Audit Case Study

AUDIT| CAF8 | RANA NAVEED KHAN
AUDIT | CAF8
Chapter Wise Case Study with
Solutions
Compiled By
Rana Muhammad Naveed Khan
CA(Final), LLB, MBA, M. Phil, MIPA(AUS), AFA(UK)
AUDIT BY RANA NAVEED KHAN | Case Study with Solution | CFE College, Lahore Page 1
Chapter 1 | Concept and need for assurance
1 Wealthy Bank Limited (WBL) is considering to appoint external auditor for the year ending
June 2020. WBL has shortlisted the following three audit firms for appointment as external
auditor and has presented certain matters relating to each of them for your consideration:
Rao Arif & Company, Chartered Accountants
The firm has recently admitted a new partner who worked as CFO till June 2017, of Noor
Engineering Limited, a subsidiary of WBL.
Hatim Tughlaq & Company, Chartered Accountants
One of the partners in the firm has obtained a loan from WBL of Rs. 5 million. The firm has
informed that the partner would not be able to repay the loan till 2021.
Rashid Kareem & Company, Chartered Accountants
Rashid, one of the partners in the firm, has several commercial properties in Lahore. He has
rented out five properties to WBL for its branch operations.
Required: In the light of the Companies Act, 2017 discuss whether any of the above firms
can be appointed as external auditor of WBL. (06)
(ICAP, CAF 09 Level Spring 2020)
2 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 fs using credit card of CBL and the balance outstanding against it on
28 February 2018 was Rs. 1.1 milhon. 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)
(ICAP, CAF 09 Level Spring 2018) (ICAP’s Official Question Bank for CAF 09 Q. # 56a)
3 Comment on each of the following situations with reference to the appointment of external
auditors in accordance with the requirement of the Companies Act, 2017.
(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)
(ICAP, CAF 09 Level - Spring 2017)
(ICAP’s Official Question Bank for CAF 09 - Q. # 25f&g)
4 The following three entities have approached Alpha & Company, Chartered Accountants
(the firm) for appointment their statutory auditors. In each case there are following issues
which need to be considered before the firm fen as accept the assignments.
(i) Client: Safe Bank Limited
Issue: the firm has acquired office equipment from the bank under finance lease
arrangements. In addition, some partners of the firm are also using the bank's credit card
facility.
(ii) Client: Pride Communication Limited (PCL):
Issue: One of the firm’s partners had remained the director of PCL for many years, as a
nominee of Federal Government.
(iii) Client: Gama Limited Issue: A partner of the firm holds shares in Beta Limited which {s an
associated company of Gama Limited.
Required:
In each case specify the minimum conditions specified by Companies Act, 2017, which
should be fulfilled in order to accept the audit engagement. (09)
(ICAP, CAF 09 Level - Spring 2008) (ICAP’s Official Question Bank for CAF 09 - Q, 21)
5 Comment on each of the following independent situations in respect of appointment of
auditors, with reference to the applicable rules and regulations:
(a)Guava and Company, Chartered Accountants, have received a request for appointment as
auditor of Orange Bank Limited (OBL). Most of the partners of Guava and Company maintain
their accounts with OBL and are enjoying credit card facilities from them. The maximum
outstanding balance on the credit card facility, due from any partner is Rs. 899,000.
(b) Apricot and Company, Chartered Accountants, have received an offer for appointment as
auditor of Banana Limited. Mr. Pumpkin who is a nominee director of the Government on
the Board of Directors of Banana Limited holds 25% shares in Water Melon Limited. The
spouse of a partner also holds shares in Water Melon Limited.
(c) Mr. Zaheer, a legal practitioner, has received an offer for appointment as external auditor
of Lychee (Private) Limited (LPL). The paid up capital of LPL is Rs. 1,500,000 of which 40% is
owned by Blue Black Limited, a listed company.
(d) | Walnut and Company, Chartered Accountants, have received an offer for appointment
as external auditors of Wasim (Private) Limited (WPL), in place of the previous auditors, who
were removed before the completion of their term. You may assume that WPL has
completed all the legal formalities before removing the previous auditors.
(e) Mr. Sadiq has recently joined your firm as a partner. He has served on the Board of
Directors of Strawberry Limited (SL) until 30 June 2009, as a Government nominee. In the
Annual General Meeting of SL held on 31 August 2011, a shareholder has proposed the
name of your firm for appointment as the external auditors for the year ending 30 June
2012. (11)
(ICAP, CAF 09 Level - Autumn 2011) (ICAP’s Official Question Bank for CAF 09 - Q.# 40)
6 Comment on each of the following independent situations with reference to the applicable
rules and regulations.
(a) Waqar is a partner in Sohail and Company, Chartered Accountants, who are the auditors
of Wasim Limited for the year 2017 Aqib who was a partner of Waqar in 2008 in his food
business, has recently been appoint as a Director of Wasim Limited. (02)
(b) Aleem, Asif and Company (AAC), Chartered Accountants, has accepted an offer for
appointment as auditors of Gul Limited (GL). Kamal who is a partner in AAC, held 5000
shares in GL. Within thirty days of acceptance M gifted the shares to his son Kamran, who is
a manager in AAC. (06)
(c) You have recently signed the audit report of Sadiq Limited. The management has
approached you reduction in audit fee for the next year because the company has been
suffering losses for the past three.
(d) Saleem is a partner in Orange and Company, Chartered Accountants. He also practices as
a sole proprietor and has received an offer for appointment as auditor of ABC Financial
Services Limited which is a subsidiary of DEF Bank Limited. The balance outstanding against
the credit card issued by DEF Bank Limited to a parent of range and Company is Rs.
1,010,500.
7 Comment on each of the following independent situations with reference to the applicable
rules and regulations.
(a) Zaman is a partner in a firm of Chartered Accountants and holds 5,000 shares in Mardan
Limited (ML). His firm has received an offer for appointment as auditors of Khanewal Limited
(KL). ML and KL are subsidiaries of Dera Khan Limited (DKL). (03)
(b) The total paid up capital of IJK Limited is Rs. 990 million whereas its ordinary share
capital is Rs. 130 million. LMN Limited holds 50 million non-voting preference shares and 2
million ordinary shares in IJK Limited. The par value of both types of shares is Rs. 10 each.
Bilal and Company has received an offer for appointment as auditors of IJK Limited. Faryal,
the wife of a partner in Bilal and Company, is a director in LMN Limited. Faryal also holds
10,000 shares in LMN Limited. (04)
(ICAP, CAF 09 Level - Autumn 2012) (ICAP’s Official Question Bank for CAF 09 - Q. # 7)
8 Comment on each of the following independent situations in the light of the requirements
of the Companies Act, 2017: (a) Khan and Company, Chartered Accountants has received an
offer for appointment as auditors of Good Bank Limited (GBL). Shahid is a partner in Khan
and Company. He has obtained a personal finance of Rs. 450,000 from GBL and also holds
GBL’s credit card. The outstanding balance on his credit card is Rs. 150,000. (03) (b) Abid is a
partner in AFL & Company, Chartered Accountants. AFL has accepted an offer for
appointment as auditors of Saima Limited (SL). Saima, the wife of Abid, owned 11% shares in
SL. She also works as SL’s General Manager Marketing. Saima disposed of the shares held by
her to Abid’s father, within 30 days of the appointment of AFL but continues to remain
employed in SL. (03)
(ICAP, CAF 09 Level - Autumn 2013)
9 Comment on the following independent situations, with reference to the requirements of
the Companies Act, 2017. Hamid is a partner in a Chartered Accountant firm and holds
100,000 Term Finance Certificates in Sona Fertilizers Limited (SFL). Hamid’s firm is
considering to accept the audit of SFL. (02)
10 Comment on each of the following situations with reference to the appointment of external
auditors in accordance with the requirements of the Companies Act, 2017.
(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)
(ICAP, CAF 09 Level - Spring 2015) (ICAP’s Official Question Bank for CAF 09 - Q. # 14)
11 Justify giving reasons whether the appointment of auditors in the following cases is in
compliance with the requirements of Companies Act, 2017.
(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)
(ICAP, CAF 09 Level - Spring 2016) (ICAP’s Official Question Bank for CAF 09 Q. # 30)
12 Daud and Company Chartered Accountants (DC), has an offer 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 Act, 2017, 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)
(ICAP’s Official Question Bank for CAF 09-Q. 4 32)
13 State whether or not under the following circumstances, an auditor becomes disqualified to
be appointed as auditor of the company under Companies Act, 2017.
(i) The auditor and one of the directors of the company are real brothers.
(ii) The auditor has given an interest-free loan to the company.
(iii) The auditor after appointment has been allotted 10 percent shares of the company.
(iv) The auditor has given his consent to act as the auditor of the company on a fee being
less than the fee charged by the retiring auditor. (04)
(ICAP, CFAP 06 Level - Summer 1992)
14 The Board of Directors of Noorani Public Limited (NPL) has appointed Asim & Co. an audit
firm, as the external auditorg of the company for upcoming year. Mr. Abid, one of the
partners of the audit firm, holds 200 shares of NPL and he is not directly engages in the audit
assignment of NPL.
Required: Explain whether Asim & Co. can be appointed as external auditor of the
company.(03) (ICMA Pakistan - Fall 2016)
15 Mr Akbar is the Chief Executive of Prosperity Limited, a listed company. He is not pleased
with the performance of the current auditors. He is planning to propose the name of M/s
Asghar Saleem & Co. as the new auditors in the coming AGM after approval of the Board. Mr
Asghar a partner in M/s Asghar Saleem & Co. is the brother of Mr Akbar. Is the arrangement
legally permissible? (02)
16 Orient Trading Limited was incorporated on October 21, 2004. Ahmad Ali, the company
secretary has approached you on October 31, 2004 for your appointment as the first
statutory auditor of the company. Assuming that you are eligible for this appointment,
explain who should make this appointment under the provisions of the Companies Act,
2017. (03)
17 Mr. K the partner of an audit firm, in normal course of his investment activities bought
shares of ABC Limited, of which his firm was statutory auditor. However, he disposed of all
these shares within thirty days and immediately informed the company secretary about the
whole transaction. Is the company secretary required to take any step under the Companies
Act, 2017? Discuss. (04)
18 (a) You have received a letter from the company secretary of ABC Group of companies on
March 04, 2006. The group consists of four public limited unlisted companies. The secretary
requested you to advise him as to who will have the authority to appoint new auditors in
following situations relating to different companies of the group:
 The auditors of Company A will be retiring in August, 2006 on the conclusion of the
Annual
 General Meeting of the company. The auditors of Company B were removed by the
members on March 02, 2006.
 The auditors of Company C became disqualified on February 14, 2006.
 The auditors of Company D resigned on January 28, 2006. (08)
b) What Would be the term of office of new auditors in the cases given above?
(ICAP, CAF09 Level – Spring 2006
19 Cobblers Limited is the holding company of Shoes Limited and Boots Limited. There is no
common directorship as the holding company has nominated different persons as the
directors for each subsidiary. Moreover, there is no intercompany investment among the
subsidiary companies.
The following issues are under consideration of the company secretary:
i. The directors of Shoes Limited, which had been incorporated eighty-three days
back, are considering appointment Mr. Bright, a chartered accountant, as the first
auditor. Mr. Bright holds a very smal] number of shares in Boots Limitud
ii. The members of Cobblers Limited have appointed Mr. Polite, a qualified MBA, as
auditor of the company their annual general meeting at a fee which is less than the
fee charged by the previous auditor.
In the light of relevant provisions of Companies Act, 2017, provide your response to the
following:
(a) With reference to (i) above, discuss whether Mr. Bright is qualified to be appointed as
auditor of Shoes Limited.
(b) With reference to (ii) above, discuss the validity of appointment of Mr. Polite as auditor
of Cobblers Limited. (05)
20 State with reason, following are true or false:
(i) Director can appoint auditor;
(ii) If auditor is not appointed in the general meeting, he is appointed in the next general
meeting.
(iii) First auditors must be appointed before first general meeting.
(iv) Power and duties of auditor can be limited by the Management.
(v) Auditor is liable for negligence if they fail to detect fraud or errors.
(vi) Appointment of the auditor in a private limited company is not compulsory under
provision of the Companies Act.
(ICAP, CAF 09 Level - Adapted2017)
21 Describe the relevant provisions of the Companies Act, 2017 that would be required to be
complied with in the following circumstance: - On 1 March 2014 AB Limited, a listed
company, received a notice from a member of the company proposing a change in the
auditors of the company. The annual general meeting of AB Limited is scheduled to be held
on 19 March 2014. (03)
22 Discuss the following, in the light of provisions of the Companies Act, 2017:
- On 30 August 2012, Rafiq Nizami & Co. (RNC), Chartered Accountants, were appointed as
auditors of Delton Traccors Limited (DTL), a listed company, for the year ending 30 June
2013. Zafar, a partner of RNC, holds 5,000 shares of DTL. (03)
(ICAP, CAF 03 Level - Autunin 2012)
23 Mr. Azhar, the sole proprietor of Azhar & Co. Chartered Accountants, was appointed as the
auditor of XYZ Limited, an unlisted public company, for the financial year ending June 30,
2009. Mr. Azhar married Miss Ismat, a director of XYZ Limited, on February 23, 2009. The
company secretary of XYZ Limited wants to know whether the marriage would have any
impact on the status of Mr. Azhar as the auditor of the company. Discuss the situation with
reference to the relevant provisions of the Companies Act, 2017.
24 The management of Pakpurt Limited had a dispute on taxation matters with their auditors,
ABC & Co. The directors want to remove auditors before finalization of audit and appoint
XYZ & Co. in their place. While discussing the matter Mr. Kazim, one of the directors
objected that the auditors cannot be removed before the annual! general meeting. Keeping
in view the above case you are required to comment on the claim of Mr. Kazim considering
the relevant provisions of the Companies Act, 2017. (02)
25 During your audit of Rigsby Ltd for the year ended 31 July 2002, the following points have
arisen.
(a) The directors have not provided you with details of transactions in the private bank
account, which Is used for their expenses, as the year-end balance is unchanged from 31 July
2001.
(b) You have not been able to see the minutes of directors’ meetings because the directors
regard some of the matters as confidential.
(c) An extraordinary general meeting had been held on 14 November 2001, of which you
had been unaware, to capitalise some reserves. You believe there might not have been
sufficient reserves at that time to meet the capitalisation. (03)
State what rights of the auditor, set out in the Companies Acts, have been denied.
(Institute of Chartered Accountants in England and Wales, Professional Level - September
2002)
26 In the light of Companies Act, 2017 comment on each of the following independent
scenarios:
(a) Partners of Ubaid & Co., Chartered Accountants have authorised Zehra, who is a
chartered accountant, to sign the audit report of Tufail Limited. Zehra is a manager in the
firm and has been managing the audit of Tufail Limited for a number of years. (02)
(b) Tariq Limited a listed company, is due to hold its annual general meeting on 15
September 2017. Discuss the rhe and duties of the auditors of Tariq Limited in relation to
the meeting. (04)
(c) Fareed, a director of Tameer Limited, got married to Hira, a chartered accountant. Hira is
a senior employee of Salman & Co., Chartered Accountants who are also the auditors of
Tameer Limited. (02) (d) Brass Limited wants to appoint Jafer & Co., Chartered Accountants
as their statutory auditor. One of the partners in Jafer & Co. had served on the Board of
Brass Limited for many years as a government nominee. (02)
27 Under the provisions of the Companies Act, 2017 briefly describe whether Murad is eligible
to be appointed as an auditor of the company in each of the following independent
situations:
(i) Murad, a partner in Delta and Company, Chartered Accountants, is also a director in
Gama Limited (GL). His firm has received an offer for appointment as auditors of Star
Limited (SL). Both GL and SL are subsidiaries of Pluto Limited (PL). (03)
(ii) Murad is a sole proprietor in Murad and Company, Chartered Accountants. He has
received an offer for appointment as auditor of Super Energy Limited (SEL), a power
generation company in Multan. Murad has not paid his electricity bills to SEL for the last two
months. (02)
(iii) Murad is a partner in Beta & Company, Chartered Accountants (BCC). His firm has
accepted an offer for appointment as auditors of Panama Limited (PL). Rita, who is Murad’s
sister, is working as an internal auditor in PL. She also owns 20% shares in PL. Rita disposed
the shares to Murad’s wife, within 30 days of appointment of BCC but continues to remain
employed in PL. (05)
28 You are the senior manager in a small audit firm and your responsibilities include obtaining
new clients. New Health Food is a family owned partnership with 3 stores. In discussing the
business, you learned that New Health Food is thinking of expanding to a fourth store in a
nearby city but is undecided about how to finance the expansion. They are considering
either borrowing from a bank or from the existing owners. The owners are 2 brothers and 2
sisters, 3 of whom actively manage 1 store each, and the fourth will manage the new store
next year.
Required:
Explain which factors would suggest that New Health Food should have an audit and which
factors would suggest that an audit is not required. (04)
(Certified General Accountants, Canada - External Auditing 1, March 2009)
29 Prime Bank Limited, a bank with over hundred branches all over the country, has completed
one year of its successful operation. The directors of the bank in their board meeting have
appointed Raja, to perform audit of head office and all branches, and to issue report to
directors atend.
Is this an assurance engagement? (Give reasons) (02)
(ICMA Pakistan - Spring 2012)
30 Amjad is the chief executive and major shareholder of a newly incorporated private limited
company. He has offered your firm to be the Prst 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)
(ICAP, CAF 09) Autumn 2019, Q. #3)
1. Suggested Solutions
1 Rao Arif & Company, Chartered Accountants

A firm cannot be appointed as auditor if a partner was an employee (or officer or director) of the
company in last 3 years if a person is disqualified for a company, he is also disqualified for its
holding/subsidiary companies.
This firm cannot be appointed as auditor of WBL as one of its partners has been an employee of
its subsidiary in lac’ years.
Hatim Tughlaq & Company, Chartered Accountants
A firm cannot be appointed as auditor if a partner is indebted to the company other than in the
ordinary course of business of such entities,
Loan from a bank is a transaction of ordinary course of business. Therefore, firm can be
appointed as auditor of WBL as partner of the firm is not considered indebted to the WBL.
Rashid Kareem & Company, Chartered Accountants
A firm cannot be appointed as auditor if a partner has business relationship with the company
(other than in the ordinary course of business of such entities).
Renting property by Rashid to WBL is a transaction of ordinary course of business. Therefore,
firm can be appointed as auditor of WBL.
2  HSB is indebted to CBL as the outstanding amount on credit card exceeds legal threshold of
Rs. 1 million.
 HSB cannot be appointed as statutory auditor of CBL, as well as its subsidiary of TL.
Note: Legal provisions are applicable at time of appointment, as well as during the audit.
3 a)
 TFCs are debentures, not shares.
 Firm can be appointed as statutory auditor of SFL because Ghalib is neither a shareholder of
the company nor indebted to the company.
b)
Imran, as a partner in Pure Investment Associates, holds shares in HL. * Zain & company can be
appointed as statutory auditor of HL if:
 Shareholding is disclosed at time of appointment.
 Shares shall be disposed within 90 days of appointment.
4 (i) Safe Bank Limited
 Sum payable on each credit card should not exceed Rs. 1,000,000.
(ii) Pride Communication Limited
 Firm Will have to ensure that three years have passed since the partner resigned from
client.
 If three years have not passed, firm will have to remove the relevant partner from
partnership.
(iii) Gama Limited
 Partner shall disclose the shareholding in associated company of Gama Limited at time of
appointment.
 Shares will be disposed within 90 days of appointment.
5 (a) Guava and Company can be appointed as statutory auditor of OBL because auditor is not
indebted to the OBL as sum payable on each credit card does not exceed legal threshold of Rs.
1,000,000.
(b) Apricot and Company can be appointed as statutory auditor of Banana Limited. * Banana
Limited and Water Melon Limited are NOT associated companies, because Mr. Pumpkin is a
nominee director, and spouse does not have to disclose or dispose shares in Water Melon
Limited.
(c) Mr. Zaheer can NOT be appointed as statutory auditor of LPL because Companies Act allows
only a Chartered Accountant or Cost and Management Accountant to be statutory auditor.
(d)
 Auditor shall send professional clearance letter to outgoing auditor.
 Auditor shall also inform ICAP and shall obtain clearance from ICAP.
(e) Firm can NOT be appointed as statutory auditor of SL because one of the partner (Mr. Sadiq)
has been a director of the company in last three years.
Note: A nominee director is disqualified like other directors. However, nominee director is not
considered to determine status of ‘associated’ between two companies.
6 (a) Sohail and Company can be appointed as statutory auditor of Wasim Limited because partner
in the firm is not currently a partner of director of company.
(b) If son of partner is Major:
AAC can continue as statutory auditor of GL because partner has rightly disposed its
shareholding within 90 days of appointment. « — There is no violation of law if a manager holds
shares in audit client.
If son of partner is Minor:
AAC cannot continue as statutory auditor of GL if 90 days have passed after appointment
because partner has not rightly disposed its shareholding.
(d) Under Code of Ethics, existing auditor can reduce audit fee provided scope and quantum of
work is significantly reduced.
(d) Orange and Company is disqualified for statutory audit of DEF Bank Limited as well as for its
subsidiary ABC Financial Services because a partner in the firm is indebted to DEF Bank Limited as
sum payable on credit card exceeds legal threshold of Rs. 1,000,000.
However, Saleem can be appointed as statutory auditor of ABC Financial Services Limited as sole
proprietor, because he Is not personally indebted to the company.
7 a)
 ML, and KL are associated companies (because holding’s other subsidiary is an associate).
 Firm can be appointed as statutory auditor of KL only if:
 Shareholding of a partner of the firm in an associated company is disclosed at the
time of appointment, and
 Share are disposed within 90 days of appointment.
(b)
 IJK and LMN are NOT associated companies because LMN holds 2 million ordinary shares out
of total 13 million i.e. 15.38% which is below 20% (non-voting shares are not considered in
determining status of company).
 Bilal and Company can be appointed as statutory auditor of IJK Limited because spouse is
neither a shareholder, nor a director in IJK or any of its associated company.
8 (a)
Khan and Company cannot be appointed as auditor of GBL because one partner is indebted to
the GBL. Sum payable on credit card does not exceed legal threshold of Rs. 1,000,000.
(b)
Issue of spouse of auditor as shareholder in audit client: o AFL & Company can be appointed as
statutory auditor of SL, because shareholding by spouse of the auditor has been disposed within
90 days of appointment. o There is no violation of the law if father of auditor holds shares in
audit client. Issue of spouse of auditor as employee in audit client: Auditor is qualified as his
spouse, Saima, is not a director in SL.
9  TFCs are debentures, not shares,
 Firm can be appointed as statutory auditor of SFL because Hamid is neither a shareholder of
the company nor indebted to the company.
10 (a) SCC can be appointed as statutory auditor of ABC because spouse of partner {s not a director
in audit client or any of its holding/subsidiary.
(b) Kashif Associates (Cost and Management Accountants) can be appointed as auditor of NPL
because:
 NPL is not a public company. NPL is not a subsidiary of a public company (30%
shareholding by Siyal Limited does not make it subsidiary) and
 NPL’s paid up capital fs less than 3 million.
(Note for students: It {s also relevant to note that a private company with paid-up capital of less
than 1 million Is not required to conduct audit under Companies Act 2017
11 a)
 KC can be appointed as auditor of NEL.
 KC is not indebted to NEL, as utility bill is not overdue by 90 days at time of appointment.
(b) Issue of Shareholding of Spouse:
 Appointment of ZC as statutory auditor of HL is valid only if:
 Shareholding of spouse of a partner in JL (associated company of HL) is disclosed at time of
appointment, and o Shares are disposed within 90 days of appointment.
Issue of Directorship of Spouse in associated company:
No issue because both companies are just associated (not holding/subsidiaries).
12 (a) If wife of a partner is a director and shareholder in a subsidiary of proposed client:
DC cannot be appointed as statutory auditor of RL because spouse of a partner is a director in RL.
As DC is disqualified for RL, itis also disqualified for its holding company i.e. JL. if wife of Daud
resigns from directorship of RL, DC can accept appointment of JL provided following further two
conditions are met:
1. Shareholding of wife of Daud in associated company (i.e. RL) shall be disclosed at time of
appointment.
2. Shares shall be disposed off within 90 days of appointment.
(b) If wife of a partner is a director and shareholder in an associated company of proposed
client:
DC can accept appointment as auditor of JL provided following two conditions are met:
1. Shareholding of wife of Daud in associated company (RL) shall be disclosed at time of
appointment.
2. Shares shall be disposed within 90 days of appointment
Wife of a partner being director of an associated company does not cause disqualification of firm
as auditor.
c) If wife of a partner is a director and shareholder in a company which is unrelated to proposed
client:
DC can accept appointment as auditor of JL, because there is no relationship between JL and RL
(Director of a company having less than 20% shares in another company does not make them
associated). No action is required in this case.
Note: This question has been solved assuming Daud is a partner in DC.
13 (i) Auditor is not disqualified. Companies Act, 2017 disqualifies auditor only if spouse is director.
(ii)Auditor is not disqualified. Companies Act, 2017 disqualifies only if auditor is indebted to
company.
(iii)Auditor becomes disqualified, because he cannot acquire shares in audit client after
appointment.
(iv) Auditor is not disqualified. Companies Act, 2017 does not disqualify auditor on the basis of
fee.
14 Asim & Co. can be appointed as statutory auditor of NPL if: * Shareholding of the partner is
disclosed at time of appointment, and » Shareholding is disposed within 90 days of appointment.
Note: Legal provisions apply on all partners of the firm. If any partner is disqualified, firm is
disqualified.
15 M/s Asghar Saleem & Co. can be appointed as statutory auditor of Prosperity Limited because
there is no disqualification for brother of director (only spouse of director is disqualified).
16 1. First auditor is appointed by directors within 90 days of incorporation. Therefore, directors can
appoint the first auditor till January 18, 2005.
2. If directors do not appoint auditor within 90 days of incorporation, Commission may appoint
auditor of the company.
17 Mr. K bought shares after the appointment, so he becomes disqualified on date of purchase of
shares and casual vacancy has arisen.
Company secretary should communicate the fact to directors so that they can fill the casual
vacancy within 30 days. If casual vacancy {s not filled by directors within 30 days, company
secretary should inform SECP which may fill casual vacancy.
18 (a) Company A:
 Company (i.e. Members) has authority to appoint auditor in the Annual General
Meeting.
 If members do not appoint auditor at the AGM, Commission may appoint the
subsequent auditor.
Company B:
As auditor is removed before expiry of his term, board of directors shall appoint the auditors
with prior approval of the Commission.
Company C;
 Casual vacancy has arisen in this situation and directors have authority to appoint auditor to
fill casual Vacancy Within 30 days of its occurrence
 If directors do not fill casual vacancy within 30 days, SECP may appoint auditor to fill casual
vacancy.
Company D:
AS appointed auditor is unwilling to act, SECP will appoint auditor Is this case.
a) Term of the office of auditor, in all above cases, will be from date of appointment till the
conclusion of next AGM
19 a)
 Directors have appointed auditor within prescribed 90 days of incorporation.
 However, auditor holds shares in an associated company (because Shoes Limited and Boots
Limited both are under common management and control).
 Mr. Bright can be appointed as statutory auditor of Shoes Limited only If:
o Mr. Bright discloses his shareholding in associated company of Shoes Limited, and
o Shares are disposed within 90 days of appointment.
b)
 Mr.Polite can NOT be appointed as statutory auditor of Cobblers Limited because audit
of a public company can be conducted only by a chartered accountant. Appointment of a
disqualified person as auditor is void.
 Law does not disqualify an auditor on the basis of fee.
20 i. False. Director is disqualified for appointment as auditor in current capacity as well as for
a period of 3 years after he resigns.
ii. False. If auditor is not appointed in general meeting, he is appointed by SECP.
iii. True. First auditor is. appointed by directors within 90 days of incorporation.
iv. False. Powers and duties of statutory auditor are determined by Companies Act, 2017
and cannot be limited by management.
v. False. Auditor is responsible to obtain reasonable assurance, which is not a guarantee
that F/S are free from all misstatements. There may be some undetected material
misstatements even after audit due to inherent limitations of audit.
vi. False. Appointment of auditor in a private company {s compulsory if its paid up capital
exceeds Rs. 1 million.
21 Requirement to be complied by Company:
1. Company shall send copy of this notice to retiring auditor and shall also post on its website.
2. If retiring auditor makes a representation in writing, it shall be read out at AGM before taking
up the agenda for appointment of the auditor.
3. At AGM, members will pass a resolution to appoint auditor from proposed auditors.
4. Company shall inform Registrar within 14 days from the date of any appointment of auditor
about such appointment along with consent of appointed auditor.
22 RNC had to disclose the shareholding at time of appointment. Assuming that RNC has disclosed
this fact at time of appointment, auditor should disinvest shares within 90 days of appointment.
23 Spouse of a director cannot be appointed as statutory auditor of a company. As disqualification
has arisen after the appointment, therefore casual vacancy has arisen which should be filled by
directors within 30 days of its occurrence.
24 An auditor can be removed before the expiry of his term by special resolution of members.
Directors do not have authority to remove auditor.
25
Situation Right Violated
a Right to require the information and explanation from directors and company
b Right to access to books of accounts supporting documents/papers.
C Right to receive notice of general meeting, attend and speak at general meeting.
26 (a) If auditor is a firm, report can be signed only by firm (i.e. by partners only) with the name of
engagement partner on it. An employee cannot be authorized to sign the report.
(b)Rights:
1. Right to receive notice of annual general meeting.
2. Right to attend general meeting.
3. Right to speak at general meetings on audit related matters
4. Right to make representation in writing if change of auditor is proposed.
Duties: In case of listed company, it is duty to auditor or a person authorized by him in writing to
attend general meeting in which financial statements and auditor's report are considered.
(c) There is no disqualification as spouse of director is only an employee in audit firm and not a
partner, therefore, does not come under disqualification of auditor as per Companies Act 2017.
(d) Jafer & Co. can be appointed as statutory auditor of Brass Limited if concerned partner has
not been a director in Brass Limited in last three years.
27 (i) Murad, being a director in GL, is disqualified for appointment as statutory auditor in GL as well
as its holding PL and PL’s other subsidiary SL. Therefore, Delta and Company cannot be
appointed as statutory auditor of SL.
(ii) Murad and Company can be appointed as statutory auditor of SEP because the auditor is not
indebted to the company as the sum payable to utility company does not exceed period of 90
days.
(iii) Issue of Sister of auditor as employee in PL:
There is no legal disqualification if sister of auditor is an employee in audit client.
Issue of Sister of auditor as shareholder in PL:
There is no legal disqualification if sister holds shares in audit client. However, as the shares have
been transferred to spouse of auditor after appointment, it disqualifies Beta & Company as
statutory auditor of PL. a Casual vacancy has arises which should be filled by Board within 30
days of its occurrence.
28 Factors suggesting audit is necessary
1. One family member and owner not actively involved in business may require audit
2. If the partnership borrows from bank, then an external audit may be required by bank
Factors suggesting audit is not necessary:
1. There is no conflict of interest between owners and managers because whole business is
managed by owners themselves
2. New Health Food is not a company; therefore, its audit is not required by law.
3. If borrowing is arranged from owners, there will be no need for an audit
29 This is not an assurance engagement, because there are only two parties involved i.e.,
practitioner and responsible party
Raja has to submit his report to directors, instead of owners or other third parties.
Tip for students when a person is appointed by directors to do investigation and to issue report
to directors, it is called "Internal audit”.
External auditor is one which is appointed by shareholders and internal auditor is one which is
appointed by directors
30 There are two viewpoints to comment
Statutory audit does not add value to business:
This viewpoint is wrong. Statutory audit exists because it adds value to business and provide
many benefits e.g.
1. It increases credibility of financial statements, as most of the misstatements are identified.
corporate governance requirements)
2. It confirms that management is performing its statutory and non-statutory duties (e.g.
compliance with corporate governance requirements)
3. It assists in sale or purchase of business,
4. Auditor identifies deficiencies in entity's internal control system, and gives recommendations
to improve it.
5. It assists in grant of loan by bank
Audit helps in finding all major frauds within the company:
This viewpoint is wrong. Auditor does not identify all major frauds within the company because
of inherent limitations of audit e.g.
1. Because of time and cost limitation, auditor checks only a sample of tran actions
2. Fraud involving collusion and complex techniques are harder to detect.
3. Some accounts in financial statements involve estimates / judgments/ uncertainties which
are difficult to calculate and verify
4. Many of the audit procedures are based on auditor's judgment which can be faulty
5. Management may not provide complete information to auditor.

6. Auditor does not have specific legal powers ce power to search
Chapter 2 | Obtaining an Engagement
1 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 the
engagement letter, along with their justification. (04)
2 During the audit you are unable to obtain relevant and sufficient audit evidence that you
consider necessary for obtaining reasonable assurance about accounts receivable. You have
raised this issue with the managing director of your client and informed him of your intention to
issue a qualified opinion to highlight scope limitation. Managing director, in order to resolve this
issue has suggested for change in the scope of engagement from ‘audit’ to a ‘review
engagement’. Would you agree to such a change in the terms of engagement? Explain your
response. (07)
3 Is it appropriate to include in the audit engagement letter that: “There is an unavoidable risk that
even some material misstatements may remain undiscovered”?
(ICMA Pakistan, Professional Level P2 - Summer 2003)
4 Guilin &Partners is a CGA firm that has audited ZFL for the past S years. During the past year, ZFL
has grown to include expurts to Asia. The president and the controller both retired last year. The
new management met with Guilin this year to discuss this year’s audit and hope to reduce the
audit fees. ZFL's new management suggested that since the company had received an
unqualified audit opinion every year from Guilin, less audit work would be needed this year. They
suggested that there was no need for an engagement letter this year since Guilin’s staff were
very familiar with the company. The managing partner at Guilin, Tim, explained to the controller
that there were new accounting principles being applied this year because differential reporting
rules no longer applied to the company. Tim also explained the audit process in more detail to
the controller and president, who then agreed that the audit fees requested by Guilin were
reasonable.
Required: Explain why you would or would not require an engagement letter this year. Support
your answer with three points. (03)
(Certified General Accountants, Canada - External Auditing 1, September 2011)
5 Salt & Pepper & Co (Salt & Pepper) Is a firm of Chartered Certified Accountants which has seen
Its revenue decline steadily over the past few years. The firm Is looking to increase its revenue
and client base and so has developed a new advertising strategy where it has guaranteed that its
audits will minimize disruption to companies as they will not last longer than two weeks. In
addition, Salt & Pepper has offered all new audit clients a free accounts preparation service for
the first year of the engagement, as it Is believed that time spent on the audit will be reduced if
the firm has produced the financial statements.
The firm Is seeking to reduce audit costs and has therefore decided not to update the
engagement letters of existing clients, on the basis that these letters do not tend to change much
on a yearly basis. One of Salt & Pepper's existing clients has proposed that this year’s audit fee
should be based on a percentage of their final pre-tax profit. The partners are excited about this
option as they believe It will increase the overall audit fee.
Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers Co (Cinnamon),
whose year-end is 31 December. Cinnamon requires their audit to be completed by the end of
February; however, this is a very busy time for Salt & Pepper and so it is intended to use more
junior staff as they are available. Additionally, in order to save time and Cost, Salt & Pepper have
not contacted Cinnamon’s previous auditors.
Required:
(a) Describe the steps that Salt & Pepper should take in relation to Cinnamon:
(i) Prior to accepting the audit; and (05)
(ii) To confirm whether the preconditions for the audit are in place. (03)
(b) State FOUR matters that should be Included within an audit engagement letter. (02)
(c) (i) Identify and explain FIVE ethical risks which arise from the above actions of Salt & Pepper &
Co; and
(ii) For each ethical risk explain the steps which Salt & Pepper & Co should adopt to reduce the
risks arising. (10)
(ACCA, Fundamentals Level F8 - December 2013)
6 You have been offered to audit an entity, where management has not made any decision
regarding the applicable financial reporting framework. Explain the importance of financial
reporting framework at the client acceptance level. (03)
7 (a) ABC and Company, Chartered Accountants, have been requested to give their consent for
appointment as the auditor of Sindh Limited (SL), in place of XYZ and Company, Chartered
Accountants. The matter of appointment of ABC and Company is to be placed in the annual
general meeting of SL.
Required:
(i) Explain the responsibility of ABC and Company and the steps that it needs to take before
acceptance of the audit. (05)
(ii) What would be the retiring auditor’s responsibilities with respect to (i) above and the
responsibility of ABC and Company, in case the retiring auditor does not fulfil its
responsibility? (04)
(b) Assume that in (a) above XYZ and Company had qualified the previous year’s audit report
because it was unable to physically verify the factory building and to observe physical inventory
count, due to law and order situation. However, at the end of current year’s audit, ABC and
Company was able to observe the physical inventory count and also carry out physical
verification of the factory building as the law and order situation has improved.
Required: Discuss the matters which you would consider in the above situation and the possible
impact thereof on the audit report. (04)
(ICAP, CFAP 06 Level - Winter 2013)
8 Your firm has been approached by Snipe Ltd to accept appointment as external auditor for the
year ending 30 June 2011. In the auditor's report on the financial statements for the year ended
30 June 2010, the previous auditor issued a qualified opinion, due to disagreement over the
accounting policy for inventory valuation. This matter was cited by the previous auditor in
response to your firm's letter requesting information that might influence your firm’s decision as
to whether to accept the engagement. In addition, the previous auditor stated that the audit
fees due for the year ended 30 June 2010 remain unpaid.
Identify and explain the ethical issues arising from the above and identify any actions your firm
should take in respect of this matter before deciding whether it should accept the appointment
as external auditor. (03)
(Institute of Chartered Accountants in England and Wales, Professional Level - March 2011)
9 Mr. Dudley is the audit partner of a renowned audit firm of chartered certified accountants,
Prudent Accountants. The following matters have arisen in relation to accepting professional
appointments:
(a) The firm has been approached by a new client, Thompson Electronics Ltd, for the current
year’s audit. The client is a newly established company and has been referred by one of Dudley's
close friends, whose son works at Thompson. At a business meet, Mr. Dudley talks to a business
associate who knows one of the four directors of Thompson Electronics, Mr. Lordwick. The
business associate tells Mr.Dudley that Mr Lordwick was an accountant 1n an electronics
company ten years ago and that he was found guilty of misappropriation of the company’s
assets.
(b) The firm is considering accepting the audit of Trinity Beverages Co. In response to the
company’s professional enquiry letter, the former auditor of Trinity replied, ‘We were in
disagreement with the management over the provision of a contingent liability. The company
owes us an outstanding balance payment of audit fees amounting to $12,500.’
(c) One of the existing clients of Prudent, Master Records Pic, is planning to establish a new
business unit. This would be a film archive for outsourcing all kinds of entertainment all over the
world. The company would be implementing high-end technology and computer systems to
maintain the inventory of films. The management of Master Records wants Mr. Dudley, who Is
the audit partner for the company, to conduct the audit for the new business unit from the
current year onwards. Although Mr. Dudley Is excited about this new project, he has doubts over
the firm’s competence for conducting such an audit.
Required:
in each of the situations outlined above, discuss the issues that need to be considered by
Prudent Accountants while deciding whether or not to accept the audit assignment.
10 Your firm has been invited by Tony Divot, the managing director and majority shareholder of
Wedge Ltd (Wedge), to accept appointment as external auditor Your firm's client acceptance
procedures have identified a recent newspaper article which reported details of court
proceedings relating to a fraud committed by Tony Divot.
Explain why this matter should be considered when deciding whether or not to accept the
appointment as external auditor of Wedge. (04)
(Institute of Chartered Accountants in England and Wales, Professional Level June 2012)
1 1. Arrangement concerning Involvement of predecessor auditor (because this is the first year of
audit).
2. Arrangement concerning involvement of expert (because client has revalued property, which
may involve use of expert).
3. Reference to the expected form and content of any report to be issued by auditor (because
change in accounting policy from cost to revaluation model may require Key audit matter in
report).
4. Expected date of completion of audit (to ensure appropriate deadline is agreed between
parties).
5. Arrangement regarding the planning and performance of the audit (regarding conduct of
interim audit to meet deadline).
6. Applicable Financial Reporting Framework (to evaluate appropriateness of change in
accounting policy)
2 Whenever auditor is asked by client to revise terms of engagement during audit, auditor shall
consider whether there is a reasonable justification for the change.
As we are unable to obtain audit evidence, it seems that this change in engagement is requested
to avoid qualified opinion by changing terms of engagement. Hence, there is no reasonable
justification to the change. So, we will not agree to change the terms of engagement.
In this situation, we should continue to perform the audit engagement as per original terms of
engagement. If management not permit auditor to perform original engagement, it will be
similar to scope limitation and we shall:
 Withdraw from engagement if possible and practicable.
 Express disclaimer of opinion if withdrawal is not possible and practicable.
3 Yes, such a statement is appropriate. This statement will reduce expectation gap and
misunderstanding by client that auditor provides absolute assurance.
4 A fresh engagement letter should be sent to ZFL this year because:
1. Size of business has grown (now goods are also exported to Asia) which will bring new
accounting and audit implications to engagement.
2. There has been a significant change in senior management (president and controller have
retired).
3. New management has some misunderstanding about objective and scope of audit (as it is
expecting auditor to reduce fee and work less).
4. There has been major changes in requirements of Applicable Financial reporting framework.
5 a)
i) Auditor shall evaluate:
(a) Whether engagement team {s competent to perform the audit engagement and has the
necessary Capabilities Including time, resources and specialized knowledge
(b) Whether the firm and the engagement team can comply with relevant ethical requirements.
(c) Significant matters which arose during previous audits, and other non-assurance
engagements (if any).
(d) Auditor shall also perform following client screening procedures (ie procedures to evaluate
integrity or management)
a. Hold discussion with directors (regarding reason of change of auditor, permission to
communicate with predecessor auditor).
b. Communicate with predecessor auditor through “Professtonal Clearance/Etiquette
Letter”,
c. Obtain references from third parties (e.g. from professional advisors, Credit rating
agencies)
d. Undertake client identification procedures
e. Inspect financial statements and auditor's report of prior periods.
f. Undertake search of relevant database (e.g, internet, press releases, business journals
and other, relevant data bases)
(ii)
1. Auditor shall determine whether financial reporting framework adopted by management in
preparation of financial statements is acceptable (considering, nature of financial statements,
purpose of financial statements, nature of entity, legal requirements).
2. Auditor shall obtain agreement from management (via engagement letter) that it understands
and acknowledges its responsibilities:
a) for preparation and presentation of financial statements in accordance with AFRF.
b) for such internal control which management and TCWG determine necessary for
reparation of financial statements that are free from material misstatement (whether
due to error or fraud); and
c) to provide the auditor all relevant information (i.e. relevant to the preparation of the
financial statements); additional information (I.e. requested by auditor for the purpose
of audit); and unrestricted access to personnel (i.e. to obtain audit evidence).
(b)
a) The objective and scope of the audit;
b) Identification of the AFRF;
c) The responsibilities of the auditor;
d) The responsibilities of management;
(c)
Ethical Risk Steps to reduce the risk
Short time to complete the audit may create Advertisement should not contain reference
Intimidation. to time limitation.
Providing book keeping and accounting Non-assurance services should not be
services to assurance client creates Self- performed by assurance team.
Review Threat.
Not sending engagement letter may create Engagement letter shall be sent to existing
expectation gap and confusion among clients. client whenever it is appropriate.
Cost reduction is not an acceptable reason to
omit engagement letter.
Contingent fee creates self-interest threat A professional should not charge contingent
fee on assurance and non-assurance services
Not having appropriate resources to complete Engagement should not be accepted.
the engagement affects capability of the firm.
Quality of the audit will be reduced.
Not communicating with predecessor auditor Predecessor auditor should be communicated
is a violation of Code of Ethics by successor auditor in all cases.
6 It is a precondition of audit that Applicable Financial Reporting Framework is acceptable. Auditor
should not accept the Al engagement unless management adopts an AFRF to prepare financial
statements, and which is acceptable for auditor.
7 (a) (i) Responsibility of ABC and Company
It is the responsibility of proposed auditor (ABC) to obtain permission from client (SL) and send
professional clearance letter to outgoing auditor (XYZ).
Steps that firm (ABC and Company) needs to take before acceptance
1. Evaluate integrity of client by obtaining references of the proposed audit client and its
directors, if auditor is not already familiar.
2. Ensure that engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources.
3. Ensure that engagement team can comply with relevant ethical requirements, particularly
relating to independence. If there is any threat to safeguard, appropriate safeguards should be
established.
4. Consider significant matters that have arisen during previous engagements, and their
implications for continuing the relationship.
(ii) Retiring auditor's responsibilities (XYZ and Company)
1. Obtain written permission from client (SL) to reply to incoming auditor (ABC) (due to
confidentiality principle).
2. If permission is not given, inform proposed auditor (ABC) about non-permission.
3. If permission is given, write as quickly as possible to proposed auditor (ABC) honestly stating
relevant facts.
Responsibility of ABC and Company if retiring auditor (XYZ and Company) does not fulfill its
responsibility.
If response is not received from retiring auditor (XYZ), ABC and Company should try to obtain
relevant information from other sources (e.g. inquiries from third parties or background
investigation of senior management and TCWG).
(b) Matters to consider
There are two matters to consider in this situation:
 Whether XYZ & Company is able to obtain evidence regarding opening balances.
 Previous year’s financial statements have been audited by another auditor.
Impact on Audit Report
 If ABC and Company is able to obtain evidence on opening balances too, it shall express
unmodified opinion. But, if it is unable to obtain evidence on opening balances, it shall
express Qualified Opinion.
 ABC and Company shall include “Other Matter Paragraph” in its report to communicate
that prior year’s financial statements have been audited by another auditor (XYZ and
Company) who expressed qualified opinion.
8
Ethical Issue Explanation Actions To be Taken
Disagreement of This indicates “opinion shopping”  Review the audit report
management with by management and also indicates to ascertain basis for
predecessor auditor on doubts over management’s qualification.
accounting policy integrity.  Discuss with
management whether
they intend to change the
accounting policy (for
which opinion was
qualified).
 Communicate possible
modification in auditor’s
report at any time of

