auditor while selecting specific items for
testing. (03)

Q.8 You are the audit incharge at Quick Enterprises Limited (QEL), a distributor of fast moving
consumer goods. QEL supplies goods to retailers all over the country. The purchase
procedure of the company includes the following:
(i) Minimum stock levels are fixed on the basis of the changing demand for different
brands which is monitored by the marketing department.
(ii) At the minimum stock level, requisitions for stock purchases are generated by the
marketing department and signed by the Marketing Manager.
(iii) Pre-numbered purchase orders are generated in triplicate.
(iv) Purchase Manager signs the purchase order after matching these with the requisitions
signed by the Marketing Manager.
(v) Purchase orders are faxed to the suppliers and copies thereof are forwarded to the
stores and finance departments.
(vi) On receipt of goods, pre-numbered Goods Receiving Notes (GRNs) are prepared and
signed by the Store Incharge. Each GRN is compared with the relevant purchase order
by the Store Incharge.
(vii) GRN is forwarded to the finance department for recording in the stores ledger.

Required:
Identify the key internal controls that appear to be in place in the above system and test of
controls required to evaluate each control. (08)

Q.9 Discuss the categories of threats that may be involved in each of the following independent
situations and advise the concerned engagement partners with regard to the possible course
of action that may be adopted in each case.
(a) Awesome Hotels Limited (AHL) is a listed company and is audited by Mansoor and
Company, Chartered Accountants. The partners of Mansoor and Company stay in the
hotels managed by AHL while they are travelling. (05)
(b) An audit team member on Hunza Limited (HL) has inherited 100,000 shares in HL
after the death of his father. (05)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2013

A.1 (a) Steps that an auditor should take in order to establish whether preconditions of
an audit are present:

In order to establish whether the preconditions for an audit are present, the auditor
shall:

 Determine whether the financial reporting framework to be applied in the

preparation of the financial statements is acceptable; and
 Obtain the agreement of management that it acknowledges and understands its
responsibility:
 For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their
fair presentation;
 For such internal controls as management and, where appropriate, those
charged with governance determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether
due to fraud or error; and
 To provide the auditor with:
— Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as records,
documentation and other matters;
— Additional information that the auditor may request from
management for the purpose of the audit; and
— Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.

(b) Methods of Collecting Audit Evidence:

 Physical Examination:
Physical examination means physical verification of an asset, such as stocks,
investment certificates and fixed assets, as an evidence of its existence and its
condition.

 Third party confirmation:

Confirmation of an amount or other information shown in the client’s records
by an independent third party provides a reliable evidence of the existence of
the amount and correctness of the information, as the case may be. For
example, receivables, payables, contingent liabilities, stock with third parties
etc.

 Examination of original records:

Original records like ownership documents, bills, notices etc. provide a reliable
and conclusive evidence of the legal claims, transactions, balances etc.

 Recomputation:
Recomputation technique is applied to prove arithmetical accuracy of a
transaction and to verify that the computation is in accordance with the rules,
procedures and acceptable practices. The areas where recomputation
techniques are generally applied include depreciation computations, bonus
calculations, provisions etc.

 Enquiry:
Enquiry consists of seeking information from knowledgeable persons, both
financial and non-financial, within the entity or outside the entity. The enquiry
may not provide conclusive audit evidence but it may give some form of clue
which may lead to further verification.

Page 1 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2013

 Analytical Procedures
Analytical procedures consist of evaluations of financial information through
analysis of plausible relationships among financial as well as non-financial
data. Analytical procedures also encompass investigation of identified
fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount.

A.2 (a)
The Auditor is generally not in a position to obtain evidence from an external
source in relation to warranty provisions.

Hence the written representation, whilst being an entity generated source of

evidence, would still be useful as there are few other alternatives.

Steps to take if written representation on warranty provision is not provided

 If management does not provide the requested written representation on
the warranty provision the auditor should discuss the matter with
management to understand why they are refusing.
 In addition, the auditor should re-evaluate the integrity of management and
consider the effect that this may have on the reliability of other
representations (oral or written) and audit evidence in general.
 The auditor should then take appropriate actions, including determining
the possible effect on the audit opinion.

Impact on audit report

Unless the auditor is able to obtain sufficient appropriate evidence* to conclude
that the warranty provision is free from material misstatement, a modified
audit opinion will be required, as discussed below:
 If the warranty provision is material but not pervasive then a qualified
opinion would be appropriate, a disclaimer of opinion would be
appropriate if the effect of misstatement is both material and pervasive.

(b)
When the auditor of a parent entity is also the auditor of a subsidiary, the factors
that may influence the decision whether to send a separate engagement letter to the
subsidiary include the following:

 who appoints the subsidiary’s auditor;

 whether a separate auditor’s report is to be issued on the subsidiary’s financial
statements;
 legal requirements in relation to audit appointments;
 degree of ownership by parent; and
 degree of independence of the subsidiary’s management from the parent
company.

A.3 (a)  There is a lack of segregation of duties in PNTL which increases the risk of
material misstatement at the assertion level.
 The request of management of not sending confirmation request to GL must be
supported by strong verifiable reasons.
 Recovery of Rs. 40 million from GL may not provide sufficient appropriate
evidence in view of the serious lack of segregation of duties.
 Saleem should insist for direct positive confirmation unless the client has
significant and verifiable reasons to not to send the confirmation request.
 If Saleem concludes that management’s refusal to allow him to send a
Page 2 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2013

confirmation request is unreasonable and subsequent recovery does not provide

sufficient appropriate audit evidence, he should communicate with those
charged with governance.
 If those charged with governance donot take corrective measures then saleem
would need to determine the implications on the audit and audit opinion.
(b)  The amount of transaction is indicative of the fact that the management’s
contention regarding negligence is correct and the omission was not intentional.
 However, the failure to detect this omission is indicative of a lack of appropriate
internal control.
 Therefore, in such a situation, the auditor would need to reconsider his
assessment of risk of material misstatement and modify planned audit
procedures accordingly.

A.4 (a) The auditor shall perform the audit procedures designed to obtain sufficient
appropriate audit evidence that all events occurring between the date of the financial
statements and the date of the auditor’s report that require adjustment or disclosure
in the financial statements have been identified*.
However, the auditor is not expected to perform additional audit procedures on
matters to which previously applied audit procedures have provided satisfactory
conclusions.

(b) The following procedures will help the auditor in identifying ‘subsequent events’
that require either adjustment or disclosure in the financial statements. :

(i) Review existing procedures (if any) laid down by the management to identify
these events.
(ii) Study minutes of the meetings of the Members, Board of the directors and
other important executive committees (if any) held after the balance sheet date
and enquire about the matters which may be relevant in this regard.
(iii) Discuss with key officials on matters such as company’s policy on marketing
of new products, price structure, major sales orders booked or cancellation of
sales orders and loss of major customers, if any, new borrowings, capital
commitments, fresh guarantees, outcome of pending law suits and any change
in accounting policies etc.
(iv) Ascertain the status of litigations, claims etc. against the company from its
legal advisors.
(v) Read the entity’s latest available budgets, cashflow forecasts and other related
management reports for periods after the date of the financial statements.

A.5 (a) The credit card balance of Rs. 100,000 is within the limit allowed by the Companies
Ordinance, 1984 i.e. Rs. 500,000 outstanding towards a credit card issuer. However,
because Mr. Khan has obtained personal finance from GBL, and no maximum limit
has been specified in this regard by the Companies Ordinance, 1984 he will be
deemed indebted to GBL. and hence Khan and Company cannot be appointed as
auditors of GBL.

(b)  Saima has rightfully disposed off the shares held by her on appointment of
Abid’s firm as auditors of SL.
 Holding of shares by Father of Abid and association of Saima as General
Manager Marketing in SL is not in contravention of any of the requirements of
the Companies Ordinance, 1984 and hence appointment of Abid’s firm as an
auditor is valid.

A.6 The matters which are required to be included in the audit report issued under the
Page 3 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2013

Companies Ordinance, 1984 but are not specified by ISA 700 are as follows:

 It is mentioned that the Auditor has obtained all the information and explanations
which to the best of his knowledge and belief, were necessary for the purpose of his
audit.
 It is mentioned that the management is responsible to present the financial
statements in conformity with the requirements of the Companies ordinance, 1984.
 Whether the financial statements give the information required by the Companies
Ordinance, 1984, and in the manner so required.
 Opinion relating to maintenance of proper books of account as required by the
Companies Ordinance, 1984.
 Opinion whether the balance sheet and profit and loss account are drawn-up in
conformity with the Companies Ordinance, 1984;
 Opinion whether the balance sheet, profit and loss account and notes are:
— in agreement the books of account and
— are further in accordance with accounting policies consistently applied;
 Opinion whether the expenditure incurred during the year was for the purpose of the
Company’s business; and
 Opinion whether the business conducted, investments made and the expenditure
incurred during the year were in accordance with the objects of the Company
 Opinion as regards deduction and deposit of Zakat.

Matters which are required to be mentioned in the Audit Report prescribed under the
ISA 700 but not mentioned in Audit Report under the Companies Ordinance, 1984:

 Statement that the auditor has complied with ethical requirements.

 Auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control.

A.7 (a) (i) Selecting all items

Selecting all items of a population for examination may be appropriate in the
following situations:
 The population constitutes a small number of large value items;
 There is a significant risk and other means do not provide sufficient
appropriate audit evidence; or
 The repetitive nature of a calculation or other process performed
automatically by an information system makes a 100% examination cost
effective.
(ii) Selecting specific items
The auditor may decide to select specific items for examination in the following
circumstances:
 High value or key items:
If the selected items are of high value, or exhibit some other characteristic,
for example, items that are suspicious, unusual, particularly risk-prone or
that have a history of error .
 All items over a certain amount:
The auditor may decide to examine items whose recorded values exceed a
certain amount so as to verify a large proportion of the total amount of a
class of transactions or account balance.
 Items to obtain information:
Where the auditor intends to obtain information about matters such as the
nature of the entity or the nature of transactions.

(b) In deciding whether to select specific items from a population, the factors that may
Page 4 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2013

be relevant include:
 the auditor’s understanding of the entity,
 the assessed risks of material misstatement, and
 the characteristics of the population being tested.

A.8 (i) Internal Controls

 Segregation of duties
There is a proper segregation of duties in respect of following functions:
— Authorization of purchase requisitions
— Initiation of purchase
— Stock keeping
— Stock recording
Test of controls
 Ensure that the person carrying out the procedures does not have incompatible
functions.
 Enquire about what happens when any of the persons carrying out a particular
function is on leave.

(ii) Internal Controls

 Authoristaion
Stock purchase requisitions, purchase orders and GRN’s are duly authorized.
Test of controls
Select suitable number of documents using appropriate sampling techniques and
check whether each document is duly authorized as mentioned in the purchase
procedures.

(iii) Internal Controls

 Completeness
Purchase orders and Goods Receiving Notes are pre-numbered.
Test of controls
Check files of copies of purchase orders and GRN’s and unused purchase orders/
GRNs to ensure that they pre-numbered and are arranged in serial.

(iv) Internal Controls

 Accuracy
The quality and condition of stock received are investigated on receipt thereof.
Test of controls
 Investigate a sample of goods-received notes and substantiate that the quantity
and condition of stock are noted thereon.
 Observe the storekeeper performing these duties.

(v) Internal Controls

 Documentation
— Matching of purchase orders with purchase requisitions.
— Comparison of GRN with Purchase Orders.

Tests of controls
Select suitable number of documents using appropriate sampling techniques and
check whether each document is duly matched/ compared as mentioned in the
purchase procedures.

Page 5 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2013

A.9 (a) The purchase of goods and services from an assurance client by the firm would not
generally create a threat to independence unless the transaction is not in the normal
course of business and not on an arm’s length basis.

The creation of self interest threat or otherwise shall depend upon the nature of the
transaction and its magnitude.

If the threat created is other than clearly insignificant, safeguards should be

considered and applied as necessary to reduce the threat to an acceptable level.

Such safeguards might include:

 Discontinue the practice of staying in hotels managed by AHL or reducing its
frequency so as to reduce the magnitude of the billing.
 Ensure that the charge out rates are in accordance with those applicable to
normal customers.
 Ensure that the dealing is at arm’s length and no undue advantage is secured by
the firm.
 Discussing (informing) the issue with those charged with governance.

(b)  As a result of inheritance of shares, a self-interest threat has been created. The
following safeguards should be applied to eliminate the threat or reduce it to an
acceptance level:
— The financial interest may be disposed of at the earliest practical date; or
— The concerned staff may be removed from the assurance engagement.

 During the period prior to disposal of the financial interest or the removal of the
individual from the assurance team, consideration should be given to whether
additional safeguards are necessary to reduce the threat to an acceptable level.
Such safeguards might include:
— Discussing the matter with those charged with governance, such as the
audit committee; or
— Involving an additional chartered accountant to review the work done, or
otherwise advise as necessary.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Autumn 2013

General:

In general, the candidates’ performance was satisfactory. Those who could not pass are
advised as follows:

• Make the best possible use of additional fifteen minutes allowed for reading and
understanding the requirements of the questions. The key words or phrases may be
underlined.

• In case a student is not sure as regards the extent of details required, the marks
allocated to the question can serve as a good guide.

• Irrelevant details do not give additional marks and result in wastage of time. These
should be avoided

• Since many practical situations are given in the questions, it is very important that the
students should use their imagination to link those situations to the relevant standards
and rules.

Question-wise comments are as under:

Q.1 (a) Most candidates secured full marks in this question by correctly stating the
steps an auditor should take to determine whether the preconditions of an
audit are present. A few candidates wasted time by going into unnecessary
details regarding client acceptance procedures.

(b) It was a very simple and straightforward question and required explanation of
six methods of collecting audit evidence. Some of the candidates wrote more
than six methods which was a waste of time and showed that they lacked
clarity and were trying to guess the options. Even if a candidate knows more
than six methods he should restrict to the requirement of the question because
time is important.

Page 1 of 4
 Examiners’ Comments on Auditing – Autumn 2013

Q.2 (a) All together there were three requirements of this part of the question as
discussed below:

(i) To state briefly the importance of written representation as audit

evidence, in the verification of warranty provisions. The candidates
were expected to cover the fact that in such cases external evidence is
generally not available and there are few other alternatives to obtain
sufficient and appropriate audit evidence. Some candidates answered
accordingly but a significant number of students copied the importance
of written representation in the general sense as is given in the ISA,
instead of discussing the importance with regard to warranty provision.
A number of candidates went into details as to when written
representation is required which was not relevant. Surprisingly, some of
them also wrote about how the representation may be obtained and who
should sign the representation letter etc.

(ii) Steps to be taken if written representation on warranty provision is not

provided. Most candidates answered satisfactorily on the basis of
paragraph 19 of ISA 580.

(iii) Impact on report. In this case it was important to consider the effect of
materiality and pervasiveness of the warranty provision. However, most
candidates suggested different types of modifications without even
discussing materiality and pervasiveness.

(b) This was a straightforward question based on ISA 210 and almost all the
students secured good marks.

Q.3 (a) The question required candidates to explain the steps that the audit manager
should take if management wishes that confirmation request may not be sent
to a certain client. The question also mentioned the fact that most of the
company’s managerial powers were exercised by two officials who were
closely related. A mixed response was seen as majority of the candidates
covered some of the points such as:

(i) the request should be supported by strong verifiable reasons;

(ii) checking the recovery of the amount and

(iii) communication with those charged with governance if the request was
considered unreasonable.

However, only a few candidates were able to point out the lack of segregation
of duties which increased the risk of material mis-statement at the assertion
level and the need to consider the implications of the matter on the audit
report.

Page 2 of 4
 Examiners’ Comments on Auditing – Autumn 2013

(b) According to the given situation, incorrect information had been provided to
the auditor. Only a few candidates could identify that the error seemed
unintentional and supported management’s contention of it being a matter of
negligence. A significant number of candidates showed grave concerns about
the possibility of fraud which was quite unwarranted.

Q.4 (a) This part required brief description of the auditor’s responsibility to identify
subsequent events that required adjustment or disclosures. Majority of the
students were able to specify the auditor’s responsibility to perform audit
procedures designed to obtain sufficient appropriate audit evidence that all
events occurring between the date of the financial statements and the date of
the auditor’s report that require adjustment or disclosure in the financial
statements have been identified. However, only few could clarify that the
auditor was not required to perform “additional audit procedures” on matters
to which previously applied audit procedures have provided satisfactory
conclusions.

(b) This part was quite straightforward and a significant number of candidates
secured full marks by correctly stating the procedures that are used by the
auditor to identify subsequent events.

Q.5 This question intended to test the students on qualification/disqualification of

auditor in terms of the provisions of the Companies Ordinance, 1984.

(a) In this part most students appeared to be confused and concluded that the
limit of Rs. 500,000 applies to all credit facilities taken together. In fact this
relaxation applies to outstanding balance of credit card only. An auditor is not
allowed to avail any other credit facility from the client.

(b) Here candidates were expected to identify that Saima (the auditor’s spouse)
had rightfully disposed of the shares within the required time limit and that
holding of shares by the father of the person being appointed as auditor was
not in contravention to the provisions of the Companies Ordinance, 1984 and
also that employment of the auditor’s spouse (Saima) as GM Marketing was
also not against any provision of the Ordinance.

The performance was average as many candidates failed to discuss all the
three aspects specially the holding of shares of the company by the auditor’s
father.

Q.6 This question also had a mixed response with candidates scoring a range of
different marks. It was noted that a significant number of candidates went into great
detail regarding presentation related matters such as headings, formats and
terminology used in the reports and ignored the main differences like the following
important matters that are included in the report format under ISA 700.

(i) statement that the auditor has complied with ethical requirements;

Page 3 of 4
 Examiners’ Comments on Auditing – Autumn 2013

(ii) that the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the financial statements in order to design audit
procedures, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control.

In fact, most of the students seemed familiar with the requirements of Companies
Ordinance, 1984 but lacked knowledge of ISA 700.

Q.7 (a) This question tested knowledge of two important techniques of selecting items
for audit i.e. selecting all items of a population and selecting specific items
from a population. Generally, the candidates did well and identified the
circumstances in which these techniques are used.

(b) In this part, the candidates were required to state the factors which the auditor
had to take into consideration when deciding whether to select specific items
from a population, namely, the auditors understanding of the entity, the
assessed risks of material misstatement and the characteristics of the
population being tested. This part was very poorly answered as most students
tried to repeat the answer given in part (a) above. Many candidates did not
attempt this part.

Q.8 This was an interesting question. The steps involved in the purchase procedures of
an organization were mentioned and the candidates were required to identify the
type of control that was embedded in each procedure.

The performance was generally poor as many students mentioned control

weaknesses instead of test of controls and most of the students tried to copy the
same steps with slight change of words instead of identifying the controls such as
segregation of duties, authorization, documentation etc.

Q.9 Two independent scenarios were given in this question and the candidates were
required to identify the threats and the safeguards to reduce the threats to an
acceptable level.

(a) Most of the candidates mentioned relevant as well as irrelevant categories of

threats which displayed their lack of confidence. Many candidates only
mentioned that the auditor should not stay at hotels managed by AHL. They
could not comprehend that staying at hotels under the normal course of
business and on an arm’s length basis generally does not create a threat to
independence.

(b) The students rightly identified the self interest threat and related safeguards
but did not mention the safeguards which should be considered till such time
as the shares are disposed of.

(THE END)

Page 4 of 4
 Auditing
Intermediate Examination 5 March 2014
Spring 2014 100 marks - 3 hours
Module D Additional reading time - 15 minutes

Q.1 (a) Briefly describe ‘Preliminary Engagement Activities’ and ‘Planning Activities’. (05)

(b) You are the partner of Alamgir and Company, Chartered Accountants and have
received an offer for appointment as auditor of Guava Limited (GL). The previous
year’s audit was carried out by Babur and Company, Chartered Accountants.
Required:
State the matters that you would consider:
(i) while deciding about the acceptance of audit of GL. (03)
(ii) in establishing the overall audit strategy, including matters which are to be
considered, being the initial audit engagement. (08)

Q.2 Comment on the following independent situations, with reference to the requirements of the
Companies Ordinance, 1984.
(a) Mateen has recently joined Humayun and Company (HC), a firm of Chartered
Accountants, as a Director with a commitment of being promoted as a partner in due
course. HC is the auditor of Strawberry Limited (SL). Mateen was previously
associated with SL as a Director. He left that job in 2011 but still holds 1,000,000 (03)
shares in SL.
(b) Khawar is a partner in Ghalib and Company, Chartered Accountants. He writes
occasionally as a Free Lancer for ‘Investment Times’, a leading Financial Magazine.
Ghalib and Company are the auditors of Financial Press Limited, publisher of
Investment Times. Khawar has received a remuneration of Rs. 20,000 for his articles
published in the magazine. (02)
(c) Hamid is a partner in a Chartered Accountant firm and holds 100,000 Term Finance
Certificates in Sona Fertilizers Limited (SFL). Hamid’s firm is considering to accept the (02)
audit of SFL.

Q.3 You are the audit manager in a firm of chartered accountants and are currently faced with
the following situations at two different clients.
(i) A bank confirmation has not been received despite extensive follow up by the client. As
the deadline is close, the client has provided you the original bank statement of
31 December 2013 duly stamped and signed by the Bank Manager. Consequently, the
client is of the opinion that confirmation is no more necessary. (06)
(ii) At the planning stage of audit of Orange Limited, the management has refused to send
confirmations to three major debtors who constitute 45% of the total debtors. On
inquiry, you have been informed that these debtors are partnership concerns and take
lot of time in replying to confirmation requests. However, as an alternative the
management has offered to send negative confirmation requests. (07)

Required:
Discuss how you would deal with the above situations. Also state the possible implications
on the audit report.
 Auditing Page 2 of 4

Q.4 An auditor is required to identify and assess the risks of material misstatements to provide a
basis for designing and performing further audit procedures.
Required:
(a) State the factors which an auditor should consider while evaluating the significance of
audit risks. (06)
(b) State the matters which you would include while documenting the risk identification
and risk assessment procedures. (06)

Q.5 Discuss the categories of threats that may be involved in each of the following mutually
exclusive situations and advise the partner of the concerned firms with regard to the possible
course of action which may be adopted in each case:
(a) The audit of JJ Limited (JJL) is at its completion stage. The meetings of the audit
committee and the board of directors are scheduled to be held within a week, to
consider and approve the annual financial statements. JJL is facing financial difficulties
and has not paid the audit fee of the previous year. The CFO of JJL has committed to
pay the previous as well as current year’s audit fee, after signing the audit report. (04)
(b) During the course of audit of HP Limited (HPL), the engagement partner has informed
the firm that his brother has acquired 200,000 shares in HPL. (05)

Q.6 List the substantive procedures which may be performed by the auditor to verify the Long
Term Bank Loan. (07)

Q.7 While reviewing the audit working papers of Apple Limited (AL), the following matters
have come to your attention:
(i) The audit team was able to ascertain that AL has entered into a number of transactions
near the year-end with a new distributor Fruits Limited (FL), which is a related party.
On being confronted, the management has informed that since there were no
transactions with FL in the past, its inclusion in the schedule of related party
transactions was inadvertently omitted. (05)
(ii) The details of related party transactions provided by the management includes a
payment of Rs. 300 million to Mango Limited. The job incharge is of the view that this
transaction is not in normal course of business of the company. (04)

Required:
Analyse each of the above situations and briefly describe your course of action.

Q.8 The following situations have arisen on different clients being audited by your firm. The
year-end in each instance is 31 December 2013.
(i) During the year Iron Limited has changed its policy for valuation of intangible assets
from Cost Model to Revaluation Model. (03)
(ii) Due to fire in the record room of Titanium Limited, all the records and backup related
to the fixed assets, trade debtors and stocks were destroyed and you are unable to
perform audit procedures for verification of the balances. (03)
(iii) During the planning stage of Coal Limited it was noted that the system of internal
controls of the company is weak. This aspect was taken into consideration in
determining the nature, timing and extent of the audit procedures. (02)
(iv) One of the plants of Uranium Limited was destroyed subsequent to year-end.
Appropriate disclosure thereof has been made in the financial statements. (02)
Required:
Discuss the impact of each of the above matters on the audit report.
 Auditing Page 3 of 4

Q.9 You are the audit manager of Pineapple Limited. The audit senior has submitted following
draft audit report for your review:
AUDITORS’ REPORT TO THE DIRECTORS
We have audited the annexed balance sheet of Pineapple Limited (the company) as at
31 December 2013 and the related profit and loss account, statement of comprehensive
income, cash flow statement and statement of changes in equity together with the notes
forming part thereof, for the year then ended and we state that we have obtained all the
information and explanations which, to the best of our knowledge and belief, were
necessary for the purposes of our audit.
It is the responsibility of the company’s management to prepare and present the above said
statements in conformity with the approved accounting standards and the requirements of
the Companies Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with the auditing standards as applicable in
Pakistan. These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the above said statements are free of any material misstatement.
An audit includes examining on a test basis, evidence supporting the amounts and
disclosures in the above said statements. An audit also includes assessing the accounting
policies and significant estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit provides a reasonable
basis for our opinion and, after due verification, we report that:
(a) As described in note 16 to the financial statements, trade debtors amounting to Rs. 152
million are outstanding since many years.
(b) in our opinion, proper books of accounts have been kept by the company;
(c) In our opinion:
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of accounts and are further in accordance with the
accounting policies consistently applied;
(ii) the expenditure incurred during the year was for the purpose of the company’s
business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the company;
(d) In our opinion and to the best of our information and according to the explanations
given to us, the balance sheet, profit and loss account, statement of comprehensive
income, cash flow statement and statement of changes in equity together with the notes
forming part thereof conform with approved accounting standards as applicable in
Pakistan, and, give the information required by the Fourth Schedule of the Companies
Ordinance, 1984, in the manner so required and respectively give a true and fair view
of the state of the company’s affairs as at 31 December 2013 and of the profit for the
year then ended; and
(e) We draw attention to note 25 which indicates that the company has not recognized
contingent liability of Rs. 15.8 million. It represents mark-up on a long term bank loan.
The bank has waived the mark-up subject to the condition that the company will pay
the entire principal amount of Rs. 85 million within two years. The company has
defaulted on the last quarterly instalment but the management is confident that it will
be able to meet its liabilities in future. The bank has not taken any action against the
company.
ABC and Company Dated: 05 March 2014
Chartered Accountants Karachi

Required:
Identify the shortcomings in the above audit report. (09)
 Auditing Page 4 of 4

Q.10 Management is in a unique position to perpetrate fraud because of its ability to manipulate
accounting records and prepare fraudulent financial statements by overriding controls that
otherwise appears to be operating effectively.
Required:
Determine the audit procedures that may be performed by the auditor to address the risks
related to override of controls. (08)

(THE END)
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.1 (a) Preliminary Engagement Activities:

These are the activities undertaken by the auditor at the beginning of the audit
engagement, and include:

(i) Performing procedures regarding the continuance of the client relationship

and the specific audit engagement;
(ii) Evaluating compliance with the relevant ethical requirements, including
independence; and
(iii) Establishing an understanding of the terms of the engagement.

Planning Activities:
Planning activities includes establishing an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit plan.

(b) (i) Information that Alamgir & Co. Chartered Accountants needs to obtain in
deciding whether or not to accept the audit of GL:
Following matters may be considered in deciding about the acceptance of
audit:
 The integrity of the principal owners, key management and those
charged with governance of the entity;
 Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources;
 Whether the firm and the engagement team can comply with relevant
ethical requirements;

(ii) Matters that may be considered in establishing the overall audit strategy:
In establishing the overall audit strategy, the auditor shall:

 Identify the characteristics of the engagement that define its scope;

 Ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communications required;
 Consider the factors that, in auditor’s professional judgment, are
significant in directing the engagement team’s efforts;
 Consider the results of the preliminary engagement activities and, where
applicable, whether knowledge gained on other engagement performed
by the engagement partner for the entity is relevant; and
 Ascertain the nature, timing and extent of resources necessary to perform
the engagement.

Being the initial audit engagement following matters should also be

considered in establishing the overall audit strategy:
 Arrangements to be made with the predecessor auditor.
 Communicate major issues identified during discussion with the
management, to those charged with governance and consider that how
these matters will affect the overall audit strategy and audit plan.
 The audit procedures necessary to obtain sufficient appropriate audit
evidence regarding opening balances.
 Other procedures required by the firm’s system of quality control for
initial audit engagements (for example, the firm’s system of quality
control may require the involvement of another partner or senior
individual to review the overall audit strategy prior to commencing
significant audit procedures or to review reports prior to their issuance).

Page 1 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.2 (a) Since Mateen presently is not a partner in the firm, his firm can be the auditor of the
company. However, the firm at the time of admitting him as a partner, would need
to ensure that:
— the period of three years has lapsed from the date when Mateen resigned from
the directorship of SL.
— The shareholding of Mateen in SL is disposed off.

(b) Appointment of Khawar’s firm is valid because he is not an employee of Financial

Press Limited, and writes as a free lancer in the newspaper published by the
company.

(c) There is no restriction in the Companies Ordinance, 1984 on holding the Term
Finance Certificates issued by the audit client. Therefore, the appointment of
Hamid’s firm as an auditor of SFL is valid.

Ans.3 (i)  Bank confirmation contains details such as facilities, securities, additional
banking relationships, trade finance, derivative and commodity trading and
custodian arrangements. These information are not available in bank
statement. Moreover, the bank confirmation is supposed to be received directly
from the bank whereas the bank statement has been received through the client.
 We need to determine whether a response to a positive confirmation is
necessary to obtain sufficient appropriate audit evidence related to bank
balance as at December 31, 2013.
 If it is concluded that the response to bank confirmation is not necessary then
we would perform alternate audit procedures to obtain sufficient appropriate
audit evidence relating to details not provided by the bank.
 If we are unable to obtain sufficient appropriate audit evidence from alternative
audit procedures or if we conclude that the response to the bank confirmation is
necessary and we are unable to obtain bank confirmation , then it will
constitute a scope limitation. Accordingly, we would qualify the audit report or
issue a disclaimer of opinion depending on the materiality and pervasiveness of
the matter.

(ii)  The request by management for sending negative confirmation requests is not
appropriate as these are usually sent when population comprises of large
number of small account balances.
 The reason provided by the management for not sending confirmation request
to three debtors is not appropriate.
 In view of the above, we would ask the client to send positive confirmation
request.
 If the client refuses to send positive confirmation, we would evaluate the
implications of the refusal on the risk of material misstatement, including the
risk of fraud and on the nature timing and extent of other audit procedures.
 Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.
 If we are unable to obtain sufficient appropriate audit evidence form alternative
audit procedures or if we conclude that the confirmation is necessary and we
are unable to obtain confirmation from the debtors, then it will constitute scope
limitation. Based on the materiality and pervasiveness of the matter, we would
issue a qualified or disclaimer of opinion as appropriate.

Page 2 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.4 (a) Factors to be considered by auditor in exercising judgment relating to the

significance of audit risks:
In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following:

 Whether the risk is a risk of fraud;

 Whether the risk is related to recent significant economic, accounting or other
developments and, therefore, requires specific attention;
 The complexity of transactions;
 Whether the risk involves significant transactions with related parties;
 The degree of subjectivity in the measurement of financial information related
to the risk; and
 Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.

(b) Documentation Required for Risk Identification and Risk Assessment

procedures:
The auditor shall include in the audit documentation:

 The discussion among the engagement team about the susceptibility of the
entity’s financial statements to material misstatement and decisions reached.
 Key elements of the understanding obtained regarding each aspect of the entity
and its environment and each internal control component; the sources of
information from which the understanding was obtained; and the risk
assessment procedures performed;
 The identified and assessed risks of material misstatement; and
 The risks identified, and related controls about which the auditor has obtained
an understanding.

Ans.5 (a) Threats:

Self interest threat is created as the auditor would like to recover the previous year’s
audit fee.

Safeguards:
Generally the payment of previous year audit fees should be received before the
report is issued. However, if the fee is not paid additional safeguards may be
applied, which may include:

 Discussing the outstanding fees with the audit committee and those charged
with governance.
 Involving an additional chartered accountant who did not take part in the
assurance engagement, to provide advice or review the work performed.

(b) Threats:
Self interest threat is created as the shares are held by a close relative of the
engagement partner.

As the engagement partner has promptly notified the firm about the interest of his
brother, hence it is likely that it would not impair the independence of the
engagement partner.

Page 3 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014

Safeguards:
Significance of threat should be evaluated and if the threat is other than clearly
insignificant, safeguards should be considered and applied as necessary to reduce
the threat to an acceptable level. Such safeguards might include:

 If possible the engagement partner may convince his brother to dispose of the
shares;
 If the disposal does not occur at the earliest practical date, the engagement
partner may be changed.
 An additional chartered accountant who did not take part in the assurance
engagement may review the work done or otherwise advise as necessary.

Ans.6 Substantive Procedures for verification of Long Term Bank Loan:

 Check approval of board of directors.
 Study loan agreement and make relevant extracts.
 Check calculation of interest paid/ accrued.
 Obtain bank confirmation and confirm the particulars of security deposited with the
bank as security for the loans or charge created on an asset or assets of the client.
 Ensure that the particulars mentioned in the bank confirmation are same as
mentioned in the loan agreement.
 If the loan is secured against mortgage or charge, check the mortgage deed or any
other related document.
 If there is any default in the payment of installments, check the related implications
of the default and ensure they are properly reflected in the financial statements.
 Prepare a movement schedule during the year and match the opening and closing
balances, and also confirm that loan balance is appropriately reduced by the amount
paid during the year.
 Ensure proper disclosure is made in the financial statements.

Ans.7 (i) Since related party relationship/ transactions have been identified which were not
previously identified or disclosed to the auditor, the auditor shall:

 Promptly communicate the relevant information to the other members of the

engagement team;
 Where the applicable financial reporting framework establishes related party
requirements:

— Request management to identify all transactions with FL for the auditor’s

further evaluation; and
— Perform appropriate substantive audit procedures relating to significant
related party transactions with FL;
— Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or
disclosed to the auditor, and perform additional audit procedures as
necessary; and
— If the non-disclosure by management appears intentional (and therefore
indicative of a risk of material misstatement due to fraud), evaluate the
implications for the audit.

Page 4 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014

(ii) For identified significant related party transactions outside the entity’s normal
course of business, the auditor shall:

 Inspect the underlying contracts or agreements, if any, and evaluate whether:

— The business rationale (or lack thereof) of the transactions suggests that
they may have been entered into to engage in fraudulent financial reporting
or to conceal misappropriation of assets;
— The terms of the transactions are consistent with management’s
explanations; and
— The transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework; and
 Obtain audit evidence that the transactions have been appropriately authorized
and approved.

Ans.8 (i) Exception to the consistent application of accounting policies will be mentioned in
the audit report along with the note reference where disclosure is made about
change in accounting policy and statement whether the auditor concurs with it or
not.
(ii)  The auditor will issue a disclaimer of opinion on account of limitation of scope
and as the matter is material and pervasive in nature.
 It is also to be mentioned that proper books of accounts as required by the
Companies Ordinance, 1984 have not been kept by the company.
(iii) The responsibility of management regarding establishing and maintenance of
system of internal controls is mentioned in the Audit Report, however, no opinion
is required regarding operating effectiveness of internal controls. There would be no
impact on audit report.
(iv) If in the auditor judgement, the matter of destruction of plant is fundamental to
users understanding of the financial statement then an emphasis of matter
paragraph is required to be given in the audit report referring to a note in the
financial statements where the relevant disclosure is made in the financial
statement.

Ans.9 Shortcomings in the audit report:

 Auditor’s report is addressed to the directors, whereas it is required to be addressed
to the members.
 The responsibility regarding the establishing and maintenance of internal control is
missing from the scope paragraph.
 With respect to trade debtors, the auditors need to mentioned that how the trade
debts should be accounted for and the resultant impact on the profit or loss for the
period.
 The phrase “as required by the Companies Ordinance, 1984” is missing from the
opinion related to maintenance of proper books of accounts.
 The auditor has neither qualified the opinion/nor issued an adverse opinion with
respect to trade debtors.
 There is no need to mention 4th schedule in point # (d).
 Opinion relation to zakat deduction and its deposit is missing.
 It should also be mentioned in the emphasis of matter paragraph that our opinion is
not qualified in respect of this matter.
 Name of the engagement partner is missing.

Page 5 of 6
 AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014

Ans.10 Course of action:

Irrespective of the auditor’s assessment of the risks of management override of controls,
the auditor shall design and perform audit procedures to:

(i) Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements.

In designing and performing audit procedures for such tests, the auditor shall:
 Make inquiries of individuals in the accounts department about inappropriate
or unusual activity they have noticed during processing of journal entries and
other adjustments;
 Select journal entries and other adjustments made near the yearend; and
 Consider the need to test journal entries and other adjustments throughout the
period.

(ii) Review accounting estimates for biases and evaluate whether the circumstances
producing the bias, if any, represent a risk of material misstatement due to fraud.

In performing this review, the auditor shall:

 Evaluate whether the judgments and decisions made by management in
making the accounting estimates, even if they are individually reasonable,
indicate a possible bias on the part of the management that may represent a risk
of material misstatement due to fraud. If so, the auditor shall reevaluate the
accounting estimates taken as a whole; and
 Evaluate the results of the accounting estimates and judgments made in the
prior years.

(iii) For significant transactions that are outside the normal course of business for the
entity, or that otherwise appear to be unusual, the auditor shall evaluate whether the
business rationale (or the lack thereof) of the transactions suggests that they may
have been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Auditing Intermediate Examination - Spring 2014

General:

The overall performance this time was far below the desired standard. Besides inadequate
preparation, the main reason for failure was the practice of answering questions without
reading the exact requirement or the failure to address the exact requirement of the
question.

Question-wise comments.

Question 1 (a)

The candidates were required to briefly describe preliminary engagement activities and
planning activities. Most candidates tackled the first part of the question correctly by
stating the need for client acceptance/continuance procedures, ethical compliance and
understanding/agreeing the terms of the engagement. However, with respect to
preliminary activities many candidates mentioned some of the substantive procedures that
are carried out during an audit as opposed to mentioning the scope, timing and direction
of the audit.

Question 1 (b) (i)

Generally the students seemed unaware of the matters that should have been considered
while deciding about the acceptance of audit. Instead of focusing on the core issues such
as integrity of the client and the competence, capability and ethical requirements of the
firm and engagement team, most of them deliberated on the issue of minimum audit fee
and seeking of clearance from the previous auditors which were not relevant because
these matters are considered once a decision is made in principle as regards the
acceptance of audit.

Question 1 (b) (ii)

This part was generally well attempted. However, many candidates ignored the fact that it
was an initial audit engagement and the matters related thereto.

Question 2

This question required the candidates to give their views on three outlined situations in
light of the independence principles applicable to an auditor. Most of the candidates
extended reasonable response in line with the related professional pronouncements. The
common points that were missed are as follows:

Page 1 of 5
 Examiners’ Comments on Auditing – Spring 2014

Question 2 (a)

It was not appreciated that Mateen is presently a director in the firm and therefore the
appointment of the firm is valid. Holding of shares by Mateen would only be relevant
when Mateen is made a Partner in the firm.

Question 2 (b)

Many students could not appreciate that Khawar is a freelance and does not have an
employee relationship with the client and therefore appointment of the firm was valid.

Question 2 (c)

Very few students could recognize that holding Term Finance Certificates and holding
shares are two different things and there is no restrictions in the Companies Ordinance,
1984 regarding holding of TFCs; hence the appointment of the firm was in order.

Question 3

In this question, two independent situations were given and the candidates were required
to explain that as an auditor, how would they deal with these situations and the
implication thereof on the auditors report.

Question 3 (i)

Generally, the candidates could not recognize the fact that a confirmation is supposed to
be received directly from the bank whereas the bank statement was received through the
client. Also, a bank confirmation contains details about securities, facilities, additional
banking relationships etc, as opposed to a bank statement which only states the balance in
the bank account. Most of the students however appreciated the necessity of alternative
procedures but many among them could not conclude that the situation involves scope
limitation and opinion needs to be qualified or disclaimed depending upon the materiality
and pervasiveness of the matter. Some candidates went into extensive detail about
various types of alternative procedures and ignored the later part of the question with
regard to the possible effect on the audit report.

Question 3 (ii)

Many candidates correctly recognized that a negative confirmation would be

inappropriate in the circumstances because of the small number of large balances; and
that the reason provided by the management for not sending positive confirmation
requests was inappropriate. However, complete answers were rarely seen. Many
candidates did not state that the client should be asked to send requests for positive
confirmations. Most candidates did not state as to what would be done if client does not
act accordingly and the need to perform alternative procedures. Possible implications on
the audit report were seldom discussed and among those who did try to address this
aspect, very few could provide a completely correct answer.

Page 2 of 5
 Examiners’ Comments on Auditing – Spring 2014

Question 4 (a)

This question seemed to cause the most confusion amongst candidates as a significant
number failed to secure even a few marks. A number of candidates stated the procedures
required to deal with the risks or which lead to the identification of risks rather than the
factors needed to be considered whilst evaluating the significance of the audit risks such
as the risk of fraud, degree of subjectivity in the measurement of financial information,
complexity of transactions, unusual transactions etc.

Question 4 (b)

Here the candidates were required to state the matters to be included while documenting
the risk identification and risk assessment procedures. Only few candidates seemed to
have studied the relevant part of the auditing standard. Most of them relied on guesswork.
All sorts of irrelevant issues were deliberated like the difference between control and
substantive procedures, extent of audit procedures and the effect of risk. Many candidates
narrated the audit procedures for obtaining evidence.

Question 5 (a)

This question also had two outlined situations where the candidates were required to
identify the threats involved and the possible course of action for the auditor. Most of the
candidates did well in this question; however, some students listed all the threats without
evaluating their relevance to the given situation. In such cases no marks are awarded.
There was a self-interest threat due to non-receipt of fees and although candidates did
mention that the previous year’s fees should be received before the current year’s report
is issued, some did not mention the additional safeguards required if it was not received.

Question 5 (b)

This question was generally well answered as candidates analyzed the situation correctly
and specified the safeguards. However, many candidates did not mention that the
significance of the threat needed to be evaluated and safeguards should be considered to
reduce it to an acceptable level, unless the threat is clearly insignificant.

Question 6

This was a straightforward question in which substantive procedures required for

verification of long term loans had to be stated. The question was generally well
responded. However, most students did not mention the need to verify the terms and
conditions associated with the loan agreement and review of documents related to
security against mortgage or charge, if any. Some of them stated that the terms of the loan
must be compared with those generally prevalent in the industry, which was not relevant.

Question 7

The candidates were required to analyze and discuss the possible course of action in two
different circumstances, pertaining to related party transactions.

Page 3 of 5
 Examiners’ Comments on Auditing – Spring 2014

Question 7 (i)

According to the given situation, the client had failed to disclose certain related party
transactions. The overall performance was good but some candidates specified detailed
substantive procedures for verification of related party transactions instead of addressing
the given situation as per the guidance provided in the auditing standards. (See para 22 of
ISA 550).

Question 7 (ii)

Most of the candidates did well in this question, in accordance with para 23 of ISA 550.

Question 8

In this question four independent situations were given and the candidates were required
to discuss the possible impact thereof, on the audit report.

Question 8 (i)

Situation: Change in Accounting Policy

Very few candidates identified the need to mention the exception to the consistent
application of accounting policies and whether or not the auditor concurred to the
exception. Instead, they stated that an emphasis of matter paragraph would be required.
Some candidates wrote about the accounting treatment of intangible assets under the Cost
and Revaluation model which was not required.

Question 8 (ii)

Situation: Due to destruction of records the auditor was unable to perform audit
procedures related to fixed assets, trade debts and stocks.

Most candidates correctly mentioned that a disclaimer of opinion would be required

under the circumstances; however, many among them could not identify that the auditor
would also be required to report that proper books of accounts as required by the
Companies Ordinance, 1984 have not been maintained.

Question 8 (iii)

Situation: Weaknesses in internal control had been identified and considered in

determining the nature, timing and extent of audit procedures.

Most of the candidates did not appreciate the fact that weaknesses in controls are not
reported in the audit report. Most of them advised some sort of modification.

Page 4 of 5
 Examiners’ Comments on Auditing – Spring 2014

Question 8 (iv)

Situation: A major asset had been destroyed after year-end and this aspect had been
disclosed in the financial statements.

About half the candidates correctly identified the need of an emphasis of matter
paragraph which should give reference to the note in the financial statements where the
matter was disclosed. The others had little idea and resorted to guesswork which mostly
resulted in irrelevant answers. Some candidates went into details regarding the going
concern assumption. Such a discussion was not required.

Question 9

In this question an audit report was given and the candidates were required to identify the
shortcomings in the report. A good performance was expected, however, most candidates
were more focused on the format of the report and could not identify most of the errors in
the contents of the report. The most common point either missed or wrongly interpreted
by the candidates was with regard to trade debtors which were long overdue. This issue
was highlighted in the audit report but no opinion was given thereon and accordingly
required attention of the candidates.

Question 10

Most candidates failed to answer this question correctly. They described the meaning of
management override of controls and how and why it could be purported but failed to
address the exact requirement of the question i.e. the procedures that the auditor would
need to perform to address the risks related to management override of controls.

(THE END)

Page 5 of 5
 Certificate in Accounting and Finance Stage Examinations
The Institute of 1 September 2014
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 Khanewal Limited (KL) has requested your firm to submit engagement letter for KL’s
statutory audit. The engagement partner has asked you to establish whether preconditions
for the audit of KL are present.

Required:
What matters would you consider in order to ensure that preconditions for the audit exist? (05)

Q.2 Your firm is the auditor of ABD Limited (ABDL). After the acquisition of majority
shareholding in HG Motors (Private) Limited (HGM), ABDL has decided to replace the
existing auditors of HGM in the next annual general meeting and has approached you for
appointment as HGM’s auditors for the next year.

Required:
(a) In the light of the Companies Ordinance, 1984 explain the procedures to be followed
and formalities to be complied with for appointment of your firm as the auditor of
HGM. Also explain the rights of the existing auditors in this situation. (08)

(b) Explain the responsibilities of your firm and the existing auditors in the above
situation under the Code of Ethics for Chartered Accountants. (05)

Q.3 Your firm is the auditor of Cell Phones (Private) Limited (CPPL), which operates a chain
of mobile phone retail outlets. About 25% of shareholding in CPPL is owned by Anwar
and his wife. Anwar is the Chief Executive of CPPL and also looks after the finance and
operations of the company. There are five other directors and each of them holds 15%
shares in CPPL.

The Internal Audit Function comprises of three senior officers who are graduates. Their
duties include checking of accounting records, physical stock taking, preparation of bank
reconciliations, reviewing payments and verification of fixed and current assets.

During the planning phase, Anwar stressed the need for early completion of audit, in order
to be able to submit the audited financial statements for seeking a long term finance. He
was of the view that internal audit working papers would be of enormous help in
performing and early completion of the audit.

Required:
(a) Identify and briefly describe the fraud risk factors in the above scenario. (06)
(b) State whether it would be advisable to use the internal audit working papers in the
above situation and give three distinct reasons to support your decision. (06)

Q.4 List any five substantive procedures for the verification of each of the following:
(i) Accrued expenses
(ii) Contingencies (10)
 Audit and Assurance Page 2 of 3

Q.5 Your audit team members have attended the physical inventory count of Sutlaj Limited.
Their observations are as follows:

(i) Stock count was supervised by the warehouse incharge who reports to the production
manager.
(ii) In view of the various ongoing projects, temporary staff had to be hired to conduct
the stock count.
(iii) Pre-numbered count sheets were used by the staff which contained columns for
inventory ledger balances, physical balances and excess/shortages.
(iv) The staff was instructed to ensure that no item of inventory was counted twice and
for this purpose they were asked to remain in constant contact with other staff.
(v) On completion, all the count sheets were signed by the store incharge and the head
of the administration department

Required:
Identify the weaknesses in the inventory count procedures and state the implications on the
physical count. (08)

Q.6 You are the training manager in a firm of chartered accountants. Prepare brief presentation
for newly inducted trainees, on the following:

(a) Control Environment and its elements (04)

(b) Walk through tests and why these are performed (03)
(c) Materiality and Performance Materiality. (05)

Q.7 The management of Pioneer Textile Limited (PTL) has provided you with management
representation that they have disclosed to you all known instances of non-compliances with
laws and regulations that are relevant to the preparation of the financial statements.

However, during the field work your team identified a payment of penalty of Rs. 2 million
to an environmental agency. PTL’s management claims that the disclosure of the related
non-compliance was inadvertently omitted.

Required:
Discuss the appropriateness of management representation and how would you deal with
the above situation. (05)

Q.8 Deehan Super Stores has launched a sales promotion scheme. Accordingly, the customers
who purchase a loyalty card gain reward points on every purchase. The points may be
redeemed by adjusting the value of the available points in any subsequent purchase.

Required:
Draw a flow chart showing the payment process including point accumulation and point
redemption. (09)

Q.9 Classify the following controls as preventive, detective, or corrective controls. Give brief
reasons to justify your answers.

(i) Training on applicable policies, department policy/ procedures

(ii) Batch totals
(iii) Segregation of duties
(iv) Contingency planning
(v) System logs
(vi) System backup (06)
 Audit and Assurance Page 3 of 3

Q.10 (a) Briefly describe the term ‘Integrity’ in accordance with the Code of Ethics for
Chartered Accountants. (02)

(b) Briefly describe ‘advocacy threat’ and give an example thereof. (02)

(c) Briefly state the difference between ‘actual independence’ and ‘perceived
independence’. (03)

(d) The principle of confidentiality imposes an obligation on chartered accountants to

refrain from disclosing confidential information. State three key exceptions to the
above rule. (02)

(e) Briefly describe the term ‘systematic sampling’. (01)

(f) State the conditions under which it may be appropriate to send negative
confirmations. (02)

(g) State any three procedures which are generally adopted by the auditor to obtain
evidence in review engagement. (02)

(h) State the auditor’s responsibility with respect to events between the end of the
reporting period and the date of the auditor’s report. (02)

(i) Give any three audit procedures to ensure completeness of list of related parties
provided by the management. (02)

(j) State any two factors which the auditor should consider to ensure reliability of audit
evidence. (02)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.1 In order to establish whether the preconditions for an audit are present, I will:

(i) determine whether the financial reporting framework to be applied in the

preparation of financial statements is acceptable;
(ii) obtain the agreement of management that it acknowledges and understands its
responsibility:
 for the preparation of the financial statements in accordance with the
applicable financial reporting framework.
 for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
 to provide us with all relevant and requested information and unrestricted
access to all personnel.

Ans.2 (a) Procedures to be followed and formalities to be complied with for removal of
existing auditors and appointment of new auditors:

 ABDL shall give a notice at least 14 days before the annual general meeting to
the company, for a resolution for appointment of your firm as an auditor at a
Company’s annual general meeting.
 HGM shall forthwith send a copy of such notice to the retiring auditor and shall
also give notice thereof to its members not less than seven days before the date
fixed for the general meeting
 HGM shall, within fourteen days from the date of appointment of our firm, send
to the registrar intimation thereof, together with our consent in writing.
 HGM shall, within fourteen days from the date of removal of the existing
auditor, send intimation thereof to the registrar.

Rights of the existing auditors:

 Where a notice is given of such a resolution and the retiring auditor makes with
respect thereto a representation in writing to the company not exceeding a
reasonable length and requests its communication to the members of the
company, the company shall:
— in any notice of the resolution given to members of the company, state the
fact of the representation having been made; and
— send a copy of the representation to every member of the company to whom
notice of the meeting is sent.
and if a copy of the representation is not sent as aforesaid because it was received
too lateor because of the company’s default, the auditor may, without prejudice to
his right to be heard in person, require that the representation shall be read out at the
meeting:

(b) Responsibilities of our firm and of the existing auditors:

Our firm will communicate with the existing auditors to establish if there are any
matters that it should be aware of when deciding whether or not to accept the
appointment. The following points should be noted in connection such
communication:

 HGM permission is required for any such communication. If HGM refuses to

give its permission, the appointment as auditor should not be accepted.

Page 1 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

 If HGM does not give the existing auditor the permission to reply to any
relevant questions of our firm, the appointment as auditor should not be
accepted.
 If existing auditor provides the required information, our firm should assess all
the available information and take a decision about whether or not to accept the
audit engagement.
 If the existing auditor does not provide any information relevant to the
appointment, we may accept or reject the engagement based on other available
knowledge.
 Even if the existing auditor provides professional reasons to suggest that we
should not accept the audit, the final decision in this regard shall be based on
our professional judgment.

Ans.3 (a) Fraud Risk Factors:

Rapid Changes in Technology:

Products like mobile phones are likely to become obsolete very quickly, as more
advanced products come on to the market. The company faces a threat due to rapid
changes in technology; therefore the management may be inclined to manipulate the
accounting records.

Lack of Segregation of Duties/ Dominance of management by a single person:

As Anwar is the Chief Executive and is also responsible for finance and operations
of the company, this gives him a personal motivation to misstate figures to show
improved performance.

Long Term Loan:

As the company has applied for long term loan, it may be inclined to manipulate the
figure to show better financial position to the bank.

Demand for early completion of audit:

The demand by Anwar for early completion of audit creates undue suspicion
because such pressures are sometime applied to distract the auditor from his
responsibilities.

(b) Whether it would be advisable to use the internal audit working papers in the
above situation and give three distinct reasons to support your decision:

It is not advisable to use the work of internal audit for external audit purposes due to
following reasons:
 Status of the internal audit function within the entity
Administratively all the internal audit staff are under the influence of Anwar
and hence their independence is impaired.

 Conflicting responsibilities:
The internal audit staff’s responsibilities for preparing bank reconciliation
statement is in conflict with its responsibility as a member of the internal audit
function.
 Qualifications of internal audit staff:
All the internal audit personnel are graduates and do not have required
competence about various aspects of the internal audit function.

Page 2 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.4 The audit approach to gathering evidence on contingencies and commitments is as

follows:

(i) Accrued expenses:

 Obtain or prepare a listing of accrued expenses as at the end of the reporting
period. Check the calculations and additions for arithmetical accuracy.
 Check the amounts in the listing against the balances in the relevant main
ledger expense accounts and ensure that the amounts are the same.
 Verify the invoices received or payments made after the year end and ensure
that the amount accrued appears reasonable in relation to this evidence.
 Compare the list of accrued expenses with the list that was prepared at the
same date in the previous financial year, and enquire about items not listed in
the current year that were in the list in the previous year.
 Review the list of accruals for completeness, based on the auditor’s knowledge
of the business.
 Relate items on the list of accruals to other audit areas, such as the bank
confirmation letter (which might provide details of unpaid/accrued bank
charges).
 Perform analytical procedures on accrued expenses. For example, the auditor
might measure the ratio of accrued payroll expenses to total payroll costs for
the year, and compare this with the similar ratio in previous years. Significant
differences should be investigated.

(ii) Contingencies:
 Ascertain the approach taken by the client’s management for identifying
contingencies.
 Review the minutes of board meetings (where such matters are likely to be
discussed).
 Review relevant material related to the industry as a whole such as financial
statements of major companies in the industry to identify possible industry-
wide contingencies.
 Review the client’s correspondence with lawyers.
 Review the invoices for legal services to identify undisclosed contingencies
and additional information about contingencies
 Consider direct confirmation from the company’s lawyers and legal advisors.
 Consider whether expert advice may be required from outside sources other
than lawyers.
 Ensure that provisions has been made in case the relevant condition as
specified in IFRS are met.

Page 3 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.5 Weakness Implications

The warehouse incharge is supervising The warehouse in charge is himself
the inventory count procedure. responsible for the inventory, therefore he
lacks independence.
Temporary staff involved in the Temporary staff may not be aware of the
physical inventory count. nature of inventory, and may not have
any interest in detecting or reporting
discrepancies.
Lack of precise instructions to the The staff has been instructed to remain in
counting team. constant contact with each other to avoid
double counting. This depicts lack of
precise instructions and it increases the
risk of mistakes in counting like missing
out items or double counting.
Inventory is not tagged when it is This gives rise to a risk that items of
counted. inventory will be counted twice, and
possibility that some items may not be
counted at all.
Count sheets not signed by the staff In this case, it becomes difficult to identify
carrying out the count. the staff who has carried out the count,
therefore any discrepancy found cannot
be investigated properly .
Count sheets stated the quantity of Count teams will focus on finding the
items expected to be found in the number of items mentioned on the count
warehouse. sheets. This could more likely result in
undercounting of inventory.

Ans.6 (a) Control Environment and its elements

The ‘control environment’ is often referred to as the general ‘attitude’ to internal
control of management and employees in the organization.

The elements of control environment includes the following:

 Communication and enforcement of integrity and ethical values

 Commitment to competence
 Participation of those charged with governance.
 Management’s philosophy and operating style
 Organizational structure
 Assignment of authority and responsibility
 Human resource policies and practices

(b) Walk through tests:

Auditor is required to gain an understanding of the various elements of the internal
control system operating within an entity.

Once this understanding has been gained, the auditor should confirm that his
understanding is correct by performing ‘walk-through’ tests on each major
transaction type (for example, revenue, purchases and payroll) .

Page 4 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Walk-through testing involves the auditor selecting a small sample of transactions

and following them through the various stages in their processing in order to
establish whether his understanding of the process is correct.

(c) Materiality:
Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of financial statements. The auditor
keeping in view the concept of materiality gives his opinion i.e. whether the
financial statements present fairly in all material respects the financial position and
performance of the entity.

Performance Materiality:
Performance materiality means the amount or amounts set by the auditor at less
than materiality for the financial statements as a whole to reduce to an
appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a
whole.

If applicable, performance materiality also refers to the amount or amounts set by

the auditor at less than the materiality level or levels for particular classes of
transactions, account balances or disclosures.

Performance materiality recognizes the fact that errors/omissions detected in a

particular area may not breach the overall materiality level but when all the
errors/omissions in all the areas is combined or added together, the overall
materiality could be breached.

Ans.7 The management representation regarding disclosure of non compliance with law does
not remain appropriate, as it contradicts with the audit evidence obtained.

To address the contradiction, we should:

 consider whether his risk assessment of that area is still appropriate.
 consider whether additional audit procedures are needed.
 consider the integrity of management, document those concerns and consider the
possible course of action.

Page 5 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.8

Start

Items entered.
Bill processed

Yes Does customer Yes Does customer Yes

Is customer a loyalty
want to redeem has enough
card holder? the points? reward points?

No No
No Updation of points
to the loyalty card

Payment of bill Payment of bill through

partly through redemption of points
Payment of bill redemption and
through cash or partly through cash
credit card
Updating the loyalty
points

Printing of bill

Session end Yes End

No
Next Customer

Page 6 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.9 (i) Training on applicable policies, department policy/ procedures:

It is a preventive controls, as the individuals are trained to perform their duties as
per the applicable policies and procedures that are in place.

(ii) Batch totals:

It is a detective control as program will report any discrepancy between the
manually counted batch total and its own batch total, as an error report.

(iii) Segregation of duties:

It is a preventive control as it involves assigning different people the responsibilities
of authorising and recording transactions and maintaining the custody of assets.
This reduces the likelihood of an employee being able to both carry out and conceal
errors or fraud.

(iv) Contingency planning:

It is a corrective control as it involves the corrective measures to be adopted in case
of any mishap.

(v) System logs:

It is a detective control as this generates an audit trail that can be used to understand
the activity of the system and to diagnose problems.

(vi) System backup:

It is a corrective control as it will involve any retrieval measures in case of any
damage to the original data.

Ans.10 (a) Integrity:

Members should be straightforward and honest in all professional and business
relationships. Integrity implies not just honesty but also fair dealing and
truthfulness.

A chartered accountant should not be associated with reports, returns,

communications or other information which according to him is materially false or
misleading.

(b) Advocacy threat:

Advocacy threat occur when members promote a position or opinion on behalf of a
client to the point that subsequent objectivity may be compromised.

Example:
Acting as an advocate for an assurance client in litigation or dispute with third
parties.

(c) Actual Independence:

Actual independence means that the auditor should not be influenced by anything
which results in compromising his professional judgement while expressing an
opinion.

Perceived independence:
The auditor must be seen to be independent, i.e. the auditor should avoid facts and
circumstances due to which a third party may conclude that his integrity, objectivity
or professional skepticism had been compromised.

Page 7 of 8
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

(d) The following are circumstances where chartered accountants are or may be
required to disclose confidential information:

 Disclosure is permitted by law and is authorized by the client.

 Disclosure is required by law.
 There is a professional duty or right to disclose, when not prohibited by law:

(e) Systematic sampling:

It is a method of sampling whereby a random starting point is chosen from the
population and then items are selected with a standard gap between them (for
example, every 10th item).

(f) Conditions required to be met for sending external confirmations:

It may be appropriate to send negative confirmation request if all of the following
conditions are met:
 The risk of material misstatement is low and controls have been tested.
 The population comprises of large number of small account balances or
transactions.
 A very low exception rate is expected.
 There is no specific reason which would cause the respondent to ignore the
confirmation request.

(g) Procedures of review engagement:

The procedures for the review of financial statements will usually include:
 Inquiry
 analytical procedures
 Agree and reconcile Interim Financial Information with the accounting
records.

(h) Auditor’s responsibility with respect to events between the end of the reporting
period and the date of the auditor’s report:
The auditor is required to obtain sufficient appropriate evidence that all subsequent
events that require adjustment or disclosure in the financial statements:
 have been identified, and
 are suitably reported in the financial statements.

(i) Audit procedures to ensure completeness of related parties

The procedures to ensure completeness of related parties will generally include:
 review of prior year working papers
 review of company’s procedures for identification of related parties
 review shareholder’s records

(j) The auditor should consider the source of audit evidence, effectiveness of related
controls, form of audit evidence etc.

(THE END)

Page 8 of 8
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Autumn 2014

General

The overall performance was much better as compared to the previous attempt as 42% of
the students scored passing marks.

Question-wise performance is discussed below:

Question 1

This question was generally well answered with candidates correctly stating the
preconditions for an audit such as the need for an acceptable financial reporting
framework and acknowledgement of management’s responsibilities for preparation of the
financial statement, internal controls and access to information and personnel. However,
a number of candidates failed to mention that obtaining an agreement from management
with respect to the premise of an audit was also necessary. Further, some students mis-
understood the term completely and started focusing on the capability of an auditor and
the capacity of the audit firm.

Question 2

According to the scenario given in this question, a firm has been approached for
appointment as auditor of a company by replacing the existing auditor, during the
forthcoming Annual General Meeting.

