Past Paper Audit

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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)
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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.

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)

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)

Suggested Solution of September 2019 is
still not Published By ICAP. It will be
uploaded here, As soon as it is Published by
ICAP.
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The Institute of 5 March 2019
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)

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)

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)

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
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
 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
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
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
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.

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Suggested Answers
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
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)
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)

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

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Suggested Answers
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
(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.

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Suggested Answers
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
(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.

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Audit and Assurance
Suggested Answers
(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.

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Audit and Assurance
Suggested Answers
(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
 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)

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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)
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)
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)

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
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
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
 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
 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
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
(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
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
(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
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)

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)

Q.10 You are the audit partner of GMP & Company, Chartered Accountants. The following
(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
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
(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
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
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.

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Audit and Assurance
Suggested Answers
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.

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Audit and Assurance
Suggested Answers
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
Certificate in Accounting and Finance Stage Examinations
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)

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)

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
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
(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
(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
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
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
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
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)

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)

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
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
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
(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
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
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
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)

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
(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)

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
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
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
(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
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
(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
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
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
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)
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.

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

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)

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)

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

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)

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)
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)

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Audit and Assurance

(i) No subsequent events were identified.

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No. of Balance as at 30 June 2019

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Audit and Assurance

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(i) Extracts from statement of financial position

(ii) Extracts from statement of profit or loss

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Ans.1 (a) (i) No further audit work is required.

(iii) This is an adjusting event. We should perform the following steps:

Subsequent receipt of the amount should be checked.

 Purchase order issued by the customer.

 Inquire management about reasons for refusal to send confirmation.

– Obtain the correspondence with the supplier.

 Communicate with those charged with governance, if:

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Areas which require significant auditor attention are those which:

 Involve significant audit risks

Ans.3 (i) Provision against litigation

 Circulate confirmation to legal advisors of the company.

(ii) Trade payables

 Circulate balance confirmation requests to trade creditors.

(iii) Loans to employees

 Discuss the increase in loan amount with management.

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(iv) Trade debtors

 Discuss the reason for change with the management.

(v) Cost of sales

 Perform cut-off test for purchases.

(b) Procedure for shareholder(s):

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Responsibilities of the board:

 The retiring auditor is given an opportunity to make a representation in writing to the

Ans.5 (i) No comments.

 Perform analytical procedures on the overall depreciation.

Ensure that non-current assets have been classified in appropriate account.

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Ans.6 (a) Matters to be included in engagement letter

– It should be included in the engagement letter that management would make

(b)  There is a risk of embezzlement in cash collection and inventory.

Ans.8 Evaluation of the situation:

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 If the financial statements are amended, the auditor is required to:

– Carry out the necessary audit procedures on the amendment.

 If the financial statements are not amended, the auditor is required to

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Due to above, the following safeguards may be implemented:

(b) All announcements, communications and public notices should:

 Be aimed at informing the recipients or the public in an objective manner.

 Create false, deceptive or unjustified expectations of favourable results.

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