accepting engagement.
Predecessor auditor’s Incoming auditor cannot accept  Inquire management the
fee is outstanding appointment if retiring auditor’s reason for overdue fee.
fee is outstanding.  Do not accept
engagement unless fee of
predecessor auditor is
paid.
9
Proposed Client Issues to Consider while accepting the audit
a) Thompson Electronics Ltd Client is a newly established company:
Firm should ensure whether it has competence and
resources enough to obtain sufficient understanding of
business and evidence on timely basis.
Close friend's son is an employee in client
This will create familiarity threat for which firm may have
to apply appropriate safeguards.
Director of the client has been guilt of misappropriate in
past:
This raises question on integrity of management, leading
to higher risk of material misstatement at financial
statement level.
b) Trauma Beverages Ltd Disagreement of predecessor auditor with management:
This indicates Intimidation threat as some disagreement
may also arise with current auditor. Firm should first
discuss correct accounting treatment (based on its own
professional judgment) of said disagreement with
management and should obtain their consent.
Pending fee of predecessor auditor:
Firm shall not accept the proposed audit unless fee of
predecessor auditor is paid.
c) New Business unit of Master Use of high-end technology and computer system:
Records Firm should consider whether it has sufficient resources,
time and competent staff to obtain sufficient appropriate
audit evidence, especially if it has not performed similar
audit before.
Use of expert
Further, firm should also consider use of Expert on this
audit as there may be specialized areas where firm may not
have sufficient knowledge and experience to obtain
evidence.
10  This matter indicates lack of integrity of managing director.
 It increases risk of fraud in financial statements.
 Lack of integrity in managing director also creates doubt on reliability of representation by
management
 Auditor will have to consider overall approach in this audit e.g. engaging more experienced
staff, increase professional skepticism etc.
Chapter 3 | PLANNING AND RISK ASSESMENT
1 Your firm is the statutory auditor of Teak Pakistan Limited (TPL) for the year ended 30 June 2020.
During the final review of audit work, your audit team informed you that TPL uses a third party
software for its payroll. While checking the tax calculation, they identified an error in the
calculation of monthly tax deduction from salary. The audit junior who performed the test,
extrapolated the error over the entire population. This resulted m an overall short deduction of
Rs. 920,985S. She concluded that the error was not material because this amount was less than
the audit materiality set at the financial statement level i.e. Rs. 1,000,000.
Further, she discussed this matter with the TPL’s management who has agreed to deduct the
differential amount from the salary of the next month and will deposit it into government
exchequer. Therefore, she concluded that no accounting adjustment is required for the year
ended 30 June 2020.
Required:
(i) Briefly discuss the conclusion made by the audit junior regarding materiality of the transaction
and recording of the error.
(ii) State the additional steps that you would suggest to your audit team. (Implications on audit
report are not required) (07)
2 You are the manager responsible for the audit of a newly incorporated company, Trojan Limited
(TL). Following are the extracts from the first draft financial statements of TL for the year ended
31 December 2019:
Rs. in million
Revenue 12,000
Profit Before Tax 72
Total assets 13,000
Total liabilities 7,000
Since this is the first year of operation, the profit before tax was quite low. However, as per the
management's projection, the profit before tax would grow exponentially over the next three
years.
Your audit team has determined the materiality on the basis of profit before tax for the year
ended 31 December 2019. In view of the audit team profit before tax is the main performance
indicator for TL's board of directors.
Required: Discuss the appropriateness of the benchmark used by your team in determining the
materiality and suggest the alternative(s) available to your team. (06)
3 ABC Steel Limited is a profit-oriented company and have a history of profitable operations and Its
profit is stable year over year. Based on discussion with management and on review of nine
months financial statements It is expected that ABC Steel Limited will have consistent profit as
per historical trend.
Required:
(a) In the above circumstances what is appropriate benchmark(s) to calculate the materiality?
(01)
(b) Alternatively, assume that ABC Steel Limited has loss during the year. In this circumstance
what is appropriate benchmark(s) to calculate the materiality? (01)
(ICMA Pakistan - Summer 2018)
4 For each of the following scenarios determine: a) Planning materiality, b) Performance

materiality and c) Evaluate audit findings.
Scenario 1: HMK & Co. is a retail business. The components of its financial statements are:
1. Net Profit 3,200,000
2. Total Revenue 350,000,000
3. Total Assets 240,000,000
Auditor of HMK & Co. allocates 40% of financial statement materiality to inventories.
During the audit of inventories, HMK & Co.'s audit firm detected two misstatements that
aggregated to Rs. 110,000.
Scenario 2: Delta Investments Bank provides mutual funds services to investors. The components
of its financial statements are:
1. Net Profit 2,200,000
Delta's auditor uses 20% of financial statements materiality as performance materiality of any of
account balance or classes of transactions.
During the course of the audit, Delta's audit firm detected a misstatement that resulted in
overstatement of assets and revenue by Rs, 120,000.
Scenario 3: Welfare Hospital treats poor patients and runs on donations received from general
public. The components of its financial statements are:
1. Net Profit 15,000
Welfare Hospital's auditor uses 50% of financial statements materiality as performance
materiality.
During the course of the audit, audit firm detected one misstatement that resulted in an
overstatement of net profit by RS 20,000.
5 If after planning for specific audit procedures, the auditor determines that the acceptable
Materiality level is lower, Audit Risk is increased. How does the auditor compensate for this? (02)
6 You are the audit manager in charge of the audit of Tempest, a limited liability company. The
company’s year end is 31 December, and Tempest has been a client for seven years. The
company purchases and resells fittings for ships including anchors, compasses, rudders, Sails etc.
Clients vary in size from small businesses making yachts to large companies maintaining large
luxury cruise ships. No manufacturing takes place in Tempest.
Information on the company’s financial performance is available as follows:
2005 Forecast 2004 Actual

$000 $000
Revenue 45,928 10,825
Cost of Sales (37,998) (31,874)
Gross Profit 7,930 8,951
Administration costs (4,994) (4,758)
Distribution Cost (2,500) (2,500)
Net Profit 436 1,693
Non-current Assets(NBV) 3,600 4,500
Current Assets
Inventory 200 1,278

Receivables 6,000 4,052
Cash And Bank 500 1,590
Total Assets 10,300 11,420
Share Capital 1,000 1,000

Accumulated Profits 5,300 5,764
Total Shareholder’ Fund 6,300 6,674
Non-current Liabilities 1,000 2,058

Current liabilities 3,000 2,958
Total Liabilities 10,300 11,420
Other information
 The industry that Tempest trades in has seen moderate growth of 7% over the last year.
 Non-current assets mainly relate to company premises for storing inventory. Ten delivery
vehicles are owned with a net book value of $300,000.
 One of directors purchased a yacht during the year.
 Inventory is stored in ten different locations across the country, with your firm again
having offices close to seven of those locations.
 A computerised Inventory control system was introduced in August 2005. Inventory
balances are obtainable directly from the computer system. The client does not intend to
count inventory at the year end by rely instead on the computerised inventory control
system.
Required
Using the information provided above, prepare the audit strategy for Tempest for the year
ending 31 December 2005. (15)
(ACCA, Fundamentals Level F8- December 2008)(ICAP’s Official Question Bank for CAF 09-Q. #
474)
7 State the following are true or false.
(i) Audit plan is prepared in each year.
(ii) Audit planning helps the auditors in conducting the audit efficiently.
(iii) Audit plan helps the management to identify the important audit areas.
(iv) Audit plan is prepared during the conduct of audit.
(v) Audit plan can be revised at any time.
(vi) Audit Planning is not applicable on recurring audit client.
(ICAP, CAF 09 Level - Adapted)
8 Hi-tech Computers (Hi-tech) is a profit-oriented company and sells computers to stores. You are
the manager of audit engagement team at Hi-tech, and are in the process of determining an
appropriate materiality level for this audit client. One of your team members is of the view that
profit before tax should not be used as a base for determining materiality for Hi-tech.
Required:
(i) Can a base other than profit be used to determine materiality for profit oriented entities? If
so, under what conditions?
(ii) State 3 examples of bases, other than profit, that the auditor could use in determining
materiality in this case.
(iii) If draft financial statements for the year under audit have not been prepared yet, how can
auditor calculate materiality level?
9 “An audit program is desirable when new staff members are assigned to an engagement, but an
experienced auditor should be able to conduct an audit without reference to an audit program.”
Do you agree? Discuss.
10 Five Stars Foods International Limited {s a producer/manufacturer of wide range of food
products Including daily use items such as jams, marmalades, jellies, cereals and few specialized
food products for diabetic and heart patients. The company has set up two manufacturing
facilities, one in Karachi and the other in Lahore. Mostly, items are sold locally, however, the
company also exports few high quality products mainly to Middle East and Afghanistan. Major
raw material items are procured from local markets, however, few specialized items are
imported directly by the company. The company’s sales for the year ended June 30, 2009
amounted to Rs.500 million while the expected turnover for the year ending June 30, 2010 is
Rs.750 million. The company is maintaining a Steady profit margin at 10% which is expected to
continue during the current year. The company’s major financing has been made through equity
and very small debt financing is arranged mainly for meeting working Capital requirements.
During the year the company has launched a new low calories products range “Eat Light” in
collaboration with a US based company. An aggressive advertisement and publicity campaign
was undertaken for launching this new product range on which an amount of approximately
Rs.10 million was incurred.
Your firm has been the auditor of Five Stars Foods International Limited for the last couple of
years and you have gathered above information in the process of planning for the year ending
June 30, 2010. During the year the Chief Executive Officer of the company was also changed and
also there has been a major change in the Board of Directors. The new management has
requested you to brief them on some key aspects of the audit.
Required:
In view of these developments you have to prepare a brief report for the management which
should include the following:
(a) What is materiality? Why is it important for an audit under International Standards on
Auditing? (05)
(b) What is the relationship between materiality and audit risk and how does it impact on an
audit? (05)
(c) Do you consider the advertisement and publicity expense incurred on launching the new
product range as material? Explain with reasons. (05)
(d) The key audit risk areas for the year ending June 30, 2010 with brief reasons. (05)
(ICMA Pakistan, Professional Level P2 - Summer 2010)
11 This question consists of a number of items pertaining to an auditor’s risk analysis for a company.
Indicate whether each of following factors are likely to increase or decrease risk of material
misstatement. Explain your decision
(1) During current year, Adam Sugar Mills Limited (ASML) became profitable first time since last 4
years
(2) ASML's board of directors is controlled by Adam. the majority shareholder, who also acts as
the chief executive officer
(3) The internal auditor reports to the CFO, and the CFO reports to Adam
(4) The accounting department has experienced a high rate of turnover of key personnel
(5) Daring 2012. ASML changed the method preparing its financial statements from the cash
basis to the accrual basis under generally accepted accounting principles
(6) Daring the year, litigation filed against ASML in 2010 was withdrawn. It was alleged that the
company discharged pollution into locality. Disclosures made in previous financial statements
have been removed from current year’s financial statements.
(7) During December 2012, ASML signed a contract to lease equipment from an entity owned by
ASML's part
(8) A public offering of ASML’s share is planned for late 2013.
12 You and a colleague are carrying on a heated discussion. The colleague makes a number of
statements about the auditing profession that you believe are wrong. Explain why each of the
statement is wrong.
(i) "Auditing neither creates goods nor adds utility to existing goods and therefore does not add
value to business. Auditing exists only because it has been legally mandated."
(ii) "The only reason I would hire an auditor is with the expectation that the auditor search for
fraud that might exist within my company. Searching for fraud should be the primary focus of an
audit."
(iii) "Auditing is narrow-just to find mistakes. I would rather pursue a career where I really
understand a company's business and would be in a position to make recommendations that
would improve it."
(iv) "If auditors make recommendations to clients based on weaknesses in the company
operations, the auditors ought to make those recommendations public. This would help increase
the public trust." (08)
13 Salman is a new employee in the financial reporting department of Eagle Company, a midsize
publicly-held company with annual profit of Rs 75 million.
As Eagle Company prepared for its annual audit, his manager came to him to complain about the
auditors. Their audit fees was so high, yet every yearthey never found all of the mistakes made
by the staff in Eagle company. One year, he explained, they can missed a Rs. 5,000 fraud.
Required:
a) How can Salman convince his manager about value that the company receives from an
audit?
b) How can Salman explain that missing a Rs 5,000 fraud does not indicate that the auditors
performed an ineffective audit?
c) How can Salman explain that missing a Rs. 500,000 fraud does not indicate that the
auditors performed an ineffective audit?
The managing director of Bridle Ltd, an external audit client of your firm, has discovered that an
employee has diverted £30,000 of company funds into his own bank account by creating and
paying purchase invoices on fictitious supplier accounts over the last twelve months. The
managing director has contacted your firm to express his concern that the audit team did not
discover this fraud during the external audit and has requested a meeting with the engagement
partner to discuss the issue. The financial statements for the current year show revenue of £25
million and profit before tax of £1.5 million.
Explain why the managing director’s expectation that the audit team should have discovered the
fraud is unrealistic. (04)
14 You are the audit manager responsible for the audit of Beachwood Textile Limited (BTL). At the
planning stage, your audit team has assessed that there is no significant risk of material
misstatement due to fraud and management override of control. The audit team's assessment is
based on the fact that BTL has been an audit client of the firm for the last 10 years and no
material misstatement had been reported in the previous years.
Required:
Guide your audit team with regard to their assessment of risk. (08)
15 Your firm is the external auditor of Avian Limited (AL), a listed company, for the year ending 31
March 2020. AL is engaged in the business of construction and selling of construction material.
During the planning stage, the audit team has noted the following points for your consideration:
(i) AL's CEO aggressively follows up with the departmental heads for meeting the financial targets
established by the directors. Performance of senior management at AL is measured in terms of
year-on-year profit growth. There is an internal audit division of AL and it reports directly to the
CEO.
(ii) AL is facing difficulties in fulfilling its contracts for supply of building blocks due to a sudden
rise in the cost of raw material, however no provision has been made in the financial statements.
AL's CFO explained that provision has not been made as amount cannot be determined with
certainty now and therefore provision will be made next year, if required. Audit team was of the
view that the provision has not been made because it would significantly affect the profitability
of the company.
Required: Briefly discuss the possible ‘fraud risk factors’ from the above scenario. (09)
16 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)
17 While reviewing the audit flies of four different clients you confronted the following situations:
(i) Due to tough competition in the market, the company has been unable to increase he prices
of its products since last 5 years.
(ii) Addition to intangible assets, amounting to Rs 500m include research cost of Rs. 10 m which
is duly based on the profitability of the computer.
(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 dispatched amounting
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:
In each of the above situations, identify with justification whether it represents a risk of fraud.
(06)
(ICAP CAF-9 Level - Sprig 2015) (ICAP’s Official Question Bank for CAF-9 - Q. 8 78)
18 You are the Audit Manager on the audit of Al-Salam Pakistan Limited (ASPL) for the year ended
June 30 2010 ASPL is engaged in the manufacture of a wide range of plastic products. While
reviewing the initial work performed by the audit team, the following matters have come to your
notice:
(i) The quantity of material scrapped during the year is materially different from the quantity of
scrap sold. The company’s records show nil balance both at the beginning and at the close of the
year. No reconciliation for the difference has been provided by the company.
(ii) Sales for the year have increased by 7% over the previous year However, it has been noted
that sales in the last two weeks of June 2010 have been exceptionally high and represent 15% of
the annual sales The avert working Papers carry the following observations in respect of the
above:
 70% of the sales in the last two weeks of June were made to two new customers whose
crecit assessment has not been formally documented;
 a significant portion of the goods sold to the above referred customers were returned in
the first week of July 2010, and
 management bonuses are linked to the operating performance of the company
During the year, ASPL purchased a machine for Rs 25 million. The payment voucher is duly
supported by the invoice from the supplier However, the fixed assets schedule provided by the
client shows the amount capitalized as Rs 25 million Depreciation has been charged on this
amount The difference of Rs 22.5 m is appearing in the Bank Reconciliation Statement.
Required: Analyze each of the above situations and assess whether it represents a fraud or an
error. (06)
(ICAP, CAF 09 Level - Autumn 2010)(ICAP’s Official Question Bank for CAF 09 - Q. # 26)
19 At the planning phase of the audit of Prudent Limited, a listed company senior auditor of your
team submitted the following information:
 The Board of Directors of the company has recently appointed Mr Smart as new chief
executive whose remuneration is mostly based on earnings.
 Mr Smart is reputed as a seasoned business executive and has been a very good frend of
the Chairman of the audit committee
 Since his joining he has proved to be the main decision maker and the Board appears to
be relying considerably on Mr Smart and less interested in day to day operations of the
company.
 Board s main concern is now the growth in net earnings estimated for the next year
which Mr Smart strongly believes, will be 30% at the minimum.
 There are a number of instances of lack of segregation of duties and Mr Smart being cost
conscious, has allowed the Situation to continue.
 There is a big lay off plan in place and employees are expecting such plan although it has
been kept as top secret. This lay off will help the company to achieve higher growth in
earnings.
Required: Describe the fraud risk factors, if any, that are indicated in the above information. (06)
(ICAP CFAP 06 Level - Winter 2000)
20 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 in 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:
identify fraud risk factors in the above scenario. (04)
(ICAP, CAF 09 Level - Spring 2018) (ICAP’s Official Question Bank for CAF 09 - Q. # 57a)
21 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)
22 One of your audit clients is Tye Co a company providing petrol, aviation fuel and similar oil based
products to the government of the country it is based in. Although the company is not listed on
any stock exchange, it does follow best practice regarding corporate governance regulations. The
audit work for this year is complete, apart from the matter referred to below.
As part of Tye Co's service contract with the government, it is required to hold an emergency
inventory reserve of 6,000 barrels of aviation fuel The inventory is to be used if the supply of
aviation fuel is interrupted due to unforeseen event$ such as natural disaster or terrorist activity.
This fuel has in the past been valued at its cost price of $15 a barrel. The current value of aviation
fuel is $120 a barrel Although the audit work is complete, as noted above, the directors of Tye Co
have now decided to show the ‘real’ value this closing inventory in the financial statements by
valuing closing inventory of fuel at market value, which does not comply with relevant
accounting standards. The draft financial statements of Tye Co currently show a profit of
approximately $500,000 with net assets of $170 million.
Required:
(a) List the audit procedures and actions that you should now take in respect of the above
matter. (06)
(b) For the purposes of this section assume from part (a) that the directors have agreed to value
Inventory at $15/barrel. Having investigated the matter in part (a) above, the directors present
you with an amended set of financial statements showing the emergency reserve stated not at
6,000 barrels, but reported as 60,000 barrels. The final financial statements now show a profit
following the inclusion of another 54,000 barrels of oil in inventory. When queried about the
change from 6,000 to 60,000 barrels of inventory, the finance director stated that this change
was made to meet expected amendments to emergency reserve requirements to be published in
about six months’ time. The inventory will be purchased this year, and no liability will be shown
in the financial statements for this future purchase. The finance director also pointed out that
part of Tye Co's contract with the government requires Tye Co to disclose an annual profit and
that a review of bank loans is due in three months. Finally, the finance director stated that if your
audit firm qualifies the financial statements in respect of the increase in inventory, they will not
be recommended for re-appointment at the annual general meeting. The finance director
refuses to amend the financial statements to remove this ‘fictitious’ inventory.
Required:
(i) State the external auditor's responsibilities regarding the detection of fraud; (03)
(ii) Discuss to which groups the auditors of Tye Co could report the ‘fictitious’ aviation fuel
inventory; (04)
(iii) Discuss the safeguards that the auditors of Tye Co can use in an attempt to overcome the
intimidation threat from the directors of Tye Co. (03)
(ACCA, Fundamentals Level F8 - June 2009) (ICAP’s Official Question Bank for CAF 09 - Q. # 51)
23 You are part of the Hashim & Co. audit team working on the audit for Sparkle Ltd (Sparkle) for
the year ending 30 June 2015. Sparkle is a national fashion footwear retail chain with stores
located throughout Pakistan. On 1 August 2011, Sparkle obtained additional financing from Big
Bank (BB). This financing was subject to strict loan covenants. During the 2015 audit, Sparkle’
chief financial officer (CFO) confided that he suspected Sparkle was in breach of its loan
covenants during the course of the 2015 financial year. This would put his bonus in jeopardy, as
maintaining loan covenants is one of his KPIs.
Since Hashim & Co started auditing Sparkle five years ago, Sparkle has been plagued by poor
internal controls over accounts payable operations. In past audits, Hashim & Co has brought the
poor internal controls to management's attention. One example of Sparkle’ poor internal control
is that Farhan, one of the accounts payable clerks, is able to approve and pay transactions of up
to Rs. 30,000 per transaction. You have learned that Farhan is currently having trouble paying his
mortgage. Despite Hashim & Co bringing these weaknesses to management's attention,
processes at Sparkle remained unchanged.
Kamran was in charge of purchases during 2015 and renegotiated Sparkle’ contract with Luxury
so that Sparkle pays cash on delivery for all Luxury materials, instead of the industry standard 30
days. No one outside of the purchasing department is aware of the renegotiation.
Required:
State three potential fraud risk factors that indicate fraud could be an issue at Sparkle and
provide explanations for your answer.
24 You are the audit senior at Prime chartered accountants working on the audit of Crescent
Standard Limited (CSL) for the year ended 30 June 2015. CSL has 10 maintenance workshops,
with its head office based in Karachi. Parts for maintenance of ships are often expensive.
CSL holds a stock of standard parts that are most frequently required for repairs. Specialist parts
are ordered from Overseas as and when required. No formal inventory record of parts is
maintained at the CSL workshops. When parts arrive, they are simply stored in the workshop
without any reconciliation back to the packing slip or the invoice. The Parts are charged to clients
as disbursements when invoicing for the finished job.
Stock take is not conducted at year end. Instead, the balance carries forward from one year to
the next, because It is not Expected to change much.
CSL’s accounts receivable function is managed by an employee who prepares invoices and credit
notes, and receipts and bank payments. He also has signing authority on the bank account and
perform bank reconciliations.
CSL’s division managers receive a bonus of 15 per cent of their salary if profit targets are
reached. These profit targets are set by head office based on aggressive growth assumptions.
Required: List three fraud risk factors indicated by the information above and explain why they
are a fraud risk.
25 You are the audit senior in a firm of chartered accountant, and are in the process of planning the
30 June 2020 audit of Morning Limited. Morning Limited is about to acquire 100% shares of
Sehar limited during the year. Following is the information regarding acquisition.
 Sehar Limited operates a small juice-based operation in Karachi.
 Sehar Limited was owned by Salman (CEO) and Jamshed (CFO). Salman and Jamshed
were motivated to sell the business because they did not have enough cash to start new
projects to grow business.
 Salman and Jamshed have similar philosophies and together they have kept close control
of the operations of Sehar Limited, being involved in all day-to-day aspects of the entity's
operations. As Sehar Limited is a small company, there is no separate audit committee or
internal audit function.
 Sehar Limited's sales staff are paid a relatively low salary, with generous bonuses if sales
targets are met.
 Sehar Limited’s external borrowings contained net asset and interest coverage loan
covenants. In order to obtain the funding, the lender required that Salman provide a
personal guarantee that the loan would be repaid, the management accounts for Sehar
Limited showed that actual revenue was consistently in excess of budget by 5 to 10 per
cent. This is a very good result given current tough conditions in the industry.
 About 25% of company’s sales are cash based.
Required: Based on the information provided above, identify five fraud risk factors in relation to
acquisition of Sehar Limited.
26 The audit report on the financial statements of Spaniel Co, a long-standing audit client, for the
year ended 31 December 2012 was issued in April 2013, and was unmodified. In May 2013,
Spaniel Co’s audit committee contacted the audit engagement partner to discuss a fraud that
had been discovered. The company’s internal auditors estimate that $4-5 million has been stolen
in a payroll fraud, which has been operating since May 2012. The audit engagement partner
commented that neither tests of controls nor substantive audit procedures were conducted on
payroll in the audit of the latest financial statements as in previous years’ audits there were no
deficiencies found in controls over payroll. The total assets recognized in Spaniel Co's financial
statements at 31 December 2012 were $80 million. Spaniel Co is considering suing Groom & Co
for the total amount of cash stolen from the company, claiming that the audit firm was negligent
in conducting the audit.
Required:
Explain the matters that should be considered in determining whether Groom & Co is liable to
Spaniel Co in respect of the fraud. (06)
(ACCA, Professional Level P7 - June 2013)
27 Sukoon Limited is engaged in manufacturing and sale of office equipment. It has appointed you
in place of XYZ & Company for the audit of financial statements for the year ended June 30,
2007. During the audit you noted the following: An employee of the company, responsible for
after-sales-services, misappropriated cash which he recovered from the customers without
raising proper invoices. The amounts were small and much below the materiality level.
During the last year (ended on June 30, 2006), the middle management in connivance with
lower staff booked a sale of material amount which actually pertained to the current year. The
higher management has issued warning letters to the concerned employees but is reluctant to
take any further action as the company has not suffered any losses. XYZ & Company has given an
unmodified report on the previous year’s financial statements.
Required:
Describe how each of the above situations will impact the following:
(i) Assessment of risk and audit procedures; (03)
(ii) Communication with management and with those charged with governance. (04)
1 i)
Conclusion made by audit junior is wrong because:
 While performing procedures at a particular class of transaction, misstatements should
be compared with performance materiality, and not with overall materiality.
 Even if a misstatement is lower than materiality level, it may require adjustment if it
becomes material on aggregate basis or on qualitative basis. As incorrect calculation of
tax is a non-compliance with laws and regulations, it is likely to be material on qualitative
basis.
 While using sampling, extrapolation is used to project estimated misstatements. This
extrapolated amount cannot be recorded in accounts (as these do not represent actual
misstatements).
ii)
 There is a risk of incorrect processing of payroll system, and other related items may also
be misstated (e.g. payroll expense, net amount paid to employees).
 Audit team should perform tests of controls over payroll software to obtain evidence
about accuracy and completeness of transactions processed by payroll system.
 If further errors are identified, control risk should be set at high level in payroll system
and substantive testing should be increased.
2 Appropriateness of Benchmark:
Materiality is determined considering users (mainly shareholders), and not just directors.
Profit is not an appropriate benchmark in this case as this Is very low figure in current year. This
will result in a low materiality level, causing unusual increase in risks of material misstatement.
There will be over-auditing which will affect efficiency of the audit.
Suggestions:
Average of past years’ profit can also not be used as benchmark, as this is first year of operation.
Following alternative benchmarks can be used to calculate materiality:
 Revenue
 Total expenses
 Total Assets
 Equity
A suitable percentage could range from 0.5% to 1% on the basis of these benchmarks
3 a) As ABC Steel Limited is a profit-oriented company, profit before tax is the appropriate
benchmark to calculate materiality.
(b) Total Revenue, Total Assets, Total Expenses, Equity, Gross Profit may also be used as
alternate benchmark to calculate materiality.
4 Scenario 1:
(a)
HMK & Co. is a profit-oriented entity; hence, net profit would be the most appropriate
benchmark for determining materiality. Using rule of thumb, planning materiality would be “Net
Profit * 5%” i.e., 3,200,000 * 5% = Rs. 160,000.
(b)
Auditor of HMK & Co. allocates 40% of financial statement materiality to inventories, hence,
performance materiality for inventories would be “Financial Statements Materiality * 40%" = Rs.
64,000.
c)
Auditor has detected two misstatements that aggregated to Rs. 110,000. As identified
misstatements exceed performance materiality, auditor will have to propose adjustments for at
least Rs. 46,000 so that the remaining misstatement would be equal to or less than Rs 64000 If
management does not correct all misstatements and some misstatements remain, uncorrected
auditor shall apply qualitative criteria of materiality on those misstatements.
Scenario 2:
(a)
Delta is a profit-oriented company in the business of mutual fund/banking; hence, total assets
would be the m Appropriate benchmark for determining materiality. Using rule of thumb,
planning materiality would be Total Assets * 0.5% i.e., 170,000,000 * 0.5% = Rs. 850,000.
(c) The identified misstatement is less than performance materiality so no adjustment would be
required. However, auditor Shall also consider nature of misstatement to evaluate qualitative
criteria of materiality.
Scenario 3:
(a)
Welfare Hospital is a not-for-profit company with nominal amount of profit (close to break-
even); hence, total assets (or total revenue also) would be appropriate benchmark for
determining materiality. Using rule of thumb, planning materiality would be “Total Assets *
0.5%” i.e., 22,000,000 * 0.5% = Rs. 110,000.
Auditor uses 50% of financial statement materiality to determine performance materiality,
hence, performance materiality would be “Financial Statements Materiality * 50%" = Rs. 22,000.
(c) The detected misstatement Is less than performance materiality. However, in this case,
adjustment of Rs. 20,000 would turn the profit into loss. This nature of misstatement makes this
item material. So, an adjustment is required for this misstatement.
5 Auditor performs more audit procedures. He can increase tests of controls as well as substantive
procedures.
6 Characteristics of the Engagement
1. Financial reporting framework is the accounting and reporting standards as applicable in
Pakistan and the requirements of Companies Act, 2017.
2. There are no industry specific requirements.
3. Expected coverage of inventory count is 7 out of 10 warehouses (located near our
offices).
4. Company has introduced computerized inventory control system, so there may be need
of team members having sufficient IT skills.
Reporting objectives of the management:
Key dates for the audit engagement are:
a. Date of start of interim audit.
b. Meeting with audit committee.
c. Date of approval of F/S.
d. Date of audit report.
e. Date of management letter.
Factors that are significant in directing the engagement
Materiality Threshold:
 As net profit is volatile and revenue is more consistent, therefore we will select Revenue
as benchmark to calculate Materiality.
 Materiality will be calculated at 0.5% of Revenue.
Areas of high risk:
 Sales: Client has shown a growth of 12.5% as compared to industry growth of 7%. This
indicates that sales may be overstated.
 Inventory: Inventory turnover ratio has decreased from 14.4 days (1,278 / 31,874 * 360) to
1.9 days (200 /37,998 * 360). Inventory may not be completely recorded, or there may be
valuation errors.
 Debtors: Debtors’ turnover ratio has increased from 35.7 days (4,052 / 40,825 * 360) to 47.0
days (6,000 / 45,928 * 360). This indicates that company may have debt collection problems.
 Non-current assets have decreased significantly, however, no specific reason is provided by
client. This requires further investigation.
 Non-current liabilities have decreased significantly. Some liabilities may have been
unrecorded.
 There is a related party transaction. There may be some other unidentified related party
transactions, which may not be on arm’s length basis.
Audit approach to address risk:
1. Audit testing will focus on the use of compliance testing where possible.
2. For new computerized system:
 Initial installation, including transfer of balances, will be checked.
 Inventory count will be conducted at year end and compared with computerized
balance.
7 (i) True.
(ii) True.
(iii) False. It helps auditor, not management.
(iv) False. It is prepared at start of the audit.
(v) True.
(vi) False. Audit planning is applicable on initial as well as recurring audit clients.
8 1) Yes. For a profit-oriented entity, basis other than profit may also be used if there is no profit
during the year.
(ii)
1. Total Revenue
2. Total Expenses
3. Total Assets
(iii)
If financial statements are not prepared by client yet, auditor can calculate materiality level
from:
1. Interim Financial Statements (projected for whole year)
2. Budgeted financial statements
3. Financial Statements of prior periods
Such materiality may be subsequently revised at final audit stage.
9 I don't agree.
A written audit program is required for all audits.
The documentation of the audit plan {s a record of the planned nature, timing and extent of risk
assessment procedures and further audit procedures in response to the assessed risks. It also
serves as a record of the proper planning of the audit procedures.
10 (a)
Simple question requiring reproduction of concept.
(b)
There is an inverse relationship between materiality and the level of audit risk i.e. the higher the
materiality level, the lower the audit risk and vice versa. Auditor takes into account this relation
when determining nature, timing and extent of audit procedures.
For example, if materiality level is reduced, audit risk will be increased. Auditor shall compensate
it by modifying nature, timing and extent of audit procedures i.e. auditor shall:
1. Perform additional tests of controls (if necessary)
2. Increase extent of substantive procedures
(c)
Using rule of thumb, an appropriate level of materiality = Profit before tax * 5% i.e, (750 million*
10%) million.
As the amount involved in research and development Rs. 10 million is much higher than
materiality level, hence it is a material item.
(d)
Following are the key audit risk areas for the year ending June 30 2010:
Audit Risk Area Reason
Advertisement and  Material amount is involved in this transaction.
Publicity expense  This is a non-routine transaction and internal controls may not be
effective to deal with it.
 Management may intentionally try to capitalize it instead of
expensing it out
Valuation of new Cost and NRV of new product may not be calculated accurately.
product
Foreign Currency Foreign currency transactions may be complex and subject to regulatory
transactions requirements.
(import as well as Foreign currency transactions will have to be measured in local currency
export) which increases risk of material misstatement
New top-level New top-level management may not be aware of business. Hence, there
management Is greater risk of misstatement in this year because of inexperienced
management.
11 Decision Explanation
Risk will increase Unusual growth/ profitability indicates a risk of material misstatement.
Risk will increase Domination of management by a single person or small group without
compensating controls. That person may act in his own best Interest
and will have opportunity for financial statement fraud.
Risk will increase A deficiency in internal control increases risk of material misstatement.
Independence of internal auditor Is Impaired if he reports to
management (i.e. CFO) instead of TCWG (i.e. Board of Directors or
Audit Committee)
Risk will increase Turnover In key personnel increases risk of material misstatement
because Inexperienced and untrained staff may cause errors
Risk will increase Changes In accounting/regulatory requirements increase risk of
material misstatement because misstatements are likely to occur on
initial application.
Risk will increase Pending litigation and contingent liabilities cause risk of material
misstatement. They are withdrawn, so risk is reduced.
Risk will increase Complex Transactions and Significant related party transactions
Increase material misstatement
Risk will increase There is a risk of material misstatement in business segments likely to
be sold to show improved financial performance and financial position
to buyer to receive higher price.
12 (i) There are many advantages of conducting audit, even if it is not required by law. (state some
of advantages)
(ii) Primary focus of auditor is verification of financial statements. Searching of fraud is not his
responsibility. (however, if he identifies a fraud during audit, he communicates it to TCWG)
(iii) Scope of audit also includes obtaining understanding of entity and its internal control, and to
make recommendation if deficiency in internal control is identified.
(iv) Auditor should not disclose confidential information to any third party. Further, external
parties are usually interested financial statements, and not in internal control.
13 a) Any two points from advantages of audit
b) This misstatement is immaterial Materiality level is 3,750,000 (= 75,000,000*5%)
c) Although this misstatement is material but auditor provides Reasonable Assurance mark for
material misstatement due to inherent limitations of audit.
14 Comments on assessment by team:
This risk assessment by audit team is incorrect. Past integrity and honesty of management is not
a valid justification to set low or no risk of fraud or risk of management override of control.
ISAs state that:
 Auditor should plan and perform the engagement with professional skepticism that
there may exist circumstances that may indicate possibility of fraud.
 Risk of management override of controls may vary, however, it exists in all audit
engagements
Guidance:
1. Audit team should revise its assessment.
2. It should perform risk assessment procedures in current year specifically to identify risk of
fraud, and should also remain alert throughout the audit to identify circumstances indicating
fraud.
3. Irrespective of assessment of the risks of management override of controls, auditor shall
design and perform the audit procedures to address management override of controls.
15 i) Aggressive financial targets established by directors:
There will be pressure on departmental heads to achieve financial targets. They may engage in
fraudulent financial reporting.
Performance of senior management linked with profitability;
Managers may overstate profit to obtain performance bonus.
Internal audit function reporting to CEO:
Internal audit function is not independent of management. There will be ineffective oversight by
internal auditor on management.
(ii)
Disagreement with auditors:
CFO is unwilling to record provision in financial statement so that financial results are not
disturbed. This attitude towards adjustments proposed by auditors, is an indication of risk of
fraud.
16 Fraud Risk Factor: Unusually high growth rate
There is a pressure on management to achieve targeted growth rate. Further, growth rate during
the year has been unexpectedly and exceptionally high. Moreover, management is receiving
bonuses based on financial performance. These conditions indicate that management has
incentives and pressure to engage into fraudulent financial reporting.
Fraud Risk Factor: Expected sale of IL
As there is an indication that IL may be sold, there is incentive to present best view of the
financial performance and financial position of entity to get higher price of the business.
17 (i) This situation represents risk of fraud, because there is increased competition in the market
and company is unable to increases its price of product since last 5 years. Due to decreasing
profitability, company may face going concerns Problems and may attempt to hide it in financial
statements.
(ii) This appears to be an error as there is inherent risk in research and development costs for
misclassification. Further, supporting evidence is also available.
(iii) This represents risk of fraud, because chief executive and higher management may attempt
to overstate profits to earn high bonuses.
(iv) This appears to be a risk of fraud, because significant sales has been made on the last days of
the accounting year Which have not been dispatched within reasonable time.
18 (i) This situation represents risk of fraud relating to misappropriation of assets as scrap inventory
of company fs Mission and no reconciliation has been performed which shows deficiencies in
internal control over assets. &
(ii) This situation represents risk of fraud relating to fraudulent financial reporting on following
grounds:
 there have been unusually high sales in the last two weeks of the year.
 there have been week internal controls over financial reporting i.e. credit assessment is
not made for new, customers.
 Significant portion of sales has been returned soon after the year.
 Management may intentionally overstate profits to get its bonuses based on profits of
the company.
(iii) This appears to be an error of transposition as supporting documents are available (neither
missing nor altered), Although there is a difference in bank reconciliation but it has been duly
explained by management.
19 Fraud Risk Factors: Chief Executive’s remuneration linked with operating results
This may create Incentive for fraudulent financial reporting.
Fraud Risk Factors: Close relation of higher management with audit committee
Such a close relation impairs independence of audit committee and renders control environment
as weak. This provides opportunity of fraud.
Fraud Risk Factors: Undue reliance of board on management
Ineffective oversight of board on activities of management provides opportunity of fraud.
Fraud Risk Factors: Focus of board on growth
Excessive pressure on management to meet the requirements or expectations of board creates
pressure to commit fraud,
Fraud Risk Factors: Lack of segregation of duties
Ineffective monitoring of management over financial reporting process and internal control
creates opportunities for lower management to commit fraud.
Fraud Risk Factors: Layoff of employees
Adverse Relationships between entity and employee having access over assets provides
employees Incentive for fraud.
20 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.
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.
21 (a)
Fraud Risk Factor: Portable and precious inventory:
Mobiles can be easily misappropriated by dishonest employees or customers.
Fraud Risk Factor: Management is the majority shareholder:
They may ‘window dress’ financial statements to increase Personal wealth.
Fraud Risk Factor: Undue time pressure from management:
This makes auditors suspicious because, not given appropriate time to auditor may be attempt
file some misstatements
Fraud Risk Factor: Seeking long term finance on the basis of financial statements:
Management may manipulate the figures to show better financial performance and position to
the bank.
(b)
It is not advisable to use the work of internal audit for external audit purposes due to the
following reasons:
Conflicting responsibilities:
The internal audit staff’s responsibilities for preparing bank reconciliation statement is in conflict
with its responsibility as a member of the internal audit function.
Qualification of internal audit staff:
All the internal audit personnel are graduates and do not have required competence about
various aspects of the internal audit function.
Status of the internal audit function within the entity
It seems as if there is no audit committee and Anwar is giving directions to internal audit. Hence,
their independence is impaired.
22 a)
 IAS 2 requires to value inventory at lower of cost and NRV. If inventory is stated at
market value (which is above the cost), this will be a misstatement in financial
statements.
 Effect is material, as amount of misstatement $6,300,000 = (1,200 - 150) * 6,000 is
greater than materiality level $ 250,000 (=5,000,000 * 5%).
 Auditor should discuss the matter with TCWG and should explain them correct
accounting treatment and should request them to amend financial statements.
 If financial statements are amended, auditor shall express unmodified opinion on
financial statements.
 If financial statements are not amended, auditor shall express qualified opinion on
(b)
(i) Auditor’s primary responsibility is to express an opinion on financial statements (i.e. whether
financial statements are free from material misstatement).
Auditor is not primarily responsible to prevent or detect frauds, because fraud may involve
sophisticated techniques, and collusion.
Regarding fraud, auditor is responsible to:
 Perform procedures to identify risk of material misstatement due to fraud, and to
respond to risk of fraud.
 Maintain professional skepticism throughout the audit recognizing the possibility that a
misstatement due to fraud may exist.
(ii)
 Matter should be reported to TCWG.
 Due to confidentiality principle, auditor has no obligation to report fraud to outsiders
(e.g. government agencies). However, as an exception to confidentiality principle,
auditor shall report it to regulatory authorities if required by law. For this purpose,
auditor may obtain legal advice from lawyers and may read contract of government with
client to determine whether auditor has legal obligation to report.
(iii)
Finance director does not have authority to appoint or remove auditor.
Safeguards:
 Discuss the matter with TCWG.
 Discuss the matter with other partner at the firm to ensure that findings and actions of
engagement partner are valid.
 Resign from the engagement and communicate resignation to parties as required by law
(e.g. to shareholders or regulatory authorities), so that matter is placed in their hands.
23 Fraud Risk Factor: Sparkle deals in luxury shoes:
Nature of inventory is such that there is a risk of misappropriation of inventory i.e. small in size,
precious in value ownership is difficult to determine.
Fraud Risk Factor: CFO bonus linked to the achievement of KPIs, including the maintenance of
loan covenants:
Incentive to manipulate the accounts to ensure this occurs
Fraud Risk Factor: Farhan can approve and pay invoices of up to Rs. 30,000, and is under
personal financial obligation:
Farhan could misappropriate company funds e.g. by paying dummy invoices.
Fraud Risk Factor: Sparkle pays Luxury cash on delivery, contrary to normal terms.
There is a risk that the cash is misappropriated
24 Fraud Risk Factor: Inadequate record keeping over the spare parts and consumables asset.
Risk of misappropriation of the spare parts and consumables asset due to a lack of supervision
over assets at CSL’s many different locations.
Fraud Risk Factor: Inadequate segregation of duties between management of accounts
receivable and cash at bank.
The accounts receivable staff member has the opportunity to misappropriate assets e.g. by
crediting invoices and diverting cash to their own account.
Fraud Risk Factor: Management remuneration is contingent upon achieving aggressive forecasts.
Management may attempt to overstate profit by recording fictitious revenue or incorrectly
recording revenue in the current period. Similarly, expenses may be incorrectly recorded in a
subsequent period or expenditure may be incorrectly capitalized.
25 Following factors represent risk of fraud:
1. Management is the majority shareholders. They may ‘window-dress’ financial
statements to increase personal wealth.
2. Business is facing liquidity problems and shareholders are intending to sale the business.
3. There is domination of management by just 2 persons without audit committee or
internal audit function.
4. Bonuses of sales staff are based on sales target of the company. This gives them
incentive to inflate or falsify Sales.
5. There is pressure on management to meet debt-covenant requirements relating to net
assets and interest coverage.
6. Management has given personal guarantee of loans.
7. Financial results of the company are significantly different from industry.
8. There is excessive dealing in cash, which may be misappropriated by dishonest
employees.
26 The primary responsibility for the prevention and detection of fraud rests with both TCWG and
management.
An auditor is responsible for obtaining reasonable assurance that the financial statements are
free from material misstatement, whether due to fraud or error. Amount involved is material
even if divided over two periods i.e. $3 million (8/12 x 4.5 million) is greater materiality level
determined using rule of thumb 1% of total assets of company (i.e. 0.8 million = 80 million * 1%)
Although, auditor may not be able to detect a fraud for number of reasons, however, auditing
standards request that is responsibility of auditor to:
 Assess risk of material misstatement due to fraud.
 Maintain professional skepticism throughout the audit recognizing the possibility that a
material misstatement due to fraud may exist.
Auditor has not met his responsibility as:
1. He did not work with appropriate professional skepticism (perhaps because of long standing
client).
2. He did not perform tests of controls before placing reliance on them (previous years’ strong
controls are not a valid basis for reliance).
3. Substantive procedures on payroll have also not been performed.
These facts to a conclusion that Spaniel Co is likely to be able to successfully prove that the
audit firm has been negligent in the audit of payroll, and that Groom & Co is liable for some or all
of the financial loss suffered.
27
Situation i) Assessment of risk and audit ii) Communication with
procedures management and with TCWG
An employee This represents weakness in internal Auditor shall communicate this
of the control, as invoices are not raised for matter on a timely basis to the
company… cash received from customers. Auditor’s appropriate level of management.
risk of material misstatements, Ordinarily, the appropriate level of
including risk of fraud, will increase. management is at least one level
Auditor shall perform nature, timing above the persons who appear to
and extent of audit procedures be involved with the suspected
response to such higher risk of material fraud.
misstatement. No communication to TCWG is
required in this case, as amount is
neither significant nor involves
management.
During the This is a fraudulent financial reporting Auditor shall communicate this
last…. through management override of identified fraud to TCWG as it
controls. Auditor shall perform involves management, and is not