In part (a) most of the students explained the procedure to be followed correctly except
the requirement to intimate the registrar about the change. Some of the students
mentioned about informing and obtaining permission from ICAP which was incorrect.

In part (b) most of the candidates restricted their response only to seeking professional
clearance. Many students did not mention the responsibilities of the previous auditors to
respond to new auditor’s request for NOC and the new auditor’s responsibilities if a
response is not received from the previous auditors or a negative response is received.
Further, few students also discussed the capabilities of the new firm to take up the audit
and the eligibility of the auditors who can accept the audit of a listed company, which
were not relevant.

Page 1 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2014

Question 3(a)

This question required identification of fraud risk factors in the given scenario. Most of
the candidates rightly outlined the issues like lack of segregation of duties, the role of
CEO (Anwar) and the financing need and/or the early completion of audit as amongst the
fraud risk factors. However, most of them ignored the fact that due to rapid change in
technology, inventory may become obsolete which also becomes a fraud risk factor.

It was also noted in a number of instances that even though the students were able to
identify the relevant fraud risk factors, they did not properly explain why there was a risk
or what affect the risk had. For example, some candidates identified the demand by
Anwar for early completion of the audit as a risk; however, they did not explain that there
was a risk because requirement for early completion could limit the ability of the auditor
to carry out a thorough audit and may distract him from his responsibilities.

Question 3(b)

This part required candidates to assess whether it was appropriate to use working papers
of the internal audit. Most of the candidates rightly recommended not to rely on the
working papers of the internal audit but could only identify the lack of appropriate
qualification of internal audit personnel as the reason. The issue of independence and
conflicting responsibilities was highlighted by a limited number of students only.

Question 4

It was a simple question with the requirement to list five substantive procedures for
verification of accrued expenses and contingencies. The part related to accrued expenses
was fairly attempted by majority of the candidates. However, some students did not
mention important steps like subsequent payment and analytical review etc.

In case of contingencies, the majority missed important points like lawyers’ confirmation
and compliance with IFRSs. Many candidates stressed on checking the information made
available by the client but did not mention steps to ensure completeness.

Question 5

It was a simple question requiring identification of weaknesses in inventory count

procedure in the given scenario and the implications of such weaknesses on the inventory
count. This question was well attempted as the candidates managed to identify the related
weaknesses. However, a number of students also explained how such weaknesses may be
improved instead of explaining the implications of the identified weaknesses. Some of
the students unnecessarily discussed stocks held by third party and obsolete stocks
whereas in scenario based questions, unless the situation explicitly demands otherwise,
one should restrict to matters related to the given scenario only.

Page 2 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2014
Question 6

The question consisted of three parts. The requirement and the candidates performance in
each part are discussed below:

(a) Control Environment and its elements.

This part was well attempted. Majority of the students explained Control
Environment correctly although some of them wrote ambiguous/incomplete
statements such as “Control Environment is the Environment in which controls
operate”.

Only few candidates were able to mention all the elements of Control Environment
but a vast majority could mention only 3 or 4 of them. Some students used
guesswork and included anything they thought fit like honesty, integrity etc.

(b) Walk through tests and why they are performed.

Walk through tests are performed to confirm the auditors understanding of the
internal controls. Many students confused these with tests of controls and stated that
walk through tests are performed to test the effectiveness of controls. Many students
mentioned that these are carried out to determine whether detailed substantive tests
are to be performed or not.

(c) Materiality and Performance Materiality.

The overall performance was good as generally the candidates seemed to understand
the two concepts and also the difference between them.

Question 7

According to the situation given in the question, it was determined during the audit that
information provided by the client as part of management representation was inaccurate
as an incidence of non-compliance with law had not been reported.

The performance was average as many candidates jumped to the conclusion that audit
opinion needs to be modified, without analyzing the situation. Further, the following
important steps were mostly missing.

 Consider whether risk assessment in the concerned area is still appropriate.

 Consider the integrity of management, document those concerns and consider the
possible course of action.

Question 8

The requirement was to draw a flow chart relating to a loyalty card scheme, showing
payment process, point accumulation and point redemption by customers. Preparation of
flow charts requires a lot of practice which seemed to be lacking in most cases.

Page 3 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2014
Question 9

In this question, six controls were identified and the candidates were required to classify
them as preventive, detective or corrective controls and to give brief reasons to support
their classification.

Generally this question was well attempted. However, in some cases candidates managed
to identify the correct control but could not explain their reasons clearly. Some candidates
gave conflicting and ambiguous answers; for example, some of them correctly identified
training as a preventive control; however, in the explanation they stated that trained
persons are able to “detect” and “correct” errors.

Question 10

This question consisted of 10 short questions of 1, 2 and 3 marks each. The question was
generally well answered. However, some candidates did not read the requirements of
each part carefully and produced lengthy explanations where the requirement was to state
the points only. The performance in each part is discussed below:

(a) Generally done well.

(b) Advocacy threat was described correctly but examples were often incorrect. Many
students gave examples of purchase of shares which was not relevant in this case.

(c) The concept of actual independence and perceived independence was

appropriately distinguished by majority of the candidates. However, a significant
number of students were totally confused as regards perceived independence and
stated that actual independence represented “true independence” whereas perceived
independence meant that the auditor was not independent and only appeared to be
independent.

(d) In outlining the situation where confidential information may be disclosed, many
candidates did not seem to distinguish between ‘required by the law’ and
‘permitted by the law’. Some candidates also gave examples of such situations
which was not required.

(e) While describing systematic sampling many candidates correctly stated that the
items are selected after a standard gap but did not state how the starting point is
selected.

(f) Most of the candidates mentioned the conditions for sending negative
confirmations but did not mention an important point that negative confirmation
may be used if all the said conditions are met.

(g) This question regarding obtaining of evidence in case of a review assignment was
generally well answered. However, some candidates confused review assignment
with “consultancy” engagements. Many students did not mention a key step i.e.
agreeing of interim financial information with accounting records.

Page 4 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2014

(h) Many students seemed confused and discussed auditors responsibility for events
subsequent to publishing of financial statement or after signing of the report instead
of the responsibility for the subsequent events after the period end but before the
date of auditors report.

Many students mentioned that auditor is responsible to ensure that all subsequent
events have been duly incorporated in the financial statements whereas such
responsibility lies with the management. The auditor’s responsibility is only to
obtain audit evidence to support the above view.

(i) Candidates seemed to have a good understanding of related party procedures.

However, some of them stated procedures to verify the listed related parties rather
than procedure for ensuring the completeness of the related information.

(j) This part was well answered by most of the candidates.

(THE END)

Page 5 of 5
 Certificate in Accounting and Finance Stage Examinations
The Institute of 2 March 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 (a) The auditor is required to identify and assess the risk of material misstatement at both
the financial statement and assertion levels.

State what is meant by risk at financial statement level and assertion level. Give one
example of risk at each level. (03)

(b) The audit engagement letter specifies objective and scope of audit, responsibilities of
auditor and management, applicable financial reporting framework and form and
contents of audit report. State any four additional matters that may be included in the
engagement letter. (04)

(c) The external auditors are normally appointed by the shareholders at the annual
general meeting (AGM) of the company. State the exceptions to this rule. (03)

(d) Describe deployment and opportunity flowcharts. (04)

(e) Identify the matters that need to be considered by the auditor at the time of designing
and performing substantive analytical procedures. (04)

(f) State the matters that auditor needs to consider where the written representation
provided by the management is inconsistent with other audit evidence. (03)

(g) What are the matters which the auditor should consider while designing an audit
sample, determining its size and selecting the sampling units? (03)

Q.2 Comment on each of the following situations with reference to the appointment of external
auditors in accordance with the requirements of the Companies Ordinance, 1984.

(a) ABC Limited and DEF Limited are associated companies on account of common
directorship. Salman and Company, Chartered Accountants (SCC) have received an
offer for appointment as the auditor in ABC. Salman, a partner in SCC is the spouse of
Naveen, who is an employee in DEF. (02)

(b) All the partners of Kashif Associates are Cost and Management Accountants. The
firm has received an offer for appointment as the auditor of Nihal (Private) Limited
(NPL). NPL has a paid-up capital of Rs. 500,000 and 30% of its shares are held by
Siyal Limited which is a public company. (03)

Q.3 While reviewing the final audit file of XYZ Limited for the year ended 30 June 2014, you
have identified that certain amendments were made in the final audit file after the date of the
auditor’s report.

Required:
Comment on the above situation in the light of International Standards on Auditing. (07)
 Audit and Assurance Page 2 of 3

Q.4 Mineral Limited (ML) has incorporated a liability for gratuity payable to its employees on
the basis of actuarial valuation carried out by Professionals Limited (PL). As the audit
partner of ML you are not satisfied with the valuation report prepared by PL, and have
decided to appoint Experts Limited (EL) to carry out the valuation exercise again.

Required:
(a) State the matters that you would consider regarding:
(i) The competence, capabilities and objectivity of EL. (03)
(ii) Evaluation of the adequacy of EL’s work. (03)

(b) Briefly discuss the course of action in case you are not satisfied with the work
performed by EL. (03)

Q.5 The audit of Sehat Pharmaceutical Limited (SPL) is in progress. Based on the previous
experience with the client and the initial tests of control, the auditor has assessed a low risk
of material mis-statement in the area of debtors.

The debtors circularization summary depicts the following information:

Balance Confirmations Amount Nature of Confirmations

Customer No. of
outstanding sent covered confirmations received
segment customers
---------------------------------- Rs. in ‘000 ----------------------------------
Distributors 12 75,200 8 70,500 Positive 7
Wholesalers 105 52,500 30 12,500 Positive 28
Hospitals
250 31,200 75 20,300 Negative 4
and clinics
Retailers 130 12,500 50 7,000 Negative 12

Analysis of confirmations received is as follows:

 3 out of 7 confirmations received from distributors did not agree with the amount
outstanding in SPL’s ledger.
 One of the distributors, Saleem Distributors (Private) Limited (SDPL) has gone into
winding up. The balance receivable from SDPL is outstanding since last one year.
 Replies received from the hospitals did not agree with the balance outstanding in
SPL’s records. However, the differences were reconciled by the audit staff.
 All the 12 confirmations received from the retailers showed disagreement with the
records of SPL. However, only 2 could be reconciled.

Required:
(a) Evaluate the decision regarding sending of negative confirmations. (04)
(b) Determine the course of action the auditor should consider in case of balances agreed,
balances not agreed and replies not received. (05)
(c) State the procedures that need to be performed in case of amount due from SDPL. (03)

Q.6 You are the audit manager on the audit of a listed company, Kamil Limited (KL). Prior to
completion of audit, you came across a prospectus issued by Neelum Limited (NL)
according to which a director of KL is the chief executive of NL. However, the name of NL
was not included in the list of related parties provided by KL. On being confronted the
management has advised that the name was omitted inadvertently as the appointment took
place just two months prior to the year end.

Required:
Discuss your course of action in the above situation. (07)
 Audit and Assurance Page 3 of 3

Q.7 Discuss the categories of threats that may be involved in each of the following independent
situations and advise the partners of the concerned firm with regard to the possible course of
action that may be followed in each situation:

(a) Ahmed has recently joined a firm of Chartered Accountants. The firm intends to
depute him on the audit of Masoom (Private) Limited (MPL). Prior to joining the
firm, Ahmed had been providing accounting and taxation services to MPL for many
years, in the capacity of a consultant. (04)

(b) It has been discovered that father of one of the trainees posted on the audit of Chalak
Limited (CL), has a financial interest in CL. (04)

(c) Hoshiyar Limited (HL), an audit client of your firm has recently advertised certain
vacancies in its accounts department. The said positions have been applied for by
number of individuals including two staff members who are posted on the audit of HL. (04)

Q.8 You have been assigned to plan the test of controls in respect of receiving of goods and
invoices from suppliers of Bhurban Limited. In this regard, you are required to identify the
following:

(a) The related risks (03)

(b) Controls that you expect to see to address the above risks (04)
(c) Audit procedures that you need to perform to test the controls (03)

Q.9 While reviewing the audit files of four different clients you confronted the following
situations:

(i) Due to tough competition in the market, the company has been unable to increase the
prices of its products since last 5 years.
(ii) Addition to intangible assets, amounting to Rs. 500 million include research cost of
Rs. 10 million which is duly supported by invoices from suppliers.
(iii) During the last three years, the Chief Executive and higher management has been
earning handsome bonuses, based on the profitability of the company.
(iv) Physical stock take on 31 December 2014 included goods sold but not despatched
amounting to Rs. 52 million. The delivering of goods was stopped on the request of a
distributor. Upto 20 January 2015, the distributor has taken delivery of goods
amounting to Rs. 2 million.

Required:
(a) In each of the above situations, identify with justification whether it represents a risk
of fraud. (06)
(b) Describe what actions are to be taken by an auditor on identifying a fraud risk factor. (04)

Q.10 Controls over data transmission help to ensure that transmitted data is complete, secure and
unaltered.

Required:
State any five controls over data transmission which help to ensure that the data is secure
and unaltered. (04)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

Ans.1 (a) Financial Statement Level:

Risks at financial statement level are those which are pervasive to the financial statements as a
whole and which potentially affect many assertions.

Example: If management has a tendency to override internal controls it would affect all areas of
the accounting system.

Assertion Level:
Risk at assertion level are those which relate to specific objectives of the financial statements.

Example: All liabilities have not been recorded and all recorded assets exist.

(b) Additional matters that can be included in the engagement letter:

 Additional details on the scope of the audit, such as reference to applicable legislation,
regulations, ISAs, and ethical pronouncements.
 The fact that because of the inherent limitations of an audit, and the inherent limitations of
the internal control, there is an unavoidable risk that some material misstatements may not
be detected even though the audit was properly planned and performed in accordance with
ISAs.
 Arrangements regarding the planning and performance of the audit, including the
composition of the audit team.
 The expectation that management will provide written representations.

(c) Exceptions:
The Directors are allowed to:

 appoint the first auditors of a newly formed company.

 fill a casual vacancy; for example where the current auditors is no longer able to act.

The Commission may appoint a person as an auditor to fill the casual vacancy, if neither the
shareholders nor the directors have appointed the auditors.

(d) Deployment flowchart:

A deployment flowchart shows the actual process flow and identifies the people or groups
involved in each step. It also shows where the people or groups fit into the process sequence and
how they relate to one another throughout the process.

Opportunity flowchart:
The opportunity flowchart differentiates between:

 Process activities that add value which are essential for producing the required product or
service.
 Process activities that add cost only and are not essential for producing the required product
or service.

(e) When designing and performing substantive analytical procedures the auditor should:

 determine the suitability of particular substantive analytical procedures for given assertions –
i.e. how effective they will be in detecting a particular type of material misstatement.
 develop an expectation of recorded amounts or ratios and evaluate whether that expectation
is sufficiently precise to identify a misstatement.
 evaluate the reliability of the data from which the expectation has been developed.
 determine what level of difference from expected amounts is acceptable without further
investigation.

Page 1 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

(f) If a representation by management is contradicted by other audit evidence, the auditor should:

 consider whether his risk assessment of that area is still appropriate.

 consider whether additional audit procedures* are needed.

If the auditor has concerns about the integrity of management, document those concerns and
consider withdrawing from the audit.

(g)  When designing an audit sample, the auditor shall consider the purpose of the audit
procedure and the characteristics of the population from which the sample will be drawn.
 The sample size should be sufficient to reduce sampling risk to an acceptably low level.
 The auditor shall select items for the sample in such a way that each sampling unit in the
population has an equal chance of selection.

Ans.2 (a) Salman and Company is eligible to be appointed as the auditor of ABC Limited because, Naveen
is in the employment of DEF which is an associated company and such employment has not
relevance in the context of appointment of an auditor.

(b) Kashif Associates can be appointed as the auditor of NPL as there is no qualification criteria
mentioned for private companies having paid up capital of less than Rs. 3 million.

Holding of 30% shares of NPL by a public company is of no relevance.

Ans.3 (i) After the assembly of the final audit file has been completed, the auditor must not delete or
discard audit documentation before the end of its retention period.

(ii) However the changes to document can be made if:

 the changes are deemed necessary.
 there are exceptional circumstances in which the auditor has to perform new or additional
procedures or reaches new conclusions.

(iii) If it appears that it was necessary to modify existing or add new documentation after this stage,
the auditor is required to document:
 when and by whom the modifications were made.
 the reasons for making them.

(iv) If exceptional circumstances arise after the date of the audit report; the auditor is required to
document:
 the circumstances
 the new or additional procedures performed, audit evidence obtained, conclusions reached
and their effect on the auditor’s report, and
 when and by whom the resulting changes to audit documentation were made and who
reviewed them.

Ans.4 (a) (i) Matters that should be considered by the auditor in determining the competence,
capabilities and objectivity of EL
The competence, capabilities and objectivity of an expert may be assessed in one or more of
the following ways:
 Personal experience with previous work of that expert.
 Discussions with that expert.
 Discussions with other auditors or others who are familiar with that expert’s work.
 Knowledge of that expert’s qualifications, membership of a professional body or
industry association, license to practice, or other forms of external recognition.
 Published papers or books written by that expert.

Page 2 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

(ii) While evaluating the adequacy of the EL’s work, the following would be considered:
 Reasonableness of the EL’s conclusions.
 Consistency of such conclusions with other audit evidence.
 Reasonableness of significant assumptions and methods used.
 Relevance, completeness and accuracy of source data.

(b) If the auditor decides that the work of the expert is not adequate he is required to:
 agree additional work with the expert, or
 perform other appropriate additional audit procedures.
 hire another expert

Ans.5 (a) (i) Hospitals and clinics:

The decision to send negative confirmation was appropriate as all the conditions for
sending negative confirmation i.e. Large number of small account balances, low risk of
material misstatement, low exception rate as only four customers have disagreed with the
balances due and that have been also reconciled and there was no knowledge of
circumstances that would cause recipient to disregard the confirmation request.

(ii) Retailers:
Results of confirmations depict high risk of material misstatement and high exception rate.
However, since the decision to send negative confirmation was taken on the basis of initial
assessment, the decision under the circumstances seems correct.

(b) Balance agreed: No further audit work is required.

Balance not agreed: In this case:

 The client should be asked to review the replies and reconcile the balances in its records
with the balances confirmed by the customer.
 The reconciliation prepared by the client should be checked.
— The reconciling items depicting errors in the client’s records should be investigated and
corrected.
— The client should be asked to resolve the difference in case the reconciling items
depicting errors on part of the customers.
No reply received: In these cases, alternative procedures should be performed (e.g. subsequent
payments and checking of invoices/ dispatch notes in order to obtain evidence to confirm the
customer’s balances.

(c) From the winding up event it appears that the amount receivable from SDPL is irrecoverable.
Therefore, the auditor needs to ensure that the amount of irrecoverable receivables are written off
or is duly provided for.

The following substantive procedures should also be performed:

 Review any correspondence of the SPL with the liquidator/management of SDPL (if any),
relating to recovery of the amount due.
 Review the calculation of amount of provision/write off and basis thereof.

Ans.6 In the scenario, a previously undisclosed related party has been identified. I shall:

 communicate the relevant information to the audit team.

 assess as to why the entity’s system failed to identify or disclose the related party relationship.
 request management to identify all transactions with NL and disclose them accordingly.
 perform appropriate substantive procedures on the newly identified related parties or significant
related party transactions.
 assess the reasonableness of the management’s explanation and;
 evaluate the implications on the audit, if the non-disclosure appears intentional.
Page 3 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

Ans.7 (a) The previous provision of accounting and taxation services to MPL and long association of
Ahmed with MPL will create self-review and familiarity threat.

Significance of threats needs to be evaluated and if threats are other then clearly insignificant,
safeguards need to be applied to reduce the threats to an acceptable level.

In case Ahmed is included in the Audit engagement the related safeguards may include:

 involving an additional chartered accountant to review the work done by Ahmed or

otherwise advise as necessary.
 independent internal quality reviews.

If the threats are significant, Ahmed should not be part of the assurance engagement team.

(b) In the given situation involvement of such trainees in the audit of CL may result in a self-interest
threat.

The materiality and significance of the financial interest, needs to be evaluated. If the financial
interest is immaterial then the audit trainee may be allowed to work on that client, otherwise only
safeguard available is to withdraw the trainee from this assignment.

(c) A self interest threat is created when a member of the assurance team participates in the
assurance engagement while knowing, or having reason to believe, that he may join the assurance
client in future.

The threat created can be reduced to an acceptable level by the application of the following
safeguards:

 Ask the individual to notify the firm when entering serious employment negotiations with
the assurance client;
 Remove of the individual from the assurance engagement;
 Perform an independent review of any significant judgments made by that individual while
on engagement.

Ans.8 (a) Risks:

Risks related to receiving of goods and invoice from suppliers are as follows:

 Goods may be accepted from a supplier without having been ordered.

 The company may fail to claim discounts from suppliers despite being due.
 Supplier may raise invoices for goods that have not actually been received/purchased.
 Goods received from suppliers are of inferior quality.

(b) Related controls

Suitable controls may be as follows:

 A copy of all delivery notes should be retained, with a signature of the member of staff who
took receipt and checked the goods.
 Goods received notes should be produced for each delivery, from the delivery note or after a
physical count of the items received.
 A member of the accounts staff or purchasing staff must be responsible for checking
discounts allowed by suppliers.
 There should be a segregation of duties between the individuals who take delivery of goods,
those who place the orders and those who record the purchase invoices in the accounting
system.
 All purchase invoices should be checked against a purchase order and a goods received note.

Page 4 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2015

(c) Tests of control

 Ensure that goods received notes, purchase orders and purchase invoices are matched with
each other.
 Confirm from documentary evidence that discounts are claimed from suppliers when
available.
 Check that the segregation of duties does exist.

Ans.9 (a) (i) Inability to increase the prices of its products since last 5 years
The Company’s profitability is under threat due to increased competition therefore the
management may be inclined to manipulate the accounting records.

(ii) Research costs wrongly capitalized

It is an error and is not indicative of fraud, as research costs is only 2% of the total amount
capitalized and the underlying records were duly supported by invoices from the suppliers.

(iii) Bonuses linked with profitability

It is a fraud risk factor as it is evident that management is receiving profit related bonuses,
therefore the management may be inclined to manipulate the accounting records.

(iv) Goods sold but not dispatched

It is a fraud risk factor as it seems that management has tried to inflate the sales in order to
deceive financial statement users, an apparent intention behind this action can be to
overstate the profits of the company.

(b) Course of action:

In response to assessed risk of material misstatement due to fraud, the auditor shall:

 emphasize to the Audit team the need to maintain an attitude of professional skepticism.
 assign more experienced staff or increased supervisor of staff.
 To the extent not already done, the auditor shall obtain an understanding of the entity’s
related controls, relevant to such risks.
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may be
indicative of fraudulent financial reporting resulting from management’s effort to manage
earnings; and
 incorporate an element of unpredictability in the selection of the nature, timing and extent of
audit procedures.
 design and perform further audit procedures whose nature, timing and extent of audit
procedures are responsive to the assessed risk of material misstatements.

Ans.10 Controls over data transmission include:

 firewalls to prevent intrusion into the programs that send and receive data.
 restricting access to source data that is transmitted.
 only using secured Wi-Fi with password protection.
 using check sums and check digits to ensure that data received is intact.
 data encryption.

(THE END)

Page 5 of 5
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Spring 2015

General:

The overall performance in this paper was average. Candidates displayed reasonable
knowledge of areas where they were required to state meanings and facts, however, when
they were required to analyze information or identify risks and the related controls, they
displayed a lack of understanding.

Question-wise comments are as under:

Question 1(a)

Candidates were required to state the meaning of risk at the financial statement and
assertion level with an example of each. Many candidates mentioned correctly that the
financial statement level risks are those which are pervasive to the financial statements as
a whole. However, many students stated that such risks affect many “accounts” instead of
many “assertions”.

As regards assertion level risks, the performance was poor as most of the candidates
could not explain that these risks relate to specific objectives of the financial statements.

Question 1(b)

This part was generally well attempted as most of the candidates displayed good
knowledge of matters contained in engagement letters.

Question 1(c)

This part was also attempted well and candidates possessed good understanding of
situations where auditors are appointed by persons other than the company’s
shareholders.

Question 1(d)

Candidates were asked to describe deployment and opportunity flowcharts. This proved
quite difficult. Many candidates did not attempt this part at all and others did not show
proper understanding of those flowcharts. The students are advised to seek guidance in
this regard from ICAP’s suggested answers.

Page 1 of 6
 Examiners’ Comments on Audit and Assurance – Spring 2015

Question 1(e)

Candidates displayed a lack of understanding of matters to be considered when designing

and performing substantive analytical procedures as many of them gave irrelevant details.
The students are advised to seek guidance in this regard from ICAP’s suggested answer.

Question 1(f)

The performance in this part was good and generally the candidates correctly identified
the auditor’s reaction to a situation where written representation of the management is
inconsistent with other audit evidence.

Question 1(g)

Candidates did not display appropriate knowledge of considerations regarding sample

design, size and selection. Most of the candidates mentioned just one point that size of
the sample would depend upon the extent of risk. The important point i.e. sample, should
be selected in such a way that each sampling unit has an equal chance of selection, was
covered by few candidates only.

Question 2

In this question the candidates were required to comment on two simple situations related
to appointment of auditor. Response in each case is discussed below:

(a) Though a number of students gave the correct answer that employment of spouse
of a partner in associated company of the client has no relevance to the
appointment of the auditor. However, many candidates gave detailed provisions
of the Companies Ordinance related to directors of audit clients and their spouses
which was not relevant.

(b) Generally, the candidates were able to mention correctly that there was no
specific requirement as regards appointment of auditors of a private company
with paid up capital of less than Rs. 3 million, provided the company was not a
subsidiary of a public company. However, some candidates stated incorrect paid
up capital requirement and many candidates considered NPL as a subsidiary of a
public company.

Question 3

In this question, the candidates were required to discuss the requirements related to
discarding or deleting audit documentation after the assembly of the final audit file has
been completed. However, a significant number of candidates thought that the question
pertained to amendments to the financial statements and audit report, on identification of
subsequent events and provided significant details of the procedures required in such
situation.

Many candidates used guesswork and stated matters such as permission of the
engagement partner/manager and importance of the documents etc. which were entirely
irrelevant.

Page 2 of 6
 Examiners’ Comments on Audit and Assurance – Spring 2015

Question 4(a)

This was a straightforward question and was well responded. Candidates displayed a
good understanding of matters necessary to determine the competence, capabilities and
objectivity of the expert and evaluation of the “work” of the expert. However, points
related to competence and adequacy of work were interchanged in some cases.

Question 4(b)

It was a simple question where candidates needed to discuss the course of action, in case
the auditor was not satisfied with the work performed by the auditors’ expert. Generally
the candidates performed well. However, some candidates repeated the same points as
were mentioned in response to part (a) of the question.

Question 5

In this question, data relating to four different customer segments was provided. An
analysis of the debtor circularization carried out by the auditor and brief comments on the
response received were also provided. The requirements were divided into three parts.
Response to each part is discussed below:

(a) In this part, the candidates were required to comment on the decision to send
negative confirmations to two of the four segments. The candidates response was
quite poor, because of the following reasons:

 Some candidates analyzed all segments irrespective of whether they were sent
negative or positive confirmations and therefore lost valuable time.

 Some candidates gave a combined answer for both, retailers as well as

hospitals/clinics and did not discuss them separately as separate segments.
Consequently, they gave inappropriate answers as the two situations were
quite different and concluding remarks in two cases should have been
different.

 Many candidates stated the factors that justify sending of negative

confirmations; but did not conclude as to whether the decision to send
negative confirmation was correct or not.

For a proper analysis of the situation, the candidates are advised to seek guidance
from ICAP’s suggested answer.

Page 3 of 6
 Examiners’ Comments on Audit and Assurance – Spring 2015

(b) In this case, the candidates were required to state the required audit procedures
when (i) replies to confirmations agreed with the balances in the clients books (ii)
did not agree and (iii) when replies were not received. Many candidates were not
able to correctly describe the necessary procedures when balances did not agree.
Many of them just mentioned about the need for a reconciliation without
mentioning that the reconciliation needed to be checked and also did not
distinguish between reconciling items which indicated errors on the part of the
client and those which indicated errors on the part of the customers. In case of no
reply, most students recommended written reminders, follow up, telephone calls
etc. Only about 50% of the candidates mentioned about the need to adopt
alternative procedures.

(c) In this part, majority of the candidates mentioned about the need to write
off/provide for the amount receivable. However, they did not mention that the
calculation and basis of such write off/provision should be reviewed.

Question 6

In response to this question, majority of the candidates went into extensive details
regarding various substantive procedures to verify related party transactions instead of
addressing the situation given in the question i.e. clients failure to disclose Neelum
Limited as a related party; and its implications on further audit procedures.

Candidates should always read the question carefully and it has been mentioned quite
often that display of irrelevant knowledge even if correct, is of no value and is a mere
wastage of time.

Question 7

In this question, three situations were given and the candidates were required to advise
the firm about the possible course of action in each situation. The performance in each
case is discussed below:

(a) Self-review and familiarity threats were correctly identified by majority of the
students as the concerned employee of the firm was providing accounting and
taxation services as a consultant prior to appointment in the audit firm. The
safeguards were also mentioned correctly. However, the need to identify the
significance of such threats and to decide whether the concerned person should be
a part of the respective assurance engagement, was not discussed.

(b) The threat was correctly identified in most cases as a self-interest threat when a
father of a trainee has a financial interest in the client but the issues of materiality
and significance of the threat were not discussed by many students. Further, many
candidates produced a long list of safeguards and did not appreciate that if the
financial interest was material, the only safeguard available was to remove the
concerned trainee from that audit.

Page 4 of 6
 Examiners’ Comments on Audit and Assurance – Spring 2015

(c) There is a self-interest threat when a member of the team participates in an

assurance engagement while knowing that he may join the assurance client in
future. The overall performance was good. However, some candidates incorrectly
identified other threats such as advocacy threat and intimidation threat instead of
or in addition to self-interest threat.

Question 8(a)

The question required the candidate to identify the risks related to the receiving of goods
and invoices from suppliers. Most of the risks such as acceptance of goods without being
ordered or raising of invoices for goods not received etc. were correctly identified.
However, some candidates gave detailed substantive procedures to address those risks
which were not required. Further, many candidates mentioned controls on placement of
orders which were also irrelevant.

Question 8(b)

In this part the candidates were required to specify the controls that would address the
risks identified by them in part (a) of the question. Many candidates mentioned correctly
the controls such as segregation of duties, checking, physical counting, cross-matching of
documents, signature of authorized personnel on certain documents, etc. However, many
candidates did not display a good understanding of the difference between a control
(implemented by the company) and a test of control (performed by the auditor).

Question 8(c)

In this part the candidates were required to mention the audit procedures to test the
control identified by them in part (b) above. As indicated above, many candidates
repeated the procedures mentioned as controls in the previous part rather than stating how
they would “check/test” whether such controls actually existed.

Question 9

In this question, four independent situations were given and the candidates were required
to identify with justification whether the situation represents a risk of fraud. The
performance in each part is discussed below:

(a) (i) As the company’s profitability was under threat, management may have
been inclined to manipulate records to show a better position as the
company’s performance was likely to have deteriorated because it was not
able to increase the prices. Many candidates did not view the situation in
that perspective.

(ii) Majority of the students identified correctly that research costs added to
intangible assets represented only 2% of the amount capitalized and was
duly supported by invoices. Hence, it was an error as opposed to a fraud risk
factor.

Page 5 of 6
 Examiners’ Comments on Audit and Assurance – Spring 2015

(iii) Most candidates correctly stated that due to management’s interest in

receiving profit related bonuses, there existed a risk that management may
manipulate records.

(iv) By reporting sales of goods which had not yet been dispatched, the
management may be trying to overstate profits of the company and this was
identified by a number of candidates. However, many candidates completely
misunderstood this part and expressed the view that the company was
overstating inventory by keeping such items in the closing stock.

(b) This part required candidates to specify the actions to be taken by the auditor if a
fraud risk factor is identified and most of the candidates were able to perform
well.

Question 10

Many candidates scored full marks in this question in which they were simply required to
state various controls over data “transmission” that help to ensure that data is secure and
unaltered. Some candidates did not read the question carefully and mentioned general
data security procedures rather than those required in case of transmission of data.

(THE END)

Page 6 of 6
 Certificate in Accounting and Finance Stage Examinations
The Institute of 8 September 2015
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 (a) Explain the term ‘Expectation Gap’ in the context of an audit and give three examples
of expectation gap. (04)
(b) International Standards on Auditing require an auditor to evaluate the control
environment and assess its effectiveness. State the factors that the auditor should
consider in evaluating the control environment. (04)
(c) A schedule of related party transactions provided by the client includes two significant
transactions which are outside the normal course of business. State the substantive
procedures that an auditor should undertake, in respect of these transactions. (04)
(d) State key features of a review engagement which distinguish it from a statutory audit
and identify two types of review engagements. (03)
(e) Identify the factors that are considered in determining the independence of internal
auditors. (02)
(f) State four substantive procedures for verification of share premium account appearing
in the statement of financial position. (02)
(g) Briefly explain with examples, the different levels of assurance that can be provided to
an assurance client. (03)
(h) State the conditions under which an auditor may send negative confirmations. (04)

Q.2 Your firm has been re-appointed as the auditor of Elegant Limited (EL) for the year ended
30 June 2015. The firm has been the auditor of EL for the last five years.

Required:
(a) How would you assess whether it is necessary to send an audit engagement letter to
EL for the year ended 30 June 2015? (05)
(b) State how you would proceed if EL requests your firm to change certain terms of the
engagement. (04)

Q.3 You are the Audit Manager on the audit of Durable Cement Limited (DCL). The
information contained in the planning document includes the following:

(i) DCL is presently operating in poor general economic conditions and is also faced
with tough competition, due to the availability of low priced imported cement.
(ii) In addition to the wholesalers, DCL supplies cement directly to various government
departments and real estate developers. The sale is authorized by the credit control
department; however, payments from government departments are often delayed.
(iii) During the year, DCL has made investment in securities of unlisted public companies.
(iv) A long-term loan was obtained in 2007 to finance the existing plant. The amount is
repayable in 10 annual instalments.
(v) DCL operates a non-funded gratuity scheme for its employees.

Required:
Assess the inherent risks (high, low or moderate) along with appropriate justification, related
to the following assertions:

Valuation of factory plant
Valuation of trade receivables

Ownership right of finished goods inventory
Valuation of unlisted securities

Accuracy of long-term finance
Valuation of provision for gratuity (09)
 Audit and Assurance Page 2 of 3

Q.4 Your firm is the auditor of Customized Machinery Limited (CML), a listed company, for
the year ended 30 June 2015. CML has an asset base of Rs. 3.5 billion and profit before tax
of Rs. 350 million. On 10 August 2015, after the issuance of audit report but prior to the
issuance of financial statements, you have been informed as under:

(i) CML had been awarded a contract of Rs. 500 million in April 2015 for supply of
specialized machinery parts in August 2015 to a foreign customer. CML was expecting
a profit of 20% on the contract. However, the government of the foreign country has
placed certain restrictions on import because of which the customer has cancelled the
purchase order under force majeure clause.
(ii) The inventory against the above order is lying in the warehouse and requires an
expense of Rs. 105 million in order to become usable for other customers.
(iii) According to the management, the cancellation of this order will not affect the
operations of the company in any significant manner.

Required:
Discuss how you would deal with the above situation. (07)

Q.5 Following IT related controls are being employed at Vision Limited:

(i) The general ledger system is automatically updated with sub-ledger transactions (e.g.
Accounts Receivable) every night through batch processing.
(ii) The system automatically maintains second copies of all programs and data files.
(iii) Access to programs and data files is restricted using passwords.
(iv) Invoices that are entered into the system are physically counted.
(v) Firewalls (software and hardware) are installed to restrict unauthorized access.
(vi) Screen warnings are displayed as regards incomplete processing.
(vii) Vision Limited has service level agreements with reliable software companies, for
technical support.
(viii) Review of output against expected values.

Required:
(a) In respect of each control, determine whether it is a preventive, detective or corrective
control. (04)
(b) Also classify each of the above between general IT controls and application controls. (04)

Q.6 As the engagement partner, you have reviewed the working papers of Nadeem Limited (NL)
in which the audit team has highlighted the following matters:

(a) NL provides six months warranty to its customers and has hired an expert to compute
the warranty provision. The management is not willing to provide written
representation for the warranty provision because the provision is in accordance with
the expert’s advice. (04)
(b) Certain contingent assets have been disclosed in the draft financial statements in
which inflow of economic benefits is possible but not probable. The management is of
the view that International Financial Reporting Standards does not prohibit making
additional disclosures which enhance the users understanding of the financial
statements. (03)
(c) According to the accounting policy for revenue recognition, revenue from sale of
goods is recognized on dispatch of goods to customers. However, during the year, NL
has entered into various agreements in which the goods are required to be delivered at
the premises of the customers. (03)

Required:
Discuss the possible impact on the audit report.
 Audit and Assurance Page 3 of 3

Q.7 (a) List any four ways in which the debtor balances may be stratified. (02)

(b) You are the audit incharge on the audit of Opportunity Limited (OL). OL deals in fast
moving consumer goods. For sending of confirmations, an audit team member has
stratified the debtors as follows:

Category A Balances exceeding Rs. 50 million 12 customers

Category B Balances below Rs. 50 million 100 customers
Category C Balances below Rs. 10 million 280 customers
Category D Balances below Rs. 1 million 600 customers

During a meeting some of the team members have expressed divergent views, as
follows:

(i) Verification of balances of category A and B will provide sufficient coverage

and evidence; therefore there is no need to cover other categories.
(ii) Selection should be done on haphazard basis, as under this method all items of
population have equal chance of selection.
(iii) Selection of sample should be done systematically, whereby items constituting
10% of the amounts in each category should be selected in descending order.

Required:
Discuss the appropriateness of options discussed in the meeting and give your
suggestion in this regard. (05)

Q.8 (a) Differentiate between Symmetric key ciphers and Asymmetric key ciphers in relation
to data encryption techniques. (02)
(b) Identify any four types of information that can be extracted from system logs. (02)

Q.9 Discuss the categories of threats and related safeguards in each of the following situations:

(a) Your firm is the auditor of Prime Super Markets Limited, a chain of super markets.
During a promotional campaign, the management has distributed discount vouchers
which have also been given to the audit team members. (04)
(b) You are the manager on the audit of Abid Textile Mills Limited. The client has
requested you to send two staff members on secondment for three months to assist the
chief financial officer as its two senior accounting team members have resigned
recently. (05)
(c) Fine Petroleum Limited (FPL) is the audit client of your firm for five years. During
the year, the engagement partner has been changed due to mandatory rotation as per
Code of Corporate Governance. However, the firm has decided to retain Atif, the
audit manager, who has been involved in the audit of FPL for the past five years. (04)

Q.10 You have been assigned to plan the test of controls in respect of salaries and wages. In this
regard you are required to identify the following:

(a) Possible control weaknesses in overtime payments (03)

(b) Principal controls over payment of overtime (04)
.

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.1 (a) The term ‘expectation gap’ refers to the fact that the public perception of the role and
responsibilities of the external auditor is different from his statutory role and
responsibilities. The expectations of the public are often set at a level higher than that at
which the external auditor actually operates.
Some examples of the misunderstandings inherent in the public’s expectations are as
follows:
 The public believes that the audit opinion in the audit report amounts to a ‘certificate’
that the financial statements are correct and can be relied upon for all decision-making
purposes.
 The public also believes that the auditor has a duty to prevent and detect fraud and that
this is one reason for an audit.
 The public assumes that, in carrying out his audit work, the auditor tests 100% of the
transactions undertaken during the accounting period.

(b) In evaluating the control environment, the auditor should consider such factors as:
 management participation in the control process, including participation by the board
of directors
 management’s commitment to a control culture
 the existence of an appropriate organisation structure with clear divisions of authority
and responsibility;
 an organisation culture that expects ethically-acceptable behaviour from its managers
and employees; and
 appropriate human resources policies, covering recruitment, training, development and
motivation, which reflect a commitment to quality and competence in the organisation.

(c) If the auditor discovers significant related party transactions outside the entity’s normal
course of business he must:
 Inspect the underlying contracts or agreements to evaluate whether:
– the contracts etc. were entered into in order to engage in fraudulent financial
reporting or to hide the misappropriation of assets (a lack of business rationale
might indicate this)
– the terms of the contracts etc. are consistent with management’s explanations, and
– the transactions have been properly accounted for and disclosed.
 Obtain evidence that the transactions were properly authorised.

(d) The key features of review engagement that distinguish it from statutory audit are as
follows:
 Review engagement requires less evidence than an audit
 Opinion in the review engagement is expressed in negative terms

Two types of review engagements:

 Attestation engagement
 Direct reporting engagement

(e) Following factors are considered in determining the independence of internal auditors:
 To whom does the internal auditor reports to
 Who decides the scope of internal audit work
 Frequency of rotation of internal audit staff
 Appointing authority of chief internal auditor
 Conflict of interest i.e. they should not be responsible for designing internal controls

Page 1 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

(f) Audit procedures for verification of share premium account:

 Obtain an analysis of movements in share premium account during the period.
 Check the accuracy of these movements by checking supporting documentation.
 Ensure that any specific legal requirements relating to share premium have been
complied with. (For example, check that the entity has not breached legal restrictions
on use of the share premium account.)
 Check authorization in respect of all movements during the year.

(g) Reasonable Assurance:

A high (but not absolute) level of assurance provided by the practitioner’s conclusion
expressed in a positive form. The reasonable assurance is usually expressed in case of
statutory audits.

Limited Assurance
A moderate level of assurance provided by the practitioner’s conclusion expressed in a
negative form. The negative form of assurance is usually expressed in case of review
engagements.

(h) A negative confirmation can be used, where any of the following condition is met:
 The risk of material misstatement has been assessed as low and controls have been
tested.
 The population is comprised of large number of small account balances.
 A very low exception rate is expected.
 The auditor is not aware of the circumstances which would cause the respondent to
ignore the request for confirmation.

A.2 (a) In determining the need to send an engagement letter, the firm should assess whether:
 circumstances require a revision in the terms of engagement.
 management need to be reminded of the existing terms of the engagement.
The following factors may indicate that the above is appropriate:
 Any indication that the entity misunderstands the objective and scope of the audit.
 Any revised or special terms of the audit engagement.
 A recent change of senior management.
 A significant change in ownership.
 A significant change in nature or size of the entity’s business.
 A change in legal or regulatory requirements.
 A change in other reporting requirements.

(b)  We would consider whether the request is “reasonable”.

 If the request is reasonable then revised terms should be agreed and recorded in
engagement letter.
 If the request is unreasonable, we should discuss the matter with the management and
if the management agrees with our view point, then there is no need for amendment
in the existing terms of engagement.
 If we are unable to agree to the changes and management also do not agree with our
viewpoint then we would consider withdrawing from the engagement and consider
whether there is any obligation to report the circumstances to those charged with
governance, owners or regulators.

Page 2 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.3 Assessment of
S. No. Assertion Justification
inherent risk
(a) Valuation of factory High  Due to poor economic conditions, there is a risk that
plant the value of plant may be impaired.
 Inherent risk is also high due to the complexity and
subjectivity involved in calculation of impairment loss.
(b) Valuation of trade Low/Moderate The valuation assertion for trade receivable and allowance
receivables for doubtful debts is affected by judgments. However as
the debts from Government departments are usually
secured, the chances of bad debts are low.
(c) Rights to ownership Low/Moderate Cement bags are usually kept in company’s’ premises
of finished goods (Godowns) and in the absence of any other information
inventory the ownership of inventory can be verified.
(d) Valuation of High Determination of fair value is complex, and involves
unlisted securities subjectivity and judgment in the absence of any market
quotations.
(e) Accuracy of long Low Third party confirmation i.e., bank confirmation is
term finance available therefore inherent risk is low.
(f) Valuation of High Due to complexity and subjectivity involved in the
provision for gratuity calculation of provision for gratuity.

A.4 The imposition of restriction by foreign country is an adjusting event as the inventory prepared
for the order can not be supplied to any other customer, without considerable expense of Rs. 105
million. The revised net realizable value of the inventory would therefore be approximately
Rs. 395 million (500-105), as against the cost of Rs. 416.67 million (500÷1.2), resulting in an
adjustment of Rs. 21.67 million which is approximately 6.19% of the profit before tax.

As an auditor we have no obligation to perform any audit procedures after the date of the audit
report. However, in view of the fact that the above situation has come to our knowledge, we are
required to discuss the matter with management and inquire how it intends to address the matter
in the financial statements.

If the financial statements are amended, the auditor is required to:

 carry out the necessary audit procedures on the amendment
 extend his review of subsequent events up to the date of the new audit report.

If management do not amend the financial statements for the event identified, then the auditor
should take appropriate action to prevent reliance on the audit report after taking legal advice.

Page 3 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.5 Ans.5(a) Ans.5(b)

Control Type of General IT controls /
controls Application controls
(i) The general ledger system is automatically Preventive Application controls
updated with sub-ledger transactions (e.g.,
Accounts Receivable) every night through
batch processing.
(ii) The system automatically maintain second Corrective Application controls
copies of all programs and data files.
(iii) Access to programs and data files is restricted Preventive General IT controls
using passwords.
(iv) Invoices are physically counted that are Detective Application controls
entered into the system.
(v) Firewalls (software and hardware are Preventive General IT controls
installed to restrict unauthorized access).
(vi) Screen warnings about incomplete processing. Detective Application controls
(vii) Service level agreements. Corrective General IT controls
(viii) Review of output against expected values. Detective Application controls

A.6 (a) The argument that the written representation is not necessary because the provision is
incorporated on the basis of expert’s advice is not correct.

The recognition of provision on basis of expert’s advice will not preclude management from
assuming responsibility for the warranty provision.

If the management do not provide the written representation, the auditor will require to re-
evaluate the effect which may have on reliability of representations and audit evidence in
general.

The auditor may qualify or disclaim the opinion on the financial statements depending on
the materiality and pervasiveness of the matter.

(b) The argument of management relating to additional disclosures is not valid, as this
disclosure will make the financial statements misleading, as IAS allows disclosure of only
those contingent assets which are probable.

If the amount is material and the management refuses to remove the disclosures from the
financial statements, then the auditor may qualify the audit report.

(c) It is not a change in Accounting policy. However, if the revenue for the customers to whom
the goods are to be delivered to their premises, is material to the financial statements, the
auditor will ask the management to revise the accounting policy for revenue recognition to
cover all types of sales contracts.

If the management refuses to revise the policy accordingly and record the sales based on
such policy then the audit report will be qualified.

Page 4 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

A.7 (a) Ways in which debtors population may be stratified are as under:
 By product
 By customers or category of customers
 Geographically
 Terms of sales such as credit terms/Aging
 By values

(b) Views expressed by the team member:

(i) The view that if verification of balances of category A and B is carried out than there is
no need to perform further procedures is not correct as the results of audit procedures
applied to items in category A and B will only provide evidence about the items that
make up that category (stratum).

The auditor should obtain sufficient appropriate audit evidence regarding items in
categories C & D as these can also be material.

(ii) The view that sampling should be carried out on haphazard basis to ensure equal
chance of selection is not correct as such assurance is only ensured by using random
sampling, i.e. use of random numbers to select items.

(iii) The view related to systematic sampling is not correct, as selection of 10% items is not
systematic sampling. Systematic sampling involves, selection of first item on random
basis and then items are selected with a standard gap between them (for example, every
10th item).

Suggestion:
Both haphazard and systematic sampling may be used in the normal manner, either with or
without stratification. However, these methods cannot be used in the manner as suggested
by the team members because it may result in extensive testing on immaterial items, thereby
increasing the cost which may not be efficient. It may also be appropriate to use random
sampling to ensure all items in a population have an equal chance of selection.

A.8 (a) Symmetric key ciphers:

These use related (often identical) keys to both encrypt and decrypt information. This is
sometimes called ‘shared secret’ between two or more parties.

Asymmetric key ciphers:

These use different keys to encrypt and decrypt information (one to lock, the other to
unlock). This is sometimes called ‘public/private’ key.

(b) Information that can be extracted from system logs inlcude:

(i) Which user logged-in, when and where from
(ii) Failed log-in attempts
(iii) Who accessed and amended data in a file
(iv) Changes made to a program – what, when and by whom

A.9 (a) Accepting of discount vouchers may create self interest and intimidation threats.

However, if the value of discount vouchers is not clearly insignificant, the threat to
independence cannot be reduced to an acceptable level by the application of any safeguard.

If the value is other than clearly insignificant, the members of the audit team should be
instructed not to accept the discount vouchers.
Page 5 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2015

(b) The lending of staff by a firm to an audit client will create a self-review threat. However, the
threat may be reduced to an acceptable level if the firm's personnel:
 are not involved in exercising discretionary authority; or
 do not assume management responsibilities.
 are not given audit responsibility for any function or activity that they performed or
supervised.

The audit client should acknowledge its responsibility for directing and supervising the
activities of assigned personnel.

(c) Familiarity and self-interest threats are created by using the same senior personnel on an
audit engagement over a long period of time. This applies to the audit manager also.
The significance of the threats shall be evaluated and following safeguards should be applied
if necessary to eliminate the threats or reduce them to an acceptable level:
 Rotating the audit manager as well;
 Having a professional accountant who was not a member of the audit team review the
work of the audit manager;
 Regular independent internal or external quality reviews of the engagement.

A.10 (a) Following are the possible weaknesses that may exist in overtime payments:
 There may be weaknesses in the system for recording time spent at work. When
employees are paid on the basis of time, there will be a system of ‘time-in’ and ‘time-
out’, typically using employee identity cards and a time recording device. The risk is
that employees will ‘clock on’ on behalf of a colleague, using the identity card that the
colleague has given him.
 Overtime payments may not be properly authorized which includes situation where a
person works overtime without proper authorisation.
 Incorrect rates of overtime may be used.

(b) Principal controls over payment of overtime:

 List of overtime payment (time or the amount) should be signed by person duly
authorised in this regard by the organisation.
 A overtime rates should be checked by a person authorised in this regard by the
organisation.
 The process of recording time should be monitored either by an authorized supervisor
or by the use of bio-metric machine.
 It should be ensured that the amount of overtime is correctly incorporated in the salary
sheets and deductions therefore if any have been appropriately made.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Autumn 2015

General:

The overall performance was satisfactory. The paper had a wider coverage of the syllabus
and consequently those who had resorted to selective studies could not perform well. The
impact of selective studies can be gauged from the fact that more than 15% students
scored zero in four questions.

Question-wise comments are as under:

Question 1(a)

The requirement of this part of the question was to explain the term ‘expectation gap’ and
to give three examples thereof. The performance was above average as generally the
candidates performed well. However, some students explained it as the difference
between expected and actual results of the tests performed by the auditor. Some of them
explained it as the differences between the management and the auditor.

Question 1(b)

The requirement was to identify the factors that the auditor would consider in evaluating
the control environment. Many students seemed confused and specified the various
controls that are applied by the management. Some candidates quoted the components of
the control environment rather than the factors for its evaluation.

Question 1(c)

Many students did not read the question carefully. Consequently, they mentioned the
routine procedures that are performed to identify and disclose the related party
transactions instead of focusing on the fact that the transactions were outside the normal
course of business.

Question 1(d)

This part was well answered. However, many students did not specify the types of
review engagements. Many students mentioned the names of the standards rather than the
types of review engagements.

Page 1 of 6
 Examiners’ Comments on Audit and Assurance – Autumn 2015

Question 1(e)

The requirement was to identify the factors that are considered in determining the
independence of internal auditors. Many students talked about independence of external
auditors. Very few students gave the correct answer.

Question 1(f)

Very few students gave correct answer to this question which required substantive
procedures for verification of share premium account. Many answers were limited to
tracing of opening balance only. Further, many students tried to relate market price with
share premium. Some of them even mentioned about verification of list of shareholders
which was totally irrelevant.

Question 1(g)

The requirement was to explain the different levels of assurances and give examples. The
performance was poor. A variety of answers were observed but very few stressed upon
two important aspects i.e. high/moderate level of assurance and positive/negative form of
the assurance. Instead, many students discussed the various types of audit reports.

Question 1(h)

The use of negative confirmation was rightly explained by a large number of candidates.
However, only few candidates mentioned all the conditions.

Question 2(a)

The performance in this part was above average. However, only few students could
secure full marks. ISA specifies two main conditions which indicate the need to send an
engagement letter. It gives six other factors which indicate the existence of these two
conditions. In most of the cases the candidates only mentioned the six factors but did not
mention the two main conditions.

Question 2(b)

The performance in this part was average. Majority of the candidates only mentioned that
if the changes are unreasonable the auditor should resign. Steps that may be taken before
deciding to resign such as discussion with management and reporting to those charged
with governance, were rarely mentioned.

Question 3

In this question, a scenario was given and on the basis thereof, the candidates were
required to identify the level of risk (high, low, moderate) associated with six different
areas of audit along with appropriate justification. The key observations are specified
below:

 Many students tried to evaluate the risks involved in the given situation but did not
rate the risk as high, moderate or low.
Page 2 of 6
 Examiners’ Comments on Audit and Assurance – Autumn 2015

 Proper justifications were not provided. Some common issues in this regard were as
follows:

o Risk for gratuity was declared high because calculation of gratuity is complex and
not because it was unfunded.
o Risk in valuation of unlisted securities is high because of the absence of market
quotations whereas mostly the students mentioned poor economic conditions as
the reason.
o Risk related to trade debts was declared as high since payments from government
were delayed. The fact that government dues are eventually recovered did not
receive due consideration from the students.

Question 4

This question was based on a situation which had arisen after the issuance of the audit
report but before the issuance of financial statements. The key aspects of the students
performance are discussed below:

 Many students failed to clearly identify that it was an adjusting event.

 Many students reached the conclusion that the auditor should take steps to avoid
reliance on the audit report without discussing the intermediary steps such as
discussing with client and trying to reach an agreement regarding amendment in
financial statements.

 Many students who identified it as an adjusting event described the need for
disclosure only and did not recommend any other amendment.

 It was clearly written in the question that audit report has been issued. Still, many
candidates mentioned the steps that were required in case the audit report had not
been issued.

 Very few students specified the procedures in case the client agrees to revise the
financial statements appropriately.

 Many students answered the question in different parts and termed some of the
information as adjusting and some of it as non-adjusting. In fact, all the information
pertained to a single event and should have been dealt with accordingly.

Question 5

In this question, eight IT related controls were mentioned and the candidates were
required to classify each control as preventive, detective or corrective and then as General
IT control or Application control. The question proved easy for most of the students as
they only had to choose between 3 and 2 choices whereas even in MCQs, there are four
choices. However, some candidates mentioned two different choices against the same
control and such answers were considered incorrect. Some students wasted time in
writing each control.

Page 3 of 6
 Examiners’ Comments on Audit and Assurance – Autumn 2015
Question 6

The question contained three observations which were highlighted during the audit of a
company. The candidates were required to discuss the possible impact thereof on the
audit report. One of the major issue in many answer scripts was that the candidates only
recommended modification of audit report without clearly identifying the type of
modification i.e. qualification, disclaimer, emphasis of matter paragraph, etc.

Performance with respect to each part is discussed below:

Question 6(a)

Majority of the students accepted the management’s argument that the provision is as per
expert’s advice and stated that if alternate procedures can be performed then audit report
does not need to be modified even if the management refuses to provide appropriate
representation. This was not correct because when any amount in the financial statements
is computed on the basis of assumptions the management must assume responsibility for
these assumptions even if the calculation has been carried out by an expert. Further, many
candidates also discussed attributes of the expert which were not required at all, in this
case.

Question 6(b)

Average performance was witnessed in this part as most of the candidates correctly
concluded that contingent assets cannot be disclosed unless it is probable that these
would be realized. However, as regards the impact on audit report, most of the candidates
seemed confused and recommended insertion of emphasis of matter paragraph probably
because they were not sure whether the report may be qualified merely on the grounds of
disclosures.

Question 6(c)

The performance in this part was very poor. Most of the students termed it as a case of
recording of revenue in contradiction of the accounting policy and recommended that the
report may be qualified. In fact, in the given scenario, the accounting policy needed to be
revised to ensure that in all cases revenue is recognized when the risks and rewards
associated with ownership are transferred to the customer because it would be
inappropriate to follow the existing policy in case of contracts which required delivery of
goods at the customers’ premises. This aspect was discussed by few students only.

Question 7(a)

This part was quite simple and almost every student performed well.

Page 4 of 6
 Examiners’ Comments on Audit and Assurance – Autumn 2015
Question 7(b)

According to the situation given in this part of the question, the debtors of an
organization were divided into four categories. Customers above Rs. 50 million will be
placed in Category A, those above Rs. 10 million and Rs. 1 million in Category B and C
respectively and those below Rs. 1 million in Category D. Three different suggestions
were given for drawing a sample and verification and the candidates were required to
discuss the appropriateness of each method of drawing the sample and give a final
recommendation. The best comments were received in respect of option (i) where
majority of the candidates concluded correctly that ignoring Category C and D altogether
would not be appropriate. In response to the second option some of the students discussed
positive and negative confirmation which was totally irrelevant. Very few candidates
could correctly identify that haphazard sampling does not ensure equal chance of
selection for each item and this can be ensured by random sampling. In the case of third
option, only about 25% of the candidates could identify that selection based on
descending order cannot be termed as systematic sampling.

Question 8

Part (a) was very well answered by majority of the students. In part (b) also, the
performance was good. Many students mentioned about CPU speed which was incorrect.
The overall result was quite unique as about 20% students secured full marks whereas an
equal number of students did not attempt it and a further 8% could not secure any mark.

Question 9

This question contained three situations and the candidates were required to discuss the
categories of threats involved and the related safeguards. Performance in each part is
discussed below:

Question 9(a)

The overall performance was below average. Self-interest threat was correctly identified
by majority of the students but very few could identify the intimidation threat. Further,
mostly the candidates just mentioned that discount vouchers should not be accepted.
Significance or insignificance of the amount involved was not discussed. Many students
specified safeguards such as involving additional chartered accountant, quality control
and review of the work, which were not relevant.

Question 9(b)

The overall performance was average. Though the threat was generally identified
correctly as a self-review threat, however, in most of the cases the safeguard that
management responsibilities should not be assumed was not mentioned.

Page 5 of 6
 Examiners’ Comments on Audit and Assurance – Autumn 2015
Question 9(c)

In this part also, candidates correctly mentioned relevant threats, but most of them
mentioned only one safeguard i.e. rotation of the audit personnel. The safeguards relating
to independent quality control review by an independent reviewer were rarely mentioned
by the students. Many students said that the partner should be rotated which was already
mentioned in the question.

Question 10

This was a simple question where the requirement was to identify the possible
weaknesses in overtime payments and suggestion of appropriate internal controls over
payment of overtime.

On the whole, performance of the candidates was average. An important weakness i.e.
working overtime without proper authorization was rarely mentioned.

Many students correctly identified the weaknesses but were unable to explain the
corresponding controls which was surprising because it was quite simple. For example, a
weakness that overtime is not authorized, can simply be controlled by having a proper
system of authorization.

Many students mentioned the steps involved in testing the controls, which was not
relevant.

(THE END)

Page 6 of 6
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers were also advised to award marks for
alternative approaches to a question and relevant/well-reasoned comments/explanations.

Mark(s)
A.1 (a)  Explanation of expectation gap 1.0
 01 mark each for any three examples of expectation gap 3.0

Mark(s)
(b)  Up to 01 mark for each factor to be considered 4.0

Mark(s)
(c)  01 mark for each substantive procedure 4.0

Mark(s)
(d)  Key features of review engagement 2.0
 Types of review engagement 1.0

Mark(s)
(e)  Up to 0.5 mark for identification of each factor 2.0

Mark(s)
(f)  0.5 mark for each substantive procedure 2.0

Mark(s)
(g)  01 mark for brief explanation of each level of assurance 2.0
 0.5 mark for an example of each level of assurance 1.0

Mark(s)
(h)  01 mark for each condition 4.0

Mark(s)
A.2 (a)  Need assessment 2.0
 Up to 0.5 mark for each factor considering the appropriateness of need
assessment 3.0

Mark(s)
(b)  01 mark for each matter to be considered for changes in terms of
engagement 4.0

Mark(s)
A.3  Assessment of inherent risk 3.0
 Justification of assessment 6.0

Mark(s)
A.4  Identification of subsequent event 1.0
 Consideration of materiality 1.0
 Auditors’ responsibility with respect to subsequent events 2.0
 Procedures to be performed by the auditor 3.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2015

A.5  Classification of each control into preventive, detective and corrective

controls 4.0
 Classification of each control into General IT and Application controls 4.0

Mark(s)
A.6 (a)  Need for written representation 1.0
 Course of action if management do not provide written representation 1.5
 Impact on audit report 1.5

Mark(s)
(b)  Invalidity of management argument and its justification 2.0
 Impact on audit report 1.0

Mark(s)
(c)  Identification of issue, materiality and course of action to be followed 2.0
 Impact on audit report 1.0

Mark(s)
A.7 (a)  Up to 0.5 mark for each way of stratification of debtors 2.0

Mark(s)
(b)  Discussion on appropriateness of options discussed in the meeting 3.0
 Suggestion 2.0

Mark(s)
A.8 (a)  Difference between symmetric key ciphers and asymmetric key
ciphers 2.0

Mark(s)
(b)  0.5 mark for each type of information that can be extracted from
system logs 2.0

Mark(s)
A.9 (a)  Identification of threats 2.0
 Discussion on related safeguards 2.0

Mark(s)
(b)  Identification of threat 1.0
 Discussion on related safeguards 4.0

Mark(s)
(c)  Identification of threats 1.5
 Discussion on related safeguards 2.5

Mark(s)
A.10 (a)  01 mark for each possible control weakness 3.0

Mark(s)
(b)  01 mark for each principal control 4.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examinations
The Institute of 8 March 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 You are the Audit Incharge of Rehan Limited for the year ended 31 December 2015. While
reviewing the working papers and discussion with audit team, you have noted the following:

(i) The audit team did not send balance confirmation requests for amounts below
Rs. 100,000 because according to the client, lot of efforts were required to follow up
the customers and the balances were also not material.

(ii) One of the conclusions drawn as per the working papers is “there are no unrecorded
liabilities, as confirmations have been received from all selected parties and no
differences were noted. Hence, no further test is required.”

Required:
(a) Discuss with reasons whether you agree with the approach adopted/conclusion drawn
by the audit team. (03)
(b) Provide brief guidance to the audit team in respect of each of the above situations. (05)

Q.2 You are the CFO of a newly incorporated company which has recently established five
super markets in the city. One of your responsibilities is to implement internal controls.

List six key controls:

(a) over cash sales and cash handling; (06)
(b) to reduce possibility of misappropriation of inventory. (06)

Q.3 (a) Because of its ability to exert influence, management is in a position to perpetrate
fraud and prepare fraudulent financial statements.

Identify six different ways in which fraud may be committed by management through
overriding of controls. (06)

(b) Briefly state the audit procedures which may be performed to identify the risks of
material misstatement due to fraud. (05)

Q.4 Justify giving reasons whether the appointment of auditors in the following cases is in
compliance with the requirements of Companies Ordinance, 1984.

(a) Kashif and Company, Chartered Accountants (KC) has received an offer for
appointment as the auditor of National Electricity Limited (NEL). On the request of
one of the partners of KC, NEL has allowed him to pay his last month’s electricity bill
amounting to Rs. 150,000 in monthly instalments of Rs. 15,000 each. (03)

(b) Zubair and Company, Chartered Accountants (ZC) has received an offer for
appointment as auditor of Haroon Limited (HL). Saima, who is the wife of a partner
of ZC, is the chief executive of Jameel Limited (JL). JL is an associated company of
HL. Saima also holds 100,000 shares in JL. (03)
 Audit and Assurance Page 2 of 3

Q.5 Identify the threats that may be involved and applicable safeguards, if any, in each of the
following scenarios:

(a) Your firm is the auditor of Delicious Biscuits Limited (DBL) for the past three years.
On previous year’s audit, Affan was the audit manager. He has recently joined DBL as
GM finance. (05)
(b) ABC leasing company has a lease portfolio of Rs. 500 million. Atif, the Audit
Manager on ABC, has obtained a lease finance amounting to Rs. 800,000 from ABC. (05)

Q.6 (a) State five key substantive audit procedures for verification of Provisions. (05)

(b) Briefly describe how an auditor evaluates the sufficiency of audit evidence. (04)

(c) Briefly explain how an external auditor would evaluate the adequacy of the work
performed by the internal audit function. (04)

(d) List six physical access controls over an IT system. (03)

(e) Briefly discuss the concept of ‘Professional skepticism’. (03)

Q.7 Determination of materiality level requires professional judgement on the part of the
auditor.

(a) Briefly describe the importance of materiality in the following stages of audit:
(i) Planning stage (01)
(ii) Reporting stage (02)

(b) What aspects of materiality should be documented by an auditor in the working

papers? (04)

Q.8 You are the audit partner of XYZ & Company, Chartered Accountants. The following
matters are under your consideration:

(a) Asif Limited has made certain investments and has classified them as long term
investments. The management has also provided written representation in this regard.
However, before the finalization of financial statements the company disposed of
some of the said investments. (04)

(b) Mansoor Limited has entered into significant related party transactions during the year
which are approved by the Board of Directors and appropriately disclosed. The
management has also agreed to provide a written representation but you have not
received it yet. (03)

Required:
Analyse the above situations and explain how you would proceed in the above matters.

Q.9 You are the audit manager in a firm of Chartered Accountants. Your firm is often required
to engage an auditor’s expert for reporting on matters relating to the audits.

(a) List four key terms of engagement which should be agreed with the expert. (02)
(b) Specify the factors which should be considered in evaluating the adequacy of the work
performed by the expert. (04)
 Audit and Assurance Page 3 of 3

Q.10 Briefly describe the following concepts:

(a) Audit trail in a computerized environment (03)
(b) Embedded audit facilities and its significance (04)

Q.11 You are the audit manager of the Educational University (EU) for the year ended
31 December 2015. EU has a student base of 2,500 students. It follows a policy of receiving
50% of the fees at the start of the semester and 50% in the middle of the semester. However,
10% discount is allowed to those students who pay the entire amount in advance. The cost
of course material is included in the fees. The semester starts in December and June each
year. You have noticed that 30% of the students who were registered in December 2015 had
not claimed the course material till 31 December 2015.

Required:
Discuss the audit risks in the above scenario and how you would deal with them. (07)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

Ans.1 (a) (i) The approach of not sending confirmation requests to balances below
Rs. 100,000 is not correct unless the total of such balances is clearly immaterial.

(ii) The conclusion documented by the team is not correct as the confirmation received
from creditors only confirms the recorded amount and is not relevant for the purpose
of testing of unrecorded liabilities.

(b) (i) The audit team is required to discuss the matter with client’s management and ask
them to send confirmation as per the normal sampling procedure of the audit firm.

In case the management does not agree, the audit team should evaluate the
implications of management's refusal on the auditor's assessment of the relevant risks
of material misstatement, including the risk of fraud, and on the nature, timing and
extent of other audit procedures;

(ii) Following information should be tested by the audit team to draw conclusion related
to unrecorded liabilities:

 subsequent disbursements
 unmatched receiving reports (Inventory Cutoff)

Ans.2 (a) Key controls on cash sales and cash handling:

(i) Responsibility to receive cash should be clearly identified.
(ii) Proper locks should be provided to each person responsible for handling cash.
(iii) Cash should be kept in a locked and secure area until it is deposited.
(iv) Cash registers and credit card machines should be balanced at least once a day.
(v) Proper policies should be made to deal with cash shortages/excesses.
(vi) Timely deposit of cash should be ensured.
(vii) Cash register should be used to record cash sales.
(viii) Transfers of cash from one person to another should be kept at a minimum.

(b) (i) Adequate segregation of duties or independent checks.

(ii) Adequate system of authorization and approval of transactions (for example, in
purchasing, movement between locations etc.)
(iii) Use of door locks and surveillance cameras.
(iv) Surprise physical count and timely reconciliation of inventory items.
(v) Mandatory vacations for employees performing key control functions.
(vi) Periodic rotation of employees.
(vii) Restricted storage area.
(viii) Different entry and exit doors.
(ix) Access controls over automated records, including controls over and review of
computer systems event logs.
(x) Job applicant screening of employees with access to assets.

Page 1 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

Ans.3 (a) (i) Forging or altering accounting records or supporting documentation which form the
basis of the financial statements
(ii) Misrepresenting or intentionally omitting events or transactions from the financial
statements
(iii) Intentionally misapplying accounting principles
(iv) Concealing or not disclosing, facts that could affect the amounts recorded in the
financial statements.
(v) Engaging in the complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
(vi) Embezzling receipts (for example, diverting them to personal bank accounts)
(b) The auditor is required to perform the following procedures to identify the risks of material
misstatement due to fraud:

 Make inquiries of management in respect of:

- their assessment of the risk of material fraud
- their process in place for identifying and responding to the risks of fraud
- any specific risks of fraud identified or likely to exist
- any communications within the entity in respect of fraud (including to employees
regarding management’s views on business practices and ethical behaviour)

 Make inquiries of management and others within the entity as to whether they have
any knowledge of any actual, suspected or alleged frauds and to obtain views about
the risks of fraud.
 Evaluate any unusual or unexpected relationships identified in performing analytical
procedures which might indicate a risk of material fraud.
 Evaluate information obtained from other risk assessment procedures to see if any
fraud risk factors exist.

Ans.4 (a) The appointment of KCC is valid, as 90 days have not lapsed in case of outstanding bill.
However, the concerned partner should be requested to settle the amount of bill before the
expiry of 90 days as it will result in disqualification of KCC as auditors of NEL.

(b)  Appointment of Zubair and Company is valid.

 Under the Companies Ordinance, 1984, there is no restriction on the appointment of
spouse of chief executive of an associated company as the auditor.
 The holding of 100,000 shares by Saima is required to be disclosed at the time of
appointment. Further, these shares should be disposed off within 90 days of the
appointment.

Page 2 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

Ans.5 (a) Familiarity or intimidation threats may be created if a member of audit team joins the audit
client.

Following are the safeguards:

(i) Modifying the audit plan;
(ii) Assigning individuals to the audit team who have sufficient experience as compared to
the individual who has joined the client;

(b) A loan from an audit client to an audit team member will not create a threat to
independence, if the loan is made under normal lending procedures, terms and conditions.

If the loan is not made under normal lending procedures, terms and conditions, a self-
interest threat would be created that would be so significant that no safeguard could reduce
the threat to an acceptable level. However, as the loan has already been disbursed, the only
safeguard available is to remove the manager from the audit team or ask him to settle the
lease obligation.

Ans.6 (a) Key substantive procedures for verification of provisions include the following:
(i) Ensure that all provisions have been recognized in accordance with the IAS 37.
(ii) Review the measurement of the closing balance for each provision and discuss these
with management if appropriate. Consider whether it might be appropriate to take
expert advice on the existence or measurement of a provision.
(iii) Review the board approval related to provisions booked in the financial statements.
(iv) Review the list of provisions for possible omissions, based on the auditor’s knowledge
of the business and the industry in which it operates.
(v) Relate the testing of provisions to other areas of the audit work, such as
correspondence with lawyers/minutes of Board of director’s meeting (which might
reveal more information about matters to which the provisions relate).
(vi) Compare provisions for the current financial year with provisions in previous years,
and investigate any major differences or omissions.
(vii) Review the subsequent events to ensure completeness of provisions.

(b) Factors to be considered by auditor in deciding sufficiency of audit evidence:

The decision relating to sufficiency of audit evidence depends upon the judgment of the
auditor. Apart from professional judgment, following factors are also relevant in
determining the sufficiency of audit evidence.
(i) the seriousness of the risk that the financial statements might not give a true and fair
view; when this risk is high, more audit evidence will be required
(ii) the materiality of the item
(iii) the strength of the internal controls in the client’s accounting systems

(c) In order to evaluate the adequacy of internal audit function, the external auditor should
assess whether:
(i) The work was properly planned, performed, supervised, reviewed and documented;
(ii) Sufficient, appropriate evidence was obtained to enable internal auditors to draw
reasonable conclusions;
(iii) Appropriate conclusions were reached, consistent with any reports prepared;
(iv) Any exceptions or unusual matters were properly resolved.

Page 3 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

(d) Physical access controls over an IT System might include:

(i) Doors and door-locks
(ii) Alarms
(iii) Surveillance camera or video
(iv) Cables that allow a user to lock a laptop to a desk
(v) Fingerprints readers to log-in to a system
(vi) Lockable briefcase

(e) Professional Skepticism:

It refers to an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.

However, it does not mean that the auditors should disbelieve everything they are told, but
they should view what they are told with a skeptical attitude, and consider whether it
appears reasonable and whether it conflicts with any other evidence.

Ans.7 (a) (i) Planning stage – The concept of materiality is used in determining the nature, timing
and extent of further audit procedures;

(ii) Reporting stage – The materiality concept is used in evaluating the effect of
uncorrected misstatements, if any, on the financial statements and in forming the
opinion in the auditor's report.

(b) The auditor shall document the following aspects of materiality:

(i) Materiality for the financial statements as a whole;
(ii) Performance materiality;
(iii) Basis of computing materiality; and
(iv) Any revision of (i) to (ii) as the audit progresses.

Ans.8 (a) In this case, the representation provided by the management contradicts with the audit
evidence obtained later and therefore we should:
 consider whether his risk assessment of that area is still appropriate
 consider whether additional audit procedures are needed
 assess the impact on auditors assessment of management’s integrity, document those
concerns and consider withdrawing from the audit.

(b) The written representation from the management must cover:

 the completeness of the information that has been provided about the identity of
related parties and related party relationships and transactions, and
 the adequacy of accounting for and disclosure of such related party relationships and
transactions in the financial statements.

The audit report should not be signed unless the written representation has been received.

If management does not provide the written representation, it will result in limitation of
scope and we would take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report.

Page 4 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

Ans.9 (a) (i) the nature, scope and objectives of the expert’s work
(ii) the respective responsibilities of the expert and the auditor
(iii) the form of the expert’s report
(iv) confidentiality requirements

(b) The factors that should be considered in evaluating the adequacy of the expert’s work,
include:
 reasonableness of the expert’s conclusions
 consistency of those conclusions with other audit evidence
 reasonableness of significant assumptions and methods used
 relevance, completeness and accuracy of source data.

Ans.10 (a) Audit Trail in a computerized environment:

An audit trail refers to the ability of the auditor to trace a transaction through all its
processing stages. An audit trail can be provided by a record (‘log’) of how the computer has
processed any transaction.

An audit trail may not exist in ‘paper form’ in an online system, but the computer program
should be written so as to generate the audit trail on request for any transaction.

(b) Embedded Audit Facilities:

It is an audit software that is built into the client’s IT system, either temporarily or
permanently.

The purpose of embedded audit facilities is to allow the audit to carry out tests at the time
the particular transactions are being processed, in ‘real time’.

This can be very useful for the audit of online systems where:
 data is continually processed and master files are being continually updated, and/or
 it is difficult, if not impossible, for the system to provide a satisfactory audit trail for the
transactions, through the system.
 an embedded audit facility may also print details of the transactions it has monitored,
or copy them to a computer file, so that the auditor can study the transactions.

Ans.11 Audit risk

There is a risk that revenue from fees income and sale of goods is misstated due to following
reasons:
 Fees income may be recognized immediately on receipt of fees rather than recognized on
monthly basis as the services are rendered.
 Discounts given to students may not be accounted for properly, resulting in overstatement of
revenue.
 There is a risk that revenue related to sale of course material is in appropriately classified as
part of the university fees, as a result of which it may have been recognized proportionately
on the basis of time (services provided).
 Entire revenue from sale of course material may not be recognized.

Page 5 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

Audit procedures and test

 Understand and test the system of recording revenue i.e. between sale of books and university
fees.
 Review global reconciliation keeping into consideration of number of students registered,
semester fees, and discount allowed, cost of course material etc.
 Ensure that revenue is booked for course material in respect of all registered students
irrespective of whether course material is taken by them or not.
 Ensure that cost of books not yet claimed has been charged off in the accounts.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Spring 2016

General:

The overall performance of the students in this attempt was very poor. Especially, very bad
performances were witnessed in questions 1, 8, 10 and 11. There was a tendency to write
what one knew rather than what was being asked as would be seen in the question-wise
comments. Moreover, sub-standard writing skills were quite common as many students could
not even distinguish between words such as “assess”& “access” and “trial”& “trail” and were
unable to maintain the same tense, while writing their answers.

Question-wise comments

Question 1

In this question the candidates were required in their capacity as audit manager, to
comment on two issues which they identified during review of the working papers. The
overall performance was very poor as discussed below:

 Very few of the students mentioned or described how to deal and what procedures to
perform in respect of the management’s refusal to send confirmations in respect of
balances below Rs. 100,000. In fact, most of them concurred with the decision
without raising any concerns. Many students suggested sending negative
confirmations without mentioning any reasons thereof.
 Very few students could explain that the confirmation received from creditors only
confirms the recorded amount and is not relevant for the purpose of testing of
unrecorded amounts.

Question 2

This question was in the context of a recently established chain of supermarkets and
required identification of necessary controls on specific areas as discussed below:

(a) Cash Sales and Cash Handling.

Majority of the candidates seemed to ignore the fact that they were discussing
controls relevant to a chain of supermarkets and as if they were working in an
environment prevailing in the 1990s. Most of them mentioned that there should be
segregation of duties between persons receiving the cash and the person recording
it. Many of them also mentioned controls over payments. Controls such as timely
deposit of cash and provision of locks to keep the cash securely were rarely
mentioned. Many students mentioned controls over sales rather than over cash.

Page 1 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2016

(b) Controls to reduce possibility of misappropriation of inventory.

The performance in this part was much better. However, some of the common
issues are discussed below:

 Almost all students mentioned about monthly or periodic physical check;

however, only few mentioned the need for ‘surprise physical count’.
 Checks over purchasing of goods, movement of stocks and surveillance
cameras were generally missed out.

Question 3

This question was based on the topic of ‘fraud’ and consisted of two parts. Performance
in each part is discussed below:

(a) A below average performance was witnessed in this part though a number of
students secured high and even full marks also. The major issue with most of the
candidates was that they did not seem to understand that the answers should be
focused on how fraud may be perpetrated by the management by override of
controls. Moreover, most students seemed to focus on misappropriation of assets
and ignored other areas such as altering of records, concealing of facts, etc.

(b) Again students failed to understand the main crux of the question i.e. the
requirement to state the procedures to identify the risks of material miss-statements
due to fraud as many of them tried to identify substantive procedures aimed at
discovering frauds or the procedures to mitigate the risk of fraud.

Question 4

This question consisted of two parts. In each part a situation was given and the candidates
were required to assess whether the appointment of auditors was in compliance with the
requirements of Companies Ordinance 1984. Part wise comments are given below:

(a) Performance in this part was average. Many candidates gave correct answers but
many of them stated incorrectly that appointment of KCC is invalid because the
partner’s electricity bill was outstanding which meant that he was indebted to NEL.
They did not understand that since 90 days had not lapsed therefore the appointment
could be valid provided the concerned partner settles the bill within 90 days.

(b) The performance in this part was also average as about 50% of the candidates were
able to explain that there is no restriction on the appointment of spouse of chief
executive of an associated company as the auditor.

Question 5

This question also consisted of two parts. Each part contained a situation and the
candidates were required to identify the threats involved and suggest appropriate
safeguards. Part-wise comments are provided below:

Page 2 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2016

(a) Performance in this part was above average. Majority of the candidates rightly
identified the threats and related safeguards. However, a number of candidates
identified self-interest threat which was not correct. Many candidates mentioned
irrelevant safeguards also.

(b) The performance was average. Most of the students were able to identify the self-
interest threat. However, very few candidates discussed the main issue i.e. whether
the lease was under normal conditions or otherwise.

Question 6

This question consisted of five parts. Part-wise comments are provided below:

(a) Five substantive procedures for verification of Provisions

Overall performance was above average as almost every student specified some of
the procedures correctly. However, many students tried to repeat the same points to
reach the required tally of five procedures. Further, procedures for identifying
unrecorded liabilities were usually missed.

(b) How auditor evaluates sufficiency of the audit evidence

The overall performance was reasonable. However, an important point that the
auditor would need to use his judgment to determine the sufficiency of audit
evidence was not mentioned except in few cases.

(c) How to evaluate adequacy of the work at internal audit function

This was the worst answered part of this question. Rather than focusing on
adequacy of the work most students went on to write about the independence,
competence and qualification of the internal auditor which was not in line with the
requirement of the question.

(d) Six physical access controls over an IT system

This part was well answered by majority of the students. However, some of the
students included logical controls also. Some candidates resorted to repetition of
same points. Many such students mentioned different biometric identifications such
as facial, fingerprints and eye scanning etc. as separate points.

(e) Brief discussion on Professional Skepticism

This part was generally well answered. However, many candidates discussed
professional excellence rather than professional skepticism.

Page 3 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2016

Question 7

(a) In this part of the question, the candidates were required to briefly describe the
importance of materiality at (i) planning stage and (ii) reporting stage. Most of the
students discussed the reporting stage correctly; however discussion on materiality
at planning stage was mostly sub-standard as most students did not discuss its
importance with relevance to designing the nature, extent and timing of the
procedures. In many cases it was ignored altogether. Some of the students tried to
give a combined answer in which they simply highlighted the importance of
materiality without referring to any of the two stages.

(b) The requirement was to specify the matters that need to be documented in the
working papers in respect of materiality. The overall performance was below
average as many students seemed to resort to guesswork and gave lengthy answers
covering various irrelevant issues.

Question 8

Both parts of this question on written representation were very poorly answered as
discussed below:

(a) The key issue to ponder in this case was the fact that representation provided by the
client had proved false by subsequent events. Consequently, the candidates were
expected to consider the impact of the situation on the risk assessment carried out
by the auditor previously. Most of the students failed to comprehend the situation
and focused on identifying subsequent events, discussing adjusting and non-
adjusting events and how to deal with the situation in the financial statements. Only
few students were able to give a correct answer.

(b) The performance in this part was also poor. Most of the candidates failed to
understand the importance of written representation in the given situation and
talked about carrying out alternate procedures which was not relevant.

Question 9

This question pertained to the issue of engagement of an auditor’s expert. Performance in

each part is discussed below:

(a) The requirement was to list four key terms related to engagement of an auditor’s
expert. There was wide fluctuations in the quality of the answers as a large number
of students secured full marks and almost a similar number did not score any mark
as probably because of selective studies, they didn’t have any know-how about the
given aspect.

(b) In this part, as in question 6 (c), the students failed to understand that they were
required to evaluate the work of the expert rather than the expert themselves. It
must be noted that evaluation of the work is carried out after it has been performed
as was mentioned in the question, whereas evaluation of the expert is undertaken
before appointment.

Page 4 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2016

Question 10

(a) The requirement in this part was to describe the concept of audit trail. The
performance was average. Many students tried to guess the correct answer from the
word ‘trail’ but ignored the requirement to discuss it with reference to
computerized environment. Surprisingly, a number of students continuously used
the word ‘trial’ instead of ‘trail’.

(b) The requirement in this part was to describe the concept of embedded audit facility
and its significance. The performance was below average as many students were
not able to write anything relevant and used pure guesswork. Some of the better
students were able to describe the concept correctly but seemed quite unaware of
when i.e. under what circumstances such a facility is used.

Question 11

In this question, the candidates were required to discuss the audit risks in a given scenario
which pertained to revenue recognition by a university in terms of course fee which
includes the cost of course material. It was the worst answered question in the paper.

Some of the key observations are discussed below:

 Most of the students put their entire focus on course material which was not taken
rather than the whole scenario.
 Risks of inappropriate recording of fee income and discount were rarely identified.
 Many candidates identified risks from the university’s point of view rather than from
the perspective of the auditor.
 Only few students were able to identify the steps required to deal with the situation.

(THE END)

Page 5 of 5
www.gcaofficial.org Page 213
www.gcaofficial.org Page 214
 Certificate in Accounting and Finance Stage Examinations
The Institute of 6 September 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 (a) You are working in IT department of a firm of Chartered Accountants. The partners
are concerned about the confidentiality of client data which is electronically
transmitted by firm’s staff from the clients’ offices.

Required:
Suggest controls over data transmission to ensure confidentiality of data. (03)

(b) Discuss the auditor’s course of action if management refuses to allow auditor to send
confirmation request. (Impact on audit report is not required) (05)

(c) In the context of control activities explain what is included in ‘Performance reviews’. (03)

(d) Explain the term ‘Communication protocols’. (04)

(e) Specify any four main categories of general controls that an auditor would expect to
find in a computer based information system. (04)

Q.2 (a) Discuss the external auditor’s responsibility relating to fraud in an audit of financial
statements. (04)

(b) Sometime the management’s attitude towards the audit/auditors is indicative of the
possibility of material misstatement in the financial statements due to fraud. Give four
examples of such attitude/circumstances. (04)

(c) You are the auditor of Information Limited (IL), which is engaged in the development
of customized software. During the last three years IL has become the leading
software developer in the industry due to completion of large number of projects.

During the initial meeting the client has informed that:

IL has achieved a growth of 60% as compared to the growth target of 30% set for
the financial year ended 30 June 2016 and the board of directors are considering to
distribute 25% of the profit to the management staff as performance bonus.

one of the competitors has shown its willingness to acquire IL.

Required:
Identify the fraud risk factors in the above situations. (03)

Q.3 (a) State the auditor’s responsibility in respect of ‘Assembly of final audit file’. (03)

(b) The audit report of Salim Limited was signed on 30 April 2016. After issuance of the
audit report, the auditor was informed that a major debtor has become bankrupt.

Required:
Specify the matters that the auditor would be required to document in the above
situation. (03)
 Audit and Assurance Page 2 of 3

Q.4 (a) Specify the procedures that an auditor should perform to ensure completeness of the
list of related parties provided by the directors. (06)

(b) As part of audit procedure you have requested the management of Energy Limited to
provide specific representation relating to completeness of related parties and related
party transactions.

The management is of the view that since the auditor has carried out a detailed review
in which no undisclosed transactions were identified, a written representation is not
necessary.

Required:
Evaluate the above situation, comment on the management’s stance and suggest the
appropriate course of action available to the auditor. (06)

Q.5 In relation to the audit report on financial statements and the contents thereof (under
revised/new ISAs), discuss the appropriateness or otherwise of the following statements:

(a) The management is only responsible for preparation of financial statements in

accordance with the financial reporting framework and for such internal controls as
management determines are necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error. (03)

(b) Reasonable assurance is a high level of assurance and is a guarantee that if audit is
conducted in accordance with ISAs, it will always detect a material misstatement
whenever it exists. (03)

(c) The auditor obtains an understanding of controls relevant to the audit in order to
design audit procedures that are appropriate in the circumstances and also for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control. (03)

(d) The description of the auditor’s responsibilities for the audit of the financial statements
should be included within the body of the auditor’s report. (03)

(e) The audit report can only be signed in the personal name of the auditor. (02)

(f) Key audit matters are determined from the matters communicated with the
management of the entity that required significant auditor’s attention in performing
the audit. In making that determination, the auditor shall take into account the effects
on the audit of significant events or transactions that occurred during the current year
and prior period presented. (03)

Q.6 Briefly state test of details for verifying the valuation assertion of tangible non current assets
where the company follows revaluation policy for valuation of such assets. (08)

Q.7 Daud and Company, Chartered Accountants (DC), has received an offer for appointment as
auditor of Jamal Limited (JL). Wife of Daud is a Shareholder and Director in Royal
Limited (RL).

Required:
In accordance with the requirements of the Companies Ordinance, 1984, state whether and
under what circumstances DC could accept the audit, under each of the following situations:
(a) JL holds 51% shareholding in RL. (03)
(b) JL is an associated company of RL. (05)
(c) One of the directors in JL also holds 10% shareholding in RL. (02)
 Audit and Assurance Page 3 of 3

Q.8 Identify the threats which may be involved and suggest appropriate safeguards, if any, in
each of the following scenarios:

(a) The planning phase of the annual audit of ABC (Private) Limited for the year ended
30 June 2016 is in progress. The engagement partner intends to include Kamran as a
member of audit team who joined the firm last month. Before joining the firm
Kamran was employed in the finance department of ABC. (05)

(b) Nasir is the audit manager on the audit of Diamond Limited (DL) for the year ended
30 June 2016. Nasir has informed that his father owns 10,000 shares in DL. (04)

Q.9 State any eight key procedures which are performed during a review engagement of
historical financial statements. (08)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.1 (a) Controls over data transmission may include the following:
 Firewalls to prevent intrusion into the programs that send and receive data
 Only using secured Wi-Fi with password protection
 Data encryption

(b) If management refuse to allow the auditor to send a confirmation request the auditor
should:
 inquire as to management’s reasons for the refusal, and seek audit evidence as to the
validity and reasonableness of those reasons;
 evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
 perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.

The auditor shall communicate with those charged with governance if:
 the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable; or
 the auditor is unable to obtain relevant and reliable audit evidence from alternative
audit procedures,

(c) Performance reviews – In the context of control activities, performance review includes:
 analyses of actual performance against budget and forecasts;
 analyses of actual performance against prior period performance
 control reporting and variance analysis

(d) Communications protocol

A communications protocol is set of digital rules for message exchange within or between
computers.

When systems communicate they use pre-defined formats for exchanging the messages.
This ensures that each part of the message is recognized and interpreted by the recipient in
the intended fashion.

For each communication a protocol must define:

 Syntax – the arguments used to create the message
 Semantics – how each argument is to be interpreted
 Synchronization – how the sender and receiver will actually exchange the message

Communication protocols are implemented through a combination of hardware and

software.

(e) The main categories of general controls that an auditor would expect to find in a computer-
based information system are:
(i) controls over the development of new computer information systems and applications
(ii) controls over the documentation and testing of changes to programs
(iii) the prevention or detection of unauthorised changes to programs (for example, by an
employee committing fraud or by a ‘hacker’ accessing the system)
(iv) controls to prevent the use of incorrect data files or programs

Page 1 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.2 (a) The objective of a statutory audit (an external audit) is to express an opinion on the truth
and fairness of the views presented by the financial statements. The auditor is not primarily
responsible for the prevention or detection of fraud.

The auditor will be concerned with fraud only to the extent that it might impact on the
view shown by the financial statements. He will therefore be concerned with the risk of
material fraud.

The auditor should maintain an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.

Further, he must respond appropriately to fraud or suspected fraud identified during the
audit.

(b) Management’s attitude towards the auditor which may indicate the possibility of a material
misstatement includes:
 Denial of access to records, facilities, certain employees, customers, vendors, or others
from whom audit evidence might be sought.
 Undue time pressures imposed by management to resolve complex or contentious
issues.
 Unusual delays by the entity in providing requested information.
 An unwillingness to add or revise disclosures in the financial statements to make them
more complete and understandable.

(c)  Rapid growth or unusual profitability.

 Significant portions of key management personnel’s compensation i.e. bonus being
contingent upon achieving aggressive targets for operating results.
 Pressure on management to show good profitability considering the proposed
acquisition.

A.3 (a) The auditor is required to assemble the final audit file(s) on a timely basis after the date of
the auditor’s report. This usually excludes drafts of working papers or financial statements,
or notes that reflect incomplete or preliminary thinking. After the assembly of the final
audit file has been completed, the auditor must not delete or discard audit documentation
before the end of its retention period.

(b) In such case the auditor is required to document:

 the circumstances;
 the new or additional procedures performed, audit evidence obtained, conclusions
reached and their effect on the auditor’s report; and
 when and by whom the resulting changes to audit documentation were made and who
reviewed them.

A.4 (a) In order to ensure the completeness of list of related parties provided by the client, your
audit procedures could include the following:
 Review working papers for previous years, to look for names of known related parties.
 Review the company’s procedures for identifying related parties.
 Inquire about the relationships between directors and other entities i.e. whether any
director is a director, CEO, major shareholder etc. in another company.
 Review shareholder records for the names of major shareholders.
 Review minutes of BOD meetings and general meetings of the company.
 Get confirmation from any other audit firms involved in the audit about related parties.
(e.g. in case of audit of a group of companies, more than one firm of auditors are
involved)

Page 2 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

(b) According to the International Standard on Auditing (ISAs) the auditor is required to
obtain written representations from management and, where appropriate, those charged
with governance that:
 they have disclosed to the auditor the identity of the entity's related parties and all the
related party relationships and transactions of which they are aware; and
 they have appropriately accounted for and disclosed such relationships and
transactions in accordance with the requirements of the framework.

In view of the above, the auditor should not accept the argument given by the
management. If management does not provide one or more of the requested written
representations, the auditor shall:
 discuss the matter with management/ those charged with governance;
 re-evaluate the integrity of management and evaluate the effect that this may have on
the reliability of representations (oral or written) and audit evidence in general; and
 take appropriate actions, including determining the possible effect on the opinion in
the auditor's report

A.5 (a) The statement is not appropriate, as management is also responsible for assessing the
entity’s ability to continue as a going concern and whether the use of the going concern
basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern.

(b) The statement is appropriate to the extent that reasonable assurance is a high level of
assurance. However, second statement is not appropriate as reasonable assurance is not a
guarantee that an audit conducted in accordance with ISAs will always detect a material
misstatement, due to inherent limitations of audit.

(c) The statement is appropriate to the extent that auditor has to obtain an understanding of
internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances. However, the second statement is not appropriate
because the auditor is not required to express an opinion on the effectiveness of internal
controls in conjunction with the audit of the financial statements.

(d) The statement is not appropriate the responsibilities in addition to the main body of the
audit report can be included;
 Within an appendix to the auditor’s report, in which case the auditor’s report shall
include a reference to the location of the appendix; or
 By a specific reference within the auditor’s report to the location of such description on
a website of an appropriate authority.

(e) The statement is not appropriate as the audit report can either be signed in the name of the
audit firm or the personal name of the auditor or both.

(f) The statement is not appropriate as the Key Audit Matters are selected from the matters
communicated with those charged with governance and in making those assessments
matters pertaining current period only are considered as opposed to matters pertaining to
prior period.

Page 3 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.6 Test of details for verification of valuation assertion of tangible non-current assets:
 Check the cost in the financial statements against the purchase invoices/contracts for the
assets.
 Check that the purchase expenditure is analysed reasonably between land, buildings and
equipment.
 Review the allocation of total expenditure on non-current assets between capital and
revenue amounts.
 Verify amounts in the financial statements with the valuer’s report.
 Obtain an understanding of the work of the expert through considering the reasonableness of
valuations/assumptions used in valuations.
 Evaluating the competence, capabilities and objectivity of the expert.
 Check that valuations are regularly updated.
 Check that all the assets of the similar class are revalued.

A.7 (a) JL holds 51% shareholding in RL:

As Daud & Co. (DC) is not qualified for appointment as the auditor of RL due to
directorship and shareholding of partner’s wife in RL, DC cannot be appointed as the
auditor of any of its holding company i.e. JL.

(b) JL is an associated company of RL:

DL is ineligible to act as the auditor of JL, as the spouse of the partner holds shares in the
associated company. However, since Daud’s wife holds shares prior to the appointment,
DC can be appointed as auditor of JL subject to comply with the following requirements:
 Disclose this fact to JL at the time of appointment as auditor.
 Divest her investment in RL within 90 days of appointment.

The directorship of Daud’s wife in RL is not relevant for the appointment of DC as the
auditor of JL.

(c) One of the directors in JL also holds 10% shareholding in RL:

Daud and Company can be appointed as the auditor of JL as there is no disqualification
with respect to common shareholding in another company, which is neither a subsidiary
nor an associated company of the prospective audit client.

A.8 (a) Self-interest, self-review and familiarity threats will be created, as Kamran has served as an
employee in ABC.

Safeguards:
 Conducting a review of the work performed by Kamran as a member of the audit
team,
 Not including the member in the audit team.

(b) As the father of Nasir is a close family member, having a direct financial interest in DL, a
self-interest threat is created.

Safeguards:
 Disposing as soon as practicable, of all the shares by Nasir’s father (a close family
member)
 Having a professional accountant review the work of Nasir;
 Replacement of Nasir from the Audit team.

Page 4 of 5
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.9 Procedures for the review of historical financial statements will usually include the following:
 Obtain an understanding of the entity’s business and the industry in which it operates.
 Make inquiries into:
 the entity’s accounting policies, practices and procedures, including the preparation of
financial statements
 material assertions in the financial statements that are subject to the review
 decisions taken at board meetings and other meetings of the entity that may affect the
financial statements
 the completeness of the accounting records that were used to prepare the financial
statements.
 Applying analytical procedures designed to identify unusual relationships between items in
the financial statements, and individual items that appear unusual. Analytical procedures
would include:
 comparing the financial statements under review with financial statements for prior
periods
 comparing the financial statements with the anticipated results and financial position
of the entity
 a study of the relationships between elements in the financial statements that should
be expected to conform to a predictable pattern (based on the entity’s past experience
or normal ratios/relationships for the industry as a whole).

 Other procedures that will usually be carried out in a review of financial statements
include:
 discussions with the company’s auditors (if the audit firm is not the firm of
accountants that is performing the review engagement)
 obtaining representations from management
 considering the appropriateness of the accounting policies employed by the entity
 making inquiries into subsequent events (after the date of the statement of financial
position)
 making a review of the statements as a whole.

(THE END)

Page 5 of 5
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Autumn 2016

General:

A good performance was witnessed in this paper. The primary reason was that generally
the candidates seemed to have avoided the tendency of selective studies as the
performance was almost equally good in all the questions. Question wise comments are
discussed below:

Question 1

This question consisted of five parts. Part (a), (d) and (e) were well attempted by most of
the students. In part (b) very few students were able to mention all the points. Most of the
students missed the steps relating to communication with those charged with governance.
Further, most of the students explained the implication on the report of the management
refusal which was not required. In part (c) most of the students did not say anything about
control reporting and budget analysis.

Question 2

The performance in this question was average. It was a very straight forward and should
have been a high scoring one as quite a few facts were already included in the questions.
However many students failed to understand the requirements and comprehended the
question in a different perspective.

Question 2(a)

In this part, the candidates were required to discuss the external auditor’s responsibility
relating to fraud. It was a four mark question and quite obviously the requirement was to
discuss that the primary responsibility is to express an opinion on the financial statements
and how the issue of detection of fraud is associated with the primary responsibility.
Instead, most of the students went on to explain the complete procedure how the fraud
risk factors are identified and addressed. Many students even mentioned that it is
auditors’ responsibility to identify fraud, which raised question about even the most basic
understanding of such students.

Question 2(b)

This part required the candidates to identify four examples where management’s attitude
towards the audit/auditors is indicative of a possibility of fraud. Generally the
performance was satisfactory, however, some of the students reproduced the fraud risk
factors which were not relevant as had nothing to do with management’s attitude.

Page 1 of 4
 Examiners’ Comments on Audit and Assurance – Autumn 2016

Question 2(c)

The scenario in this part of the question was quite simple and most of the students were
able to score well.

Question 3(a)

The performance in this part relating to assembly of audit file was below average as a
significant number of students were unaware of the concept and resorted to guesswork.

Question 3(b)

The performance was reasonable. However, a number of students approached this

question as a case of subsequent event. Some students went as far as discussing possible
implication on the report, though the question merely required the matters that were to be
documented in the given scenario.

Question 4(a)

It was a well answered question and most of the students secured high marks. However,
some students restricted themselves to steps for verification of the already identified
related party transactions rather than steps to ensure completeness.

Question 4(b)

This part was based on a situation whereby the management had declined to issue
specific representation regarding completeness of list of related parties and related party
transactions. The overall response was average. Most of the students were able to identify
that the reason given by the management was not acceptable and the management should
be asked to provide written representation. However, very few can clearly describe as to
what the auditor should precisely do in case of management’s refusal.

Question 5

This question consisted of six parts. Each part contained a statement regarding audit
report and contents thereof and the candidates were required to identify whether the
statement was appropriate, based on the relevant ISA. Performance in each part is
discussed below:

Question 5(a)

The performance was quite poor as generally the candidates were unable to identify that
in addition to the responsibilities mentioned in the statement, management’s
responsibility to assess the entity’s ability to continue as going concern and some related
responsibilities are also required to be mentioned in the audit report.

Question 5(b), (c) & (d)

Most of the student got high marks. Errors were rare.

Page 2 of 4
 Examiners’ Comments on Audit and Assurance – Autumn 2016

Question 5(e)

Quite a few students instead of discussing the responsibilities of signing of audit report
focused on differentiating between single member firm and firms having multiple
partners which had no relevance.

Question 5(f)

The performance in this part was poor. Students were generally not able to identify any of
the two key points, i.e. key audit matters are selected from the matters reported to those
charged with Governance and that these relate to the current year as matters only relating
to previous years are not covered.

Question 6

The performance was average as the students mostly wrote a few relevant points only.
Many students also included control tests whereas it was clearly mentioned that test of
details were required. Further, many students did not read the question carefully and only
covered revaluation rather than valuation assertion. Consequently, they wrote unduly
lengthy notes on the attributes of the valuer, whereas only a brief reference was quite
sufficient.

Question 7

This question on qualification/disqualification of auditor contained three parts/situations.

Performance in each part is discussed below:

Question 7(a)

The performance remained average as a number of students were of the view that
directorship and/or shareholding in subsidiary is not relevant in evaluating the
qualification of the auditor of the holding company.

Question 7(b)

This was a well scoring part. However, most of the students failed to mention that
directorship of the wife does not matter in the scenario.

Question 7(c)

Again a very well attempted part as most of the student correctly identified that the given
situation had no relevance as regards the appointment of auditor.

Question 8

This was the best attempted question as more than 85% students secured passing marks
and a substantial number scored high marks. Almost all the students identified the threats
correctly. Few marks were lost because some of the related safeguards were missed.

Page 3 of 4
 Examiners’ Comments on Audit and Assurance – Autumn 2016

Question 9

The requirement was to specify eight key procedures which are performed in case of a
review engagement involving historical financial statements. The performance remained
mixed. About 9% of the students did not attempt this question whereas about 12% scored
full marks.

Majority of the students, even those who managed to secure passing marks, seemed to
lack a clear understanding of a review engagement as many of the procedures included in
their answers are only performed in an audit engagement.

(THE END)

Page 4 of 4
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations.

Mark(s)
A.1 (a) 01 mark for each control over data transmission 3.0

(b) 01 mark for discussing each course of action 5.0

(c) 01 mark for each point to be included in ‘Performance reviews’ 3.0

(d) Explanation of the term ‘Communication protocols’ 4.0

(e) 01 mark for each category of general control 4.0

A.2 (a) Discussion on auditors responsibility relating to fraud 4.0

(b) 01 mark for each example of attitude/circumstances 4.0

(c) 01 mark for identification of each fraud risk factor 3.0

A.3 (a) Discussion on auditor’s responsibility in respect of ‘Assembly of final audit

file’ 3.0

(b) 01 mark for each matter to be documented 3.0

A.4 (a) 01 mark for each procedure to ensure completeness of related parties 6.0

(b)  Evaluation of the situation and comment on management stance 3.0

 Suggesting appropriate course of action available to the auditor 3.0

A.5 (a)  Appropriateness/inappropriateness of the statement 0.5

 Justification of appropriateness/inappropriateness of statement in
relation to audit report 2.5

(b)  Appropriateness/inappropriateness of the statement 0.5

 Justification of appropriateness/inappropriateness of statement in
relation to audit report 2.5

(c)  Appropriateness/inappropriateness of the statement 0.5

 Justification of appropriateness/inappropriateness of statement in
relation to audit report 2.5

(d)  Appropriateness/inappropriateness of the statement 0.5

 Justification of appropriateness/inappropriateness of statement in
relation to audit report 2.5

(e)  Appropriateness/inappropriateness of the statement 0.5

 Justification of appropriateness/inappropriateness of statement in
relation to audit report 1.5
Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2016

Mark(s)
(f)  Appropriateness/inappropriateness of the statement 0.5
 Justification of appropriateness/inappropriateness of statement in
relation to audit report 2.5

A.6 Up to 01 mark for each test of detail for verification of valuation assertion of
tangible non-current assets 8.0

A.7 (a)  Validity/invalidity of appointment 1.0

 Justification of validity/invalidity of appointment in accordance with
the Companies Ordinance, 1984 2.0

(b)  Validity/invalidity of appointment 1.0

 Justification of validity/invalidity of appointment in accordance with
the Companies Ordinance, 1984 4.0

(c)  Validity/invalidity of appointment 1.0

 Justification of validity/invalidity of appointment in accordance with
the Companies Ordinance, 1984 1.0

A.8 (a)  01 mark for identification of each threat 3.0

 01 mark for identification of each applicable safeguard 2.0

(b)  Identification of threat 1.0

 01 mark for identification of each applicable safeguard 3.0

A.9 Up to 01 mark for each procedure performed during a review engagement 8.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examinations
The Institute of 7 March 2017
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 You have been assigned the audit of Sukkur Limited (SL), a listed company, for the year
ended 31 December 2016. The company engaged in the business of manufacturing security
equipment for the local market. During the planning phase, while reviewing the previous
year’s audit file, you have noted that in 2015, due to introduction of many new equipment
in the market and changes in technology, SL faced stiff competition and its market share
reduced from 45% to 35%. However, the management has now informed you that SL has
made significant investment in technology which has helped the company to increase the
market share to 38% in 2016.

The following information has been extracted from the draft financial statements:

Extracts from the statement of comprehensive income

2016 2015 2014
(draft) (audited) (audited)
------------- Rs. in million -------------
Revenue 10,742 9,703 9,650
Cost of sales 8,050 7,177 6,740
Financial charges 750 600 350
Profit before tax 1,550 1,601 2,260

Extracts from the statement of cash flows

2016 2015 2014
(draft) (audited) (audited)
------------- Rs. in million -------------
Cash flows from operations (3,361) (1,948) (585)
Cash flows from financing activities 4,000 3,500 1,500

Required:
(a) Identify any four fraud risk factors in the above scenario. (04)
(b) Identify four audit risks which the auditor should consider while planning the audit. (06)

Q.2 (a) During the audit of Shahbaz Chemicals Limited (SCL) for the year ended
31 December 2016, the audit team had noticed that sales of SCL has declined due to
various reasons and SCL is facing difficulties in selling the existing stock of inventory
at current price levels.

Required:
Explain the steps which the auditor should perform to ensure that carrying value of
inventories is based on lower of cost and net realisable value. (04)

(b) Express Limited is a medium size entity engaged in trading of electronic appliances.
After the issuance of financial statements and audit report for the year ended
30 June 2016, a major debtor was declared bankrupt by the Court. No recovery has
been made from the debtor after year-end.

Required:
Evaluate the above situation and state the procedures which the auditor would need to
perform. (08)
 Audit and Assurance Page 2 of 3

Q.3 You are the audit partner in a firm of chartered accountants. Some of the audits are in the
finalization stage and presently the following matters are under your consideration:

(a) The management of Sohni Limited has changed its revenue recognition policy. As the
audit engagement partner you are satisfied with the accounting and disclosures related
to change in accounting policy. Further, the impact of the change is significant. (04)

(b) There is a legal dispute between Marvi Limited and one of its customers. In this regard,
the legal advisor has confirmed the stance of the management in a meeting with you.
However, he has refused to provide a written confirmation thereon. (02)

(c) The management of Laila Limited is not willing to make certain disclosures. The
management is of the view that these disclosures will not add any value to the financial
statements. Further, the information required to make these disclosures cannot be
compiled before the deadline for completion of the audit. (04)

Required:
Discuss the possible impact on the audit report and specify the procedures (if any) which
you would undertake in the above situations.

Q.4 Discuss the categories of threats and related safeguards in each of the following situations:

(a) An unlisted audit client which has recently been incorporated has requested your firm
to assist the finance department in the preparation of financial statements. (03)

(b) Saleem has recently been promoted as a partner and the audit of TTL has been
assigned to him. TTL owns and operates a chain of restaurants. The following matters
are under his consideration:

(i) Asif has been involved in the audit of TTL as audit senior for the last three years.
He has recently qualified as chartered accountant and Saleem wants to appoint
him as audit manager.
(ii) TTL’s management has requested Saleem to include Rashid, a semi-senior, in the
audit team. Rashid is the son of TTL’s Marketing Director.
(iii) The firm has long cordial relationship with the management of TTL. Saleem has
noticed that the firm often uses the restaurants run by TTL for conducting its
internal functions. (07)

Q.5 You are the audit senior on the audit engagement of Farhan Foods Limited and assigned to
attend the inventory count.

Required:
(a) State what matters you would consider while observing the inventory count. (05)
(b) State the procedures to be performed during the final audit in relation to the cut-off
assertions for sales and purchases. (03)

Q.6 (a) List any four situations that may require revision in the terms of audit engagement
letter. (04)

(b) Discuss the concepts of stewardship and accountability in the context of a limited
company and fair presentation (true and fair view) in relation to the financial
statements. (06)

(c) Discuss the course of action which may be adopted by the auditor if pre-conditions of
audit are not present. (04)

(d) State the factors which determine the extent to which an auditor may use Analytical
procedures as a form of substantive audit evidence. (04)
 Audit and Assurance Page 3 of 3

Q.7 You are currently in the planning phase of the audit of Fresh Dairies Limited (FDL) for the
year ended 31 December 2016. The information available to you in respect of the company’s
debtors includes the following:
Percentage of customers
Balance outstanding
Customer category Number of customers who confirmed the
(Rs. in ‘000)
balance last year
Distributors 20 30,500 90%
Wholesalers 2,250 12,750 70%
Restaurants 12 20,400 83%
Individual customers 5,700 9,800 20%
73,450

FDL is a low risk client and therefore you are assessing whether to send negative
confirmation requests.

Required:
In respect of each of the above categories of customers, discuss the appropriateness of
sending negative confirmation requests. (09)

Q.8 (a) Briefly state the course of action which should be adopted by a firm if the requested
written representations are not provided by the client. (02)

(b) You are the audit manager at Afzal Textile Mills Limited (ATML). While reviewing
the draft financial statements and the working paper file, the following matters have
come to your attention:

(i) There is a significant decline in the number of related parties and related party
transactions.
(ii) During the year, ATML has acquired 15% shareholding in Bashir Textiles
Limited, a listed company.
(iii) ATML owns six buildings out of which four have been revalued during the
current year while the remaining buildings would be revalued next year.

Required:
Discuss whether it would be necessary to obtain management representation in respect
of the above matters. (06)

Q.9 (a) Differentiate between General IT controls and Application controls. Also give two
examples of each type of control. (06)

(b) Discuss the effects on Application controls where General IT controls are ineffective. (03)

Q.10 Comment on each of the following situations with reference to the appointment of external
auditors in accordance with the requirement of the Companies Ordinance, 1984.

(a) Bilal and Company, Chartered Accountants has received an offer for appointment as
auditor of Dawood Limited (DL). Ghalib, a partner in Bilal and Company holds
100,000 Term Finance Certificates of DL. (03)

(b) Zain and Company, a firm of Chartered Accountants, has received an offer for
appointment as auditor of Haris Limited (HL). Imran, a partner in Zain and Company
is also a partner in Pure Investment Associates, a partnership firm, which owns 100,000
shares in HL. (03)

(THE END)
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.1 (a) Fraud risk factors in the scenario are:

 high degree of competition or market saturation, accompanied by declining
margins and profitability.
 high vulnerability to rapid changes, such as changes in technology, product
obsolescence, or interest rates.
 excessive pressure exists for management to meet the requirements or
expectations of third parties due to the need to obtain additional debt
financing to stay competitive.
 recurring negative cash flows from operations or an inability to generate cash
flows from operations while reporting profitable operation.

(b) Audit risks

(i) Risk of fraudulent financial reporting by Management override of controls:
In view of the declining earnings trend and declining margin and increase in
financing the management may be inclined to fraudulent financial reporting
by overstating the revenues or understating the expenses.

(ii) Risk of impairment in value of property, plant and equipment:

Due to introduction of new technology there is a possibility that value of
existing plant and machinery is impaired.

(iii) Risk of overstatement of existing inventory:

Due to change in technology, the demand for SL’s products has been affected
and there is a possibility that net realizable value of inventory may have
declined and a provision for obsolescence may be required.

(iv) Risk of overstatement in value of debtors:

In view of the negative operating cash flows, it seems that SL has not been
able to generate operating cash flows despite increase in sale, which might
indicate that debtors are either doubtful or not recoverable.

Ans.2 (a) Shahbaz Chemicals Limited

The following steps shall be performed by the audit team:
 Review and test the procedures in place for comparing NRV with cost for
each item of inventory.
 Review the information gathered during the physical inventory count
(e.g. deterioration of inventory) which may suggest that NRV may be lower
than cost.
 Review the records relating to goods returned by customers or allowances
granted to customers.
 Review inventory records and order books for evidence of slow-moving items
and compare their expected NRV with cost.
 Select major items of inventory from the list of stock and compare NRV with
cost.
 Review prices at which goods have been sold after the reporting period, for
evidence that NRV is higher than cost.

Page 1 of 6
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

(b) Express Limited

The auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, the matter has
come to the knowledge of the auditor and bankruptcy of customer is indicative of
condition that existed at balance sheet date as no recovery has been made from the
debtor after the balance sheet date. Had the bankruptcy been known to the auditor
at the date of the auditor's report, it may have caused the auditor to amend the audit
report, therefore, he shall:
 discuss the matter with management and, where appropriate, those charged
with governance.
 determine whether the financial statements need amendment and, if so
inquire how management intends to address the matter in the financial
statements.
 carry out the necessary audit procedures on the amendment.
 review the steps taken by management to inform about the situation to
anyone who received the original financial statements and audit report.
 extend the review of subsequent events up to the date of the new audit report
 if management does not agree to change the financial statements, the auditor
should consider the available alternative to him.

Ans.3 (a) Change in accounting policy has to be reported as a key audit matter. For this
purpose it is necessary that it should be discussed with those charged with
governance. In the key audit matter section, the auditor shall:
 include a reference to the related disclosure(s), if any, in the financial
statements
 state why the matter was considered to be one of most significance in the audit;
and
 specify how the matter was addressed in the audit.

(b) The verbal confirmation from the legal advisor cannot be taken as sufficient
appropriate audit evidence and on account of inability to obtain sufficient
appropriate audit evidence. The auditor may consider to qualify or disclaim an
opinion on the financial statements

(c) If in the opinion of the auditor the non-disclosure of information results in material
misstatement in the financial statements, he shall:
 discuss the non-disclosure with those charged with governance;
 describe in the ‘Basis for opinion section’ the nature of the omitted
information; and
 issue a qualified opinion on the basis of inability to obtain sufficient
appropriate audit evidence.

Ans.4 (a) Assisting financial statement audit client in matters such as preparing accounting
records or financial statements may create a self-review threat when the financial
statements are subsequently audited by the firm.

The related safeguards are as follows:

 Arrange for such services to be performed by an individual who is not a
member of the audit team.
 If such services are performed by a member of the audit team, use a partner or
senior staff member with appropriate expertise who is not a member of the
audit team, to review the work performed by such person, during the audit.

Page 2 of 6
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

(b) (i) As Asif is associated with the client since last three years it will create a
familiarity threat, an appropriate safeguard would be to exclude Asif from the
engagement team.
(ii) Independence of Rashid can be threatened as Rashid is a close family member
of marketing director. Although marketing director is not directly related to
the preparation of financial statements, however, he could be tempted by
management for not identifying errors due to influence of his father. In order
to provide safeguard against the threat the firm should not include Rashid in
the audit team.
(iii) Independence of audit firm can be compromised if extra ordinary benefits is
obtained for conducting internal functions at restaurants of TTL. As a
precaution, the firm should avoid using the restaurants of TTL.

Ans.5 (a) During the count, the auditor should consider:

 whether or not the count is being conducted in accordance with the written
instructions of the client’s management
 the condition of the inventory, in order to identify items where NRV might be
below cost (and in particular, inventory that seems to have deteriorated in
condition)
 whether or not inventory not owned by the client entity is properly identified
and labelled (for example, inventory owned by customers but held on the
entity’s premises)
 whether or not, during the count, production of new inventory and the
movement of inventory are controlled and properly documented, in
accordance with management’s instructions for the count
 At the end of the count, whether or not all inventory items have been counted
and tagged accordingly.

(b) Cut-off at final audit:

The audit team should take last few receiving and delivering notes on either side of
the year-end and trace these to invoices and ledgers and inventory record to ensure
that sales and purchases have been included in the correct periods and related
receivables and payables are booked accordingly.

Ans.6 (a) Situations that may require revision in the terms of engagement letter are as
follows:
 Any indication that the entity misunderstands the objectives and scope of the
audit;
 Any revised or special terms of the audit;
 A recent change in the senior management/ ownership;
 A significant change in nature or size of the entity’s business;

(b) Stewardship:
The directors have a stewardship role. They look after the assets of the company
and manage them on behalf of the shareholders.

Accountability:
As agent of the shareholders, the board of directors is accountable to the
shareholders. The directors show their accountability to the shareholders by
preparing annual financial statements and presenting them to the shareholders for
discussion and approval.

Page 3 of 6
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Fair presentation (True and fair view):

Although the phrase ‘true and fair view’ has no legal definition, the term ‘true’
implies free from error, and ‘fair’ implies that there is no undue bias in the financial
statements or the way in which they have been presented.
In preparing the financial statements, a large amount of judgement is exercised by
the directors. Similarly, judgement is exercised by the auditor in reaching his
opinion. The phrases ‘true and fair view’ and ‘present fairly’ indicate that a
judgement is being given that the financial statements can be relied upon and have
been properly prepared in accordance with an appropriate financial reporting
framework.

(c) Pre-conditions of an audit are not present:

If the pre-conditions of audit are not present, the auditor shall:
 discuss the matter with the management and explain to them what the pre-
conditions are and why they are required.
 unless required by law or regulation, the auditor shall not accept the proposed
audit engagement. If the management is unable to address the auditor’s
concern.

(d) The factors which determine the extent to which analytical procedures may be
used as a form of substantive procedures are as follows:
 suitability of particular substantive analytical procedures for given assertions;
 reliability of data from which the auditor's expectation of recorded amounts or
ratios is developed;
 whether the expectation as regards the recorded amounts is sufficiently precise
to identify a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated.

Ans.7 For sending negative confirmation, all of the following conditions are required to be
met:
(i) The risk of material misstatement has been assessed as low and controls have been
tested.
(ii) The population is comprised of large number of small account balances or
transaction.
(iii) A very low exception rate is expected.
(iv) The auditor is not aware of circumstances which would cause the respondent to
ignore his request for confirmation.

Based on the above, my comment on appropriateness of sending confirmation requests for

each category of customers are as follows:

Customer category Comments

Distributors The condition of large number of small account balances is
missing, therefore positive confirmation will be sent.
Wholesalers All the conditions of sending negative confirmation exists,
therefore negative confirmation can be used.
Restaurants The condition of large number of small account balances is
missing, therefore positive confirmation will be sent.
Individual customers It is evident from past experience that confirmation request is
usually ignored, therefore positive confirmation will be used.

Page 4 of 6
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.8 (a)  Discuss the matter with the management.

 Re-evaluate the integrity of the management.
 Take appropriate action including determining the possible effects on the
auditor’s report.

(b) (i) This must be included in a representation letter. The written representation
must cover the completeness of the information that has been provided about
the related parties and related party transactions.

(ii) This may not be included in a representation letter. The auditor should obtain
sufficient appropriate audit evidence on this matter such as checking the
shareholding in the share register, etc.

(iii) This should not be included in a representation letter. This is a matter of

incorrect accounting treatment which the auditor should discuss and resolve
with the management.

Ans.9 (a) General IT controls Application controls:

General IT controls aim to establish a Application controls are the specific
framework of overall control over the controls over the relevant applications
computer information system’s maintained by the computer. The
activities to provide a reasonable level purpose of application controls is to
of assurance that the overall objectives establish specific control procedures
of internal controls are achieved. over a particular application. In order
to provide reasonable assurance that all
transactions are authorized and
recorded, and are processed
completely, accurately and on a timely
basis.

Examples of General IT controls:

 Segregation of duties
 Password protection
 Virus checks
 Backup copies

Examples of Application controls:

 Authorisation controls e.g. data is input only by authorized personnel
 Control totals
 Batch controls
 Authorisation controls e.g restriction on printing of document.

(b) Weaknesses in general IT controls may result in IT application controls becoming

ineffective. However it is possible that manual procedures exercised by users may
provide effective controls at the application level.

Page 5 of 6
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.10 (a) According to Companies Ordinance 1984, there is no bar on Bilal and Company to
be appointed as the auditor of DL as holding of TFC’s in the audit client is not
prohibited under the provisions of the Companies Ordinance, 1984.

(b) Zain and Company is ineligible for appointment as the auditor of HL as Imran is a
partner in Pure Investment Associates, which holds share in HL which is prohibited
under the Companies Ordinance, 1984. In order to be eligible for appointment, the
fact of holding of shares is required to be disclosed at the time of appointment.
Further, the shares are to be disposed-off within 90 days of such appointment.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Spring 2017

General:

The paper was reasonably attempted and the passing percentage was 36%. However, it
was much below the passing percentage achieved in the previous attempt i.e. 54%. The
decline was mainly attributable to very poor performances in Questions # 1 and 3 which
was quite surprising as these were normal questions from frequently tested areas.

Question-wise comments.

Question 1(a)

The requirement was to identify fraud risk factors in the given scenario. The performance
was quite poor mainly because the candidates were not able to differentiate between
fraud risk factor and Audit risk. Most of the candidates identified audit risks instead of
fraud risk factors.

Question 1(b)

The performance in this part was relatively better as compared to part (a). The most
common error in this part was that the candidates stated audit risks which were not
related to the given scenario. Many students who had already identified the audit risks
erroneously while responding to part (a), tried to define audit risk which was not relevant.
Many candidates gave definitions of Inherent, Control and Detection risks.

Question 2(a)

In this part of the question, the candidates were required to specify the steps which the
auditor should perform to ensure carrying values of inventories is based on lower of cost
and NRV. The performance in this part was satisfactory. However, many students gave
generalized steps and did not say anything about the observation mentioned in the
question. Several students focused on how the NRV is computed which was not required.

Question 2(b)

This was a straight forward question from ISA 560 “Facts Which Become Known to the
Auditor after the Financial Statements Have Been Issued”. Majority of the candidates
performed well in this part also. However, it appeared that several students had not
studied the above ISA altogether. Many such students specified the steps that may be
carried out to verify the information given in the scenario, which was totally incorrect.

Page 1 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2017

Question 3

This question contained three situations (parts) and the candidates were required to
discuss the possible impact on the audit report and specify the procedures which the
auditor may be required to take, in each case. The overall performance was very poor as
only 7% of the candidates secured passing marks. A common issue in part (b) and (c) was
that many candidates only mentioned that a modified opinion would be issued but did not
specify the exact nature of modification. Further comments on each part are given below:

Question 3(a)

The performance was very poor. Only few candidates could identify that change of
accounting policy has to be reported as a key audit matter and therefore missed all the
related issues. However, the students generally scored marks by mentioning that auditor
needs to concur with the change.

Question 3(b)

It was rightly noted by majority of the candidates that refusal to grant written
confirmation by lawyer is a scope limitation in gathering audit evidence and would have
a consequential impact on the audit report either being qualified or disclaimer being
issued. However, some students presumed it to be an issue of management representation
and went into a totally different direction.

Question 3(c)

This was a simple situation where the management was unwilling to make certain
disclosures. Generally the candidates were able to identify that a qualified opinion would
be given but most of them failed to explain clearly about giving details of the nature of
information in the basis of opinion paragraph. Further, before making any final decision,
the auditor was supposed to bring the issue to the knowledge of those charged with
governance. This aspect was rarely covered.

Question 4

This question contained four simple situations [one in part (a) and three in part (b)] and
the candidates were required to discuss the threats and the related safeguards in each
case. It was well attempted as more than 70% of the candidates secured passing marks.
Comments on each situation are given below:

Question 4(a)

Most of the candidates performed well in this part of the question. Some candidates
identified self-interest threat which was incorrect. Some candidates did not mention the
correct safeguards and stated that while preparing the financial statements, the auditor
should not take any management decision which was not appropriate in the given context.

Page 2 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2017
Question 4(b)(i)

The overall performance was good. However, many candidates incorrectly identified self-
review threat instead of familiarity threat.

Question 4(b)(ii)

Good performance was witnessed in this part also. However, many candidates also
mentioned familiarity threat which was not correct. Some of them even mentioned
intimidation threat which was totally incorrect. As regards the safeguards, some of the
candidates mentioned that the work carried out by Rashid should be reviewed by a
chartered accountant which was not appropriate as the work performed by all team
members is reviewed at various stages as a matter of routine rather than in that particular
situation.