procedures specific to this area to appropriately addressed by higher
address this risk. Further, he will management.
address the risk at financial statements
level with appropriate “overall
response”.
Chapter 4 | Audit Evidence ISA 500

1 For each of the following indicate what assertion(s) is violated.
(a) A Goods Receipt Note (GRN) is prepared but not recorded until the company pays for the
goods.
(b) Certain repair costs that should be expensed are capitalized.
(c) No loss is recorded for a pending lawsuit against the client that is material, probable and can
be measured.
(d) Wages incurred for the month but not paid by month end, therefore not recorded until pald
(e) Goods sent to customers after the balance sheet date, are recorded as of the balance sheet
date.
(f) A capital lease is improperly accounted for as an operating lease.
(g) A 56,000 sale was recorded at 65,000.
and Balance sheet are correct
(h) The basis of inventory valuation is FIFO; however, it is disclosed in notes to the accounts as
AVCO Income Statements
(i) During the physical inventory count the client's employees mistakenly counted some items
twice.
(j) Some inventory items are out on consignment and were not counted during the physical
inventory
(k) Some inventory items are listed at cost, but net realizable value is lower.
(l) Included in the inventory counts are some items that are held on consignment.
2 There are seven types of audit procedures i.e. Inquiry, Observation, Inspection, External
Confirmation, reperformance, recalculation and Analytical Procedures. These procedures can be
used as risk assessment procedures, test of controls or substantive procedures.
For each audit procedure listed below, identify:
(a) Area of financial statements to which it relates.
(b) Assertion(s) addressed by the procedure.
Audit Procedures:
1 Perform test count of tangible assets at year end.
2. Develop expectation of salaries expense. Compare it with actual expense and investigate
unusual difference.
3. Selecting approved sales orders and examining their related GDN, sales invoices and posting in
Sales Journal.
4. Calculate depreciation charge for a sample of assets and agree to Fixed Asset Register
5. Discuss the potential obsolescence of inventory items with inventory manager.
6. Confirming the balance and other information from entity's banks through confirmation letter
at year end,
7 Watching client personnel taking a physical count of tangible assets to check whether company
procedures are being followed
8. Calculate G.P. Ratio of current year and compare with previous year.
9. Preparation of Bank Reconciliation Statement by auditor during the year,
10. Checking title documents of property of client
11. Review a sample of timesheets/clock cards for evidence of authorization of overtime by a
responsible official.
12. Examining, large sales invoices for a period of five days before and after year end to
determine whether sales are recorded in the correct period.
3 You are the audit senior on the audit of Orio (Private Limited, a large manufacturing company,
for the year ended 30 June 2015. You are reviewing the audit working papers prepared by the
audit assistant, Bisma.
(a) You notice that on 30 June Bisma attended the stocktake. She selected numerous items
from the client's inventory sheets for counting and all were found to be correct. Bisma
concluded that the inventory was fairly stated.
(b) You also noticed that advertising expenses are material, although only 50 per cent of last
year's balance. Bisma selected a large sample of entries and agreed them to supporting
documents. No errors were found. Bisma concluded that advertising expenses were
reasonable.
Required:
Indicate whether sufficient appropriate audit evidence was obtained to support the conclusions
reached Give reasons. (04)
4 Sara, an assistant auditor, decided to inspect documentary evidence that all shipments made by
Kid Sport Co. have been invoiced. Accordingly, she selected a sample from sales invoices and
matched each invoice with shipping documents.
Comment on her decision.
5 The following sources of audit evidence are used by auditors when verifying the amounts at
which stock and cash at bank are stated in the financial statements:
(1) an oral representation by management in respect of the adequacy of a provision for obsolete
stock and
(2) a bank confirmation letter for audit purposes.
Requirements:
(a) Comment on the reliability of the sources of evidence identified above (02)
(b) Describe the additional evidence you would seek to identify obsolete stock (02)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2000 December)
6 M/s. SFS & Co. is a Chartered Accountants firm having wide range of clients. Presently the firm is
engaged in the audit assignment of M/s. International Chemical Limited. The Chief Executive
Officer (CEO) of the company advised the audit team to carry out the audit from the Head Office,
situated in Lahore. Moreover, he further apprised that the company has some business activities
in an area which cannot be visited by the audit team due to security concerns during the course
of audit. Being the member of the audit team, you have selected certain items/ transactions for
your examination and requested the client to provide the related evidence and supporting
documentations/ records. The client has shown inability to provide the original supporting
evidences due to the risk of misplacement during movement of documents, however, agreed to
make available the photocopies of such records/ documents.
Required:
Suggest a course of action to be followed in the above situation in view of the general principles
applicable to reliability of the information to be used as audit evidence. (03)
(ICMA Pakistan, Professional Level P2 - 2014 May)
7 There are various types of evidence and each has different degrees of reliability. Listed below are
some pairs of various types of evidence:
(a) Sending confirmation letter to bank versus examining the client's bank statements
(b) An examination of raw material requisitions versus an auditor's recalculation of depreciation
(c) Discuss the likelihood and amount of loss in a lawsuit against the client with client's in-house
legal counsel versus discussion with the CA firm's own legal counsel
(d) Examine sales invoices when several competent people are checking each other's work versus
examining documents prepared by a competent person on a one person staff.
(e) Shipping documents prepared by the client's dispatch department versus a sales confirmed by
customer.
(f) Confirm receivables with individual customers versus confirming accounts receivable with
business organizations.
(g) A bank confirmation versus observation of the segregation of duties between cash receip and
recording in the accounts receivable subsidiary ledger
Required
Determine for each pair whether the first or the second type of evidence is generally more
reliable Provide an explanation for your selection.
8 Rank these evidence in order of reliability:
a) Amount shown on monthly statements from creditors
b) Amount of "discounts received computed by the auditor from supporting documents
c) Amounts shown in letters received directly by auditor from creditors
d) Amounts obtained from minutes of board of directors' meetings
9 Rank the following items of audit evidence concerning the ownership of land, using a scale of 1
(for best) to 4 (for worst)
Situation Rank
1. Ask management of the client company owns the land.
2. Phone the bank and ask if it holds title deeds on the client's behalf.
3. Visit the bank and examine title deeds.
4. Ask the bank for written confirmation that it holds title deeds.
10 Link the type of account with the purpose of the primary test in directional testing.
(a) Assets i. Overstatement

(b) Liabilities ii. Overstatement
(c) Income iii. Understatement
(d) Expense iv Understatement
(BPP F8 Study Text)
11 Jamshed & Company, Cas is auditing the Star Bank Limited. M. Jamshed is evaluating the
collectability of a Rs. 40 million loan receivable which is given to a firm of partnership and is
secured by a mortgage on property of land and building.
The appraisals performed by the Appraisal Company, showed value of property in excess of the
loan amount Upon enquiry, Mr. Bilal, the bank's vice president stated: "I know the loan is good
because I myself own 40 percent of the partnership that owns the property and is obligated on
the loan."
Jamshed then wrote in the working papers.
“The loan appears collectible: Mr. Bilal personally attested to knowledge of the collectability as a
major owner in the partnership obligated on the loan, and the appraised value exceeds the loan
amount".
Required:
Do you perceive any problems with M. Jamshed's reasoning or the appropriateness of evidence?
Also suggest appropriate course of action.
12 Order the following pieces of evidence based on their reliability from most to least reliable.
(a) A memo prepared internally and sent from the audit client CFO to the audit client CEO.
(b)An oral communication with the same information as in (a) above, spoken to the auditor by
accountant.
(c) A confirmation about debt owed to the audit client provided in writing directly to the auditor
from the outside third party
(d) A copy of an invoice prepared inside the company, sent to a customer, and then returned by
the customer with a cheque as a remittance advice.
13 Comment on the Relevance and Reliability of following evidences:
1. A letter from bank, confirming bank balance at year end, directly received by auditor.
2 Creditors' monthly statements prepared by Ad ounts Payable Department of the company.
3. Copies of sales invoices sent to customers, prepared by Accounts Receivable department of
the company,
4. Shipping documents sent by company and received back after acknowledgment of customer.
5. Title documents about company's properties held in bank locker.
6. A bank statement from client's file.
14 (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 3,500 cartons. Required. E*plain how
you would resolve the above issues. (05) (Impact on the audit report is not required)
15 List any four ways in which the debtor balances may be stratified. (02)
(b) You are the audit in charge 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)
(ICAP, CAF 09 Level - Autumn 2015) (ICAP’s Official Question Bank for CAF 09 - Q, #80)
16 You are the audit manager in a firm of Chartered Accountants. The audit seniors on various jobs
have sought your advice in respect of the following independent situations:
(i) The expected rate of deviation based on the auditor’s understanding of controls has
increased to an extent which is unacceptably high.
(ii) Number of debtors has increased from 4,500 to 5,000 and the amount of debtors as a
percentage of total assets has also increased.
(iii) The expected amount of misstatement has decreased from Rs. 300,000 to Rs. 200,000
and tolerable misstatement has increased by Rs. 50,000.
Required:
State with reasons, the effect of each of the above issues on the sample size of:
(a) Tests of controls; and (b) substantive procedures. (07)
17 The following is a summary of the year-end receivables balances at Mike’s Manufacturing and
the equivalent figures for the previous year. Performance materiality has been set at Rs. 50,000.
Customer 20X5 20X4
Rs. Rs.
Jones 25,000 24,000
Smith 60,000 30,000
Brown 20,000 20,000
White 10,000 11,000
Crane 205,000 189,000
Other Customers (all 166,000 74,000
balances under Rs. 10,000)
Total 486,000 348,000
Brown went into liquidation during the year.

Required:
Set out which of the above balances, as a minimum, the auditor should select for testing and
explain why. (03)
(ICAP’s Official Study Text for CAF 09- Page # 183)
18 The results of tests of detail on a sample of receivables balances recorded as Rs. 2,000,000
indicate that the correct balances should be Rs. 1,950,000. The total of balances of items has
been recorded as Rs. 10,000,000.
Explain:
(a) what the auditors might conclude about the projected misstatement in the population of
trade receivables
(b) the relevance of the concept of tolerable misstatement in this situation.
(ICAP’s Official Study Text for CAF 09 – Page 79)

19 The agreed receivables report produced by the computer is shown below:
Number of Range of debt Total debt $ Current $ 1 to 2 More than 2

Receivables Months old $ months $
15 Less than 0$ (87,253) (87,253)
197 $0 to 20,000$ 2,167,762 548,894 643,523 975,345
153 $20,0001 to 5,508,077 2,044,253 2,735,073 728,751
$50,000
23 $50,0001 or 1,495,498 750,235 672,750 72,513
more
388 9,084,084 3,256,129 4,051,346 1,776,609
Required:
Discuss which items might be chosen for verification. (05)
(ACCA, Fundamentals Level F8 - June 2008) (ICAP’s Official Question Bank for CAF 09 - Q.
#131dii)
20 The audit manager is starting to plan the audit of Tam Co. The audit senior and audit junior are
assigned to the audit. Comments are being made about how to select a sample of sales invoices
for testing. Audit procedures are needed to ensure that the managing director has signed them
and then to trace details into the sales day book and sales ledger.
‘We should check all invoices’ suggests the audit manager.
‘How about selecting a sample using statistical sampling techniques’ adds the audit senior.
‘Why waste time obtaining a sample?’ asks the audit junior. He adds ‘taking a random sample of
invoices by reviewing the invoice file and manually choosing a few important invoices will be
much quicker.’
Required: Briefly explain each of the sample selection methods suggested by the audit manager,
audit senior and audit junior, and discuss whether or not they are appropriate for obtaining a
representative sample of sales invoices. (09)
(ACCA, Fundamentals Level F8 - December 2006) (ICAP’s Official Question Bank for CAF 09 -
Q#104b)
21 Following is a set of situations that may or may not involve sampling. -
a) An auditor is examining loan receivables at a local bank. The population of loans contains
two strata. One stratum is composed of 40 loans that are each greater than Rs.1 million.
The second stratum contains 300 loans that are less than Rs.1 million. The auditor has
decided to test all loans greater than Rs.1 million and 20 loans less than Rs.1 million.
b) Assume the same facts as in (a) above, except that the auditor decides to apply analytical
procedures to the second stratum of loans.
c) An auditor has haphazardly selected 20 sales invoices to be examined for proper pricing
of the goods purchased by
d) the customer.
e) The prepaid insurance account is made up of four policies that total Rs. 30,000. The
auditor has decided that this account is immaterial and decides that no policies will be
examined.
f) Perform a walkthrough of purchase transactions by selecting one purchase and following
it through all processing steps from the initial purchase order to recording in the general
ledger.
g) Selecta sample of purchase vouchers and ensure they are supported by receiving
documents.
h) Selecta sample of items from the inventory in hand and checked they are valued at
correct amount.
i) Select a sample of long-term debt agreements and ensure they have been approved in
the board of directors minutes.
j) Evaluate the control environment by inquiring of personnel as to the existence of a code
of conduct.
Required: Indicate which situations involve audit sampling. If sampling is involved, also indicate
whether it relates to Tests of Details or Tests of Controls.
22 An auditor wishes to ensure that purchases in the income statement are not materially
overstated. What is the Most appropriate population from which to extract a sample of
purchases for testing? (01)
(Institute of Chartered Accountants in England and Wales, Professional Level - June 2006)
(Certified Accounting Technician, UK – June)
23 (i) What may be the effect (i.e. increase, decrease, or negligible) of the following factors on the
sample size for test of controls? (02)
Factor Effect on Sample Size
1. An increase in the extent to which the auditor's risk
assessment takes into account relevant control.
2. An increase in the tolerable rate of deviation.
3. An increase in the expected rate of deviation of the
population to be tested.
4. An increase in the auditor's desired level of
assurance that the tolerable rate of deviation is not
exceeded
(ii) What may be the effect (i.e. increase, decrease, or negligible) of the following factors on the
sample size for tests of details (02)
1. An increase in the auditor’s assessment of the risk of
material misstatement.
2. An increase in the use of other substantive procedures
desired at the same assertion.
3. An increase in the auditors’ desired level of assurance that
tolerable misstatement is not exceeded b actual
misstatement in the population.
4. An increase in the tolerable misstatement.
5. Stratification of the population.
6. Increase in number of sampling units in the population.
(ICMA Pakistan, Professional Level P2 - August 2012)
24 (a) An auditor selects purchases for the first two weeks and the last two weeks of a year as part
of checking cut-off procedures. Is this sampling? Is it effective?
(b) A company issued share capital during the year. Can an auditor use sampling to verify the
transactions?
(c) Why is it said that the sample results regarding tests of controls do not have to be projected
to the entire population?
25 An analysis of the trade receivables of Zais, a limited liability company, as at 31 May 2004 reveals
the following:
Balance Level Number of Balances Value

Over $15,000 3 $94,107
$10,001 to $15,000 10 $139,406
$7,501 to $10,000 19 $165,100
$2,501 to $7,500 51 $174,842
$0 to $2,500,146 146 $130,975
Credit Balances 7 ($621)
Total 236 $703,809
Janice, your audit supervisor, has instructed you to obtain direct confirmation of trade
receivables using a sample size of 70 trade receivables balances. You are to use the positive
confirmation method. In the course of her conversation with you, Janice mentioned that it is not
always appropriate to adopt a sampling approach when testing various populations during the
course of an audit.
Required: (a) Explain the significance of including:
(i) All accounts with balances in excess of $7,500; (ii) Some accounts with zero balances; in the
sample of trade receivables balances of Zais to be confirmed. (06)
(b) Describe the other types of account in addition to those stated in (a) above, which would
require special attention and would need to be represented in the sample of trade receivables
balances to be confirmed. (06)
(Certified Accounting Technician, UK – June 2004)
26 You are given the following information and results of the sampling performed on the area of
Repair Expenses during an audit.
Population Sample Misstatement
Number Amounts Basis Number Amounts Amounts
Category 1 30 2,500,000 All items 30 2,500,000 15,000
Category 2 320 4,500,000 Random 40 525,000 500
350 7,000,000 70 3,025,000 15,500
Required:
1. Calculate projected misstatement for the population.
2. Evaluate the result and recommend audit procedures to be performed, if tolerable
misstatement is Rs. 22,000.
3. Evaluate the result and recommend audit procedures to be performed, if tolerable
misstatement is Rs. 18,000.
27 You are auditing Besmaco, a company that sells chemicals and is based in Cairo. Its inventory
consists of 4,000 items. You are testing the balances of inventories.
Sample size is 870 and total value of this sample is $1m. Total value of population of 4,000 items
is S5m. The misstatement found in the sample amounted to $20,000. There was one anomalous
misstatement of $ 5,000.
How would you evaluate the sample results if the tolerable misstatement was determined to be?
(a) $100,000 (b) $50,000
28 Cambridge is a company that wholesales motor car spares to a large number of retail stores.
Details of trade receivables at the end of the reporting period were as follows.
Number % Value $ %
Nil Balances 600 9.1 - -
credit balances 50 0.8 (120,0000 (10)
$1 to $1,000 5120 77.8 3072000 22.2
$1,001 to $10,000 600 9.1 4620000 33.4

$10,001 to $20,000 120 1.8 1810000 13.1
$20,001 to $50,000 60 0.9 2350000 17.0
Over 50,000 35 0.5 2120000 15.3
Total 6585 1000 13,852,000 1000
Required:
Describe how you might select a sample for direct confirmation of:
(a) balances over $50,000;
(b) balances between $1 and $1,000. (04)
(ACCA Adapted)
29 In performing test of details on inventory, the auditor decided to perform sampling. He selected
all items on randomly selected two pages from the client's 90-page inventory listing. The
sampling resulted in selection of items amounting Rs. 1,000,000 whereas total book value of
population was Rs. 100,000,000. Auditor found a total of Rs. 100,000 Overstatements in the
sample.
Since the senior indicated that the amount of performance materiality in the inventory account
was Rs. 2,000,000, the auditor concluded that the recorded inventory value was materially
correct.
Evaluate the auditor's sampling plan and the manner in which the results were evaluated
30 John and Mia are CGA students working at the same accounting firm. They are assisting in an
external audit of GG Company's December 31, 2008 financial statements. John started work on
January 23, 2009 and chose 50 vendors from the currently recorded accounts payable in a
random sample, and found the following 3 errors:
Recorded Value Correct Value
$ 1,500 $ 1,050
$ 925 $1,925
$ 1,850 $ 1,800
John added up the errors and concluded that the company’s accounts payable were $500
overstated. Mia reviewed John’s working papers and advised John that he had made several
sampling errors.
Required: State whether or not you agree with Mia and explain your answer. Give 3 reasons to
support your answer.
(CGA - Canada, June 2009)
31 For each of the following, identify whether sampling would be appropriate or some other
approach needs to be applied:
(i) Substantive testing for long term loans from commercial banks (Population size: 5
loans / Rs. 250 million). (02)
(ii) Compliance testing for revenue cycle - goods dispatch function (Population size:
100,000 dispatches / Rs 550 million); (02)
(iii) Substantive testing for payroll expenses (Population size: 102 employees / Rs. 85
million); and (02)
(iv) Substantive testing for additions to fixed assets (Population size: 100 items / Rs. 70
million); (02)
32 Indus Limited has a policy to change their auditors every year. Explain whether the auditors of
Indus Limited Should prepare proper working papers, despite the fact that they would not be
appointed for the next term (03)
33 ‘Audit working papers are the property of the auditors, who may destroy the papers, sell them,
or give them away." Criticize this quotation.
34 Year-end of Sky Company ends on 30 June 2012 and audit report was signed on 3 September
2012. Following are some events which occurred in relation to the audit work papers.
(a) On 15 October 2012, you received a bank confirmation letter in the mail. You replaced the
faxed copy in the audit file with this letter.
(b) As for point (a) above, except that you received the confirmation on 15 November 2012.
(c) On arriving at work on 2 September 2012, you write up your notes of the final audit meeting,
which was held with the client on 13 August 2012, and place them in the audit file.
Required: State whether each of the above events meets or breaches the documentation
requirements of ISA 230 Audit Documentation. Also write additional documentation required by
ISA 230, if any, in each case.
35 The partnership of Smith, Frank & Clark, a CPA firm, has been the auditor of Greenleaf, Inc., for
many years. During the annual audit of the financial statements for the year ended December 31,
20X2, a dispute developed over whether certain disclosures should be made in the financial
statements. The dispute resulted in Smith, Frank & Clark's being dismissed and Greenleaf’s
engaging another CPA firm. Greenleaf demanded that Smith, Frank & Clark turn over all working
papers applicable to the Greenleaf audits or face a lawsuit. Smith, Frank & Clark refused.
Greenleaf has instituted a suit against Smith, Frank & Clark to obtain the working papers.
Will Greenleaf succeed in its suit? Explain
36 At 1:00 p.m., when the break whistle sounded, Naveed, an assistant auditor, had his desk
completely covered with various types of working papers. Naveed stopped work immediately,
but not wanting to leave the desk with such a disorderly appearance, he took a few minutes to
sort the papers into proper order, place them on top of one another, and weight them down
with a heavy paperweight. He then departed for lunch. The audit manager, who had been
observing what was going on, was critical of the assistant’s actions. What do you think was the
basis for criticism by the auditor-in-charge?
37 The auditor’s M/s T & T Partners have been asked repeatedly by the management of Top Food
(Pvt) Limited to handover the letter of confirmation for statement of balances received by the
auditors directly from the debtors and creditors during the final audit of the company. What
course of action the auditor should take? (04)
(ICMA Pakistan, Professional Level P2 - Winter 2009)
38 Robert, CGA, owns a small CGA firm. He fs the only CGA in the firm and employs CGA students
for a short time on Jobs as needed. He is careful to always supervise the students as required by
ISAs. He accepted an audit engagement with Cam Company, and is trying to find ways to control
costs. One of his ideas is to reduce the amount of documentation that the audit team produces.
Robert realizes that audit working papers are used to facilitate the review, normally by another
partner, at the conclusion of the audit. However, since he is a sole practitioner, he will be
reviewing his own work. If Robert cannot find ways to cut costs, he will not be able to obtain this
auditing engagement.
Required: Identify any other problems, besides file review, that Robert could encounter as a
result of his decision to reduce the amount of audit documentation he produces on this audit.
(Certified General Accountants, Canada - External Auditing 1, September 2008)
39 The following is an audit working paper prepared by an assistant on the Williams audit:
(9,50) Balance per Books @ 31/12/0X

Prepared by __
Reviewed by __
Williams Inc.
Bank Confirmation-General Account
31/12/0X
Balance per Bank @ 31 12/0X $20,200.22

Deposit in Transit 2,000.00
Outstanding Checks (5,200,060)
Other -Note Collected by Bank (10,000.00)
Bank Service Charge (9.50)
Balances per Books @ 31/12/0X $8,990,694
Column footed.
Amount agrees to amount recorded as a deposit on the bank statement and description agrees
with receipt enclosed with 12/31/0X bank statement.
Agreed to bank statement as on 31/12/0X.
Agreed to general ledger.
Required:
Criticize the above working paper that you are reviewing as senior auditor on the December 31
audit of Williams Inc. You will receive credit for proper points you bring up and lose credit for
improper ones.
40 You are reviewing working papers produced by the audit team. an example of a working paper
you have just reviewed is shown below.
Client Name: Specs4You Co Year end: 30 April Page: x
Working paper: Payables transaction testing YORK
Prepared by: Date:
Reviewed by: CW Date: 12 June 2007
Audit assertion: To make sure that the purchases are correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system. Trace
details to the goods received note (GRN), purchase invoice (PI) and the purchase day book (PDB)
ensuring that the quantities and prices recorded on the purchase order match those on the GRN,
PI and PDB.
Test details: In accordance with audit risk, a sample of purchase orders were selected from a
numerically sequenced purchase order system and details traced as stated in the method. Details
of items tested can be found on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five
purchase orders did not have any associated GRN, PI and were not recorded in the PDB. Further
investigation showed that these orders had been cancelled due to a change in spectacle
specification. However, this, does not appear to be a system weakness as the internal controls do
not allow for changes in specification.
Conclusion: Purchase orders are completely recorded in the purchase day book.
Required: Explain why the working paper shown above does not meet the standards normally
expected of a working paper. Ks) (09 mar Note: You are not required to reproduce the working
paper. (07)
(ACCA, Fundamentals Level F8 - June 0 6) (ICAP’s Official Question Bank for CAF 09 - Q. #1)
1 a) Completeness.
b) Classification
c) Completeness
d) Completeness
e) Cutoff
f) Classification
g) Accuracy
h) Presentation and Disclosure
i) Existence
j) Completeness
k) Valuation and Allocation
l) Rights and Obligation
2
Procedure a. Area b. Assertion
1. Perform test count.. Inventory/Fixed Existence
Assets/Cash
2. Develop expectation of salaries.... Salaries Expense Completeness and
Occurrence of Salaries
3. Selecting approved sales Sales Completeness
4. Calculate depreciation charge… Depreciation expense Accuracy of Depreciation
Expense
5. Discuss the potential obsolescence Inventory Accuracy, Valuation and
Allocation
6. Confirming the balance Bank Existence
7. Watching client personnel. Inventory/Fixed Existence
Assets/Cash
8. Calculate G.P. Ratio..... Sales, and Cost of Completeness and
Sales Occurrence of Sales and Cost
of Sales
9. Preparation of Bank.... Bank Accuracy. Valuation and
Allocation, and Completeness
of Bank
10. Checking title documents. Property Rights and Obligation of
Property
11. Review a sample of timeshect.... Salaries expenses Occurrence of Payroll
12. Examining large sales invoices for Sales Cut-off of Sales
3 a) Sufficient appropriate evidence has not been obtained because Bisma verified only one
assertion i.e. Existence. No work has been performed on other assertions (eg. "Completeness",
"Valuation and Allocation)
(b) Sufficient appropriate evidence has not been obtained as Bisma has tested assertion of
"Occurrence only. Whereas, primary risk in advertisement was of "Completeness" (considering
50% reduction is compared to last year). Therefore, Bisma should also have tested unrecorded
amounts in advertising expense.
4 This decision is wrong.
There is no relevance between assertion to be tested and procedure performed. If Sara wishes to
ensure that all shipments have been invoiced (ie. Completeness of Revenue), she should select
sample from shipping documents and each shipping document should be matched with sales
invoice to ensure they have been recorded.
Marking Scheme Errors
 Sara wants to check Completeness  Shipping documents and GDN are different
 She performed procedure for occurrence  Students don't know from which
 GDN to sales invoices documents to start the procedure
5 a)
Oral representation by management is less reliable because
 It is oral evidence
 It is internal evidence.
 Reliability of representation from management is influenced by integrity of
management, and consistency with other evidence
Bank confirmation is highly reliable evidence because
 It is external evidence.
 It is documentary evidence
 It is obtained directly by auditor
b)
 Check sale price of Inventory after the year.
 Check aging report
 Calculate Inventory turnover ratio
 Identify damaged inventory during stock count.
6 As per the general principles the audit evidence provided by original documents is more reliable
than the audit evidence provided by the photocopies or facsimiles. Therefore, auditor should
insist client to provide original documents for inspection. If original documents are not provided,
and auditor concludes evidence is not appropriate, he may express modified opinion.
7 a) Confirming bank balance is more reliable as this evidence is directly received by auditor-
b) Recalculation of depreciation is more reliable as it is directly performed by auditor
himself.
c) Discussion with CA firm's own legal counsel is more reliable as this evidence is from
source independent of client
d) Examining sales invoices when several people are working is more reliable as segregation
of duties improves internal control
e) Sales confirmed by customer is more reliable as it is from independent sourc
f) Receivables confirmed with business organizations are more reliable as there will be
more internal controls in a business organization
g) Bank confirmation is more reliable as it is from source Independent of client (and
observation provides limited evidence for time of observation only)
8 b,c,a,d
9 Situation Rank
1. Ask management of the client company owns the land. 4
2. Phone the bank and ask if it holds title deeds on the client's behalf. 3
3. Visit the bank and examine title deeds. 1
4. Ask the bank for written confirmation that it holds title deeds. 2
10
Nature of account Purpose of test
Assets Overstatement
Liabilities Understatement
Income Understatement
Expenses Overstatement
11 Statement from Mr. Bilal is an Internal and verbal evidence. Further, this loan is a transaction
with related party Therefore, more reliable evidence should have been obtained by auditor (e.g.
obtaining written confirmation directly from partnership).
12 (c) evidence is External, Documentary, Original, Direct,
(d) evidence External, Documentary, Original
(a) evidence is Documentary.
(b)evidence is just an oral representation
13 Sr. Comments on Reliability Comments on Relevance
1 Highly Reliable Provides evidence about Existence of Bank
Balance
2 Moderately reliable if internal Provides evidence about Completeness of
controls are strong Purchases Transactions (to that creditor during
the month)
3 Moderately reliable if internal Provides evidence about Accuracy of Sales
controls are strong Transaction
Less reliable if internal controls are
weak
4 Moderately reliable if internal Provides evidence about Occurrence of Sales
controls are strong Transaction
Less reliable if internal controls are
weak
5 Highly Reliable Provides evidence about Rights & Obligations of
Properties
6 Moderately reliable Provides evidence about Existence of Bank
Balance
14 (a)
Weaknesses in Sampling Approach Suggestion
population has been made by Netting-off Sample should be selected from Sales only.
sales and sales return. Sales return should not be netted-off
For Super stores only a sample has been As 10 superstores represents small number of
selected transactions, representing selected. 40% of
population, therefore, 100% selection should
have been made from this category
Sample has been selected by combining ISAs require that sample should be selected
distributors and wholesalers. Stratification separately from each category. Population
has been ignored. should be stratified and sample should be
separately selected from distributors and
wholesalers.
If statistical sampling is being used, then