Question 4(b)(iii)

An average performance was witnessed in this sub-part. Most of the students failed to
understand that the threat would only be significant if some extra-ordinary benefit is
obtained. Some of them even mentioned that the firm should not continue as the auditor
which was quite inappropriate. In fact, the threat if any, was easily manageable by
reducing the use rather than refusing the audit altogether.

Question 5(a)

This was a straight forward question in which the candidates were asked to state the
matters to be considered at inventory count and majority of the candidates performed
well. However, many candidates gave verification steps such as agreement with ledger,
valuation of excess/shortages and verification of NRV, which were not relevant in the
context of the question.

Question 5(b)

The performance in this part was below average as the candidates generally lacked proper
understanding of the cut-off procedures. Many candidates discussed performing the
procedures on invoices but did not discuss delivery documents. Many candidates were
totally ignorant and mentioned steps such as analytical review, inspection of
suppliers/debtors statements, etc.

Question 6(a)

This straight forward question on audit engagement letter was well answered by majority
of the students. However, many candidates mentioned the key contents of the letter which
was not relevant. Some students completed the tally of four points by repeating the same
thing in different words and lost easy marks.

Page 3 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2017
Question 6(b)

The overall performance in this part was quite poor. Only few of the candidates who had
studied and could understand the question’s requirements responded well and secured
good marks. However, most of the candidates completely deviated from the concept and
related requirements outlined in the question.

Question 6(c)

This question required course of action to be adopted by auditors if pre-conditions of

audit are not present. The overall performance was poor as most of the candidates wasted
time in writing the pre-conditions which was totally irrelevant.

Question 6(d)

The performance in this part was below average. Most of the candidates misjudged the
requirement and wrote how analytical procedures are performed, whereas the question
required the factors which determine the extent to which analytical procedures are used
as a form of substantive audit evidence.

Question 7

This question in essence had two requirements i.e. conditions for use of negative
confirmations and appropriateness of the use of negative confirmation in the given
scenarios. Most of the candidates correctly identified the preconditions for use of
negative confirmations although some of them mentioned exactly the opposite of what
should have been written.

While discussing the scenario, many candidates did not seem to understand that for
sending negative confirmations, all the conditions should be met and it was not enough if
some of them were met.

Question 8(a)

A short and straight forward question on management representation which was generally
well answered.

Question 8(b)

This part required analysis of scenario and whether it was necessary to obtain
representation or not. Most of the candidates rightly stated that representation would be
required in case of related parties but erred in the other two cases. They must understand
that representation is not a substitute for available audit evidence and that it cannot justify
an incorrect accounting treatment.

Page 4 of 5
 Examiners’ Comments on Audit and Assurance – Spring 2017
Question 9(a)

The overall performance in this question was considerably below average and reflected
the candidates’ lack of knowledge in the area of IT controls. Most of the candidates could
not differentiate between general IT controls and application controls and therefore could
not give correct examples also.

Question 9(b)

This part was in continuation to the first part and where candidates failed to attend first
part, they also erred in this part. Even otherwise, very few candidates seemed to
understand that manual procedures exercised by users may provide effective controls at
the application level.

Question 10

The question was focused with reference to the requirements of Companies Ordinance,
1984 with regard to auditors’ appointment. Mixed responses were seen in response to
both parts of the questions. In part (a), only about 25% of the candidates could explain
that Term Finance Certificates are not shares and therefore the appointment is valid. In
part (b), the position was slightly better as majority of the students were aware that
shareholding of auditor in associate also needs to be considered in assessing compliance
with eligibility requirements.

(THE END)

Page 5 of 5
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in a question may exceed the total marks.

Mark(s)
A.1 (a) 01 mark for identification of each fraud risk factor 4.0

(b) 1.5 marks for identification of each audit risk which the auditor should consider
while planning the audit 6.0

A.2 (a) 01 mark for explanation of each step which should be performed 4.0

(b)
Evaluation of the situation 2.0

01 mark for mentioning each audit procedure 6.0

A.3 (a)
Discussion on the possible impact on the audit report 3.0

Audit procedures to be performed 1.0

(b)
Discussion on the possible impact on the audit report 2.0

(c)
Discussion on the possible impact on the audit report 3.0

Audit procedures to be performed 1.0

A.4 (a)
Identification of threat 1.0

01 mark for discussing each applicable safeguard 2.0

(b)
Identification of threats 3.0

Up to 1.5 marks for discussing each applicable safeguard 4.0

A.5 (a) 01 mark for each matter to be considered while observing the inventory count 5.0

(b) 01 mark for mentioning each procedure to be performed in relation to the

cut-off assertions for sales and purchases 3.0

A.6 (a) 01 mark for identification of each situation 4.0

(b) Discussion on the concept of ‘stewardship’ 2.0

Discussion on the concept of ‘accountability’ 2.0
Discussion on the concept of ‘fair presentation’ 2.0

(c) Up to 02 marks for each course of action if pre-conditions of audit are not
present 4.0

(d) Up to 1.5 marks for each factor to be considered in determining the extent of
analytical procedures 4.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2017

Mark(s)
A.7
Up to 01 mark for each condition to be met for sending negative confirmation 3.0

1.5 mark for discussing appropriateness/inappropriateness of sending negative
confirmation for each category of customer 6.0

A.8 (a) Up to 01 mark for each course of action to be adopted 2.0

(b) 02 marks for discussing each situation 6.0

A.9 (a)
Up to 1.5 marks for each differential point 4.0

0.5 mark for each example 2.0

(b) Discussing the effects on IT application control where general IT controls are
ineffective 3.0

A.10 (a)
Discussion on validity/invalidity of appointment in accordance with the

Companies Ordinance, 1984 2.0

Conclusion 1.0

(b)
Discussion on validity/invalidity of appointment in accordance with the

Companies Ordinance, 1984 2.0

Conclusion 1.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 7 September 2017
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 In response to an audit engagement letter sent to Roof Limited (RL), Mr. Aziz Aslam, the
new chief executive of RL has requested your firm to provide absolute assurance in the audit
report.

Required:
Draft an appropriate reply mentioning any four reasons why the above request cannot be
complied with. (05)

Q.2 Your firm has recently been appointed as the external auditor of Door Limited. The
engagement partner has planned a meeting with the audit team to discuss the overall audit
strategy and finalize the audit plan.

Required:
List the planning activities which you would need to discuss with the engagement partner
regarding the issues related to first year of audit engagement. (04)

Q.3 Discuss the threat(s) that may be involved and the related safeguards in each of the
following situations:

(a) Anwar, an ex-trainee has recently rejoined your firm. He is interested in acting as the
engagement manager on Curtains Limited, where he had been employed during the
past two years. (04)

(b) House Limited (HL) owns the building in which the Karachi office of your firm is
located. HL owns multiple projects across the city and provides its premises to various
concerns on rental basis. HL has requested your firm to become its auditor for the year
ending 30 June 2018. (05)

(c) Window Limited (WL), an audit client of your firm has approached the taxation
department of your firm to review the income tax return to be filed by WL. (03)

Q.4 Your firm is the auditor of Bell Limited (BL) which is engaged in manufacturing and
assembling of vehicles. BL has been encountering frequent stock-outs. To address this issue,
it has developed an Inventory Management System (IMS) and connected it with the systems
of all the suppliers. IMS generates and sends purchase orders to the suppliers automatically
when the inventory reaches the reorder threshold.

Required:
(a) Discuss the risks to be considered due to the introduction of the above mentioned
solution. (04)
(b) What controls would you expect in IMS to mitigate the above risks? (05)
 Audit and Assurance Page 2 of 3

Q.5 TS Limited is a small software house. Due to the nature of the business no significant
human resources are required except the programmers and system analysts. The Managing
Director (MD) oversees all the operations. Besides the programmers and system analysts
there is only one manager, who reports to the MD.

Required:
Describe the key characteristics of such organisations with respect to internal controls and
the risk which the auditor may face in such audits. (06)

Q.6 You are the audit manager responsible for the audit of Clocks (Private) Limited (CPL).
While reviewing the draft planning document prepared by the audit senior, you observed
that he has assessed risk of material misstatement due to fraud and risk of management
override of control as low due to the fact that CPL has been an audit client of the firm for
the last 10 years and no material misstatement had been reported in the previous years.

Required:
(a) Draft an email to be sent to the audit senior to guide him with regard to the above
matter. (06)
(b) Suggest appropriate procedures with regard to risk of material misstatement due to
fraud. (07)

Q.7 (a) Apart from profit before tax, list any four benchmarks which can be used to determine
the materiality at the financial statement level. (02)

(b) Differentiate between review engagement of financial statements and the annual audit. (04)

(c) Identify four examples of situations which may require the engagement of an auditor’s
expert. (02)

(d) Describe the limitations of flowcharts as a tool of system documentation. (04)

Q.8 On the audit of Babar Limited (BL) you have noted a transaction whereby a loan payable to
the holding company which was overdue for six months was settled by transfer of securities
owned by BL.

Required:
Evaluate the above scenario and specify the audit procedures which need to be performed. (06)

Q.9 You are the audit partner of the firm and your manager has highlighted the following
matters:

(a) The profit before tax of Tariq Limited (TL) for the year ended 30 June 2017 is
Rs. 790 million. TL provides three year warranty to its customers and has made
provision of Rs. 80 million in this regard. The management carries out the
computation internally. The process is complex and based on various assumptions.
Therefore, your firm has appointed an expert after following all the necessary
procedures for assessing the competence, capability and objectivity of the expert. (08)

(b) Your firm has been appointed as the auditor of Yaqoob Limited for the audit of the
year ended 30 June 2017. The audit team was not able to perform the inventory count
at year end because the appointment was made on 15 July 2017. (07)

Required:
Describe the steps that will be performed in each of the above situation and discuss the
possible implications of the above on the audit report. (Drafting of audit opinion is not
required)
 Audit and Assurance Page 3 of 3

Q.10 You are the audit partner of GMP & Company, Chartered Accountants. The following
matters are under your consideration:

(a) The CEO of a client is travelling out of the country on 20 September 2017 and would
not be available on the date of signing of report which is 29 September 2017.
However, he has offered to sign all the representations before leaving. (04)

(b) A client has modified the representation letter with regard to the responsibility of
management to provide the auditor with all information relevant for the purpose of
audit. It has been stated, that “except for the information destroyed in fire, we have
provided all the necessary information for the purpose of audit”. (03)

(c) The managing director of a client which is a family owned business has sent the
following email to the audit manager:

“I believe the financial statements we have provided to you are final. Although
adjustments are required to correct some of the balances, but being immaterial,
they would not affect the decision making of the owner. We therefore believe
that the audit report may now be signed and the required corrections may be
included in the representation letter”. (04)

Required:
Discuss how you would deal with the above situations.

Q.11 Open system interconnection (OSI) is a conceptual model that standardizes the internal
functions of a communication system by partitioning them into seven logical layers. Identify
and briefly describe each of these layers. (07)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.1 To CEO, APL.

An auditor cannot obtain absolute assurance because there are inherent limitations in an
audit that affect the auditor’s ability to detect material misstatements. These limitations
arise because of the following:

(i) The use of testing/sampling techniques;

(ii) The limitations that exist in any accounting and internal controls system (for
example, the possibility of collusion);
(iii) The fact that most audit evidence is persuasive rather than conclusive; and
(iv) The work undertaken by the auditor to form an opinion is permeated by judgment.

Further, other limitations may affect the persuasiveness of evidence available to draw
conclusions on particular financial statement assertions (for example, transactions
between related parties).

Ans.2 Since it will be the first time we will be auditing Door Limited, I will have to discuss the
following additional matters with the engagement partner:

 Arrangements to be made with the predecessor auditor, for example, to review the
predecessor auditor’s working papers;
 Any major issues (including the application of accounting principles or of auditing
and reporting standards) discussed with management in connection with the initial
selection as auditor, the communication of these matters to those charged with
governance and how these matters affect the overall audit strategy and audit plan;
 The audit procedures necessary to obtain sufficient appropriate audit evidence
regarding opening balances; and
 Other procedures required by the firm’s system of quality control for initial audit
engagements.

Ans.3 (a) The association of Anwar with Curtains Limited will create self-review and
familiarity threat. If the threats are significant, Anwar should not be part of the
assurance engagement team.

In case Anwar is included in the Audit engagement the related safeguards may
include:

 Involving an additional chartered accountant to review the work done by

Anwar or otherwise advise as necessary.
 Independent internal quality reviews.

(b) In the given situation, the acceptance of audit engagement will result in a business
relationship with an audit client which may pose a familiarity threat to objectivity.

However, the significance of the threat in such situation depends upon the
following:

 Whether it is in the ordinary course of business;

 Whether the tenancy agreement is on an arm’s length basis; and
 The materiality of the contract for either of the party.

From the situation given, it can be determined that this business relationship is in
the ordinary course of business on an arm’s length basis and not material to either
of the parties, hence, the engagement can be accepted.
Page 1 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

(c) Income tax return contains information which is directly related to a significant
figure in the financial statements. Therefore, the acceptance of review of income
tax return would create a self review threat.

In case the engagement is accepted the related safeguards may include the
following:

 The review may be performed by professionals who are not members of the
audit team;
 If the service is performed by a member of the audit team, a partner or senior
staff member with appropriate expertise and is not a member of the audit team,
review the tax calculations; or
 The firm does not get involved in management decision making and clarifies
this fact in the communication with the client.

Ans.4 (a) The introduction of IMS may create the following risks:

 There is an increased level of dependency on the computer system of the

organisation and also of the supplier. Any computer failure may therefore have
an increased impact on the organisation.
 There is an increased risk of possible loss or corruption of data due to the
process of transmission.
 There are also security risks in the transmission of data and unauthorised
individuals may be able to gain access to the data.

(b) Controls that could mitigate the above risks are as follows:

 Controls over transmission of data (encryption, acknowledgement systems,

authentication codes, etc.);
 Monitoring and checking of output;
 Virus protection systems; and
 Contingency plans and back up arrangements.

Ans.5 Many of the control activities that are typically found in a large company such as
segregation of duties, internal audit etc. may be inappropriate for a small entity because
they are too costly or impractical for such smaller organizations. Often, control systems
in small entities are based on a high level of involvement by the directors or owners.
Following audit risks may arise when control systems rely excessively on the involvement
of senior management:

(i) There may be a lack of evidence as to how systems are operating.

(ii) There may be lack of evidence of controls.
(iii) Management may override controls that are in place.
(iv) Management may lack the expertise necessary to control the entity effectively.

Page 2 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.6 (a) Email to job-in-charge

To: Audit Senior

Date: 07 September 2017
Subject: Risk of material misstatement due to fraud and management override of
control

I have reviewed the draft planning document prepared by you and I want to bring
your attention to the risk of material misstatement due to fraud and management
override of control.

When planning and performing an audit, we should adopt an attitude of

professional skepticism. We should have an attitude that includes a questioning
mind, being alert to conditions which may indicate possible misstatement due to
error or fraud, and a critical assessment of audit evidence.

We should recognize the possibility that a material misstatement due to fraud could
exist, notwithstanding our past experience of the honesty and integrity of the
entity’s management and those charged with governance.

Although the level of risk of management override of controls will vary from entity
to entity, the risk is nevertheless present in all entities. Due to the unpredictable
way in which such override could occur, it is a risk of material misstatement due to
fraud and thus a significant risk. Irrespective of our assessment of the risks of
management override of controls, we shall design and perform the audit procedures
for management over ride of controls.

If you require any further information on the above, please do not hesitate to
contact me

Yours faithfully,
XYZ

(b) Following are the procedures for risk of material misstatement due to fraud:

(i) Make enquiries of management in respect of:

 their assessment of the risk of material fraud;
 processes in place for identifying and responding to the risks of fraud;
and
 any specific risks of fraud identified or likely to exist.

(ii) Make inquiries of management and others within the entity as to whether
they have any knowledge of any actual, suspected or alleged frauds and to
obtain views about the risks of fraud.
(iii) Make inquires of internal audit.
(iv) Evaluate any unusual or unexpected relationships identified while performing
analytical procedures which might indicate a risk of material fraud.
(v) Evaluate information obtained from other risk assessment procedures to see if
any fraud risk factors are present.

Page 3 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.7 (a) The following can be the benchmark for determining materiality:
 Gross profit
 Total expenses / Total Revenue
 Total equity
 Total assets / Total Liabilities

(b) Review Engagement Annual Audit

The procedures performed are The procedures performed in an audit
substantially less than those performed includes test of controls, substantive
in an audit and are mostly limited to procedures, analytical procedures and
analytical procedures and inquiries. inquiries.
A review does not provide a high level An audit is designed to provide a high
of assurance and in some cases do not level of assurance to the users of the
provide any assurance. financial statements.

(c) Following are the situations which may require the engagement of an auditor’s
expert:

 legal opinions
 specialist valuation areas, such as property or pension liabilities
 analysis of complex or unusual taxation issues
 specialized inventory counts

(d) The limitations of flowchart as a tool of system documentation includes the following:
 These are only suitable for describing standard systems rather than recording
systems with numerous unusual transactions.
 Flowcharts are also not appropriate for recording systems with further
classifications of subsystems or subroutines.
 Constructing a flow chart is a time consuming process because an auditor must
learn about the operating personnel involved in the system and gather samples of
relevant documents
 There is a possibility of recording and checking areas that are of no audit
significance.
 Flowcharts are difficult to amend because a single amendment may require
changes in the entire chart.

Ans.8 Repayment of loan to the holding company in the form of transfer of securities indicates a
significant and unusual related party transaction, which is outside the entity’s normal
course of business. In this regard following audit procedures may be performed:

 Inspect the underlying contracts or agreements to evaluate whether:

– the terms of the contracts etc. are consistent with management’s explanations.
– the transactions have been properly accounted for and disclosed.
– the contracts and agreements were entered to engage in fraudulent financial
reporting or to hide the misappropriation of assets (a lack of business rationale
might indicate this).

 Obtain evidence that the transactions were properly authorised.

 If management has made a statement in the notes to the financial statements that a
related party transaction was made on the same terms as an arm’s length
transaction, the auditor must obtain evidence to support this statement.

Page 4 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.9 (a) Provision of warranty is 10% of the PBT and therefore it is material to the financial
statements

Since the expert has been appointed and matters related to his appointment have
already been considered, we may need to perform the following procedures:

 Evaluate the reasonableness of significant assumptions and methods used

 Evaluate the relevance, completeness and accuracy of source data
 Evaluate the reasonableness of the expert’s conclusions
 Carry out analytical procedures to assess the reasonableness of the provision as
compared to other relevant items
 Confirm that the accounting provisions of IAS 37 have been complied with, in
making the provision
 In case there is a difference between the valuation of the auditor’s expert and
the valuation of the management, discuss the difference with the management.

Reporting implication
In case the difference between the valuation of the auditor’s expert and the
valuation of the management is material and cannot be resolved, we will have to
give a qualified opinion.

However, if we have obtained sufficient appropriate evidence regarding the

valuation and presentation of the warranty provision, then we will have to include
relevant details under the heading of key audit matters in our audit report, because
it is an area of higher assessed risk of material misstatement due to involvement of
high degree of uncertainty and significant auditor judgment.

(b) Our firm was not appointed as auditors of the YL until 30 June 2017 and thus did
not observe the counting of physical inventories as the end of year 30 June 2017. In
this situation, we may perform the following procedures:

 Conduct physical inventory count after the date of the financial statements.
 Check whether the changes in inventory between the count date and the date
of the financial statements are properly recorded.
 Investigate the reason for significant differences between the information
obtained during the physical count and the inventory records.
 Assess the reliability of inventory records.

Reporting implication
If the auditor concludes that it would be impracticable or not possible to work back
the inventory then this would be a scope limitation and depending upon the
material and pervasiveness of the amount of inventory, the auditor should qualify
or disclaim his opinion.

Furthermore, the auditor should include other matter paragraph and mention that
the prior period financial statements were audited by another auditor.

Page 5 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2017

Ans.10 (a) Offer of CEO cannot be accepted as the letter of representation is to be dated as
near as practicable (but not after) the date of audit report, because:

 written representation is also obtained in respect of subsequent events

 further matters might also arise during the course of audit for which we may
require management representation.

However, the written representations are requested from those responsible for the
preparation of financial statements. Therefore, in the absence of the Chief
Executive Officer, management representation may be obtained from the Chief
Financial Officer and those charged with governance.

(b) If the management modifies our requested wording, we may still be able to
conclude that it is a reliable representation.

However, before arriving at any conclusion, we must consider the effects of the
information destroyed in the fire on the financial statements and on our ability to
obtain the necessary audit evidence and the possible impact on our audit report.

(c) If adjustments are immaterial, representation letter may include the effect of any
uncorrected immaterial misstatements. However, the decision regarding materiality
of the uncorrected misstatements is to be made by the auditor and not by the client.

Further, materiality depends on the fact that omission or misstatement would

influence the economic decision of the user, and the financial statements are
relevant not only for the owners but also for other users which may include
bankers, government institutions, etc., therefore, the comment of the managing
director regarding the effect on decision making is not correct.
If financial statements remain uncorrected and the required correction is material
also, its impact on audit report would need to be assessed.

Ans.11 Following are the logical layers of OSI:

 Physical – defines electrical and physical specifications for devices – e.g. copper, fibre
optic cable, etc.
 Data link – provides functional and procedural means to transfer data between network
entities and to detect and correct errors that may occur in the physical layer.
 Network layer – provides functional and procedural means of transferring variable
length data sequences from a source host on one network to a destination host on a
different network.
 Transport layer – provides transparent transfer of data between end users providing
reliable data transfer services to the upper layers.
 Session layer – controls the connections (dialogues) between computers. The session
layer establishes, manages and terminates the connections between the local and remote
application.
 Presentation layer – establishes context between application-layer entities in which the
higher-layer entities may use different syntax and semantics if the presentation service
provides a mapping between them.
 Application layer – This is the OSI layer closest to the end user as it interacts with
software applications that implement a communicating component.

(THE END)

Page 6 of 6
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Examiners’ comments
Audit and Assurance
Certificate in Accounting and Finance
Autumn 2017 Examinations

General:

The overall passing percentage in this attempt was quite poor as only 14.7% candidates
secured passing marks as compared to 35.8% in the previous attempt. Majority of the students
performed well in straight forward memory based questions but reflected poor skills in
attempting scenario based questions and those requiring application of knowledge.

Question-wise Comments:

Question 1

This question was based on a simple scenario according to which a client had requested the
auditor to provide absolute assurance in the audit report. The candidates were required to draft
an appropriate reply.

The question was simple and majority of the candidates i.e. 65% obtained passing marks. The
common mistake was that instead of mentioning the inherent limitations of audit, the inherent
risks were mentioned.

Question 2

In this question the candidates were required to list the activities which the audit team would
like to discuss in its initial meeting with the engagement partner, covering issues pertaining to
the first year of audit engagement. The overall performance remained average as around 30%
candidates secured passing marks. However, a large number of students (around 40%) had no
idea whatsoever of the issues which are discussed at planning stage and could not secure even
a single mark. Many candidates did not restrict themselves to issues concerning the first year
of audit and wasted time by covering other areas of planning.

Question 3

This question required identification of threats and related safeguards to be applied in three
different situations each covered in a separate part of the question. The overall passing
percentage was 23%. Comments on each part are given below:

Part (a)

Majority of the answers suggested only one safeguard i.e. not to allow Anwar to be the
engagement manager. Hence, safeguards in case the threat is not considered significant and
Anwar is appointed as the engagement manager were not covered.

Page 1 of 5
 Examiners’ comments on Audit and Assurance,
CAF Examination Autumn 2017

Part (b)

The performance remained below average. Most of the students took the easy way out of
suggesting that the firm should refuse to accept the audit, without giving any reason or simply
mentioning conflict of interest. Only few candidates were able to suggest correctly that the
significance of the threat should be evaluated and the basis thereof.

Part (c)

Majority of the students performed well in this question, however some students identified
familiarity threat instead of self-review threat.

Question 4

This question pertained to Electronic Data Interchange and required the students to discuss the
risks involved in introducing an inventory management system which was connected with the
systems of all the company’s suppliers and the controls to mitigate such risks. The
performance in this question was very poor and only 15% candidates scored passing marks.
Most of the students enumerated the risks involved in purchase of inventories which was
totally irrelevant and ignored the risks associated with the connectivity to the suppliers’
systems. Consequently, the controls required to address the risks were also incorrect.

Question 5

This question was about a small software house where all the operations were overseen by the
Managing Director. The senior staff consisted of analysts and programmers and just one other
manager who reported to the MD. The requirement was to describe the key characteristics of
such organizations with respect to internal controls and risks.

The response was average and about 29% of the candidates secured passing marks. Answers
were mostly generic and important points like lack of evidence of operation of systems and
internal controls were usually missing. Key characteristics of large organizations such as
segregation of duties, internal audit are usually not found in small organizations this needs to
be portrayed which were missed by most of the candidates. Moreover, many candidates wrote
risks pertaining to programmers and system analyst which was totally irrelevant.

Question 6

This question was based on a simple scenario whereby in the planning stage an audit senior
had assessed the risk of misstatement due to fraud as low because of previous experience with
the client which spanned over ten years. The requirement was to guide the audit senior in the
given situation and to suggest appropriate procedures with regard to risk of material
misstatement due to fraud.

The performance remained poor as only 17% of the candidates secured passing marks. The
risk of material misstatement due to fraud and management over ride of controls is primarily
discussed in ISA 240 however students were generally not able to link the relevance. The
candidates were expected to highlight and briefly discuss the importance of professional
skepticism, the unpredictable nature of this risk and hence its significance in all situations.
Most of the students did not proceed accordingly and listed down whatever they could think of.
Page 2 of 5
 Examiners’ comments on Audit and Assurance,
CAF Examination Autumn 2017

Moreover, while discussing the procedures, many candidates wrote the procedures where fraud
has been identified or is suspected, rather than the required procedures which pertained to the
planning phase.

Question 7

This question contained four parts. The overall performance was good as 57% candidates
secured passing marks and about 10% of the candidates secured high marks. Part wise
comments are given below:

Part (a)

It was probably the simplest of questions and the requirement was to specify four benchmarks
which may be used for determination of materiality. Almost all the students scored high or full
marks in this part of the question.

Part (b)

In this part of the question, the candidates were required to differentiate between a review
engagement and an annual audit. Mostly the performance remained good. However, many
candidates went into too much detail without considering the fact that only 04 marks were
available. Consequently, lot of precious time was wasted which puts unnecessary pressure on
the remaining questions.

Part (c)

This question was almost as simple as part (a) and was well performed by most of the
candidates.

Part (d)

In this part of the question, the candidates were required to describe the limitations of flow
charts as a tool of system documentation. As has been discussed in the general comments,
most of the candidates were not prepared on IT side of the syllabus. The performance in this
part proved this point once again as irrelevant answers were provided by most of the
candidates.

Question 8

This question pertained to a scenario according to which a loan to the holding company was
settled in an unusual manner i.e. by issuance of shares. The candidates were required to
evaluate the situation and suggest the required audit procedures. The overall performance
remained poor as only 18% of the candidates secured passing marks.

A good number of students identified the related party relationship but failed to identify it as a
transaction outside the normal course of business and listed general audit procedures related to
related party transactions. Moreover some of the students ignored the fact that it was a related
party transaction and perceived it as a going concern problem which was totally incorrect.

Page 3 of 5
 Examiners’ comments on Audit and Assurance,
CAF Examination Autumn 2017

Question 9

This question contained two parts and each part contained an independent situation. The
candidates were required to specify the audit steps to be performed and possible implications
on the audit report in the given scenarios. The overall performance was very poor as only 6%
candidates could secure passing marks. Part wise comments are given below:

Part (a)

According to the given situation, the audit firm had hired an expert for evaluation of provision
for warranty provided to the customers. The amount of provision had been computed by the
client internally using certain complex assumptions.

The performance was extremely poor but could have been better. Majority of the candidates
did not read the question carefully and suggested procedures related to assessing the
competence and capability of the expert as they clearly disregarded the fact that according to
the question these aspects had already been considered by the firm. This situation can have
been avoided easily. Moreover, while discussing the implications on the audit report, the
reporting of the issue as a key audit matter was mostly ignored. Complete answers covering all
angles were rare.

Part (b)

It was a simple scenario according to which the auditor was not able to perform inventory
count because the appointment was made after year-end. The candidates were generally able to
discuss the requirement to carry out stock taking as soon as possible and verification of the
movement. However, while discussing the reporting implications, very few students could
visualize that verification of the changes between the year-end and inventory count date may
not always be possible. Further, besides inventory, another issue also emerged from the
scenario i.e. that it was the first year of audit. The requirement to include other matter
paragraph in such a situation was also not mentioned in majority of the cases.

Question 10

This question was divided into three parts. Each part contained a situation and the candidates were
required to comment how the audit partner would deal with it. The overall performance was extremely
poor as only 3% of the candidates secured passing marks. Part wise comments are given below:

Part (a)

In this situation, the CEO was travelling abroad and was not available on the date of the report and
therefore he had offered to sign all representations before leaving. The overall performance was very
poor as most of the candidates were unable to grasp that representations should be as near as
practicable, before the audit report. Further, very few could specify that it is not necessary that CEO
should sign the representation.

Part (b)

This was a tricky situation in which the management had stated in its written representation
that “except for the information destroyed in fire, we have provided all the necessary
information for the purposes of audit”. The performance in this part remained extremely poor.
Page 4 of 5
 Examiners’ comments on Audit and Assurance,
CAF Examination Autumn 2017

Most of the students only discussed one aspect i.e. whether the management’s stance was
reasonable or not. The failed to understand that even if the stance was correct and reasonable,
the auditor cannot give an unmodified opinion merely on that basis. However, whether any
modification is needed or not would depend on the significance of the information destroyed
and the auditor’s ability to obtain audit evidence through other means.

Part (c)

According to this scenario the MD of the client had written a letter to the firm that financial
statements provided by them are final except for certain immaterial adjustments which would
not affect the decision making of the owner and therefore the audit report should be signed and
required adjustments should be included in the representation letter. The performance was
relatively better, however, only few students commented on the fact that it is not just the
owner whose decisions are based on the financial statements; there are other stakeholders also
for whom financial statements are important.

Question 11

This question required identification and brief description of open system interconnection
(OSI). The performance in this question was quite poor as about 42% students did not attempt
this question whereas 16% students could not secure any mark. However, there were good
performances as well as about 7% of the students secured full marks.

(THE END)

Page 5 of 5
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017

Note regarding marking scheme:

The marking scheme is given as a guide. However, markers also award marks for alternative
approaches to a question and relevant/well-reasoned comments/explanations. Moreover, the
available marks in answer may exceed the total marks of a question.

Mark(s)
A.1
Mentioning the reason of not giving absolute assurance 1.0

01 mark for identification of each inherent limitation 4.0

A.2 01 mark for each planning activity related to first year of audit engagement 4.0

A.3 (a)
Identification of threats 1.0

01 mark for discussing each safeguard 3.0

(b)
Identification of threat 1.0

Discussion on the significance of threat 3.0

Discussion on the safeguard / decision 1.0

(c)
Identification of threat 1.0

Up to 01 mark for discussing each safeguard 2.0

A.4 (a) 01 to 02 marks for discussion on each risk 4.0

(b)
01 mark for identification of each control 4.0

0.5 mark for each example of control 1.0

A.5
Discussion on the key characteristics of small organizations with respect to

internal control 2.0

01 mark for each risk faced by the auditor 4.0

A.6 (a)
Discussion on the concept of professional skepticism 2.5

Discussion on the presence of risk of material misstatement of fraud
and management override of control 2.5

01 mark for the presentation of the email 1.0

(b) 01 mark for each procedure with regard to risk of material misstatement due
to fraud 7.0

A.7 (a) 0.5 mark for each benchmark 2.0

(b) 01 mark for each difference 4.0

(c) 0.5 mark for each example 2.0

(d) 01 mark for each limitation of flowchart 4.0

A.8
Identification of transaction as significant and unusual related party

transaction outside normal course of business 1.0

01 mark for each audit procedure 5.0
Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2017

Mark(s)
A.9 (a)
01 mark for each procedure related to evaluation of expert’s work and
verification of warranty provision 6.0

Discussion on reporting implication 2.0

(b)
01 mark for each procedure related to inventory verification 4.0

Discussion on reporting implication 3.0

A.10 (a)
01 mark for each reason for not accepting written representation on
20 September 2017 3.0

Discussion on who can provide the written representation 1.0

(b)
Discussion on acceptability of written representation 1.0

Evaluation of situation and the impact on report 2.0

(c)
Discussion on acceptability of managing director’s suggestion 1.0

Discussion on the concept of materiality 1.0

Evaluation of the situation and the impact on audit report 2.0

A.11
0.5 mark for identification of each layer 3.5

0.5 mark for brief description of each layer 3.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 6 March 2018
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 (a) On 5 March 2018, HSB & Company, Chartered Accountants (HSB) has been offered
appointment as external auditor of Tahir Limited (TL) for the year ending
31 December 2018. TL is the subsidiary of Crypto Bank Limited (CBL), which is
audited by another firm of chartered accountants.

Hatim, a partner of HSB is using credit card of CBL and the balance outstanding
against it on 28 February 2018 was Rs. 1.1 million. Hatim plans to clear the dues by
30 July 2018, which is well before the commencement of audit. It is expected that the
audit planning activities will commence from 1 November 2018.

Required:
Comment on the above situation in the light of Companies Act, 2017. (04)

(b) State the matters which an auditor should consider to establish whether the
pre-conditions for an audit are present. (05)

Q.2 You are the audit manager in a firm of chartered accountants. Following is the extract of
the email received from the job-in-charge responsible for the audit of your client Concordia
Limited (CL) for the year ending 31 March 2018:

“I am considering to circulate negative confirmations on 1 April 2018 for debtor

balances outstanding as on 31 March 2018 as firstly, the reporting deadlines at CL
are very stringent, secondly, the population comprises of a large number of small
balances and thirdly, risk of material misstatement has been assessed as low.

I have also been offered by CL’s CFO that one of their staff would get all the
confirmations signed from the debtors and deliver them to our firm’s office. This
could help us in meeting the reporting deadline.”

Required:
Comment on the suggestions of the job-in-charge. Assuming that the suggestion by job in
charge is not considered appropriate, suggest an alternative approach keeping in view the
time limitations. (06)

Q.3 Faheem is the audit manager on audit of Blue Bell Limited (BBL) for the year ending
31 March 2018, which is in the planning stage. BBL has a well-established internal audit
function which reports directly to the audit committee. The staff of the internal audit
department have adequate level of competence and are members of professional accounting
bodies.

Considering the above, Faheem intends to engage internal auditors to perform audit
procedures for certain audit areas.

Required:
On behalf of the engagement partner, provide appropriate guidance to Faheem to assist him
in selecting the areas where direct assistance of internal auditors can be utilized. (06)
 Audit and Assurance Page 2 of 4

Q.4 (a) You are the audit partner at BLC & Company, Chartered Accountants. The following
matters are under your consideration:

(i) Artificial Technologies Limited (ATL) has recognised an intangible asset of

Rs. 100 million in respect of development costs relating to a software which
ATL expects to market in future.

The market research conducted by ATL indicates a promising demand for such
software. However, the expected cost required to complete the software has
increased significantly and ATL requires further Rs. 50 million to complete the
project. Since ATL has already utilised its existing credit limit on other projects,
it is facing difficulties in raising financing for the above software.

ATL’s draft financial statements show profit before tax of Rs. 270 million. (05)

(ii) RL is involved in the manufacturing and supply of beverages throughout

Pakistan, through its plant situated in Lahore. During the year, a fire occurred at
RL’s plant due to which a significant portion of the plant has been destroyed.
The management has written off the plant and recorded an insurance claim
amounting to Rs. 400 million. The written down value of the plant at the time of
fire was Rs. 390 million.

RL is negotiating the purchase of another plant and order is expected to be

placed soon after receiving the insurance claim.

RL’s draft financial statements show profit before tax of Rs. 300 million. (07)

Required:
Discuss how you would deal with each of the above situations and the possible
implications of the above on the audit report. (Drafting of audit opinion is not required)

(b) While reviewing the list of ‘trade and other payables’ at BAC Limited, you have
noticed that one of the trade creditors is not in the list. State any two audit procedures
to be performed in relation to the completeness assertions for trade payables. (02)

Q.5 (a) Discuss the threats and the related safeguards in each of the following situations:

(i) Saleem is the audit senior at Mango Industries Limited (MIL). MIL’s finance
manager has requested him to provide the residential addresses of the
engagement manager and the engagement partner. The finance manager wants
to send them one of MIL’s latest product. (03)

(ii) Akram is the audit senior engaged on the audit of Dragon Limited (DL). He has
informed the audit manager that he has been offered a job by DL and that he
would be joining DL from 1 April 2018. The audit is expected to be completed
on 15 March 2018. (03)

(b) Amjad is the audit senior at Orange Limited (OL), a software house. OL has adopted
IFRS 15 ‘Revenue from Contracts with Customers’ for preparation of its financial
statements for the year ending 31 March 2018. However, the manager finance of OL
is indecisive as regards revenue recognition on certain contracts.

He has asked Amjad to suggest accounting treatment of such contracts in accordance

with IFRS 15. Amjad does not have in-depth knowledge of this IFRS and therefore,
he has consulted his friend who has recently attended a workshop on IFRS 15.

Required:
(i) Discuss the threats in the above situation. (03)
(ii) What actions the firm should take to ensure that such situation is avoided in
future? (03)
 Audit and Assurance Page 3 of 4

Q.6 (a) Briefly discuss the key benefits which may arise due to splitting of work between
interim and final audit. (02)

(b) Briefly describe any three risks of material misstatement in case of significant related
party transactions. (03)

(c) What course of action should the auditor take, if he doubts the reliability of the
management representation due to its inconsistency with other audit evidence? (04)

(d) Discuss the circumstances in which an auditor may include other matter paragraph in
the audit report. (04)

(e) State any four controls that an auditor expects over data transmission. (03)

(f) Auditor should actively look for subsequent events up to the date of auditor’s report.
State the procedures which an auditor should perform specifically for identification of
subsequent events. (04)

Q.7 You have been assigned the audit of Pacific Shipping Limited (PSL) for the year ended
31 December 2017. During the audit, you have noted that the invoicing system was not
operational for four days in January 2017. Upon inquiry, you were informed that some
changes were made by one of the three programmers working in the IT department, merely
on the request of a sales officer. The change caused the whole invoicing system to
malfunction and it had to be closed down. During these four days, all invoices were
generated manually.

Required:
Identify any three control weaknesses in the above situation and suggest any two mitigating
controls against each weakness. (09)

Q.8 Green Limited (GL) is a listed company engaged in the manufacturing of garments and
apparels. During the audit planning meeting for the year ending 31 March 2018, the Chief
Financial Officer of GL has provided the following information:

(i) GL was previously exporting all its production under the brand name of ‘Wearables’.
However, it has been facing the issue of decline in export orders and therefore has
decided to start focusing on the local market. Accordingly, it has made an agreement
with BL, according to which GL’s products would be sold to BL who would market
them through BL’s retail outlets spread throughout Pakistan. A director of GL holds
major shareholding in BL.

(ii) Two of the directors of GL holding 16% and 13% shares in GL have informed the
Board that they intend to sell their entire shareholding in GL in order to concentrate
on some of their other businesses.

(iii) While discussing some of the internal control deficiencies in the payroll processing
department, which were raised in the previous year’s management letter, the CFO has
informed that the matter has been referred to the internal audit department but is
pending because of the illness of the Chief Internal Auditor.

Required:
(a) Identify fraud risk factors in the above scenario. (04)
(b) Describe what actions an auditor should take on identifying a fraud risk factor. (05)
 Audit and Assurance Page 4 of 4

Q.9 You are audit senior at Advanced Limited (AL) which is engaged in the business of
assembling and marketing of consumer electronics. The process followed by AL for
procurement is as follows:

(i) Store Department generates a numerically sequenced purchase requisition (PR), when
the quantity falls below re-order level. PR shows the name of goods and quantity
required and is signed by the store officer. The approved PR is forwarded to the
Purchase Department for procurement.
(ii) Purchase Department has a list of suppliers which was prepared in 2015 by including
all the suppliers who had supplied goods to AL during the previous five years. Later,
some suppliers were added to the list on the recommendation of the store manager.
(iii) When a PR is received, the five most experienced suppliers are contacted and purchase
order (PO) is issued to the most experienced supplier provided he agrees to supply the
goods on the same price which was paid by AL on the latest purchase. The PO is
issued in the form of an email by the purchase manager. A copy of the email is also
sent to the store manager and the finance manager. In case of large or unusual
purchases, PR and PO are also authorised by the store manager prior to sending the
email.
(iv) On receiving the goods, the store officer agrees the goods dispatch note (GDN) of the
supplier with the PO to ensure that description of goods is the same as were ordered by
AL. An acknowledged copy of GDN is given to the supplier and another copy is sent
to the accounts department.
(v) Store Department prepares sequentially numbered Goods Received Note (GRN),
which is signed by the store officer after counting the goods received. Entry in the
stores ledger is made on the basis of GRN.
(vi) On receiving the invoice, purchase is recorded by the accounts department after
comparing the quantity received as per the GDN with PO and the invoice.

Required:
Identify the weaknesses in the internal control system of AL and their possible effects and
give your recommendations to AL. (15)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.1 (a) A person shall not be qualified for appointment as auditor if he/she is indebted to
the company or any of its holding or subsidiary company other than in the ordinary
course of business of such entities. Further, a person who owes a sum of money not
exceeding one million rupees to a credit card issuer shall not be deemed to be
indebted to the company.

Hatim’s plan that he would pay off all his dues before the commencement of audit
is not valid, as the auditor appointed in the general meeting holds the office from
the conclusion of that meeting until the conclusion of the next annual general
meeting. If the firm intends to be appointed as the auditor of TL, Hatim would have
to reduce the amount due on his credit card to less than Rs. 1 million prior to the
firm’s appointment as the auditor of TL.

(b) To establish if the preconditions for an audit are present, the auditor shall:

 establish if the financial reporting framework to be used in the preparation of

the financial statements is acceptable; and
 obtain the agreement of management that it acknowledges and understands its
responsibility (the ‘premise’):
 for the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their
fair presentation;
 for internal controls to ensure that the financial statements are not
materially misstated; and
 to provide the auditor with all relevant and requested information and
unrestricted access to all personnel.

Ans.2 We cannot choose to circulate negative confirmation merely on the fact that risk of
material misstatement has been assessed as low and majority of the balances comprise of
large number of small balances. Before using the negative confirmation as the substantive
procedures, we also need to ascertain that:

 exception rate is expected to be low; and

 there is no apparent reason to suspect that the customers would disregard the
confirmation request.

Furthermore, we cannot consider the offer of CFO because we should maintain control
over external confirmation requests which include sending the requests ourselves with an
instruction for responses to be sent directly to us.

Ideally, confirmation of balances should take place after the reporting period, and should
be based on customers’ account balances as at the reporting period. However, to reduce
the time pressure at the final audit stage, the confirmation process can also be based on
balances at an interim date before the end of the financial year (normally no more than
three months before the end of the reporting period). However, while doing so, we should
consider the fact that we will need to check the changes in the debtor balances between
the confirmation date and the end of the reporting period.

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.3 Before selecting the areas where direct assistance of internal auditors can be used. Faheem
should consider the following matters:

 The internal auditor should not be involved in making significant amount of

judgement in:
 planning and performing audit procedures; and
 evaluating the audit evidence gathered.
 The audit areas assigned to internal auditors should not relate to areas where risk of
material misstatement is assessed as high.
 Evaluate the existence of threats to objectivity and level of competence of the
internal audit staff who will be providing direct assistance
 The areas assigned should not relate to work in which the internal auditors have
been involved and which has already been, or will be, reported to management or
those charged with the governance by internal audit function.
 The areas assigned should not relate to the decisions you make in accordance with
ISA regarding the internal audit function and the use of its work or direct assistance.
 It should be ensured that despite using internal auditors to provide direct assistance
to the extent planned, together with the planned use of the work of the internal audit
function, the external auditor would still be sufficiently involved in the audit, given
the external auditor’s sole responsibility for the audit opinion expressed.

Ans.4 (a) (i)  The intangible asset measured at Rs. 100 million is material as it represents
37% of profit before tax.
 IAS 38 requires that the entity should be able to demonstrate the
availability of adequate technical, financial and other resources to complete
the development and to use or sell the intangible asset. As ATL appears to
be short of finance, it is questionable whether sufficient funds would be
available to complete the development work and take the product to
market. Therefore, it appears that the criteria for capitalization of
development costs contained in IAS 38 Intangible Assets is not met.
 Discuss this matter with the management and those charged with
governance to assess their plans for arranging the necessary finance. In case
the auditor believes that there is a doubt as regards the company’s ability to
complete the development work, the intangible asset should be
derecognized and the auditor should request the management to amend the
financial statements.
 If the management fails to resolve the issue appropriately, the auditor may
have to qualify the report as the misstatement is material, but not pervasive.

(ii)  Since the fire has destroyed a significant portion of RL’s plant, the auditor
should consider RL’s ability to continue as a going concern.
 Evaluate financial condition of RL as the cost of new plant is expected to
be much higher and insurance claim of Rs. 400 million may not be
sufficient to purchase a new plant.
 Discuss with the management and those charged with governance that how
they intend to finance the new plant and the operational expenses during
the closure of the plant.
 Inspect the insurance policy and the correspondence with insurance
company for the verification of the insurance claim.
 Read the minutes of those charged with governance for further details.
 Analyze the latest available interim financial statements, to assess the
impact of the accident on RL’s financial performance.
 In case the going concern basis is inappropriate but the financial statements
have not been adjusted accordingly we will express an adverse opinion.

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

 In case going concern basis is appropriate but material uncertainty exists

and the management has not made appropriate disclosures, we will express
a qualified or adverse opinion depending upon the materiality and
pervasiveness of the situation.
 If the management has made appropriate disclosures in the financial
statements regarding material uncertainty, we will express an unmodified
opinion and will draw attention to the disclosure through a separate section
under the heading material uncertainty related to going concern.

(b)  Review the list to identify major suppliers i.e. regular suppliers of frequently-
purchased items who are not in the listing of trade payables.
 Compare the list of trade payables with the listing of the previous year’s audit.
Look for explanations as to why any major supplier is not appearing on the
current year’s listing.
 Apply other analytical procedures and obtain explanations for any significant
differences identified while carrying out the above tests.

Ans.5 (a) (i) Accepting of gift may create self-interest and familiarity threats.

If the value of the gift is not clearly insignificant, the threat to independence
cannot be reduced to an acceptable level by the application of any safeguard.

Consequentially in such situation, the members of the audit team should be

instructed not to accept the gift.

(ii) A self-interest threat is created when a member of the audit team participates
in the audit engagement while knowing that he / she may join the client
sometime in the future.

On receiving such notification, the significance of threat shall be evaluated

and following safeguards could be applied:
 Removing the individual from the audit team; or
 A review of any significant judgments made by that individual while on
the team.

(b) (i) Following are the threats in the mentioned situation:

 Suggesting the client about accounting treatment would create a self-
review threat, because that accounting treatment will also be the subject
matter of the assurance engagement.
 Even though Amjad’s friend has attended the workshop on IFRS-15, it
does not necessarily mean that he is competent enough to advise the client
regarding the accounting treatment under IFRS-15, as it could involve
significant judgment. It would create a threat to professional competence
and due care.
 Sharing of information with his friend may create threat to confidentiality.

(ii) Following actions could be taken by the firm to avoid such a situation in
future:
 Regularly conduct professional development of its staff for any recent
changes or updates in professional pronouncement.
 Circulate documented internal policies and procedures requiring
compliance with the fundamental principles.
 Implement an effective disciplinary mechanism to promote compliance
with policies and procedure.
Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Ans.6 (a) Key benefits that may arise from splitting the work between interim and final audit
are as follows:
 More flexible resource planning within the firm (the timing of interim audit is
typically more flexible than the timing of final audit. This helps to reduce
demand for audit staff during ‘busy season’)
 Earlier identification of significant matters
 Shareholders and other users receive audited accounts earlier/Earlier
completion of the audit
 Increased audit efficiency

(b)  Accounting systems may not be effective at identifying and summarizing

related party transactions and balances.
 Related party transactions may not be conducted on normal market terms.
 Related parties may operate through complex structures and therefore may be
used to commit fraud.

(c)  Perform other audit procedures to attempt to resolve the matter or finalize your
view point.
 Consider the effect of the above on reliability of other representations and the
audit evidence.
 Consider whether the risk assessment remains appropriate and if not, revise the
risk assessment and determine the nature, timing and extent of further audit
procedure. The auditor may also reconsider assessment of the competence,
integrity, ethical values or diligence of the management.
 If the auditor has concerns about the integrity of management, he should
document those concerns and consider withdrawing from the audit and the
impact on the report.

(d) Following are the circumstances in which an auditor may include other matter
paragraph in the audit report:

 Relevant to Users’ Understanding of the Audit: In the rare circumstance

where the auditor is unable to withdraw from an engagement, the auditor may
consider it necessary to include an Other Matter paragraph in the auditor’s
report to explain why it is not possible for the auditor to withdraw from the
engagement.
 Relevant to Users’ Understanding of the Auditor’s Responsibilities or the
Auditor’s Report: Law, regulation or generally accepted practice in a
jurisdiction may require or permit the auditor to elaborate on matters that
provide further explanation of the auditor’s responsibilities in the audit of the
financial statements or of the auditor’s report thereon.

 Reporting on more than one set of financial statements: An entity may

prepare set of financial statements in accordance with more than one
framework and engage the auditor to report on both sets of financial
statements. If both the frameworks are acceptable, the auditor may include an
Other Matter paragraph in the auditor’s report
 Restriction on distribution or use of the auditor’s report: When the financial
statements are prepared for a specific purpose, the auditor may consider it
necessary to include an Other Matter paragraph, stating that the auditor’s
report is intended solely for the intended users, and should not be distributed to
or used by other parties.

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

(e)  Data encryption during data transmission

 Availability of firewalls to prevent intrusion into the programs that send and
receive data
 Program controls that ensure data is transmitted in the correct format
 Restricting access to source data that is transmitted
 Only using secured Wi-Fi with password protection
 Using check sums and check digits to ensure that data received is intact

(f)  Obtain an understanding of management’s procedures for identifying

subsequent events.
 Inquire of management as to whether any subsequent events have occurred
which might affect the financial statements.
 Read the entity’s latest subsequent financial statements.
 Read minutes of shareholders’ meetings, meeting of the board of directors held
after the date of the financial statements and inquire about matters discussed at
any such meetings where minutes are not available.
 Obtain written representations in respect of subsequent events.

Ans.7 Control weakness Suggested control

It appears that changes are made in the  All changes must be authorized at an
system without proper authorization. appropriate level.
 Change requisition, assessment and
approval should be properly
documented.
 Log of changes in program must be
maintained and reviewed at an
appropriate level periodically to ensure
that no unauthorized changes in the
programs are made.
 There should be restricted access to
program files and only authorised
programmers should have access to
them.
It appears that there was lack of testing  No change shall be made in live
in the offline environment prior to the environment. All changes made in the
implementation, which resulted in the program should first be tested in offline
malfunction of the system. environment.
 Impact of change on existing functioning
must be assessed before implementing
the change.
It appears that due to unavailability of  Backup policy as per needs of the PSL
last updated backups or improper must be in place.
backup policy, the invoicing system was  Recorded backups must be restored
not operational for four days. periodically to assess their effectiveness.

Ans.8 (a) Fraud risk factors:

Significant decline in customer demand:

Due to significant decline in demand of foreign customers, the management may be
inclined to show improved results by manipulating the accounting records.

Significant related party transactions:

Significant related party transactions between GL and BL would provide an
opportunity for engaging in fraudulent financial reporting.
Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Sale of shares by director:

The directors' intention to sell their shareholding in GL provides them an incentive
to manipulate the annual profits so that they can achieve the maximum possible
gain from the sale of shares.

Non-implementation of last year’s external auditor’s recommendations:

Management failure to place controls against weaknesses identified by the external
auditor on timely basis shows the management’s attitude towards the improvement
of internal controls and consequently it increases the risk of fraud.

(b) Course of action:

In response to assessed risk of material misstatement due to fraud, the auditor shall:
 emphasize to the Audit team the need to maintain an attitude of professional
skepticism.
 assign more experienced staff or increased supervision of staff.
 to the extent not already done, the auditor shall obtain an understanding of
the entity’s related controls, relevant to such risks.
 evaluate whether the selection and application of accounting policies by the
entity, particularly those related to subjective measurements and complex
transactions, may be indicative of fraudulent financial reporting resulting from
management’s effort to manage earnings.
 incorporate an element of unpredictability in determining the nature, timing
and extent of audit procedures.
 design and perform further audit procedures whose nature, timing and extent
are responsive to the assessed risk of material misstatements.

Ans.9 S.No. Control weakness Possible effect Recommendation

(i) The list prepared by the There might be suppliers There should be a formal
purchase department has on the list who are not process of approving the
not been approved by competent enough to list and also for placing
anyone other than the make the supply. the suppliers on the
purchase department. approved list.
(ii) List has not been The list of the suppliers
updated since 2015. should be updated on a
regular basis.
(iii) Lack of proper criteria Purchases may be made The criteria for addition
for selecting suppliers as from unreliable suppliers. of new supplier should
presently suppliers are be comprehensive which
added to the list without should cover both
considering their financial and technical
financial soundness, capabilities of the
experience, etc. suppliers.
(iv) Purchase requisitions are This could lead to All purchase requisitions
processed merely on the inappropriate purchases, should be authorized by
initials of the stores i.e. in terms of type of the store manager as well
officer. /There is no goods or their quantity. as the user department.
formal process of
reviewing the purchase
requisition received from
store department.

Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

(v) Purchase orders are not Liabilities for goods PO should be

pre-numbered as they arereceived may not be pre-numbered or be
issued in the form of recorded or may be issued in sequential order
email. recorded more than once controlled by a computer
if there is no sequential system.
numbering.
(vi) Quotations are not Purchases may be made Prior to ordering of
obtained from the at a higher price or goods the shortlisted
supplier before placing discounts may not be suppliers should be asked
the orders. availed. to submit the quotations,
which should be
reviewed by the purchase
committee.
(vii) High value or other than This leads to lack of A purchase committee
routine purchases are segregation of duties comprising of senior
only authorized by the which may result in officials should be
purchase manager and inefficiencies. formed to oversee
store manager. purchases above a certain
amount.
(viii) There is no system of Sub-standard goods may Proper inspection should
quality inspection. be received. be carried out before
accepting the goods.
(ix) Although GRN has been There is a possibility of Before payment,
prepared by the store incorrect payment to the supplier’s invoice should
department, payment has supplier. be reconciled with GRN
been made on the basis and PO.
of GDN instead of
GRN.
(x) Inventory and payable Cut off errors may arise Inventory/payables
are recorded upon receipt i.e. where goods are should be recorded on
of invoice only. received but invoice is the basis of GRN.
received after year end.

(THE END)

Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Spring 2018

General:

The overall performance in this attempt was much better than the previous attempt as the
passing percentage increased from 14% to 29%. However, the performance in questions
4, 7, 8 and 9 was quite poor. A clear observation was that students perform well in
straight forward memory based questions but reflect poor knowledge in scenario based
questions.

Question-wise comments:

Question 1

The overall performance in this question was quite good as 74% of the candidates
secured passing marks. The performance in part (b) was excellent as a significant
majority of the students got high marks. In Part (a) the students generally wrote correctly
that being indebted to the company disqualifies a person from becoming auditor and also
mentioned credit card limit of Rs 1 million. But most students wrongly concluded that
Hatim can be appointed as auditor if he clears his dues before the commencement of
audit.

Question 2

In this scenario based question the candidates were required to comment on whether the
suggestion to circulate negative confirmation was appropriate in the given situation and
to suggest an alternative approach if the suggestion was not considered appropriate.

The overall performance was quite satisfactory as 39% of the candidates secured passing
marks. Many students wrote about the four conditions necessary for opting for negative
confirmation but did not identify the conditions which were not being met in the given
scenario. Most students also commented that CFO’s offer should not be accepted but
were unable to conclude and suggest the required way out to tackle the situation.

While mentioning the alternate approach, a lot of students mentioned about circulating
the confirmations on sample basis. This was not appropriate as the confirmations are sent
to the debtors on sampling basis when the population comprises of a large number of
debtor balances even if there is no time constraint.

Page 1 of 4
 Examiners’ Comments on Audit and Assurance – Spring 2018

Question 3

This was a simple question in which the requirement was to guide the audit manager
about selecting areas where direct assistance of internal auditors can be utilized;
considering the given scenario.

28% of the candidates secured passing marks in this question. However, it appears that
most of the candidates had not studied this area as 51% of the candidates secured one or
less mark. Many students did not read the question carefully and instead of providing
guidance for carrying out the selection of areas, they carried out the selection themselves.

Question 4

This question consisted of two parts. Part (a) was further sub-divided into two sub-parts.
Each sub-part contained a scenario and the candidates were required to discuss how they
would deal with each scenario. In part (b), the requirement was to specify two audit
procedures in relation to the completion assertion in case of trade payables. The overall
response was quite poor as only 11% candidates secured passing marks. Comment on
each part/sub-part is given below:

Question 4(a)(i)

Though some of the students produced very precise answers, most of them were unable
to assess the situation correctly. A significant number of students tried to relate it with
going concern issue which was totally irrelevant. Some of them only discussed the
materiality of the amount involved without commenting on whether the accounting
treatment was correct or not. Moreover, majority of the students treated Rs. 50 million
i.e. the amount further required to complete the project while considering the materiality
which was incorrect as the amount in question was Rs. 100 million i.e. the amount which
had been recognised as intangible. Furthermore, some of them simply stated that the
accounting treatment was incorrect but did not explain why.

It was also observed that despite that the profit for the year and the value of the intangible
were mentioned in the question, students were not able to conclude that whether the
effect of the misstatement would be material or pervasive and discussed consequences of
both possibilities.

Question 4(a)(ii)

In this 7 mark question, most of the students correctly identified the going concern issue
but failed to explain how the auditor should deal with the situation. Most of them only
discussed the impact on the audit report assuming that the going concern assumption was
no more valid, without specifying any measures to assess the situation. They failed to
realise that since the plant was fully insured and the company had been earning handsome
profits, it was more probable that the going concern assumption was still valid. On the
other hand, many students did not feel the need to discuss the going concern issue at all
and stressed only upon the recoverability of the insurance claim. A number of students
mentioned steps such as verification of purchase price of the plant and recalculation of
written down value, etc. which were totally irrelevant.

Page 2 of 4
 Examiners’ Comments on Audit and Assurance – Spring 2018

Question 4(b)

This part requiring identification of two procedures to be performed in relation to

completeness assertion for trade payables was also answered in below average manner.
Most of the students mentioned steps regarding verification of the identified liabilities
rather than ensuring that all payables have been recognised.

Question 5

The overall performance in this question was average as 35% of the candidates secured
passing marks. The question consisted of two parts. Part (a) was further sub-divided into
two sub-parts. Each sub-part contained a scenario and the candidates were required to
discuss the threats and related safeguards in the given situations. In sub-part (i) the
performance remained below average as majority of the candidates simply stated whether
gifts should be accepted or not without considering the significance of the gift. Most of
those who were of the view that the gifts should not be accepted, did not give any
appropriate reason thereof. Some of them identified intimidation and advocacy threats
which were totally irrelevant. Performance in sub-part (ii) was quite good as the
candidates seemed to understand the situation well.

Performance in part (b) was quite poor. In sub-part (i) mostly, they raised the issue of
lack of knowledge on the part of Amjad. The critical issues i.e. emergence of self review
threat and the threat to confidentiality were rarely discussed. In sub-part (ii) where the
requirement was to list down the actions the firm should take to ensure that such situation
is avoided in future, mostly the candidates focused on CPD activities related to IFRSs
only and overlooked the need for guidance regarding appropriate behaviour at the client,
disciplinary procedures and compliance with fundamental principles.

Question 6

This question consisted of six short questions. The performance was good as 61% of the
candidates secured passing marks. Brief comments on performance in each part are given
below:

(a) Most of the students were able to identify points such as early identification of
significant issues and timely/efficient conduct of audit. However, the advantage
of better resource planning was generally missed.
(b) Most of the students could only identify just one risk i.e. risk of giving undue
favour. The other risks include failure to identify all related party transactions,
risk of fraud, etc.
(c) The performance in this part was extremely poor. Many candidates did not
attempt it altogether. The issue of integrity of management and how the auditor
should handle it were rarely mentioned.
(d) The performance remained clearly divided between the good and the poor
performing candidates i.e. between those who secured full marks and those who
couldn’t obtain any mark. Most of the students who secured passing marks in the
paper were able to secure high marks in this part as well.

Page 3 of 4
 Examiners’ Comments on Audit and Assurance – Spring 2018

(e) The performance in this part was good as most of the candidates were able to
identify at least three controls. Poor performing candidates were those who tried
to fulfill the requirement of four controls but did not care to ensure that they
identify relevant controls only.
(f) The performance remained average. Some students gave pertinent answers but
many other seemed confuse and tried to mention procedures related to subsequent
receipts, subsequent warranty claims, subsequent sale prices to assess NRV, etc.
which were totally irrelevant.

Question 7

In this question the candidates were required to identify 3 control weaknesses and suggest
2 mitigating controls for each weakness in a scenario where changes in system had
caused the invoicing system to malfunction and close down for 4 days. The overall
performance remained below average as only 21% of the candidates secured passing
marks. A large number of candidates identified issuance of invoices manually as a control
weakness which was incorrect as it was just a contingency measure rather than a routine
practice.

Question 8

This question on fraud risk factors was poorly responded as only 15% of the candidates
secured passing marks. In part (a) where fraud risk factors were to be identified, most of
the candidates just copied the text from the question without elaborating as to why that
particular fact is a fraud risk factor.

In part (b), students were required to list down the actions which the auditor should take
in respect of the identified fraud risk factors. The performance in this part was better,
though comprehensive answers were rarely given.

Question 9

In this question six steps followed by an organisation during its procurement process
were mentioned and the candidates were required to identify the weaknesses in internal
controls, their possible effects and give recommendations.

The performance in this question was much below expectation as only 22% of the
candidates secured passing marks. Answers were not up to the mark in many cases so the
scores were not very good in this question.

Answers were generally flooded with repeated points whereas other important ones were
missed. Lack of proper criteria for selecting suppliers and pre-numbering of purchase
orders remained un-noticed by most of the students. Some students wrote about issuing
invoices rather than receiving invoices. Some students merely repeated the words written
in the question as the weaknesses without explaining why these were considered as a
weakness.

(THE END)

Page 4 of 4
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a)
Comments on validity of appointment as auditor 3.0

Conclusion 1.0

(b) 01 mark for identifying each matter to be considered for establishing the
presence of pre-conditions for an audit 5.0

A.2
Explanation of the criteria for circulating negative confirmation 3.0

Highlighting the need to receive confirmation directly 1.0

Discussion on how to reduce time pressure at the finalization stage 2.0

A.3 01 mark for each matter that Faheem should consider while identifying the areas
where direct assistance of internal auditor can be utilized 6.0

A.4 (a) (i)
Determination of materiality 1.0

Discussion on:
− whether the capitalization criteria as per IAS-38 was met or not 2.0
− the procedures to be followed and the reporting implications 2.0

(ii) Discussion on:

assessment of whether RL is a going concern 2.0

the procedures to be followed 4.0

reporting implications 1.0

(b) 01 mark for each audit procedure 2.0

A.5 (a) (i)
0.5 mark for identification of each threat 1.0

Discussion on the significance of threat 1.0

Discussion on the related safeguard 1.0

(ii)
Identification of threat 1.0

01 mark for each safeguard 2.0

(b) (i) 01 mark for identification of each threat 3.0

(ii) 01 mark for each action that the firm should take for avoiding the
situation in future 3.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018

Mark(s)
A.6 (a) 0.5 mark for each benefit of splitting the work between interim and final audit 2.0

(b) 01 mark for each risk of material misstatement in case of significant related
party transactions 3.0

(c) 01 mark for each step that may be taken in case the reliability of management
representation is inconsistent with other audit evidence 4.0

(d) 01 mark for each circumstance in which other matter paragraph may be
included in the audit report 4.0

(e) 0.75 mark for each control over data transmission 3.0

(f) 01 mark for each procedure for identification of subsequent events 4.0

A.7
01 mark for each control weakness 3.0

01 mark for each mitigating control 6.0

A.8 (a) 01 mark for identification of each fraud risk factor 4.0

(b) 01 mark for description of each action that an auditor should take on
identifying a fraud risk factor 5.0

A.9
01 mark for each control weakness 8.0

0.5 mark for each possible effect 3.5

0.5 mark for each recommendation 3.5

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 4 September 2018
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 A friend of yours has invested in the shares of Ascender Limited. On receiving the
company’s annual report, he made the following comments:

“The auditor has expressed an unqualified opinion. Since the auditor must have
arrived at his opinion after testing majority of the transactions, therefore the financial
statements are correct in all respects. Since no control deficiencies and fraudulent
conduct had been reported by the auditor, I can safely invest further amount of money
in the company because there is no risk that I will lose my money due to fraudulent
conduct of management or misrepresentations in the financial statements.”

Required:
Write a letter to your friend to remove his misconceptions related to the audit of financial
statements including brief explanation of your point of view. (08)

Q.2 (a) You are the audit senior at FSY Limited (FSY) for the year ended 30 June 2018. FSY
manufactures and supplies toys to wholesalers, super stores and distributors. Different
prices are charged from each customer depending upon their credit rating and amount
of purchases.

Your team has made a plan for test of details for verification of sales. The sampling of
invoices would be made as per the following plan:
(i) Sales reported in the financial statements is Rs. 800 million net of sales returns.
This would be used for determining the sample size.
(ii) 50% of the net sales represents sales to distributors, 40% to super stores and 10%
to wholesalers.
(iii) FSY sells its toys to 10 super stores only, who are invoiced on a monthly basis.
The audit team would test all the invoices of June and December because
invoices prepared close to period end are more prone to overstatement. In
addition, 2 invoices would be checked for each of the other 10 months.
(iv) 100 sales invoices to distributors and wholesalers would be selected haphazardly
from invoice files. The number of invoices to be checked has been determined
considering that expected rate of deviation is low. The expectation regarding rate
of deviation is based on the fact that overall audit risk has been assessed as low.

Required:
Identify the weakness in the sampling approach planned by the audit team and suggest
appropriate changes. (10)

(b) Following matters arose during the performance of test of details on sales:
(i) Three invoices of superstores could not be found in the record room. The staff
explained that it would require a lot of time to find them and requested your
team to select some other invoices. Scrutiny of the ledger revealed that total
amount of these missing invoices was Rs. 6 million.
(ii) Five of the invoices issued to distributors were booked at the rate of
Rs. 1,725 per carton instead of Rs. 1,275 per carton. The quantity involved was
3500 cartons.

Required:
Explain how you would resolve the above issues.
(Impact on the audit report is not required) (05)
 Audit and Assurance Page 2 of 3

Q.3 You are the audit manager responsible for the audit of Hub Mills Limited (HML). At the
planning stage, materiality level was determined at Rs. 8 million.

Audit team has completed the audit field work for the year ended 30 June 2018 and has
presented the following issues identified during the audit for your review:
(i) Goods worth Rs. 3 million were returned by a customer on 5 July 2018 due to poor
quality. Since the goods were returned subsequent to year end, no adjustment has
been recorded by the management.
(ii) HML is facing liquidity issues which has resulted in adverse key financial ratios. To
address the issue, HML has sold one of its offices to a company managed by a director
of HML. The office was sold for Rs. 40 million. Since the management had correctly
recorded the disposal, no specific disclosures related to this sale have been made in the
financial statements. Directors are confident that these sale proceeds would solve the
cash flow problems of HML.
(iii) A customer who owed Rs. 11 million at year-end, was declared bankrupt on
15 August 2018. The management had already provided 50% of the balance in the
financial statements.

Revenue for the current year is Rs. 800 million (2017: Rs. 950 million) and loss before tax is
Rs. 22 million (2017: Rs. 7.6 million).

Required:
(a) In respect of each of the audit issues identified by your team, mention the impact
(if any) which these might have on the audit report along with proper justification. (10)
(b) What matters would you want to include in the management representation letter,
with regard to the above issues. (05)

Q.4 You are the audit senior on the audit of Ormara (Pvt.) Limited (OPL). During the planning
phase of the audit, you have identified that OPL has adopted the revaluation model for
buildings for the first time. The valuation was carried out by an independent well established
external valuer.

Required:
Identify and assess the risks of material misstatement at assertion level and briefly state the
key audit procedures to mitigate these risks. (05)
(Procedures for assessing the competence and objectivity of the expert are not required)

Q.5 (a) You have recently been promoted as a partner in the assurance department of a firm of
chartered accountants. Your portfolio of clients includes Shah Motors (Pvt.) Limited
(SML), a leading car dealer. Qaiser, a senior manager assurance in your firm, has been
auditing SML for the past 7 years. While updating you about SML, Qaiser informed
about the following:
(i) On the request of an audit team member, CFO of SML has helped the team
member’s brother in securing early delivery of a vehicle ordered by him on
preferential basis.
(ii) SML has hired a new Head of Marketing. His son Amjad is expected to be
included as a junior team member in SML’s audit team.

Required:
Discuss the possible threats which may arise, their significance and the safeguards
required to mitigate those threats. (10)

(b) State the circumstances where a chartered accountant may be required to disclose the
information obtained during the audit. (03)
 Audit and Assurance Page 3 of 3

Q.6 Imran is the audit senior responsible for the audit of Pasni Garments Limited (PGL). During
the audit he noticed that PGL made significant transactions with related parties.

Required:
(a) State the audit procedures which should be performed to check whether all related
parties have been disclosed. (05)
(b) What steps should Imran perform if he identifies any related party transactions which
were not identified and disclosed by the management? (06)
(Impact on the audit report is not required)

Q.7 (a) Briefly describe what is a system log file and give any four types of information that
may be generated by a system log. (03)

(b) Differentiate between General IT controls and Application controls. (04)

(c) Advanced Limited (AL) uses an in-house developed integrated system for all its
accounting and operational needs. AL has been facing following issues in transaction
processing:
(i) While processing a batch of 50 purchase invoices, it was noticed that 3 invoices
of suppliers were posted twice in the accounts.
(ii) Some instances have been identified in which AL’s accountant had posted the
amount received from the customers in some other customer’s account due to a
typing error of the customer code.
(iii) While processing the payments, the accountant often fails to mention the cheque
number, due to which it takes a lot of time to trace the payment in bank
statement.
(iv) While recording inventory movement, the accountant had used incorrect
inventory codes. Since those codes did not exist, the system posted the
transaction in suspense account.

Required:
Identify and briefly describe one specific application control in respect of each of the
above type of errors, to reduce the risk of such errors. (08)

Q.8 (a) The auditor should be cognisant of the fact that fraudulent financial reporting often
involves management override of controls. State any four techniques which the
management may use for fraudulent financial reporting. (04)

(b) Under the Companies Act, 2017 identify the situations in which the Commission may
appoint a person to fill the vacancy of an auditor. (03)

(c) Briefly discuss the steps an auditor would need to take if management refuses to allow
him to send confirmation request to a debtor. (05)

(d) Mention any six tests of controls which an auditor may perform in respect of dispatch
of goods and invoicing in an organisation where all related documents are prepared
manually. (06)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Note:
The suggested answers are provided for the guidance of the students. However, there are alternative
solution(s) to the questions which are also considered by the Examination Department while marking
the answer scripts.

Ans.1 To: ABC

Dated: 4 September 2018

Subject: Explanation Of Misstatement Related To Audit

I received your comments on the audit report of Ascender Limited and want to clarify that:

The auditor, because of inherent limitation of audit, cannot reduce audit risk to zero. Therefore,
auditor provides a reasonable assurance but not absolute assurance that financial statements are
free from material misstatement.

In order to provide reasonable assurance, auditor plans and performs audit procedures based on
the concept of materiality and assessment of audit risk. Auditor does not aim to examine all or
the majority of transactions. Based on professional judgment about the effectiveness of the
selection, auditor applies audit procedures using 100% selection, specific selection or audit
sampling. Thus, selective examination of specific items does not provide audit evidence about the
whole population and conclusion drawn from a sample may be different if the entire population
were subject to the same procedure.

The management is responsible for the internal controls for the preparation of financial
statements and auditor is responsible to obtain understanding of the same in order to design audit
procedures. Auditor is not required to express opinion on effectiveness of internal controls.

Furthermore, the auditor is responsible to provide reasonable assurance not the absolute
assurance that financial statements as a whole are free from material misstatement, whether
caused by fraud or error. As stated above, the principle of materiality will also be applied here in
case of misstatement due to fraud.

The objective of a statutory audit (an external audit) is to express an opinion on the truth and
fairness of the view presented by the financial statements. Its objective is not the prevention or
detection of fraud.

Moreover, there is a possibility that despite all due care, the auditor is unable to detect a fraud
especially those involving management override of controls.

I hope above explanations would enhance your understanding regarding auditor’s roles and
responsibilities in the audit of financial statements.

Yours faithfully,

XYZ

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

Ans.2 (a) S. No. Weakness in sampling approach Recommendations

(i) The audit team had used net sales Sample should be representative of the
for calculating the sample size. population, which in this case is ‘sales’.
Therefore, sampling should be based on
gross sales.
(ii) Testing all the invoices of June and Total super stores invoices issued in a
December, being specific selection, year are 120 and the sales of superstores
will not enable the auditor to project constitute 40% of the total sales,
the results to entire population. therefore, the audit team may consider
testing all the invoices of the super stores.

Audit team could use statistical sampling

so that results can be projected to entire
population.

Furthermore, the risk of overstatement of

sales near the year-end may be catered
through other tests such as cut off test of
sales.
(iii) Haphazard selection of 100 invoices In view of low risk, it appears that the
is a non-statistical selection and risk team considers random sampling
of auditor biasness is very high. It appropriate under the given
will not enable the auditor to project circumstances, but in order to make the
the results to entire population. process efficient opted for haphazard
selection. The sales to distributors and
wholesalers is around 60%. Therefore, use
of statistical sampling would be more
appropriate so that results could be
projected to entire population.

(iv) Selection of invoice from the files There is a risk that those transactions
instead of selecting from the sales would not be identified for which files are
ledger. not made. Hence, the selection should be
made from the ledger for occurrence and
accuracy and from delivery record for
completeness and cutoff.
(v) Distributors and wholesalers have If sales to distributors and wholesalers
been clubbed together for have different characteristics, then they
determining the sample size. They should be considered separately as two
are likely to have different strata for calculating the sampling size
characteristics. and selecting the sample.
(vi) In performing test of details on The inherent risk for sales is generally
sales, expected misstatement is considered to be high, therefore setting
based on expected deviation rate. In the expected misstatement should not be
case of sales expected misstatement set as low without considering the
cannot be based on overall risk inherent risk.
assessment.
The following will be considered while
setting expected misstatement:
 Subjectivity involved
 Results of risk assessment and test of
controls
 Results of audit procedures applied in
prior period warrants such a use; or
 Results of other substantive procedures

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

(b)  The audit team should not accept other invoices as a sample in replacement of the
three misplaced invoices. It should try to perform alternate audit procedures to verify
those sales. If that is not possible, the team should request the management to find
those invoices. Otherwise it should be considered as a misstatement.

 The audit team should investigate whether the missing invoices represent a control
weakness or indicative of fraud and evaluate its impact on the overall audit
accordingly.

 As for the sale recorded with incorrect rates, the management should be asked to
reduce the sales by Rs. 1,575,000.

 The audit team should also investigate whether the invoices recorded at incorrect
rate represent control weakness, due to which the management was unable to detect
the error in the invoices previously.

 The audit team must obtain a high degree of certainty that such misstatement is not
representative of the population for which it may need to perform additional audit
procedures.

 If it is established that the misstatement is representative of the population, the audit

team should project the misstatements found in the sample to the entire population
of the stratum and consider increase in the extent of substantive testing and the
nature of testing.

Ans.3 (a) (i) The return of goods due to quality issues is an adjusting event for which condition
existed at the year end. Revenue reported in the financial statements should be
reduced by Rs.3,000,000 by recording sales return. The cost of sales should also be
reduced accordingly.

The auditor should also consider that there may be quality issues with other
inventory items as well requiring them to be written down to NRV.

In term of the impact on the audit report, the level of misstatement is not material as
the materiality has been set at Rs. 8 million, consequently this issue will have no
impact on the audit report; unless there are other misstatements and the aggregate of
such misstatements is material to the financial statements.

(ii)  HML’s liquidity issues, adverse key financial ratios and recurring net loss cast a
doubt on HML’s ability to continue as a going concern.

We need to satisfy that there is no doubt over the going concern assumption.

If the going concern basis is appropriate but a material uncertainty exists, which is
adequately disclosed in the financial statements, then a paragraph related to
material uncertainty would have to be included in the audit report. In case
adequate disclosures are not given, audit report may express qualified or an
adverse opinion.

If the going concern basis is not appropriate an adverse opinion would be given,
unless HML agrees to present the financial statements on other than going
concern basis.

 Sale of office to a company managed by the director of HML is a related party

transaction and needs to be disclosed specifically as a related party transaction.
Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

The disclosure and the magnitude of transaction are both material to the financial
statements. If it is not disclosed in the financial statements appropriately, it will be
considered as a misstatement on account of application of accounting policy. The
opinion will be modified accordingly.

(iii) Declaration of a customer as bankrupt is an adjusting subsequent event and the

remaining 50% of the balance also needs to be written off.

The above issue individually is not material to the financial statement, therefore has
no impact on audit report. However, if this misstatement is not corrected and
aggregate of all uncorrected misstatements is material to the financial statements, the
report will be modified accordingly.

(b) The directors would need to provide representation as regards the following:
(i) That based on their assessment it is appropriate to prepare accounts on the going
concern basis.
(ii) That the assumptions used to assess going concern (future cash flows, earnings etc.)
are reasonable.
(iii) Completeness of the information that has been provided about the identity of related
parties and related party relationships and transactions.
(iv) Adequacy of accounting and disclosure of such related party relationships and
transactions in the financial statements.
(v) All the transaction with the related parties have been carried out at arms length.
(vi) All events subsequent to the date of financial statements and for which IFRS require
adjustment or disclosure have been adjusted or disclosed.
(vii) The effects of uncorrected misstatement are immaterial, both individually and in
aggregate to the financial statement as a whole along with the list of uncorrected
misstatement.

Ans.4 Adoption of revaluation model for building indicates the risk of in-correct valuation and
presentation of buildings and surplus on revaluation.

Audit procedures to mitigate the above risk are as follows:

 Verify amounts in the financial statements with the valuer’s report.
 Consider the reasonableness of the valuation and the assumptions used for valuation.
 Check that the rise in value on revaluation have been appropriately recorded in the
financial statements and depreciation has been calculated on the revalued amount(s).
 Consider involving auditor’s own expert.
 Check that revaluation have been appropriately disclosed in the financial statements.
 Ensure that all class of building has been revalued.

Ans.5 (a) (i) Familiarity and self-interest threat may arise because of long association of Qaiser on
the audit of SML.

The threat is significant but it also needs to be further evaluated by considering

whether SML’s management team has changed or whether the nature or complexity
of SML’s accounting and reporting issues has changed.

Following safeguards may be applied:

 Replace Qaiser with any other senior manager having appropriate experience.
 Asking a professional accountant who was not a member of the audit team to
review the work.
 Regular independent internal or external quality reviews of the engagement.

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

(ii) Requesting CFO for expediting the delivery may create self-interest, familiarity,
intimidation threat to the independence of the audit team member.

The threats seem to be significant because the preferential treatment was not in the
normal course of the business.

The audit team member who has obtained preferential treatment should not be made
part of the audit team and in case he is made part of the team, his work should be
reviewed by an independent chartered accountant.

It should also be ensured that no such breach of ethics occurs in future and the firm
should communicate and strictly implement its policies in this regard. Firm may also
consider taking disciplinary action against the individual who had obtained the
preferential treatment from SML.

(iii) Family and personal relationship between a member of the audit team and the Head
of Marketing of SML may create self-interest, familiarity and / or intimidation
threats.

The threat would be significant because of the close relationship. The significance
would also depend on Amjad’s responsibilities on the audit team.

Following safeguards may be applied:

 Removing Amjad from the audit team

 Structuring the responsibilities of the audit team so that Amjad does not deal
with matters that are within the responsibility of his father.
 Review of work carried out by Amjad,

(b) A chartered accountant should refrain from disclosing confidential information acquired as
a result of professional and business relationships. However, under the following
circumstances, a chartered accountant may be required to disclose confidential
information:

 Disclosure is required by law.

 There is a professional duty or right to disclose, when not prohibited by law.
 Disclosure is permitted by law and is authorized by the client.

Ans.6 (a) Imran should perform the following audit procedures to ensure the completeness of
identification of related parties.
 Review working papers for previous years, to look for names of known related parties.
 Assess the adequacy of the company’s procedures for identifying related parties.
 Review minutes of shareholder meetings and board of directors meeting.
 Review shareholder records for the names of major shareholders.
 Review the regulatory returns and the information supplied by the entity to the
regulatory authorities.
 Inspect non-routine and unusual transactions.
 Inspect significant contracts and agreements not in the ordinary course of business.
 Review significant contracts renegotiated by the entity during the period.
 Identify all employee benefit plans and the names of officers and trustees.
 Review internal audit reports.

Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

(b) If he discovers previously unidentified or undisclosed related parties or (significant) related

party transactions he must:
(i) promptly communicate the relevant information of the related party transaction to
other members of the audit team.
(ii) perform appropriate substantive procedures on the newly identified related parties or
significant related party transactions.
(iii) request management to identify all transactions with the newly identified related
parties.
(iv) inquire as to why the entity’s internal control system failed to identify or disclose
these related party relationships or transactions.
(v) Reassess the risk of there being unidentified or undisclosed related parties or
(significant) related party transactions and respond to the reassessed risk.
(vi) If the non-disclosure by management appears intentional (and therefore indicative of
risk of material misstatement due to fraud), evaluate the implications for the audit.

Ans.7 (a) A system log is a file that records events taking place in the execution of a system. This
generates an audit trail that can be used to understand the sequence of activities of the
system and to diagnose problems.

Types of information that may be generated by a system log are:

 Which user logged-in, when and where from

 Failed log-in attempts
 Who accessed and amended data in a file
 Changes made to a program – what, when and by whom
 When employees entered and left the building
 Black box flight recorders
 CPU speed
 Broadband speed
 Which web pages a user accessed
 Attempted cyber intrusions

(b) General IT controls Application controls

General IT controls aim to establish Application controls are the specific controls
policies and procedures for overall over the relevant applications maintained by
control over the computer information the computer. The purpose of application
system’s activities such as controls is to establish specific control
development, changes in program and procedures over a particular application. In
data files. It provides a reasonable level order to provide reasonable assurance that all
of assurance that the overall objectives transactions are authorized and are processed
of internal controls are achieved. completely, accurately and on a timely basis.

(c) (i) Control Totals

Control total means the total value for all the transactions input. This total is given
by the computer prior to processing. The total given by the computer is checked with
the total taken manually.

(ii) Check Digits

AL can use check digits with the customer code to prevent the posting of amounts in
in-correct customer account. Check digits forms part of the account code which
allows the computer program to check the validity of the code.
(iii) On-Screen Prompts
On-screen prompts are displayed on the computer screen when a compulsory field in
the data entry form is not filled.

Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2018

(iv) Existence Check

Existence check could be written into the system to ensure that the program will look
at the value for a particular item of data in the input transaction, and if it is invalid, it
will produce an error report and will not process the transaction.

Ans.8 (a) Fraud can be committed by management overriding controls using techniques such as the
following:
 Recording fictitious journal entries.
 Inappropriately adjusting / changing assumptions and judgments used previously to
estimate account balances.
 Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
 Concealing or not disclosing facts that could affect the amounts recorded in the
financial statements.
 Engaging in complex transactions / unusual transactions to misrepresent the financial
position or financial performance of the entity.
 Altering records and terms related to significant and unusual transactions.

(b) The Commission may appoint a person to fill the vacancy in the cases if:
 The company fails to appoint the first auditors within a period of 90 days of the date of
incorporation of the company;
 The company fails to appoint the auditors at an annual general meeting;
 The company fails to appoint an auditor to fill up a casual vacancy within thirty days
after the occurrence of the vacancy;
 The appointed auditors are unwilling to act as auditors of the company.

(c) If management refuse to allow the auditor to send a confirmation request the auditor
should:
 inquire about the reasons for refusal and seek audit evidence as to the validity and
reasonableness;
 evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
 perform alternative audit procedures such as, subsequent receipts and inspection of
documents, designed to obtain relevant and reliable audit evidence.

If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable, or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures, the auditor shall communicate
with those charged with governance

Failure to obtain sufficient appropriate audit evidence indicates scope limitation and the
auditor shall assess the implications of such limitation on the auditor’s opinion.

(d)  Check whether appropriate segregation of duties exist.

 Check whether all invoices and GDNs are pre-numbered.
 Check that invoices show a customer order number and a dispatch note number.
 Check the signature of customers on delivery notes to confirm the acceptance of the
customers.
 Check that credit notes are cross-referred to a sales invoice number.
 Observe the dispatch process in operation.
 Obtain documentary evidence that a member of the accounts staff has carried out
arithmetical checks on the accuracy of invoices.
 Check the credit notes to ensure that they contain the authorization signature of the
appropriate manager.
(THE END)
Page 7 of 7
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance –
Autumn 2018

General:

The overall performance in the paper was good as 55.2% candidates secured passing
marks. Most of those who could not perform well were those who have been failing for
the past many attempts. They should rethink their approach towards study. The most
important thing is to cover the entire syllabus. They should also learn answering the
scenario based questions as in many cases they write statements which are not incorrect
but are irrelevant to the given situation.

Question-wise comments:

Question 1

In this question the candidates were required to guide their friend who had certain
misconceptions regarding audit of financial statements, which were described in the
question. The performance in this question was below average as only 33% candidates
secured passing marks.

Most of the students missed the following important points:

1. Auditors do not examine majority of the item. Rather, they concentrate on significant
items based on their materiality and risk of misstatement associated with them.
2. Unqualified opinion does not imply that financial statements are correct in all respect.

Question 2

This question consisting of two parts was the most poorly performed question as only 7%
candidates secured passing marks. Performance in each part is discussed below:

Question 2(a)

The candidates had very little idea as to the aspects that need to be considered in the
process of sampling. The performance was extremely poor as the candidates failed to
identify the weaknesses in the audit approach, especially the following:

1. Selection of invoices should be made from the sales ledger because if selection is
made from invoice files there would be a risk that any amounts posted in the ledger
without an invoice would not be detected.

Page 1 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2018

2. Deviation rate for sales cannot be based on overall risk assessment. Inherent risk
associated with sales is generally high and should also be considered.
3. Expected deviation rate could not be set at lower level on the basis of overall audit
risk unless:
 Experience of the population from previous audits warrants such a use.
 Experience from current audit on areas relating to the population justifies this
setting

Question 2(b)

The performance in this part was also very poor. Most of the candidates found no harm in
accepting the proposal to select other invoices in place of the three invoices which could
not be found. Most of those who did object to it, could not explain as to how the auditor
should react to it.

Question 3

The overall performance in this question was poor as only 23% candidates secured
passing marks. The question was based on a scenario according to which three issues had
been identified by the audit team, during the audit. There were two requirements set out
in part (a) and (b) of the question. Performance in each part is discussed below:

Question 3(a)

In this part the candidates were required to identify the impact of each of the three issues
on the audit report along with proper justification. Impact on the audit report was mostly
described correctly but proper justification was not provided. Justification included
considering matters such as materiality, whether it was an adjusting or non-adjusting
event, etc.

Question 3(b)

In this part, the requirement was to identify the matters which the auditor would like to
include in respect of the three issues discussed in the question. It appears that the students
did not read the requirement carefully. The most common mistake was that most
candidates produced a long list of items which had no relationship with the issues
discussed in the question. Furthermore, a number of students identified matters to be
included in the management letter instead of management representation letter.

Question 4

The performance in this question was poor as only 26% candidates secured passing
marks. About 18% of the candidates did not attempt this question or scored zero marks.

Page 2 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2018

The question required risk of material misstatement at the assertion level. As valuation
model was changed, the two assertions which were to be identified were valuation and
presentation. Most of the candidates could not identify the relevant assertions or the
relevant audit procedures. Most of them kept on discussing the proficiency of the expert,
which were not irrelevant and it had specifically been mentioned in the question that
these were not required.

Question 5

This question consisted of two parts. This was quite an easy question. However, the
overall performance was just average as 54% candidates secured passing marks. Part
wise performance is discussed below:

Question 5(a)

In this part the candidates were required to identify the possible threats and discuss their
significance and the relevant safeguards. Generally the performance was good. Some of
the common mistakes are discussed below:

 Many candidates mentioned relevant as well as irrelevant threats and loss marks.
Some of them even mentioned five to six threats. It must be noted that there only a
limited number of threats and hence if the students mention irrelevant threats along
with the relevant ones, they would lose marks.
 Significance of the threat were not discussed.

Question 5(b)

It was a simple and easy question which was well answered by most of the candidates.
However, many candidates missed this part of the question altogether.

Question 6

Good performance was witnessed in this question as 73% candidates secured passing
marks. Performance in each part is discussed below:

Question 6(a)

The most common mistake in this part of the question was that instead of identifying the
audit steps to ensure that all related party transactions have been disclosed, many students
listed the steps to verify the already identified related party transactions.

Question 6(b)

The most common error in this part of the question was that many candidates considered
it as an unintentional error and ignore the possibility of intentional error. Hence, they
could not identify some very key steps.

Page 3 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2018

Question 7

This question consisted of three parts. The overall performance in this IT based question
was below average as only 41% candidates secured passing marks. Performance in each
part is discussed below:

Question 7(a)

The requirement was to describe a system log file and list any four types of information
which the system log file contains.

This proved to be a simple question and was well answered by most of the candidates.

Question 7(b)

In this part the requirement was to differentiate between general IT controls and
application controls. The performance in this part remained poor as most of the
candidates were unable to appreciate the principal difference i.e. purpose of application
controls is to establish specific control procedures over a particular application; whereas,
general IT controls refer to the overall controls applicable to the entire computer systems
and procedures.

Question 7(c)

Mixed performance was witnessed in this part of the question. Many students scored full
marks whereas there were many who could not secure any mark. The most common
errors were as follows:

 Some candidates failed to understand the question altogether and mentioned input
controls, output controls and processing controls.
 In (iii) many candidates mentioned sequential check which was totally incorrect as
cheque numbers are not necessarily in sequence.

Question 8

This question consisted of four parts. It was the best attempted question as 84%
candidates secured passing marks. Part wise comments are given below:

Question 8(a)

The performance in this a part was average. About 20% of the candidates secured full
marks but many candidates were not clear. Some of the points mentioned were totally
incorrect such as embezzlement of cash, posting of amounts in incorrect accounts,
reporting on going concern basis despite serious uncertainties, etc. Further, some of the
points were too general such as overstatement of income, understatement of expenses,
alteration of accounts, etc.

Question 8(b)

This was a very easy question and almost every student performed well.
Page 4 of 5
 Examiners’ Comments on Audit and Assurance – Autumn 2018

Question 8(c)

In this part, the requirement was to discuss the auditors steps where the management
refuses to allow sending confirmation to certain parties. This area had been tested several
times in the past but the performance was good except in case of very weak students i.e.
those whose total marks were less than 30.

Question 8(d)

In this part the candidates were required to mention six tests of controls related to
dispatch of goods and invoicing. The performance remained average as most of the
students included irrelevant controls to reach the tally of six. These included controls
related to credit limits and steps such as observing the procedures. A common mistake
was that according to many candidates dispatch notes are prepared on the basis of sales
invoices, whereas it is the other way round.

(THE END)

Page 5 of 5
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 Discussion on:

concept of materiality and the basis of selection of transactions for audit 2.0

auditor’s opinion and the inherent limitations of audit 2.0

auditor’s responsibility related to internal controls and fraud detection 4.0

A.2 (a)
0.5 mark for identification of each weakness in sampling approach 2.0

Up to 01 mark for each recommendation/suggested change 8.0

(b)
Discussion on the auditor’s course of action for resolution of issues

relating to missing invoices and invoices recorded at incorrect rates 3.0

Discussion on the effect of misstatement on the extent of test of details and
nature of testing 2.0

A.3 (a)
Up to 01 mark for discussion of each issue 4.0

Up to 01 mark for each possible impact on the audit report 6.0

(b) Up to 01 mark for each matter to be included in the management representation

letter 5.0

A.4
0.5 mark for identification of each risk at assertion level 1.0

Up to 01 mark for each key audit procedure 4.0

A.5 (a)
0.5 mark for identification of each threat 3.5

Evaluation of the situation and significance of the threat 3.0

0.5 mark for discussing each safeguard 3.5

(b) 01 mark for each circumstance where a chartered accountant may be required to
disclose the information obtained during the audit 3.0

A.6 (a) Up to 01 mark for each audit procedure 5.0

(b) Up to 01 mark for each step to be performed on identification of undisclosed

related party transaction 6.0

A.7 (a)
Explanation of system log file 1.0

0.5 mark for each type of information generated by a system log 2.0

(b) 01 mark for each difference 4.0

(c)
01 mark for identification of the application control in each case 4.0

01 mark for brief explanation of the identified application control 4.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2018

Mark(s)
A.8 (a) 01 mark for each technique which the management may use for fraudulent
financial reporting 4.0

(b) Up to 01 mark for each situation in which the Commission may fill the vacancy
of an auditor 3.0

(c) 01 mark for each step the auditor would take if management refuses to allow
sending confirmation request to a debtor 5.0

(d) 01 mark for each test of control 6.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 5 March 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 (a) You are the audit manager in a firm of chartered accountants. During the audit of a
client for the year ended 31 December 2018, the audit team has prepared the following
schedule to summarize the responses from the debtors:
Balance
Debtor account
S.No. Debtor confirmed by Management explanation
balance
the debtor
(i) AB Rs. 500,000 Rs. 500,000 No explanation.
(ii) CD Rs. 800,000 Rs. 700,000 Consignment of Rs. 100,000 was
shipped on 31 December 2018
and received by customer on
01 January 2019.
(iii) KL Rs. 600,000 Rs. 250,000 Consignment of Rs. 600,000 was
shipped on 27 December 2018 but
goods amounting to Rs. 350,000
were returned due to quality
issues, subsequent to year end.
(iv) YZ Rs. 400,000 No reply No explanation.
received

Required:
Describe the steps (if any) which the audit team may perform in respect of each of the
above debtors. (05)

(b) Tariq Limited (TL) is in dispute with one of its suppliers Hamid (Private) Limited
(HPL) over a claim of Rs. 10 million; due to quality issues with the product. The
management has informed you that negotiations with HPL have concluded and HPL
has agreed to pay Rs. 7 million whereas the rest of the amount would be written off.
TL’s management has provided a written representation to the auditor with respect to
the said receivable. However, they want to preclude the auditor from sending a
confirmation to HPL.

Required:
Evaluate the appropriateness of written representation as audit evidence and
determine the course of action available to the auditor in the above situation. (07)

Q.2 Respond to the following independent situations in the light of International Standards on
Auditing:

(a) Risk of overstatement in revenue was considered as significant risk and was also
communicated to those charged with governance. Discuss whether it should be included
in the key audit matters section. (04)

(b) No such matter arose during the audit which needs to be reported as key audit matter.
Discuss whether the auditor still needs to include key audit matters section in audit report. (02)

(c) A qualified opinion has been expressed. The details of the qualification are also
mentioned in the key audit matters section. Is it appropriate to do so? (03)
 Audit and Assurance Page 2 of 4

Q.3 You are the audit manager in a firm of chartered accountants. Your audit client Zakir
Textile Mills Limited (ZTML) has emailed you its draft financial statements for the year
ended 31 December 2018 along with certain explanations. The information provided by
ZTML is summarized below:

(i) Extracts from statement of financial position

2018 2017
Equity and Liabilities ------ Rs. in ‘000 ------
Equity and reserves 29,287 22,000
Long-term loan 8,000 12,000
Provision against litigation 1,100 1,000
Trade and other payables 6,400 6,500
44,787 41,500
Assets
Property, plant and equipment 25,100 22,818
Loans to employees 1,000 800
Trade debtors 8,500 8,000
Inventory 7,600 7,000
Cash and bank balances 2,587 2,882
44,787 41,500

(ii) Extracts from statement of profit or loss

2018 2017
------ Rs. in ‘000 -----
Sales 84,000 73,000
Cost of sales 60,400 54,750
Gross profit 23,600 18,250
Expenses 12,850 10,950
Net profit before taxation 10,750 7,300
Taxation 3,463 2,555
Net profit 7,287 4,745

(iii) At the start of the year, ZTML had increased the sale price of its products by 13%.
(iv) The entire long term loan was obtained in 2017. The principal is payable in three
annual instalments along with the amount of interest.
(v) Increase in property, plant and equipment represents additions made during the year,
net of depreciation. There were no disposals during the year.
(vi) ZTML has a policy of giving interest free loan to its employees. The loan entitlement
was reduced during the year from 8 times the gross salary to 5 times of gross salary.

Required:
Using analytical procedures, identify unexplained fluctuations and inconsistencies in the
above scenario. State the key audit procedures which you would perform to address the
issues identified by you. (Maximum of three key audit procedures are required for each issue) (11)

Q.4 (a) Under the Companies Act, 2017, state the procedure to be followed if the board of
directors decides to recommend the reappointment of existing auditor for the next
year. (02)

(b) The board of directors of Alpha Limited intends to re-appoint the existing auditor for
the next year. However, Javed, a shareholder of the company, wants to appoint a
different auditor.

Required:
Briefly explain the procedure that Javed should follow. Also state the responsibilities
of the board in this regard. (06)
 Audit and Assurance Page 3 of 4

Q.5 You are the audit manager in a firm of chartered accountants. While reviewing the audit
working papers of a client you came across the following audit program on property, plant
and equipment:
Related
S.No. Audit procedures
assertion
(i) Verify reconciliation of ledger balances with the fixed asset Completeness
register.
(ii) Obtain schedule of fixed assets showing opening balances, Accuracy
additions, disposals, depreciation and closing balances.
(iii) Verify the cost of additions to fixed assets and capital work in Accuracy
progress with the related invoices.
(iv) Physically inspect the additions made during the year. Existence &
Ownership
(v) On sample basis select assets and check the depreciation Accuracy
calculation.

Required:
Critically review the audit program and suggest changes or additional audit procedures as
may be necessary. Assume that the assets are carried at cost, no disposal was made during the
year and no impairment testing is required. (11)

Q.6 (a) You are the audit manager in a firm of chartered accountants. Your firm has been
appointed as the auditor of a listed company, Rustam Raees Limited (RRL) for the
year ending 31 December 2019. RRL has been publishing their annual financial
statements within one month of the year end and have set strict deadlines for the
completion of audit. Further, this year, RRL has changed its accounting policy
relating to property, plant and equipment, from historical cost to revaluation model.

Required:
List the matters (related to the given scenario only) which you would like to include in (04)
the engagement letter, along with their justification.

(b) Ameer Welfare Trust (AWT) is engaged in providing education and three daily meals
to the underprivileged citizens of the society. Donation collection kiosks have been
established at various public spots which collect donations predominantly in cash.

The constitution of AWT states that administration costs should not exceed 10% of its
income. Due to this restriction, AWT has employed only one accountant who works
on part time basis.

The constitution further requires AWT to maintain separate bank accounts for
donations collected for education and meals. Donors are requested to mention the
purpose of donation. Donation received for a specific purpose cannot be spent for any
other purpose.

Required:
Identify the risks which AWT’s auditor would need to consider. (05)

Q.7 (a) Discuss the term ‘performance materiality’ and the purpose for which it is used. (03)

(b) State the matters to be documented by the external auditor if he uses the internal
auditor for providing direct assistance on the audit. (04)
 Audit and Assurance Page 4 of 4

Q.8 Expert Limited (EL) is an unlisted public company engaged in production of various
products. In January 2018, an equipment malfunctioned which caused severe injuries to
some of the workers. EL had paid compensation to the workers but a case for violation of
safety regulations had also been filed by the regulator. On the basis of legal advice, EL had
recorded a provision of Rs. 5 million in its financial statements for the year ended
31 December 2018.

The board of directors approved the financial statements on 01 March 2019 and on the same
date your firm expressed an unmodified opinion. EL plans to issue the financial statements
on 5 March 2019. On 3 March 2019 the court imposed a penalty of Rs. 15 million on EL.
Management of EL informed the auditor accordingly.

Required:
Evaluate the need for amendment in financial statements and state the procedures which the
auditor would need to perform in the above situation. (09)

Q.9 (a) Chand Travels (CT) is a tour operator, which provides airline ticket bookings, hotels
reservations and customized tour packages. CT has recently implemented a software
for maintaining its financial records.

Required:
What do you understand by logical access controls? Briefly describe four logical access
controls that CT should employ. (07)

(b) Describe four controls which CT may employ to reduce the possibility of disruption of
operations. (04)

Q.10 (a) You are the audit manager at a client Exim (Private) Limited (EPL). During the
finalisation meeting with the client, the CFO of EPL admired the performance of the
audit team. He informed that a junior member of the audit team gave valuable
suggestions regarding a trading business which EPL is considering to launch in the
near future, as he had worked as an intern in a large business house involved in similar
business. The CFO also informed that the audit junior has offered to arrange a
warehouse on reasonable rent as he works part time in his brother’s estate agency.

Required:
Identify the threats in the above scenario and suggest appropriate safeguards. (05)

(b) A firm of chartered accountants sometimes issues public notices and advertisements
on behalf of the clients. Further, it also communicates with the prospective clients
while negotiating the services to be offered.

Required:
Under the Code of Ethics for Chartered Accountants:

prepare brief guidelines about the basic principles and matters to be kept into
perspective while making any such communications. (03)

list the activities/statements which should be avoided in order to adhere to the
above principles. (05)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.1 (a) (i) No further audit work is required.

(ii) This is a timing difference. We need to obtain goods delivery note and customer
acknowledgement to ascertain the date of delivery and date of acceptance of goods.

(iii) This is an adjusting event. We should perform the following steps:

 Check the return of goods with the relevant goods receipt document.
 Ask the client to reduce the sales and receivables and incorporate corresponding
effects in cost of sales and inventory.

(iv) Follow-up procedures should be initiated. For example, second request and third
request letters could be sent, or the client could be asked to contact the customer for a
reply.

Subsequent receipt of the amount should be checked.

If no payment (or only part-payment) has been received, the outstanding sales invoices
should be checked with:

 Purchase order issued by the customer.

 Delivery note duly acknowledged by the customer.

(b) Written representations are necessary information that the auditor requires in connection
with the entity’s financial statements. Although written representations provide audit
evidence, they do not provide sufficient appropriate audit evidence on their own about any
of the matters with which they deal. The fact that the management has provided reliable
written representations do not affect the nature or extent of other audit evidence that the
auditor should obtain. Hence, considering the scenario, the auditor should take the
following steps to obtain the required evidence:

 Inquire management about reasons for refusal to send confirmation.

 Seek audit evidence as to their validity and reasonableness.
 In case a valid reason is not provided by the management, evaluate the implications of
management’s refusal on the auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud and on the nature, timing and extent of other
audit procedures;
 Perform alternative audit procedures to obtain relevant and reliable audit evidence,
such as:

– Obtain the correspondence with the supplier.

– Check subsequent receipt from the supplier.

 Communicate with those charged with governance, if:

– The auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable.
– The auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures.

 The auditor shall determine the implications for the audit and the auditor’s opinion in
accordance with ISA 705 given such a limitation on scope.

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.2 (a) The audit report should include only those matters in the KAM section which required
significant auditor attention.

Areas which require significant auditor attention are those which:

 Involve significant audit risks

 Significant judgement on the part of management / auditor.
 Significant transactions and events affecting the audit.

Even though KAMs are extracted from the matters communicated with those charged with
governance, however, not all significant risks or matters communicated to those charged
with governance are considered as KAMs. The auditor needs to determine whether the risk
of overstatement of revenue fulfills the above mentioned criteria and is of most significance
to the current year audit, only then it can be included as a key audit matter.

(b) Even if the auditor determines, depending on the facts and circumstances of the entity and
the audit, that there are no key audit matters to communicate, the audit report shall include
the key audit matter section.

The fact that there are no key audit matters to communicate in the report, should be
mentioned under the heading Key Audit Matters.

(c) A matter giving rise to a qualification by their nature is a key audit matter. However, these
matters shall not be described in the Key Audit Matters section of the audit report, rather
the matter is to be reported in accordance with the requirements of related ISA. However,
reference to the basis for qualified opinion is to be included in the Key Audit Matter section.

Ans.3 (i) Provision against litigation

Even though the change in provision against litigation is not significant but due to the high
inherent risk, further steps needs to be taken as follows:

 Circulate confirmation to legal advisors of the company.

 Scrutinize payments of legal expenses to ensure that all legal cases have been identified
by the client.
 Review the minutes of the board meetings.
 Obtain expert advice, if considered necessary.
 Verify the basis for recording of provision.

(ii) Trade payables

Despite the increase in cost of sales, trade payables have decreased. Consequently the
following procedures may be performed:

 Circulate balance confirmation requests to trade creditors.

 Compare the current list of trade payables with prior year’s working papers to identify
any omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
 Scrutinize subsequent payments and ensure that appropriate accruals were made
against those payments.

(iii) Loans to employees

Despite the reduction of entitlement of loan, it has increased from previous year.
Considering this inconsistency, following procedures may be performed:

 Discuss the increase in loan amount with management.

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

 Check payment of amount of loan given to employees during the year with payment
voucher having acknowledgment of employees.
 Obtain confirmation of loan balances from employees.
 Verify approval of new loan given to employees.
 Ensure that recoveries are being made as per policy and are recorded.

(iv) Trade debtors

Sales has increased by 15% but debtors have only increased by 6%. Considering this
inconsistency following procedures may be performed:

 Discuss the reason for change with the management.

 Circulate confirmation requests to debtors.
 Trace a sample of shipping documents to sales invoice and into the sales and
receivable ledgers.

(v) Cost of sales

Despite 15% increase in sales, cost of sales has increased by only 10%. Considering this
fluctuation, following steps may be performed:

 Perform cut-off test for purchases.

 Check that the correct quantity of material, labour and overheads has been used.
 Perform analytical calculations over the cost of inventory consumed and other major
costs.
 Verify the major costs with bills, invoices and other related documents.

(vi) Expenses
Even though the finance cost would also have reduced due to reduction in loan, expenses
have increased by 17%. Considering this fluctuation, following steps may be performed:
 Ask the client for the detailed breakup of the expenses
 Enquire from management for any inconsistencies in the break-up of expenses
obtained.

(vii) Taxation
Tax rate was exactly 35% of the profit before taxation in last year which have reduced to
32%. Considering this fluctuation, following steps may be performed.
 Obtain and review the tax working prepared by the management
 Check the enacted tax rates.

Ans.4 (a) Following procedures shall be followed for appointment of the existing auditor for the next
year:

 The board shall first obtain the consent of the proposed auditor.
 A notice shall be given to the members with the notice of general meeting.
 On the appointment of the auditor the board shall ensure that, within fourteen days
from the date of appointment of the auditor, an intimation is sent to the registrar
thereof, together with the consent in writing of the appointed auditor.

(b) Procedure for shareholder(s):

Javed should follow the following process if he alone or together with other willing
shareholders, holds 10% shareholdings in Alpha Limited:

 The shareholder(s) should first obtain the consent of the proposed auditor.
 A notice should be given to the company in this regard, not less than seven days before
the date of the annual general meeting.
Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Responsibilities of the board:

The company shall forthwith send a copy of notice received from Javed to the retiring
auditor and shall also post it on the company’s website.

Since an auditor, other than the retiring auditor is proposed to be appointed, the board shall
ensure that:

 The retiring auditor is given an opportunity to make a representation in writing to the

company at least two days before the date of general meeting.
 Representation received from the retiring auditor is read out at the meeting before
taking up the agenda for appointment of the auditor.

Ans.5 (i) No comments.

(ii) Obtaining the asset schedule showing opening balances, addition, disposal, depreciation and
closing balance addresses the assertion of completeness only but not accuracy.

(iii) Apart from verifying the cost of the asset through purchase invoices, the following steps
would also be required:

 Verify the date from which asset was available for use from purchase invoices or the
completion certificate of capital work in progress, to ensure that depreciation is
recorded from the correct date.
 Check the allocation of total expenditure between capital and revenue expenditure in
case of additions.
 Check that purchases are duly authorised.

(iv) Physical inspection of assets may not address the assertion of ownership.

Additional procedures
 For addressing the assertion of ownership, check the title documents of the assets
especially the assets purchased on sample basis.
 Check bank confirmation for any charge on assets, if any.
 Check register of charges maintained by the client, if any.
 Physically verify the existing assets from register to floor and vice versa.

(v) This step would not be enough. Following procedures would also be required.

 Perform analytical procedures on the overall depreciation.

 Review the depreciation rates for reasonableness in the light of the nature of assets, its
estimated useful life and residual value.
 Ensure that consistent depreciation methods are in use.
 Ensure that fully depreciated assets are not subject to depreciation.
 Obtain approval for additions made during the year.

The audit program has no procedure related to presentation assertion. Auditor should review the
disclosure in the financial statements and ensure that they are correct and clear.

Ensure that non-current assets have been classified in appropriate account.

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Ans.6 (a) Matters to be included in engagement letter

 Being the first year of audit for our firm, arrangements concerning the involvement of
predecessor auditor would be necessary.
 Use of auditor’s expert may be required as RRL has changed its accounting policy from
historical cost convention to revaluation model.
 Due to strict deadlines:

– It should be included in the engagement letter that management would make

available the draft financial statements along with all relevant information in time
to allow for the completion of audit in accordance with the proposed time table.
– We need to communicate the planning and performance of the audit, including the
composition of the audit team.
– We may also consider using RRL’s internal audit department and this fact may
have to be communicated through the engagement letter.

(b)  There is a risk of embezzlement in cash collection and inventory.

 Donation for food are recorded in donation for education account and vice versa.
 Contributions are spent on other than intended purpose.
 There is a risk that the money spent on administration is not recorded as administration
cost and is misclassified.
 Since only one person is responsible for managing the accounts, there is a lack of
segregation of duties and hence risk of fraud and error may arise.
 Since there is no full time person to look after the accounts, there is a risk that
transactions are not recorded on a timely basis.

Ans.7 (a) Performance materiality means the amount or amounts set by the auditor at less than
materiality for the financial statements as a whole or at less than the materiality level for
particular classes of transactions, account balance or disclosures.

Performance materiality is set to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements in the financial statements or in
classes of transactions, account balance or disclosures exceeds the materiality as a whole.

(b) If the external auditor uses internal auditors to provide direct assistance on the audit, the
external auditor shall include the following in the audit documentation:

 The evaluation of the existence and significance of threats to the objectivity of the
internal auditors, and the level of competence of the internal auditors used to provide
direct assistance;
 The basis for the decision regarding the nature and extent of the work performed by the
internal auditors;
 Who reviewed the work performed and the date and extent of that review in accordance
with ISA 230;
 The written agreements obtained from an authorized representative of the entity and the
internal auditors; and
 The working papers prepared by the internal auditors who provided direct assistance on
the audit engagement.

Ans.8 Evaluation of the situation:

The auditor has no obligation to perform any audit procedures regarding the financial statements
after the date of the auditor’s report. However, the matter has come to the knowledge of the
auditor before publication of financial statements and imposition of penalty is indicative of
condition that existed at balance-sheet date.

Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Course of action:
Had the actual amount of penalty imposed by the court been known to the auditor at the date of
the auditor's report, it may have caused the auditor to ask the management for adjustment in the
financial statements. Therefore, the auditor need to perform the following procedures:

 Discuss the matter with management and, where appropriate those charged with
governance
 Inquire how management intend to address the matter in the financial statements.
 Instruct management not to issue the financial statements before the necessary amendments
have been made

 If the financial statements are amended, the auditor is required to:

– Carry out the necessary audit procedures on the amendment.

– Extend his review of subsequent events up to the date of the new audit report.

 If the financial statements are not amended, the auditor is required to

– Take appropriate action to prevent reliance on the audit report, after taking legal
advice.
– In the longer term, the auditor should also consider resigning from the audit, but this
would not be appropriate as an immediate response to the problem.

Ans.9 (a) Logical access controls are tools and protocols used for identification, authentication,
authorization and accountability in computer information systems. It enables the
organization to identify users, restrict access to specific resources and produce audit trail of
systems and user activity.

 The login account must uniquely identify the person, but it must be part of a standard
similar to all other logins.
 The password has to be sophisticated and must be of a certain prescribed length.
 The access to the system must be limited in accordance with roles and responsibilities of
the users.
 User must be logged out after a certain period of in-activity.

(b)  Maintaining secure second copies of all programs and data files (‘back-up copies’).
 Take measures for the protection of equipment against fire, power failure and other
hazards.
 Make disaster recovery plans, such as an agreement with another entity to make use of
its computer center in the event of a disaster.
 Suitable maintenance and service agreements with software companies to provide
‘technical support’ in the event of operating difficulties with the system.

Ans.10 (a) Offering business advice to the audit client in such an informal manner is a breach of
professional behavior by the audit junior. He also appears to be in breach of the
fundamental principal of professional competence and due care, unless he has the required
competency to offer such an advice.

Moreover, business relationship between the member of the audit team and the audit client
will create self-interest threat and intimidation threat.

Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2019

Due to above, the following safeguards may be implemented:

 Any work performed by the audit junior to date should be critically reviewed.
 We need to take steps to ensure that the client does not act on any advice that the
junior provided.
 We should also assess any gaps in our internal training process; the junior should have
received training prior to his audit assignments so that he understood his role as an
auditor.

(b) All announcements, communications and public notices should:

 Be aimed at informing the recipients or the public in an objective manner.

 Conform to the basic principles of legality, decency, clarity, honesty and truthfulness.
 Not project an image, which is inconsistent with that of a professional person bound to
high ethical and technical standards.

Activities / statements which may expressly be considered not to meet the above criteria
and are therefore prohibited include those that:

 Create false, deceptive or unjustified expectations of favourable results.

 Imply the ability to influence any court, tribunal, regulatory agency or similar body or
official.
 Consist of self-laudatory statements that are not based on verifiable facts.
 Make comparisons with other professional accountants in practice.
 Contain any other representations that would likely to cause a reasonable person to
misunderstand or be deceived.
 Make unjustified claims to be an expert or specialist in a particular field of
accountancy.
 Contain testimonials or endorsements.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Spring 2019

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9 10
50% 34% 5% 57% 13% 44% 50% 63% 27% 23% 21%

General comments

The overall performance in this attempt was average. However, students showed poor skills
in attempting scenario based questions such as Q.3 and Q.5 which required application of
knowledge. It has been observed that students have a tendency to write what they knew
rather than what was being asked. Students are therefore advised to carefully read the
question and its requirements before answering it.

Question-wise common mistakes observed

Question 1(a)

Students wasted time in explaining the difference between the debtor account balance and
the balance confirmed by the debtor. In fact, these were provided in the question.

Question 1(b)

 In case of refusal, the impact on the risk of material misstatement and the nature, timing
and extent of other audit procedures was not mentioned.
 Communication with those charged with governance was ignored.

Question 2(a)

 Significant transactions and events affecting the audit were missed out.
 Students failed to realize that all significant risks or matters communicated to those
charged with governance are not considered as key audit matters.
 It was concluded that if there is a misstatement in revenue then it should be included in
key audit matter section. In fact, in such a case the audit report should be qualified
instead of including it in key audit matter section.

Question 2(b)

Candidates did not mention that if there are no key audit matters to communicate in the
report, this fact should be reported.

Page 1 of 3
 Examiners’ comments on Audit and Assurance Spring 2019

Question 2(c)

 It was incorrectly concluded that since a qualified opinion has been expressed, it needs
to be included in the key audit matter section.
 Reference to the basis for qualified opinion which should be included in the key audit
matter section, was not mentioned.

Question 3

 Students did not analyse the financial statements in the light of other information
provided in the question and consequently failed to identify the areas in which there
were no unexplained fluctuation or inconsistency.
 The audit procedures mentioned by the students were not related to the inconsistency
identified.
 Increase in provision against litigation was not discussed.

Question 4(a)

Obtaining consent of the proposed auditor and circulating the notice to the members was
not mentioned.

Question 4(b)

Providing the opportunity to the retiring auditor to make a representation in writing to the
company and ensuring that it is read out in the meeting was not mentioned.

Question 5

 Procedures related to disposal of fixed assets, valuation of fixed assets and impairment
of assets were mentioned. In fact, it was specifically mentioned in the requirement that
assets were carried at cost, no disposal was made during the year and no impairment
testing was required.
 Instead of suggesting changes or additional audit procedures, students reproduced the
same procedures that were mentioned in the question.
 Verification of the date from which the asset was available for use was generally not
mentioned.
 The fact that physical verification of the assets did not address the assertion of
ownership was not mentioned.
 Use of bank confirmation for checking the charge on assets was not mentioned.
 Audit procedures for analytical review of depreciation, review of depreciation rates,
consistent depreciation methods and ensuring that fully depreciated assets were not
subject to depreciation were not mentioned.

Question 6(a)

 General points were mentioned without any justification.

 Audit procedures for valuation of property, plant and equipment and their reporting
implications were mentioned which was not required.

Page 2 of 3
 Examiners’ comments on Audit and Assurance Spring 2019

 Timely availability of the draft financial statements, relevant information and

communication of the planning and performance of the audit due to the strict deadline
was ignored.

Question 6(b)

Good performance was observed in this part.

Question 7(a)

The fact that performance materiality is for class of transaction, account balance or
disclosures, was not mentioned.

Question 7(b)

Good performance was observed in this part.

Question 8

Students failed to mention that if the financial statements are not amended auditor needs to
take appropriate action to prevent reliance on the audit report and in the longer term, the
auditor should consider resigning from the engagement.

Question 9(a)

 Logical access control was not properly defined. Some of the key characteristics such as
authorization, accountability and audit trial were ignored.
 Only logical access control mentioned was password protection. All other controls such
as user access rights, implementing firewall to restrict unauthorized users, log-out in
case of certain period of inactivity, etc. were ignored.

Question 9(b)

General IT controls which are not related to ensure continuity of operations, such as,
program development, testing of program, login IDs and password management were
mentioned.

Question 10(a)

Threat due to the audit team member offering business advice to the CFO and its related
safeguard was not discussed.

Question 10(b)

Instead of mentioning the guidelines while issuing public notices and advertisements,
students listed and explained the fundamental principles of code of ethics.

The End

Page 3 of 3
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a) Up to 01 mark for each audit step 5.0

(b)
Evaluation of appropriateness of written representation 2.0

Evaluation of reasonableness of management refusal and its impact on
audit approach 3.0

Discussion on communication with those charged with governance 1.0

Discussion on audit report implications 1.0

A.2 (a)
Discussion on the matter to be considered for key audit matter 1.0

0.5 mark for each area which requires significant auditor attention 1.5

Conclusion 1.5

(b)
Brief discussion on inclusion of the key audit matter section as per scenario 1.0

Disclosure of fact in the audit report to communicate that there is no key
audit matter 1.0

(c) Discussion on whether to include the qualification details in key audit matter 3.0

A.3
01 mark for identification of each unexplained fluctuation and inconsistency 5.0

Up to 0.5 mark for each key audit procedure 6.0

A.4 (a) Up to 01 mark for each procedure 2.0

(b)
Up to 01 mark for each procedure 3.0

Up to 01 mark for each responsibility of the company towards retiring
auditor 3.0

A.5
Up to 01 mark for each deficiency/error identified in the audit program 3.0

Up to 01 mark for each additional audit procedure 8.0

A.6 (a) Up to 01 mark for each matter to be included in the engagement letter 4.0

(b) Up to 01 mark for each identified risk 5.0

A.7 (a)
Discussion on performance materiality 2.0

Brief discussion on the purpose of performance materiality 1.0

(b) Up to 01 mark for each matter to be documented 4.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2019

Mark(s)
A.8
Evaluation of the situation 2.0

Up to 01 mark for each procedure 7.0

A.9 (a)
Describing the logical access controls 3.0

01 mark for mentioning each logical access control 4.0

(b) 01 mark for each control 4.0

A.10 (a)
Evaluation of the situation 1.0

0.5 mark for identification of each threat 1.0

01 mark for each safeguard 3.0

(b)
01 mark for each basic principle 3.0

Up to 01 mark for mentioning each activity/statement which should be
avoided 5.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination
The Institute of 3 September 2019
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 You are the manager of Saba and Company, Chartered Accountants, responsible for the
audit of Tiger Limited (TL). While reviewing the draft financial statements and the
working paper file, following matters have come to your attention:

(i) No subsequent events were identified.

(ii) During the stock count, certain items were physically present but were not appearing
in stock sheets provided by TL. The management informed you that these items
were sold but were not dispatched upon customer request.
(iii) TL has a policy for making full provision against receivables when they become
overdue for 360 days or more. However, three customers were not fully provided for
in accordance with the TL’s policy. The management contented that they are
rigorously following up with these parties and are confident to recover the
outstanding balances very soon.
(iv) There was only one litigation pending against the company which has appropriately
been disclosed in the financial statements.

Required:
Discuss whether it would be necessary to obtain management representation in respect of
above matters. (08)

Q.2 (a) Aslam is a junior member of your audit team. During an informal discussion with
your team members, Aslam has inquired you about the reasons of emphasizing on
professional scepticism when honesty and integrity of the management is not
questionable based on prior experience. Briefly respond to the inquiry of Aslam. (03)
(b) Mention any four general controls over development of new computer information
systems and applications. (04)
(c) Briefly describe any five inquiries that the auditor may make for identifying the risk
of material misstatement due to fraud. (05)
(d) State any five audit procedures that could be performed to obtain sufficient
appropriate audit evidence for determining whether or not a material uncertainty
exists when events are identified that may cast doubt on the entity’s ability to
continue as a going concern. (05)

Q.3 Amjad is the chief executive and major shareholder of a newly incorporated private limited
company. He has offered your firm to be the first external auditor of the company. During
a meeting, he was of the viewpoint that statutory audit exists because it has been legally
mandated and it does not add value to business. However, he believes that audit helps in
finding all major frauds within the company.

Required:
Discuss how you will respond to the viewpoints of Amjad regarding the audit of financial
statements. (07)
 Audit and Assurance Page 2 of 4

Q.4 You are the job-in-charge on the audit of Ostrich Limited (OL), a food processing
company, for the year ended 30 June 2019. For sending debtor balance confirmations, OL
has provided you the following schedule for the year ended 30 June 2019:

No. of Balance as at 30 June 2019

Debtors
customers Rs. in ‘000
Chain Stores
Store – A 1 5,150
Store – B 1 3,398
Store – C 1 4,236
Supermarkets 30 7,104
Restaurants 500 6,364
Credit balances 3 (1,000)
Total 25,252

There are no overdue and nil balances as on 30 June 2019. The risk of material
misstatement has been assessed as low and controls have been tested.

Required:
Discuss the audit strategy that you would follow for selecting the debtors for balance
confirmation. (07)

Q.5 You are the manager responsible for the audit of Zebra Limited (ZL). ZL normally has
significant sale and purchase transactions with its related parties.

Guide your audit team regarding the audit procedures and related activities that should be
performed for obtaining information relevant to identifying the risks of material
misstatements associated with related party relationships and transactions. (08)

Q.6 You are the job-in-charge on the audit of Sambar (Private) Limited (SPL), engaged in
production and marketing of textile products.

Your team has performed a walkthrough of the sales and receivable process which is
summarized as follows:
(i) SPL has employed a Sales Representative (SR), who is responsible for finding new
customers and taking orders from all customers.
(ii) Orders are recorded on a pre-numbered order form duly signed by the customers.
After taking the customer order, SR mentions the maximum credit limit and credit
time after verbally confirming them with the Director Operations, on the order form.
SR then forwards one copy of the order form to the warehouse and another copy to
the Factory Accountant (FA).
(iii) Warehouse supervisor dispatches the completed order from the warehouse,
accompanied by a manually prepared pre-numbered delivery note. He keeps a copy
of delivery note and sends another to FA.
(iv) FA manually prepares a pre-numbered invoice using the details mentioned on the
order form. FA also ensures that the customer should not exceed the maximum
credit limit after the new order. FA normally sends one copy of invoice to the
customer along with the delivery note and keeps the second copy along with the
order form in the record of accounts department. However, due to delay in receiving
the order information, invoice is sometime sent after the delivery.
(v) Each Friday, FA inputs the week’s invoices into the computerized accounting
software. At each month end, FA prepares age analysis and follows-up with
customers who have not paid within their credit time.
 Audit and Assurance Page 3 of 4

Required:
Identify the control weaknesses in sales and receivable process of SPL along with their
possible effects and give your recommendations to SPL. (15)

Q.7 You are the audit manager on Beluga Limited (BL) for the year ended 31 August 2019.
The following issues have been brought to your notice by your audit team:

(i) BL has pending tax litigation in which tax department has raised demand of
Rs. 75 million. The matter has been challenged by BL and the decision in this
respect is currently pending with the Appellate Tribunal. BL’s tax advisor is
confident of positive outcome of this litigation. No provision has been made in this
regard; however, it has been disclosed as a contingency in the financial statements.