haphazard technique is not appropriate.
Random or Systematic technique should have
been used.
Sample size has been determined based Expected rate of deviation is NOT a relevant
Expected Rate of deviation factor for selecting sample in “Tests of
Details’. Sample should have been selected
on the basis of expected misstatement.
Expected rate of deviation is based on the Determination of Expected Rate of deviation
basis of low overall audit risk depends on experience of population in
previous audits, and auditors understanding
of business.
(b)
 While performing sampling for tests of details, if auditor is unable to apply audit
procedures on a selected item, auditor treats them as a misstatement.
 Therefore, auditor should not accept suggestion of staff to select some other items. Staff
should be emphasized to find the same invoices selected by auditor.
 Otherwise, these should be treated as misstatement, and it should be projected.
(ii) This is a misstatement of Rs. 1,575,000 = (1,725 - 1,275) * 3,500. Further, auditor should
project this misstatement.
15 (a) Debtors may be stratified on the basis of Value, Age, Location, Products, or Terms of trade
etc.
(b)
Appropriateness of Options:
Option (i):
This view is incorrect. Although, selecting high value items will ensure that a major portion of
debtors is verified, however, this is not a sampling technique. Auditor cannot express his
conclusion about entire population in this case.
Misstatements in small amounts may become material when aggregated.
Option (ii):
This view is also Incorrect. Haphazard sampling is used in non-statistical sampling in which all
units do not have equal chance of selection. To ensure equal chance of selection, auditor must
use statistical sampling (with systematic or random selection).
Option (iii):
This view Is also incorrect. Selecting 10% of amounts in each category is NOT systematic
selection. Further, this method is not an efficient method, as it ignores high value items in
Category A.
Suggestion;
1, All items from Category A should be selected to cover major portion.
2. Specific items should be selected from Category B, C and D with focus on:
a. Overdue balances. b. Credit balances. c. Accounts in dispute.
3. A sample of randomly selected items should also be taken from remaining population to cover
entire population.
16 (a)
(i) Effect on Sample Size for Tests of Controls:
(i) If expected rate of deviation is unacceptably high (i.e. greater than acceptable rate of
deviation), auditor shall not perform tests of controls.
(ii)Increase in population has negligible effect on sample size for tests of controls.
(iii) Decrease in expected amount of misstatements, and increase in tolerable misstatements
shall not affect size for tests of controls because these are not relevant factor for determining
sample size for tests of controls.
(ii) Effect on Sample Size for Tests of Details:
(i) If expected rate of deviation is unacceptably high, it shall not affect sample size for tests of
details because expected rate of deviation is not a relevant factor for determining sample size for
tests of details.
(ii) Increase in amount of debtors has negligible effect on sample size for tests of details.
(iii) If expected amount of misstatement has decreased, sample size for tests of details will
decrease. If tolerable misstatement has increased, sample size for tests of details will decrease.
17 Smith should be selected as this balance is above performance materiality. Also, the balance has
doubled since the previous year.
Brown should be selected. Although it is below performance materiality it seems likely that the
receivable is irrecoverable.
Crane should be selected as individually material.
Although the “other customers” balances all fall well within the performance materiality
threshold, they are material in total, and so a sample of these should be verified.
18 (a) There is a misstatement of Rs. 50,000 (2,000,000 - 1,950,000) in the sample of Rs. 2,000,000.
Therefore, projected misstatement in the population of Rs. 10,000,000 is Rs. 250,000
(=50,000/2,000,000 * 10,000,000)
(b) Auditor shall compare the projected misstatement with tolerable misstatement.
If projected misstatement is less than tolerable misstatement, auditor may conclude that
population is not materially misstated.
If projected misstatement is more than tolerable misstatement, sampling does not provide
reasonable basis for conclusion.
19 Selection on the basis of materiality: Select all receivables ranging $50,001 or more, to ensure
that no material misstatement exists in significant part of population.
Selection on the basis of risk: Select all receivables less than 0, to ensure that there are no
omitted or misclassified transactions e.g. advance
1. cash recorded in debtors or cash recorded but relevant sales not recorded.
2. Select material receivables which are “1 to 2 months old” or “more than 2 months old”,
because these may not be collectible and may require provision
Remaining receivables: Random sample will be selected from remaining population of
categories, to provide an overall view of the accuracy of receivable balance.
20 Suggestion by audit manager:
Explanation of method:
This is a method of selecting all items for testing.
Comments on appropriateness:
This method is not used in performing tests of controls. performing tests of details, this method
is used on in following situations (otherwise it will cause inefficiency):
 Population consists of small number of large items, or
 There is significant risk which cannot be reduced by other means,
 100% testing becomes cost effective due to repetitive nature of calculations using CAAT.
Suggestion by audit senior:
Audit senior is suggestion to use statistical Sampling. Under this method, items are selected
randomly and probability theory is applied to evaluate results.
Comments on appropriateness
This method is appropriate, particularly where there are very large number of transactions.
However, knowledge and resources are necessary to use this method.
Suggestion by audit junior:
Manually selecting important invoices is called ‘specific item selection’.
Comments on appropriateness:
This method is not appropriate if auditor wishes to draw conclusion about entire population,
because it gives evidence only about items selected, and not about entire population.
21 (a) In first strata, sampling is not involved. In second strata, sampling is involved, which relates to
tests of details.
(b) In this case, sampling is also not involved in second strata now.
(c) Sampling is involved, which relates to tests of controls.
(d) Sampling is not involved.
(e) Sampling is not involved. This relates to specific item
(f) Sampling is involved which relates to Tests of Details.
(g) Sampling is involved which relates to Tests of Details.
(h) Sampling is involved which relates to Tests of Controls.
(i) Sampling is not involved.
22 Recorded amounts in purchases account
23 Factor Effect on Sample Size
1. An increase in the extent to which the auditor's risk Increase
assessment takes into account relevant control.
2. An increase in the tolerable rate of deviation. Decrease
3. An increase in the expected rate of deviation of the Increase
population to be tested.
4. An increase in the auditor's desired level of Increase
assurance that the tolerable rate of deviation is not
exceeded
ii)
1. An increase in the auditor’s assessment of the risk of Increase
2. An increase in the use of other substantive procedures Decrease
desired at the same assertion.
3. An increase in the auditors’ desired level of assurance that Increase
tolerable misstatement is not exceeded b actual
misstatement in the population.
4. An increase in the tolerable misstatement. Decrease
5. Stratification of the population. Decrease
6. Increase in number of sampling units in the population. Negligible Effect
24 (a) No. This is not sampling because sample does not represent whole population. This is
effective to test cut-off assertion.
(b) Auditor should not use Sampling in share capital because transactions in share capital are
usually small number of large values.
(c) Because Projected deviation rate is always the same as Sample deviation rate.
25 (a) (i) Selection of all customers over $7,500 will verify 57% of population in amount by testing
only 14% of population in number. Auditor will be more confident about his conclusion on
debtors as he has covered substantial portion.
(ii) Selection of some accounts with zero balances will ensure completeness of debtors. If major
parties with which client does business have zero balances, it may indicate possibility of
misstatements e.g. non-recording or misclassification of sales, cut-off errors, or fraudulent
activity.
b)
Following types of accounts may require special attention:
(i) Accounts with credit balances.
(ii) Over-due balances
(iii) Accounts in dispute or with high provisioning, or which have been written-off as bad.
(iv) Those which have exceeded the authorised credit limit.
(v) Those which show higher/lower balances at the balance sheet date as compared to other
times during the year.
(vi) Those to which credit notes have been regularly posted.
(vii) Accounts which have not paid by the date of examination.
(viii) Related parties
26 1. Projected Misstatement = 15,000 + (500/525,000 * 4,500,000) = Rs. 19,286.
2. As the projected misstatement is less than the tolerable misstatement, hence it can be
concluded that population is not materially misstated. No further work necessary.
3. As the projected misstatement is greater than the tolerable misstatement, hence, sampling
has not provided a reasonable basis for conclusion.
Auditor should perform following procedures in such case:
 Request management to investigate identified misstatement to identify further
misstatements (in such case auditor will corroborate whether misstatements remain) or
 Revise nature, timing and extent of further audit procedures (e.g. auditor may increase
sample size, or modify substantive procedures).
27 Best estimate of misstatements in population = (20,000 - 5,000)/1,000,000 * 5,000,000 + 5,000 =
80,000 (Note that anomalous misstatement is not used in projection, however it is included in
total of misstatements)
(a) In this case, projected misstatement + anomalous misstatement is less than tolerable
misstatement. Sampling provides reasonable basis for conclusion that population is free from
(b) In this case, projected misstatement + anomalous misstatement is greater than tolerable
misstatement. Sampling does not provide reasonable basis for conclusion. Auditor should extend
his procedures to detect unidentified misstatements.
28 (a) balances over $50,000; All items should be selected in this category (to cover large portion of
receivables) because this represents small number of large values.
(b) balances between $1 and $1,000. This category consists of large number of small balances,
therefore, only a sample should be selected from this category: Sample size will depend on
various factors e.g. risk and selection method may be random, systematic or haphazard.
(Student should note that we are not commenting here on positive or negative confirmation
because requirement was only to describe how to select sample)
29 (1) In auditing most of the assets and liabilities (e.g. Property, Plant and Equipment, Inventory,
Debtors, Creditors), it Is always considered efficient and effective to stratify the population. Then
high value items are selected separately and a Sample is selected from the rest of population.
This has not been done here.
(2) Sample selection method used is Block Selection. This method does not give a sample which
is representative of population.
(3) Auditor did not project the misstatement before conclusion. Projected misstatement {is
10,000,000 (100,000/1,000,000 * 100,000,000) which is much greater than Tolerable
misstatement i.e. Rs. 2,000,000.
(4) Conclusion reached is incorrect. As in this case, sampling does not provide a reasonable basis
for conclusion about population.
(5) Auditor did not propose adjustment for identified misstatement. (though amount identified is
immaterial, however, it is always better to propose adjustments for identified misstatements).
30 I agree with Mia. John has made following errors:
 Population was not appropriate (sample should be selected from vendors as at
December 31, 2008 and not from current vendors).
 Sample misstatement is $500 understatement and not overstatement.
 John did not project the misstatement on the population.
31 (i) Sampling is not appropriate. Population consists of small number of large value items, so
100% examination should be made.
(ii) Sampling is appropriate because population is large. Further, 100% testing is not
appropriate on tests of controls.
(iii) In auditing payroll, sampling is not an appropriate technique. In this area, usually
Analytical Procedures are performed instead of Tests of Details
(iv) Sampling is not appropriate. Auditor should use specific item selection i.e. selecting high
value items from this population to cover a large portion.
32 Yes, auditor should still prepare audit working papers because:
 These provide evidence that audit was planned and performed in accordance with ISAs.
 These provide evidence that auditor has appropriate basis for opinion.
 Further there are some other benefits of preparation of working papers e.g. facilitation
in direction supervision and review, determination of accountability.
33 This statement is wrong.
Although auditor is the owner of working papers, however:
1, He is required to retain the working papers and cannot destroy them before completion of
retention period.
2. He is also responsible to follow Confidentiality Principle and cannot sell or give working papers
to third parties
34
Item Meets ISA 230 documentation requirements? Additional documentation required
a) Yes, because this is a part of normal file No additional document is required.
assembly process.
b) Yes, although 60 days’ time for file assembly Specific reason for making change.
period has passed, yet such changes are Who made the changes and when.
allowed to be made by ISA provided some Who reviewed the changes and
matters are document. when.
c) No, ISA requires for timely preparation of No additional document is required.
documents. However, in this case, undue
delay has occurred which affects quality,
timely review and accuracy of evidence.

Requirement of ISA not met.
35 No, because auditor is the owner of working papers prepared by him and it is not obligatory on
him to give them to any other person unless this is mutually agreed between client and auditor.
36 Working papers were left open for examination by anyone during lunch hour. This is a violation
of confidentiality principle. These should be kept in a locked place.
37 Working papers are the ownership of auditor. It is not obligatory on auditor to handover any
working paper to anyone else (including audit client).
However, he can handover such working papers:
 To client (at his own discretion) or
 To other parties (with permission of client)
lf auditor does not want to handover working papers to client, he should communicate to TCWG
that working papers are his Ownership and he Is not willing to handover them to client.
38 Decision of Robert to reduce necessary audit documentation {s incorrect. He may encounter
following problems if such an idea is adapted:
1. He will be unable to prove that audit was planned and performed in accordance with ISAs and
Regulatory requirements.
2. He will be unable to prove that audit report issued by him was appropriate.
3. There will be no proper direction, supervision and review.
4. Accountability of work performed will be difficult to determine.
5. Quality Control Review will be affected.
6. Help of this year’s procedures cannot be taken in future years.
39 The working paper's deficiencies include:
1. It is not identified who prepared and who reviewed the working paper.
2. Date of preparation and date of review is not mentioned.
3. Name of audit firm is not mentioned.
4. Title of schedule is wrong, it is a bank reconciliation, not a bank confirmation,
5. The symbol “♥"Balance per Bank is incorrect. It should be agreed with balance as per bank
statement (or confirmation letter), not with general ledger.
6. The bank service charge and note collected by bank should be adjusted in cash book, These
items should not appear in BRS.
7. Detail of outstanding cheques and deposit in transit is not mentioned.
8. The tick mark is missing in the working paper.
9. Casting of BRS is incorrect.
10. The tick mark is incorrect relating to the deposit in transit. If it was on the 31/12/0X bank
statement, it would not be a deposit in transit.
11. No work is performed on outstanding cheques.
12. Page reference {s not given.
40 The audit working paper does not meet the standards of preparation of working papers because:
1. Page reference is not given (xxxxxxx is not a valid page reference).
2. Year is missing in year end,
3. It is not mentioned that who prepared the working papers.
4. Date of preparation of working papers is also not mentioned.
5. Audit assertion is not clear. Word “Accuracy”, “Occurrence” and “Completeness” etc.
should have been used, instead of general word “correct”.
6. In Method, basis of selection of sample should have been mentioned.
7. In Test Details, specific page reference should have been made were details of Items
tested can be found.
8. In Results, if system does not allow change in specification, it should have been
concluded as control weakness.
9. Reviewer could not identify and resolve above deficiencies in working paper which
shows that quality control procedures of firm are not adequate.
Chapter 5 | Internal Controls
1 You are manager responsible for the audit of Pine Limited (PL) for the year ended 31 August
2020. PL has large contracts with many government entities. During the year, the government
has significantly reduced its spending which has also affected its contract volumes with PL.
Devaluation of the local currency has also resulted in increased costs of the Materials purchased
from overseas suppliers
During the planning work review, your team has provided you the following ratios:
2020 2019
Gross profit margin 32% 28%
Accounts payable to cost of sales ratio 0.20 0.28
Trade days receivable 90 75
Required:
(i) Explain the fluctuations and inconsistencies in the given ratios.
(ii)State any four key audit procedures which you would perform to address each issue identified
(i) above. (09)
2 You are the audit senior responsible for the audit of Dragon Pakistan Limited (DPL), a listed
company. DPL operates in the pharmaceutical industry which is highly regulated by the
government and heavy fines are placed on any non-compliance of the regulations.
The main product of DPL is Drug A. The raw material for the production of Drug A is imported
from Switzerland. Drug A has been underperforming for a number of years and is currently sold
at low margins. Last year, a competitor introduced a much-improved version of Drug A.
Considering the tough competition, all the companies in the pharmaceutical industry including
DPL have to continuously Carry out research activities for development of new drugs and
improvement of the existing drugs.
Required:
(a) Outline the business risks that exist in DPL. (02)
(b) Identify and briefly discuss the financial statement line items that could be misstated as a
result of the business risks outlined in (a) above. (06)
3 Ameer Welfare Trust (AWT) is engaged in providing education and three daily meals to the
underprivileged citizens of the society. Donavon collection kiosks have been established at
various public spots which collect donation, 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 ang 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)
4 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 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 m 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)
(ICAP, CAF 09 Level - Autumn 2015) (ICAP’s Official Question Bank for CAF 09 - Q. #19)
5 Analytical procedures are an important and powerful tool for auditors in explaining the
performance of a business. ISAs 315 and 320 require the auditor to apply analytical procedures
at the planning and overall review stages of the audit.
Required:
Explain the possible reasons for the following changes in accounting ratios found at the planning
stage of the audit:
(i) an increase in the current ratio
(ii) a decrease mm the gross profit margin; and
(iii) an increase in the inventory holding period; (06)
Note: No marks will be awarded for showing the calculation of the ratio, all parts carry equal
marks.
(ACCA, Fundamentals Level F8 - June 2002) (ICAP’s Official Question Bank for CAF 09 - Q. #
110a)
6 (a) For each illustration given below, identify the component of audit risk which is most directly
related to the illustration. (10)
(i) A client fails to discover employee fraud on a timely basis because bank accounts are not
reconciled monthly
(ii) Cash is more susceptible to theft than an item of fixed assets.
(iii) Confirmation of receivable by an auditor fails to detect a material misstatement.
(iv) Disbursements have occurred without proper approval.
(v) Inadequate segregation of duties.
(vi) Omission of a necessary substantive audit procedure.
(vii) Susceptibility of loan receivable to material misstatement, before considering related
controls.
(viii) Technological developments make a major product obsolete.
(ix) For stock-in-trade perpetual inventory count system has not been established.
(x) ABC company, a client, lacks sufficient working capital to continue operations
(b) Based on the information given below, indicate whether each of the following factors
would most likely increase audit risk, decrease audit risk, or have no effect on audit risk (05)
(i) This is the first year of profit since commencement of operations five years ago.
(ii) The chief executive officer is also a Majority shareholder of the company.
(iii) The internal auditor reports to the finance director.
(iv) The accounts department has experienced a high rate of turnover of key personnel.
(v) The auditor has been auditing the company for the past three years.
7 Company A deals in manufacturing of furniture on order and all inventory is available on one
site. Company B deals n manufacturing of computer-USBs and its inventory is available on
different outlets throughout the Lahore.
Required: Which client is a high-risk client for auditor and why?
8 This question consists of a number of items pertaining to an auditor's risk analysis for a company.
Indicate whether each of the following factors are likely to increase, or decrease risk of material
misstatement. Explain your decision.
(1) During current year, Adam Sugar Mills Limited (ASML) became profitable first time since
last 4 years.
(2) ASML's board of directors is controlled by Adam, the majority shareholder, who also acts
as the chief executive officer.
(3) The internal auditor reports to the CFO, and the CFO reports to Adam.
(4) The accounting department has experienced a high rate of turnover of key personnel.
(5) During 2012, ASML changed the method of preparing its financial statements from the
cash basis to the accrual basis under generally accepted accounting principles.
(6) During the year, litigation filed against ASML in 2010 was withdrawn. It was alleged that
the company discharged pollution into locality. Disclosures made in previous financial
statements have been removed from current year’s financial statements.
(7) During December 2012, ASML signed a contract to lease equipment from an entity
owned by ASML’s parent company.
(8) A public offering of ASML’s share is planned after the audit.
9 Consider the following three independent material situations.
a) Bill Smith was the CEO and director of Millat Tractors Limited, until he died
unexpectedly. After his death, his son, Will Smith, became the new CEO of Millat
Tractors and embarked on a cost cutting exercise, which included a reduction in key staff
in the credit department.
b) Your client is a large car manufacturer that uses an electronic data interchange system to
transmit purchase orders to its many suppliers. Each supplier electronically transmits an
invoice, which is credited directly to the creditors’ account. The goods usually take one
or two weeks to arrive. Once they have been received, a goods received note is raised
and matched with the supplier's invoice, and payment is authorised.
Required
For each of the two situations described above:
(i) provide a brief explanation as to why the situation constitutes an audit risk.
(ii) indicate and justify the component of the audit risk model affected.
(iii) Indicate the key account balance(s) affected.
(iv) indicate the audit assertion(s) to be tested
10 Ajio is a charity whose constitution requires that it raises funds for educational projects. These
projects seek to educate children and support teachers in certain countries. Charities in the
country from which Ajio operates have recent} become subject to new audit and accounting
regulations. Charity income consists of cash collections at fund raising events, telephone appeals,
and bequests (money left to the charity by deceased persons). The charity is small and the
trustees do not consider that the charity can afford to employ a qualified accountant. The charity
employs a part time bookkeeper and relies on volunteers for fund raising. Your firm has been
appointed as accountants and auditors to this charity because of the new regulations. Accounts
have been prepared (but not audited) in the past by a volunteer who is q recently retired
Chartered Certified Accountant.
Required:
(a) Describe the risks associated with the audit of Ajio under the headings inherent risk, control
risk and detection risk. (10)
(b) List and explain the audit tests to be performed on income and expenditure from fund raising
events. (10)
(ACCA, Fundamentals Level F8- December 2003) (ICAP’s Official Question Bank for CAF 09 -
Q46)
11 You are the audit partner responsible for audit of a large consumer goods company.
The chief executive is concerned that the controls over recording of sales in one of the divisions
of the company are not strong. He has informed you of the following:
 Sales are very heavy in the last fortnight of the year
 The divisional head is remunerated, based on profits of the division.
(a) Identify audit risks based on the above information. (02)
(b) Describe the audit approach for each of the above risks. (06)
12 The EuKaRe charity was established in 1960. The charity's aim is to provide support to children
from disadvantage backgrounds who wish to take part in sports such as tennis, badminton and
football.
EuKaRe has a detailed constitution which explains how the charity's income can be spent. The
constitution also notes that administration expenditure cannot exceed 10% of income in any
year.
The charity’s income is derived wholly from voluntary donations. Sources of donations include:
(i) Cash collected by volunteers asking the public for donations in shopping areas,
(ii) Cheques sent to the charity’s head office,
(iii) Donations from generous individuals. Some of these donations have specific clauses attached
to them indicating that the initial amount donated (capital) cannot be spent and that the income
(interest) from the donation must be spent on specific activities, for example, provision of sports
equipment.
The rules regarding the taxation of charities in the country EuKaRe is based are complicated, with
only certain expenditure being allowable for taxation purposes and donations of capital being
treated as income in some situations.
Required:
(a) Identify areas of inherent risk in the EuKaRe charity and explain the effect of each of these
risks on the audit approach (12)
(b) Explain why the control environment may be weak at the charity EuKaRe. (04)
(ACCA, Fundamentals Level F8 December 2008) (ICAP’s Official Question Bank for CAF 09
Q50b&c)
13 You are the auditor of Reliable Generators Limited (RGL) for the year ended 30 September 2014.
RGL is primarily engaged in the business of manufacturing and sale generators. The generators
are supplied all over the country through a network of distributors.
On receipt of order from a distributor, the order is recorded electronically and transmitted to the
factory. 100% payment is received in advance. Following are the extracts from draft financial
Statements provided by the client:
Income statement for the year ended 30 September
2014 (Draft) 2013 (Audited)
----- Rs. In ‘000’------
Revenue 60,222 59,638

Purchases 42,676 40,848
Statement of financial position as at 30 September
2014(Draft) 2013 (Audited)
----- Rs. In ‘000’------
Trade payables 1,653 1,895
Provision for warranty claims 1,265 1,193
Other related information is as follows:

(i) Effective 01 October 2013, in order to match its competitors, RGL has increase the
warranty period from 3 to 5 years.
(ii) A discount of 20% was offered to address the issue of reduced demand witnessed in the
3rd quarter. As a result of the discount, the situation improved significantly, during the
4th quarter.
(iii) In August 2014, serious defects were discovered in one of the major components.
Consequently, significant quantity of such components was returned to the supplier.
(iv) Scanning of the supplies’ ledger accounts revealed various payments for which no
satisfactory reply was given by the management. However, said amounts were
recovered before the year end.
Required
Identify and evaluate the audit risk in the above situation and how would you respond to these
risks. (15)
(Note Routine verification steps may not be mentioned)
14 You are the Audit Manager of Mustafa and Company, Chartered Accountants, responsible for the
audit o Standard Home Appliances, a listed company.
Extracts from the company’s financial statements are resented below:
30-Sep -2012 30-Sep -2011

Income statement ------Rs. In million --------
Revenue 1,190 1,174
Gross Profit 509 537
Operating Profit 242 227
Finance charges (77) (69)
Profit before tax 165 158
Statement of Financial Position

Property, plant and equipment 1,054 833
Intangible assets 140 100
Inventory 423 260
Trade Receivable 417 250
Cash and bank balances 29 54
Total Assets 2,063 1,497
Equity and liabilities

Share Capital 1,000 1,000
Retained earnings 218 233

Long term borrowing 277 50
Liabilities against assets subject to finance lease 180 -
Bank overdraft 185 52
Trade and other payables 203 162
Total Equity and liabilities 2,063 1,497
During the year, the company has introduced various products based on latest technologies.
These new products are being manufactured on a new plant which has been acquired under a
lease agreement for a period of four years. The plant commenced operations on 01 January
2012. The useful life of the plant is 5 years. Intangible assets represent cost of software installed
and designs which have been acquired from a renowned multinational company.
Required: Identify and evaluate the audit risks in the above situation. (12)
15 You have recently joined an audit company and have been asked to visit new client, Nowroz
Textile Limited (NTL), to develop audit strategy document. The following points were discussed
and noted during the meeting with the Chief Financial Officer (CFO) of the company:
 The company manufactures and sells cotton lawn and ready-to-wear garments. The
market share and profit are growing rapidly. The company made an investment in order
to expand the existing plant and machinery by 15%. The company has expensed out part
of investment as expenses for current year.
 The company is now utilizing 25 marketing outlets including 10 rented from other parties
and entered into the agreement with 6 big stores to sell the additional product.
 The company has also implemented Enterprise Resource Planning (ERP) Accounting
System during the year. However, the two systems are still being run in parallel as the
testing of the new system is in process.
 The company is going to launch many new designs whereas, stock of old and defective
prints, returned by the customers, are lying in the store. The company pays additional
bonus on achievement of sales goals to retail stores and market staff.
Required: identify any four (04) audit risks in the above situation and auditor's responses to
those risks as part of audit planning for NTL. (08)
(ICMA Pakistan - Fall 2017)
16 You have been appointed as the auditor of Tee Pharmaceuticals Limited (TPL) for the year ended
31 March 2012. An extract from the draft financial statements is resented below:
2012 2011
Income Statement ---- Rs. In million ----
Revenue 48,970 47,500
Finance charges 3,000 1,200
Profit after tax 70 600
Statement of Financial Position 2012 2011

---- Rs. In million ----
Intangible assets 7,000 3,000
Stocks 27,000 15,500
Trade receivables 13,800 11,500
Share Capital (Rs. 10 each) 20,000 20,000
Retained earnings 1,170 1,100

Long term loans 10,500 3,000
Short term loans 27,000 15,000
During the planning process, you have gathered the following information:
(i) TPL’s operations were highly successful until 2008. However, due to increased
competition the profitability has reduced significantly over the last four years.
Consequently, the company has embarked upon an ambitious plan whereby it has
taken the following steps:
Three new products have been introduced for which patent rights have been purchased. The
new products were introduced in the market in December 2011.
Anew plant has been acquired which is expected to reduce the cost of production
significantly.
The above measures have been financed through a bank loan against hypothecation of
stocks and trade receivables.
(ii) TPL has had a dispute with a major distributor who alleges that products were
delivered in damaged packets and the quantities therein were short as compared to
the numbers mentioned on the packets.
(iii) A franchisor has initiated a legal action against the company on grounds of
infringements of patent rights.
(iv) TPL had entered into a one year agreement with a foreign supplier for supply of raw
material. On 20 April 2012 the government of the country in which the supplier is
registered, has initiated legal! proceedings against that supplier for breach of quality
standards.
Consequently, the government of the country in which TPL is operating has banned all imports
from that supplier.
Required: Identify the audit risks that exist in the above scenario and the manner in which you
would address those risks, during the audit under the following headings:
(i) Raw materials (iii) Intangibles
(ii) Trade receivables (iv) Liquidity issues (19)
17 You work as an audit manager in a reputed firm of Chartered Accountants and have recently
been allocated Alfa Foods as major audit client in your portfolio. The company is engaged in
manufacture and sale of canned, ready-to-eat foods. Financial information for June 2014 and
results for June 2013 are as shown below:
June 2014 June 2013

(Rs. 000) (Rs. 000)
Revenue 165,750 100,120
Administrative costs 5,243 3,800
Selling and marketing costs 7,897 5,420
Net Profit 22,660 25,785
PPE 18,770 20,460

Inventory 8,884 1,752
Receivables 24,184 14,323
Cash and Bank balances 45 6,430
Long term loans 5,000 1,000

Trade creditors 7,632 5,629
Accrued expenses 1,567 750
Short term finance (over draft facility) 4,592 --
The long term loan from a commercial bank is secured by a mortgage over the company’s land
and building which have a book value of Rs. 7.5 million.
No provision for expired canned food has been made in the 2014 Financial Statements
A debtor who owes Rs. 10 million to Alfa Foods has recently announced for bankruptcy owing to
financial difficulties. No provision has been recorded by Alfa Food, working relationship with the
debtor and the amount would therefore be recovered.
From the information above, identify and explain FIVE risks that should be considered by the
audit team when planning the audit engagement for Alfa Foods. (15)
(PIPFA - Winter 2014)
18 Your firm is the external auditor of Graphite plc (Graphite) for the year ended 30 November
2013. The principal activity of the company is the manufacture and installation of mining
equipment. Graphite operates from two freehold sites in Cardiff and Newcastle. Trading
conditions are difficult and revenue in previous years has increased by less than 2% per annum.
You are the audit manager and the engagement partner has asked you to consider the following
key areas of audit risk:
(1) Revenue
(2) Work in progress
(3) Trade receivables
(4) Freehold premises
All work performed by the company is carried out under short term fixed-price contracts for
mining companies located throughout Europe and all customers are invoiced in Sterling.
Graphite’s employees design the equipment to customers’ specifications and buy in components
from suppliers in mainland Europe and install the machinery. Overseas suppliers invoice Graphite
in Euro.
The contract price is negotiated and agreed with the customer before commencement of any
work by Graphite. The terms of payment require an initial payment of 40% of the contract value
prior to the commencement of any work and the balance following the successful installation of
the equipment. It is company policy to recognize revenue once the customer confirms successful
installation of the equipment. Graphite’s terms of trade require payment within 30 days of
invoice date for both initial payments and final instalments One customer, Durcoal Ltd, is
withholding its final instalment of £1,835,000 as it claims that the equipment is not operating
efficiently.
All direct costs relating to each contract are recorded in the company’s job costing system which
is integrated with the purchases and payroll systems. The finance director uses the cost records
to calculate the value of work in progress for the monthly management accounts and the year-
end financial statements. For the valuation of work in progress a percentage is added to direct
costs to cover production overheads. The percentage is determined by taking attributable
overheads in the management accounts as a percentage of direct costs in the management
accounts. Provision is made for contract losses where appropriate. The prior year audit identified
a number of weaknesses in the job costing system.
The company’s freehold premises in Cardiff were valued by an external valuer in October 2013.
The premises are Currently included in the accounting records at cost less accumulated
depreciation which is lower than the valuation figure. The directors wish to recognize the new
valuation in the-financial statements for the year ended 30 November 2013
The engagement partner has provided you with the following extracts from the financial
statements.
Income statement for the year ended 30 November 2013(draft) 2012(audited)

£’000’ £’000’
Revenue 51,260 47,560
Cost of sales 30,760 30,440
Gross profit 20,500 17,120
Statement of financial position as at 30 November
Current assets
Work in progress 7,500 6,305
Trade receivables 6,620 3,450
Requirement: Justify why the items listed (1) to (4) in the scenario have been identified as key
areas of audit risk and, for each item, describe the procedures that should be included in the
audit plan in order to address those risks. (23)
Note You should present your answer in a two-column format using the headings:
(1) Justification; and
(2) Procedures to address the risk
(Institute of Chartered Accountants in England and Wales, Professional Level - December 2013)
19 The auditor needs to understand the business in order to assess the risk of potential account
misstatements. An auditor made the following list of observations during the tour of the plant
and distribution center. For each observation, indicate the potential audit risk associated with
the observation.
1. The auditor notes that a large number of production machines are sitting idle outside.
2. The distribution center seems busy and messy. Although there are appropriate policies
and procedures in Place but supervisor emphasizes delivery of goods on time and often
paper work is completed hours after delivery,
3. One area of the distribution center contains some products that seem to have been
there for a long time. They are dusty and the packaging looks old.
4. The receiving area is fairly automated. Many products come packaged in cartons or
boxes. The receiving department uses computer scanners to read the contents on a bar
code, and when bar codes are used, the boxes or containers are moved immediately to
the production area where they are to be used.
5. The company uses minimum security procedures at the warehouse. There is a fence
around the facilities, but employees and others seem to be able to come and go with
ease.
20 Audit risks for particular accounts and disclosures can be conceptualized in the model:
Audit risk (AR) = Inherent risk (IR) * Control risk (CR) * Detection risk (DR).
Use this model as a framework for considering the following situations and deciding whether the
auditor’s conclusion is appropriate.
(a) Paul, CPA, has participated in the audit of Tordik Cheese Company for five years, first as an
assistant accountant and the last two years as the senior accountant. Paul has never seen an
accounting adjustment recommended and believes the inherent risk must be zero.
(b) Hill, CPA, has just (November 30) completed an exhaustive study and evaluation of the
internal controls of Edward Foods, Inc. (fiscal year ending December 31). Hill believes the control
risk must be zero because no material errors could possibly slip through the many error-checking
procedures and review layers that Edward used.
(c) On the audit of Philly Manufacturing Company, Fields CPA decided to use substantive
procedures to audit the yearend balances very thoroughly to the extent that the risk of failing to
detect material errors and irregularities should be 0.02 or less. Fields gave no thought to internal
control and conducted only a very limited review of Philly's internal control system.
(d) Shad, CPA, is nearing the end of a “dirty” audit of Allnight Protection Company. Allnight’s
accounting personnel all resigned during the year and were replaced by inexperienced people.
The comptroller resigned last month in disgust The journals and ledgers were a mess because
the one computer specialist was hospitalized for three months durng the year. “Thankfully,”
Shad thought, “I've been able to do this audit in less time than last year when everything was
operating smoothly.”
(American Institute of Certified Public Accountants - adapted)
21 Syawal Sdn Bhd, an audit client of Aidil & Associates, operates five hotels in various locations
around the country. The following information relates to the company’s operations during the
year ended 31 March 2010.
1. Two new directors, namely the managing director and the financial director were appointed in
April 2009. The new managing director has extensive experience of working in the hotel sector
and adopts an aggressive and assertive management style, while the new financial director is an
unqualified accountant with only limited experience in the hotel sector.
2. The remuneration package for the company’s directors provides for the payment of a bonus
based on the profits of the company.
3. The company’s accounting system relies on daily sales and accounting information being input
into remote terminals at each hotel, for transfer to a secure central computer based in the head
office accounts department.
4. Each hotel offers restaurant, gym, conference and meeting facilities. The company owns all of
the hotels’ land and buildings. During the year, two hotels were substantially extended to create
additional restaurant space.
Required: Identify and explain any four (4) inherent risks matters to be considered in the risk
assessment of Syawal Sdn Bhd. (06)
(Malaysian Institute of Accountants - September 2010)
22 You have conducted analytical review procedures on the draft accounts of Blunt Ltd for the year
ended 31 October 2001. Two of your findings are as follows,
1) The gross profit margin has decreased from 29% for the previous year to 23% for this
year.
2) The current ratio has decreased from 1.6 at the previous year end to 1.2 at this year-end.
The directors had expected a decrease in both these measures but not by as much as shown
above.
Indicate what errors might be incorporated within the draft accounts to produce these
unexpected variations, and in which areas you would carry out extra audit work in order to reach
a conclusion. (03)
23 Following IT related controls are being employed at Vision Limited:
(i)The system automatically maintains second copies of all programs and data files,
(ii) Access to programs and data files is restricted using passwords,
(iii) Invoices that are entered into the system are physically counted,
(iv) Firewalls (software and hardware) are Installed to restrict unauthorized access.
(v) Screen warnings are displayed as regards incomplete processing,
(vi) Vision Limited has service level agreements with reliable software companies, for technical
support.
(vii) Review of output against expected values.
Required: (a) In respect of each control, determine whether It Is a preventive, detective or
corrective control, (3.5)
(b) Also classify each of the above between general IT controls and application controls. (3.5)
(ICAP, CAF 09 Level - Autumn 2015) (ICAP’s Official Question Bank for CAF 09 - Q # 60)
24 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)
(ICAP, CAF 09 Level ~ Autumn 2014) (ICAP’s Official Question Bank for CAF 09 ~ Q. # 61)
25 Classify the following controls as preventive, detective, or corrective controls. Give very brief
reasons to justify your answers.
(i) Strong passwords
(ii) Exception reports
(iii) Digital signatures
(iv) Segregation of duties
(v) Backups
(vi) Review of system activity logs (06 marks)
26 Classify the following controls into Input, Processing and Output Controls.
(i) Limit checks on calculated amounts.
(ii) Signature on source documents.
(iii) Use of bar codes.
(iv) Audit trail.
(v) Exception report showing data that does not confirm to specified criteria,
(vii) Initial data should be within a predetermined range of values.
(vii) Checkpoint and recovery procedures.
(viii) Unique login and password.
(ix) Restriction on printing of confidential reports.
(x) Sequential checks. (06 marks)
(ICAP, CAF 09 Level -Autumn 2012)