(ii) On 20 September 2019 one of the warehouses of BL caught fire destroying entire
inventory, furniture, fixtures and equipment. The book values of the destroyed assets
at the time of fire were Rs. 100 million. BL has lodged a claim with the insurance
company.

The draft financial statements for the year ended 31 August 2019 show a profit before
taxation of Rs. 500 million and net assets of Rs. 1,400 million.

Required:
(a) State the audit procedures which may be performed in respect of each of the above
audit issues identified by your team. Also briefly discuss the implications of these
issues on the audit report. (10)
(b) Draft an opinion paragraph to be included in the audit report of BL in accordance
with the requirement of International Standards on Auditing, assuming that the
matter in (i) above is not dealt with in accordance with the requirements of IFRS.
(Basis of opinion paragraph is not required) (05)

Q.8 (a) Shayan has recently been hired as the audit manager in a firm of chartered
accountants which is the auditor of Python Limited (PL). Shayan previously served
as manager finance in PL for three years.

The firm is considering to depute Shayan as the engagement manager for the audit
of PL for the year ended 31 August 2019.

Required:
Identify the possible threats which may arise and discuss their significance. Also,
discuss the safeguards required to mitigate the threats under each of the following
assumptions:
(i) Shayan resigned from PL with effect from 30 June 2019
(ii) Shayan resigned from PL with effect from 30 June 2018 (07)

(b) Your firm has been asked to submit a tender for appointment of an engagement
currently held by another firm of chartered accountant.

Required:
Briefly discuss the safeguards that shall be applied to eliminate any threat(s) or
reduce them to an acceptable level before accepting the engagement. (04)

(c) You are the manager on the audit of Dolphin (Private) Limited for the year ending
31 December 2019. The client has requested you to send an audit trainee on
secondment for October and November 2019 to assist the chief financial officer, as
one of the key staff members of the accounting team has resigned.

Required:
Identify the threat(s) in the above scenario and suggest appropriate safeguards. (04)
 Audit and Assurance Page 4 of 4

Q.9 Plover Limited has recently developed an integrated system for maintaining its financial
records. During testing, following input and processing errors were identified in the system:

Input errors
(i) A non-existent product number was mentioned on the online order form.
(ii) Inward movement of inventory was recorded in some other inventory account.

Processing errors
(i) In the payroll system, all employees of a department were processed at the rate of
Rs. 100 per hour instead of approved rate of Rs. 80 per hour.
(ii) Salaries of few employees were processed twice.

Required:
Identify and briefly describe one application control in respect of each of the above type of
errors, that would have been effective in either preventing or detecting the error. (08)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

A.1 (i) This must be included in the representation letter. The written representation must
cover that there were no events subsequent to the date of the financial statements
and for which IFRSs require adjustment or disclosure.
(ii) This may not be included in the representation letter. The auditor should obtain
sufficient appropriate evidence on this matter such as checking the customer
correspondence or directly confirming from the customer. However, after obtaining
sufficient appropriate audit evidence, the auditor may still ask for management
representation that the stock has been held on the instruction of the customer.
(iii) This should not be included in the representation letter. This is a matter of incorrect
application of accounting policy, which the auditor should discuss and resolve with
the management.
(iv) The auditor must include this matter in the representation letter. The representation
would cover that all known actual or possible litigation and claims, whose effects
should be considered when preparing the financial statements, have been disclosed
to the auditor and accounted for and disclosed in the financial statements.

A.2 (a) The past experience regarding honesty and integrity of the entity’s management
and those charged with governance is critical for the auditor. However, a belief that
management and those charged with governance are honest and have integrity,
does not relieve the auditor of the need to maintain professional skepticism. In fact,
maintaining of professional scepticism throughout the audit helps the auditor to
reduce the risks related to:
 overlooking unusual circumstances.
 over generalizing when drawing conclusions from audit observations.
 using inappropriate assumptions in determining the nature, timing and extent
of the audit procedures and evaluating the results thereof.
 critical assessment of audit evidence.
 identification of material misstatement.

(b) Following general control may be considered while developing a new computer
systems or applications:
 Appropriate IT Standards should be used when designing, developing,
programming and documenting a new computer system.
 There should be controls to ensure that tests are carried out on new systems
before they are introduced.
 A new computer system design should be formally approved by the system
‘user’.
 There should be a segregation of duties between the designers and testers of
systems.

(c) The auditor may make the following inquiries to identify the risk of material
misstatement due to fraud:
 Management’s assessment of the risk that the financial statements may be
materially misstated due to fraud, including the nature, extent and frequency of
such assessments.
 Management’s process for identifying and responding to the risks of fraud in the
entity, including any specific risks of fraud that management has identified or
that have been brought to its attention, or classes of transactions, account
balances, or disclosures for which a risk of fraud is likely to exist;

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

 Management’s communication, if any, to those charged with governance

regarding its processes for identifying and responding to the risks of fraud in
the entity; and
 Management’s communication, if any, to employees regarding its views on
business practices and ethical behavior.
 Enquire whether they have knowledge of any actual, suspected or alleged fraud
affecting the entity.

(d) (i) Analyzing and discussing the cash flow, profit and other relevant forecasts
with the management.
(ii) Analyzing and discussing latest available interim financial statements.
(iii) Reading the terms of loan agreements.
(iv) Confirming existence, terms and adequacy of the borrowing facilities.
(v) Reading minutes of meetings of shareholders, those charged with governance
and relevant committees for reference to financing difficulties.

A.3 Our response to the viewpoints of Amjad would be as follows:

(i) It is not correct that the statutory audit does not add value to business. In fact:
 it increases the credibility of the financial statements. This is important to
potential lenders, who may insist on the company having an audit as a
pre-condition for lending money.
 it confirms to management that they have performed their statutory duties
correctly.
 it provides assurance to management that they have complied with non-
statutory requirements.
 it helps on establishing accountability of the management, especially when the
business owners (shareholders) have hired others to manage their business, as
is typically in modern corporations.
 the need for assurance also arises because there is a complexity of transactions,
information and processing systems which renders difficult in determining the
proper presentation without a review by an independent expert.
 it provides feedback on effectiveness of internal controls. Where internal
controls are weak or inadequate, the auditor will give recommendations for
improvement. This will assist management in improving the internal controls
and reducing the risk(s).

(ii) The objective of a statutory audit (an external audit) is to express an opinion on the
truth and fairness of the view presented by the financial statements. Its objective is
not primarily the prevention or detection of all or major fraud. In fact, it is primarily
the responsibility of management to establish systems and controls to prevent or
detect fraud.

Further, the auditor is concerned with fraud that might impact the financial
statements and is therefore concerned with the risk of material fraud.

A.4 We will have to check the completeness and accuracy of the list prepared by the client.

Stratified sampling could be used for selecting customer balances for circularizing the
confirmation.

If the chain stores are selected, 51% (or 49% in absolute terms) of the population can be

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

covered without excessive time and cost being involved. Therefore, all the three chain
stores could be selected for confirmation.

Debtors from superstores and restaurants should be chosen on the basis of any appropriate
sample selection method adopted by the team.

Since balances of chain stores and super stores consist of large balances, positive
confirmation should be circulated.

Since the population of restaurant comprises of large number of small account balances, the
risk of material misstatement has been assessed as low and control have been tested,
negative confirmation can be used if the following two conditions are also met:
 A very low exception rate is expected; and
 The auditor is not aware of circumstances which would cause the respondent to ignore
the request for confirmation.

Credit account balances should also be separately selected for circulating the confirmation.

A.5 I would suggest the following activities/procedures to my team, in respect of identification

of risks of material misstatement related parties:
 The audit team’s discussion on risk shall include specific consideration of
susceptibility of financial statements to material misstatement due to fraud or error
through related parties and their transactions.
 The audit team should inquire of management regarding:
 the identity of related parties including changes from prior period;
 the nature of the relationships between the entity and its related parties; and
 whether any transactions occurred between these related parties during the
period and, if so, the type and purpose of the transactions.
 what controls the entity has to identify, account for and disclose relating to related
party relationships and transactions.
 The audit team should obtain an understanding of the controls, if any, that
management has established to:
 identify, account for, and disclose related party relationships and transactions;
 authorize and approve significant transactions and arrangements with related
parties;
 authorize and approve significant transactions and arrangements outside the
normal course of business.

 The audit team should maintain alertness for evidence of related party information
when obtaining other audit evidence, in particular, when scrutinizing bank and legal
confirmations and minutes of meetings.
 If significant transactions outside the normal course of business are discovered, the
audit team should inquire management the nature of the transactions and whether
related parties could be involved.
 The audit team should share relevant information obtained about the entity’s related
parties with other members of the engagement team.

Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

A.6 S. No. Control weakness Possible effects Recommendations

(i) No formally approved Goods may be supplied to All new customers should
credit list exits. customers with a poor undergo a credit reference
credit rating. This may check before being
increase the risk of bad accepted as new customers.
debts and financial losses.
Credit limits should be set
for all customers and it
should be reviewed on a
periodic basis every month
to avoid selling goods on
credit to risky customers.
(ii) Credit limit is confirmed SR may mention the limit Communication regarding
verbally. which was not mentioned the confirmation of credit
by Director Operations as limit should be
no documentary evidence appropriately documented.
exist.
(iii) Credit limit is not checked New production order may SR should ask the credit
with accounts department be issued for goods which balance of the customer
before forwarding the are not required to be from FA prior to forwarding
customer order to produced. it to the warehouse.
warehouse for processing.
Goods may be dispatched to
customers who have
already availed their credit
limit.
(iv) There seems to be no Incorrect quantity of goods Before orders are
process to match the GDN to may be dispatched which dispatched, the warehouse
the original order prior to may affect goodwill as well supervisor should also
dispatch. as revenue. compare the quantity and
quality of goods with the
original order.
(v) There seems to be no The company could suffer All GDNs should be matched
procedures to ensure the financial loss if invoices are to the invoice and filed
completeness and accuracy not raised or are not timely together.
of invoices. raised or are prepared
On a periodic basis FA
inaccurately.
should perform a review of
un-invoiced GDNs to ensure
all dispatches have been
invoiced.
The customer order file
should be reviewed
periodically in order to
confirm that the order, GDN
and invoice details are
matched with each other.
(vi) No acknowledgment from Customer may falsely claim The person responsible for
customer is obtained after that delivery has not been delivery should obtain
the delivery of the order. made. customer acknowledgment
on delivery order.

(vii) Invoices are not prepared There may be a mismatch in Invoice should be prepared
on the basis of GDN. the quantity of goods after checking the quantity
delivered and invoiced. from the GDN and price
from the customer order.

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

(viii) Ledgers are not updated on Due to this delay there is a All the invoices and receipts
a timely basis. possibility that some of the should be recorded when
invoices or receipts may go they are prepared and
un-recorded. deposited/received.

Ledgers would not reflect

updated balances, due to
which sales may be made to
customers who have fully
utilized their credit limits or
vice versa.

(ix) Updated age analysis may Sales may be made to those Age analysis should be
not be available when the customers who are already readily available.
Director Operations decides overdue for a long time.
on the credit limit to be Director Operation should
given to the customer. also review the age analysis
as he is the one who is
setting the credit limits.

(x) Debtors are only followed Delayed follow up of Debtors should be followed
up on periodic basis. overdue accounts may lead up whenever their invoices
to bad debts. are becoming due or they
are close to the expiry of
their credit limits.

A.7 (a) (i)  Review minutes of the board meeting in which such matter were
discussed.
 Review the client’s correspondence with the tax advisers and invoices for
tax services.
 Obtain direct confirmation from tax adviser.
 Obtain and review the correspondence with the tax authorities.
 Consider whether expert advice may be required from outside sources
other than tax advisor.
 Consider any legal precedent or case law by assessing relevant historical
and recent judgments passed by the courts and other authorities in similar
situation.
 Obtain written representation from the management.
 Evaluate the adequacy of the disclosure in the financial statement.

From the information provided it seem to indicate that the accounting

treatment adopted is in line with IAS 37 which requires a contingent liability
to be disclosed. Therefore there would be no impact on the audit report of BL.

We may have to include an emphasis of matter paragraph in the audit report

highlighting the matter with a reference to the note to the financial statements.

(ii) Since the event occurred after the date of financial statements and the amount
of loss is material, the auditor should obtain evidence that whether the incident
has been appropriately disclosed in the financial statements as a non-adjusting
event.

We will need to verify the financial impact to be disclosed in the financial

statements by verifying the write down of stocks, loss of property and

Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

equipment, etc.

We will also need to assess the adequacy of the insurance claim and whether it
covers all the losses by reviewing the insurance policy and the correspondence
with the insurers.

We will have to include an emphasis of matter paragraph in the audit report

highlighting the matter with a reference to the note to the financial statements.

In case the management disagrees to disclose the incident then we may

consider expressing a qualified opinion.

(b) Qualified Opinion

We have audited the financial statements of Beluga Limited (the Company), which
comprise the statement of financial position as at 31 August 2019, and the
statement of comprehensive income, statement of changes in equity and statement
of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies.

In our opinion, except for the effects of the matter described in the Basis for
Qualified Opinion section of our report, the accompanying financial statements
present fairly, in all material respects, (or give a true and fair view of) the financial
position of the Company as at 31 August 2019, and (of) its financial performance
and its cash flows for the year then ended in accordance with International Financial
Reporting Standards (IFRSs).

A.8 (a) Self-interest threat, self–review threat or familiarity threat may be created. Shayan
previously being the manager finance was in a position to exert significant influence
over the preparation of the PL’s accounting records which would now be subject to
his own review in the capacity of audit manager. Furthermore, since Shayan has
worked for three years in PL, he may be influenced by his ex-subordinates.
Considering these facts, the threat appears to be significant.

If Shayan had previously worked in PL until 30 June 2019

Since he resigned during the period covering by the audit, the threat created would
be so significant that no safeguard could reduce the threat to an acceptable level.
Consequently, Shayan shall not be part of the audit team.

If Shayan had previously worked in PL until 30 June 2018

 Threats would only be created for decisions made or work performed by Shayan
in the prior period, while employed at PL and should be evaluated in the current
period as part of the current audit engagement.
 If Shayan is appointed as the engagement manager then the work performed by
him as a member of the audit team should be independently reviewed.

(b)  Acquiring an appropriate understanding of the nature of the client’s business,

the complexity of its operations, the specific requirements of the engagement
and the purpose, nature and scope of the work to be performed.
 Asking knowledge of relevant industry or subject matters.
 Checking relevant regulatory or reporting requirements.
 Complying with quality control policies and procedures designed to provide
reasonable assurance that specific engagements are accepted only when they
can be performed.
 Assigning sufficient staff with the necessary competencies.
Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2019

 Using expert where necessary.

 Agreeing on a realistic timeframe.
 Asking the existing auditor to provide known information on any facts or
circumstances that, in the existing auditor’s opinion, your firm needs to be
aware of before deciding whether to accept the engagement.
 Obtaining necessary information from other sources.

(c) The lending of staff by a firm to an audit client will create a self-review threat,
However, the threat may be reduced to an acceptable level if:
 they are not involved in exercising discretionary authority; or
 they do not assume management responsibilities and the audit client should
acknowledge its responsibility for directing and supervising the activities of
assigned personnel.
 an additional review of the work performed by the seconded staff may be
carried out.
 they are not given audit responsibility in future for any function or activity that
they performed or supervised.
 are not included in the audit team.

A.9 Input Errors

(i) Existence check:

Existence check can be written into a computer program to test the validity of input
data. The program looks at the value for a particular item of data in the input
transaction, and if it is invalid, it produces an error report and will not process the
transaction. A program check can be carried out on the product code for all order
forms, and if the code is not within the defined list, an error report will be produced.

(ii) Check digit:

PL can use check digits with the inventory codes to prevent the posting of in-ward
movement in in-correct inventory account. Check digits are controls within a
computer program on the validity of key numerical codes, such as customer codes,
supplier codes and employee identification numbers. When check digits are used,
every code is given an extra digit, the check digit. This is a unique digit obtained
from the other digits in the code.

Processing Errors

(i) Master file controls:

PL should implement controls over access to master files. These are controls to
check that data held on master files and standing files is correct. Effective control
would restrict access to the payroll wage rate file to the human resource department
only.

(ii) Control total:

PL may use control total, batch total or hash total to prevent duplicate processing of
salary. Control totals may be used when several transactions are input for
processing at the same time. Control total means the total value for all the
transactions input. This total is given by the computer prior to processing. The total
given by the computer is checked with the total taken manually.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Autumn 2019

Passing %

Question-wise Overall
1 2 3 4 5 6 7 8 9
43% 51% 37% 49% 37% 9% 19% 29% 15% 25%

General comments

Better performance was observed in this session as compared to previous session. However,
the result was still not up to the mark. Main reasons for below average performance seemed
to be inability of examinees to implement theoretical knowledge to scenario based
questions. Examinees are advised to practice the application of concepts by attempting
scenario based questions of past examinations. It was also commonly noted specially in
Q.2(d), and Q.5 that examinees did not read the requirement of the question and
consequently wrote incorrect answers. Examinees are advised to read the requirements of
the question very carefully before attempting it.

Question-wise common mistakes observed

Question 1

 Some of the examinees mentioned that since no subsequent event is identified, it would
not be included in the representation letter.
 Some examinees mentioned that it would only be included in the representation letter if
the auditor could not find any evidence for stock held on behalf of the customer.

Question 2(a)

Few examinees did not mention that how professional skepticism helps throughout the
audit.

Question 2(b)

Good performance was observed in this part of the question.

Question 2(c)

Good performance was observed in this part of the question.

Page 1 of 3
 Examiners’ comments on Audit and Assurance Autumn 2019

Question 2(d)

Instead of stating audit procedures for determining whether or not a material uncertainty
exists that may cast doubt on the entity’s ability to continue as a going concern, examinees
wrote the examples of such events and conditions.

Question 3

Most of the examinees were not able to mention more than two benefits of a statutory audit.

Question 4

Most of the examinees only discussed the conditions of sending positive and negative
confirmations to debtors and ignored other aspects of the answer such as stratification of the
population, selecting entire population of chain stores for confirmation and using sample
selection method.

Question 5

Many examinees wrote audit procedures for identification of related parties instead of
mentioning audit procedures and related activities for identifying risks of material
misstatement associated with related parties.

Question 6

 Most of the examinees did not read the sales and receivable process and only mentioned
segregation of duties as a control weakness repeatedly in different words.
 Credit limit is not checked with accounts department before forwarding the customer
order to warehouse was barely mentioned by any of the examinee.
 Customer acknowledgment of the delivery of the order was not mentioned.
 Updated age analysis may not be available was also not mentioned.

Question 7(a)

 Most of the examinees did not mention more than one or two audit procedures.
 For pending tax litigation, many examinees recommended to qualify the audit report
which was incorrect.
 Instead of discussing the subsequent event and its reporting implications due to the fire
incident, examinees mentioned the audit procedures related to going concern and its
reporting implications.

Question 7(b)

A majority of examinees either did not attempt this question or failed to obtain any mark
which reflected selective study on their part.

Question 8(a)

Many examinees correctly identified the threats but they failed to discuss their significance.

Page 2 of 3
 Examiners’ comments on Audit and Assurance Autumn 2019

Question 8(b)

Examinees either did not attempt this question or gave irrelevant answers because of
selective study. Examinees are advised to seek detailed guidance from ICAP’s suggested
answers.

Question 8(c)

Good performance was observed in this part of the question.

Question 9

 Many examinees only identified the application control and were not able to describe it.
 Using check digit to prevent recording inventory in an incorrect account was not
mentioned.
 Access controls over master file for the payroll data were also not mentioned by most of
the examinees.

(THE END)

Page 3 of 3
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 For each matter:

0.5 mark for reaching conclusion whether to obtain management representation 2.0

1.5 marks for discussion on the conclusion reached 6.0

A.2 (a)
Importance of maintaining professional scepticism 1.0

Discussing briefly the reason of maintaining professional scepticism 2.0

(b) 01 mark for each general control over development of new computer
information systems and applications 4.0

(c) 01 mark for each inquiry that the auditor may make for identifying the risk of
material misstatement due to fraud 5.0

(d) 01 mark for each audit procedure 5.0

A.3
01 mark for mentioning each benefit of statutory audit 4.0

Discussion on auditor’s responsibility to identify fraud 3.0

A.4
01 mark for discussing each audit strategy for selecting debtors for balance
confirmation 5.0

Discussion on the conditions for sending negative confirmation 2.0

A.5 01 mark for each audit procedure and related activity for identifying the risk of
material misstatement associated with related party transactions 8.0

A.6
01 mark for identification of each control weakness 8.0

0.5 mark for possible effects of the control weakness 3.5

0.5 mark for recommendations 3.5

A.7 (a)
01 mark for each audit procedure 7.0

Brief discussion on reporting implication 3.0

(b)
Disclosure such as name of company audited, component of financial

statements, period covered etc. 3.0

Drafting a qualified opinion on the financial statements 2.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2019

Mark(s)
A.8 (a)
0.5 mark for identification of each threat 1.5

Discussion on significance of threat 4.0

Mentioning safeguard to reduce the threat 1.5

(b) 01 mark for mentioning each safeguard 4.0

(c)
Identification of threat 0.5

Up to 01 mark for each safeguard 3.5

A.9
0.5 mark for identification of each correct control 2.0

1.5 marks for describing each control 6.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 3 March 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all TEN questions.
(ii) Answer in black pen only.

Q.1 You are the audit senior responsible for the audit of Dragon Pakistan Limited (DPL), a listed
company. DPL operates in the pharmaceutical industry which is highly regulated by the
government and heavy fines are placed on any non-compliance of the regulations.

The main product of DPL is Drug A. The raw material for the production of Drug A is
imported from Switzerland. Drug A has been underperforming for a number of years and is
currently sold at low margins. Last year, a competitor introduced a much improved version
of Drug A.

Considering the tough competition, all the companies in the pharmaceutical industry
including DPL have to continuously carry out research activities for development of new
drugs and improvement of the existing drugs.

Required:
(a) Outline the business risks that exist in DPL. (02)
(b) Identify and briefly discuss the financial statement line items that could be misstated as
a result of the business risks outlined in (a) above. (06)

Q.2 Your firm is the external auditor of Avian Limited (AL), a listed company, for the year
ending 31 March 2020. AL is engaged in the business of construction and selling of
construction material.

During the planning stage, the audit team has noted the following points for your
consideration:

(i) AL’s CEO aggressively follows up with the departmental heads for meeting the
financial targets established by the directors. Performance of senior management at AL
is measured in terms of year-on-year profit growth. There is an internal audit division of
AL and it reports directly to the CEO.

(ii) AL is facing difficulties in fulfilling its contracts for supply of building blocks due to a
sudden rise in the cost of raw material, however no provision has been made in the
financial statements. AL’s CFO explained that provision has not been made as amount
cannot be determined with certainty now and therefore provision will be made next
year, if required. Audit team was of the view that the provision has not been made
because it would significantly affect the profitability of the company.

Required:
Briefly discuss the possible ‘fraud risk factors’ from the above scenario. (09)
 Audit and Assurance Page 2 of 5

Q.3 (a) You are the manager responsible for the audit of a newly incorporated company,
Trojan Limited (TL). Following are the extracts from the first draft financial statements
of TL for the year ended 31 December 2019:

Rs. in million
Revenue 12,000
Profit before tax 72
Total assets 13,000
Total liabilities 7,000

Since this is the first year of operation, the profit before tax was quite low. However, as
per the management’s projection, the profit before tax would grow exponentially over
the next three years.

Your audit team has determined the materiality on the basis of profit before tax for the
year ended 31 December 2019. In view of the audit team profit before tax is the main
performance indicator for TL’s board of directors.

Required:
Discuss the appropriateness of the benchmark used by your team in determining the
materiality and suggest the alternative(s) available to your team. (06)

(b) You are the manager responsible for the audit of Crown Limited (CL) for the year
ended 31 December 2019. Your audit team has informed you that CL is developing a
new product ‘Solar giant’ which would have three times more power generation
capacity than the regular solar panels available in the market. CL had capitalised
development costs of Rs. 40 million in 2018 and Rs. 38 million in 2019. Based on
technical feasibility carried out by the production department, testing of solar giant is in
the right direction and the product would be launched as per plan in June 2020.

However, review of board minutes revealed that CL is facing technical problems that
may delay the launch of solar giant till March 2021. The minutes further revealed that
CL may require to incur further Rs. 50 million for the development of this project. This
would result in increase in selling price that was originally envisaged by CL.

CL’s management is of the view that they would overcome these technical problems
without incurring any additional cost and would launch the solar giant as per original
plan, in June 2020.

The draft financial statements show a profit before tax of Rs. 150 million.

Required:
State the audit procedures which may be performed in respect of above audit issue.
Also discuss the implication of this issue, if any, on the audit report. (08)

Q.4 On the audit of Qalander Limited, your team has performed the following audit procedures
for collecting the audit evidence with respect to understatement of payables against raw
materials:
(i) Verified the amounts recorded in supplier ledgers through underlying supporting
documents.
(ii) Sent direct confirmations to selected suppliers from the list of suppliers appearing in the
payable subsidiary ledgers.
(iii) Reviewed the list of subsequent material disbursements to suppliers from bank ledgers.
(iv) Reviewed unpaid invoices and ensured that they are properly recorded.

Required:
Comment on above audit procedures performed by your audit team in the context of testing
the understatement of payables. Also suggest further procedures, if any, that are required to
be performed with respect to the understatement of trade payables. (07)
 Audit and Assurance Page 3 of 5

Q.5 (a) An audit junior of your firm has inquired about the following matters relating to an
audit:

(i) Is there any need to evaluate the adequacy of expert’s work, if the procedures
related to competency and independence of the auditor’s expert have been
performed?

(ii) Can an audit firm include a reference to the expert’s work in the audit report so
that the audit firm’s responsibility may be reduced in the areas in which the audit
firm does not have expertise?

Required:
Comment on the above queries raised by audit junior in the light of International
Standards on Auditing. (06)

(b) Malta Limited (ML) has been facing problems in running an effective internal audit
department. The directors of ML has shared with you a brief structure, functioning,
roles and responsibilities of the current internal audit department, which are as follows:

The internal audit department is headed by Hina Akram, a Chartered Accountant. She
works in close coordination with CFO and CEO. She prepares audit plan for each
quarter by herself. All the internal audit findings are first discussed at length with both
the CFO and the CEO and are then presented to the audit committee.

Hina’s internal audit team comprises of three members, Usman, Kashif and Amna.
Usman is responsible for the audit of treasury and payments, Kashif is responsible for
the audit of procurement, payables and production and Amna is responsible for the
audit of revenues, receivables and assets, for the last three years. Hina believes that the
continued involvement of her team in the same areas has helped them to develop
expertise in their assigned areas. This also helps her and her team to design internal
controls for the above mentioned areas in an effective manner.

Required:
Identify the deficiencies relating to independence of internal audit department and
recommend measures which should be taken to protect the independence. (07)

Q.6 You are the audit manager in a firm of chartered accountants. During the audit of a client
for the year ended 31 December 2019, the audit team has prepared the following schedule to
summarize the responses from three debtors:

Balance
Balance at
Debtor confirmed by Comment
year-end
the debtor
A Rs. 500,000 Rs. 500,000 Confirmation was received through client.
B Rs. 800,000 Rs. 800,000 Confirmation was received after many
follow-ups with the client. However, the
audit team have come to know that the
confirming party had not received the
confirmation request.
C Rs. 500,000 Rs. 150,000 Consignment of Rs. 500,000 was shipped on
27 December 2019 but goods of Rs. 350,000
were returned subsequent to year-end.

Required:
Evaluate the evidence obtained and describe the steps (if any) which the audit team may
perform in respect of the above debtors. (10)
 Audit and Assurance Page 4 of 5

Q.7 Sawari Limited (SL) is engaged in the business of assembling motorcycles. Following IT
related matters are under consideration of the management:
(i) SL uses Inventory Management System (IMS) which is connected with the systems of
all its suppliers. IMS generates and sends purchase orders to the suppliers automatically
when the inventory reaches the reorder level. SL has recently been receiving the
complaints of short deliveries. On further inquiry it was revealed that the supplier
received different quantity orders than those actually generated by IMS. Initial
investigation revealed that data was changed during transmission to the suppliers.
(ii) SL’s IT data room maintained at its head office caught fire. All data including last
month backup kept within the premises was lost and critical hardware was also slightly
damaged due to this incident. Consequently, SL’s IT operations suffered a downtime of
ten days.

Required:
Suggest any three mitigating controls against each of the above matters. (06)

Q.8 Wealthy Bank Limited (WBL) is considering to appoint external auditor for the year ending
June 2020. WBL has shortlisted the following three audit firms for appointment as external
auditor and has presented certain matters relating to each of them for your consideration:

Rao Arif & Company, Chartered Accountants

The firm has recently admitted a new partner who worked as CFO till June 2017, of
Noor Engineering Limited, a subsidiary of WBL.

Hatim Tughlaq & Company, Chartered Accountants

One of the partners in the firm has obtained a loan from WBL of Rs. 5 million. The firm has
informed that the partner would not be able to repay the loan till 2021.

Rashid Kareem & Company, Chartered Accountants

Rashid, one of the partners in the firm, has several commercial properties in Lahore. He has
rented out five properties to WBL for its branch operations.

Required:
In the light of the Companies Act, 2017 discuss whether any of the above firms can be
appointed as external auditor of WBL. (06)

Q.9 (a) You are a partner in a firm of chartered accountants. You have received a letter from a
special investigation committee formed by the government to investigate the affairs of
Naqshbandi Limited (NL). Your client Rahim Limited (RL) is the subsidiary of NL.
The investigation committee requires you to submit the details of all the transactions
carried out by RL with NL and its related parties. The committee also requires your
firm to report the transaction value and the arm’s length value of all the transactions.

Required:
In the light of Code of Ethics for Chartered Accountants, discuss any three factors that
your firm should consider while disclosing client information to the investigation
committee. (03)
(b) Your firm has just been appointed as the auditor of Get Fit Gym Limited (GFG) which
operates a chain of high end gyms and fitness centers across the country. The
managing director of GFG is a close friend of the audit manager and the audit was
awarded to your firm through this connection.
In a recent meeting, the managing director of GFG has offered to grant membership to
all the staff members of your firm at 50% discount.

Required:
Evaluate the threat(s) which may arise in the above situation. Also discuss the
safeguards required to mitigate such threat(s). (08)
 Audit and Assurance Page 5 of 5

Q.10 (a) State any four actions that an auditor should take on identification of a fraud risk
factor. (04)

(b) What do you understand by logical access controls? Briefly describe any four logical
access controls. (06)

(c) Briefly discuss the key characteristics of small sized organisations with respect to
internal controls and risks which the auditor may face in such audits. (06)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

A.1 (a) Business Risk (b) Financial Statement Assertions

DPL has to comply with very strict Liabilities may be understated relating to
regulations and any non-compliance undisclosed penalties.
would result in heavy fines.
A contingent liability may not be disclosed in the
financial relating to any legal action taken by the
regulator against DPL.
DPL’s competitor has introduced a new Since DPL is selling Drug-A at lower margin, its
product which has caused DPL to inventory might need to be recorded at lower of cost
reduce it selling price. or net realizable value.

Since DPL is a listed entity and the revenues are

decreasing, DPL may overstate its revenue or
understate its expenses.

If the revenues keep on decreasing DPL’s property,

plant and equipment may need to be tested for
impairment.
DPL has to continuously carry on If the criteria for development cost (or intangible
research projects. asset) has not been met research cost might be
in-appropriately recorded as development cost.
Due to significant imports of raw There is a risk that trade payables may not be
material DPL is exposed to foreign translated using the correct exchange rate.
currency risk because of the
fluctuation in exchange rates. Exchange gains and losses may not be calculated
correctly.

A.2 Aggressive targets for departmental heads

CEO aggressively follows up with the departmental heads for achieving the targets set by those
charged with governance. It seems that there is an excessive pressure on management to meet
financial targets established by the directors therefore they may be under undue pressure to
misstate the financial statements.

Performance measurement of senior management

Since the performance of the senior management is measured in terms of year-on-year profit
growth they would have an incentive to fraudulently misstate the financial statements to obtain
bonuses or increments.

Internal audit department reports to CEO

Reporting of internal audit department to the CEO will impair their independence. Therefore this
deficiency in internal control structure would give an opportunity for fraudulent financial
reporting.

Significant subjective judgements

Determination of the provision required for onerous contract may require significant subjective
judgements on part of the management. There is an opportunity for the management to misstate
the recognition of expenses and liabilities.

Furthermore, since the performance is measured in terms of year-on-year profit growth,

management would have an opportunity to achieve those targets by not recording the required
provision.

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

Not recording provision

Justification of the CFO does not seem correct as information regarding rise in the cost of raw
material can easily be obtained from the market. The fraud risk factor further increases with the
fact that the audit team also suspects that the provision has not been recorded to maintain the
profitability.

Maintaining the profitability

Excessive interest by management in maintaining the profitability and earning trend represents
the management’s attitude which would increase the fraud risk.

A.3 (a) Information is considered material if its omission could influence the economic decision of
the users taken on the basis of the financial statements. Only considering the board of
director as the only users of financial statements for determining materiality is not correct.

Furthermore, since TL is a newly established entity, use of ‘profit before tax’ will not be a
good benchmark as current year profit is low because of first year of operation. Further,
considering a benchmark on the basis of future profitability is also not correct.

If materiality is still to be determined based on ‘profit before tax’, it will result in a low
materiality level, which will require performing detailed testing. By setting a lower
materiality the auditteam would also increase their sensitivity to a potential misstatement.

Alternatively assets or revenue may be considered to be an appropriate benchmark, in the

determination of materiality. The audit team however, based on their audit strategy and
approach, may consider other appropriate benchmarks (e.g. total expenses, net assets etc.).

(b) The total development cost incurred to date is Rs. 78 million which is 52% of profit before
tax and is therefore material.

Your team should first discuss with the management and those charged with governance to
evaluate the contradicting views obtained from the board minutes and the management’s
explanation.

If the view of the board of directors is valid then perform the following audit procedures:
 Consider whether CL would be able to arrange the additional funding requirements for
completion of the project.
 Ask management to provide the revised marketing plans to assess that whether a
market at such an increased price actually exists.
 Review revised projections, feasibility and forecasts for using resources and generating
future economic benefits.
 Obtain written representation from management as to their commitment to complete
the project.
 Assess whether CL would be able to produce the solar roof at an increased cost.

If the view of the board of directors is not valid then perform the following audit procedures:
 Obtain and read the documentation of research team’s notes and conclusions related to
completion of the project and the funding requirements.

Reporting implications:
If the matter is resolved the auditor may consider including it in the key audit matter
section of the audit report.
However, if it is established that conditions required for recognition of development cost
Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

are not met then auditor should request the management and those charge with
governance to expense out the development cost. If they disagree, as the matter is not
pervasive as it only affects specific items in the financial statements and therefore a
qualified opinion should be issued. The audit report should include an explanation of the
issue in the basis for qualified opinion paragraph.
A.4 (i) Tracing of payable amounts recorded in supplier ledgers may not be relevant as it is
directed towards evidence about overstatement of recorded payables.
Suggestion:
 Obtain the list of goods received near to year end and check whether payable has been
recorded or not.
 Trace supplier statement received from the creditor to the supplier’s ledger.
(ii) Sending direct confirmation to suppliers which are already recorded in books of account
may not be a relevant audit procedure for understatement in payables.
Suggestion:
Select accounts for direct confirmation, showing nil balances and debit balances.
(iii) Tracing material subsequent disbursement from bank ledger is not a reliable audit
procedure as amounts are being traced through bank ledgers which is an internally
generated document.
Suggestion
Trace material subsequent disbursement from third party provided bank statements.
(iv) Obtaining and reviewing unpaid invoices is a relevant audit procedure for understatement
and may be a reliable audit evidence.

Further procedures to be performed

 Review the list of account balances for any supplier who are not in the listing of trade
payable, but who would be expected to be in the listing, such as suppliers of frequently
purchased items.
 Compare the list of trade payables balances with the listing that was prepared for the
previous year’s audit. Look for explanations as to why any major balances do not appear.
 Compare the ratio of trade payables days with the previous year and investigate the
variance.

A.5 (a) Auditor remains fully responsible for the report produced, even if evidence on which it is
based was produced by others. The auditor has sole responsibility for the audit opinion
issued and this is not reduced in any way by his use of an expert.

Therefore, he should not refer in his report to the use of an expert, unless that is required
by law or regulation. Even then, or if the auditor refers to the expert’s work in his report
because it is relevant to an understanding of a modified opinion, then he must make it clear
that such a reference does not reduce his responsibility for that opinion in any way.

The auditor therefore cannot simply accept work performed by experts. That work must be
evaluated in the same way as any other audit evidence is evaluated.
 reasonableness of the expert’s conclusions.
 consistency of those conclusions with other audit evidence.
 reasonableness of significant assumptions and methods used.
 relevance, completeness and accuracy of source data.

(b) Reporting lines: Hina works in close coordination with CFO and CEO and also discusses all
Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

of the findings with them. Therefore it seems that the internal audit department is also
reporting to CFO and CEO which would impair its independence. Hina should be directly
reporting to the audit committee rather than going through CEO and CFO.

Deciding the scope of internal audit work: The scope of work carried out by the internal
auditors is solely decided by Hina without the consultation of the audit committee. The
scope of internal audit work should be decided by the audit committee or the chief internal
auditor herself with the approval of the audit committee.

Rotation of internal audit staff: Internal auditor staff has been auditing the same processes
for the last three years. They would have become too familiar with the operations that they
audit or the management responsible for them. To reduce the familiarity threat, internal
auditors should be rotated regularly.

Designing internal controls: The internal audit department is also involved in designing the
internal controls. However, they should not be responsible for the design of internal
controls within the entity. If they did, they would be required to audit their own work,
which creates self-review threat. Senior management in accounting and finance or line
management should have responsibility for the design and implementation of internal
controls, taking advice where appropriate from the external auditors when control
weaknesses are identified during the external audit.

A.6 Debtor A
Evaluation
Even though the balance confirmed is the same, it raises doubt for the reliability of the response
because the confirmation was not received directly from the confirming party.

Steps to perform
 Auditor should modify or add procedures to resolve doubts over the reliability of
information to be used as audit evidence.
 Auditor should contact the confirming party and request them to respond directly to the
auditor.

Debtor B
Evaluation
It appears that the confirmation did not come from the originally intended confirming party. It
carries risk of interception, alteration or fraud.

Steps to perform
 Auditor should resend the confirmation again to the debtor.
 Auditor should revise the risk of material misstatement at the assertion level and modify
planned audit procedures accordingly.
 If it is ascertained that fraud exist, it is important that the matter is brought to the
appropriate level of management and those charged with governance.
 If the auditor has doubts about the integrity of the management or those charged with
governance, than the auditor should consider to obtain legal advice for appropriate course
of action.

Debtor C

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

Evaluation
Sales return subsequent to the year-end can be an adjusting event which needs to be adjusted in
the financial statements.

Steps to perform
 Check the return of goods with the relevant goods receipt document.
 Inquire from the management the reasons for the return of good and assess whether it is
an adjusting event.
 If it is established that it is an adjusting event than ask the client to reduce the sales and
receivables and incorporate corresponding effects in cost of sales and inventory.
 Consider the fraud risk that whether the sales were made for overstating the sales for the
year end.

Additional steps (overall)

Since there are doubts over the reliability of the confirmation response, the auditor should also
perform the following alternate audit procedures to gather audit evidence:
 Subsequent receipt of the amount should be checked.
 If no payment has been received, the outstanding sales invoices should be checked with
purchase order issued by the customer and delivery note duly acknowledged by the
customer.

A.7 (i)  Firewalls to prevent intrusion into the programs that send and receive data.
 Restricting access to source data that is transmitted.
 Using check sums and check digits to ensure that data received is intact.

(ii)  SL should also store its backup data at some other location.
 SL should develop disaster recovery plans, such as an agreement with another entity to
make use of its computer center in the event of a disaster such as a fire or flood.
 The company should make suitable maintenance and service agreements with
software companies, to provide ‘technical support’ in the event of operating difficulties
with the system.

A.8 Rao Arif & Co.

Under the provision of Companies Act, 2017, a person who is, or at any time during the preceding
three years was a director, other officer or employee of the company is not eligible for
appointment as auditor.

Furthermore, a person will not be qualified for appointment as auditor of a company if he is

disqualified for appointment as auditor of any other company which is that company’s subsidiary
or holding company.

Therefore, being the former CFO of WBL’s subsidiary will make Rao Arif & Co. ineligible for
appointment as external auditor.

Hatim Tughlaq & Co.

Under the provision of Companies Act, 2017, a person who is indebted to the company other than
in the ordinary course of business of such entities cannot be appointed as the auditor.

Since it is in the ordinary course of WBL to grant loan therefore HatimTughlaq & Co. can be
appointed as external auditor WBL.
Rashid Kareem & Co.
Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

A person or a firm who, whether directly or indirectly, cannot be appointed as auditor if it has
business relationship with the company other than in the ordinary course of business of such
entities.

If properties are rented out in the ordinary course of business than Rashid Kareem & Co. can be
appointed as the external auditor of WBL.

A.9 (a)  Whether the interests of all parties, including third/related parties whose interests
may be affected, could be harmed if the client consents to the disclosure of
information.
 Whether all the relevant information related to the related parties is known and
substantiated, to the extent it is practicable.
 Since the requirement of the committee involves reporting on the arm’s length price of
the transaction which generally involves unsubstantiated facts or unsubstantiated
conclusions, professional judgment shall be used in determining the type of disclosure
to be made, if any.

(b) Threat
Close friendship of the audit manager with the managing director would cause a familiarity
threat, because the audit manager would be biased towards the managing director and
would sympathetic to his interest or too accepting of his work.

Safeguard
 Structure the audit manager’s responsibilities to reduce any potential influence over
the assurance engagement; or
 Review the assurance work from a chartered accountant; or
 Remove the audit manager from the engagement.

Threats
 Offering of membership at reduced rate could cause a self-interest threat to the audit,
because the recipients may not want to lose their benefit, and therefore be biased in
their audit work or not seek adjustments where there are material issues in the
financial statements.
 An intimidation threat may also arise because the audit client may threaten to make
such offers public to degrade the firm’s reputation.

Safeguards
Auditors are not allowed to accept such benefits unless their value is trivial and
inconsequential. In this case, the value of a reduced membership of a high end gym is
unlikely to be trivial and inconsequential to audit staff members and therefore the firm
should reject this discounted offer of MD.

A.10 (a) In response to assessed risk of material misstatement due to fraud, the auditor shall:
 emphasize to the audit team the need to maintain an attitude of professional
skepticism.
 assign more experienced staff or increased supervision of staff.
 to the extent not already done, the auditor shall obtain an understanding of the
entity’s related controls, relevant to such risks.
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may
be indicative of fraudulent financial reporting resulting from management’s effort to
manage earnings.
Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

(b) Logical access controls are tools and protocols used for identification, authentication,
authorization and accountability in computer information systems. It enables the
organization to identify users, restrict access to specific resources and produce audit trail
of systems and user activity.
 The login account must uniquely identify the person, but it must be part of a standard
similar to all other logins.
 The password has to be sophisticated and must be of a certain prescribed length.
 The access to the system must be limited in accordance with roles and
responsibilities of the users.
 User must be logged out after a certain period of in-activity.

(c) Many of the control activities that are typically found in a large company such as
segregation of duties, internal audit etc. may be inappropriate for a small entity because
they are too costly or impractical for such smaller organizations. Often, control systems in
small entities are based on a high level of involvement by the directors or owners.

Following audit risks may arise when control systems rely excessively on the involvement
of senior management:
 There may be a lack of evidence as to how systems are operating.
 There may be lack of evidence of controls.
 Management may override controls that are in place.
 Management may lack the expertise necessary to control the entity effectively.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Spring 2020

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9 10
27% 44% 10% 15% 70% 40% 71% 61% 37% 50% 41%

General comments

Better performance was observed in this session as 41% examinees were able to secure
passing marks as compared to 25% in previous session. It was commonly observed that
examinees performed well in the questions which involved rote learning whereas they
struggled in the questions which required application of knowledge.

Question-wise common mistakes observed

Question 1(a)

 Examinees mentioned the risks related to financial statements line item rather than
discussing the business risk.
 Business risk related to foreign currency and research project was not mentioned.

Question 1(b)

 Risk of impairment of property plant and equipment was not mentioned.

 Risk of incorrect translation of trade payables and calculation of exchange gains and
losses were ignored.

Question 2

 Fraud risk factor was identified but it was not discussed appropriately.
 Fraud risk factors related to significant subjective judgment and management interest in
maintaining the profitability of the company were not mentioned.

Question 3(a)

Examinees only mentioned the alternative benchmarks available for determining materiality
and failed to discuss the selection and appropriateness of the benchmark used by the audit
team and implication of setting a lower materiality level.

Page 1 of 3
 Examiners’ comments on Audit and Assurance Spring 2020

Question 3(b)

 Discussion with the management and those charged with governance regarding the
conflicting views were not mentioned.
 Inquiring about revised marketing plans to assess that whether a market at such an
increased price actually exists was not mentioned.
 Reviewing revised projections, feasibility and forecasts for using resources and
generating future economic benefits, were also not mentioned.
 Examinees considered the additional Rs. 50 million required to be incurred on the
project as materiality for determining that whether the audit report would be qualified.
 Examinees mentioned inconclusive statements that the qualified opinion would be
expressed if misstatement is material and adverse opinion would be expressed if
misstatement is material and pervasive.

Question 4

 Examinees were not able to identify the issues in the audit procedures performed for
testing the understatement of trade payables and therefore, did not mention relevant
suggestions.
 Examinees failed to comprehend that the audit report could also be issued before 20
December, therefore there was still a possibility that all of the other information may
not be provided to the audit team before the issuance of the audit report. Consequently,
the related course of action and the reporting implications were also missed out.
 Examinees did not mention the reporting implications if after the correction of the prior
period error, the predecessor auditor is willing to issue a new report or is unwilling to
reissue the auditor’s report on the prior period financial statements.

Question 5

Examinees performed well in this question.

Question 6

 Some of the examinees failed to realize that confirmation from debtor A was not
received directly, therefore it raises doubt for the reliability of the response.
Consequently, the examinees mentioned that no further procedure is required.
 Some of the examinees did not comprehend that since the confirmation from debtor B
did not come from originally intended confirming party, it carried risk of interception,
alteration or fraud. Consequently, they also did not mention the related procedures.

Question 7

Examinees performed well in this question.

Page 2 of 3
 Examiners’ comments on Audit and Assurance Spring 2020

Question 8

 Examinees failed to realize that CFO’s three year cooling off period had not lapsed and
therefore Rao Arif & Company could not be appointed as the auditor of WBL.
 Examinees did not appreciate that it is the ordinary course of business for bank to grant
loans to individuals therefore, mentioned incorrect answer.

Question 9(a)

Examinees did not mention whether all the relevant information is known and
substantiated, to the extent it is practicable and the professional judgment required for
determining the type of disclosure to be made.

Question 9(b)

 Examinees identified the threat but did not evaluate it.

 Examinees did not mention about structuring the audit manager’s responsibilities to
reduce any potential influence over the assurance engagement.

Question 10(a)

 Examinees did not mention about obtaining an understanding of the entity’s related
controls, relevant to such risks.
 Examinees did not mention about evaluating whether the selection and application of
accounting policies by the entity, particularly those related to subjective measurements
and complex transactions, may be indicative of fraudulent financial reporting.
 Reassess the risk of material misstatement and design and perform further audit
procedures whose nature, timing and extent are responsive to the reassessed risk of
material misstatements were also not mentioned by the examinees.

Question 10(b)

Logical access control was not properly defined. Some of the key characteristics such as
authorization, accountability and audit trial were ignored.

Question 10(c)

Examinees did not mention the key characteristics of small sized organizations with respect
to internal controls.

The End

Page 3 of 3
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2020

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a) 0.5 mark for identification of each business risk 2.0

(b) 0.5 mark for identification of each financial statement line items and 0.5 mark
for discussion thereof 6.0

A.2
0.5 mark for identification of each fraud risk factor 3.0

01 mark for discussing each fraud risk factor 6.0

A.3 (a)
Discussion on selection and appropriateness of the benchmark used by the
audit team 2.0

Discussion on the implication of setting a lower materiality level 2.0

0.5 mark for mentioning each alternative benchmark for determining
materiality 2.0

(b)
01 mark for each audit procedure 5.0

Discussion on implications on the audit report 3.0

A.4
0.5 mark for commenting on each audit procedure performed by the audit team 2.0

01 mark for each suggestion and further audit procedure 5.0

A.5 (a)
Discussion on auditor’s responsibility regarding the audit report, when an
expert’s work is used 1.0

Discussion when an auditor can refer to an expert’s work in his report 2.0

Discussion on the need to evaluate the expert’s work 1.0

0.5 mark for each procedure to be performed to evaluate the expert’s work 2.0

(b)
01 mark for identification of each deficiency 4.0

01 mark for mentioning each recommendation 3.0

A.6
01 mark for evaluation of the audit evidence obtained against each debtor 3.0

01 mark for each further procedure to be performed 7.0

A.7 01 mark for mentioning each mitigating control 6.0

A.8 For each situation:

01 mark for mentioning the relevant requirement of the Companies Act, 2017 3.0

01 mark for concluding whether the firm can be appointed as external auditor 3.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2020

Mark(s)
A.9 (a) 01 mark for discussing each factor that the firm should consider while
disclosing client information to the investigation committee 3.0

(b)
0.5 mark for identification of each threat 1.5

Up to 01 mark for the evaluation of each identified threat 2.5

01 mark for discussing each safeguard required to mitigate the threats 4.0

A.10 (a) 01 mark for each action that an auditor should take on identification of a
fraud risk factor 4.0

(b)
Discussing logical access controls 2.0

01 mark for describing each example of logical access control 4.0

(c)
Discussing the key characteristics of a small organization 2.0

01 mark for mentioning each risk which the auditor may face 4.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 22 September 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Q.1 You are manager responsible for the audit of Oak (Private) Limited (OPL) for the year ending
30 September 2020. The following issues have been brought to your notice by your audit team:

(i) During planning the year-end inventory count, audit team decided to visit third party
premises for inventory valued at Rs. 10 million. Third party has informed that because
of restrictions imposed by the government in the wake of COVID-19, it has limited
number of staff and consequently may not allow the audit team to visit its premises for
inventory count at year-end. However, the audit team may visit its premises on or after
31 October 2020 for inventory count.

(ii) A competitor has alleged that OPL has infringed its patent rights and has taken legal
action for damages of Rs. 500 million. OPL’s independent legal advisor is of the view
that no estimate can be made about the outcome of the case at this point of time. No
provision has been made for the possible loss, however OPL intends to fully disclose it
in the notes to the financial statements.

The projected profit before tax is Rs. 75 million.

Required:
For each of the above issues:
(a) state the audit procedures which may be performed by your audit team. (10)
(b) discuss with reasons, the implication(s) on the audit report. (08)

Q.2 (a) You are manager responsible for the audit of Pine Limited (PL) for the year ended
31 August 2020. PL has large contracts with many government entities. During the year,
the government has significantly reduced its spending which has also affected its
contract volumes with PL. Devaluation of the local currency has also resulted in
increased costs of the materials purchased from overseas suppliers.

During the planning work review, your team has provided you the following ratios:

2020 2019
Gross profit margin 32% 28%
Accounts payable to cost of sales ratio 0.20 0.28
Trade days receivable 90 75

Required:
(i) Explain the fluctuations and inconsistencies in the given ratios.
(ii) State any four key audit procedures which you would perform to address each
issue identified in (i) above. (09)
 Audit and Assurance Page 2 of 3

(b) Your firm is the statutory auditor of Teak Pakistan Limited (TPL) for the year ended
30 June 2020.

During the final review of audit work, your audit team informed you that TPL uses a
third party software for its payroll. While checking the tax calculation, they identified
an error in the calculation of monthly tax deduction from salary. The audit junior who
performed the test, extrapolated the error over the entire population. This resulted in an
overall short deduction of Rs. 920,985. She concluded that the error was not material
because this amount was less than the audit materiality set at the financial statement
level i.e. Rs. 1,000,000.

Further, she discussed this matter with the TPL’s management who has agreed to deduct
the differential amount from the salary of the next month and will deposit it into
government exchequer. Therefore, she concluded that no accounting adjustment is
required for the year ended 30 June 2020.

Required:
(i) Briefly discuss the conclusion made by the audit junior regarding materiality of
the transaction and recording of the error.
(ii) State the additional steps that you would suggest to your audit team. (Implications
on audit report are not required) (07)

Q.3 During the audit of Cedar Limited (CL), your audit team observed that CL has sold one of its
freehold lands to Maple (Private) Limited (MPL) at a loss of Rs. 10 million. Your team’s
further investigation of the matter and reading of the minutes of the board of directors’ meeting
revealed that:

(i) a director of CL holds 20% shareholdings in MPL which makes this entity as CL’s
related party; and
(ii) MPL would pay 30% of the consideration in cash and the remaining amount over a
period of five years.

Required:
Evaluate the above related party transaction and suggest any eight key audit procedures that
your team should perform in this respect. (10)

Q.4 Consider each of the following independent situations:

(i) Spruce Limited issued its financial statements on 15 September 2020 for the year ended
30 June 2020. On 22 September 2020, your audit team came to know that a major debtor
has filed bankruptcy due to destruction of its production facility in a terrorist attack on
20 August 2020.

(ii) During the audit of Larch Limited (LL) for the year ended 30 June 2020, the audit team
noticed that the management of LL had worked out the net realisable value (NRV) on
the basis of the sales price at year-end. Since NRV was greater than cost, LL recorded
the inventory in the draft financial statements at cost. However, after reporting period,
LL is facing difficulties in selling the inventory at current price level and therefore
considering to revise its prices.

Required:
In each of the above situations, evaluate the need for amendment in the financial statements
and suggest the audit procedures, if any, which the auditor would need to perform. (09)
 Audit and Assurance Page 3 of 3

Q.5 You are manager responsible for the audit of Bamboo Limited. Your team has asked for your
guidance whether to involve an auditor’s expert for:
(i) valuation of provision for doubtful debts. The provision has significantly reduced by
Rs. 100 million as compared to previous year.
(ii) fixed asset revaluation. The management has recently revalued its fixed assets. The
revaluation surplus has increased by Rs. 80 million.

The draft financial statements show a profit before tax of Rs. 500 million.

Required:
Guide your audit team about involvement of an auditor’s expert. (06)

Q.6 (a) Differentiate between general IT controls and application controls. (04)

(b) The internal auditor of Cyprus (Private) Limited has identified some discrepancies in
the sales revenue. After investigation, it was identified that some unknown changes were
made to the master price-list which resulted in such discrepancies.

Required:
Suggest any three general IT controls and three application controls to prevent
occurrence of such error. (06)

Q.7 You are the audit manager responsible for the audit of Beachwood Textile Limited (BTL). At
the planning stage, your audit team has assessed that there is no significant risk of material
misstatement due to fraud and management override of controls. The audit team’s assessment
is based on the fact that BTL has been an audit client of the firm for the last 10 years and no
material misstatement had been reported in the previous years.

Required:
Guide your audit team with regard to their assessment of risk. (08)

Q.8 Haris Awan has recently been appointed as a partner in HBC Chartered Accountants. Haris
has been assigned the audit of Hemlock Limited (HL). HL has been the firm’s client for the
past 15 years. Haris has asked Babar Raza, manager responsible for the audit of HL for the
last seven years, to assist him in the planning phase. Babar has informed him that:

(i) attitude of HL’s Chief Financial Officer (CFO) has been very aggressive towards audit
team members, particularly at times when questioned on any of his judgements in
relation to accounting matters.
(ii) CFO normally gives us a short deadline for completion of the audit.
(iii) one of the previous audit team members has recently joined HL as Manager Finance
and has ensured us his full cooperation towards the timely completion of the audit.

Required:
Discuss the possible threat(s) which may arise in the above situation, their significance and
the safeguards required to mitigate those threats. (12)

Q.9 (a) In the light of ICAP’s Code of Ethics, state the circumstances where a Chartered
Accountant is required to disclose confidential information. (03)

(b) In the light of Companies Act 2017, describe the requirements for the cost audit and the
person authorized to conduct it. (04)

(c) Briefly explain any four elements of an assurance engagement. (04)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

Ans.1 (a) Inventory count:

Audit team should consider whether the physical count can be conducted on
31 October 2020. If the inventory count can be carried out, then the following
procedures should be performed:
 Conduct physical inventory count after the date of the financial statements.
 Check whether the changes in inventory between the count date and the date
of the financial statements are properly recorded.
 Investigate the reason for significant differences identified during the physical
count and the inventory records.
 Assess the reliability of inventory records.

Audit team should also consider and discuss with the management and the third
party that whether the physical count can be conducted through video link.

If it is impracticable to conduct an inventory count at a later date, then the

following procedures should be performed:
 Inquire from the management whether third party will carry out any
inventory count on 30 September 2020, and if yes, obtain the inventory count
sheets.
 Inquire from the management whether third party regularly provides the
inventory levels held at their warehouse, and whether any discrepancies has
previously been identified.
 Obtain details of the inventory transferred to the third party warehouse and
inspect documents of subsequent sale/transfer out to ascertain the condition
and existence of the inventory.
 Request confirmation from the third party as to the quantities and condition
of inventory held on behalf of the entity.

Litigation:
 Discuss with the OPL’s legal advisor(s) in respect of the outcome of the case.
 Obtain the minutes of meeting with regards to discussion on this litigation.
 Review the subsequent correspondence with the competitor, if any.
 Involve auditor’s legal expert to assess the outcome of the case.
 Evaluate the adequacy of the disclosure in the financial statements, in
particular the disclosure of the uncertainty in estimation and its
quantification.
 Obtain written representation from the management regarding the fact that
no estimate can be made about the outcome of the case.

(b) Inventory count

 If the auditor is able to attend the inventory count or obtains sufficient
appropriate audit evidence without attending the inventory count, an
unmodified opinion will be expressed.

 If the auditor is not able to attend the inventory count at the third party
warehouse and also could not obtain sufficient appropriate audit evidence
through alternate audit procedures, it will be a limitation of scope.

If the auditor attends the inventory count on 31 October 2020 but still could
not obtain sufficient appropriate evidence, it will also be a limitation of scope.

The value of the inventory recorded by management is 13.3% of profit before

tax and therefore material but not pervasive as it is isolated to one account
head of the financial statements. Therefore, the audit opinion should be

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

modified with a qualified opinion. The auditor needs to include a basis for
qualified opinion, explaining the reasons for inability to obtain sufficient
appropriate audit evidence.
Litigation
 If the auditor agree with management’s treatment, an unmodified opinion
should be issued.
 The claim is 667% of profit before tax and represents a significant
uncertainty which would turn OPL’s profit into a loss. Therefore, the audit
report should be modified using an Emphasis of Matter paragraph and a brief
description should draw the users’ attention to the relevant disclosure note.
 If the auditor does not agree with management’s treatment based on the
opinion of the auditors expert, auditor should modify his opinion accordingly.

Ans.2 (a) The increase in the gross profit margin is inconsistent with the increase in the cost
of materials due to devaluation of local currency and decrease in volume of sales
with the government. Considering this inconsistency, following steps may be
performed:
 Review the explanations obtained by the audit team for the increase in the
gross profit margin even after decrease in government contracts and increase
in import prices.
 Perform cut-off test for purchases and sales.
 Check that the costing of material, labour and overheads have been correctly
applied.
 Perform analytical calculations over the cost of inventory consumed and
other major costs.

The accounts payable to cost of sales ratio has decreased significantly (29%),
despite weakening of the local currency. Consequently, the following procedures
may be performed:
 Ensure that foreign trade payables are translated at the closing foreign
currency exchange rates.
 Circulate balance confirmation requests to trade creditors.
 Compare the current list of trade payables with prior year’s working papers
to identify any omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.

Trade day receivable has increased significantly (20%), which indicates that PL is
facing problems in collecting trade debts. There is a possibility that provision for
doubtful debt may not be correctly recorded. Considering this, following
procedures may be performed:
 Obtain aging of the receivable balances.
 Obtain confirmation from major customers.
 Review the subsequent collection of trade receivables.
 Assess the adequacy of provision against overdue balances.

(b) Discussion on conclusion:

Since the auditor has extrapolated the error over the entire population, he should
obtain sufficient evidence that the misstatement or deviation also affects the rest
of the population.

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

Steps to be performed:
 Investigate the nature and cause of the error i.e. whether the errors identified
are an indication of system errors.
 Investigate whether the problem lies within one transaction only, or it
affected multiple transactions or affected any specified period.

Discussion on conclusion:
The conclusion drawn by the audit junior is not correct, as there may be other
errors which when aggregated, may result in a material misstatement.

It may also be an indication of similar errors in the accounting software.

The accounting treatment suggested by the management is also not correct,

because payable to FBR and receivable from employees have been understated at
year-end.

Steps to be performed:
 Involve the IT specialist for obtaining assurance on the proper functioning of
the accounting software.
 Consider whether there is any fines or penalties which need to be accounted
for in the financial statements.
 Discuss with the management to record the short deduction as receivable
from employees and payable to FBR.

Ans.3 Since the related party transaction was not disclosed to the audit team by the client, it
creates a risk of not disclosing all related party(ies) and related party transaction(s).
Further, the way the transaction is structured (i.e. sold on loss and 70% payment over a
period of five years), it seems that it is not in the ordinary course of business.

Key audit procedures to be performed:

(i) Inquire with management the reasons for disposal of freehold land.
(ii) Promptly communicate the relevant information of the related party transaction
to other members of the audit team.
(iii) Request management to identify all transactions with MPL for further evaluation.
(iv) Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or disclosed
to the auditor, and perform additional audit procedures.
(v) Inquire as to why the CL’s system failed to identify or disclose this related party
relationship and transaction.
(vi) Obtain representation from the management that all related parties have been
identified and disclosed to the auditor.
(vii) Inquire about the influence of director with respect to the said transactions.
(viii) If the non-disclosure by management appears intentional (and therefore
indicative of risk of material misstatement due to fraud), evaluate the implications
for the audit.