27 Segregate the following into preventive, detective and corrective controls and give brief
justification in support of your choice.
(i) Reviewing credit card bill before payment.
(ii) Keeping ATM card PIN separate from ATM card.
(iii) Monitoring expenditures against budgeted amounts.
(iv) Submitting revised invoices after correction.
(v) Updating IT access lists if individual's role changes.
(vi) Review of implemented controls by internal auditor.
(vii) Mandatory change of computer passwords after every 45 days. (07)
28 Delphic Co is a wholesaler of furniture (such as chairs, tables and cupboards). Delphic buys the
furniture from six majo, manufactures and sells them to over 600 different customers ranging
from large retai)] chain stores to smaller owner, controlled businesses. The receivables balance
therefore includes customers owing up to $125,000 to smaller balances Of about $5,000, all with
many different due dates for payments and credit limits. All information {s stored on Delphic,
computer systems although previous audits have tended to adopt an ‘audit around the
computer’ approach,
You are the audit senior in charge of the audit of the receivables balance. For the first time at
this client, you have decided to use audit software to assist with the audit of the receivables
balance. Computer staff at Delphic are happy to help the auditor, although they cannot confirm
completeness of systems documentation, and warn that the systems have very old Operating
systems in place, limiting file compatibility with more modern programs.
The change in audit approach has been taken mainly to fully understand Delphic’s computer
systems prior to new internet modules being added next year. To limit the possibility of damage
to Delphic’s computer files, copy files will be provided by Delphic’s computer staff for the auditor
to use with their own audit software.
Required:
(a) Explain the audit procedures that should be carried out using audit software on the
receivables balance at Delphic Co. For each procedure, explain the reason for that procedure.
(09)
(b) Explain the potential problems of using audit software at Delphic Co. For each problem,
explain how it can be resolved. (08)
(c) Explain the concept of ‘auditing around the computer’ and discuss why this increases audit
risk for the auditor. (03)
29 Porthos, a limited liability company, is a reseller of sports equipment, specialising in racquet
sports such as tennis, squash and badminton. The company purchases equipment from a variety
of different suppliers and then resells this using the Internet as the only selling media. The
company has over 150 different types of racquets available in inventory, each identified via a
unique product code.
Customers place their orders directly on the Internet site. Most orders are for one or two
racquets only. The ordering/sales software automatically verifies the order details, customer
address and credit card information prior to orders being verified and goods being despatched.
The integrity of the ordering system is checked regularly by ArcherWeb, an independent Internet
service company.
You are the audit manager working for the external auditors of Porthos, and you have just
started planning the audit of the sales system of the company. You have decided to use test data
to check the input of details into the sales system. This will involve entering dummy orders into
the Porthos system from an online terminal.
Required: List the test data you will use in your audit of the financial statements of Porthos to
confirm the completeness and accuracy of input into the sales system, clearly explaining the
reason for each item of data. (06)
30 Following a competitive tender, your audit firm Cal & Co has just gained a new audit client Tirrol
Co. You are the manager in charge of planning the audit work Tirrol Co's year end is 30 June 2009
with a scheduled date to complete the audit of 15 August 2009 The date now is 3 June 2009.
Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory,
sales and purchasing systems are computerised, with each location maintaining its own
computer system. The software in each location is the game because the programs were written
specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated
on a monthly basis at Tirrol Co's head office to produce management and financial accounts.
You are currently planning your audit approach for Tirrol Co. One option being considered is to
re-write Cal & Co’s audit software to interrogate the computerised inventory systems in each
location of Tirrol Co (except for head office) as part of inventory valuation testing. However, you
have also been informed that any computer testing will have to be on a live pasis and you are
aware that July is a major holiday period for your audit firm.
Required:
(i) Explain the benefits of using audit software in the audit of Tirrol Co; (03)
(ii) Explain the problems that may be encountered in the audit of Tirrol Co and for each
problem, explain how that problem could be overcome. (10)
120a)
31 Advance Limited (AL) uses an in-house developed integrated system for all its accounting
operational needs, AL has been facing following issues in transaction processing:
(i) While processing a batch of 30 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: identity 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)
32 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
tor 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: identity any three control weaknesses in the above situation and suggest any two
mitigating controls against each weakness (09)
33 The auditors of Malaga Co, a large engineering company are now in the course of auditing the
company’s financial statements for the year ended 31 October 2006. -
At the audit briefing meeting, the audit manager made the following statements:
(i) ‘whilst we are all aware of the benefits that Malaga Co should have gained from using a
computer-based accounting system, we need to be alert to the specific risks that a computer-
based accounting system poses to an entity.’
(ii) ‘we will be using audit software.’
Required: (a) State FOUR benefits that Malaga Co should have gained from using a computer-
based accounting system. (04)
(b) State SIX specific risks that the use of a computer-based accounting system poses to an
entity’s internal controls. (09)
(c) Explain the term ‘audit software’. (02 marks) (d) Describe FIVE examples how audit software
could be used for a specific task by the external auditors of Malaga Co. (05)
(Certified Accounting Technician, UK - December 2006, amended)
34 For the audit of the inventory cycle and year-end inventory balance of client, describe FOUR
audit procedures that could be carried out using computer-assisted audit techniques
(CAATS).(04)
35 During the external audit of Pippin Ltd, the audit senior discovered that the company does not
have a formal disaster recovery plan to enable it to recover its data processing capacity as
smoothly and as quickly as possible in response to any emergency that could disable a computer
system.
List the matters to be included in the auditor's report to management (management letter),
which deal with the possible consequences, and the recommendations that you would make, in
respect of the issue outlined above. (04)
36 Distinguish the following between control environment and control procedures:
(a) reporting, reviewing and approving reconciliation;
(b) the function of the board of directors and its committees;
(c) checking the arithmetical accuracy of the records;
(d) maintaining and reviewing control accounts and trial balances;
(e) management's control system including the internal audit function and personnel policies and
procedures
(f) segregation of duties;
(g) defined and documented code of ethics. (07)
(ICAP, CAF 09 Spring 2002)
1
i) Fluctuations in Ratios ii) Key Audit Procedures
Unusual increase in GP ratio: For Occurrence of sales:
Due to increase in cost of material, GP ratio  Select a sample of significant sales recorded
should have been decreased. There is a risk in Sales Journal and vouch back to Sales
that either sales are overstated, or cost of invoices, GDN and Sales order.
sales is understated.  Also check any returns after the year end.
For Completeness of Purchases:
Select a sample of GRN and vouch for complete
audit trail i.e., from GRN to purchase invoice,
recording in journal. (Completeness).
Valuation of Inventory (and other overheads):
Check whether correct quantity and rates of
material (and other inputs are used).
Unusual decrease in creditors: Completeness of Creditors:
There is a risk that creditors are  Perform cut-off test on purchases.
understated. Some of the creditors may  Inspect pending GRNs (i.e., goods received
not have been recorded. but suppliers’ invoices not received) and
ensure they are recorded at balance sheet
date.
 Compare account statements sent by
suppliers with their ledger accounts.
 Review significant payments made after the
year to identify if any liability relates to
current year.
 Review the list of creditors and compare
with previously year.
Unusual increase in debtors: Valuation of Debtors:
There is a risk that receivables may have  Consider basis and adequacy for provisions.
become overdue and may not be collected  Obtain aging report of receivables and test
fully. its accuracy. Compare aging with credit
period of company and identify long
outstanding debtors. Ensure they are
provided for.
 Inquire about disputed receivables, inspect
customer correspondence and board
minutes for evidence of disputes and
expected recovery.
 Examine cash recovery from debtors after
the year end. Also examine write offs of
debts after the year (normally an adjusting
event).
 Assessed historical accuracy of provision for
bad debts.
2
a) Business Risk b) Line items that could be misstated
Risk of non-compliance Provision for fines and penalties:
DPL operates in a highly regulated industry. This area is subject to misstatement because
There may be various non-compliance of laws non-compliances may have financial penalties
and regulations which may not have been adequately
provided for or disclosed in financial
statements.
Risk of import price fluctuations: Gain/Loss on foreign currency translation:
Raw material is imported from Switzerland. Changes in rates of foreign currency at year
Fluctuations in foreign currency may end may not be recorded (for Foreign
adversely affect DPL. Currency payables), or may be wrongly
recorded in Purchases instead of charging as
income/expense in P&L.
Declining product with low margins: Valuation of inventory:
Main product of DPL is facing low demand Low demand, low margin and introduction of
and low margins. If new products are not improved product by customers indicate that
introduced, company may go out of business. NRV of drug A may be lower than its cost.
Valuation of PPE:
Property, Plant and Equipment related to
manufacturing of drug A may also have
become impaired due to decrease in value in
use.
Research Activities; Development cost:
Research activities may not be successful. Some or all of capitalized development cost
may not have met recognition criteria.
3 Income of charity is derived wholly from donations.
Donation income is unpredictable It may fall in poor economic conditions, causing going concern
issues.
Donation collected through volunteers from various places.
It is difficult to ensure completeness of income (as no sales invoices are raised). Further,
donation may be stolen by volunteers.
Constitution of AWT requires that administration cost should not exceed 10% of income.
There is a risk that donation may be recorded inappropriately (e.g., misclassification between
education and meals) or may be spent inappropriately (e.g., it may not be spent in accordance
with instructions of the donor).
Weak control environment:
There is lack of segregation of duties as staff is limited. Only one person managing whole
accounts increases risk of errors and fraud.
4
Assertions Assessment Explanation
of risk
Valuation of High Poor economic conditions may decrease value-in-use of
factory plant factory plant. There is a risk that plant may have impaired.
Valuation of trade Low & Portion of receivable from government represents low risk
receivables Moderate because amounts are delayed but are eventually
recovered.
For rest of debtors, risk is moderate as estimation of

provision for bad debts involves judgments, particularly in
poor economic situations.
Ownership right of Low Possession of inventory items also provides evidence
finished goods about its ownership Further; relevant purchases invoices
inventory also provide evidence of ownership.
Valuation of High It is difficult to ascertain value of unlisted securities as no
unlisted securities market value is available for them. Many judgments and
complex calculation is involved in the valuation of unlisted
securities.
Accuracy of long- Moderate Long-term finance may have been misclassified between
term finance current and noncurrent portion. Further, interest expense
may not have been calculated correctly.
Valuation of High Complexity and judgments are involved in valuation of
provision for provision for gratuity.
gratuity
5 i) an increase in the current ratio
 Current assets (e.g., debtors, inventory) may be overstated, or
 Current liabilities may be understated (e.g., accrued expenses).
ii) a decrease in the gross profit margin:
 Sale may not have been completely recorded, or there may be cut-off errors.
 Purchases may be overstated.
 Closing stock may be understated.
iii) an increase in the inventory holding period:
There may be unsold stock of inventory which have become obsolete and company is unable to
sell its inventory,
Related fixed assets may be impaired.
6 (a)
(i) Control Risk.
(ii) Inherent Risk
(iii) Detection Risk.
(iv) Control Risk
(v) Control Risk
(vi) Detection Risk
(vii) Inherent Risk.
(viii) Inherent Risk
(ix) Control Risk
(x) Inherent Risk.
(b)
(i) Increase.
(ii) Increase.
(iii) Increase. (Finance director means CFO)
(iv) Increase.
(v) Decrease
7 Company B is a high-risk client for the auditor because:
1. It is difficult to verify existence of its inventory because of existence at various locations.
2. USBs are easy to steal and easy to sell subsequently.
3. Technological changes may make its inventory obsolete quickly; hence it may be difficult to
verify valuation.
8 Sr. Decision Explanation
1 Risk will increase Unusual growth/profitability indicates a risk of material
misstatement.
2 Risk will increase Domination of management by a single person is a fraud risk factor.
3 Risk will increase Independence of internal auditor is impaired if he reports to
management (i.e., CFO) instead of TCWG (i.e., Board of Directors or
Audit Committee).
4 Risk will increase Turnover in key personnel increases risk of material misstatement
because inexperienced and untrained staff may cause errors.
5 Risk will increase Changes in accounting /regulatory requirement increase risk of
material misstatement because misstatements are likely to occur on
initial application.
6 Risk will increase Pending litigation and contingent liabilities cause risk of material
misstatement. They are withdrawn, so risk is reduced.
7 Risk will increase Complex Transactions and significant related party transaction
increase risk of material misstatement.
8 Risk will increase There is a risk if sale of shares or business is intended, to show
improved financial performance and financial position to buyer to
receive higher price.
9
i) Why the situation ii) Component iii) Key account iv) Audit assertion(s)
constitutes an audit risk? of the audit risk balance(s) affected to be tested
affected
Reduced staff would mean Increase in Accounts Accuracy, valuation
reduced segregation of control risk. receivable and and allocation of
duties. Internal control in the provision for receivable.
credit department may be doubtful debts
affected.
Purchase is recorded before Increase in Inventory and Existence for
receiving goods. control risk. Accounts payable inventory and
Occurrence/Cut-off
on Purchases.
10 a) Inherent Risk
Risk Factor: Income of charity is derived wholly from donations:
Donation income is unpredictable. It may fall in poor economic conditions, which may raise
doubt about entity's ability to continue as going concern.
Risk Factor: Charity is managed by Volunteers and part time staff.
Volunteers are usually non-professionals and there is susceptibility of frau. Risk is also high as no
audit has been conducted in past and there is no full-time accountant.
Charity income is to be spent only for educational purposes.
There is a risk that expenditures can be incurred for objects outside of constitution of Charity.
Control Risk
Control Environment of a charity is likely to be weak due to:
 Lack of segregation of duties as staff is limited.
 Volunteer staff which may not well qualified or experienced to have good control system.
 No internal audit department working in NFPO.

 Lack of authorization due to due to lack of involvement of trustees.
Detection Risk
 Sampling risk is likely to be low because charity is a small organization and auditor may test
all or majority of transactions.
 Non-sampling risk is likely to be high because it is the first year of audit, and auditor will have
less knowledge of entity. Further, it will be difficult to verify opening balances.
b)
Audit Procedures to be performed on Income from fund raising events
 Ensure that license has been obtained from regulatory authority to avoid legal action against
charity.
 Attend fund raising events and observe procedures for receiving of cash, recording of cash,
particularly to ensure that segregation of duties exist between receiving and recording.
 At end of event, perform cash count to ensure book balance agrees with physical balance.
 Ensure that whole cash has been deposited into bank account to ensure completeness of
income.
Audit Procedures to be performed on Expenditures on fund raising events:
 Compare actual expenditure on fund raising event with budgeted expenditure, and
investigate unusual difference.
 Examine list of expenditures incurred at fund raising event and inspect their authorization.
Also inspect Supporting documents for all expenditures.
 Obtain representation from trustee that there are no unrecorded liabilities for the events.
11
Event/Condition a) Audit Risk b) Audit Approach
Sales are very heavy in the Sales may be overstated due  Discuss reasons for the
last fortnight of the year to recording of fake sales or increase in revenue with
next year’s sale recorded in management.
current year.  Perform cut-off test.
 Select a sample of
revenue from last
fortnight and check their
supporting
documentation.
 Check any returns after
the year end.
 Send confirmation letters
to major debtors.
The divisional head is Divisional head may auditor shall design and
remunerated based on overstate income and implement overall responses
profits of the division. Understate expenses to e.g.,
achieve financial target Increase level of professional
profit. There is risk at skepticism specially during
financial statement level. audit of judgment areas.
Adequate planning and
reduced materiality level.
Assigning more experienced

and specialized staff e.g., use
of experts if necessary.
12 a)
Risk and explanation of risk Effect on Audit Approach
Risk Factor: Income of charity is derived Audit report may need to modified because
wholly from donations: going concern assumption is affected by
Donation income is likely to be unpredictable uncertainty of future income.
and will fail in poor economic conditions.
Risk Factor: Cash is collected by volunteers Audit report may need to be modified
from various places. because lack of evidence to ensue
It is difficult to ensure completeness of completeness of income.
income because donation may be stolen by
volunteers (as no sales invoices are raised).
Risk Factor: Constitution of charity specifies Expenditure will have to be carefully
how the income is to be spent/expended: reviewed to ensure that expenditures are not
There is a risk that expenditure can be ultra vires the objectives of Charity
incurred for objects outside of constitution of
Charity
Risk Factor: There are specific instructions Auditor will carefully check whether;
about utilization of donation.  Specific donations are recorded as liability
There is a risk that donation may be recorded  Specific donation is expended in
inappropriately or may be spent accordance with instructions of donor.
inappropriately (e.g., it may mot be spent in
accordance with instructions of the donor).
Risk factor: Constitution of charity requires Auditor will check whether this limit has
that administration expenditure cannot exceeded.
exceed 10% of income. Auditor will also check other areas if there are
There is a risk that administration unusual increase in expense for possibility of
expenditure can exceed this limit and may be misclassification of admin
classified by management.
Risk Factor: There are complex regulations Auditor will ensure that staff is familiar and
and tax rules applicable on charity complying with relevant regulations and tax
There is a risk that rules will be broken due to rules.
lack of knowledge and expertise.
b)
Control Environment of a NFPO is likely to be weak due to:
 Lack of segregation of duties as staff is limited
 Volunteer staff which may not well qualified or experienced to have good control system.
 Lack of involvement of trustees
13
Risk Responses
Risk Factor: 100% payment is received in For evaluate and test the system for
advance. recording deferred income and its transfer to
revenue.
Revenue may be recognized pre-mature at A sample of order at year-end, trace advance

time of receipt of cash. Therefore, cut-off received to entry in deferred income account.
assertion of revenue is at risk.
Risk Factor: GP ratio has recognized  Discuss with management why GP ratio
GP ratio has increased to 35.3% did not decrease with decrease in sale
(21,249/60,222 *100) this year from 33% price.
(19,681/59,638 * 100) in last year, despite the  Perform cut-off tests on sales and
fact that company has given 20% discounts purchases.
during the year. It indicates overstatement of  Inspect a sample of sales invoices and test
sales or understatement of purchases. recording of sales and treatment of
discount.
Risk Factor: Creditor’s turnover ratio has  Send Confirmation letters to creditors
decreased  Review pending Goods Received Note, to
Creditor’s turnover ratio has decreased to identify any purchase not recorded
13.9 days (1653/42676 *100) this year from  Perform cut-off test on purchases
16.7 days (1895/40848 *100) in last year  Review significant payments made after
which indicates understatement of creditors. the year to identify if any payments relate
to current year
Risk Factor: Warranty period has increased
Provision for warranty has significantly
increased to 2.1% (1,265/60,222 *100) this
year from 2% (1,193/59,638 *100) as
compared to last year, despite the fact that
company has increased it’s despite the fact
that company has increased its warranty
period from 3 to 5 years. It indicates risk of
understatement of provision for warranty.
14 Risk Factor: Stagnant Revenue despite launch of various new products
There has been only 1% increase in sales (1,190/1,174) despite launch of various new products
this year based on latest technologies. It indicates sales may be understated.
Further, it also indicates that new products have not been successful or demand for existing
products have decreased, and indicates inventory may have become obsolete requiring write-
down of inventory from cost to NRV. Therefore, Valuation and Allocation assertion of Inventory
is also at risk.
Further, new plant purchased for new products may also have become impaired as its value in
use has decreased if new products are not successful.
Risk Factor: Increase in Cost of Sales (as %age of Sales)
increase in cost of sales (681/1,190= 57.23% as compared to last year 637/1,174= 54.23%) may
be because of depreciation of new plant, but it also indicates overstatement of purchases or
overheads. Further, it may indicate understatement of closing stock.
Risk Factor: Decrease in operating expenses (as %age of Sales)
Decrease in operating expenses (267/1,190 = 22.4% as compared to last year 310/1,174 = 26.4%)
indicates understatement of operating expenses (specially advertisement and sales related cost
should increase when new products are launched). It also indicates misclassification between
operating expenses and cost of sales.
Risk Factor: Decrease in finance charge (as %age of borrowings)
Decrease in finance charge (77/642=11.99% as compared to last year 69/102=67.65%) indicates

understatement of finance charges. Therefore, Completeness and Accuracy assertions of finance
charges are at risk. It may also indicate overstatement of borrowings.
Risk Factor: Increase in Inventory Turnover Days:
Increase in inventory turnover days (423/681*360 = 224 days as compared to last year
260/637*360 = 147 days) indicates that Inventory may be overstated e.g. fake inventory may
exist, or there may be incorrect valuation of inventory, or inventory may have become obsolete
requiring write-down of inventory from cost to NRV. Therefore, Existence and Valuation and
Allocation assertions of Inventory are at risk.
Risk Factor: Increase in Debtors Turnover Days:
Increase in debtors turnover days (417/1,190*360 = 126 days as compared to last year
250/1,174*360 = 77 days) indicates that debtors may be overstated e.g. fake debtors may exist
or slow-moving/doubtful debtors may exist from whom full recovery is not expected. Therefore,
Existence and Valuation and Allocation assertions of Debtors are at risk.
Risk Factor: Intangible assets recognized and purchased by company:
Intangible assets may be incorrectly valued because of subjectivity and complexity in valuation
(e.g. issue of useful life, issue of internal expenses). Therefore, Valuation and Allocation assertion
of Intangible Assets is at risk.
Risk Factor: Increased level of borrowing:
Deteriorating current ratio and increased level of borrowing which indicates company’s liquidity
position is worsening.
15
Risk Response
Risk Factor: Significant investment in Plant &  Compare actual expenditure on plant and
Machinery: machinery with budget. Investigate
There is a risk of misclassification between unusual fluctuation.
capital and revenue expenditure.  Select a sample of cost incurred, and
check with supporting documents to
ensure expense has been properly
classified
Risk Factor: Inventory is located at various  Select a sample of locations to be
locations: physically inspected by auditor. Conduct
It will be difficult for auditor to verify simultaneous stock checking for selected
existence and completeness of inventory. locations.
 For locations not selected for stock-
count, compare inventory level with
previous periods. Obtain working papers
of internal auditors, if relevant.
Risk Factor: New accounting system has  Auditor shall inspect system notes of new
been launched: accounting system and shall test control
There is a risk that opening balances have not over its implementation.
been transferred accurately and completely  Auditor shall compare the balances of
into new accounting system. new system with old system to identify
issues in processing of accounting system.
Risk Factor: Company pays additional bonus  Discuss reasons for the increase in
on achievement of sales goals: revenue with management.
 Perform cut-off test.
Sales may be overstated due to recording of  Select a sample of significant revenue

fake sales or next year’s sales recorded in recorded and check their supporting
current year. documentation.
 Check any returns after the year end.
 Send confirmation letters to major
debtors.
Risk Factor: There is stock of old and  Obtain and inspect aged inventory report
defectives gods returned by customers: and review for evidence of slow moving
Stock may not have been recorded at lower inventory.
of cost and NNRV. Further, sales return may  Inquire client about calculation of NRV of
not have been appropriately recorded. inventory and check reasonableness of
basis of calculation (e.g. subsequent sale
price of inventory)
 Ensure sale has been reversed for all
returned items
16 RAW MATERIAL
Audit Risks Procedures to address risk
1.Inventory turnover ratio has increased to Discuss reason for increase in number of days
198.5 days (27,000 / 48,970 * 360) this year with management (i.e. change in purchase
from 117.5 days (15,500 / 47,500 * 360) in policy or difficulty in selling).
last year, which indicate; overstatement of Obtain and inspect aged inventory report and
stocks due to slow-moving or obsolescence. review for evidence of slow-moving/obsolete
2. Foreign supplier has been banned due to inventory.
supply of poor quality products. Therefore, Inquire client about calculation of NRV of
inventory purchased from that supplier may inventory (particularly of foreign supplier),
also have become obsolete. and check reasonableness of the basis of
calculations (e.g. subsequent sale price of
inventory)
TRADE RECEIVABLES
Audit Risk Procedures to address risk
1. Debtors turnover ratio has increased to  Discuss reason for increase in number of
101.5 days (13,800 / 48,970 * 360) this year days with management (i.e. change in
from 87 days (11,500 / 47,500*360) in last credit policy or difficulty in collection)
year, which indicates that debtors may be  Obtain aged receivable analysis and
overstated e.g. fake debtors may exist whom review for evidence of overdue balances
full recovery is not expected. Therefore,  Inspect customer correspondence and
Existence and Valuation and Allocation board minutes for evidence of disputes
assertions of Debtors are at risk.  Examine bank statement to see if
2. There is a dispute with a major distributor. receivables are paid after year end
Amount receivable from this distributor may  Direct confirmation of balances with
not be recovered in full. customers
 Consider basis and adequacy of
provisions for full distributor and other
debtors.
INTANNGIBLES
1. There has been significant increase in  Inspect the agreement of patent with
intangible assets, which indicates the risk of franchisor
incorrect capitalization.  Inquire the client about calculation of
2. Despite purchase of new patents during value in use of patents, and check
the year, there has been no significant reasonableness of the basis of
increase in revenue, which indicates patents calculations.
may not be commercially successful.  Obtain confirmation from legal advisor
3. Legal action by franchisor on infringements regarding possible outcome.
of patent rights may result in cancellation of
rights and impairment of related intangible
asset.
LIQUIDITY ISSUES
1. Current ratio has decreased to 1.5 (40,800  Inquire management about its plan to
/ 27,000) this year from 1.8 (27,000 / 15,000) resolve the liquidity issues.
in last year, which indicates company is facing  Review management's plan. If plan is not
problems in settling its debts. reasonable, it would become a material
2. Increase in interest expense has uncertainty related to going concern.
significantly dropped profitability of
company. There is risk that company may not
be have sufficient profits to bear it in future.
17 Risk Factor: Unusual growth in revenue:
Revenue has increased by almost 66% as compared to last year, without any apparent reason.
There is a risk that this has been overstated by management by recording fake sales.
Risk Factor: Cost of Sales has increased significantly:
Cost of sales (as a percentage of sales) has increased significantly from 65% in last year to 78% in
this year. This indicates that purchases and other manufacturing expenses may have been
overstated.
Risk Factor: Increase in inventory turnover ratio:
Inventory turnover ratio has increased from 6 days (last year) to 19 days (this year). This
indicates that company is facing difficulty in selling its inventory and some of the inventory may
have become obsolete. This risk is further confirmed by the fact that no provision for expired
canned food has been made in the 2014 Financial Statements.
Risk Factor: Debtor has gone bankrupt:
There is a risk that full amount may not be recovered from this debtor. Therefore, debtors would
be overstated if appropriate amount of provision for bad debts is not recorded.
Risk Factor: Increased borrowings during the year:
Company's liquidity position has worsened during the year and company has obtain significant
short-term as well as long-term borrowings. There are following risks with higher level of
borrowings:
 Borrowings may not be appropriately classified between short-term and long-term portion.
 Interest expense may not be appropriately calculated and recorded.
 Disclosures relating to debts may not have been appropriately and completely included in
 If company breaches debt-covenant requirements, debt may become immediately payable
and company may not have sufficient resources to pay the debt which may cause going
concern problems.
18
REVENUE
Justification Procedures to address risk
1. There is an unusual increase of 7.8%  Discuss reasons for the increase in
(51,260 / 47,560) in revenue as compared to revenue with management.
less than 2% in previous years. Therefore,  Vouch entries in the revenue account to
there is a risk of Occurrence assertions of invoices and confirmation of successful
sales. installation.
2. 40% of revenue is received in advance prior  Perform cut-off tests e Evaluate and test
to commencement of work. There is a risk the system for recording deferred income
that revenue may be recognized pre-mature. and its transfer to revenue.
Therefore, there is a risk of Occurrence  For a sample of contracts in progress at
assertions of sales. year end trace initial payment invoice to
entry in deferred income account
WORK IN PROGRESS
1. Work in process involves estimation of 1. Enquire if there were any systems issues
stage of completion (which is subjective); and during the year and if previous years
absorption of overhead (which is complex). issues have been remedied.
Therefore, Valuation and Allocation assertion 2. For a sample of material costs, reperform
of Inventory is at risk. exchange rate translation and check the
2. Inventory turnover ratio has increased to rate to a reliable source.
87.8 days (7,500 / 30,760 360) this year from 3. Obtain workings for overhead allocation
74.5 days (6,305 / 30,440 * 360) in last year, and ensure only attributable overheads
which indicate overstatement of work in are included.
process. 4. Assess consistency of valuation of work in
3. Number of weaknesses in job costing process with previous years.
system were identified in previous year which 5. Compare actual costs to budget to
may result in erroneous valuation in current identify cost overruns which may indicate
year too. potential losses.
4.Suppliers invoice in euro and there may be 6. Compare contract price to estimated total
errors in translation. costs for contracts in progress at the year
5. There may be loss on some contracts in end to ascertain whether provision for
progress due to cost-overrun losses is required.
7. Inspect ageing of WIP to identify any
unbilled/irrecoverable WIP.
TRADE RECEIVABLES
1. Debtors turnover ratio has increased to  Obtain aged receivable analysis and
46.5 days (6,620 / 51,260 * 360) this year review for evidence of overdue balances
from 26.1 days (3,450 / 47,560 * 360) in last  Inspect customer correspondence and
year, which indicates that debtors may be board minutes for evidence of disputes
overstated e.g. fake debtors may exist or poor  Examine bank statement to see if
debtors may exist from whom full recovery is receivables are paid after year end
not expected. Therefore, Existence and  Review credit notes issued after year end
Valuation and Allocation assertions of  Direct confirmation of balances with
Debtors are at risk. customers
2. A material amount of receivable  Inspect contract with Durcoal

(1,835,000) is in doubt because of dispute.  Consider basis and adequacy for
This amount may not be recovered in full. provisions for Durcoal and other
balances.
FREEHOLD PREMISES
1. Revaluation may be incorrectly calculated Ensure Competence, Capabilities and
and recorded because it involves Subjectivity Objectivity of the Valuer
and Complexity (e.g. deferred tax Auditor shall obtain knowledge of expert’s
implication). Therefore, Valuation and independence, qualification, experience,
Allocation assertion of fixed assets is at risk. expertise, and reputation.
2. The Newcastle site has not been revalued Ensure adequacy of valuation report
(IFRS require all properties in the same class Auditor shall determine adequacy of work by
to be revalued). evaluating:
1. Relevance, completeness, and accuracy of
significant source data
2. Relevance and reasonableness of
significant assumptions and methods
3. Reasonableness of expert's findings and
conclusions
4. Consistency of these conclusions with
other audit evidence
Ensure revaluation has been properly
accounted for in financial statements:
1. Ensure that entire class of asset has been
revalued.
2. Ensure that valuation is up-to-date.
3. Ensure that valuation is appropriately
accounted for in accounts.
4, Recalculate “revaluation surplus (or loss)”,
and “depreciation expenses” and ensure
these have been correctly recorded in books
of accounts.
5. Ensure that appropriate disclosures have
been made in accordance with IAS-16.
19 Sr Audit Risk
1 Impairment loss needs to be recorded on idle machines.
Further, idle machines may need to be recorded as “assets held for sale”.
2 Internal controls over sales might be weak. Auditor should be concerned about
preparation of correct billing of Sales with respect to quantity and price.
3 This indicates obsolete inventory which might have to be recorded on NRV.
4 There is no quality and quantity inspection on receiving goods. Using bar codes only to
accept receiving might result in paying for ‘garbage’.
5 This may result in theft of inventor and other assets of company .
20 (a)
Paul's view is incorrect. Inherent risk can never be zero. If no adjustment have been made in
past, it may mean misstatements were not material. If IR = 0, then AR = 0, then no further audit
work need be done which is not allowed by ISAs and practice,
(b)
Hill's view is incorrect. Control risks can never be zero. There are always some inherent
limitations. If no adjustment have been made in past, it may mean misstatements were not
material. Moreover, auditor did not cover last month so internal controls on whole year cannot
be relied upon. If CR = 0, then AR = 0, then no further audit work need be done which is not
allowed by ISAs and practice.
(c)
Field’s view is permissible as per ISAs. This result in effective audit, however efficiency of audit
will not be achieved by this approach.
(d)
Conclusion does not seem appropriate.
Inherent risk and control risk both are high. So in case of higher risk of material misstatement (as
compared to last year), auditor would need to perform more substantive procedures to reduce
the risk. If audit is completed in less me, sufficiency and appropriateness of audit evidence
obtained is in question.
21 New Managing director and financial director:
Managing director with aggressive and assertive style management and unqualified
inexperienced financial director could lead to misstatements in financial statements.
Remuneration package of directors linked with profits:
Profits of the business could be overstated by directors to achieve targets, so that bonus is
received.
Information transmitted from remote terminals through IT system:
Inaccurate or incomplete or incompatible information could be forwarded to head office due to
remoteness of IT operations.
Extension of two hotels during the year:
There may be incorrect categorization of cost between Revenue and Capital Expenditure.
Therefore, Classification assertion of repair expense is at risk.
22 Finding Errors which might be incorporated in accounts Areas where to carry out
extra audit work
1 Understand of sales Sales
Overstatement of purchases Purchases
Understatement of closing stock Closing stock
2 Understatement of debtors, cash and bank or Debtors
prepayments Cash and Bank
Overstatement of creditors or accruals Prepayments
Creditors, Accruals
23 Sr no a) Preventive, Detective or Corrective b) IT General or IT Application
i) Corrective IT General
ii) Preventive IT General
iii) Detective IT Application
iv) Preventive IT General
v) Detective IT Application
vi) Corrective IT General
vii) Detective IT Application
24
Sr no Type of Control Justification
i) Preventive Because trained people are less likely to commit errors.
ii) Detective Because when compared with manual total, batch total will
identify errors.
iii) Preventive Because errors and fraud are less likely to occur if more than one
people are involved in the transaction.
iv) Corrective Because backup will help in recovering data and continuity of
operations in the event of disaster.
v) Detective Because system logs are used to analyze performance of system
and diagnose problems in it.
vi) Corrective Because backup will help in recovering data and operations in the
event of disaster.
25 Sr no Type of Control Justification

i) Preventive Because passwords will prevent unauthorized access to system
and data.
ii) Detective Because exceptions reports are used to detect errors in the
operation of system.
iii) Preventive Because digital signatures ensure unauthorized data is not used.
iv) Preventive Because errors and fraud are less likely to occur if more than one
people are involved in the transaction.
v) Corrective Because backup will help in recovering data if data gets damaged
or corrupted.
vi) Detective Because system logs are used to analyze performance of system
and diagnose problems in it.
26 Sr no Type of Control Sr no Type of Control

i) Processing Control vi) Input Control
ii) Input Control vii) Processing Control
iii) Input Control viii) Input Control
iv) Output Control ix) Output Control
v) Output Control x) Input Control
27 Sr no Type of Control Justification

i) Detective Because it helps to find errors in billing.
ii) Preventive Because it prevents unauthorized use of ATM card, even if
someone gets its possession.
iii) Detective Because it identifies deviation from budgets and further
investigation may identify errors.
iv) Corrective Because it will correct already identified errors
v) Preventive Because it will prevent unauthorized use of access rights.
vi) Detective Because it will identify weaknesses in control by an independent
person.
vi) Preventive Because it will prevent risk of misuse of passwords.

28 a)
Procedure Reason
Auditor may cast individual debtors’ listing To ensure accuracy and completeness of
and compare it with control account receivables
Auditor may compare the outstanding To ensure balance does not exceed credit
balance with credit limit limit.
Auditor may calculate and compare debtors’ To identify if debtors are having difficulty in
turnover ratios. payment which may require provision.
Auditor may stratify population based on To select debtors for confirmation
large and unusual items.
Auditor may prepare an aging of receivables To assist with the identification of
irrecoverable receivables.
b)
Potential Problem How to resolve
There may be substantial setup costs to use Cost benefit analysis from the audit point-of-
audit software. view should be carried out prior to deciding
to use audit software.
Changes to clients’ computer systems can Starting to use audit software this year is
result in cost! amendments to the audit therefore not advisable because Delphic’s
software. system will change next ear.
Auditor will be using copy files which means To ensure that the files are genuine either the
auditor will not be certain whether actual auditor should supervise the copying or the
files are being used. ‘live’ files on Delphic’s computer systems
should be used.
There is lack of system documentation of If sufficient documentation is not available,

Delphic. audit software may not be used.
Audit Software may not be compatible with lf there are compatibility issues, audit
client software software may not be used
c) This term means that the ‘internal’ software of the computer is not documented or
audited by the auditor, but that the inputs to the computer are agreed to the expected
outputs from the computer.
This method of auditing increases audit risk because:
 The actual computer files and programs are not tested; the auditor has no direct
evidence that the programs are working as documented.
 Where errors are found in reconciling inputs to outputs, it may be difficult or even
impossible to determine why those errors occurred.
29 Procedure Reason
Input of an order for less than one and more To ensure reasonableness check is working
than 5 tennis racquets. and an exception report or warning message
is shown for such inputs
Input of an order without payment details or To ensure incomplete orders are rejected by
other required fields of sales orders system and only complete order are accepted
Input of invalid inventory code Ensures that the computer detects the invalid
code and presents an error message.
30 i)
1. Auditors are able to check the accuracy and completeness of processing of transactions
in IT system (i.e. “auditing through computers”).
2. Enable auditors to test a large volume of data accurately.
3. Reduces efforts on routine work and gives opportunity to concentrate on judgmental
areas.
ii)
Potential Problem How to resolve
Report is to be signed in six weeks after the Access to client's software and data should be
year end. So, auditor has less time to write obtained as soon as possible. Firm should
and test audit software. engage IT expert as part of audit team.
There may be substantial setup costs to use Cost benefit analysis from the audit point-of-
audit software. view should be Carried out prior to deciding
to use audit software. Use of software should
be limited to important activities only.
Most of the audit work will be done in July Staff should be carefully planned for
which is a major holiday period for audit firm engagement team, to ensure availability of
staff during July. If needed, staff from other
offices may also be borrowed or hired
Client is using customized software. This System documentation should be obtained
means auditor will have to spend more time from client to obtain understanding of
on understanding it and testing it. software.
Computer testing will be on live basis. There Client should be asked to make back-up files
is a risk of accidental amendment or deletion of data.
of client data.
Each location maintains its own computer Client should be asked to inquire which
system. These system may be modified at branches have modified system, and audit
branch level and may not be compatible with work should be focused on material
each other branches.
31
Sr no Application Control Description of application control
i) Batch Total/ Control Batch total is applied when several transactions are input for
Total processing at the same time. When all transactions are
processed by the system, a manually calculated sum of
number of transactions (called Transaction Count) or sum of
value of transactions (called Control Total) from source
documents is compared with electronically calculated sum of
recorded transactions to ensure transactions are accurate and
completely recorded.
ii) Check Digit Check-digits are checks on the validity of key numerical codes
e.g. customer codes employee identification numbers. A
check-digit is a digit that is calculated in a mathematical way
from the other digits in the original code and then is added to
the end of the code as extra-digit to detect transposition
errors.
iii) On screen Prompt These are screen warnings which ensure transactions are
completely processed and not left partly.
iv) Existence Test A check to ensure that a code/number exists by looking up the
code 1n the valid record.
32
Control Weakness Suggested Control
Changes made without Changes in programs should be approved by appropriate level of
authorization management
There should be restricted access to program files and only
authorized programmers should have access to them.
Program not tested No program changes should be made in live operation.
before live operation All program changes should be tested offline before live
operations.
No disaster recovery Backup copies (i.e. second copies) of all programs and data files
plan/contingency plan Maintenance and service agreements with software companies
33 (a)Advantages of using Computer-based information system in business:

1. Computer system can handle large volume of data and complex calculations.
2.Timeliness, availability and accuracy of information
3. Facilitates the additional analysis of information
4. Facilitates monitoring of performing of company’s activities and procedures.
b)
1. There may be unauthorized access to data and changes to system, especially when many users
access a Central database (e.g. due to hacking).
2. There may be processing errors e.g. wrong transactions may be processed as well as valid
transactions may be wrongly processed.
3. Potential loss or destruction of data (e.g. due to virus)
4. IT personnel may gain more than necessary privileges and may break segregation of duties.
5. There may be compatibility issues between different software and hardware.
6. Expensive to set-up.
c) Audit Software’s are computer programs used by the auditor to interrogate (i.e. to verify)
information in client's IT system for use in audit work. Their principle objective is substantive
testing.
(d)
Audit Software can be used in any area of financial statements for following purposes:
 In Analytical Procedures (e.g. in variance analysis, turnover ratios, trend analysis)
 In Sampling (e.g. stratification, sample selection)
 In determination of Materiality
 In detection of unusual items.
 In drafting audit report
34 Using CAATs:
1. Auditor may calculate and compare inventory turnover ratios to identity slow moving
items which may require write-down to NRV (or provision)
2. Auditor may cast inventory listing to confirm accuracy and completeness of inventory.
3. Auditor may select a sample of inventory items to recalculate cost and/or NRV of items.
4. Auditor may test cut-off by comparing dates of GRN and GDN with related invoices
recorded in journal.
35 Weakness Noted: company does not have a formal disaster recovery plan.
Possible consequences:
1. Staff may not be aware of their responsibilities in the event of a disaster
2. There miay be loss of accounting data, customer/supplier goodwill and profits.
3. Disaster may hinder continuity of operations such as payment of suppliers and invoicing
customers
Recommendation:
1. There should be recovery plans which should be fully documented, specifying arrangements
and should be communicated to staff.
2. There should be off-site back of data on regular basis.
3. Backup plan should be periodically tested to ensure it works as intended.
4. Insurance policies. .
36 (a) Control Procedure/ Activity
(b) Control Environment
(c) Control Procedure/ Activity
(d) Control Procedure / Activity
(e) Control Environment
(f) Control Procedure / Activity
(g) Control Environment
Chapter 6 | Test of Controls
1 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
Required:
Identify the control weaknesses in sales and receivable process of SPL along with their possible
effects and give your recommendations to SPL. (15)
2 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 b 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)
3 You are the audit in charge at Quick Enterprises Limited (QEL), a distributor of fast moving
consumer goods. QEL supplies goods to retailers all over the-country. The purchase procedure of
the company includes the following:
(i) Minimum stock levels are fixed on the basis of the changing demand for different
brands which is monitored by the marketing department.
(ii) At the minimum stock level, requisitions for stock purchases are generated by the
marketing department and signed by the Marketing Manager.
(iii) Pre-numbered purchase orders are generated in triplicate.

(iv) Purchase Manager signs the purchase order after matching these with the requisitions
signed by the Marketing manager.
(v) Purchase orders are faxed to the suppliers and copies thereof are forwarded to the
stores and finance departments.
(vi) On receipt of goods, pre-numbered Goods Receiving Notes (GRNs) are prepared and
signed by the Store Incharge. Each GRN is compared with the relevant purchase order by
the Store Incharge.
(vii) GRN is forwarded to the finance department for recording in the stores ledger. Required:
identify the key internal controls in the above system and test of controls required to
evaluate each control. (08)
4 Your firm is the auditor of Shahzad Limited (SL), a listed company, which is a wholesaler of
consumable products. SL records its sale on delivery of goods and maintains up to date
computerised inventory records. A full inventory count was conducted at the year end. The
senior who attended the physical stocktaking at the central warehouse has observed the
following matters:
(i) The inventory count took place on January 1, 2010 under the supervision of the
Inventory Controller. No movement of inventory took place on that day.
(ii) Four counting teams were formed. Each team comprised of two persons. The floor area
was allocated by the teams among themselves.
(iii) Each team was instructed by the Inventory Controller to remember which inventory had
been counted.
(iv) Pre-numbered count sheets were provided to the staff involved in the inventory count.
The count sheets showed the inventory ledger balances, to facilitate reconciliation.
(v) Old, slow-moving or already sold inventories were highlighted on the count sheets at the
time of counting.
(vi) Items not located on the pre-numbered inventory sheets were recorded on separate
sheets which were numbered by the staff.
(vii) At the end of the count, all inventories against which advances from customers had been
received were removed from the physical inventory on the instruction of the Inventory
Controller.
Required: identify the weaknesses in the system of inventory count. Give appropriate
explanations to support your point of view. (09)
(ICAP, CAF 09 Level - Spring 2910) (ICAP’s Official Question Bank for CAF 09 - Q. # &9)
5 Client background - sales system.
Seeley Co is a wholesaler of electrical goods such as kettles, televisions, MP3 players, etc. The
company maintains One large warehouse in a major city. The customers of Seeley are always
owners of small retail shops, where electrical B0ods are sold to members of the public. Seeley
only sells to authorised customers; following appropriate credit checks, each customer is given a
Seeley identification card to confirm their status. The card must be used to obtain goods from
the warehouse.
Despatch and sales system
Despatch and sales system operates as follows:
1. Customers visit Seeley's warehouse and load the goods they require into their vans after
showing their Seeley identification card to the despatch staff.
2. pre-numbered goods despatch note (GDN) is produced and signed by the customer and a
member of Seeley’ despatch staff confirming goods taken.
3. One copy of the GDN is sent to the accounts department, the second copy is retained in the
despatch department.
4. Accounts staff enter goods dispatch information onto the computerised sales system. The
GDN is signed.
5. The computer system produces the sales invoice, with reference to the inventory master file
for product details and prices, maintains the sales day book and also the receivables ledger. The
receivables control account is balanced by the computer.
6. Invoices are printed out and sent to each customer in the post with paper copies maintained
in the account, department. Invoices are compared to GDNs by accounts staff and signed.
7. Paper copies of the receivable’s ledger control account and list of aged receivables are also
available.
8. Error reports are produced showing breaks in the GDN sequence.
Required: Using information from the scenario, list SIX tests of control that an auditor would
normally carry out on the dispatch sales system at Seeley Co and explain the reason for each
test.
(ACCA, Fundamentals Level F8 — June 2008) (ICAP’s Official Question Bank for CAF 09 - Q. #
431b) Spring 2002)
6 Greystone Co is a retailer of ladies clothing and accessories. It operates in many countries around
the world and has expanded steadily from its base in Europe. Its main market is aimed at 15- to
35-year-olds and its prices are mid to low range. The company’s year-end was 30 September
2010. Ordering process Each country has a purchasing manager who decides on the initial
inventory levels for each store, this is not done in conjunction with store or sales managers.
Goods received and Invoicing To speed up the ordering to receipt of goods cycle, the goods are
delivered directly from the suppliers to the individual stores. On receipt of goods the quantities
received are checked by a purchase assistant against the supplier's delivery note, and then the
assistant produces a goods received note (GRN). The checked GRNs are sent to head office for
matching with purchase invoices. As purchase invoices are received they are manually matched
to GRNs from the stores, this can be a very time consuming process as some suppliers may have
delivered to over 500 stores. Once the invoice has been agreed then it is sent to the purchasing
director for authorisation. It is at this stage that the invoice is entered onto the purchase ledger.
Required: - As the external auditors of Greystone Co, write a report to management in respect of
the purchasing system which:
(i) Identifies and explains FOUR deficiencies in that system;
(ii) Explains the possible implication of each deficiency;
(iii) Provides a recommendation to address each deficiency.
(ACCA, Fundamentals Level F8 – December 2010)
7 Haydn Co is a limited liability company and wholesale supplier of stationery products. It
commenced trading in 2001 and now has 60 employees with separate sales and accounts
departments However at a recent board meeting, concern was expressed at some aspects of the
company’s internal control, including those relating to sales and trade receivables. Jon May, the
sales director is an excellent salesman and has been largely responsible for the company’s
growth since 2001 and for the implementation of the control activities exercised over the
company’s sales and trade receivables system. The following policies and procedures form part
of the control activities exercised over that system.
1. Haydn Co uses a networked integrated sales and general ledger accounts system The
company’s accountant and assistant accountant, together with Jon May and the trade
receivables department clerks (sales clerks) have full access to all sales ledger files including the
master file
2. Requests from potential customers to open a credit account are forwarded to Jon May, who
carries out full credit checks before deciding whether to grant a credit facility When credit
facilities are granted a sales clerk updates the sales ledger master file with the new customer
details Credit limits are not applied to customer accounts as Jon May
considers this to be a restricting factor in achieving sales targets. Slow or late paying customers
are pursued for payment by Jon May.
3. Customer orders received, in writing or by telephone, are directed to a sales clerk After
establishing that a trade receivables ledger account exists, the clerk uses a sales invoicing
programmed to generate a prenumbered sales invoice and accompanying goods despatch note
addressed to customers tor products as ordered The programme prices sales invoices
automatically using authorised prices stored in a standing data file Full access to this file to
restricted to Jon May and the sales clerks.
Required:
From the information provided on the sales and trade receivables system of Haydn Co:
(i) identify FOUR weaknesses in the system;
(ii) Describe the implication of each weakness identified;
(iii) Recommend improvements to address the weakness. (16)
(Certified Accounting Technician, UK - December 2005)
8 You are an audit manager in the internal audit department of Matalas. You are currently auditing
the petty cash systems at the different branches. Your initial systems notes on petty cash contain
the following information:
1. The average petty cash balance at each branch is $5,000.
2. Average monthly expenditure is $1,538, with amounts ranging from $1 to $500.
3. Petty cash is kept in a lockable box on a bookcase in the account’s office.
4. Vouchers for expenditure are signed by the person incurring that expenditure to confirm they
have received re imbursement from petty cash.
5. Vouchers are recorded in the petty cash book by the accounts clerk; each voucher records the
date, reason for the expenditure, amount of expenditure and person incurring that expenditure.
6.Petty cash is counted every month by the accounts clerk, who is in charge of the cash. The
petty cash balance is then reimbursed using the ‘imprest’ system and the journal entry is
produced to record expenditure in the general ledger
7. The cheque to reimburse petty cash is signed by the accountant at the branch at the same
time as the journal entry to the general ledger is reviewed. Required: Explain the internal control
weaknesses in the petty cash system at Matalas Co. For each weakness, recommend a control to
overcome that weakness (12)
9 Education For All Foundation (EFAF) is a large charity-based organization, engaged in providing
education to needy children, at a token fee of Rs. 100 per child. It receives donations for its
activities both in cash and through its bank accounts. The major expenditure relates to payment
to teachers and petty cash.
Required: Briefly describe the key controls which you as an auditor expect to find in respect of
receipts and payments. (07)
10 Flowers Anytime sells flowers wholesale. Customers telephone the company and their orders are
taken by clerks who take details of the flowers to be delivered, the address to which they are to
be delivered, and account details of the Customer. The clerks input these details into the
company’s computer system (whilst the order is being taken) which is integrated with the
company’s inventory control system. The company’s standard credit terms are payment one
month from the order (all orders are despatched within 48 hours) and most customers pay by
bank transfer. An accounts receivable ledger is maintained and statements are sent to customers
once a month. Credit limits are set by the credit D controller according to a standard formula and
are automatically applied by the computer system, as are the prices of G flowers. Required:
Describe and explain the purpose of the internal controls you might expect to see in the sales
system at Flowers Anytime over the: - (i) Receipt, processing and recording of orders. (06) (ii)
Collection of cash. (04)
(ACCA, Fundamentals Level F8 - December 2002) (ICAP’s Official Question Bank for CAF 09 - Q.
# 72b)
11 DinZee Co assembles fridges, microwaves, washing machines and other similar domestic
appliances from parts Produceds from a large number of suppliers. As part of the interim audit
work two weeks prior to the company year-end, you are, testing the procurement and purchases
systems and attending the inventory count. Procurement and purchases system; Parts inventory
is monitored by the store manager. When the quantity of a particular part falls below re-order
level, an e-mail is sent to the procurement department detailing the part required and the
quantity to order. A copy of the e-mail is filed on the store manager’s computer. Staff in the
procurement department check the e-mail, allocate the order to an authorised supplier and send
the order to that supplier using Electronic Data Interchange (EDI). A copy of the EDI order is filed
in the order database by the Computer system. The order is identified by a unique order
number. ty When goods are received at DinZee, the stores clerk confirms that the inventory
agrees to the delivery note and checks the order database to ensure that the inventory were in
fact ordered by DinZee. (Delivery is refused where goods do not have delivery note.) The order in
the order database is updated to confirm receipt of goods, and the perpetual inventory system
updated to Show the receipt of inventory. The physical goods are added to the parts store and
the paper delivery note is stamped with the order number and is filed in the goods inwards
department. The supplier sends a purchase invoice to DinZee using EDI; invoices are
automatically routed to the accounts department, on receipt of the invoice, the accounts clerk
checks the order database, matches the invoice details with the database and updates the
database to confirm receipt of invoice. The invoice is added to the purchases database, where
the purchase day book (PDB) and suppliers individual account in the payables ledger are
automatically updated.
Required:
List SIX audit procedures that an auditor would normally carry out on the purchases system at
DinZee Co, explaining the reason for each procedure. (12)
(ACCA, Fundamentals Level F8 - December 2007) (ICAP’s Official Question bank)
12 You are the audit manager of a company and preparing audit program. You have been provided
the following details of Capitalization of fixed assets:
 The company has a committee of senior executives to authorize purchase orders for capital
items.
 Each asset, on receipt, is assigned a unique serial number and is recorded on the fixed assets
register.
 On arrival of an asset, a goods received note (GRN) is completed, signed by responsible
officer and forwarded to finance department to make payment and update fixed assets
register.
 Internal audit undertakes periodic review of assets in the register and compares them to
assets on Site, using the serial number to confirm existence of the assets.
 Access to the fixed assets register is restricted to authorized officers only (password
protected).
Required; you are required to explain the tests of control you would perform, to assess that the
controls related to fixed assets are operating effectively. (08)
(ICMA Pakistan Fall 2017)
13 Jhelum Machinery (Private) Limited (JMPL) is engaged in the manufacture of customized
machinery. Recently a fraud has been discovered which was perpetrated by Salahuddin, the
purchase manager. Salahuddin was responsible for approving the suppliers after obtaining and
evaluating the competitive quotes and placement of orders.
Salahuddin had set up a private limited company Neelum (Private) Limited (NPL) in which his
brother and wife are directors. NPL supplies spare parts to JMPL. The fraud was committed with
the help of Karamat, a production supervisor and Farhan, the store keeper. The supplies
delivered by NPL contained a large proportion of damaged spare parts.
However, full payments were made to NPL as Farhan never raised any objections on the quality
of goods received. On the other hand, Karamat issued inflated consumption reports to cover
significant part of the damaged spare parts.
The fraud was discovered when Farhan went on leave due to illness.
Required:
Identify the control weaknesses in the above situation which may have enabled the perpetration
of fraud. (06)
(ICAP, CFAP 06 Levell - Winter 2013)
14 King Ltd is a new audit client of your firm. The finance director has attended a seminar on
“Understanding how your auditors work”, and has come away convinced that you will be able to
rely on the internal controls within the company to Rad reduce the overall amount of work done.
Identify the circumstances in which this approach may not be possible leading you to undertake
full substantive testing. (02)
(ICAEW Professional, December 2002)
15 a) In respect of each of the following internal control techniques, state the underlying
Accounting Control Purpose:
(i) cancellation of processed documents. (01)
(ii) segregation of duties. (01)
(iii) periodic physical inventory count. (01)
(iv) use of prenumbered forms. (01)
(v) matching of documents. (01)
b) You have noted the following Intentional Compliance Deviations during your audit:
(i) deliberate by passing of the credit approval procedures. (01)
(ii) deliberate by-passing of preparation of shipping documents. (01)
(iii) deliberate failure to perform prescribed detailed physical quantity count on INCOMING
shipment of materials. (01)
(iv) deliberate failure of clerk to perform verification of pricing operations on sales invoices. (01)
(v) deliberate failure of CFO to control keys to cheque-writing machine in accordance with
prescribed policy State the possible motives underlying the above-referred deviations. (01)
(ICAP, CFAP 06 Level, Winter 2001)
16 You are planning the audit of Bunsen Ltd, a distributor of laboratory equipment, and have
ascertained the following information from your previous year’s audit working papers. The
accounting records are computerised and all users of the system are required to log on using
identification codes and individual passwords which control their level of Access to the system.
An accounting and control manual is maintained and updated on a regular basis and any
breaches y procedures are subject to disciplinary action. Previous experience has not revealed
any evidence of management override of controls and the directors have always implemented
recommendations in your management letters.
Requirements: Identify, from the circumstances particular to Bunsen Ltd, the factors which
indicate the strength of, the control environment. Make a preliminary assessment of control risk
in Bunsen Ltd and describe, with reasons, how it will affect your audit approach. (09)
(ICAEW December 2001)
17 Hummingbird Scents Co (Hummingbird) manufactures and sells luxury toiletries; they have been
trading for over years and the company’s year-end is 30 September 2014. Hummingbird sells
products to trade customers Via its website; this represents 60% of revenue. Remaining revenue
is generated by contracts to supply toiletries to hotels
Below is a description of the sales system.
Hotel revenue
The hotel revenue is made up of four key customers. Hummingbird has one sales clerk, Brenda,
who maintains all aspects of this revenue stream; Brenda receives customer orders, raises sales
invoices and processes payments. In raisin invoices, the sales system automatically inserts the
online trade customer prices for products. However, each Hotel customer has contracted prices
which are lower than the online prices and hence Brenda manually edits the Invoices prior to
despatch.
Online revenue
New trade customers are set up in the sales ledger master file upon passing suitable credit
checks, and a credit limit is Set at this stage by the finance director. Customers place online
orders up to their pre-set credit limit, they receive an email confirmation and the sales order
interfaces into the despatch system. The order number is linked to the customer account
number. Goods are despatched daily with a goods despatched note which is referenced to the
sales order number but are not sequentially numbered.
Trade customers’ sales invoices are automatically generated by the system on the day the online
order is placed. The prices are inserted in accordance with the website rates. Occasionally
Hummingbird makes special offers or discounts sales; when this occurs the master file data has
to be amended to ensure that the correct prices are used on invoices. This task is usually
performed by a senior sales ledger clerk.
Revenue and receivables records:
On a monthly basis statements are sent to the hotel customers; a number of trade customers
have been requesting monthly statements and Hummingbird is considering this request. The
company only reconcile account at the end of September in order to verify the year-end balance.
Required:
As the external auditor of Hummingbird Co, write a report to management in respect of the
sales system described above which:
(i) Identifies and explains SEVEN deficiencies in the sales system; and
(ii) Provides a recommendation to address each of the deficiencies
18 Pahos Co trades as a department store. It has 85 employees, some of whom are hourly paid, and
a large administration apropriate segregation of duties, throughout the various accounting
functions. Your firm is auditing the company’s financial statements for the year ended 30
September 2006 and you have been assigned to the audit of wages. The company pays all
employees on a weekly basis, using a computerised payroll system to process wages, prior to
making payment directly into employees’ bank accounts Wages costs are reported as $1-62
million in the financial statements of Paphos Co for the year ended 30 September 2006
Required: identify SIX tests of control that you should carry out in connection with the audit of
the reported wages costs in the financial statements of Paphos Co for the year ended 30
September 2006. (12)
(Certified Accounting Technician, UK~ December 2006)
19 You are responsible for the external audit of Regis Ltd (“Regis”). Regis maintains a Payroll
department consisting of a payroll manager and a part-time payroll clerk. The company’s current
payroll manager joined the company three month, ago, after it was discovered that his
predecessor had been deliberately failing to remove staff leavers from the payroy system and
paying their salaries into his own bank accounts. The fraud had been going on for at least twelve
months.
Requirements: Describe the internal controls that could have reduced the risk of the payroll
fraud as described occurring. (05)
20 During the course of audit, the Auditor observed the following with respect to the inventory
counting:
 Computer based inventory system is currently installed and is working properly. An up-to-
date inventory records are maintained by the company. The year-end inventory quantities
that are used in determining the year-end inventory value are arrived at by carrying out full
inventory physical counts at each of the garden center. The same set of inventory count
instructions are provided at each center.
 The inventory count will be supervised by the inventory controller for the site and will take
place on January 1, 2014. The count will commence at 6:00 am. The center will be closed on
the day of the count. No sales of inventory will take place on January 1, 2014 but transfer of
inventory between garden centers is permitted in order to distribute it where needed.
 One member of staff will be allocated to the count and provided with computer generated
inventory counting sheets showing the quantity per system. These sheets will be distributed
and re-collected by the site inventory controller.
 Where the quantity observed is different to the quantity of the sheet, it should be crossed
out and the new quantity will be written down.
 The quantity for any inventory that looks damaged or un-saleable should be crossed out and
treated as zero.
 Once all the sheets have been collected up and test count completed, the inventory
controller will manually update the computerized system to reflect the count quantities.
Once the system is updated the count sheets can be discarded.
Required:
Identify and explain five deficiencies in the inventory counting system and also suggest that how
each deficiency can be eliminated/reduced. (10)
(ICMA Pakistan, Professional Level P2 - February 2014)
21 You are responsible for the audit of the fixed assets of Bevs Ltd, for the year ended 31 October
2002.
From your discussions with the finance director, you ascertain that a capital expenditure budget
is prepared annually. Departmental managers can authorise capital expenditure up to £5,000, as
long as it is within their budget Board approval is required for amounts above this threshold but
the managing director, who is also the major shareholder in the \ company, does not always
adhere to this policy. He often commits the company to acquiring assets without considering Q.
how they are to be financed, leaving the finance director to arrange the borrowings. Capital
expenditure proposal forms are required to be completed but this is not always done,
particularly when items are required in an emergency, and there is no formal policy in respect of
obtaining quotes for major items of expenditure. he There is a fixed asset register which is
reconciled to the nominal ledger on a monthly basis. No other checking procedure, involving the
fixed asset register are undertaken.
Requirements: Identify weaknesses in the system described above and, for each weakness,
explain the consequences that could result from it. (06)
(Institute of Chartered Accountants in England and Wales, Professional Level December 2002)
22 Letham Co isa large engineering company with ten manufacturing units throughout the country
in which it is located. The manufacturing process is capital intensive and the company holds a
wide variety of plant and equipment.
The finance director is responsible for the preparation of a detailed non-current assets budget
annually, which is based on a five-year budget approved by the whole board of directors after
consultation with the audit committee. This annual budget, which is also approved by the full
board, is held on computer file and is the authority for the issue of a purchase order.
When the item of plant and equipment is delivered to the company, a pre-numbered goods
received note (GRN) is prepared, a copy of which is sent to the accounting department, and used
to update the non-current assets budget to reflect the movement. The equipment is carefully
inspected by production personnel and tested for proper operation. An operational certificate is
prepared by the production department and this is used by the accounting department, together
with the GRN, to check against the purchase invoice when it is received.
At the same time as the purchase invoice enters the purchasing system, a computerised non-
current assets register is updated. Access to the non-current assets register is restricted to
personnel in the accounting department. On a rolling basis throughout the year the non-current
assets register is compared to plant and equipment on site by accounting department personnel,
using identification numbers in the register and permanently marked onto each item in the
factory
Required: Identify SIX STRENGTHS in Letham’s internal control in respect of non-current assets
and explain why they may reduce control risk, (12)
23 a) During the course of the external audit of Palmatum Ltd (Palmatum), it was discovered that
on several occasions throughout the year employees had not followed company policy of
obtaining quotes from three different suppliers’ pro, to placing an order for property, plant
and equipment. Prepare notes, in readiness for drafting the audit firm’s report to the
management of Palmatum, which outline the possible consequences of this significant
internal control deficiency and provide recommendations to remedy the deficiency. (04)
b) During the external audit of Eagle Ltd (Eagle), the audit senior discovered that the company
does not undertake periodic reconciliations of the plant and equipment register with the
physical assets. Prepare notes, in readiness for drafting the audit firm’s report to the
management of Eagle, which outline the possible consequences of this internal control
deficiency and provide recommendations to remedy the deficiency. (04)
24 (a) During the course of the external audit of Green Ltd (Green), it was discovered that, on a
number of occasions sales staff granted customer discounts in excess of authorised levels.
Prepare notes, in readiness for drafting the audit firm's report to the management of Green,
which outline the possible consequences of this significant internal control deficiency and
provide recommendations to remedy the deficiency,
(Institute of Chartered Accountants in England and Wales, Professional Level)
(b) During the external audit of Cupcake Ltd (Cupcake) it was discovered that, on a number of
occasions, customers were not required to sign the delivery note on receipt of goods despatched
by Cupcake. Prepare notes, in readiness for drafting the firm's report to the management of
Cupcake, which outline the possible consequences of this internal control deficiency and provide
recommendations to remedy the deficiency. (04)
25 During the audit of your client Combi Ltd, you discover that the company's receivables ledger
clerk is able to set UP NEW credit customer accounts without reference to more senior staff
members. A new customer's details are entered directly onto the computerised receivables
ledger, and no written record of these is retained. Also, credit limits are generally not set for
credit customers. Set out, in a manner suitable for inclusion in a report to management, the
possible consequences arising from these weaknesses, and your recommendations to remedy
the weaknesses. (3)
26 Vital Fresh Limited (VFL) is a large consumer goods company, engaged in producing milk and
juices. The company purchases raw material from wide range of suppliers across Pakistan. The
Board of Directors is concerned about the existence of effective controls in purchase and
payment process of the company. The details of existing purchase and payment process are as
follows:
 The production department sends a requisition form to ordering department for
required material.
 An order clerk raises a purchase order and selects a supplier on the basis of fast
delivery.
 The order clerk sends out the purchase order, which is not sequentially numbered.
 Only orders above Rs. 100,000 are authorised by the purchase manager.
 Purchase invoices, received from suppliers, are input into general ledger and
subsidiary ledger weekly by order clerk.
 Director finance authorizes the payments to suppliers by viewing whether total
payment to be paid to suppliers is reasonable.
 The company's bank accounts are reconciled quarterly.
Required: i) Identify at least five (05) deficiencies in each of the above purchase and payment
process.
ii) Explain possible effect of deficiencies identified in part (i) above on internal control of such
processes.
iii) Provide recommendation to address each deficiency identified in part (i) above. (07)
(ICMA Pakistan 2017)
27 Miller Co is a pharmaceutical manufacturer. The purchasing department is managed by Mr
Wurm and his assistant Walter Green. When goods are required, the inventory manager
Frederica sends a purchase requisition to Mr Wurm, who Requires WaIter to type out a purchase
order. Walter manually enters a sequential number onto the purchase order. when the goods
arrive, they are stored in the warehouse. Supplier's GDN is sent to accounts department which
records purchases.
Required:
(a) Identify FOUR deficiencies in the system and state their implications.
(b) Suggest recommendations to improve the system
28 You are the auditor of Advice Co., During your audit of the purchases cycle you have concluded
the following weaknesses.
1. Payables ledger clerks amend standing data on master file on oral instructions from purchase
manager
2. The financial director signs cheques made out to suppliers without sight of any
supporting documentation.
Required: In respect of the above weaknesses set out the consequences of each weakness and
the recommendation you would suggest as they might appear in the management letter
29 You have just completed a review of the controls at Pakistan Cables Limited and have concluded
that their internal control is excellent one of the best systems you have seen. The audit manager
Has suggested that as an internal control is so good, you test the controls and if they prove to be
effective, you rely Completely on these controls to gain reasonable assurance that the financial
information is fairly stated.
Required: Comment on the audit manager’s suggestion.
30 Purchases department of Bata Pakistan Limited receives requisitions from store manager as well
as from various departments. To speed up, purchasing process, these requisitions do not require
authorization. As soon as purchase requisitions are received, Purchase department issues
unnumbered purchase orders to any supplier, it thinks appropriate. For convenience, blank
purchase orders are accessible to all purchasing department staff.
Required; List the internal control weaknesses in the above situation and write
recommendations to improve those weaknesses. (05)
31 Faisal Spinning Mills Limited experienced the following situations.
(a) During a street riot involving protestors rallying against Faisal Spinning Mills Limited’s
environmental record, several people forced their way into the company’s computer centre,
which was on the main level of the office building. A number of protestors smashed the
computer equipment and other minor destruction was incurred. The system was inoperable for
several days.
(b) A night operator knew more about the system than anyone else. During a period of several
weeks, he accessed the master payroll program, which was stored online, and increased his basic
salary.
(c) A customer payment was entered by the keypunch operator as Rs. 38,500 instead of Rs.
385,000.
Required:
Various types of control structure policies and procedures are appropriate for the prevention,
detection or correction of misstatements. Identify a policy or procedure that would have
prevented, detected or corrected each of the situations above.
32 The auditor needs to understand the business in order to assess the risk of potential account
misstatements. The auditor made the following list of observations during the tour of the plant
and distribution center. For each observation, indicate the potential audit risk associated with
the observation. Also explain briefly how the audit should be adjusted for the knowledge of the
risk.
1. The auditor notes that a large number of production machines are sitting idle outside.
2. The client utilizes a large amount of chemicals. The waste chemicals are stored in vats and
barrels in the yard before being shipped for disposal to an independent disposal firm.
3. The distribution center seems busy and messy. Although there are appropriate policies and
procedures in place but supervisor emphasizes delivery of goods on time and often paper work is
completed hours after delivery.
4. One area of the distribution center contains some products that seem to have been there for a
long time. They are dusty and the packaging looks old.
5. The receiving area is fairly automated. Many products come packaged in cartons or boxes. The
receiving department uses computer scanners to read the contents on a bar code, and when bar
codes are used, the boxes or containers are moved immediately to the production area where
they are to be used.
6. The company uses minimum security procedures at the warehouse. There is a fence around
the facilities, but employees and others seem to be able to come and go with ease.
33 The auditor needs to assess management integrity as a potential indicator of risk. Although the
assessment of management integrity takes place on every audit engagement, it is difficult to do
and is not often well documented, for each of the following management scenarios, indicate
whether you believe the scenario reflects negatively on management integrity.
1. The owner/manager of a privately held company also owns three other companies. The
entities could all be run as one entity, but they engage extensively in related-party transactions
to minimize the overall tax burden for the owner/manager.
2. The president of a publicly held company has a reputation for being a “hard nose” with a
violent temper. He has been known to fire a divisional manager on the spot if the manager did
not achieve profit goals.
3. Jamshed is the president of a privately held company that has been accused of illegally
dumping waste and failing to meet government standards for worker safety. Jamshed responds
that his attitude is to meet the minimum requirements of the law and if the government deems
that he has not, he will clean up.
4. Kaleem is the young, dynamic CFO of Golden-Glow Enterprises, a company which is in financial
crisis nowadays. Kaleem has a reputation for being a fast-living party animal, and the society
pages have carried reports of “extravagant” parties at her home.
34 Glamour Textile Mills Limited has recently issued a document to all employees entitled “Our
Code of Conduct.” It sets out standards of ethical behavior towards other employees, suppliers,
and customers. Each employee also has a contract including a formal job description. All new
employees are given aptitude tests appropriate for the area they will work in. As a result, the
company does not consider it necessary to obtain references or conduct other background
checks.
The board includes ten directors, two of whom are independent (being former executives of the
company). The full board meets twice a year and evaluates top management's performance (as
well as considering other issues). The directors have an audit committee, which includes both
independent directors, and which meets once a year to discuss internal control with the
company’s accounting and finance staff.
Requirement: Discuss strengths and weaknesses in the control environment of Glamour Textile
Mills Limited.
35 You have conducted tests of control as part of your audit. The only particular control had not
been operated. Explain the considerations that will determine the effect these exceptions will
have on your audit. (03)
(ICAEW Professional, September 2001)
36 Describe a conventional internal control technique that could be employed to deter or
discourage actual occurrences of each of the following types of accounting errors or
irregularities:
(a)intentional or unintentional errors in the preparation of sales invoices. (02)
(b) theft of an office typewriter. (02)
(c) unintentional duplicate payment of bills. (02)
(d) unintentional payment for items billed but not received from suppliers. (02)
(e) payroll fraud committed by Foreman. Foreman prepares time cards for former employees.
Foreman receives former employees’ cheques, delivers cheques to former employees and splits
the take with them. (02)
(f) loss of cash due to errors committed by the bank. (02)
(g) packing errors by suppliers. (02)
37 For each error and fraud listed below, identify one internal control procedure which, if properly
designed and implemented, most likely could assist in preventing or detecting the error and
fraud.
(i) Invoices for goods sold are posted to incorrect customers’ accounts.
(ii) Goods ordered by customers are shipped, but are not billed to anyone.
(iii) Invoices are sent for shipped goods but are not recorded in the sales journal.
(iv) Invoices are sent for shipped goods and are recorded in the sales journal but are not
posted to customer account.
(v) Credit sales are made to individuals with unsatisfactory ratings.
(vi) Customers cheques are misappropriated before being forwarded to the cashier for
deposit. (07)
38 Recruitment Co is a limited liability company which operates as a prestigious, executive
recruitment agency. Its most recent financial statements are those for the year ended 31 March
2005. The directors of the company have developed a strong control environment in the
company and have introduced effective internal controls. These include the review of monthly
management accounts at formal monthly board meetings and the use of a non-current assets
register.
The company has 36 employees, most of whom are provided with an executive type of company
car. It is company policy to purchase only new cars and to replace them when they are two years
old. Employees are allowed to purchase replaced cars and they do so by forwarding sealed bids
to the company as and when replaced cars become available. To protect the company from
receiving only low bids from employees, sealed bids are also received from independent motor
Car dealers. (10)
Required: Suggest FOUR internal controls that Recruitment Co should employ over the disposal
of cars.
(Certified Accounting Technician, UK - June 2005)
39 You are the auditor of Stardollar Ltd (“Stardollar”), a company that owns and operates 30 coffee
shops selling coffee, tea, and snacks for consumption on and off the premises. The majority of
purchases are handled centrally by the company’s accounting function at head office. However,
the manager of each coffee shop is responsible for making cash payments toa small number of
casual staff and local food suppliers who require to be paid in this way.
Identify the internal controls you would expect to see in place at Stardollar in respect of cash
payments made by the manager at each coffee shop. (03)
40 During the audit of your client Alfredo Limited, you discover that the monthly bank
reconciliations prepared by the assistant accountant are not subject to review.
Set out, in a manner suitable for inclusion in a report to management, the possible consequences
arising from the above weakness, and a clear description of your recommended control
procedures to remedy the weakness. (03)
2007)
41 Following is a set of instructions for the year end physical inventory count at a manufacturer.
1. Counting is to be carried out by staff from the warehouse and the accounts department.
Counters are to report at 8:00 a.m. on June 30% to the warehouse manager.
2. The warehouse manager will issue sequentially numbered inventory sheets which will
include pre-printed descriptions of the inventory lines and the quantities supplied by the
inventory controller.
3. The count area is to be divided into sections and each will be allocated a section by the
warehouse manager. Items are to be marked once counted.
4. The production manager will estimate the materials required for use in production on
the day and ensure that they are taken out of the warehouse and moved to the
production department. Goods to be despatched are to be taken out of the warehouse.
5. The number of the last despatch note will be recorded by the warehouse manager.
6. Damaged inventory is to be noted as such on the inventory sheets.
7. Any discrepancies between physical and book inventory will be referred to the
warehouse manager.
8. All inventory sheets are to be signed by the counter and returned to the warehouse
manager at the end of the count. The warehouse manager will check the numerical
sequence of the inventory sheets.
Required
Identify the strengths and the weaknesses of the above instructions. (06)
42 When planning a financial report audit, an auditor must understand audit risk and its
components. Audit firm of a company evaluates the risk of material misstatement by
disaggregating it into its two components: inherent risk and control risk.
Required
For each of the situations in the table below, indicate which component of audit risk will be most
affected. Also give reason.
1. Client fails to discover employee fraud on a timely basis because bank accounts are not
reconciled monthly.
2. Cash is more susceptible to theft than an inventory of coal.
3. Auditor fails to detect a material misstatement by confirmation of receivable.
4. Disbursements have occurred without proper approval.
5. There is inadequate segregation of duties.
6. A necessary substantive audit procedure is omitted.
7. Technological developments make a major product obsolete.
8. The CEO of Kohat Cement Company Limited issued a media statement on 1 August 2010,
stating that company had committed massive accounting fraud resulting in overstated profits
and assets over the past five years.
9. Dr Jahangir is the major shareholder of Media Glass Limited (MGL) and its CEO and has
influence over the board of directors
10. Your firm has audited MGL for the last four years.
11. The internal audit function reports to the audit committee.
12. During the current year, MGL began leasing a manufacturing facility that is owned by Faraz
Limited. Dr Jahangir is a partner in Faraz Limited.
13. MGL has been the subject of lawsuits by users of Framadon, who claim that the drug affects
their liver function. MGL is confident that there are no side effects from the use of Framadon.
14. There has been high turnover of key accounting personnel during the last two years.
43 For each of the following situations, explain how risk of material misstatement should be
assessed and what effect that assessment will have on detection risk.
(a) Pak Datacom Limited is a fast-growing trucking company. Imran is chairman of the board and
CEO. He personally makes all major decisions with little consultation with the board of directors.
(b) Infi-Tech Company is engaged in the manufacture of data storage devices. The industry is
very competitive and subject to quick changes in technology.
(c) On the audit of The First National Bank, you have had numerous arguments with the
management over a number of accounting issues. The major issue has related to the bank’s
reserve for loan losses and the value of collateral. Your prior audits have indicated that a
significant adjustment is required each year to the loan loss reserves.
44 Answer whether the following are true or false. If false state reasons:
a) ICQ and Flow charts are types of internal control.
b) Audit planning can affect the internal control system.
c) Perform tests of control if internal control is weak.
45 Distinguish the following between control environment and control procedures:
(a) reporting, reviewing and approving reconciliation;
(b) the function of the board of directors and its committees;
(c) checking the arithmetical accuracy of the records;
(d) maintaining and reviewing control accounts and trial balances;
(e) defined and documented code of ethics. (05)
(ICAP, CAF 09 Level - Spring 1993) (ICAP, CAF 09 Level - Spring 2002)
46 Blake Co assembles specialist motor vehicles such as lorries, buses and trucks. The company
owns four assembly plants to Which parts are delivered and assembled into the motor vehicles.
The motor vehicles are assembled using a mix of robot and manual production lines. The
‘human’ workers normally work & standard eight-hour day, although this is supplemented by
overtime on a regular basis as Blake has a full order book There is one shift per day; mass
production and around the clock working are not possible due to the specialist nature oF the
motor vehicles being assembled.
Wages system - shift workers
Shift-workers arrive for work at about 7.00 am and ‘clock {n’ using an electronic Identification
card. The card is scanned by the time recording system and each production shift-worker's
identification number is read from their card by the scanner. The worker is then logged in as
being at work. Shift-workers are paid from the time of logging in. The logging in process is not
monitored as it is assumed that shift-workers would not work without first logging in on the time
recording system.
Shift-workers are split into groups of about 25 employees, with each group under the supervision
of a shift foreman, each day, each group of shift-workers is allocated a specific vehicle to
manufacture. At least 400 vehicles have to be manufactured each day by each work group. If
necessary, overtime is worked to complete the day's quota of vehicles. The shift foreman is not
required to monitor the extent of any overtime working although the foreman does ensure
workers are not taking unnecessary or prolonged breaks which would automatically increase the
amount of overtime worked, Shift-workers log off at the end of each shift by re-scanning their
identification card.
Payment of wages
Details of hours worked each week are sent electronically to the payroll department, where
hours worked are allocated by the computerized wages system to each employee’s wages
records. Staff in the payroll department compare hours worked from the time recording system
to the computerised wages system, and enter a code word to confirm the accuracy of transfer.
The code word also acts as authorisation to calculate net wages. The code word is the name of a
domestic cat belonging to the department head and {s therefore generally known around the
department.
Each week the computerised wages system calculates:
(i) gross wages, using the standard rate and overtime rates per hour for each employee,
(ii) statutory deductions from wages, and
(iii) net pay.
The list of net pay for each employee {s sent over Blake's internal network to the accounts
department. In the accounts department, an accounts clerk ensures that employee bank details
are on file. The clerk then authorises and makes payment to those employees using Blake’s
online banking systems. Every few weeks the financial accountant reviews the total amount of
wages made to ensure that the management accounts are accurate.
Termination of employees
Occasionally, employees leave Blake. When this happens, the personnel department sends an e-
mail to the payroll department detailing the employee's termination date and any unclaimed
holiday pay. The receipt of the e-mail by the payroll department is not monitored by the
personnel department.
Salaries system - shift managers
All shift managers are paid an annual salary; there are no overtime payments. Salaries were
increased in July by 3% and an annual bonus of 5% of salary was paid in November.
Required:
(a) As the external auditors of Blake Co, write a management letter to the directors in respect of
the shift-workers wage? recording and payment systems which:
(i) Identifies and explains FOUR weaknesses in that system;
(ii) Explains the possible effect of each weakness;
(iii) Provides a recommendation to alleviate each weakness.
Note up to two marks will be awarded within this requirement for presentation. (14)
(b) List THREE substantive analytical procedures you should perform on the shift managers’
salary system. For each procedure, state your expectation of the result of that procedure. (06)
(ACCA, Fundamentals Level F8 - December 2008) (ICAP’s Official Question Bank for CAF 09 - Q.
# 132b,c)
6. Suggested Solution
9 Control over Receipts:

Receipt through cash:
 For cash received at counter, one person should receive the cash and an independent person
should prepare a receipt voucher.
 At day end (and on surprise basis), cash count should be performed by an independent
person; and cash should be kept at safe place.
 Cash should be deposited into bank on daily basis
Receipt through Bank:
 Bank reconciliation statement should be prepared on monthly basis, and should be reviewed
by an independent person
 Student wise report of outstanding fee is generated, and presented to management for
appropriate action.
Controls over Payment:
Payments to Teachers:
 A master file of all employees should be maintained by HR department, and any changes
should be made promptly.
 Payroll should be prepared on basis of monthly attendance record of teachers (approved by
head of the department).
 Payroll should be compared on month-to-month basis and large fluctuations should be
investigated.
Payments for Petty Cash:
Set reasonable limit.
 Spending on pre-approved expenses only.
 Spending should be supported by documents and recorded on petty cash vouchers
10
11
12
13 No identification / approval of related party relationships and transactions:

There should have been a system in place to identify the relationship between Salahuddin and
directors of NPL.
Quality and quantity of goods not checked on receipt of goods:
Quality of goods is not checked at time of receipt of goods by a receiving department,
Independent of custodian of inventory.
Physical verification of Inventory not being done:
Physical verification of inventory is either not performed or is inadequately performed as
damaged inventory was not identified on timely basis.
No Performance Review:
Gross profit margins (or standard costing system) are not reviewed by management against
budgets, to identify unusual high cost of sales due to inflated consumptions.
14 a) Initial assessment at planning that controls not strong.