Ans.4 (i) Evaluation:

The incident occurred after the year-end for which no condition existed before the
year-end. Therefore, it is a non-adjusting event for which the financial statements
does not need an amendment.

Furthermore, after the financial statements have been issued, the auditor has no
obligation to perform any audit procedures regarding such financial statements.

Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

Therefore, no action from the auditor with regards to financial statements for the
year ended 30 June 2020 is required.

However, auditor shall inquire how the management intends to address the
matter in the financial statements. If the management amends the financial
statements to disclose the non-adjusting event then the auditor shall extend the
audit procedures to the date of new audit report.

(ii) Evaluation:
The difficulty in selling the inventory after the year-end at current prices and
consideration of revising the price give the evidence about their net realizable
value (NRV) at the year-end, which is an adjusting event. Therefore, NRV of the
inventory should be calculated on the basis of revised selling price after the year-
end and the financial statements should be adjusted accordingly.

Suggested audit procedure:

 Review prices at which goods have been sold after the reporting period, for
evidence that NRV is higher than cost.
 Review and test the procedures in place for comparing NRV with cost for each
item of inventory.
 Select major items of inventory from the list of stock and compare NRV with
cost.
 Review inventory records and order books to identify of slow-moving items
and compare their expected NRV with cost.
 Review the information gathered during the physical inventory count
(e.g. deterioration of inventory) which may suggest that NRV may be lower
than cost.
 Review the records relating to goods returned by customers or allowances
granted to customers.

Ans.5 (i) Valuation of provision for doubtful debts

The auditor may use the work of an expert to provide knowledge relevant to the
audit, which the audit firm does not possess. Provision of doubtful debt is an area
of accounting and auditing for which an auditor is expected to have expertise and
can be verified by various evidences available, such as aging, subsequent receipts,
etc. Therefore, the audit team does not require an expert for valuation of provision
for doubtful debts.

(ii) Fixed asset revaluation

The balance of fixed asset revaluation is material to the financial statements.
Furthermore, due to complexity involved it has an inherent risk of material
misstatement. Since the only source of evidence available is valuation report, the
auditor should involve an expert due to lack of expertise and availability of audit
evidence for verification of revaluation surplus.

Ans.6 (a) General IT controls Application controls

General IT controls aim to establish a Application controls are the specific
framework of overall control over the controls over the relevant applications
computer information system’s maintained by the computer. The
activities to provide a reasonable level purpose of application controls is to
of assurance that the overall objectives establish specific control procedures
of internal controls are achieved. over a particular application to provide
reasonable assurance that all

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

transactions are authorized and are

processed completely, accurately on a
timely basis.

(b) Examples of general IT controls:

 Physical access to computer terminals may be restricted to authorized
employees.
 Access to programs and data files may be restricted using passwords. There
should be rigorous checks by management to ensure that a password system
is being used effectively by employees (so that passwords are not easy to
‘guess’)
 Firewalls (software and hardware) can be used to prevent unauthorized
external access via the internet.

Examples of application controls:

 Management review of master files and standing data
 Regular updates of master files
 Review log files for changes made in master files

Ans.7 When planning and performing an audit, we should adopt an attitude of professional
skepticism. We should have an attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a
critical assessment of audit evidence.

We should recognize the possibility that a material misstatement due to fraud could
exist, notwithstanding our past experience of the honesty and integrity of the entity’s
management and those charged with governance.

Although the level of risk of management override of controls will vary from entity to
entity, the risk is nevertheless present in all entities. Due to the unpredictable way in
which such override could occurs, it is a risk of material misstatement due to fraud and
thus a significant risk. Irrespective of our assessment of the risks of management
override of controls, we shall design and perform the audit procedures for management
override of controls.

Assessing the risk of fraud as non-significant is also not correct based on the
presumption that BTL has been the firm’s client for the last 10 years and no material
misstatement had been reported in the previous years. The audit team should identify
and assess the risk of material misstatement due to fraud at the financial statement level
and at the assertion level. Furthermore, the audit team shall consider that there is a risk
of fraud in revenue recognition which may result in a material misstatement unless
justifiably rebutted.

Ans.8 Familiarity and self-interest threat may arise because of using Baber on the audit of HL
over a long period of time.

The threat is significant but it also needs to be further evaluated by considering whether
HL’s management team has changed or whether the nature or complexity of HL’s
accounting and reporting issues has changed. Furthermore, due to the long association
of Babar with HL, he may be too sympathetic to their interest or too accepting of their
work.

Following safeguards may be applied:

Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

 Replace Baber with any other manager having appropriate experience.

 Ask a professional accountant who is not a member of the audit team, to review
the work.
 Regular independent internal or external quality reviews of the engagement.

CFO aggressive attitude towards the audit team and setting short deadlines for
completion of audit indicates presence of intimidation threat.

The threat is significant as audit firm may be pressurized into accepting CFO’s
judgements even when these may not be appropriate and due to very strict deadlines
firm may not be able to obtain sufficient appropriate audit evidence. This may result in
the issuance of an inappropriate audit opinion.
Following safeguards may be applied:
 Independent review of areas requiring judgements.
 Assign highly skilled and competent audit team members.
 Discussing with those charged with governance the attitude of CFO towards the
audit team.

Familiarity or intimidation threats are created as the manager finance has been a
member of the previous audit team.

Being in the position of manager finance, the individual is responsible for the
preparation of financial statements and will be in continuous communication with the
audit team. Due to these factors the threat seems significant.

Following safeguards may be applied:

 Assign individuals to the audit team who have sufficient experience in relation to
the individual who has joined the client; or
 Have a professional accountant review the work of the former member of the
audit team.
 Modify the audit plan.

Ans.9 (a)  Disclosure is permitted by law and is authorized by the client or the employer
 Disclosure is required by law
 There is a professional duty or right to disclose

(b)  Where any company is required under the Act to include in its books of
accounts the particulars of cost accounts.
 The Commission may direct that an audit of cost accounts of the company
should be conducted in the order subject to recommendation of the regulatory
authority supervising the business of relevant sector.
 The audit of cost accounts will be conducted by Chartered Accountant or Cost
and Management Accountant and will have same powers, duties and liabilities
as an auditor of the company.

(c) An assurance engagement performed by a practitioner consist of the following

elements:
(i) Three party relationships: An assurance engagement is a three party
relationship consist of practitioner, responsible party and intended users.
(ii) Subject matter: This is the data such as the financial statements that have
been prepared by the responsible party for the practitioner to evaluate.

Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

(iii) Evidence: Information used by the practitioner in arriving at the conclusion

on which their opinion is based. This must be sufficient and appropriate.
(iv) Assurance Report: The report containing the practitioner’s opinion. This is
issued to the intended user(s) following the collection of evidence.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

CERTIFICATE IN ACCOUNTING AND FINANCE (CAF) EXAMINATIONS

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Autumn 2020

Passing %

Question-wise
Overall
1 2 3 4 5 6 7 8 9
28% 6% 52% 23% 42% 49% 18% 23% 79% 27%

General comments

The overall passing percentage in this attempt was 27% as compared to 41% in the previous
attempt. It was commonly observed that the examinees did not carefully read the
requirement of the question and therefore missed out key aspects of the answer. For
example, in question 1, very few examinees discussed the reason of reporting implications
and in question 8, examinees did not discuss the significance of the threat. Further,
majority of the examinees performed well in straight forward memory based questions but
performed poorly in scenario based questions which required application of knowledge.

Question-wise common mistakes observed

Question 1(a)

 Assessing the reliability of the inventory records, if the inventory count was to be
carried out at a later date, was not discussed.
 No audit procedure was mentioned if it was impracticable to conduct an inventory count
at a later date.
 Reviewing the minutes of meeting in respect of litigation was not mentioned.

Question 1(b)

 Reporting implications were not discussed.

 Many examinees confined their answer to the inconclusive statements that the qualified
opinion would be expressed if misstatement is material and adverse opinion would be
expressed if misstatement is material and pervasive.
 For the legal actions against the audit client related to infringement of patent rights,
examinees did not discuss about inclusion of an emphasis of matter paragraph.

Question 2(a)

 The audit procedures mentioned by the examinees were not related to the inconsistency
identified.
 Examinees were able to mention one or two audit procedures to address each issue.

Page 1 of 3
 Examiners’ comments on Audit and Assurance Autumn 2020

Question 2(b)

 Examinees failed to mention about obtaining sufficient evidence that whether the
misstatement or deviation also affected the entire population. Consequently, the related
steps to be performed were also not mentioned.
 Examinees did not mention that payable to FBR and receivable from employees was
understated at year-end. Consequently, the related steps to be performed were also not
mentioned.
 Examinees also failed to mention that error identified may be an indication of similar
errors in the accounting software and the related steps to be performed.

Question 3

 Examinees failed to evaluate the fact that there was the possibility that the transaction
may not be made in the ordinary course of business.
 Examinees did not mention about inquiring the management in respect of reasons for
disposal of freehold land.

Question 4

 Examinees failed to comprehend that it was a non-adjusting event as the bankruptcy of

the debtor occurred after the year-end and there was no condition existed before the
year-end.
 In the case of NRV issue, examinees failed to mention some of the important audit
procedures such as 1) Review prices at which goods have been sold after the reporting
period, for evidence that NRV is higher than cost; 2) Review and test the procedures in
place for comparing NRV with cost for each item of inventory; and 3) Review
inventory records and order books to identify slow-moving items and compare their
expected NRV with cost.

Question 5

Examinees did not mention that provision of doubtful debt is an area of accounting and
auditing for which an auditor is expected to have expertise.

Question 6(a)

Examinees failed to mention that general IT controls provide a reasonable level of

assurance that the overall objectives of internal controls are achieved, whereas the purpose
of application controls is to establish specific control procedures over a particular
application to provide reasonable assurance that all transactions are authorized and are
processed completely, accurately on a timely basis.

Question 6(b)

Examinees suggested general IT controls in place of application controls and vice versa.

Page 2 of 3
 Examiners’ comments on Audit and Assurance Autumn 2020

Question 7

 While discussing the procedures, many examinees wrote the procedures by considering
the situation where fraud was identified or suspected, rather than the required
procedures which needed to be performed at the planning phase.
 Majority of the examinees did not discuss professional skepticism at all and why
management override of control as in-significant.

Question 8

 Examinees did not discuss the significance of the threat.

 In the case of threat related to aggressive attitude of the CFO, examinees were only able
to mention one safeguard i.e. discussing with those charged with governance the
attitude of CFO towards the audit team.
 Regarding the fact that one of the previous audit team members has recently joined HL
as Manager Finance, examinees perceived as Manager Finance joined the audit team
and consequently produced irrelevant answer.

Question 9(a)

Examinees performed well in this question.

Question 9(b)

Some of the examinees mentioned the requirement of statutory audit rather than mentioning
the requirements of cost audit.

Question 9(c)

Examinees performed well in this question.

(THE END)

Page 3 of 3
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2020

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a) 01 mark for each audit procedure 10.0

(b) 04 marks for discussion on implications of each issue 8.0

A.2 (a)
01 mark for identification of each fluctuation and inconsistency 3.0

0.5 mark for each audit procedure 6.0

(b)
Discussion on conclusion made by the audit junior 3.0

01 mark for identification of each additional step 4.0

A.3
Evaluation of related party transaction 2.0

01 mark for each audit procedure 8.0

A.4
02 marks for evaluation of each situation 4.0

01 mark for each audit procedure 5.0

A.5 03 marks for providing guidance on each situation 6.0

A.6 (a) 01 mark for each differentiating point 4.0

(b) 01 mark for each control 6.0

A.7 01 mark each for providing guidance on assessment of risk 8.0

A.8
0.5 mark for identification of each threat 2.0

01 mark for discussing each safeguard required to mitigate each threat 6.0

01 mark for discussing the significance of each threat 4.0

A.9 (a) 01 mark for stating each situation 3.0

(b) Up to 1.5 marks for describing each requirement of the Companies Act, 2017 4.0

(c) 01 mark for explanation of each element 4.0

(THE END)

Page 1 of 1
 Certificate in Accounting and Finance Stage Examination

The Institute of 2 March 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Q.1 You are the audit manager responsible for the audit of NKL Limited for the year ended
28 February 2021. The audit team has prepared the following summary of debtors’ balances
for your review:

Summary of debtors’ balances and their confirmed amounts as at 31 January 2021

Assertions verified: Completeness, Cut-off and Rights and Obligations
Balances (Rs.)
S.No. Debtor(s) confirmed Comments
as per books
by debtor(s)
(i) Alpha 800,000 800,000 -
(ii) Beta 900,000 900,000 Confirmation was returned by the
courier on the grounds of invalid
address. Confirmation was resent by
the client through its rider. The reply
was received directly by the auditor.
(iii) Gamma 700,000 No reply Gamma has gone into liquidation.
received
(iv) Small 600,000 Not These represent various small
distributors applicable distributors whose balances were
below Rs. 30,000. Due to immaterial
balances, they weren’t selected for
sending confirmation.

Required:
Assess the appropriateness of the work performed by the audit team. Also suggest the
additional procedures (if any) which the audit team may perform. (10)

Q.2 (a) Salman is the shareholder of Polkadot Limited (PL) and wants to appoint auditor
other than the existing auditor as proposed by the board.

Required:
In the light of the Companies Act, 2017 briefly explain the process that Salman should
follow in the above situation. Also discuss the requirements that PL should follow. (05)

(b) Afaq & Co has been appointed as the auditor of Ethereum Limited (EL) in place of
retiring auditor in the AGM.

Required:
List the additional matters that you should consider in the first year of EL’s audit. (04)
 Audit and Assurance Page 2 of 4

(c) Your firm is the auditor of Monero Limited (ML).

ML’s financial statements were issued on 28 February 2021. However, after receiving
a High Court judgement on 2 March 2021, ML’s management assesses its impact and
has decided to revise its financial statements.

Required:
Discuss the documentation that is necessary to be included in the audit working file
regarding the above matter. (03)
Note: Audit procedures are not required.

Q.3 During the audit of Tether Limited (TL), the audit senior noticed that in one of the floors of
the office building, a business other than that of TL was being run. On inquiry with TL’s
management, it was identified that the floor was given to the daughter of a director for six
months for running her online business. No rent is being charged as it has been a vacant
floor and carries no marginal cost to TL.

Required:
Evaluate the above arrangement and discuss the procedures which should be performed by
the audit senior. (09)

Q.4 Cardano Limited (CL) is engaged in the business of assembling motor bikes. CL has a fully
integrated Computerised Accounting System (CAS). You have been given responsibility for
reviewing the internal controls relating to procurement. In this respect, you have gathered
the following information:

Ordering of inventory:
 Approved supplier’s list is maintained in CAS. The list was last reviewed for changes
two years ago. However, during the intervening period, any supplier whose
performance is not satisfactory is timely removed from the list. As a control measure,
the list is accessible and editable only by the employees of Procurement Department
(PD).
 The Inventory Control Department (ICD) of CL generates a numerically sequenced
Purchase Requisition (PR), when the quantity of a particular inventory item reaches
re-order level. PR is electronically forwarded within the CAS to the PD.
 For all regular and routine orders, PD reviews the PR and selects a supplier from the
approved supplier’s list. A Purchase Order (PO) having a unique sequential order
number is then generated for the selected supplier.
 For large or out of the ordinary purchases, a tendering process is carried out by the
PD. Procurement Manager invites tenders through an advertisement in newspaper
and the supplier offering the lowest price is selected by the Procurement Manager in
consultation with Head of Procurement.

Receiving of inventory:
 When inventory items are received, the officer in ICD confirms that the inventory
agrees to the PO. The CAS is then updated to confirm receipt of inventory and an
electronic numerically sequenced Good Received Note (GRN) is generated. The
physical inventory items are then transferred to store.

Required:
Identify any six weaknesses in the internal control system of CL and their possible effects.
Also give your recommendations to overcome these weakness to CL. (12)
 Audit and Assurance Page 3 of 4

Q.5 (a) You are the audit senior on the audit of Nano Footwear Limited (NFL) for the year
ending 31 March 2021. NFL is in the business of making a wide variety of footwear
products. Your review of the last year working papers and initial meeting with the
NFL management have revealed the following:

(i) Due to a high influx of low priced Chinese products in the local market, NFL
has been experiencing a decline in customers’ demand and high degree of
competition. The sales managers have been given aggressive sales targets during
the year which are their key performance indicators and are considered in their
annual appraisals.

(ii) All the management and policy decisions such as human resources, accounting
estimates and procurement are taken by the CEO himself.

Required:
Briefly discuss the possible ‘fraud risk factors’ from the above scenario. (06)

(b) Discuss what actions that an auditor should take on identification of the fraud risk
factors. (05)

Q.6 You are a partner in a firm of chartered accountants. Following independent matters are
under your consideration:

(i) The draft financial statements of Elrond Pakistan Limited (EPL) for the year ended
31 January 2021 include inventory of Rs. 26 million that was purchased on
1 January 2021 for fulfilling a large specialized order of a foreign customer. Due to
sudden imposition of import restriction in the foreign country, the customer cancelled
the order on 28 January 2021. The draft financial statements show that EPL’s profit
before tax is Rs. 130 million.

(ii) During the audit of Stellar Limited (SL), the management informed the audit team
that its largest customer, Ether Limited (EL) has recently notified that it will not
renew its contract with SL, which is due to expire on 30 June 2021. Sales from EL
constitutes 70% of the total revenue. The management has further informed that they
are in negotiation with EL and are hopeful to retain the customer.

Required:
For each of the above independent matters:
(a) state the audit procedures which may be performed by your audit team. (08)
(b) discuss with reasons, the implication(s) on the audit report. (10)

Q.7 Your firm is the auditor of Iota Limited (IL) and audit report is expected to be signed on
10 March 2021.

IL’s management has just informed you that due to certain personal reasons, CEO will not
be available from 5 March 2021 to 15 March 2021. They have provided you with the
following alternate options:

(i) CEO will sign all the representations either on 4 March 2021 or 16 March 2021.
(ii) CEO will call on 10 March 2021 to the engagement partner and will verbally confirm
all the representations required by the auditor.

Required:
Comment on the acceptability of each option with reason(s) and suggest the best course of
action for obtaining the representations in the above scenario. (06)
 Audit and Assurance Page 4 of 4

Q.8 (a) Describe any four limitations of flow chart as a tool of system documentation. (04)

(b) Companies having large in-house developed software, have a risk that new programs
might be introduced without proper authorisation. Briefly discuss any four general IT
controls to mitigate this risk. (04)

(c) Discuss the effects on application controls where general IT controls are ineffective. (02)

Q.9 You are the Ethics and Quality Control Manager in an audit firm namely HMB Chartered
Accountants. The audit manager responsible for the audit of Fantom Limited (FL), has
started the audit planning for FL and come across the following matters for which he needs
your guidance:

(i) Fizza was planned to be the engagement supervisor for the audit of FL. She has
received an employment offer from FL. However, she is considering not to accept
FL’s employment offer.
(ii) FL is the main sponsor of the ongoing cricketing event. Being the main sponsor, FL
has received some entry passes of VIP enclosure of the final match. It has offered three
such passes to the audit team members.
(iii) Your firm is under renovation process and about to procure two central air
conditioning systems through tendering process. Your firm has received quotations
from various vendors including FL. The total expenditures for purchase and
installation of two central air conditioning units are expected to be Rs. 50 million.
(iv) FL has offered your firm that the fee for taxation services of this year may be based on
a percentage of tax saved.

Required:
Identify the threat(s) which may arise and evaluate their significance. Also recommend the
course of action or the mitigating actions which may be taken by your firm. (12)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.1 Interim balances:

Since the interim balances were used for sending confirmation, the auditor will need to check the
changes in the receivable balances between the confirmation date and the end of reporting
period. This check will consist mainly of checking entries in the receivable control account with
the transactions entered in the book of prime entry during the same period.

Assertions addressed:
Cut-off, rights and obligation assertion has been correctly identified the audit team.
However, the receivable balances are generally tested for overstatement, the completeness
assertion is therefore less relevant. Assertion related to existence is more relevant as this
exercise confirms that the receivables do in fact exist, and there is no overstatement of
receivables in the financial statements. Accuracy and valuation assertion is also verified during
the confirmation exercise which has not been addressed by the audit team.

Debtors’ wise assessment of work:

(i) Alpha:
No further procedure required.

(ii) Beta:
The auditor should maintain control over the external confirmation requests, including the
process of sending the requests himself. The confirmation being sent directly was returned
by the courier on the grounds of invalid address and that resending by the client may
indicate doubts on the reliability of the response. The auditor should also consider
performing alternate audit procedures to verify the receivable balance such as subsequent
clearance, review the supporting documentation such as signed PO, delivery
documentation and sales invoice.

(iii) Gamma:
From the winding up event it appears that the amount receivable is irrecoverable.
Therefore, the auditor needs to ensure that the amount of irrecoverable receivables is
written off or is duly provided for.
 Review any correspondence with the liquidator/debtor, relating to recovery of the
amount due.
 Review the calculation of amount of provision/write off and basis thereof.

(v) Small Distributors:

Audit team’s decision to ignore small balance is not correct. The team may consider
sending negative balance confirmation. If the team ensure that there is low risk of material
misstatement, low exception rate is expected and there is no reason to disregard the
confirmation request.

A.2 (a) Salman should follow the following process if he alone or together with other willing
shareholders, holds 10% shareholdings in PL:
 The shareholder(s) should first obtain the consent of the proposed auditor.
 A notice should be given to PL in this regard not less than seven days before the date of
the annual general meeting.

PL shall forthwith send a copy of notice received from shareholder(s) to the retiring
auditor and shall also post it on its website.

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

Since an auditor, other than the retiring auditor is proposed to be appointed, PL shall
ensure that:
 the retiring auditor is given an opportunity to make a representation in writing to PL
at least two days before the date of general meeting.
 representation received from the retiring auditor is read out at the meeting before
taking up the agenda for appointment of the auditor.

(b) Planning activities to be performed by Afaq & Co.

 Arrangements to be made with the predecessor auditor, for example, to review the
predecessor auditor’s working papers.
 Any major issues (including the application of accounting principles or of auditing and
reporting standards) discussed with management in connection with the initial
selection as auditor, the communication of these matters to those charged with
governance and how these matters affect the overall audit strategy and audit plan.
 Audit procedures to be performed to obtain sufficient appropriate audit evidence
regarding opening balances.
 Other procedures required by the firm’s system of quality control for initial audit
engagement.

(c) If, the auditor performs new or additional audit procedures or draws new conclusions
after the date of the auditor’s report, the auditor shall document:

 the circumstances encountered;

 the new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report; and
 when and by whom the resulting changes to audit documentation were made and
reviewed.

A.3 Evaluation:
Transaction with the daughter of a director is a related party transaction not conducted at arm’s
length. Even though the management decides not to charge any amount from the daughter of the
Director, being a related party transaction, this arrangement needs to be disclosed in the
financial statements. Not disclosing the related party transaction would be a non-compliance of
IAS-24 and the Fourth Schedule of Companies Act 2017 and will be a material misstatement.
Furthermore, it was a transaction which was not disclosed to the audit team.

Procedures to be performed by the audit senior:

(i) Communicate the relevant information to the audit team.
(ii) Discuss with management the terms of the arrangement, and whether is there any
contract or agreement in place.
(iii) Request management to identify all transaction related to the new arrangement.
(iv) Request management to identify the fair value of the new arrangement.
(v) Reconsider the risk of other unidentified or undisclosed related parties or related party
transactions.
(vi) Inquire from the management that whether this arrangement has been authorized.
(vii) Inquire as to why the client’s system failed to identify or disclose this related party
relationship and transaction.
(viii) If the management does not disclose the arrangement in the financial statements, then
discuss the non-disclosure with those charged with governance.
(ix) Consider the risk of fraud and management integrity if the non-disclosure appears
intentional and evaluate the implications for the audit.
(x) Obtain management representation that all related parties and the transactions with them

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

have been disclosed to the audit team.

A.4 S.No. Control weakness Possible effect Recommendation

(i) The list has not been CL may miss out some The suppliers list should be regularly
reviewed since the more competent updated in which new supplier(s)
last two years. supplier(s) then the should be added.
existing one.
(ii) Suppliers’ list is Any changes made to Supplier list should only be editable by
editable by all the the suppliers list may go the person who is authorized to make
employees in PD. unnoticed. changes.

The change log should be reviewed on

a regular basis for changes.

All the changes made in supplier list

must be approved the appropriate
authority.
(iii) Supplier selected CL may be paying higher Quotations from at least three
without asking for prices to the suppliers. suppliers should be invited.
quotation.
A member of the purchasing staff must
There is a risk that CL be responsible for checking discounts
may fail to claim allowed by suppliers.
discounts from
supplier(s).
(iv) There is no This could lead to All routine purchase requisition
segregation of duties inappropriate should be approved by the store
in the ordering purchases, i.e. in terms manager.
process. of type of goods or their
quantity. There should be a purchase committee
and all large purchases should first go
through the purchase committee.

All orders exceeding a certain amount

should require an approval from
finance department.
(v) Suppliers are selected Goods may be ordered Suppliers should also be screened for
merely on the basis of which may not fulfill the the quality of the goods being offered.
prices offered. technical requirements. Such as obtaining quality certifications
from the supplier.

The supplier may not Volume requirements should also be

have the capacity to considered when selecting a supplier
fulfill the orders. as well as their financial stability
(credit reference checks).
(vi) There is no system of Sub-standard goods Proper inspection should be carried
quality inspection. may be received. out before accepting the goods.

Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.5 (a) (i) Pressure on the sales managers to meet sales target:
Since the performance of the sales manager is measured in terms of sales, they
would have an incentive to fraudulently record the fake sales at year end to meet
their targets in order to obtain bonuses or increments.

(ii) Aggressive sales targets:

Sales managers are given aggressive sales target, which might not be attainable.
Therefore, sales managers would be under pressure to achieve those targets by
recording fake sales at year end to meet their targets.

(iii) Decline in customers’ demand:

Decrease in customers’ demand due to cheap alternatives, the management would
have under pressure to overstate the revenue or book fictitious revenue
transactions..

(iv) Domination of the management by a single person:

All the management decisions including those related to HR and accounting estimate
are dominated by the CEO. Due to his dominant position, there is an opportunity for
the CEO to override control and involve in any fraudulent activity.

(v) Excessive involvement of CEO in application of accounting estimates:

The authority of adoption of accounting estimates should be with the CFO and not
with the CEO. CEO’s excessive involvement in the adoption of accounting estimates
indicates his attitude which may lead to fraudulent financial reporting.

(b) In response to assessed risk of material misstatement due to fraud, the auditor shall:
 emphasize to the audit team the need to maintain an attitude of professional
skepticism.
 assign more experienced staff or increased supervision of staff.
 obtain to the extent not already done, an understanding of the entity’s related controls,
relevant to such risks.
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may
be indicative of fraudulent financial reporting resulting from management’s effort to
manage earnings.
 incorporate an element of unpredictability in determining the nature, timing and
extent of audit procedures.
 design and perform further audit procedures whose nature, timing and extent are
responsive to the assessed risk of material misstatements.
 consider revising the materiality level.

A.6 (i) (a) Audit procedures:

 Inquire from the management that whether any contract was made with the
foreign customer.
 Review the contract to identify as to whether any recovery can be made from the
customer for exiting/breaching the contract.
 Inquire from the management that since the inventory was for specific use, could
it be put to some other use.
 Inquire from the management that whether they have carried out any exercise to
determine the NRV of this inventory.
 Assess the managements working of NRV for accuracy.

(b) Reporting implication:

The value of the inventory recorded by management is 20% of profit before tax and
Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

therefore material but not pervasive as its effect restricted to one account head of the
financial statements.

If the management records the NRV adjustment then a clean opinion would be issued.
However, the auditor may consider including it as a key audit matter.

If the auditor considers that no major adjustment is required in the inventory value
and the management has not recorded that adjustment, then the auditor will combine
it with other misstatements to assess whether the combined effect is material.

If the auditor considers that major adjustment is required in the inventory value and
the management has not recorded that adjustment, then the auditor expressed a
qualified opinion. The auditor needs to include a basis for qualified opinion,
explaining the reasons for qualifying the opinion.

(ii) (a) Audit procedures:

 Discuss with the management that whether they have carried out a going concern
assessment.
 Discuss with management that whether there are any contingency plan(s) in place
for the loss of this contract.
 Review the negotiations with EL regarding the contract renewal being carried out.
 Inquire the management that whether any new customer has been identified
subsequently.
 Review the minutes of board of directors meeting to identify the course of action
to be adopted by the management.
 Review the projected cash flow and profit and loss forecast prepared by the
management in light of this event.
 Review subsequent financial statements of EL to obtain evidence regarding the
going concern assumption.
 Obtain management representation regarding the fact that EL have sufficient
resources/support from sponsors to continue as a going concern.

(b) Reporting implication:

If there is uncertainty about the going concern status of the company and
management is willing to fully disclose the circumstances, a paragraph headed
Material Uncertainty Related to Going Concern should be included, highlighting the
issue and drawing users’ attention to the note in the financial statements. There
should be a specific statement that the opinion is not modified.

If management refuses to disclose the uncertainty, the opinion should be modified

due to misstatement/disagreement. The modification should be a qualified opinion if
the issue is considered material but not pervasive or an adverse opinion if considered
material and pervasive.

If the entity’s going concern is not valid and the financial statements are prepared on
an inappropriate basis and consequently many items in the financial statements will
be materially misstated. This would be pervasive requiring an adverse opinion stating
that the financial statements do not give true and fair view.

If the management is unwilling to make or extend its assessment a disclaimer of

opinion would be given.

Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.7 Representation letter dated 05 March 2021:

Offer of CEO cannot be accepted as the letter of representation is to be dated as near as
practicable to the date of audit report because further matters might also arise during the
intervening period for which the auditor may require management representation.

Representation letter dated 16 March 2021:

The audit report should not be signed unless the written representation has been received as it
supports other audit evidence obtained during the course of audit. If management does not
provide the written representation, it will result in limitation of scope, which would impact the
audit opinion.

Verbal Representation:
Verbal evidence is not strong audit evidence. Therefore, in order to improve the quality of this
evidence, the auditor will need to ask for any significant discussions to be confirmed in writing.

Suggestion:
If it is practicable to do so sign the audit report on 16 March 2021 or management
representation may be obtained from the Chief Financial Officer or those charged with
governance on the date of signing.

A.8 (a) Limitations of flow chart:

 These are only suitable for describing standard systems rather than recording
systems with numerous unusual transactions.
 Flowcharts are also not appropriate for recording systems with further
classifications of subsystems or subroutines.
 Constructing a flow chart is a time consuming process because an auditor must learn
about the operating personnel involved in the system and gather samples of relevant
documents. Thus involves a lot of effort and observation.
 There is a possibility of recording and checking areas that are of no audit
significance.

(b)  There should be a segregation between the tasks of programmers (who write new
programs) and computer operators (who use the programs).
 There should be full documentation of all program changes.
 There should be restricted access to programs (program files), and only authorised
programmers should have access to them.
 Program logs should be maintained, to record which programs and which versions
are used.

(c) Since the General IT controls provides assurance regarding the effectiveness of the overall
control objectives, therefore in case, IT General controls are not effective, there may be a
risk that misstatements occur and go undetected in the application system or the
application controls becoming ineffective. However, it is possible that manual procedures
exercised by users may provide effective controls at the application level. Consequently,
the auditor may consider extensive testing of application control to obtain reliance on
their operating effectiveness.

A.9 (i) A self-interest threat will be created when a member of the audit team may join the
audit-client in near future, as her decision making and objectivity may be impaired due to
the potential employment with the client. It needs to be ensured that refusal have been
formally communicated to the audit manager before planning her in the audit team. When
it has been assured that she won’t be accepting the offer then no threat would be created
Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

and she could be made part of the audit team.

If it can’t be ensured that Fizza will not accept the employment offer, then she should not
be made part of the audit team.

(ii) Accepting gifts or hospitality from an audit client may create self-interest, and familiarity
threats. The audit team’s objectivity may be compromised and they would be too accepting
the audit clients work if they are treated with gifts of considerable value. Intimidation
threat would also arise as the client may threaten the firm of making such offers public.

Even though the tickets would not have any direct cost to the audit client but they are still
of significant value to the audit team. Therefore, the audit team should not accept the
tickets for the VIP enclosure of the final match.

(iii) The purchase of goods and services from an audit client by the firm does not generally
create a threat to independence if the transaction is in the normal course of business and
at arm’s length. Since the expected transaction is of significant value, a self-interest threat
may be created.

Firm should ensure that no undue favors are accepted and that contract is awarded after a
proper tendering process.

(iv) Agreeing to accept taxation work on the percentage of the tax saved is essentially
accepting a contingent fee. This would create a self-interest threat as there will be pressure
to gain the highest tax savings for the client and this could tempt the audit firm to suggest
inappropriate tax advice.

The threat created would be so significant that no safeguard could reduce the threat to an
acceptable level, therefore the fee must be based on time and experience for the job, not
the contingent fee.

A self-review might also be created and therefore the firm should have separate teams for
the taxation service and the audit services.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION

Audit and Assurance Certificate in Accounting and Finance

– Spring 2021

Passing %

1 2 3 4 5 6 7 8 9 Overall
25% 55% 44% 41% 53% 24% 31% 57% 56% 41%

General comments

The overall passing percentage in this attempt was 41% as compared to 27% in the
previous attempt. However, it was commonly observed that the examinees commenced
writing answer without fully comprehending the requirements of the question and
consequently often missed out key aspects of the answer. For example, in Q.1, many
examinees failed to discuss the correct assertions covered by confirmation procedure;
in Q.2(b), many examinees failed to discuss the matters to be considered in first year of
audit after appointment; and in Q.9, most examinees did not discuss the evaluation of
threat. All examinees are once again advised to read the requirements of the question
carefully before writing the answer.

Question-wise common mistakes observed

Question 1

 Examinees failed to identify the correct assertions addressed through balance

confirmation.
 Examinees did not mention that the balance confirmation was carried out at an
interim date and the related audit procedures to be performed in this respect.
 In case of Beta, examinees treated the confirmation reliable and appropriate on the
grounds that it was received directly by the auditor. They did not consider the fact
that resending of confirmation by the client through its rider affected its reliability.
 Some examinees failed to mention the alternate procedures in the absence of
reliable confirmation response.

Question 2(a)

Examinees performed well in this part of the question.

Question 2(b)

Many examinees mentioned procedures focused on matters to be considered before

appointment of auditor. They did not pay attention to the fact mentioned in the question
that the auditor has already been appointed.

Page 1 of 4
 Examiners’ Comments on Audit and Assurance Spring 2021

Question 2(c)

Examinees did not mention about documenting the new or additional audit procedures
performed, audit evidence obtained and conclusions reached.

Question 3

Examinees failed to mention the following audit procedures:

 Discuss with management the terms of the arrangement, and whether there is any
contract or agreement in place.
 Request management to identify the fair value of the new arrangement.
 Inquire from the management that whether this arrangement has been authorized.
 If the management does not disclose the arrangement in the financial statements,
then discuss the non-disclosure with those charged with governance.

Question 4

 Most of the examinees mentioned irrelevant and incorrect control weaknesses such
as procurement system is computerized.
 Examinees did not appropriately discuss the implications of identified weaknesses.
 Examinees did not identify the following control weaknesses:
- GDN issued by supplier not being part of documentation and its related
implication and recommendation.
- There is no system of quality inspection.

Question 5(a)

 Fraud risk factors were correctly identified by the examinees but they did not
further discuss them.
 Examinees did not correctly classify the fraud risk factors into incentive, pressure,
opportunity or attitude.
 Excessive involvement of CEO in application of accounting estimate was not
identified.

Question 5(b)

Examinees did not mention the following action that an auditor should take on
identification of fraud risk factor:

 Incorporating an element of unpredictability in determining the nature, timing and

extent of audit procedures.
 Designing and performing further audit procedures whose nature, timing and extent
are responsive to the assessed risk of material misstatements.
 Evaluating whether the selection and application of accounting policies by the
entity, particularly those related to subjective measurements and complex
transactions, may be indicative of fraudulent financial reporting resulting from
management’s effort to manage earnings.

Page 2 of 4
 Examiners’ Comments on Audit and Assurance Spring 2021

Question 6(a)

Examinees did not mention the following audit procedures:

In the case of Elrond Pakistan Limited:

 Assess whether there was any contract with the foreign customer.
 Review the contract to identify that whether any recovery can be made.
 Determine whether the inventory has any alternative use.

In the case of Stellar Limited:

 Discuss with management that whether there are any contingency plan(s) in place
for the loss of this contract.
 Review the negotiations with EL regarding the contract renewal being carried out.
 Inquire the management that whether any new customer has been identified
subsequently.

Question 6(b)

In the case of Elrond Pakistan Limited:

 Examinees considered the matter to be pervasive, which was incorrect.

 Examinees erroneously linked the scenario with uncertainty in respect of going
concern.
 Examinees confined their answer to the inconclusive statements that the qualified
opinion would be expressed if misstatement is material and adverse opinion would
be expressed if misstatement is material and pervasive.
 Examinees did not mention that if no major adjustment was required in the
inventory value and the management did not record that adjustment, then the
auditor was required to combine it with other misstatements to assess whether the
combined effect was material.

In the case of Stellar Limited:

 Examinees did not mention the implication on audit report in case the management
did not assess the entity as going concern.
 Instead of including a paragraph titled Material Uncertainty Related to Going
Concern, examinees incorrectly mentioned about inclusion of an emphasis of
matter paragraph.

Question 7

 Examinees failed to identify that the offer for signing the representation on 4 March
2021 cannot be accepted because further matters requiring representation might
arise during the intervening period.
 Examinees did not comment on the CEO’s signing on the representation on 16
March 2021 i.e. after signing of the audit report.
 Many examinees failed to suggest the best course of action.

Question 8(a)

Examinees performed well in this part of the question.

Page 3 of 4
 Examiners’ Comments on Audit and Assurance Spring 2021

Question 8(b)

Examinees generally performed well in this part of the question. However, few
examinees did not properly identify that there should be segregation between tasks of
programmers and computer operators.

Question 8(c)

Examinees performed well in this part of the question.

Question 9

 Examinees did not evaluate the significance of the threats.

 Examinees did not identify the need to ensure formal communication of refusal to
the audit manager and that there would be no threat if the above was ensured.
 Examinees concluded that the audit firm cannot enter into any business relationship
with the audit client. In fact, it can enter into such relationship subject to
compliance with certain safeguards.
 Examinees did not discuss about negotiating a different basis of deciding the fee
related to taxation services.

(THE END)

Page 4 of 4
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2021

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1
Discussion on the use of interim balances for balance confirmation 2.0

Identification of correct and incorrect assertions 2.0

Discussion on the appropriateness of the work performed by the audit team 4.0

0.5 mark for mentioning each additional procedure 2.0

A.2 (a)
Up to 01 mark for discussing each step to be followed by the shareholder 2.5

Up to 01 mark for discussing each responsibility of the company 2.5

(b) 01 mark for each additional matter to be considered in first year of audit 4.0

(c) Up to 02 marks for each additional documentation to be included in the audit

working file 3.0

A.3
Evaluation of the transaction 2.0

01 mark for each procedure 7.0

A.4
0.5 mark for identification of control weakness 3.0

01 mark for discussing its impact 6.0

0.5 mark for suggesting the related control 3.0

A.5 (a) 1.5 marks for identification and discussion of each fraud risk factor 6.0

(b) 01 mark for each action to be taken by the auditor on identification of fraud risk
factor 5.0

A.6 (a) 01 mark for mentioning each audit procedure 8.0

(b)
Discussing whether cancellation effects are material for EPL 2.5

Discuss the reporting implication on EPL’s audit 2.5

Discussing the materiality uncertainty related to going concern implication
on SL 2.0

Discussing the modification in SL’s audit report 3.0

A.7
Up to 02 marks for discussing the validity of each option 5.0

Recommending the best course of action 1.0

A.8 (a) 01 mark for mentioning each limitation 4.0

(b) 01 mark for mentioning each general IT control 4.0

(c) 01 mark for each effect on the application control 2.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2021

Mark(s)
A.9
0.5 mark for identification of each threat 3.0

0.5 mark for evaluation of each threat 5.0

01 mark for mentioning each safeguard 4.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 7 September 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Q.1 Khyber Foundation (KF) is a non-profit organization engaged in providing medicines and
medical equipment free of cost or at substantially discounted rates to the underprivileged
people of the society. KF has obtained the approval from the relevant regulatory authorities
to operate as a non-profit organization. Therefore, KF is entitled to tax exemption subject to
conditions that administrative expenses do not exceed 15% of total donations and all
withholding taxes are duly deposited with the taxation authorities.

During the financial year 2020-21, KF has received cash donations from the following three
sources:
 Corporate entities through banking channel;
 Donation boxes placed in various retail shops; and
 Collection kiosks placed in the major shopping malls as part of donation campaign in
Ramadan.

KF has also received medical equipment from donors which are recorded at fair value.

Medicines and medical equipment are given only on a valid doctor’s prescription. This facility
is also available to KF’s employees.

KF has employed two accountants who are pursuing their bachelor’s degree. Both of them are
responsible for recording receipts, making payments, managing inventory and reporting to the
trustees.

Required:
Identify the risks which KF’s auditor would need to consider. (07)

Q.2 (a) Haris & Company, Chartered Accountants was appointed as the auditor of Cactus
(Private) Limited (CPL) for the year ending 31 December 2021. Haris, the only audit
partner of Haris & Company, passed away on 5 September 2021. No other auditor has
yet been appointed by CPL.

Required:
State the requirements of the Companies Act, 2017 for the appointment of auditor in
the above situation. (03)

(b) Khursheed Jamal is a Chartered Accountant and has recently established his audit firm
in the name of Khursheed & Company, Chartered Accountants. He is trying to expand
his clientele and in this process his friend, who is his audit client and the owner of an
advertising agency, has offered to provide significant discount for publicity of his new
firm.

Required:
In the light of Code of Ethics for Chartered Accountants, discuss whether Khursheed
should accept the offer of his friend. (07)
 Audit and Assurance Page 2 of 5

(c) Hussain Tarar is the audit partner responsible for the audit of Petra Travels (Private)
Limited (PTL). The chief executive officer (CEO) of the company has informed Hussain
that due to liquidity issues amid COVID-19, several employees including some staff
members of finance department left the company. CEO has therefore requested Hussain
to provide two staff of the audit firm for some time to run the finance department.

Required:
In the light of Code of Ethics for Chartered Accountants, discuss the threats in the above
scenario and suggest appropriate safeguards. (07)

Q.3 You are the audit manager in a firm of chartered accountants. Following independent matters
are under your consideration:

(i) In the draft financial statements of Elrond (Private) Limited (EPL) for the year ended
30 June 2021, capital work in progress of Rs. 100 million related to construction of a
new production facility is included in property, plant and equipment. Your team has
observed that the last cost incurred on the said facility was on 30 April 2021. However,
it was put to use from 1 August 2021 and therefore no depreciation has been charged at
the year-end.

The useful life of the said facility is assessed to be 10 years. The draft financial statements
show that EPL’s profit before tax is Rs. 150 million.

(ii) Cafe Elixiar (Private) Limited (CEL) operates a chain of cafes in Pakistan. Before the
year-end, a large number of customers complained about food poisoning, possibly as a
result of eating at the cafe. Some of the customers have taken legal action against CEL.
An out of court settlement with these customers is under process. No information has
been provided in this regard in the draft financial statements.

Required:
For each of the above independent matters:
(a) state the audit procedures which may be performed by your audit team. (10)
(b) discuss the implication(s) on the audit report. (08)

Q.4 Your firm is the auditor of Shahzad Limited (SL), a wholesaler of consumable products, for
the year ended 30 June 2021. SL maintains up to date computerized inventory records. The
following matters have been observed during the inventory count:

(i) The inventory count took place on 1 July 2021 under the supervision of the warehouse
manager and his staff, who are responsible for maintaining the inventory. No movement
of inventory took place on that day.
(ii) Four counting teams were formed. Each team comprised of two persons. The floor area
was allocated by the teams among themselves.
(iii) Each team was instructed by the warehouse manager to remember which inventory had
been counted.
(iv) Pre-numbered count sheets were provided to the staff involved in the inventory count.
To facilitate inventory count, inventory belonging to third parties and the inventory
ledger balances were mentioned on the pre-numbered count sheets.
(v) All the cut-off documents were provided to the audit team on the very next day after the
inventory count.

Required:
Identify any four weaknesses in the inventory count procedures and state their implications
on the physical count. (06)
 Audit and Assurance Page 3 of 5

Q.5 You are the audit manager in a firm of chartered accountants. Your audit client Dairy
(Private) Limited (DPL) has emailed you its draft financial statements for the year ended
30 June 2021 along with related notes. The information provided by DPL is summarized
below:

Draft statement of financial position as at 30 June 2021

2021 2020
------ Rs. in '000 ------
Equity and reserves 35,922 26,000
Long-term loan 6,000 12,000
Trade and other payables 7,800 6,500
Equity and Liabilities 49,722 44,500

Property, plant and equipment 22,630 26,818

Prepayments 1,500 -
Trade debtors 12,000 8,000
Inventory 13,000 7,000
Cash and bank balances 592 2,682
Assets 49,722 44,500

Draft income statement for the year ended 30 June 2021

2021 2020
------ Rs. in '000 ------
Sales 110,000 73,000
Cost of sales (83,050) (54,750)
Gross profit 26,950 18,250
Admin and marketing expenses (12,100) (10,950)
Finance cost (675) (1,530)
Net profit before taxation 14,175 5,770
Taxation @ 30% (4,253) (1,731)
Net profit 9,922 4,039

Notes:
(i) During the year, sales price of DPL products were increased by 20%, to offset the
corresponding increase in cost of production.
(ii) On 30 June 2019, DPL had obtained a loan of Rs. 20 million, which is payable in 10
equal quarterly instalments at the end of every quarter. The loan carries fixed mark-up
rate of 9%.
(iii) Decrease in property, plant and equipment represents disposals made during the year,
net of depreciation.
(iv) Prepayment represents advance rental payment of warehouse, obtained for 6 months
on 16 June 2021 at a monthly rent of Rs. 250,000.

Required:
Using analytical procedures, identify any four unexplained fluctuations and inconsistencies
in the above situation. State the key audit procedures which you would perform to address the
issues identified by you. (10)
 Audit and Assurance Page 4 of 5

Q.6 You are the audit manager in a firm of chartered accountants. Following independent
situations are under your consideration:

(i) Mega Motors Limited (MML) offers 3-year warranty for its products. MML assessed
its warranty obligation to be Rs. 20 million for the year ended 30 June 2021. The board
of directors has approved the financial statements on 6 September 2021. Just before
signing the audit report, your audit team came to know about a latent defect in MML’s
products. This defect was neither earlier discovered nor known to MML.

(ii) Dawn Hotel Limited was severely damaged by flash flood on 31 August 2021. Initial
assessment of the incident shows that significant repairs are required and the hotel
would not be operational for at least a month. Audit report for the year ended 30 June
2021 has not yet been issued.

Required:
For each of the above situations, evaluate the need for amendment in the financial statements
and suggest the auditor’s course of action. (10)

Q.7 You are the audit senior responsible for the audit of Tetra Milk Limited (TML). Your audit
team member has drafted a balance confirmation request to be sent to a major customer:

Tetra Milk Limited

Customer’s name and address: DB Limited, 46-Safoora Palace, Mall Road, Quetta.
Date: 7 September 2021

Dear Mr. Salman Shahid

In accordance with the request of our auditor, Abid Ali & Co, Chartered Accountants, we
ask that you kindly confirm your indebtedness to us which, according to our records,
amounted to Rs. 45.6 million as shown by the enclosed statement.

If the above amount is in agreement with your records, please sign in the space provided
below.

If the amount is not in agreement with your records, please notify us of the amount shown
by your records.

Yours faithfully,

-Signature-

Tetra Milk Limited

Confirmation No. A-172

The amount shown above is/is not in agreement with our records.

Account No. …………………………….…

Signature ………………………….……………………
Date ………………………………….……….
Title or position …………………….……….

Required:
Identify the shortcomings in the above draft of balance confirmation request and suggest the
necessary changes. (06)
 Audit and Assurance Page 5 of 5

Q.8 The management of Rose (Private) Limited (RPL) seeks your guidance for the following
matters:

(a) RPL is developing a sales invoicing system both for its cash and credit customers. The
system would record customer’s name, email address, cell number, NTN number etc.
at the time of sale.

Required:
Briefly discuss any four application controls, with the help of examples, which should
be incorporated in the system to ensure completeness and accuracy of data. (06)

(b) RPL’s office has recently been damaged by fire causing a system downtime for five days.

Required:
Advise any three general controls to RL which may ensure continuity of its operations
in future. (03)

Q.9 (a) How would an auditor assess the competency and capabilities of an auditor’s expert? (03)

(b) Discuss the auditor’s course of action when a client requests to change the existing terms
of the audit engagement. (03)

(c) State the auditor’s responsibility for identifying, detecting and responding to fraudulent
activities. (04)

(d) State any four factors which the external auditor may need to consider while assessing
the competence of the internal audit function. (04)

(e) List any six examples of system logs. (03)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

Ans.1 (i) There is a risk of embezzlement of cash collected from donation boxes as no receipt
is generated for cash collected in donation box.
(ii) Cash collected at kiosks may be embezzled by personnel collection cash donations;
therefore, cash is highly susceptible to theft.
(iii) There is an inherent risk that the donation income may be overstated by
overvaluing the donation in kind.
(iv) There is a risk that the management may miss-classify administration spending by
classifying items of expense incorrectly.
(v) Since there is no qualified accountant, there is a risk that:
 proper withholding of taxes may not be done leading to ineligibility of tax
credit.
 transactions are not recorded on a timely basis.
 withholding taxes are not timely deposited with the taxation authorities.
(vi) Since only two employees are responsible for recording all transactions including
inventory management, there is a lack of segregation of duties and hence risk of:
 fraud and error may arise.
 theft of medicines may arise;
(vii) The medicines may be issued to the employees or other beneficiary without
fulfilling the requirements.

Ans.2 (a) Death of Mr. Haris has caused casual vacancy in the office of auditor. The board
shall fill this vacancy in the office of auditor within 30 days. If the board fails to fill
up the casual vacancy within 30 days, the commission may of its own motion or on
as application made to it by the company or any of its member direct to make good
the default within the specified time. In case company fails to report compliance
within the specified period the commission shall appoint auditors. Any auditor
appointed to fill the vacancy shall hold the office until the conclusion of the next
annual general meeting.

(b) As per the “Code of Ethics” for Chartered Accountants, the practicing chartered
accountants are not allowed to publicize their services in a manner done by other
normal businesses.
However, appropriate newspapers or magazines may be used to inform the public
of the establishment of a new practice, of changes in the composition of a
partnership, or of any alteration in the address and telephone number of a practice.
The following should be considered before placing the announcement:
 Such announcements should be limited to a bare statement of facts in an
objective manner.
 Consideration should be given to the appropriateness of the area of
distribution of the newspaper or magazine and number of insertions.
 The basic principles of legality, decency, clarity, honesty and truthfulness
should be followed; and
 Do not project an image, which is inconsistent with that of a professional
person bound to high ethical and technical standards.

The purchase of services from an audit client by a firm does not usually create a
threat to independence if the transaction is in the normal course of business and at
arm’s length. However, the magnitude of the transaction needs to be evaluated to
substantiate that whether a self-interest threat may be created. The firm should
evaluate that the whether the amount of discount is material to the firm and would
it impair the audit team’s objectivity. It also needs to be evaluated that whether
Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

such discounts are also offered to other clients.

The firm may accept the discounted offer only if other clients are also given similar
sort of offers and the advertisement is in the compliance with the above mentioned
principles.

(c) A self-review threat may be created as the firm would be auditing the same
financial information which the team had worked on.
An advocacy threat would also be created as the firm’s employees might promote
the in-correct position adopted by them to the point that their objectivity is
impaired.
A familiarity threat would also be created as the seconded employees will become
too familiar with the management of the audit client.

The following safeguards may be adopted to address the above threats:

 Conducting an additional review of the work performed by the loaned
personnel.
 Not including the loaned personnel as an audit team member.
 Not giving the loaned personnel audit responsibility for any function or activity
that the personnel had performed.
 Providing such assistance only for a short period of time.
 Not assuming management responsibilities and the audit client is responsible
for directing and supervising the activities of the personnel.

Ans.3 EPL-Audit Procedures:

(i) Inquire from management when the asset was available for use.
(ii) Obtain the engineer’s certificate / documentation to assess when the asset was
completely built.
(iii) Read the management meeting minutes to find out whether any discussion has
been made related to the project completion.
(iv) Obtain management representation regarding when the asset was available for use.
(v) Inspect the purchase invoice of the additions made to this CWIP.
(vi) Review that only capital expenditure has been capitalized and revenue expenses
has been recorded in profit and loss.
(vii) Review the useful life for reasonableness by comparing it with other similar assets.

EPL-Reporting Implications:
EPL should start depreciating the asset when it is available for use and not when it is put
to use. If it is established that the asset has been completed before year end, the
management of EPL should be asked to record depreciation. However, the maximum
possible adjustment i.e. Rs. 1.67 million is below the materiality level i.e. Rs. 7.5 million.
Therefore there would not be any impact on the audit report and we will express an
unqualified opinion. The potential adjustment amount would need to be added to the list
of uncorrected misstatements and assess that whether they are material in aggregate. We
will also obtain a written representation in this regard that the effects of uncorrected
misstatements are immaterial, both individually and in the aggregate, to the financial
statements as a whole.

CEL-Audit Procedures:
(i) Review the legal expense account for any further claims or proceedings against the
company.
(ii) Send confirmation to the legal advisor to confirm the current status of the litigation
and the expected outcome.

Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

(iii) Review communication with the customers for out of court settlement.
(iv) Review the minutes of the board of directors meeting to assess the possible
outcome of the case.
(v) Consider the possibility of any legal proceedings and any proceedings that may be
instigated by the public health authorities as such authorities might impose
significant fines.
(vi) Seek written representation from the management about likely outcome of the
case.
(vii) Ensure that proper disclosure in this regard in the financial statements should be
made.

CEL-Reporting Implications:
Not giving disclosure of the event is qualitatively material to the financial statements. The
financial statements should include the disclosure required by the applicable financial
reporting framework. If CEL does not disclose this matter, it would be considered as a
material misstatement that relates to the non-disclosure of information required to be
disclosed. The auditor shall:
 discuss the non-disclosure with those charged with governance;
 Express a qualified opinion
 describe in the basis for opinion section the nature of the omitted information; and
 unless prohibited by law or regulation, include the omitted disclosures, provided it
is practicable to do so and the auditor has obtained sufficient appropriate audit
evidence about the omitted information.
For the customers with whom out of court settlement has been agreed a provision needs
to be recorded. If the management does not record the provision and if it is material, then
the auditor shall express a qualified opinion. The auditor needs to include a basis for
qualified opinion, explaining the reasons for qualifying the opinion.

Ans.4 Weakness Implication

The warehouse manager is supervising Since there is a lack of segregation of duties,
the inventory count procedure. the Warehouse Manager may influence the
inventory count process.

No system of marking on counted items. This may lead to double counting or

omission completely and possibility that
some items may not be counted at all.

Perpetual inventory records and third The person responsible for counting may try
party inventory records are available on to match the numbers provided instead of
count sheets. carrying out an independent count.
The third party inventory may be made part
of the inventory. Confirm that inventory
belonging to third parties, but on the client’s
premises at the date of the count, is not
included in the inventory.

Cut-off documents not obtained during There is a possibility of recording back

the inventory count. dated entries, therefore the cut-off
documents should have been obtained on
the date of the inventory count date.

Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

Ans.5 Long-term loan

It seems that DPL has failed to make the quarterly installment of its long-term loan or has
made delayed payment. This may represent default on part of DPL. Furthermore, no accrual
of finance cost for the last quarter has been made.

Audit procedures
 Obtain the loan agreement and look for any penal provision.
 Obtain correspondence with the bank to assess the possibility of any penalty or action
taken against DD.
 Critically analyze the confirmation received from the bank.
 Ask the management to record any penalty amount or loan re-classification.

Trade payables
Creditor days have decreased from 43 days to 34 days. This may represent that creditor
balances might be understated. Consequently, the following procedures may be performed:

Audit procedures
 Circulate balance confirmation requests to trade creditors.
 Compare the current list of trade payables with prior year’s working papers to identify
any omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
 Scrutinize subsequent payments and ensure that appropriate accruals were made
against those payments.

Prepayments
Since the warehouse was obtained on 16-June-21, an expense amounting to Rs. 125,000
should be transferred to profit and loss and prepayment should be reduced to Rs. 1,375,000
in the statement of financial position.

Audit procedures
 Obtain the rent agreement of the warehouse to verify the monthly rent.
 Verify and trace the payment made for the rent.
 Ask the management to record the expense amounting to Rs. 125,000.

Inventory
The inventory turnover days have increased from 47 to 57 days. Due to this increase there
might be some obsolete inventory which requires provisioning.

Audit procedures
 Verify from the stock count sheet whether any obsolete or old inventory was identified
 Obtain the inventory aging analysis.
 Obtain the management working of net realizable value and assess its accuracy.

Ans.6 Evaluation:
Even though MML came to know about the defect after the year end, the existence of
defect in MML products provide evidence of conditions that already existed at the end of
the reporting period. Therefore, it is as an adjusting event. The warranty provision
should be reassessed on the basis of the identified defect and the financial statements
should be adjusted accordingly.

Course of action:
(i) Inquire with the management about the quantity of effected products which have
been sold until the year end.
(ii) Inquire from the management whether they have assessed the revised warranty
provision on the basis of this new information.
Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

(iii) Consider involving auditor’s expert to re-assess the warranty provision.

(iv) Evaluate the management assumptions for the revised warranty provision.
(v) Assess whether there is any material effect to the warranty provision because of
the identified defect.
(vi) Ask the management to revise the financial statements and get it approved by the
board of directors.
(vii) Obtain management representation that the warranty provision reflects the
management best estimate.
(viii) Ask the management to prepare a working for the net realizable value of the
inventory and assess its adequacy.

Evaluation:
The incident occurred after the year-end for which no condition existed before the year-
end. Therefore, it is a non-adjusting event for which the financial statements do not need
amendment. The incident has a significant impact and it seems material for the users of
the financial statements. Therefore, DHL shall disclose nature of the event and an
estimate of its financial effect.

Course of action:
(i) Inquire from the management about the time it would take to repair the hotel and
make it operational.
(ii) Inquire from the management to assess the amount of revenue lost due to non-
functionality of hotel.
(iii) Inquire from the management about the estimated cost of repair.
(iv) Inquire from the management about any amount to be received from the insurance
company.
(v) Ask the management to disclose the matter in accordance with the requirements of
IFRSs.

Ans.7 Shortcomings Required changes

(i) The client has been asked to confirm Instead of using the word ‘us’ we should use
the balance and notify any ‘our auditors directly’.
difference to the audit client’s
management. It should be specifically mentioned
somewhere in the confirmation that it
needs to be mailed directly to the auditor.
(ii) The year-end date at which the The year-end date needs to be inserted just
balance need to be confirmed is not before or after the places where the account
mentioned. balance has been mentioned and the place
where client confirms his balance.
(iii) An addressed and stamped This also needs to be mentioned in the
envelope is always attached with the balance confirmation request.
confirmation request.
(iv)Balance reconciliation in case of The debtor should be asked that in case he
difference has not been asked. does not agree with the mentioned balance,
he should provide the detail and full
particulars of the difference.

Ans.8 (a) (i) Data input should be kept at minimum. For example, data of repeat customer
should be auto retrieved on entering their phone number.

Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

(ii) Data should not exceed a predetermined amount. For example, if the sale
amount exceeds the allowed credit limit the data would be rejected for
further verification.
(iii) A field should always contain data and not zeros or blanks. For example, the
record should not be saved unless data is entered in all the fields like phone
number, email address etc.
(iv) Programmed checking of the data validity in accordance with predetermined
criteria/format. For example, the system will not process record if non-
numeric character is entered in amount field or the system will pop up an
alert if less than 13 numbers are entered in the CNIC field, etc.

(b) (i) There should be measures for the protection of equipment against fire,
power failure and other hazards.
(ii) There should be controls over maintaining secure second copies of all
programs and data files (‘back-up copies’). The back-up copies can be used if
the original copies are damaged or corrupted.
(iii) The company should have disaster recovery plans, such as an agreement
with another entity to make use of its computer centre in the event of a
disaster such as a fire or flood.

Ans.9 (a) We will assess the competence, capabilities and objectivity of the expert in one or
more of the following ways:
(i) Personal experience with previous work of that expert.
(ii) Discussions with that expert.
(iii) Discussions with other auditors or others who are familiar with that expert’s
work.
(iv) Knowledge of that expert’s qualifications, membership of a professional body
or industry association, license to practice, or other forms of external
recognition.
(v) Published papers or books written by that expert.

(b) The auditor should consider the justification for the request and whether it is
“reasonable”. If the auditor considers that it is a reasonable request and the terms
of engagement are changed, the auditor and management shall agree on and record
the new terms of engagement in an engagement letter.

If the auditor is unable to agree to a change of terms he should withdraw from the
engagement and consider whether there is any obligation to report the
circumstances to those charged with governance, owners or regulators.

(c) Responsibilities of auditors for fraud in an audit of financial statements:

The auditor is concerned with fraud only to the extent that it might impact on the
view shown by the financial statements. He will therefore be concerned with the
risk of material fraud. This is to identify and assess the risks of material
misstatement and to obtain sufficient appropriate evidence about those risks
through appropriate audit procedures. He must also respond appropriately to
fraud or suspected fraud identified during the audit. It is particularly important in
relation to fraud that the auditor maintains an attitude of professional skepticism.

Auditor should communicate to those charged with governance concerning the

Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

detection or possibility of fraud.

(d) (i) Are the internal auditors members of relevant professional bodies?
(ii) Do they have adequate technical training and proficiency?
(iii) Are there established policies for hiring and training internal auditors?
(iv)Do the internal auditors possess the required knowledge of financial reporting?