b) Tests of control indicate that controls not strong.
c) Lack of evidence of operation of controls.
d) Not cost effective to test controls
15 1. To avoid duplicate payments
2. To ensure that error/fraud by one person is detected by other person
3. To ensure inventory as per records is complete and to identify any missing inventory.
4. To ensure transactions are completely recorded
5. To ensure transactions have actually occurred and are accurate.
16 Factors indicating a strong control environment:
1. An accounting and control manual is maintained on regularly basis
2. Breaches of procedures are subject to disciplinary action
3. No management override of control
4. Positive attitude to directors towards internal control
5. Management assigns authority and responsibility appropriately through codes and
passwords
Preliminary assessment:
Initial assessment of Control risk is low because due to strong control environment, errors and
irregularities are more likely to be prevented or detected and corrected on a timely basis.
How preliminary assessment will affect audit approach:
Auditor's procedures shall include mixture of tests of control and substantive procedures. If tests
of controls indicate controls have been operated effectively throughout the year, auditor shall
reduce substantive procedures. If tests of controls indicate controls have not been operated
effectively as assessed, auditor shall revise his control risk assessment and shall perform
extensive substantive procedures.
17
18 1. Select a sample of joiners during the year and check documentation for authorization of new
employees.
2. Select a sample of workers from payroll sheet and check whether they are physically present.
3. Select a time sheets/ card, and inspect signature /initial of supervisor as evidence of approval
of hours worked.
4. Select a sample of employees from payroll and inspect that hours worked and rates of pay are
in accordance with Time-sheet and approved rates.
5. Select a sample of payroll sheets and inspect signature/ initial of appropriate authority as
evidence of approval of payroll.
6. Use test data to check that exception is generating for wages beyond pre-set limits.
19 1. Segregation of duties between processing of payroll and authorization of payroll.
2. Periodic reconciliations of number of persons on payroll to independent list of staff members.
3. Independent checks of persons form payroll to personnel records/ time sheets/ physical
employees.
4. Ensure appropriate references taken up for staff and all staff take mandatory holidays/
rotations.
5. Authorization of bank transfer list to check no duplicate accounts exist
20
21
22
23 a)
Weakness Noted: employees had not followed company policy of obatining qoutes from three
different suppliers prior to placing an order.
1. Company may not be able to obtain the best price and value for money.
2. There may be fraudulent activity in purchasing process e.g. orders may be given to
friends/relatives/suppliers who give gifts/kickbacks or provide hospitality
Recommendation:
1. An appropriate authority should review that atleast three quotes are obtained before placing
orders.
2. Company's policy regarding purchases should be communicated to relevant employees and
their written consent should be obtained.
3. Employees in breach of company policy to be informed in writing and disciplinary actions
should be taken against them.
(b) Weaknes Noted: company doe not undertake periodic reconcilitions of plant and
equipment register with physical assets,
1. Assets recorded in the register may not exist or may have been stolen
2. Assets in existence, acquisitions or disposals may not be recorded
3. Assets may be impaired or no longer in use and consequently overvalued
Recommendation:
1. Regular (monthly or quarterly) reconciliation of fixed assets’ register and assets (by a person
independent of custodian of assets)
a. register to physical to ensure existence and in good condition
b. physical to register to ensure completeness of recording
2. Differences should be reported and investigated.
24 (a)
Weakness Noted: sales staff granted customer discounts in excess of authorized levels.
1. Company loses its revenue which may cause adverse impact on its cash flows.
2. Inconsistent pricing could lead to customer dissatisfaction

3. This also indicates fraudulent activity e.g. collusion between customer and staff/kickbacks
Recommendation:
1. An independent person should review the discounts which staff offers to customers. Any
“extra” discount (to boost sale) should be authorised by appropriate higher authority.
2. Company’s policy regarding discounts should be communicated to relevant employees and
their written consent should be obtained.
3. Employees in breach of company policy to be informed in writing and disciplinary actions
should be taken against them.
(b)
Weakness Noted: customers were not required to sign the delivery note on receipt of goods.
1. Company has no proof that customers have received goods. Customers may claim that goods
have not been received.
2. There is scope for fraud/theft by employees/courier (they may not deliver goods to
customers)
3. This may also result in disputes with customers/complaints/loss of goodwill/unpaid invoices.
Recommendation:
All despatches should be signed by the customer
Copy of signed despatch note should be retained by customer, courier and company. It should be
filed with sales invoice.
There should be regular .hecks to ensure that all despatches have been signed. Unsigned
despatches should jNvestigated and disciplinary action should be taken against the person
responsible for it.
25 Weakness Noted: Receivables ledger clerk is able to set up new credit customer accounts
without written records and approval.
Fake customers can be entered in receivable ledger which could be used for fraudulently
purposes (e.g. making fake sales and write off it subsequently).
Recommendation:
Standard customer set up forms to be filled out and retained for every new customer entered in
receivable ledger. A Senior person should authorize in writing new customer accounts.
Weakness Noted: Credit limits are generally not set for credit customers.
No credit limits/ checks could lead to bad debts / loss of profit.
Recommendation:
Set credit limit for every credit customer and review this limit before approving sales orders.
26
27
28
29 Internal control cannot provide absolute assurance because it has some inherent limitations.
Therefore, the auditor can never rely completely on the internal control. He must perform some
substantive procedures also.
30
31 (a) There should have been in place:

1. Access Controls (physical security)
2. Data center and computer operations controls (Offsite backup of data, disaster
recovery procedures)
(b) There should have been in place Access Controls e.g. passwords to access system, access
rights and activity log.
(c) There should have been in place Validation controls e.g. Control Totals.
32 1. Does impairment loss need to be recorded on idle machines or idle machines need to be
recorded as “assets held for sale.”
2. Whenever client is dealing with hazardous chemicals, auditor should be concerned about
compliance with environmental laws and regulations concerning disposal of wastes of such
chemical.
3. Internal controls over sales might be weak. Auditor should be concerned about preparation of
correct billing of sales with respect to quantity and price.
4. This indicates obsolete inventory which might have to be recorded on NRV.
5. There is no quality and quantity inspection on receiving goods. Using bar codes only to accept
receiving might result in paying for ‘garbage’.
6. This may result in theft of inventory and other assets of company
33 1. Significant related party transactions indicate risk of material misstatement.
2. Incentive/ Pressure on management to achieve financial goals increases risk fraud.
3. This indicates that Management’s integrity is in doubt. Auditor should consider its impact on
engagement acceptance and continuance. Auditor should also consider whether there are any
unrecorded liabilities relating to non- compliance with laws and regulations.
4. Does earnings of the company and earnings of the Charles Justify his ‘extravagant’ living
standard
34 Strengths:
a. The company has established a written code of conduct.
b. Assignment of authority and responsibility is appropriate through communicating job
description to employee.
c. Company is committed to competence as aptitude tests are being conducted.
d. Those charged with governance has participated in establishing and maintaining internal
control by forming audit committee consisting of members independent from management.
Weakness:
a. It is not mentioned whether code of conduct actual operates within company and whether
company has a disciplinary mechanism in case of non-compliance.
b. Board of directors meets only twice a year. It should meet at least four times a year.
c. Audit committee meets only once a year. It should meet more frequently.
35  Reason for non-operation
 Whether exception are isolated or symmetric
 What is the effect on financial statements
 Need to extent the substantive procedures
 Whether to include them in management letter
36 a) Sales invoices should be rechecked by an independent person.
b) CCTV cameras should be installed in office gate outward pass should be prepared for every
equipment going out of office building.
c) All supporting documents should be stamped as paid or cancelled after payment and keep in
record.
d) Supporting documents (e. g Purchase Order, goods received note) should be reviewed before
recording.
e) Surprise physical checks of factory employees should be made by an independent person.
Identity of employees should be confirmed before the payment of salaries.
f) Bank reconciliation statement should be prepared on monthly basis.
g) Before approving GRN, goods received should be inspected for quantity and quality as per
Purchase Order
37 (i) Accounts statements should be sent to customers monthly and exceptions are followed up.
(ii) Sequentially prenumbered GDN are prepared and are matched with sequentially
prenumbered sales invoices.
(iii) Batch Total (i.e. “Transaction Counts” and “Control Totals”) of sales invoices should be
compared with transactions recorded in sales journal.
(iv) Debtors’ Control Account and sales Ledger are reconciled monthly.
(v) A separate credit department should set authorized credit limit for every customer, which
should be checked at time of approving sales orders.
38 Recruitment Co should exercise the following internal controls over the disposals of cars:
1. Disposal should be authorized by board of directors or other appropriate
authorities in accordance with company policy
2. Disposal should be to the highest bidder and all bid documents should be
retained for future reference appropriate.
3. Recruitement company should release car to buyer only when whole payment
has been received in advance
4. Details of disposal of cars should be promptly and accurately recorded in the
company’s accounting record including the non-current asstes register
5. The board of directors of the company should monitor the profits /losses arising
on the disposal of reported in the monthly managemnet accounts to assess the
appropriteness of the company’s depreciation policy.
39 1. Limit should be placed on level of individual cash transactions at coffee shops.
2. Aseparate cash float should be issued to shop manager.
3. All employees (including casual) should be on payroll.
4. There should be supporting documents for all cash payments eg.:
 Invoices for cash purchases
 Signature for employees receiving salaries
 Other supporting documents for relevant expenses

5. Petty cash to be kept under locked and secured place.
40 Weakness Noted: monthly bank reconciliations are not reviewed.
Differences identified as a result of reconciliation may not be adjusted. Further, there may be
misappropriation by cashier which may not be identified on timely basis.
Recommendation:
Monthly bank reconciliation statement should be reviewed by an independent person to ensure
adjusting entries have been recorded and any unusual differences are investigated.
41
42 1. Control risk
2. Inherent risk .
3. Detection risk
4. Control risk
5. Control risk
6. Detection risk
7. Inherent risk
8. Inherent risk will increase because management lacks integrity and there are likely to be errors
in opening balances due to misstatements in previous years.
9. Control risk increase
10. Inherent risk decrease,
11. Control risk decrease,
12. Inherent risk increase if more complex accounting,
13. Inherent risk increase if more complex accounting and/or financial concerns,
14. Inherent risk increase
43 Factors indicate risk of material misstatement:
1. Domination of management by a single person or small group without compensating controls.
2. Operations in new markets
(b)
1. Operations in technologically changing markets
2. Operations in competitive markets
(c)
1. Lack of personnel with appropriate accounting skills
2. Accounts having history of errors
44 a) False. These are techniques to document the internal document
b) False. In fact, Internal control system can affect the Audit Planning
c) False If internal control is weak (based on understanding), auditor does not rely on them and
consequently does not perform tests of controls.
45 (a) Control Procedure/ Activity
(b) Control Environment
(c) Control Procedure/ Activity
(d) Control Procedure / Activity
(e) Control Environment
46 a)
i) Weakness ii) Possible effect of iii) Recommendation
weakness
The logging in process of A single employee can log-in  Logging-in process should
employees is not monitored. cards of multiple employees, be monitored to ensure
which can be paid for works an employee logs-in only

not done. once.
 Shift-manager should
reconcile number of
employees as per login
record with physical
employees.
Overtime working is not Employees may clock-out late All overtimes should be
being monitored. to receive overtime authorized in advance by
payments. appropriate authority.
Password to calculate net The code word is not secure The code word should be
wages is easy to guess and is and could be easily guessed based ona random sequence
known to every staff by an employee outside the of letters and numbers and
member. department changed on a regular basis.
An independent person does. Accounts department may Prior to payment of wages,
not compare total amount of add salaries of dummy an independent person
wages paid by accounts employees in payroll sheets, should agree the total of
department with total of wages from payroll
payroll sheet prepared by department with total of
payroll de artment. wages paid.
No acknowledgement is Payroll department may skip Emails should be
obtained from Payroll emails of terminated prenumbered or it should be
department regarding receipt employees from personnel ensured that receipt is sent
of mail of terminated department and may process back.
employees. payroll of terminated
employees.
A clerk authorizes and makes A junior member may not The payroll should be
payments to employees. identify errors, or may authorized by a senior
authorize payment of dummy manager or finance director
employees.
b)
 Compare payroll expense for the year with prior year, to identify understatement or
overstatement of payroll expense.
 Compare payroll expense month-wise to investigate unusual increase or decrease in a
particular month.
 Develop plausible relationship of payroll expense with number of employees incorporating
joiners and leavers and the pay increase. Then compare with actual expenditure recorded.
Investigate unusual difference.
Chapter 7 | Intro to Substantive Procedures
1 Total payroll for the year ending 31 December 20X3 was $1,220,000. At this time Murray Co. had
34 employees.
Total payroll for the year ending 31 December 20X4 included in the draft financial statements of
Murray Co is $1,312,000. Murray Co now has 37 employees.
All employees received a 5% pay rise from 01 April 20X4.
Required: Create an expectation of what total payroll will be for year ending 31 December 20X4.
2 Your firm is the external auditor of Brave Ltd (Brave) which maintains public parks, under a
contract with the owner of each park. The audit plan in respect of the external audit of Brave, for
the year ended 30 June 2013, requires the use of substantive analytical procedures to estimate
revenue. You have been asked to perform these procedures using the following information:
 Prices on all contracts in place on 1 July 2012 increased by 5% on that date and amounts
are invoiced at the end of each month.
 The same contracts remained in place for the year ended 30 June 2013 compared with the
prior year except for one new contract which commenced on 1 January 2013, providing
services of £150,000 per month, and an existing contract, worth £90,000 per month when
it expired on 31 March 2013.
 Prior year audited revenue was £7,560,000 and revenue recorded by Brave for the year
ended 30 June 2013 is £8,668,000.
Requirements:
(i) Calculate the expected revenue, for the year ended 30 June 2013, as required by the audit plan
for Brave. Your answer should clearly show each step in your calculation.
(ii) State the audit evidence you would obtain to test the reliability of the data used at each step
of your calculation.
(iii) Explain the actions you would take based on the result of your analytical procedures. (10)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2013 September)
3 You are responsible for planning the audit of payroll as part of the external audit of Geese Ltd
(Geese) for the year ended 31 December 2012. You have been provided with the following
information
Year ended 31 December
2012 2011
Draft Audited
Employees’ total gross pay (£'000) 2189 2175
Average number of employees in year 85 91
Company-wide pay rise (effective 1 January) 2% 3.5%
Profit before tax (£'000) 1088 1081
Using analytical procedures, identify factors which may indicate a risk of misstatement in the
payroll of Geese for the year ended 31 December 2012. (04)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2013 March)
4 Albatross Ltd had 100 employees last year with total wages of $840,000, and 100 employees this
year with a wage bill of $950,000, an increase of 13%. The annual pay rise was 6%.
Required: Suggest reasons other than error or fraud which could account for the greater-than-
expected increase.
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:
Sr Audit Procedures Related Assertion
i) Verify reconciliation of ledger balances with the fixed asset register Completeness
ii) Obtain schedule of fixed assets showing opening balances, Accuracy
additions, disposals, depreciation and closing balances
iii) Verify the cost of addition 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)
6 Which financial statement assertions are fulfilled through following audit procedures;
Debtors balance confirmation
Physical inspection of inventory
Review of bank reconciliation statements
Verification of title deeds of fixed assets (04)
1 No. of employees Average Wage Rate No. of Months Expected Payroll
A B C (A*B*C)
37 2990(W-1) 3 331890
37 3139.5(W-2) 9 1045454
1377344
W-1: Average Pay Rate last year (1,220 000/34)/12 = 2,999.0

W-2: Average Pay Rate after increment (2,990*1.05) = 3,139.5
2 (i)
Audited Revenue of prior year 7,560,000
Add: Effect of increase in price (7,560,000 * 5%) 378,000
Add: Effect of new contract (150,000 * 6) 900,000
Less: Effect of expired contract (90,000 * 3) (270,000)
Expected Revenue for the current year 8,568,000
(ii)
1. For Audited Revenue of prior year, agree with prior year working papers/audited financial
statements.
2. For increase in prices, agree to board minutes and invoices.
3. For new contract, agree price of contract and start date with original contract.
4. For expired contract, agree price of contract and end date with original contract.
(iii)
Expected Revenue 8,568,000
Actual Revenue 8,668,000
Difference (in amount) 100,000
Aa difference between expected and recorded revenue (100,000) Is greater than materiality level
determined using rule of thumb 86,680 (8,668,000 * 1%), there is risk that recorded revenue is
materially overstated.
1. Auditor shall inquire of management and shall evaluate those responses by taking into
account:
 auditor’s understanding of entity and its environment and
 other audit evidence obtained during audit
2. If no adequate explanation is given by management, auditor shall perform other audit
procedures (e.g. tests of details).
3
No. of employees Average Wage Rate No. of Months Expected Payroll
A B C (A*B*C)
85 2.0316(W-1) 12 2072
W-1:
Average Pay Rate last year 1.9918 (2,175/91)/12
Average Pay Rate this year (after increment) 2.0316 (1.992*1.02)
As difference between expected and recorded expense 117 (= 2,189 - 2,072) is greater than
materiality level determining using rule of thumb 54.4 (1,088 * 5%), there is a risk that recorded
payroll expenses is materially overstated.
4 The justifiable reason for the remaining increase in payroll would be “Overtime” worked, and
Bonuses.
5 Review of Audit Program
Sr. Comments
i) This procedure provides evidence of completeness. Audit procedure is relevant to related
assertion.
ii) This procedure provides evidence of completeness of transactions, and not of accuracy.
iii) This procedure provides evidence of accuracy.
iv) This procedure provides evidence of Existence, but not of ownership.
v) This procedure provides evidence of accuracy.
Additional Audit Procedures:

For Ownership assertion:
Check the title documents of the assets as at year end.
For Existence assertion.
Physically inspect assets from opening balance.
For Completeness assertion:
Select a sample of assets that physically exist and trace them into the fixed asset register.
For additions:
Ensure that cost of assets does not include revenue expenditures.
For depreciation:
 Check whether residual value, useful life/depreciation rate, depreciation method is
reasonable (considering industry average, replacement policy, use of asset).
 Ensure that asset has been capitalized from date when asset was ready for intended use.
For classification:
Scan ledger to identify unusual entries. If small amounts appear, these may be misclassified repair
expenses
For Presentation:
Ensure that all disclosures required by IAS - 16 have been included in financial statements and are
understandable
6 Audit Procedure Assertion Fulfilled
Debtors balance confirmation Existence, Rights and Obligation
Physical inspection of inventory Existence, Valuation and Allocation
Review of bank reconciliation statements Completeness, Accuracy, Valuation and Allocation
Verification of title deeds of fixed assets Rights and Obligation
Chapter 8 | Non-Current Assets (S.P)
1 You are the audit Partner at BLC & Company, Chartered Accountants. The following matters are
under your consideration:
i) Artificial Technologies Limited (ATL) has recognized 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 utilized 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 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)
2 You are the audit manager of Ravi Pharmaceuticals Limited (RPL) for the year ended 30
September 2013. The draft financial statements disclose a profit before tax of Rs. 200 million
(2012: Rs. 150 million) and total assets of Rs. 5 billion (2012: Rs. 4.8 billion).
The following matter arose during the course of audit and is under your consideration: RPL has
been awarded a 20-year patent right for a new drug with a brand name of Dengcol. The drug has
been developed at a cost of Rs. 400 million. (07)
Required:
Identify the matters that you should consider in the above situation, and state the audit evidence
you would expect to find in your review of the audit working papers for the year ended 30
September 2013.
3 Your firm has been appointed as the auditor of Jugnu Limited (JL), which is a manufacturer of
consumer products The auditor's report on the preceding year’s financial statements was
unmodified. The draft financial statements for the year ended April 30, 2011 disclose a profit
before taxation of Rs. 75 million (2010: Rs. 155 million) and total assets of Rs. 2,100 million
(2010: Rs. 1,910 million). You are the audit manager at JL. The following issues arose during the
audit and now require your attention: JL incurred an expenditure of Rs. 25 million on the
development of five new products. It is expected that these new products would generate future
economic benefits. On July 1, 2008 JL had acquired four high-tech machines for Rs. 200 million
which are being depreciated over a period of 10 years on the straight-line method. JL did not
have the expertise to operate the machines and had entered into an agreement with Umer
Limited to operate the machines. The contract is expiring on June 30, 2011 and Umer Limited has
shown its inability to continue after the expiry of the contract.
Required: For each of the above issues, comment on the matters that you should consider and
state the audit evidence that you expect to be available. (12)
(ICAP, CPAP 06 Level - Summer 2011)
4 Your firm is the external auditor of Waheed Engineering, a listed company, which has revenue of
Rs100 million. The head office site includes the manufacturing unit, the accounting functions and
main administration. There are a number of sales offices in different parts of the country. Waheed
Engineering does not have an internal audit department.
At the interim audit you have been assigned to the audit of the wages system. This will involve
obtaining an understanding of the wages system, testing the controls and performing substantive
procedures in order to verify wages transactions.
The wages records are maintained on a computer and all the wages information is processed at
the head office. Some of the employees in the manufacturing unit are paid in cash, and all other
employees have their wages paid directly into their bank account.
Manufacturing employees are paid their wages a week in arrears. All other employees are paid at
the end of each week or month.
There is a personnel department which is independent of the wages department. The personnel
department maintain records of the employees, including their starting date, grade, current wage
rate and leaving date (if appropriate).
Previous years’ audits have revealed frauds by wages department staff facilitated by weaknesses
in controls in the wages system. These frauds have included:
 paying employees after appointment but before they commenced work;
 paying employees after they have left; and
 paying fictitious employees.
A check of current controls in the wages system has revealed that the company has failed to
instigate controls to prevent these types of fraud recurring. so the audit programme requires
extensive substantive procedures to be carried out to ensure that recorded wages transactions
have not been misstated by similar frauds taking place in the current year.
The existence of employees at the head office site can be verified by physical inspection. From a
cost effectiveness point of view, only a small sample of sales offices will be visited. The audit
manager has asked you to consider the audit procedures you would carry out to obtain sufficient
appropriate evidence of the existence of employees at sales offices not visited by the audit staff.
The audit manager has explained that ‘unclaimed wages' arise when manufacturing employees
are not present to collect their wages. The unclaimed wage packets are given to the cashier who
records their details in the unclaimed wages book and is responsible for their custody. Any
employee who has not received his/her wage packet at the pay-out can obtain it from the cashier.
You have ascertained that there is no system of checking the operation of the unclaimed wages
system by a person independent of the cashier and the wages department.
Required:
(a) Describe the normal controls you would expect to see in a wages system and explain their
purpose.
(b) Describe how you would verify that employees are not paid before they commenced work for
the company.
(c) Describe the audit procedures you would carry out in connection with attending a pay out of
wages in cash to manufacturing employees.
(d) Describe the substantive procedures on transactions you would carry out on the unclaimed
wages system.
(e) Describe the evidence you would obtain to verify the existence of employees whose wages are
paid directly into their bank account, including those at sales offices.
(ICAP’s Official Question Bank for CAF 09 - Q. # 70)
5 Your firm is the external auditor to two companies. One is a hotel, Tourex. the other is a food
wholesaler, Pudco, that supplies the hotel. Both companies have the same year-end. Just before
that year-end, a large number of guests became ill at a wedding reception at the hotel, possibly
as a result of food poisoning. The guests have taken legal action against the hotel and the hotel
has taken action against the food wholesaler. Neither the hotel nor the food wholesaler have
admitted liability. The hotel is negotiating out of court settlements with the ill guests, the food
wholesaler is negotiating an out-of-court settlement with the hotel. At the balance sheet date,
the public health authorities have not completed their investigations. Lawyers for both the hotel
and the food wholesaler say informally that negotiations are ‘going well’ but refuse to confirm
this in writing. The amounts involved are material to the financial statements of both companies.
Required: Assuming that your firm continues with the audit of both companies, for each
company describe the difficulties you foresee in obtaining sufficient audit evidence for potential
provisions, contingent liabilities and contingent assets, and describe how this could affect your
audit reports on their financial statements. (07)
(ACCA, Fundamentals Level F8 - June 2003) (ICAP’s Official Question Bank for CAF 09 -Q. # 13)
6 As a staff member of R and A Chartered Certified Accountants you are assigned to the audit of
tangible non-current assets of Willow for the year ended 31 March 20X3, R and A have been the
auditors of Willow for many years. You obtain the following schedule of movements on property,
plant and equipment and analysis of additions from the company’s accountant.
Property Plant And Machinery Total

Rs m Rs m Rs m
Cost or Valuation
1 April 20X2 340 275 615
Additions - 123 123
Disposals - (72) (72)
Revaluations 120 - 120
31 March 20X3 460 326 786
Accumulated depreciation
1 April 20X3 24 213 237
Provision 5 30 35
Written back on disposal - (65) (65)
Adjustment on revaluation (24) - (24)
31 March 20X3 5 178 183
Carrying amount
31 March 20X3 455 148 603
Schedule of additions (plant and machinery):

Supplier Description Cost
New Models Milling machine Model 38 55
Drill Suppliers Power drill Type 45C 34
Hoist Co Electric hoist no 722 18
Sundry Below Rs 1 m 16
123
The company’s accountant also advises you that the property was revalued following a valuation
by the company’ property manager who is a professionally qualified valuer.
During your verification of depreciation, you discover that most plant and machinery is fully
depreciated. Moreover, you discover that, due to oversight, depreciation has continued to be
provided on fully depreciated items. As at the beginning of the year the amount of
overstatement was Rs 43m. The accountant suggests the correction be made by reducing t
current year’s charge for depreciation.
Required:
(a) State, with reasons, the initial audit procedures you would perform on the schedules
provided by the company’s accountant.
(b) Outline the substantive audit procedures you would apply in verifying additions to plant and
machinery.
(c) Describe the audit procedures applicable to verifying the revaluation of property.
(d) With respect to the correction to accumulated depreciation, and assuming the amount to be
material, discuss accountant’s proposed treatment. If you disagree with the accountant's
proposal, state, with reasons, the correct accounting treatment,
(ICAP’s Official Question Bank for CAF 09 -Q.112)
1 i)
How to deal with a situation
Client has capitalized development cost during the year, which is material as Rs. 100 million
greater than materiality level 13.5 million (=270 million * 5%). We shall perform procedures to
determine whether this cost has been correctly capitalized, particularly considering that client
further finance of Rs. 50 million is needed.
Auditor shall perform following procedures:
 Ensure that criteria to capitalize development cost is met. In the given situation, it seems that
client may be unable to obtain sufficient fund to complete the development work.
 Auditor shall discuss the matter with management and TCWG and shall evaluate whether
they have any arrangements for financing the 50 million.
 If auditor concludes that client is able to arrange the finance, there will be no misstatement.
 If auditor concludes that client is unable to arrange the finance, this development cost should
be derecognized. If management does not reverse this development cost, it will be a
misstatement in financial statements,
Implication on report:
If management does not derecognize development cost, auditor shall express qualified opinion on
financial Statements
(ii)
How to deal with the situation: An insured plant has been destroyed by fire and client has
recorded receivable from insurance company. We will ensure that disposal of plant and
receivable from insurance company has been correctly recorded in F/S. Matter is material as Rs
390 million is greater than materiality level 15 million (=300 million * 5%).
We shall perform following procedures:
 Recalculate accumulated depreciation expense and ensure that loss on disposal has been
appropriately recorded. Also, ensure that plant has been removed from books of accounts
and fixed assets’ register. Inspect the insurance policy and the correspondence with insurance
company for the verification of the insurance claim receivable.
 If insurance company has admitted the amount of claim, it will be recorded as receivable.
However, its insurance company has not admitted the claim, it should be disclosed as
contingent asset.
 If insurance company does not accept the claim, company may not be able to continue as
going concern. In such case, auditor shall also evaluate entity's ability to continue as going
concern.
 If insurance company has admitted the claim, there is no misstatement. Auditor shall express
unmodified opinion on financial statements. However, auditor shall include Emphasis of
Matter paragraph in his report as disaster has affected financial position of client significantly.
 If insurance company has not admitted the claim, there is misstatement in financial
statements. Auditor shall express qualified opinion (if effect is material), or Adverse opinion
(if effect is pervasive). Auditor shall also include “material uncertainty relating to going
concern” para in his report.
2 Matters to be consider:
 Company has capitalized the development cost on a new product. We will consider whether
criteria for capitalization of development cost has been met.
 Materiality of the issue, Development cost is material as amount of Rs. 200 million >
materiality 10 million (200 * 5%)
Audit evidence:
 Obtain detail of development cost and inspect related documents (e.g., development
contracts, billing and timesheets) to ensure whole cost relates to the product Dengcol.
 Inspect market research reports to ensure that the project is commercially viable.
 Inspect projection reports prepared by management, and check reasonableness of
assumptions,
 Obtain written representation from management regarding commercial viability, technical
feasibility and availability of resources.
 Inspect documents relating to registration of patents.
3 i) Matters to be considered:
Auditor will consider whether entire amount of 25 million has been recognized as intangible asset
or no amount recorded as intangible asset, auditor should ensure that criteria specified by IAS -
38 to capitalize development expenditure has been met. 2, Effect of this expenditure is material
as amount of expenditure (Rs. 25 million) is greater than materiality level determined using rule
of thumb (3.75 million = 75 million * 5%).
Audit evidence to be obtained:
1. Inspect details of projects and discuss with management to ensure that following criteria
required by 1AS - 38 to recognize development cost as intangible asset has been met eg. future
economic benefits are probable, project is feasible,
2. Discuss the feasibility of the project with management Le. a Review projects and forecasts. b.
Production and marketing plans actually exist. C. Obtain representation from management
regarding intention to complete the project.
3. Fora sample of costs, inspect supporting documents e.g. development contracts, billing and
timesheets.
4. Test controls over documentation and safekeeping of scientists’ notes, discoveries and
conclusions.
5. Discuss with management and review for possibility of impairment subsequent to recognition.
(ii) Matters to be considered:
1. Contract with Umer limited to operate the machine is expiring and JL does not have expertise
to operate the machine, there is an indication that machine have been impaired because JL will
not be able to recover its amount through regular use and may have to dispose it.
2. Effect of event is material as carrying amount of machinery (Rs. 140 million = 200 million / 10*
7) is greater than materiality level determined using rule of thumb (3.75 million = 75 million * 5%).
However, it is not pervasive as it is less than 50% of total assets (1,050 = 2,100 * 50%).
Audit evidence to be obtained:
1. Discuss with management about intended use of machine i.e, whether to dispose it or arrange
an alternative operator. Obtain written representation from management regarding its intention.
2. If management intends to dispose of the machine, then an impairment review under IAS 36
must be carried out, Auditor shall inspect evidence supporting the test of impairment eg. draft
sales agreements, cash flow projections relating to value in use, any contract relating to new uses
of machines in the company.
4 Control in wages system Purpose
Authorization of new employees Payroll is calculated only for real employees.
Communication of resigned employees Payroll is calculated only for real employees.
Sequentially prenumbered and authorized Wages are calculated only for work done by
Time Sheets (or Clock-card). employees.
Approval of a payroll Payroll should be calculated correctly
Confirmation of identity before payment. Wages are paid only to genuine employees.
b)
Select a sample of employees from payroll sheet, and inspect their respective appointment letter
(maintained at Human Resource Department). Check that salary is paid from the date mentioned
in appointment letter.
(c)
 Cashier should confirm identity of employee before payment.
 Each employee should sign as acknowledgement of receipt. This sign should be confirmed by
cashier with sign at appointment letter.
 Unclaimed wages should be listed and should be kept in a safe until collected.
(d)
 Unclaimed wages should be listed and should be kept in a safe. Physical packets should agree
with listing.
 Identity (or letter of authorization by employee, if someone else collected) should be checked
before payment of unclaimed wages.
 After a certain period, wages not claimed should be returned and deposited into bank
account. Deposit into bank account should be matched with total of unclaimed wages.
(e)
 Select a sample of employees from payroll and physically verify them.
 For a sample of employees at sales offices:
o Inspect their appointment letter at human resource department, and
o Inspect approved time sheets sent from sales offices.
 Check record of employee with tax authorities.
5 Difficulties as auditor of hotel:
Investigations by Authorities:
Investigations are not yet finalized. We will also have to ensure whether any provision Is required,
and appropriateness of disclosures relating to investigation. We will have to obtain legal opinion
on expected outcome of investigation.
Legal action by guests against hotel:
We have to ensure appropriate amount of provisions and disclosures in financial statements
regarding legal actions by guests. However, lawyers have refused to confirm expected outcome in
writing.
Legal action by Hotel against Supplier:
This is a contingent receivable. We have to make sure that this is not recorded in financial
statements, unless it is virtually certain. But no evidence from company is available to confirm
this.
Difficulties as auditor of Suppliers
Expected amount to be paid to hotel should be recorded as liability. However, no evidence from
company is available to confirm this.
Effect on Audit Report:
If lawyers do not confirm in writing expected amounts to be settled, this will be a scope limitation
and auditor shall express qualified opinion.
Pending investigation by Authorities may require Emphasis of Matter Paragraph in audit report.
6 a)
 Cast the schedule to check its mathematical accuracy.
 Agree the opening balance with prior year’s balances to check opening balances have been
correctly brought forward.
 Agree additions and disposals with lists provided by client and with general ledger.
 Agree the closing balances of schedule with General Ledger and financial statements.
 Reconcile the schedule with fixed assets’ register to ensure completeness.
b)
1. Obtain list of all fixed asset purchased during the period and agree with fixed assets’ schedule.
2. Select a sample of additions and:
a. Inspect authorization to purchase fixed assets.
b. Inspect supplier's invoice to confirm cost. Also ensure that invoice does not include
revenue expenses.
c. Inspect sale deed, purchase invoices, and legal documents as evidence of transfer of
ownership in the name of company.
d. Physically inspect sample of fixed assets acquired during the year to verify existence.
(c)
Ensure Competence, Capabilities and Objectivity of Valuer: (if a revaluer is engaged)
Detailed procedures (as mentioned in Chapter # 18 of Volume - 1) may be included if high marks
are allocated to this requirement.
Ensure adequacy of valuation: Following procedures will be performed to ensure revaluation has
been properly accounted for and disclosed in financial statements.
1. Verify amounts in financial statements with the valuer’s report.
2. Ensure that valuation is up-to-date.
3. Ensure that entire class of asset has been revalued.
4. Evaluate the method used to measure fair value to ensure consistency.
5. Ensure that appropriate disclosures have been made in accordance with IAS - 16.
6. Recalculate “revaluation surplus (or loss)”, and “depreciation expenses” and ensure
these have been correctly recorded in books of accounts.
7. Inspect the property physically to ensure their condition is the same as described in
valuation report.
8. Obtain written representations from management regarding reasonableness of any
assumptions used in determining the fair value.
(d)
The treatment proposed by accountant is incorrect. Error in prior periods should be corrected
retrospectively. Therefore, Management should restate comparatives of prior year, and should
adjust the opening retained earnings of this year to Correct this error.
Chapter 9 |Current Assets (S.P)

1 You are the audit manager in a firm of chartered accountants. During the audit of a client for the
year ended 31 December 2019, the audit team has prepared the following schedule to
summarize the responses from three debtors:
Debtor Balance at year Balance confirmed Comment
end by the debtor
A Rs 500,000 Rs 500,000 Confirmation was received through
client.
B Rs 800,000 Rs 800,000 Confirmation was received after many
follow-ups with the client. However,
the audit team have come to know
that the confirming party had not
received the confirmation request.
C Rs 500,000 Rs 150,000 Consignment of Rs. 500,000 was
shipped on 27 December 2019 but
goods of Rs. 350,000 were returned
subsequent to year-end
Required: Evaluate the evidence obtained and describe the steps (if any) which the audit team
may perform in respect of the above debtors. (10)
2 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:
Debtor Balance at year Balance confirmed Comment
end by the debtor
AB Rs 500,000 Rs 500,000 No Explanation
CD Rs 800,000 Rs 700,000 Consignment of Rs. 100,000 was
shipped on 31 December 2018 and
received by customer ok 01 January
2019
KL Rs 600,000 Rs 250,000 Consignment of Rs. 600,000 was
shipped on 27 December 2018 but
goods of Rs. 350,000 were returned
subsequent to year-end
YZ Rs 400,000 No reply received No Explanation
yet
Required:
Describe the steps (if any) which the audit team may perform in respect of each of the above
debtors. (05)
3 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 4018 as firstly, the reporting deadlines at CL are very stringent,
secondly, the population comprises of a large number of gall 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)
4 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:
Customer Number of Balance outstanding Percentage of customers who confirmed
category customers (Rs in ‘000’) the balance last year
Distributors 20 30500 90%
Wholesalers 2250 12750 70%
Restaurants 12 20400 83%
Individual 5700 9800 20%
customers
73450
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)
5 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 confirmation have been received from all selected parties and no difference were noted.
Hence, no further test is required,”
Required:
a) Discuss with reasons whether you agree with 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)
(ICAP, CAF09 – S2016)
6 You are currently in the planning phase of the audit of Mineral Water Limited (MWL) for the year
ended 30 June 2012. The following information is available to you:
Customer No of Balance 10 days 11-20 21-30 31-90 > 90
Segment customers outstanding days days days days
Super markets 12 20014 8125 5053 6396 311 129

Wholesalers 65 14910 5078 6019 3150 454 209
Retailers 553 4743 1756 1798 724 278 187