(e) Examples of system logs include:

(i) Which user logged-in, when and where from
(ii) Failed log-in attempts
(iii) Who accessed and amended data in a file
(iv) Changes made to a program – what, when and by whom
(v) When employees entered and left the building
(vi) Black box flight recorders

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance (CAF)
Examination - Autumn 2021

Passing %

1 2 3 4 5 6 7 8 9 Overall
60% 36% 19% 81% 8% 16% 12% 41% 68% 35%

General

The overall passing percentage in this attempt was 35% as compared to 41% in the previous
attempt. It was commonly observed that whenever a question on analytical reasoning (such
as Q5) is examined, examinees fail to secure good marks in such questions. Examinees are
advised to give much attention to this area of the syllabus which is not only important from
the exam perspective, but also relevant in the context of their practical training in the audit
firm.

Question-wise common mistakes observed

Question 1

Following risks were not identified by most of the examinees:

 Proper withholding of taxes may not be done leading to ineligibility of tax credit.
 Khyber Foundation may have over spent on administrative expenses and is not eligible
for tax exemption.
 Transactions are not recorded on a timely basis.
 Withholding taxes are not timely deposited with the taxation authorities.

Question 2(a)

Examinees performed well in this part of the question.

Question 2(b)

 Examinees only discussed one aspect of the question i.e. the threats related to publicity
of the services or the audit client offering significant discounts.
 While discussing the threat related to advertisement, examinees did not mention that
appropriate newspapers or magazines may be used to inform the public of the
establishment of a new practice and what needs to be complied with when placing such
an advertisement.

Page 1 of 4
 Examiners’ comments on Audit and Assurance Autumn 2021

Question 2(c)

Examinees did not mention the following safeguards:

 Not giving the loaned personnel audit responsibility for any function or activity that the
personnel had performed.
 Providing the assistance only for a short period of time.
 Not assuming management responsibilities and ensuring that the audit client is
responsible for directing and supervising the activities of the personnel.

Question 3(a)

For the audit of Elrond (Private) Limited, examinees failed to mention the following audit
procedures:

 Inquire from management when the asset was available for use.
 Obtain the engineer’s certificate / documentation to assess when the asset was completely
built.
 Read the management meeting minutes to find out whether any discussion has been made
related to the project completion.
 Obtain management representation regarding when the asset was available for use.

For the audit of Café Elixiar (Private) Limited, examinees failed to mention the following
audit procedures:

 Review the legal expense account for any further claims or proceedings against the
company.
 Consider the possibility of any legal proceedings including any proceedings that may be
instigated by the public health authorities as such authorities might impose significant
fines.

Question 3(b)

Following shortcomings were observed while discussing reporting implication for the audit
of Elrond (Private) Limited:

 Examinees used the entire amount of capital work in progress for calculating materiality
rather than the depreciation.
 Examines concluded that a qualified opinion needs to be expressed.
 Examinees also did not mention that the potential adjustment amount would need to be
added to the list of uncorrected misstatements and assess that whether they are material
in aggregate.
 Examinees did not mention about obtaining a written representation that the effects of
uncorrected misstatements are immaterial, both individually and in the aggregate, to the
financial statements as a whole.

Page 2 of 4
 Examiners’ comments on Audit and Assurance Autumn 2021

Following shortcomings observed while discussing reporting implication for the audit of
Café Elixiar (Private) Limited:

 Communicating the non-disclosure with those charged with governance.

 Describing in the basis for opinion section the nature of the omitted information.
 Unless prohibited by law or regulation, include the omitted disclosures, provided it is
practicable to do so and the auditor has obtained sufficient appropriate audit evidence
about the omitted information.

Question 4

Examinees performed well in this question.

Question 5

 Examinees did not identify the unexplained fluctuations and inconsistencies in the
following account heads:
o Long term loan
o Trade payables
o Prepayments
o Expenses
 The audit procedures mentioned by the examinees were general in nature and did not
address the unexplained fluctuations and inconsistencies.

Question 6

 Generally, the response of the examinees was only restricted to the fact that whether the
event is adjusting or non-adjusting. No further discussion on course of action was made
by the examinees.
 Examinees answered the entire scenario in the context that the said event took place after
issuance of the financial statements, and consequently produced an incorrect answer.

Question 7

Following shortcomings were not identified by the examinees:

 The year-end date at which the balance needs to be confirmed was not mentioned.
 An addressed and stamped envelope is always attached with the confirmation request.
 Balance reconciliation in case of difference has not been asked.

Question 8(a)

 Generally, the following controls were not mentioned by the examinees:

o Programmed checking of the data validity in accordance with predetermined
criteria/format.
o A field should always contain data and not zeros or blanks.
o Data input should be kept at minimum.
 Some examinees mentioned the relevant control but failed to mention any example.

Page 3 of 4
 Examiners’ comments on Audit and Assurance Autumn 2021

Question 8(b)

Examinees performed well in this part of the question.

Question 9(a)

Examinees performed well in this part of the question.

Question 9(b)

Examinees did not mention that if the auditor is unable to agree to a change of terms, he
should withdraw from the engagement and consider whether there is any obligation to report
the circumstances to those charged with governance, owners or regulators.

Question 9(c)

 Examinees mentioned that the auditor has no responsibility relating to identifying,

detecting and responding to fraudulent activities.
 Those examinees who discussed the auditors’ responsibilities did not mention the
following:
o Identify and assess the risks of material misstatement
o Auditor should communicate to those charged with governance concerning the
detection or possibility of fraud.

Question 9(d)

Examinees did not mention the following factors for assessing the competence of internal
auditors:

 Are there established policies for hiring and training internal auditors?
 Do the internal auditors possess the required knowledge of financial reporting?
 Whether the internal audit function is adequately and appropriately resourced?

Question 9(e)

Examinees performed well in this part of the question.

(THE END)

Page 4 of 4
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2021

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 01 mark for mentioning each risk 7.0

A.2 (a) 01 mark for mentioning each requirement for appointment of auditor 3.0

(b)  Discussion on whether advertisement can be made 1.0

 Matters to be considered before placing the announcement in newspaper 3.0
 Discussion on discount offered by the audit client 3.0

(c)  Identifying and discussing the threats 4.0

 01 mark for each safeguard 3.0

A.3 (a) 01 mark for mentioning each audit procedure 10.0

(b)  Evaluation of misstatement in the financial statements and its materiality 4.0
 Discussion on the audit opinion to be expressed 4.0

A.4  0.5 mark for identification of each weakness 2.0

 01 mark for stating the implication 4.0

A.5  01 mark for identifying unexplained fluctuation and inconsistency 4.0

 0.5 mark for each key audit procedure to address the issue identified 6.0

A.6  Evaluation of the need to amend in the financial statements 3.0

 01 mark for each auditor’s course of action 7.0

A.7  01 mark for identification of each shortcoming 3.0

 01 mark for suggesting each change 3.0

A.8 (a)  01 mark for discussing each application control 4.0

 0.5 mark for mentioning each example 2.0

(b) 01 mark for mentioning each general control 3.0

Page 1 of 2
 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2021

Mark(s)
A.9 (a) 01 mark for mentioning each factor to evaluate the competency of auditor’s
expert 3.0

(b) 01 mark for mentioning each course of action 3.0

(c) 01 mark for mentioning each responsibility of the auditor 4.0

(d) 01 mark for mentioning each factor to assess the competency of internal audit
function 4.0

(e) 0.5 mark for mentioning each example of system log 3.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 14 March 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Q.1 (a) Discuss any five IT General Controls relating to program change management. (05)

(b) State any three controls which would ensure that wages and salaries are not paid to the
ghost (fake) employees. (03)

Q.2 Your firm is the auditor of Adventure Travel (Private) Limited (APL) which offers a wide
range of adventure sports services such as paragliding, parasailing and scuba diving. APL
follows high safety standards to avoid any unfortunate events. However, during the year,
one of its paragliding trips was affected due to bad weather which caused severe injuries to
its clients. Immediately after this unfortunate incident, APL has invested heavily in further
upgrading its equipment to prevent happening of such incident in future. The entire
investment has been financed through a bank loan.

You have been informed that due to overwhelming response towards adventure trips,
number of tour operators have launched the same services at significantly low prices as
compared to APL; however, all these new tour operators are not following as high safety
standards as are being followed by APL.

Considering the increased competition, APL has recently widened its scope of business and
introduced:
 booking of air tickets and hotel rooms on behalf its clients at a discounted rate. APL is
entitled to a commission, if bookings are made through APL. The commission on
booking is recorded when the payment has been received.
 “Book now and Pay later” instalment scheme for all of its services.

Required:
(a) Identify the matters that you will consider while obtaining an understanding of APL
and its environment. (05)
(b) Identify and discuss the business risks and the related audit risks from the above
scenario. (09)

Q.3 Comment on the validity of each of the following statements:

(i) Inherent risk can be lowered by a strong control environment and oversight by the
entity.
(ii) The audit risk is derived from errors arising out of inherent risk which are not
prevented/detected by entity’s internal controls.
(iii) Detection risk can be lowered by carrying out more substantive tests in the audit.
(iv) Higher inherent risk leads to higher detection risk. Consequently, it increases overall
audit risk.
(v) At an audit client, inherent risk has been assessed at 50% and control risk at 80%. To
achieve an overall level of acceptable audit risk of 10%, the detection risk would be
25%. (06)
 Audit and Assurance Page 2 of 3

Q.4 Your firm has been approached by a recently formed IT Company, Data Technology
Limited (DTL), for appointment as its statutory auditors. DTL is mainly owned by three
foreign companies who are all registered abroad in tax heaven countries. Your firm does not
have any experience of auditing an IT company.

Required:
In the light of the Code of Ethics for Chartered Accountants, identify the threats to the
fundamental principles and discuss how your firm would evaluate these threats in the
context of accepting the client and engagement. Also briefly discuss the safeguards available
to your firm to address the threats. (13)

Q.5 You have received a copy of the year-end bank reconciliation statement, from your audit
client Harison Limited (HL). Details of which are reproduced below:
Rupees
Balance as per bank statement as at 31 December 2021 10,500,000
Add:
(i) Incorrect interest charged by the bank (Note-I) 240,000
(ii) Charges reversed by bank on 10 January 2022 (Note-II) 100,000
Less:
(iii) Cash directly deposited in bank by the customer to avail
5% discount (220,000)
(iv) Cheques issued to customers not yet presented (800,000)
(v) Cheques signed but not yet handed over to suppliers (250,000)
Balance as per ledger 9,570,000
Notes to bank reconciliation statement:
(I) Interest on bank overdraft amounting to Rs. 750,000 was recorded in the bank
statement. However, review of the Accounts Officer indicated an error and HL
recorded the correct amount of Rs. 510,000 in the bank ledger.
(II) This represents Letter of Credit charges which were charged twice by the bank for
import of raw material in December 2021.

Required:
(a) State the audit procedures that should be performed on the above bank reconciliation
statement. (06)
(b) Briefly discuss whether the client’s year-end bank reconciliation provides evidence
about receipts and payments cut-off. (02)

Q.6 Your audit client has provided you a draft representation letter. The extract from the
representation letter is as follows:

No management employee is involved in any fraudulent activity.

All the related party transactions and the identities of those related parties
have been disclosed to you. These have also been appropriately accounted for
and disclosed in accordance with the requirements of International Financial
Reporting Standards.

All the uncorrected misstatements identified are immaterial individually and

therefore do not need any adjustments.

Required:
Critically analyze the above representations given by the audit client. (08)
 Audit and Assurance Page 3 of 3

Q.7 You are the audit partner in a firm of Chartered Accountants. Following independent
matters for the year ended 31 December 2021 are presently under your consideration:
(a) Pioneer Electronics Limited (PEL) had implemented a new accounting software in
2021. Due to high pressure from top management, the implementation of the new
accounting software was hurried, which has resulted in numerous errors in the
inventory, payable and receivable module of the software. PEL’s staff is still in the
process of identifying and rectifying the software deficiencies. The audit team has been
unable to verify these balances through alternate means. Inventory, payable and
receivable are appearing as Rs. 200 million, Rs. 150 million and Rs. 100 million
respectively in the financial statements.
Profit before tax is Rs. 500 million, whereas the net assets are Rs. 1,850 million. (07)
(b) Your firm has been appointed as auditor in place of retiring auditor for Smart Footwear
Limited (SFL), a listed company. SFL owns number of retail outlets across Pakistan
and many of them were acquired on rental basis. During the year, SFL has adopted
IFRS 16 ‘Leases’. The audit team has made significant efforts to review the adjusting
entries made in the financial statements to reconcile the change in accounting policy of
operating leases. The matter was discussed in detail in the audit committee meeting.
Your team has included the details about adjustments and impact on financial
statements in the board letter. (07)

Required:
In each of the above independent situations, discuss the reporting implication(s)
including the changes that needs to be made in the audit report as illustrated in
ISA-700.

Q.8 (a) State the factors which may assist the auditor in assessing the reliability of audit
evidence. (05)
(b) State two advantages and two disadvantages of statistical sampling. (04)
(c) State any five matters that need to be considered by engagement quality control partner
while performing objective evaluation of audit of a listed company. (05)

Q.9 You are the audit manager in a firm of Chartered Accountants. Following independent
matters for the year ended 31 December 2021 are presently under your consideration:
(a) Quality Foods Limited has been facing liquidity issues and is heavily reliant on a bank
overdraft, which was due for renewal on 15 February 2022. Management has informed
you that negotiations with the bank are underway and it is expected that bank overdraft
limit will be renewed in next few days. (07)
(b) During the year, Delta Limited (DL) has recognised an intangible asset of
Rs. 55 million in respect of development costs of a software which DL expects to
market in future. The market research conducted by DL indicated a promising demand
for such software.
In November 2021, one of DL’s competitors successfully launched a similar software
with the help of high foreign investment. It has helped them to capture a large market
share in a short span of time.
DL’s draft financial statements show profit before tax of Rs. 250 million. (08)

Required:
For each of the above independent situations:
 discuss, from an audit perspective, the impact on the financial statements.
 state the audit procedures which may be performed by the audit team.
(Reporting implications are not required)
(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

Ans.1 (a) (i) Tests are carried out on program changes before they are introduced.
(ii) All new versions of programs must be authorised at an appropriate level of
management.
(iii) All changes to the existing program should be formally approved by the system
‘user’.
(iv) There should be a segregation of duties between the designers and testers of
systems.
(v) There should be full documentation of all program changes.

(b)  There should be a segregation of duties: the individual responsible for

preparing wages and salaries should not be the person who actually pays
them.
 The gross pay for each individual employee should be authorised by an
appropriate person.
 There should be formal authorisation of new employees.

Ans.2 (a) The auditor should consider the following matters while obtaining understanding of
APL and its environment. This will involve following factors:
 Obtaining the understanding of the tourism industry in which APL operate.
 Inquire specific laws and regulation applicable on tourism industry.
 Understand APL’s operations, the range of services it offers and its dynamics.
 Obtain the ownership structure, management structures and types of current
and planned investments.
 Assess APL’s selection and application of accounting policies, including
whether they are appropriate for its business and consistent with the industry
and the applicable financial reporting framework.
 Obtain understanding of APL’s strategies of managing the tough competition
and assess the business risk which may result in risks of material misstatement.
 Review the APLs financial performance.

(b) S# Business risk Audit risk

(i) Breach of the safety standards may Liabilities of APL might be
result in litigation against APL. understated as a result of non-
recognition of the provision in respect
Due to the increasing competition,
of the litigation.
any such incident will also affect
APL’s reputation. The disclosure regarding
contingencies may not adequately
disclose the effects of the pending
litigation.
(ii) Frequent upgradation of equipment is The frequent upgradation of
required to prevent accidents. equipment might decrease the useful
life of the equipment or might need to
be charged off instead of capitalizing
them.
(iii) APL’s competitor has introduced If the revenues keep on decreasing,
similar products at a low price which APL’s equipment may need to be
has affected APL’s revenue. tested for impairment.
(iv) Due to bank loan, APL will now have In order to meet bank’s covenants,
to manage its debt load and all the APL may overstate its revenue or
terms and conditions of that loan. understate its expenses to depict a
better picture to its lenders.
(v) There is a risk that a client may cancel There is a risk that APL may
its booking. Dealing with cancellation recognize commission as revenue
Page 1 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

will also effect revenue flow of APL. even when the criteria for recording of
commission is not met.
(vi) It seems that APL may also face cash There is a risk that receivable from
flow challenges as it would have to customers is overstated and a
pay its debt on time, whereas it would provision for doubtful customers has
be receiving money from its not been recorded.
customers later on.
There is also a risk that APL may
offer credit to those customers who
are not financially viable and would
not be able to pay on time.

Ans.3 (i) This statement is not correct. Inherent risk operates independently of controls. It
cannot be controlled. The auditor must accept that the risk exists and will not ‘go
away’.
(ii) This statement is not complete as the audit risk is derived from errors arising out of
inherent risk which are not prevented/detected by entity’s internal controls and are
not detected by further audit procedures.
(iii) This statement is correct. Detection risk can be managed by the auditor in order to
control the overall audit risk, by increasing substantive procedures, therefore
reducing detection risk.
(iv) This statement is not correct. It is not necessary that if the inherent risk is high then
the detection risk will also be high because a strong control environment may reduce
the risk. However, the detection risk is adjusted in order to achieve the overall
required level of risk in the audit.
(v) This statement is correct because of the following:
AR = IR × CR × DR
Then DR = AR / (IR × CR)
DR = 0.10 / (0.5 × 0.80)
And therefore, DR=25%

Ans.4 Self-interest threat to compliance with the principles of integrity or professional behavior
might be created. As there may be questionable issues associated with the client owners
because of their registration abroad in tax heaven countries, it might create threat(s) of
client’s involvement in illegal activities, dishonesty, questionable financial reporting
practices or other unethical behavior.

To further evaluate this threat, we will have to obtain:

 knowledge and understanding of:
 the client;
 who are the eventual owners, management and those charged with governance;
and
 business activities.
 the client’s commitment to address the questionable issues raised by the firm.

A self-interest threat to compliance with the principle of professional competence and due
care is created if the engagement team does not possess, or cannot acquire the
competencies to perform the professional services.

Factors that are relevant in evaluating the level of such a threat include the following:
 Understanding of the nature of the DTL’s business; what type of IT services does it
provide.
Page 2 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

 The complexity of DTL’s operations.

 The requirements of the engagement.
 The purpose, nature and scope of the work to be performed.
 Knowledge of relevant industries or subject matter.
 Experience with relevant regulatory or reporting requirements.
 The existence of quality control policies and procedures designed to provide
reasonable assurance that engagements are accepted only when they can be
performed competently.

The threats to professional competence and due care can be reduced by the following
safeguards:
 Assigning sufficient engagement personnel with the necessary competencies.
 Agreeing on a realistic time frame for the performance of the engagement.
 Using experts where necessary.

Ans.5 (a)  Verify the balance from bank statement/confirmation letter.

 Trace the ledger balance to the trial balance.
 Obtain and verify the interest working prepared by the management.
 Check whether the amount was also subsequently adjusted by the bank.
 Check from the bank statement that the excess charges have been reversed.
 Cash directly deposited in the bank is not a reconciling item. Ask the client to
record cash receipt in cash book.
 Ask the client to adjust the receivable balances and also record discount
expense.
 Verify subsequent clearance of these cheques.
 Ask the client to reverse the payment relating to suppliers.

(b) Yes, we can check to see when money was received and paid around the year end
and compare it to when the receipts and payments occurred.

Ans.6 Representation from management regarding any knowledge of fraud, which has occurred
is required. However, only obtaining the representation regarding management employees
narrows the representation. The representation should also include management and other
employees. Furthermore, the wording is more directed towards an absolute assurance that
no fraud has occurred. Preferably the representation should state that “no frauds...had
come to the attention of management” rather than “no frauds...have occurred”.

The auditor is required to obtain a representation from the management regarding the
related party relationship and transactions. However, in the above statement,
management has only given the representation of those related parties with which
transactions have been made. In fact, representation should to be obtained for all the
related party relationships, irrespective of the fact that whether transaction has been made
or not. Similarly, disclosures are also required for all related party relationships.

Materiality of uncorrected misstatement should be evaluated on aggregate basis instead of

individually. If aggregate uncorrected adjustments are immaterial, representation letter
may include the effect of any uncorrected immaterial misstatements.

Page 3 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

Ans.7 (a) Reporting implication:

Multiple accounts balances of the financial statements are affected for which the
auditor has not been able to obtain sufficient appropriate audit evidence, which is a
scope limitation imposed by the circumstances. Since the undetected misstatements
are not confined to single specific element of the financial statements and these also
represent a substantial portion of the financial statements, it will have a pervasive
effect on the financial statements.

Auditor shall disclaim an opinion as they are unable to obtain sufficient appropriate
audit evidence on which to base the opinion, and the auditor concludes that the
possible effects on the financial statements of undetected misstatements, if any,
could be both material and pervasive.

Changes in the standard audit report:

When the auditor disclaims an opinion due to an inability to obtain sufficient
appropriate audit evidence, the auditor shall state in the opinion paragraph that:
 the auditor does not express an opinion on the financial statements.
 because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion paragraph, the auditor has not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion;

 the auditor shall amend the opinion section of the auditor’s report to state that
the auditor was engaged to audit the financial statements.
 the auditor shall also amend the description of the auditor’s responsibility and
the description of the scope of the audit accordingly.
 unless required by law or regulation, when the auditor disclaims an opinion on
the financial statements, the auditor’s report shall not include a Key Audit
Matters section in accordance with ISA 701.

(b) Reporting implication:

The matter of application of IFRS 16 is significant as Smart Footwear operates
through number of rentals outlets. Furthermore, the change in accounting policy
and related adjustments have taken considerable time of audit team to verify. The
matter was also discussed and brought to the knowledge of those charged with
governance in the meeting of the audit committee and through board letter.
Considering all these factors, the auditor will add the matter of application of IFRS
16 as key audit matter in the audit report.

Changes in the standard audit report:

Since the financial statements of previous year were audited by another auditor, the
other matter paragraph will be added in the report which will mention that the
financial statements were audited by another auditor, the type of opinion expressed
and the date of that auditor’s report.

Ans.8 (a) Reliability of audit evidence is dependent on the following factors:

 Audit evidence is more reliable when it is obtained from independent sources
outside the entity under audit.
 Internally generated audit evidence is more reliable when the related controls
are effective.
 Audit evidence obtained directly by the auditor is more reliable than audit
evidence obtained indirectly or by inference.
 Audit evidence is more reliable when it exists in documentary form.
 Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies.
Page 4 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(b) Advantages of statistical sampling:

 Statistical sampling provides an objective, mathematically precise basis for the
sampling process.
 The required sample size can be calculated precisely (using statistical
probability techniques).

Dis-advantages of statistical sampling:

 A degree of training and technical expertise is required if auditors are to use
statistical sampling techniques effectively.
 This requires an investment in the necessary training for audit staff.

(c) The objective evaluation shall involve the following matters:

 Discussion of significant matters with the engagement partner;
 Review of the financial statements and the proposed auditor’s report;
 Review of selected audit documentation relating to the significant judgments
the engagement team made and the conclusions it reached; and
 Evaluation of the conclusions reached in formulating the auditor’s report and
consideration of whether the proposed auditor’s report is appropriate.
 Evaluation of the Firm’s independence in relation to the audit engagement;

Ans.9 (a) Financial Statement Impact:

The delay in the renewal and lack of agreement of the overdraft facility raises
material uncertainties over going concern. It needs to be determined that in case the
facility is not renewed, then would QFL would still be able to continue as a going
concern. In case there is only a material uncertainty then these should be adequately
disclosed in the financial statements to ensure that the users understand the details
of the uncertainties. If it is concluded that QFL is not a going concern then it’s
financial statements should be prepared as not a going concern.
Audit procedures:
(i) Review the correspondence of the bank with QFL’s management.
(ii) Review the board of director meeting minutes to assess the stage and likely
outcome of the with the bank.
(iii) Discuss with the management the status of negotiation with the bank.
(iv) Review the disclosures made by the management regarding the material
uncertainty / or the preparation of financial statement as not a going concern
basis.
(v) Obtain the management’s assessment of QFL ability to operate as a going
concern.
(vi) Evaluate the reasonableness of the assumptions taken by the QFL’s
management.
(b) Financial Statement Impact:
IAS 38 requires that the entity should be able to demonstrate the ability to sell the
intangible asset and generate future economic benefit. As BL’s competitor has
successfully launched its product and has captured majority of the market share, it
appears that the criteria for capitalization of development costs contained in IAS 38
Intangible Assets might not be met. Therefore, BL might have to either derecognize
the asset or consider booking an impairment loss.
Audit procedures:
(i) Test a sample of development costs for appropriate capitalisation.
(ii) Discuss the development project with management, to assess the feasibility of
the project and product.
(iii) Review revised projections and forecasts for using resources and generating
Page 5 of 6
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

future economic benefits.

(iv) Assess marketing plans and whether a market still actually exists.
(v) Whether the entity will actually be able to use or sell the asset.
(vi) Discuss management’s intention to complete the asset and either use or sell it.
(vii) Inspect development contracts and records supporting and safeguarding
patents.

(THE END)

Page 6 of 6
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance (CAF)
Spring 2022

Passing %

Question-wise
1 2 3 4 5 6 7 8 9 Overall
59% 49% 81% 14% 23% 16% 11% 67% 28% 33%

General comments

The overall passing percentage in this session was slightly lower than the previous session
passing percentage of 35%. The main reason of this decline was the selective study which
was quite evident from the poor performance in the areas related to quality control and client
and engagement acceptance. Further, it was also observed that many examinees did not
perform well in a particular question but many other examinees performed very well in the
same question.

Question-wise common mistakes observed

Question 1(a)

Following controls were generally not mentioned:

 All changes to the existing program should be formally approved by the system user.
 There should be full documentation of program changes.

Question 1(b)

Following controls were generally not mentioned:

 There should be formal authorization of new employees and their salaries.
 There should be payroll reconciliation from last month to ensure that there are not any
unusual movements.

Question 2(a)

Examinees did not identify the following matters:

 Inquiries specific to laws and regulations applicable on tourism industry.
 Understanding the entity’s operations, range of services offered and its dynamics.
 Ownership structure, management structure and types of current and planned
investments.

Page 1 of 3
 Examiners’ comments on Audit and Assurance Spring 2022

Question 2(b)

 Examinees were not able to differentiate between an audit risk and business risk and used
both terms interchangeably.
 Examinees did not identify:
o the business risk related to lower prices offered by competitors which may affect the
audit client’s revenue and consequently it’s equipment may require an impairment
review.
o the requirement of frequent upgradation and its related audit risk.
o that the audit client will have to manage its working capital and it debts load, for which
it may overstate its revenue.

Question 3

Examinees performed well in this question.

Question 4

 Examinees did not evaluate the threat related to client acceptance.

 While evaluating the threat related to engagement acceptance, examinees did not discuss
the following factors:
o Understanding of the nature of the client’s business.
o Complexity of the client’s operations.
o Knowledge of relevant industry and subject matter.
o Existence of quality control policies and procedures.

Question 5

Following procedures were not generally mentioned:

 Obtain and verify the interest working prepared by the management.
 Check that it has subsequently been adjusted by the bank.
 Check from bank statement that excess charges have been reversed.
 Ask the client to record cash receipt in cash book and adjust the receivable balance.

Question 6

Instead of critically analyzing the representations related to fraud and related party,
examinees discussed that the auditor cannot rely on management representation and should
perform audit procedures. Therefore, they did not identify the errors in the given
representation and mentioned audit procedures which were not required.

Furthermore, instead of analyzing the given extract of the representation letter, examinees
discussed about those matters which were not part of the extract. For example, including the
date, year-end, client name etc.

Page 2 of 3
 Examiners’ comments on Audit and Assurance Spring 2022

Question 7(a)

 Examinees mentioned about expressing qualified or adverse opinion, which was not
correct.
 Examinees who mentioned about disclaiming the audit opinion did not mention the
changes to be made to the audit report when a disclaimer of opinion is given.

Question 7(b)

 Examinees did not discuss that why the matter was needed to be included as a key audit
matter.
 Examinees did not know that other matter paragraph was also to be included in the audit
report as the previous year’s financial statements were audited by another firm.

Question 8(a)

Examinees performed well in this question.

Question 8(b)

Examinees performed well in this question.

Question 8(c)

The following matters were not generally mentioned:

 Review of the significant matters and the proposed audit report.
 Evaluation of the conclusions reached in formulating the auditor’s report.
 Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or contentious matters.

Question 9(a)

 Some of the examinees ignored the going concern issue and mentioned the audit
procedures for verification of interest expense and the loan amount.
 Examinees did not mention the following audit procedures:
o Reviewing the correspondence with the bank.
o Reviewing the minutes of the board of directors’ meetings to assess the stage and
likely outcome of negotiation with the bank.
o Reviewing the disclosures made by the management.

Question 9(b)

 Examinees who identified it as a going concern issue, mentioned irrelevant audit

procedures.
 Examinees only mentioned audit procedures which are required for a normal intangible
asset. They could not comprehend that launch of the product by the competitor was an
impairment condition and the procedures related to impairment were required.

(THE END)

Page 3 of 3
 AUDIT AND ASSURANCE
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2022

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a) 01 mark for mentioning each IT General Control 5.0

(b) 01 mark for mentioning each control 3.0

A.2 (a) 01 mark for mentioning each matter 5.0

(b)  01 mark for mentioning each business risk 4.0

 01 mark for mentioning each audit risk 5.0

A.3 1.5 marks for discussing the validity of the statement 6.0

A.4  0.5 mark for identification of threats 1.0

 0.5 mark for identification of fundamental principles 1.0
 01 mark for discussion on each threat 2.0
 01 mark for each factor for evaluating the threat 7.0
 01 mark for each safeguard 2.0

A.5 (a) 01 mark for each audit procedure 6.0

(b) Discussion regarding cut-off 2.0

A.6  01 mark for identification of each shortcoming 3.0

 Discussion on how to overcome the shortcoming 5.0

A.7 (a)  Discussion on the materiality and pervasiveness of the matter 3.0
 Mentioning the audit opinion to be expressed 1.0
 01 mark for mentioning each change to be made in the audit report as
illustrated in ISA-700 3.0

(b)  Discussion on the reporting implication 4.0

 01 mark for mentioning each change to be made in the audit report as
illustrated in ISA-700 3.0

A.8 (a) 01 mark for mentioning each factor for assessing the reliability of audit evidence 5.0

(b) 01 mark for mentioning each advantage and each disadvantage 4.0

(c) 01 mark for mentioning each matter to be considered by the engagement quality
review partner 5.0
Page 1 of 2
 AUDIT AND ASSURANCE
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2022

Mark(s)
A.9 (a)  Discussion on the impact on the financial statements 2.0
 01 mark for each audit procedure 5.0

(b)  Discussion on the impact on the financial statements 2.0

 01 mark for each audit procedure 6.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 12 September 2022

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.

Q.1 You are the quality control partner in an audit firm. Following independent matters are
presently under your consideration:

(a) The firm has received an offer for appointment as the auditor of Hyper Limited for the
year ending 30 June 2023 in place of the outgoing auditor.

Required:
Discuss the actions that the firm should take regarding communication with the
outgoing auditor. (03)

(b) Freshco (Private) Limited (FPL) has asked your firm to help them in implementation
of an ERP software. Your firm has refused to accept the engagement as the firm believes
that it does not have the required competencies. However, the firm has referred FPL to
an IT firm which has relevant competencies. As part of arrangement, the IT firm will
pay 15% of fee charged to FPL to your firm.

Required:
Identify and explain the threats to the fundamental principles of ICAP code of ethics. (03)

(c) Ahmed has recently joined your firm as an audit manager. The firm intends to depute
him on the audit of Monsoon (Private) Limited (MPL). Prior to joining the firm, Ahmed
had been providing accounting and taxation consultancy services to MPL for last many
years. Ahmed was also assisting MPL in preparation of annual budgets, management
accounts and calculation of tax provision based on audited financial statements.

Required:
Identify and explain the threats to the fundamental principles of ICAP code of ethics.
Also evaluate the significance of the identified threats. (07)

Q.2 (a) The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides development of the audit.

Required:
For establishing an overall audit strategy:
(i) identify any eight characteristics of the engagement that define its scope. (06)
(ii) identify any four considerations to ascertain the reporting objectives, timing of the
audit and nature of communication. (04)

(b) Suggest any five controls to prevent misappropriation of petty cash. (05)

(c) The auditor will normally select a sample of debtors who will be asked to provide
confirmation of their balances. State any six audit procedures for sending the
confirmation. (06)
 Audit and Assurance Page 2 of 3

Q.3 You are the audit manager in a firm of chartered accountants. Following independent
situations of three listed audit clients are under your consideration:

(a) The client’s management has refused to provide written representation about
management responsibilities. (05)

(b) Power Generation Limited has used the fuel price as at 30 June 2022 to value its closing
fuel inventories. Consequently, the value of fuel inventories has been increased from
Rs. 500 million to Rs. 750 million. Profit before tax for the year ended 30 June 2022 is
Rs. 2,000 million. (05)

(c) Based on detailed assessment, the management of Wallmart Limited (WL) believes that
WL may not be a going concern. Consequently, they have prepared WL’s financial
statements on liquidation basis. (05)

Required:
Briefly evaluate each of the above independent situations and discuss the impact of each
matter on the audit report including impact on the key audit matter section, if any.

Q.4 Your firm is the auditor of Ninja Foods Limited (NFL) for the year ended 30 June 2022. NFL
is a food chain having restaurants located in all major cities of Pakistan. NFL specializes in
Pan-Asian cuisine and has Japanese, Thai and Chinese food on its menu.

Following information has been gathered by the audit team:

(i) Some of the ingredients used in the food products offered to customers are imported.
On 31 August 2022, the government has banned import of luxury food items which
includes most of the imported items used in the NFL’s most selling items. NFL
currently has stock of these imported items which fulfil its requirement of next one
month only.

(ii) 70% of the customers pay in cash while the remaining 30% pay through credit/debit
cards. Furthermore, 55% of the customers’ visits are on weekend. All cash collection on
weekend is deposited in the bank on the very next working day.

(iii) NFL follows a policy in which all the expired stock is to be placed in separate store
room, which can then be adequately destroyed. In the internal audit report, it has been
highlighted that two of the restaurants were not following this policy.

(iv) During the year ended 30 June 2022, NFL’s profits have been reduced by 30% mainly
due to rising electricity prices, increase in interest rates on long term loan, decrease in
demand of the product due to recession in the economy and increase in raw material
prices due to rupee devaluation.

Required:
(a) Identify the key audit risks in the above scenario. (Ignore the risk related to going concern) (10)
(b) Assess NFL’s ability to continue as a going concern. Also suggest the audit procedures
which your team need to perform in order to validate your assessment. (10)

Q.5 Your audit team performed verification of the payroll cost for the year ended 30 June 2022,
by projecting the June 2021 payroll cost in line with increase in revenue from last year to
current year.

Required:
Comment on the suitability of analytical procedure as substantive procedure performed by
your audit team. Also suggest any changes to be made in the analytical procedure. (05)
 Audit and Assurance Page 3 of 3

Q.6 Your firm is the auditor of Chemicals Limited (CL). Following matters have been observed
while planning the inventory count for the year ending 30 September 2022:

(i) One of the chemicals having radioactive properties has been procured for a government
agency. Considering its hazardous nature, it is stored in a special container which can
only be opened in the presence of agency’s officials. The container was last opened in
the presence of agency’s official on 30 June 2022.

(ii) CL’s plant has been running on maximum capacity. Therefore, in order to timely deliver
an export order to Colombia, CL has decided to procure the chemicals from Malaysia
and directly ship the chemicals from Malaysia to Colombia. The chemicals are currently
lying at a warehouse in Malaysia and will be shipped to Colombia in the first week of
October 2022.

(iii) The production process cannot be stopped during the inventory count. Your team may
not observe the inventory count which will be in process on 30 September 2022.

Required:
State the audit procedures to verify the inventory quantities in each of the above situations. (08)

Q.7 You are the audit manager in a firm of chartered accountants. Following independent
situations are under your consideration for the year ended 30 June 2022:

(i) The board of directors of Hacksaw Limited (HL), producer of confectionery products,
approved the financial statements on 7 September 2022. Before signing the audit report,
it was revealed that retailers are returning one of HL’s products to the distributors. On
enquiry, it was found out that certain batches of that product were not processed
correctly and have caused a very bad taste. HL’s closing inventory also contains finished
goods from those batches.

(ii) Your audit client, Cola Limited was in negotiation for the acquisition of Orange
Limited (OL) since April 2022. On 15 June 2022, it was principally agreed to acquire
OL at a price of Rs. 4 billion. However, the agreement was formally signed on
10 July 2022.

Required:
For each of the above situations, evaluate the need for amendment in the financial statements
and suggest the auditor’s course of action. (12)

Q.8 The board of directors of Green Limited (GL) intends to re-appoint the existing auditor for
the next year. However, Haider, a shareholder of the company, wants to appoint a different
auditor.

Required:
Briefly explain the procedure that Haider should follow. Also state the responsibilities of GL
in this regard. (06)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.1 (a) The firm should take the following actions:

 Obtain the prior permission of the client, preferably in writing, to initiate

discussions with the outgoing auditor.
 Request the outgoing auditor to provide known information regarding any facts
or other information of which, in outgoing auditor’s opinion, our firm needs to
be aware before deciding whether to accept the engagement.
 If unable to communicate with the existing or predecessor accountant, the
proposed accountant shall take other reasonable steps to obtain information
about any possible threats.
 If the client fails or refuses to grant the outgoing auditor permission to discuss
the client’s affairs with our firm, consider such failure or refusal when
determining whether to accept the appointment.

(b) A self-interest threat to compliance with the principles of objectivity and professional
competence and due care is created if a chartered accountant pays or receives a referral
fee or receives a commission relating to a client. The firm may be interested in earning
greater commission from referring the client and might not refer it to the firm which
best meets the client’s requirement.

(c) There is a self-review threat because Ahmed may not appropriately evaluate the work
performed by him in the role of accounting and tax consultant.

There is also a familiarity threat due to Ahmed’s long association with MPL, and he
might be too sympathetic to their interests or too accepting of their work.

Ahmed’s objectivity may be compromised because of his bias, conflict of interest or

undue influence of the audit client.

Evaluation of significance of threat:

Self-review threat
The consultancy service related to preparation of annual budget and management
accounts may not pose a significant threat as the preparation of annual budget is based
on expected amount which is not subject to audit. Therefore, there may not be a self-
review threat.

It needs to be ascertained whether the preparation of management accounts is based

on the historical amounts and whether any adjustments are made to the accounting
records on the basis of the management accounts prepared by Ahmed.

However, the calculation of tax provision would be subject to audit which would
result in a significant self-review threat.

Familiarity threat
The closeness of Ahmed’s relationship with the senior management and frequency of
interaction with the management needs to be determined. In any case this is a
significant threat.

It also needs to be determined that since how long Ahmed has been providing these
services to the audit client.

Page 1 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.2 (a) (i)  The financial reporting framework used (for example, international
financial reporting standards).
 Any industry specific reporting requirements
 The location of the components of the entity (for example, there might be
overseas branches).
 The nature of the business segments to be audited, including the need for
specialized knowledge.
 The reporting currency to be used, including any need for currency
translation for the financial information audited.
 The need for a statutory audit of standalone financial statements in addition
to an audit for consolidation purposes.
 Whether the entity has an internal audit function and, if so, whether, in
which areas and to what extent, the work of the function can be used, or
internal auditors can be used to provide direct assistance, for purposes of
the audit.
 The expected use of audit evidence obtained in previous audits, for
example, audit evidence related to risk assessment procedures and tests of
controls.

(ii)  The entity's timetable for reporting such as at interim and final stages.
 The organization of meetings with management and those charged with
governance to discuss the nature timing and extent of the audit work.
 The discussion with management and those charged with governance
regarding the expected type and timing of reports to be issued and other
communications both written and oral including the auditor's report
management letters and communication to those charged with governance.
 The discussion with management regarding the expected communication
on the status of audit work throughout the engagement.

(b) (i) The maximum amount held in petty cash should be restricted to approximately
one month of petty cash spending. This is to avoid holding unnecessarily large
amounts of cash that might be stolen.
(ii) All petty cash spending should be authorized in advance by a properly
authorized person (and not by the person withdrawing the cash). Authorization
should be indicated by signing and dating the petty cash voucher.
(iii) All withdrawals of petty cash should be recorded on a petty cash voucher and
vouchers must be sequentially numbered. This is to prevent the fraudulent
withdrawal of cash and failures to record cash withdrawals
(iv) Receipts should be provided for petty cash spending and attached to the petty
cash voucher.
(v) There should be occasional checks of petty cash by a senior person (not the
person responsible for holding and issuing petty cash) to ensure that the person
responsible for holding petty cash has not been taking money fraudulently.

(c) (i) Evaluate whether to:

 use interim or final balances for circulating confirmation;
 sent positive confirmation or negative confirmation.
(ii) Obtain an aged listing of receivables ledger balances at the chosen date.
(iii) If the list is prepared by the client, check the completeness and accuracy of the
list of balances and the total of the balances in the list.
(iv) If the population of receivables ledger balances is not homogeneous, stratified
sampling might be used.
(v) A suitable sampling method should be chosen. As with all sampling, the sample
selection process should as far as possible ensure that the sample is
representative of the population of receivables.
Page 2 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

(vi) In selecting the sample, certain types of account should be considered for
inclusion, such as overdue accounts, credit balance and nil balance.

A.3 (a) Brief evaluation of the situation:

It is necessary for the auditor to obtain written representation that management has
fulfilled its responsibilities. It supports the overall control and the managements
attitude over the financial reporting process. It also supports the other audit evidence
obtained by the auditor.

Managements refusal to provide the written representation is inability to obtain

sufficient appropriate audit evidence arising from a limitation on the scope of the audit
imposed by the management.

Reporting implication:
Since the limitation of scope is related to preparation of financial statements, the effect
is pervasive.

Auditor will therefore disclaim the opinion and mention it in the opinion paragraph
that the auditor does not express an opinion on the financial statements.

Since the modification results from an inability to obtain sufficient appropriate audit
evidence, the auditor shall include in the basis for opinion section the reasons for that
inability.

Implication on key audit matter:

Since we are disclaiming the opinion, key audit matter section will not be made part
of the audit report.

(b) Brief evaluation of the situation:

Inventory is measured at the lower of cost and net realizable value. Increase of fuel
prices in international market will not have any impact on fuel quantities already
procured and held by Power Generation Limited. Any upward valuation of fuel
inventories would result in misstatement.

Reporting implication:
The effect of upward valuation is Rs. 250 million which is 10% of the profit before
tax. Since the effect is confined to a single element of the financial statement, the effect
is material but not pervasive.

The misstatement being material, auditor will have to express a qualified opinion. The
auditor shall include in the basis for opinion section, a description and quantification
of the financial effects of the misstatement.

Implication on key audit matter:

Qualified opinion is by nature a key audit matter. Therefore, a reference to the Basis
for Qualified Opinion should be included in the Key Audit Matters section.

(c) Brief evaluation of the situation:

Since the going concern basis is not appropriate, the management has rightly prepared
the financial statements on liquidation basis.

Page 3 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

Reporting implication:
The auditor may be able to express an unmodified opinion on those financial
statements, provided there is adequate disclosure therein about the basis of accounting
on which the financial statements are prepared.

However, the auditor will include an Emphasis of Matter paragraph to draw the user’s
attention to that alternative basis of accounting and the reasons for its use.

Implication on key audit matter:

There will not be any impact on the key audit matter section of the audit report and it
would be presented as usual.

A.4 (a) Cash collection:

Majority of the collection is in cash which is to be held at an outlet for up to 2 days,
therefore there is a risk of misappropriation in cash.

Inventory:
 The existing inventory of NFL might not be used because of its perishable
nature and decline in demand. Therefore, there is a risk that the inventory may
not be recorded at lower of cost or its net realizable value.
 The expired inventory is also not properly identified at some of the outlets,
therefore, there is a risk that the inventory may not be written-off.

Fines and litigation:

 Since proper control are not being followed at two outlets, there is a risk that
fines might be imposed by the government authority on inspection.
 There is a risk that expired stock might be used which may cause illness to the
consumer.
 There is a risk that provision might not be recorded for the possible fines or
litigation or disclosed as a contingency.
Interest based loans:
 NFL has obtained interest based loans. Due to the increasing interest rates,
there is a risk that NFL may be in breach of covenants.
 There is also a risk that interest accrual may not be properly recorded.
 Due to the adverse operational and economic condition, there is a risk that
management may fraudulently misstate the financial statements.

Impairment of Assets:
 Due to the decrease in demand there is a risk that property, plant and equipment
may need to be considered for impairment.

Foreign exchange translation:

 Since NFL imports ingredients, there is a risk there might not be proper
recording of foreign exchange gain or loss.
 There is also a risk that inventory might be translated using incorrect exchange
rate.

(b) Going concern assessment:

 The imported raw materials are used in their most selling items. Considering
this, it would be important to identify the quantum of revenue attributed to
those items. If it constitutes NFL’s major revenue, it may impact the future
revenue and profitability of NFL.

Page 4 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

 Due to rupee devaluation, raw material costs have risen significantly. However,
if NFL is able to find local substitute of these imported products than they might
be able to bring down the operational costs.
 NFL’s profitability has significantly declined in the current year. It may further
decline in the coming year as there is a recession in the economy and NFL may
witness low customer turnout.
 It also needs to be determined that how the increase in interest rates and
electricity will impact the profitability and whether NFL will be able to fulfill
its liabilities.

Audit procedures:
 Discuss the above situation with the management and obtain management
plans to address the ban on import of raw materials used by the Company.
 Review the management plans including identification of substitutes in the
local market, availability, impact on future purchase price, consumption and
change in recipe and customer behavior.
 Identify the quantum of those materials in the production cycle and related
revenue.
 Obtain management forecasts for next twelve months including the impact of
above factors.
 Evaluate the assumptions used by the management in preparation of the
forecast.
 Review the board minutes to identify the action plan being adopted by the
management.
 Obtain and review interim financial statements to assess the effect of the above
events.
 Read the terms of loan agreements and determine whether any of them have
been breached.
 Confirm the existence, terms and adequacy of the borrowing facilities.
 Obtain written representation from the management that their assumptions are
reasonable and that NFL will continue as a going concern.

A.5 Payroll cost:

Completeness and accuracy of the payroll cost can be determined by performing analytical
procedures. However, projecting the payroll cost of June 2021 on the basis of revenue is not
correct, as certain payroll costs are fixed and do not move in line with the revenue.

Changes to be incorporated in the analytical procedures:

Payroll cost of June 2021 would be projected to the payroll cost of year ended June 2022 by
taking the effect of the following:
 The effect of those employees who have joined and left during the year
 The effect of increments
 The effect of any deductions made in the salary
 Discuss any significant differences/inconsistencies with the management

A.6 Inventory count procedures:

Chemical stored in container

 Obtain the report prepared by agency’s officials and verify the quantities as at
30 June.
 Obtain the documentation and verify related to purchase and issuances from 1 July
to 30 September and reconcile the movement of inventory from 30 June to 30
September.
Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

 Ask the management to request the agency’s official to be present at the inventory
count on 30 September.
 Consider involving an expert to verify the quantities within the container.

Inventory held abroad

 Send direct confirmation to third party in Malaysia to confirm condition and quantity
of raw materials held.
 Consider visiting to Malaysia for attending the stock count.
 Arrange another auditor to attend the physical count in Malaysia, if practicable.
 Inspect documentation regarding inventory held by third parties (e.g. warehouse
receipts), order received from Columbia (e.g. purchase order received) and the
subsequent shipment made to the customer.
 Consider performing observing the an online inventory count.

Work in process
 Check the stage of completion of the work in progress, in respect of both materials
and conversion costs.
 Check the batch/production records and verify the finished goods subsequently
produced and reconcile it with raw material issued.

A.7 (i) Evaluation:

Even though HL came to know about the issue after the year-end, the existence of
defect in HL products provide evidence of conditions that already existed at the end
of the reporting period. Therefore, it is as an adjusting event. The provision for sales
return and NRV provision should be reassessed on the basis of the identified defect
and the financial statements should be adjusted accordingly.

Auditor’s course of action:

Sales return:
 Obtain reports to verify the quantity of those batches sold during the year.
 Obtain production reports to calculate the total production of those batches.
 Consider whether quantity of such inventory could be verified through
inventory count performed at year end.
 Obtain any subsequent claims made by the distributor for return of inventory.
 Obtain the managements working for the net realizable value of the inventory
and assess its adequacy.
 Evaluate the management assumptions for the revised provisions.
 Obtain management representation that the sales return provision and NRV
provision reflects the management best estimate.
 Ask the management to revise the financial statements and get it approved by
the board of directors.

(ii) The acquisition of OL occurred after the year-end and therefore, it is a non-adjusting
event for which the financial statements do not need amendment. It is a material
acquisition and therefore, CL shall disclose the details of the acquisition in the
financial statements.

Auditor’s course of action:

 Obtain from the management the agreement made for the acquisition.
 Assess the adequacy of the disclosure made in the financial statements.

Page 6 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2022

A.8 Haider should follow the following process if he alone or together with other willing
shareholders, holds 10% shareholding in Green Limited.

 The shareholder(s) should first obtain the consent of the proposed auditor.
 A notice should be given to the company in this regard not less than seven days before
the date of the annual general meeting.

Responsibilities of GL:
 GL shall forthwith send a copy of notice received from Haider to the retiring auditor
and shall also post it on the company’s website.
 Since an auditor, other than the retiring auditor is proposed to be appointed, GL’s
board shall ensure that:
– the retiring auditor is given an opportunity to make a representation in writing to
the company at least two days before the date of general meeting.
– representation received from the retiring auditor is read out at the meeting before
taking up the agenda for the appointment of the auditor.
– within fourteen days from the date of any appointment of an auditor,
an intimation is sent to the registrar thereof, together with the consent in writing
of the auditor concerned.

(THE END)

Page 7 of 7
 INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit and Assurance Certificate in Accounting and Finance (CAF)
Autumn 2022

Passing %

Question-wise
1 2 3 4 5 6 7 8 Overall
42% 32% 31% 29% 24% 43% 12% 74% 34%

General comments

The overall passing percentage in this session was slightly better than the previous session’s
passing percentage of 33%.

It was commonly observed that the examinees answered the questions without carefully
reading the requirement of the question. For example, in questions no. 1 and 4, examinees
did not answer according to the requirement of the questions. Further, in question 1,
examinees mentioned those areas which were not relevant to the context of the question.

Question-wise common mistakes observed

Question 1(a)

Examinees generally did not mention the following:

 If the auditor is unable to communicate with the existing or predecessor accountant, the
proposed accountant shall take other reasonable steps to obtain information about any
possible threats.
 If the client fails or refuses to grant the outgoing auditor permission to discuss the client’s
affairs with our firm, consider such failure or refusal when determining whether to accept
the appointment.

Question 1(b)

Examinees did not identify the principle of objectivity and also did not explain the identified
threat.

Question 1(c)

 The examinees did not explain and evaluate the identified threats.
 Examinees mentioned safeguards that were not required.

Page 1 of 3
 Examiners’ comments on Audit and Assurance Autumn 2022

Question 2(a)

Examinees generally did not mention the following:

 The reporting currency to be used, including any need for currency translation for the
financial information audited.
 The expected use of audit evidence obtained in previous audits.
 The organization of meetings with management and those charged with governance to
discuss the nature, timing and extent of the audit work.
 The discussion with management regarding the expected communication on the status of
audit work throughout the engagement.

Question 2(b)

The examinees did not mention the following controls:

 The maximum amount held in petty cash should be restricted to approximately one month
of petty cash spending.
 There should be occasional checks of petty cash by a senior person.

Question 2(c)

The examinees did not mention the following audit procedures:

 Obtain an aged listing of receivables ledger balances at the chosen date.
 If the list is prepared by the client, check the completeness and accuracy of the list of
balances and the total of the balances in the list.

Question 3(a)

 In the evaluation, examinees did not discuss the necessity of the management
representation regarding their responsibilities.
 Examinees did not realize that it was a scope limitation and therefore a disclaimer of
opinion would be given. Contrary to this, examinees mentioned expressing an adverse
opinion or a qualified opinion.
 Examinees did not mention that if a disclaimer of opinion is given then key audit matter
is not made part of the audit report.

Question 3(b)

 The majority of the examinees mentioned that the upward valuation of inventory was
correct and a clean audit opinion would be expressed.
 Examinees also mentioned including it as a key audit matter which was not correct.

Question 3(c)

 The examinees did not mention that an unmodified opinion would be expressed.
 Examinees mentioned including it as a key audit matter which was not correct.

Question 4(a)

Examinees did not identify the following audit risks:

Page 2 of 3
 Examiners’ comments on Audit and Assurance Autumn 2022

 Since proper controls are not being followed at the two outlets, there is a risk that fines
might be imposed by the government authority on inspection.
 The expired stock might be used which may cause illness to the consumer. Therefore,
there is a risk that the provision might not be recorded for possible fines or litigation or
disclosed as a contingency.
 NFL has obtained interest-based loans and consequently, there is a risk that NFL may be
in breach of covenants.
 Due to the decrease in demand, there is a risk that property, plant and equipment may
need to be considered for impairment.
 Since NFL imports ingredients, there is a risk that there might not be a proper recording
of foreign exchange gain or loss.

Question 4(b)

Examinees did not assess the entity’s ability to continue as a going concern in the light of the
given scenario. Instead, they straight away mentioned the audit procedures. The following
audit procedures were not mentioned by the examinees:
 Review the management plans including identification of substitutes in the local market,
availability, impact on the future purchase price, consumption and change in recipe and
customer behavior.
 Identify the quantum of those materials in the production cycle and related revenue.
 Read the terms of loan agreements and determine whether any of them have been
breached.

Question 5

 Examinees did not mention taking the effect of any deductions made in the salary.
 Most of the examinees also did not mention discussing any significant
differences/inconsistencies with the management.

Question 6

The examinees did not mention the following audit procedures:

 Consider involving an expert to verify the quantities within the container.
 Consider visiting to Malaysia for attending the stock count.
 Arrange another auditor to attend the physical count in Malaysia, if practicable.
 Check the batch/production records and verify the finished goods subsequently produced
and reconcile them with raw materials issued.

Question 7

 For the audit client HL, the examinees did not mention any procedure to verify the
quantity and value of the affected inventories.
 For the audit client OL, the examinees perceived it as an adjusting event and produced an
irrelevant answer.

Question 8

Examinees performed well in this question

(THE END)

Page 3 of 3
 AUDIT AND ASSURANCE
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2022

Note regarding marking scheme:

The marking scheme is given as a guide. Markers also award marks for alternative approaches to
a question and relevant/well-reasoned comments/explanations. Moreover, the available marks in
answer may exceed the total marks of a question.

Mark(s)
A.1 (a) 01 mark for each action the auditor should take 3.0

(b)  0.5 mark for identification of each threat and the relevant fundamental
principle 1.5
 Up to 01 mark for explanation of the threat to the fundamental principle 1.5

(c)  0.5 mark for identification of each threat and the relevant fundamental
principle 1.5
 Up to 01 mark for explaining the threat to the fundamental principle 2.0
 Up to 01 mark for evaluating the significance of the threat 3.5

A.2 (a) (i) 0.75 mark for mentioning each characteristic of the engagement which
defines the scope of overall audit strategy 6.0

(ii) 01 mark for mentioning each consideration to ascertain reporting

objectives, timing of the audit and nature of communication 4.0

(b) 01 mark for each control 5.0

(c) 01 mark for each audit procedure 6.0

A.3 (a)  Evaluation of the situation 2.0

 Discussion on the reporting implications 2.0
 Discussion on the implication on the key audit matter 1.0

(b)  Evaluation of the situation 2.0

 Discussion on the reporting implications 2.0
 Discussion on the implication on the key audit matter 1.0

(c)  Evaluation of the situation 1.0

 Discussion on the reporting implications 3.0
 Discussion on the implication on the key audit matter 1.0

A.4 (a) 01 mark for identification of each key audit risk 10.0

(b)  Assessment of going concern 3.0

 01 mark for each audit procedure 7.0

A.5  Assessing the suitability of analytical procedure 1.0

 01 mark for suggesting each change 4.0

A.6 01 mark for each audit procedure 8.0

Page 1 of 2
 AUDIT AND ASSURANCE
Summary of Marking Key
Certificate in Accounting and Finance – Autumn 2022

Mark(s)
A.7  Evaluation of the situation 4.0
 01 mark for each course of action 8.0

A.8  01 mark for each procedure which the shareholder should follow 2.0
 01 mark for mentioning each responsibility of the company 4.0

(THE END)

Page 2 of 2
 Certificate in Accounting and Finance Stage Examination

The Institute of 13 March 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.

Q.1 Your firm is the statutory auditor of Astore Limited (AL), a listed company, for the year ended
31 December 2022. AL deals in fast moving consumer goods (FMCG). In recent times, the
FMCG sector has experienced significant growth with numerous new players entering the
market and established companies expanding their operations, resulting in a fiercely contested
industry. AL has consistently endeavored to meet ever-evolving needs and preferences of
consumers by adapting to changes in the market.

Effective this year, AL has commenced importing raw materials for its new category of
consumer products. Some of these raw materials have a short-shelf-life and could become
harmful if used after their expiration date. However, AL has successfully captured the
attention of consumers with its exceptional finished products in this category, resulting in
significant increase in sales.

During the year, AL has commenced the expansion of its production facilities and the
implementation of an ERP system to integrate its operations with financial reporting process.
These initiatives are being financed through additional borrowing facilities.

Required:
Identify and discuss the business risks and the related audit risks from the above scenario. (12)

Q.2 (a) Your firm is the external auditor of Hoper Limited (HL) for the year ended
28 February 2023. HL has set a strict deadline for the completion of audit. Due to this
time limitation, one of the audit team members has prepared the fixed asset schedule
himself to ensure prompt completion of the audit for this account and efficient transition
to other areas.

Required:
In the light of the Code of Ethics for Chartered Accountants, identify and explain the
threats to the fundamental principles. (06)

(b) Chilas Insurance Limited has approached your firm for appointment as a statutory
auditor for the year ending 31 December 2023. If your firm accepts this client, it will be
the firm’s first client in the insurance industry. Apart from the audit partner, there is
only one audit supervisor who have the previous experience of handling insurance
clients.

Required:
In the light of the Code of Ethics for Chartered Accountants, identify the threats to the
fundamental principles and discuss how your firm would evaluate these threats in the
context of accepting the engagement. Also briefly discuss the safeguards available to
your firm to address the threats. (10)
 Audit and Assurance Page 2 of 3

Q.3 (a) State the advantages of sampling using stratification and discuss how misstatements are
projected where stratification is used. (04)

(b) An auditor is required to identify and assess the risks of material misstatement at both
the financial statement and assertion levels. Briefly discuss the risk at financial statement
level and provide two example of such risk. (03)

(c) In a recent audit engagement, the audit manager completed the final assembly of audit
file. Subsequently, the audit partner expressed the intention to remove certain review
remarks.

Required:
Discuss whether the audit partner can remove his review remarks. (04)

Q.4 Your firm is the statutory auditor of Bashu Clothing Limited (BCL) for the year ended
31 December 2022. BCL is a manufacturer of active wear. The draft financial statements show
profit before taxation of Rs. 300 million.

During the audit, it was observed that there was an outstanding receivable of Rs. 0.3 million
from Shigar (Pvt.) Limited (SPL) since June 2022. On inquiry, the management informed
your team that this represents a receivable from SPL for management services related to supply
chain management and human resource management. Further inquiry revealed that SPL was
referred to BCL by one of BCL’s director who also holds the same position in SPL. This was
because SPL is a newly incorporated business and required assistance in setting up these
departments.

Required:
(a) Evaluate the above transaction and discuss the course of action that the audit team
should take. (Reporting implications are not required) (12)
(b) State the representation(s) which your firm should obtain from BCL. (04)

Q.5 Your firm is the external auditor of Passu Limited for the year ended 31 December 2022. The
draft financial statements show profit before tax of Rs. 250 million.

During the audit, it was observed that the management has not provided depreciation on one
of its production plant for the months of November and December 2022 which has been
temporarily shut down due to reduction in demand. The depreciation on the plant for these
two months was Rs. 5 million.

Required:
(a) Briefly evaluate the above situation and state any four key audit procedures which may
be performed by your audit team. (06)
(b) Discuss the possible impact on the audit report. (04)

Q.6 You are the auditor of Ghizer Limited for the year ended 31 December 2022. During the
audit, you have been informed that the Federal Board of Revenue has seized the accounting
records pertaining to revenue and production for further investigation into the alleged charges
of tax evasion.

Required:
Evaluate the above situation and discuss the implications on the audit report. (10)
 Audit and Assurance Page 3 of 3

Q.7 (a) Briefly discuss the reason(s) for inclusion of ‘emphasis of matter paragraph’ and ‘other
matter paragraph’ in the audit report. (Examples are not required) (04)

(b) Under the provisions of the Companies Act, 2017, list the persons from whom the
auditor has a right to require such information or explanations as he thinks necessary
for the performance of his duties as an auditor. (04)

(c) Briefly discuss how the objectivity of the internal audit function can be evaluated. (04)

Q.8 (a) Your firm is the statutory auditor of Naltar Dairy Limited (NDL) for the year ended
31 December 2022. NDL manufactures and sells various dairy products including
ice-cream.

The audit team is currently planning to perform the test of controls in respect of the
ice-cream division’s inventory. Following information has been provided by the
management:
(i) Upon receipt of inventory at the warehouse, a process is performed to ensure its
accurate verification by counting, matching it with purchase orders, performing
quality inspection, entering it into the inventory system and proper storing it in a
designated area of the warehouse.
(ii) On a weekly basis, the warehouse manager, Fahad Baqer, randomly selects a
warehouse area for inventory counting. By rotating the designated areas, each
area is counted at least once every quarter. This count is carried out in a manner
that prevent the warehouse staff from knowing the expected quantity of items in
each area. Furthermore, the inventory is also inspected for damages and expiry
dates to ensure product quality.

(iii) Fahad conducts a comparative analysis between the inventory count and quantity
of items in the inventory system. If any differences arise, he delegates the same
counting task to a separate team for rechecking. Once it is established that the
count is correct, adjustments are recorded after the approval of Fahad himself and
the finance manager.

Required:
Identify the controls relating to the existence of inventory and suggest the test of controls
to be performed to verify that the controls are operating effectively. (08)

(b) NDL has provided the audit team with year-end inventory records, showing for each
product: the date of the last purchase, date of the last sale, cost, selling price, quantity
and year-end valuation.

Required:
List any five substantive tests that the audit team can perform on the above information. (05)

(THE END)