Five-star 7 7694 2805 2798 1784 201 111
hotels
47361 17764 15663 12054 1244 636
50% provision for doubtful debts has been made by MWL against balances outstanding for more
than 30 days whereas the balances outstanding for more than 90 days have been fully provided.
Required: (a) Indicate what would be the basis for selecting debtors for circularizing positive and
negative requests for confirmations. (06)
(b) Briefly explain as to how would you deal with a situation where a debtor confirms a balance
which Is different from the amount appearing in the confirmation request. (05)
7 At a client, there are large number of debtors with small balances. The audit incharge is
considering to send negative confirmation request.
(a) What weakness do you see in such kind of confirmations? (02) (04)
(b) Is it appropriate to send negative confirmation request in the given case? Explain briefly.
8 The audit of Karim Limited (KL) Is in progress. The audit team has requested you to advise on the
following Issue:
“The confirmation request sent to a customer who owed Rs. 35 million was responded by an e-
mail addressed to KL’s CFO.” (05)
9 You are about to commence the audit of Delta Ltd. The client year-end, December 31, was
selected as the circulation date. Confirmation results are as follows:
1. Eight positive confirmations returned indicating full agreement.
2. One positive confirmation returned indicating the balance was correct but this is the
outstanding balance as at November 30, 20X2, not December 31, 20X2.
3. One positive confirmation returned stating the balance was correct but should also reflect a
credit memo Issued on January 5, 20X3.
4, One positive confirmation returned stating the company uses an open invoice system and is
unable to respond.
5. One positive confirmation responding that the amount shown Is incorrect because it does not
reflect the 2 percent cash discount taken on January 3, 20X3.
6. One positive and three negative confirmations returned by the post office marked “No Such
Address”.
7. One positive confirmation returned stating that the balance was correct but that the company
refuses to pay because of defective product quality.
8. One positive confirmation not returned, even after two follow-up requests.
9. Two negative confirmations returned stating that balance agrees.
10. One negative confirmation returned stating the customer owed more than the balance
shown.
11. One negative confirmation returned stating that the balance was correct but asking for an
extension of cred/t period.
12. One negative confirmation returned stating “sue us".
Required: Analyze the evidence already obtained and describe any further procedures required
to complete the audit of accounts receivable.
10 WW Company's accounts receivable are typically quite low (below materiality) at year end on
December 31. The company manufactures and sells marine equipment of various types and the
main selling period begins in April. WW's customers tend to be small boat supplies stores located
m towns near lakes and other waterways. Some of the customers close their businesses for the
winter months of November to March, resulting in many confirmations not being returned. Your
firm pas audited WW Company for 3 years and this year, as in the past, control risk is low
regarding the receivables, as is inherent risk. This year, the auditor has deaded not to use
confirmations for the receivables.
Required
(a) State 3 reasons that would support the auditor’s decision not to use confirmations in this
case.
(b) if the auditor does use confirmations, state whether she should use positive or negative
confirmations. Briefly explain your answer
(c) WW advised the auditor that one of its bank accounts was closed during the year, as It was no
longer needed. Indicate whether the auditor should send a bank confirmation regarding this
account and briefly explain your answer.
(CGA - Canada, March 2008)
11 Kamal, a Chartered Accountant, is engaged to audit the financial statements of Ahmed
Wholesalers (AW) for the year ended June 30 2004 Kamal obtained and documented an
understanding of AW's internal controls relating to accounts receivables and assessed control
risk relating to accounts receivable as ‘high’. Kamal requested and obtained from AW an aged
accounts receivable schedule listing the total amount owed by each customer as of the balance
sheet date and sent positive confirmation requests to a sample of customers. Kamal has asked
Tariq, an audit staff to follow-up on the three returned confirmations that are summarized below
Assume each confirmation is material if the potential misstatement is projected to the
population.
Ref no. Customer Customer’s comments AW’s comments/
Tariq’s notes
7 Amber & Co. Yes, we ordered Rs 885,000 worth of goods The cheque was
from AW in May However, we mailed a received and
cheque for Rs 885,000 on June 8, 2004 deposited but
posted to wrong
customer’s
account.
24 Babita Trading Sure, we ordered Rs. 1,475,000 worth of
goods on April 10, 2004, but AW was out of
stock until recently. They back ordered the
goods and we finally received them on July
6, 2004
30 Claire Jones We received Rs. 1,416,000 worth of goods
on consignment from AW on June 10, 2004,
but they are not sold yet.
Required. Describe the procedure(s) if any that Kamal should perform to resolve each of the
three confirmations that were resumed. Assume that AW will record any necessary adjusting
entries and that Kamal will verify that they are appropriate.
12 Does an oral response to a confirmation request constitute an external confirmation? Justify.
(02)
(ICMA Pakistan, Professional Level P2 - 2016 February)
13 You have carried out a debtors circularisation as part of your audit of Trump Ltd for the year
ended 31 December 2002. It Was revealed that a customer disagreed with the balance because
it had sent a cheque 23 December 2002
What further formation would you require in order to conclude on the result of this test, and
why will you require this information.
14 A client obtained confirmation of balance through email. The email contains a Word file
attachment which lists the inter, company balance as well as certain other information. The
client has forwarded the email to the audit team.
Required:
Evaluate the above situation and briefly explain the steps that the auditor would be required to
carry out in the above situation. (Impact on audit report is not required)
15 As part of your audit of Windmill Ltd for the year ended 30 April 2002, you selected a sample of
20 purchase ledger balances (out of 150), amounting to £180,000 (out of £480,000) to send
confirmation requests. You found that:
 9 balances agreed to the confirmation.
 6 balances did not agree because of April 2002 invoices on the confirmation response
but not on the purchase ledger. All of these invoices are included in the accrual for late
purchase invoices. The value of these invoices is £25,000.
 3 balances did not agree because of invoices dated 29 or 30 April 2002 on the
confirmation responses but not on the purchase ledger, nor included in the accrual for
late purchase invoices. The value of these invoices is £1,500.
 2 balances could not be checked because the suppliers do not send replies.
Indicate how you would evaluate the results of this test. (02)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2002 June)
16 As part of your audit of Bristow Ltd for the year ended 31 October 2002, you conducted a
debtor’s circularization. The reconciliation of one reply to Bristow ltd.’s sales ledger balance is as
follows:
£
Balance as per reply from customer 8,156
Payment as per customer 30/10/02 not on ledger (1) 3,764
Prompt payment discount as per customer 25/9/02 not on ledger (2) 252
Sales invoice 25/10/02 not accepted by customer as goods returned because 1980
wrong product delivered (3)
Balance as per sales ledger 14,152
State what information concerning each of the reconciling entries you will require in order to
draw a conclusion from the reply, and how it might influence your conclusion. (03)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2002 December)
17 You are manager responsible for the audit of Oak (Private) Limited (OPL) for the year ending 30
September 2020. The following issues have been brought to your notice by your audit team:
During planning the year-end inventory count, audit team decided to visit third party premises
for inventory valued at Rs.10 million. Third party has informed that because of restrictions
imposed by the government in the wake of COVID-19, it has limited number of staff and
consequently may not allow the audit team to visit its N & premises for inventory count at year-
end. However, the audit team may visit its premises on or after 31 October 2020 for inventory
count.
Competitor has alleged that OPL has infringed its patent rights and has taken legal action for
damages of Rs.500 million. OPL’s independent legal advisor is of the view that no estimate can
be made about the outcome of the case at this point of time. No provision has been made for
the possible loss, however OPL intends to fully disclose it in the notes to the financial
statements. the projected profit before tax is Rs.75 million.
Required:
a) State the audit procedures which may be performed by your audit team. (10)
b) Discuss with reasons, the implication(s) on the audit report. (08)
18 You are the audit partner of the firm and your manager has highlighted the following matters
(a) The profit before tax of Tariq Limited for the year ended 30 June 2017 is Rs. 790 million. TL
provides three years 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 The management carries 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 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)
19 Hawthorn Enterprises Co (Hawtho actures and distributes fashion clothing to retall stores. its
year end was 31 March 2015. You are the audit manger and the year-end audit is due to
commence shortly. The following three matters have been brought to your attention, (1)
i) Supplier reconciliations: Hawthorn receives monthly statements from its main suppliers and
although these have been retained, none have been reconciled to the payables ledger as at 31
March 2015. The engagement partner has asked the audit senior to recommend the procedures
to be performed on supplier statements. (03)
ii) Bank reconciliation During last year’s audit of Hawthorn’s bank and cash, significant cut off
errors were discovered with a number of post year-end cheques being processed prior to the
year end to reduce payables. The finance director has assured the audit engagement partner
that this error has not occurred again this year and that the bank reconciliation has been
carefully prepared. The audit engagement partner has asked that the bank reconciliation is
comprehensively audited.
iii) Receivables: Hawthorn’s receivables ledger has increased considerably during the year, and
the year-end balance is $2-3 million compared to $1-4 million last year. The finance director of
Hawthorn has requested that a receivables circularization
Required:
Describe Substantive Procedure you will perform to obtain sufficient and appropriate audit
evidence in relation to above matters.
(ACCA Fundamentals Level F8, June 2015)
20 You are the audit manager in the firm of DeCe & Co, an audit firm with ten national offices.
One of your clients, Rocks Forever, purchases diamond jewelry from three manufacturers. The
jewelry is then sold from Rocks Forever’s four shops. This is the only client your firm has in the
diamond industry.
You are planning to attend the physical inventory count for Rocks Forever. Inventory is the
largest account on the balance sheet with each of the four shops holding material amounts. Due
to the high value of the inventory, all shops will be visited and test counts performed.
With the permission of the directors of Rocks Forever, you have employed UJ, a firm of specialist
diamond valuers who will also be in attendance. U will verify that the jewellery is, in fact, made
from diamonds and that the jewellery is saleable with respect to current trends in fashion. UJ will
also suggest, on a sample basis, the value of specific items of jewellery. Counting will be carried
out by shop staff in teams of two using pre-numbered count sheets.
Required: (a) List and explain the reason for the audit procedures used in obtaining evidence in
relation to the inventory count of inventory held in the shops.
b) Explain the factors you should consider when placing reliance on the work of UJ.
c) Describe the audit procedures you should perform to ensure that jewellery inventory is valued
correctly.
(ACCA, Fundamentals Level F8 - December 2005) (Official Question Rank for CAF 09 -Q. # 113)
21 You are responsible for the audit of the inventory of Cedar Ltd (Cedar) for the year ended 31
March 2007.The company maintains computerised inventory records which are supported by
continuous counting and consequently the company does not have a full count at the year end.
The computer system routinely generates an inventory valuation listing detailing cost and selling
price of each line and an aged inventory listing, detailing the average length of time the item has
been in the warehouse. Cedar has included a provision for slow-moving and obsolete inventory.
List the audit work you would undertake in order to establish that the provision for slow-moving
and obsolete inventory is fairly stated at 31 March 2007. (03)
22 During the audit of your client Calpurnia Ltd you discover that the company has issued a sales
credit note to a major customer two weeks after the company’s year-end. The credit note was in
respect of a shipment of inventory which was found to be faulty. state the audit work required in
respect of the above item. (02)
2006)
23 During the audit of Taurus Ltd for the year ended 30 September 2006 You were assigned the
responsibility for auditing the cash at bank figure in the balance sheet. While checking the bank
reconciliation you discovered that receipts from customers, listed as outstanding lodgements at
the year end, were cleared through the bank on 20 October 2006. Explain why this matter should
be investigated further. (03)
24 Granger is a privately owned incorporated business that operates a garage which repairs and
services motor vehicles. Most customers are required to pay by cash or cheque on collecting
their vehicle. Credit accounts are available to business customers, These customers sign the
invoice on collection of the vehicle and their business is billed monthly. Separate series of pre-
numbered invoices are drawn up by the foreman for cash sales and for credit sales. All customer
account, are maintained by the receptionist. His duties include the following:
Cash sales
 Collect cash or cheques from customers on collecting their vehicle.
 At the end of the day, check the numerical sequence of cash sales invoices, add the sales
total and agree the total to the amount of cash and cheques received.
 Record the total cash sales in the cash receipts book.

Credit sales
 Obtain the customer's signature on the copy invoice of business account customers.
 Enter the invoices in numerical sequence in the sales journal and post the customer's
account in the accounts receivable ledger.
 Send monthly statements to credit account customers and follow up overdue accounts.
 List the balances on the accounts receivable ledger at the end of the month and reconcile
the total with the control account in the general ledger.
 Write off uncollectible balances to bad debts.
Cash receipts
 Open the mail, extract cheques from credit account customers, record them in the cash
receipts book and post the accounts receivable ledger,
 Make up the day's banking of cash (and cheques) from both cash and credit sales, prepare
the deposit slip and bank the cash (and cheques).
All other accounting duties are the responsibility of two further accounts clerks and all are
subject to supervision by the garage manager.
Required:
i) Explain why the functions assigned to the receptionist result in an inadequate segregation of
duties. You! explanation should identify misstatements that could occur and indicate how those
duties could be reassigned other staff members.
ii) Identify other control procedures you would consider necessary to ensure the completeness
of the recorded cash receipts and accounts receivable.
iii) Explain the procedures to be followed in making a cash-count for audit purposes.
(ICAP’s Official Question Bank for CAF 09 - Q. #74)
25 Fizzipop manufactures and distributes soft drinks. Its inventories are controlled using a real-time
system which provides accurate records of quantities and costs of inventories held at any point
in time. This system is known within the company as the ‘Stock pop’ system and it is integrated
with the purchases and sales system. Fizzipop has an internal audit department whose activities
encompass inventories.
No year-end inventory count takes place. Inventories are held in several large warehouses where
non-stop production takes place.
Your firm is the external auditor to Fizzipop and you have been asked to perform the audit of
inventories. Inventories include finished goods and raw materials (water, sugar, sweeteners,
carbonating materials, flavourings, cans, bottles, bottle tops, fastenings and packaging
materials).
Your firm, which has several offices, wishes to rely on the ‘Stockpop’ system to provide the basis
of the figure to be included in the financial statements for inventories. Your firm does not wish to
ask the company to conduct a year-end inventory count.
Required:
(a) Describe the audit tests that you would perform on the ‘Stockpop’ system during the year in
order to determine whether to rely on it as a basis for the raw materials and finished goods
figures to be included in the financial statements. NB: You are not required to deal with work in
progress. (11)
(b) Describe the audit tests you would perform on the records held by Fizzipop at the year-end to
ensure that materials and finished goods are fairly stated in the financial statements. (09)
1 Debtor Evaluation of Steps that audit team may perform
evidence
A This is indirect Auditor should request Debtor. A to send confirmation
response. There in directly to auditor.
a risk of tampering If confirming party does not send confirmation request
of confirmation directly, this will be considered a non-response and
evidence by auditor shall perform alternative procedures.
management.
B This increases risk Auditor should contact Debtor B and ask if he has
of fraud and received auditor's confirmation request and sent the
creates doubts reply.
over integrity of If Debtor B has sent the same confirmation reply, it will
management. be a sufficient appropriate audit evidence.
If Debtor B has not sent the confirmation reply,
management's integrity will be doubtful. Further, risk of
fraud will also increase.
Auditor shall also critically evaluate other evidences
obtained internally during audit. Reliability of
representations by management also become doubtful.
Auditor may also communicate this matter to TCWG.
C Return of goods Auditor shall inquire from management the reason of

after the year end return of goods. In case of adjusting event (e.g.
may be adjusting defective goods, fake transaction to overstate sale),
event, requirement sales of goods should be reversed, and goods should be
adjustments in included in stock.
financial To ensure correct amount is reversed, auditor should
statements. inspect related sales invoice.
If goods are defective, these should be included at NRV.
In such case, auditor should also check whether defect
of inventory also affects other inventory items. If so,
other inventory may also have to be stated at NRV. In
case of manufacturing fault, impairment testing will
also be required.
2 i) Evidence obtained. No further work is necessary.
(ii) This seems timing difference. Auditor should check date of Goods Dispatch Note and date of
acknowledgement by customer to confirm the date of delivery and receipt of goods.
Note for students: word “consignment” means shipment of goods, it does not mean goods sent
on “consignment basis” or “approval basis”
(iii) Goods returned after the year due to quality issues is an adjusting event. Auditor should
check the supporting documents to confirm the receipt of goods. ensure that sales of Rs.
350,000 are reversed. Further, year-end inventory should be written down to NRV.
(iv) If negative confirmation request has been sent, auditor {s not required to perform any
procedure.
If positive confirmation request has been sent, Auditor should perform following alternative
procedures to obtain evidence:
1. Examine cash received from customer after the balance sheet date. Obtain explanation for
cash not received within credit period.
2. If cash is not received or partly received from customer, auditor shall inspect customer
signed sales orders, sales invoices, Goods Dispatch Notes and other documents
acknowledged by customer.
3 Comment on suggestions of job-in-charge:
Stringent reporting deadline is not a valid justification to send negative confirmation request
As the population consists of large number of small balances, and risk of material misstatement
has also been asses low, we can use negative confirmation but only if following other conditions
are also met:
 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 to receive confirmations indirectly through
client's staff because we should receive confirmation requests directly from confirming parties.
There Is a risk that client may temper with confirmation requests.
Suggestion on alternative approach:
Use email.
Perform alternative procedures.
Contact personally to debtor.
Use confirmation at interim date. However, if confirmation {s sent at interim date, auditor will
have to perform additional procedures to ensure that year-end balance is correct.
4 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 Population consists of small number of large account balances; there
negative confirmation is not appropriate.
Wholesalers Population consists of large number of small balances. However,
exception rate is high (as Wholesalers 30% of parties did not confirm
the balance and disregarded request). Therefore, negative confirmation
is NOT appropriate in this situation.
Restaurants Population consists of small number of large account balances;
therefore negative confirmation is NOT appropriate.
Individual Population consists of large number of small balances. However,
Customers exception rate is high (as Individual customers 80% of parties did not
confirm the balance and disregarded request). Therefore, negative
confirmation is not appropriate in this situation.
5 (a) (i) Approach of not sending confirmation requests to amounts below Rs. 100,000 is incorrect
because auditor may not be able to conclude about entire population if this category is not
selected. Also, small misstatements may also become material when aggregated. Lot of efforts is
not a justifiable reason to omit a required procedure.
(ii)This conclusion is incorrect because confirmation does not provide evidence about
Completeness of account balances as confirming parties are selected only from recorded
balances.
(b)
(i) Audit team should not accept client's suggestion of not sending confirmation. Auditor should
also select parties for balances below Rs. 100,000. If client refuses to send confirmation requests,
it will be considered scope limitation by management. Auditor shall communicate this to TCWG
and shall determine its effect on audit and auditor's report.
(ii) Following other procedures should also be performed to ensure completeness of creditors:
1. Examine cash paid to supplier after the balance sheet date and ensure liabilities were
recorded at balance sheet date.
2. Inspect pending GRNs (i.e. goods received but suppliers’ invoices not received) and ensure
they are recorded at balance sheet date.
3. Perform cut-off test by examining purchases near balance sheet date.
6 Negative confirmation is appropriate only when all of following conditions are met:
1. Relevant population consists of large number of small balances.
2. inherent risk and control risk are low, and auditor has obtained evidence about operating
effectiveness of controls.
3. Avery low exception rate is expected, and
4. Auditor is not aware of any circumstances that confirming party will disregard such requests.
Customer Segment Type of Circularization Basis of Decision
Super markets Positive confirmation Because population consists
requests to all customers of small number of large
account balances.
Wholesalers and Retailers Negative confirmation Because population consists
requests to a sample of of large number of small
customers account balances. (assuming
other conditions of negative
confirmation are met)
Five Star hotels Positive confirmation Because population consists
requests to all customers. of small number of large
account balances.
(b) If there is an exception, auditor shall ask client to reconcile the balances in its records with
the balances confirmed by the parties.
Reconciliation prepared by client should be checked to determine whether this exception is
because of:
- timing difference (i.e. cash in transit or goods are in transit), or
- misstatements in record of third party, or
- misstatement in accounts of client
Auditor shall also consider:
whether exception is indicative of fraud or deficiencies in internal control, and
If so, whether there is need to revise his risk assessment.
7 (a) Negative confirmation Is less reliable because there {s no explicit evidence that confirming
party received and verified confirmation. Confirmation may be lost during transmission or may
be disregarded by party.
(b) In the given situation, there are large number of small account balances. Therefore, negative
confirmation is appropriate provided following other conditions are also met:
1. Inherent risk and control risk are low, and auditor has obtained evidence about operating
effectiveness of controls.
2. Avery low exception rate is expected, and
3. Auditor is not aware of any circumstances that confirming party will disregard such requests.
8 Confirmation has been sent electronically which creates doubt that it may not have come from
confirming party. Further, confirmation has been received indirectly which increases the risk that
client may have tempered the confirmation.
Therefore, auditor should:
 Request confirming party to send confirmation again directly to auditor.
 If confirmation is received electronically, auditor should obtain evidence whether
communication process is secured and controlled (e.g. by use of encryption, digital
signature, web-trust authenticity).
 Auditor may verify the source and contents of the response by contacting the confirming
party.
9 Situation 1:
Evidence has been obtained. No further audit procedures required.
Situation 2:
This is a case of exception Confirming party indirectly mentioned that balance on December Is
different as per their records. Auditor should Inquire confirming party about transactions in
December.
Situation 3:
This may be Goods in transit. Auditor should check date of GRN. If goods have been returned
after December end, balance is correct. However, if Rood have been returned before December
end, adjustment should be made in accounts for sales return.
Situation 4:
This is similar to non-response. Auditor should perform alternative audit procedures.
Situation 5:
This is not a misstatement as the transaction relates to next period.
Situation 6:
There are two possibilities in such a case:
1. Address is incorrect 2. Customer is non-existent
Auditor should recheck address and telephonically contact customer for verification of address.
Confirmation should be re-sent.
Situation 7:
This is a valid debtor as the amount has been verified. However, collectability of debt is
questionable.
Auditor should:
Discuss the matter with management and consider appropriateness of provision for bad debts
regarding this customer Also consider effect of defective product on provision for sales return
and NRV of inventory.
Situation 8:
This is a case of non-response. Auditor should perform alternative audit procedures.
Situation 9:
No notation indicates there is no disagreement. Although, customer was not required to respond
in such case. No further audit procedures required.
Situation 10: This is an exception. Auditor should obtain reconciliation from client, and shall
perform further procedures to confirm whether it is a timing difference or misstatement.
Situation 11:
This is a valid debtor as the amount has been verified. However, collectability of debt is
questionable. Auditor should discuss the matter with management and consider appropriateness
of provision for bad debts regarding this customer
Situation 12:
Collectability of this debt is questionable,
Auditor should discuss the matter with management and consider appropriateness of provision
for bad debts regarding this customer.
10 (a)
1) Balance is immaterial
2) Risk of material misstatement is low
3) Confirming parties did not respond in Past
(ii) Positive. Because confirming parties have ignored requests in past.
(c) Yes. Auditor should send confirmation to bank to ensure that there is no closing balance in
the bank (i.e. to identify unrecorded asset, if any).
11 Ref. No. Customer Auditor’s Procedures
7 Amber & Co. Auditor should verify its posting to wrong customer's account. If
receipt of cheque is verified, there is no misstatement in
financial statements. However, it represents weakness in
internal control over cash receipts which should be considered
by auditor in its risk assessment. No adjustment in financial
statements needed.
24 Babita Trading This difference may be due to goods in transit, sent by AW
before year end but received by Babita after year end. Auditor
should inspect dispatch notes to verify date of dispatch. If goods
are dispatched before year end, there is a timing difference. No
adjustment needed. However, if goods are dispatched after year
end, there is a cut-off error. This transaction should be reversed
in this case.
30 Claire Jones This represents goods sent to dealers on consignment basis. As
goods are not sold at year end, client should not have recorded
its revenue and receivable. Therefore, adjusting entry should be
passed to reverse this sale transaction and stock should be
included in closing stock of AW.
12 Oral response is NOT an external confirmation, because external confirmation is a direct
WRITTEN response from third parties. If it is not in writing, it is not external confirmation.
13 We will require information regarding date of receipt of cheque by Trump Ltd to identify cut-off
error.
Explanation for understanding purpose:
 If cheque is received before 31 December 2002, it will be a misstatement if not recorded
by Trump.
 If cheque is received after 31 December 2002, it will be only a timing difference and not
a misstatement.
 If cheque has not been received, it may indicate a fraud.
14 Receiving a confirmation electronically is an acceptable mode as per ISAs. However, as

confirmation has been sent through client, therefore, it is not direct evidence. Auditor shall not
accept it as evidence, unless confirming party also sent copy (“cc”) to auditor.
Even if confirming party has sent a copy to auditor, reliability of such confirmation need to be
verified because digital files can easily be altered and forged. Therefore, auditor should:
Check whether confirmation has been sent from genuine source (e.g. by calling back to
confirming party)
Check whether communication process is secured and controlled (e.g. by use of encryption,
digital signature, web-trust authenticity)
15 Result Evaluation
9 balances agreed ........... Evidence has been obtained that these
accounts are not misstated. No further work
necessary
6 balances did Not....... Although exceptions arise, but these are only
timing differences, not misstatements ay
accruals have been recorded for the
difference.
3 balances did not ....... lf goods against these invoices have been
received before year end, these are
misstatement and should be adjusted
2 balances could be ……… Alternative procedures should be performed
in this case.
Projected errors/misstatement are 4,000 (1,500/180,000 * 480,000)
16 Sr. # Information required to draw conclusion
1 Date of receipt of cash/cheque:
Because if date of receipt is before year end it will be a misstatement and will require
adjustment.
2 Terms of the sale transactions:
Because terms of contract will make clear whether customer is entitled to discount or
not. If customer is entitled to discount, it will be a misstatement and will require
adjustment
3 Whether goods have been received or not:
Because if credit note is issued, this will be a misstatement as credit note has not been
recorded. If credit note has not been issued, then we will check that stock should not
be included in closing inventory
17 Audit Procedures to be performed:
Auditor cannot physically count the inventory; however, he can use technology to obtain
evidence e.g.
a) Observe inventory counts virtually via videoconferencing, or through drone camera.
b) Taking screenshots during the observation to enhance the evidence
c) Participation of more than one team members in this exercise to observe from various
sides of premises to reduce risk
If use of technology is not possible, auditor can perform physical verification on a future date,
and perform following procedures to obtain evidence about inventory as at 30 September 2020:
1. Roll-back transactions to reach balance at year-end.
2. Ensure that transactions during intervening period (between balance sheet date and count-
date) are accurately and completely recorded. Extent of these procedures will depend on
whether entity uses perpetual system, reliability of entity's inventory records, type of inventory
and volume of transactors.
b) Implication on audit report:
If auditor is unable to obtain sufficient appropriate audit evidence, it will be scope limitation. As
amount of Rs. 10 million {s more than materiality level 3.75 million (75 million * 5%), auditor
shall express Qualified Opinion on financial statements.
ii)
(a) Audit Procedures to be performed: Auditor should perform following procedures:
1. Use auditor’s own legal expert to consider the level of provision required considering nature
of case, legal precedents, and company’s correspondence with opponents.
2. Assess the adequacy of disclosures related to pending litigations in notes to the accounts.
(b) Implication on Audit Report: This is a material uncertainty relating to exceptional litigation.
if auditor concludes that provisioning is not required, and management adequately discloses this
fact in notes to the accounts, auditor shall express unmodified opinion on financial statements.
However, he shall include Emphasis of Matter paragraph in his report to draw users’ attention to
this matter. if a provision is required but management does not record it, or management does
not adequately disclose this fact in financial statements, auditor shall express Adverse opinion on
financial statements as impact is likely to be pervasive.
18 Steps that will be performed:
Auditor shall evaluate adequacy of work of expert. For this purpose, auditor shall evaluate:
1. Accuracy, Completeness, and Relevance of significant source data.
2. Relevance and reasonableness of significant assumptions and methods.
3. Reasonableness of expert's findings and conclusions.
4. Consistency of these conclusions with other audit evidence.
Possible implication on audit report: valuation as per auditor's expert agrees with valuation as
per management, there is no misstatement. Auditor express unmodified opinion on financial
statements. However, matter shall be included in Key Audit Matter section (because it involves
complexity, subjectivity and use of expert). If valuation as per auditor's expert is different from
valuation as per management, this is a misstatement. Auditor Shall express qualified opinion, as
matter is likely to be material.
b) Steps that will be performed: Auditor shall perform following procedures to obtain evidence
about inventory at year end:
Auditor shall perform stock-taking after the year.
Auditor shall obtain documentary record for inventory purchases and sales during the interim
period, and shall estimate year-end balance by reverse working.
Auditor shall check accuracy and completeness of documentary record.
Possible implication on audit report: if evidence for year-end inventory is obtained, auditor shall
express unmodified opinion. If evidence is not obtained, this will be a scope limitation. Auditor
shall express qualified opinion or Disclaimer of opinion on financial statements, Auditor shall also
include “Other matter paragraph” in his report to communicate that prior year’s financial
statements were audited by another auditor, or were unaudited.
19 Substantive procedures for supplier statement reconciliations:
1. Select a sample of year-end supplier statements and agree the balance to the purchase
ledger of Hawthorn. If the balance agrees, then no further work is required.
2. Where differences occur due to goods in transit, confirm from goods received notes
(GRN) whether the receipt " of goods was pre year end, if so record it as purchases for
the year.
3. Where differences occur due to cash in transit from Hawthorn to the supplier, confirm
from the cashbook and bank statements that the cash was sent pre year end.
4. Discuss any further adjusting items with the purchase ledger supervisor to understand
the nature of the reconciling item, and whether it has been correctly accounted for.
Substantive Procedure for bank reconciliation
Cash bank reconciliation statement to ensure mathematical accuracy and agree balances as cash
book with GL and balance as per bank statement with bank statement.
Trace deposits in-transit into deposit slips and cash book of current month; and in bank
statement of subsequent month. For significant delays inquire explanation from management.
Trace unpresented cheques into cash book of current month; and in bank statement of
subsequent month for clearance. For significant delays inquire explanation from management.
Examine long-outstanding cheques for reversal.
For untraced items, examine supporting documentation.
Check whether deposits in-transit and unpresented cheques in previous bank reconciliation
statement are appearing in current month’s bank statement or current bank reconciliation
statement.
(iii) Substantive procedures for receivables:
Existence
1. Select a sample of year-end receivable balances and agree back to valid supporting
documentation of GDN and sales order to ensure existence.
2. Select a significant sample of receivables and review whether there are any after date cash
receipts.
Valuation:
1. Review the aged receivables ledger to identify any slow moving or old receivable
balancing discuss the status of these balances with the credit controller process whether
they are likely to pay.
2. Review customer correspondence and board minutes to identify any balances which are
in dispute or unlikely to be paid.
3. Calculate average receivable dates and compare this to prior years, investigate any
significant differences.
4. Inspect post year-end sales return/credit notes and consider whether an additional
allowance against receivables is required.
20 a) Audit procedures regarding inventory count:
Auditor shall ensure that:
1. Staff are counting in pairs with one person checking the inventory and another
recording, to avoid falsification of count sheet.
2. Counting inventory should be flagged, to avoid double counting.
3. Count sheets are prenumbered, to ensure completeness of count sheets.
4. Shop is closed, to ensure no receipts and issues during stock count for proper cut-off.
5. On sample basis, select a sample of inventory from list and physically verify.
6. On a sample basis, select a sample of physical inventory, and trace into inventory list.
7. Review the condition of the jewellery with the independent valuer, to identify damaged
inventory.
(b) If auditor uses work of an expert, it is auditor's responsibility to:
Evaluate Competence, Capabilities and Objectivity of the Auditor's Expert.
Obtaining an Understanding of the Field of Expert.
Agree terms with Auditor's Expert.
Evaluate the Adequacy of the Expert’s Work.
(c)
Ensure that jewellery is valued at lower of cost and NRV.
Inspection/Vouching (purchase invoices, inspect Payroll sheets, management accounts).
Recalculation: (FIFO or Weighted Average Cost).
Analytical Procedures: (inventory turnover ratio).
Inquiry/Discuss with management: (for obsolete stocks, for inventory held by third parties, for
NRV)
Subsequent clearance: (for NRV)
Presentation and Disclosure: (as per IAS - 2)
Physical Verification (for damaged inventory)
21 1. Physical inspection of inventory for evidence of slow-moving/ obsolete items.
2. Discuss with warehouse personnel the possibility of slow-moving/ obsolete items
3. Inspect inventory listing for items with selling price below cost and ensure included in
provision
4. Inspect ageing report to identify slow-moving items and ensure old items included in
provision
5. Review orders/inventory movements post balance sheet date
6. Recalculate the provision
7. Compare with previous year and investigate differences
8. Obtain Management representation on adequacy of provision
22 Check the date of sales for which credit note has been issued.
If goods were sold after the year, this indicates that inventory at year end is faulty and may
require adjustment to write-down it to NRV.
If goods were sold before year end, an appropriate amount of provision for return should have
been recorded in financial statements.
Also review for other credit notes after the year-end.
Also review for possibility of other faulty inventory in stock at year end.
23 1. There is an undue delay in clearing of cheque (i.e., 20 days).
2. This is indicative of
 Weak controls over cash (i.e., cheque received but not timely deposited into bank)
 teeming and lading fraud by cashier.
24 Inadequate segregation of duties Possible misstatement How to re-assign
Person receiving the cash is also He may keep the cash in his There should be
recording the same. pocket and may not record it. independent person to
record the cash
Reconciliation is being performed He may hide errors or fraud Reconciliation should be
by person recording the by preparing wrong prepared and checked
transactions reconciliation by independent persons
Cashier is sending monthly If payments from debtors Responsibility to send
statements and is following up have been misappropriated monthly statements and
overdue accounts. by him, monthly statements chase overdue accounts
can be altered and overdue should be given to
accounts may not be independent persons
appropriately followed up
Cashier is writing off receivables Collections received from An appropriate
credit customers may be kept authority should give
by cashier, and these approval of write-offs
customers can be written off

by him subsequently.
ii)
Other control procedures include:
 A bank reconciliation should be performed periodically.
 Reconciliation of subsidiary ledger with control account should be reviewed by independent
person.
 Opening of mail process should be observed by an independent person.
 Garage manager should review the process of follow-up of overdue debts, and should
investigate steps taken
 Debtors who are written-off should be black-listed so that no further sales are made to
them.
iii)
 Stop movement of cash during cash count.
 Perform cash count in the presence of a responsible official.
 List denomination of notes, and number of notes in each denomination.
 Obtain sign of custodian on list of cash, after the cash count.
25 (a)
We shall perform following procedures to ensure that client's inventory system is operating
effectively:
 Perform preliminary analytical procedures to decide which warehouse to visit (depending on
volume of inventory and risk).
 Obtain documentation of the “Stockpop” system and review them to obtain understanding
of system design.
 Use CAATs to establish whether system operates as designed e.g. it highlights old inventory,
negative inventory and other generates other exception reports.
 Select a sample of GRNs and GDNs and trace them into system to ensure that transactions
are input on timely basis and accurately.
 Inquire management about procedures for inventory count, and review instructions
regarding inventory count.
Student must note that “Stockpop” system is implemented at each location. Further, stock count
is not done at year end, but it is conducted periodically during the year.
(b)
 Obtain schedules of the costs and quantities to be included in the financial statements
and trace these back to the output of the Stockpop system.
 Perform analytical review on year end quantity and rate to ensure these are reasonable.
 Check calculation of obsolete inventory, alongwith inspection of aging report, list of old
items.
 Ensure proper cut-off at year end on sales and purchases.
 Ensure valuation in accordance with IAS 2.
Chapter 10 |Other Assets (S.P)

1 On the audit of Qalander Limited, your team has performed the following audit procedures for
collecting the audit evidence with respect to understatement of payables against raw materials:
(i)Verified the amounts recorded in supplier ledgers through underlying supporting documents
(ii) Sent direct confirmations to selected suppliers from the list of suppliers appearing in the
payable subsidiary ledgers.
(iii) Reviewed the list of subsequent material disbursements to suppliers from bank ledgers.
(iv) Reviewed unpaid invoices and ensured that they are properly recorded. Required: Comment
on above audit procedures performed by your audit team in the context of testing the
understatement of payables Also suggest further procedures, if any, that are required to be
performed with respect to the understatement of trade payables. (07)
(ICAP CAF 08 Autumn 2020)
2 You are the manager responsible for the audit of Crown Limited (CL) for the year ended 31
December 2019 Your audit team has informed you that CL is developing a new product ‘Solar
giant’ which would have three times more power generation capacity than the regular solar
panels available in the market. CL had capitalized development costs of Rs. 40. million in 2018 and
Rs, 38 million in 2019, Based on technical feasibility carried out by the production department,
testing of solar giant is in the right direction and the product would be launched as per plan in
June 2020.
However, review of board minutes revealed that CL is facing technical problems that may delay
the launch of solar giant till March 2021. The minutes further revealed that CL may require to
incur further Rs, 50 million for the development of this project. This would result in increase in
selling price that was originally envisaged by CL.
CL's management is of the view that they would overcome these technical problems without
incurring any additional cost and would launch the solar giant as per original plan, in June 2020,
The draft financial statements show a profit before tax of Rs. 150 million,
Required:
State the audit procedures which may be performed in respect of above audit issues also discuss
the implementation of this issue, if any on the audit report. (08)
(ICAP CAF-09, Spring 2020)
3 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 advisory 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
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 or 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. (Bass of opinion paragraph is not
required) (05)
4 You are the manager on the audit of Nobel Limited, a listed company, which manufactures
automotive parts and air. conditioners for motor vehicle assemblers. Annual sale of the Company
is Rs. 850 million and profit before tax is Rs. 60 million.
Your review of the audit working paper file has disclosed the following outstanding issues: 0
(i) The company Is facing a potential legal claim from Mehran Motors Limited (MML) in respect of
defective air conditioners supplied to them. A claim for 25 million being the cost of replacement
of air conditioners and lost production time has been lodged with the Company by MML. The
management is of the view that the claim is not justified as the air conditioners were properly
functioning and had been tested for quality and that the defects have arisen because of the
negligence of MML and its technicians. However, a provision of Rs, 2 million has been made in the
financial Statements in this respect.
(ii) Depreciation on certain equipment has been charged at 10% per annum on reducing balance
method. This rate is consistent with prior years and the same rate is being used by most other
companies, in the automobile industry, However, significant losses have recently been recorded
on the disposal of similar equipment.
Management has provided written representations in respect of the above matters.
Required: What audit evidence will you gather to address the above issues? (10)
(ICAP, CAF 09 Level - Spring 2008) (ICAP’s Official Question Bank for CAF 09 - 0. #83}
5 Narrow Street Limited is an auto parts manufacturing company. The Company offers product
Warranty to its customers. You are senior in charge on the audit of the Company for the financial
year ended December 31, 2008, while reviewing the draft balance sheet, you have noted that the
provision for product warranties has increased to 150 million as compared to Rs. 85 million in the
previous year. The Company's profit after taxation as appearing in the draft profit and loss
account is Rs. 50 million. Considering the significance of this change, you have decided to carry
out a detailed test to verify the amount.
Required:
State the audit procedures to be performed in order to conclude that product warranty liabilities
are fairly stated in financial statements of the Company. (10)
(ICAP, CFAP 06 Level Summer 2009)
6 Platinum Limited (PL) is a key supplier of raw materials to Zinc Limited (ZL). PL has filed a suit
against ZL for breach of terms of an agreement. The amount claimed by PL is Rs. 10 million, ZL has
disclosed it as a contingent liability in the draft financial statements for the year ended 31
December 2011. However, ZL is striving for an out of court settlement and recent correspondence
indicates that PL is likely to agree and settle the dispute for 50% of the amount claimed by them.
Required: Describe the audit procedures that ZL's auditor should perform in the above situation.
Also discuss the impact, if any, of the above procedures on the audit report. (07)
7 You are the external auditor of Tracey Transporters, a public limited company (TT). The company’s
year-end is 31 March. You have been the auditor since the company was formed 24 years ago to
take advantage of the increase in goods being transported by road. Many companies needed to
transport their products but did not always have sufficient vehicles to move them. TT therefore
purchased ten vehicles and hired these to haulage companies for amounts of time ranging from
three days to six months.
The business has grown in size and profitability and now has over 550 vehicles on hire to many
different companies. At any one time, between five and 20 vehicles are located at the company
premises where they are being repaired; the rest could be anywhere on the extensive road
network of the country it operates in. Full details of all vehicles are maintained in a non-current
asset register.
Bookings for hire of vehicles are received either over the telephone or via e-mail in TT’s offices. A
booking clerk checks the customer’s credit status on the receivables ledger and then the
availability of vehicles using the Vehicle Management System (VMS) software on TT’s computer
network. E-mails are filed electronically by customer name in the e-mail programme used by TT. If
the customer’s credit rating is acceptable and a vehicle is available, the booking is entered into the
VMS and confirmed to the customer using the telephone or e-mail. Booking information is then
transferred within the network from the VMS to the receivables ledger programme, where a sales
invoice is raised. Standard rental amounts are allocated to each booking depending on the
amount of time the vehicle is being hired for. Hard copy invoices are sent in the post for
telephone orders or via e-mail for e-mail orders.
The main class of asset on TT’s balance sheet is the vehicles. The net book value of the vehicles is
$6 million out of total shareholders’ funds of $15 million as at 31 March 2005.
Required:
(a) List and explain the reason for the audit tests you should perform to check the completeness
and accuracy of the sales figure in TT’s financial statements. (05)
(b) List and describe the audit work you should perform on the balance sheet figure for vehicles in
TT’s financial Statements for the year ended 31 March 2005. (05)
8 Porridge is a small manufacturing company of which your firm of Chartered Certified Accountants
is the external auditor.
You have been assigned to the audit of trade payables.
The audit file indicates that control risk for purchases and payments transactions is assessed as
slightly less than high because of limitations in the extent of segregation of duties due to the small
number of accounts personnel. There are no other identified control problems or prior year audit
problems.
Narrative notes on the accounting system contain the following descriptions.
 Purchases are requisitioned by the user department and ordered, using prenumbered order
forms, by the purchasing manager.
 Raw materials and manufacturing supplies are delivered to the receiving department of the
factory where the receiver issues prenumbered goods inward notes (GINs).
 Purchases of other goods and services are delivered directly to the requisitioning department
and no GINs are issued.
 The accounts department checks suppliers’ invoices with purchase orders, and
o for production department purchases, with GINs
o for other purchases, sends the invoices to the requisitioning department manager who
initials the invoice to indicate that it is appropriate to pay. Invoices are then processed to
the accounting records using proprietary software.
 All suppliers are paid at the end of the month following the month of receipt of the invoice.

Payables at 31 October 20X3 therefore represent goods and services invoiced in October. In
addition, invoices received between 1 and 15 November were divided into those relating to goods
received or services provided before and after 31 October, the former being recorded in the
accounting records before the October trial balance was produced. On 15 November, any
unmatched GINs relating to deliveries before 31 October were posted to the accounts as at 31
October at the estimated amounts of the invoices.
Suppliers’ invoices are filed alphabetically with supporting documentation, all of which is
cancelled with the date of payment when the cheque is issued. Suppliers’ monthly statements are
also filed with the invoices. These are scrutinised by the accounts department for unusual items,
such as overdue invoices, but are not regularly reconciled with the company's own records.
Required:
(a) In your audit of trade payables in the 31 October 20X3 financial statements explain which of
the financial statement assertions you would regard as presenting the greatest inherent risk.
(b) Discuss the reasons for undertaking or not undertaking a payables’ circularization.
(c) Outline substantive procedures you would apply in your audit of trade payables relating to
production department Purchases,
(d) Explain additional procedures you would perform in verifying the completeness of non-
production department Payables.
(ICAP’s Official Question Bank for CAF 09 - Q. # 117)
9 Your firm is the auditor of Trembridge Engineering, and you have been asked to suggest the audit
work you will carry out in verifying accounts payable and purchase accruals at the company's year-
end of 30 September 20X3. You attended the inventory count at the year end.
The company operates from a single site and all raw materials for production are received by the
goods inwards department. When the materials are received they are checked for quantity and
quality to the delivery note and purchase order, and a multi-part goods received note is made out
and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy
note is raised which gives details of the problems (e.g. incorrect quantities or faulty materials).
The purchase accounting department receives the purchase invoices, check them to the purchase
order and goods received note and post them to the purchase ledger. At the end of each month,
payments are made to suppliers. The purchase ledger is maintained on a PC.
The main sundry payables and accruals at the yearend include:

(i) wages accruals and associated taxes payable;
(ii) Sales taxes payable;
(iii) time dependent accruals, such as interest on loans and overdrafts, telephone, heat and light,
and other expenses paid in arrears.
Most employees' wages are paid weekly in arrears.
Required: Describe in detail the audit work you will carry out to:
a) Check suppliers’ statements to the balances on the purchase ledger;
b) Verify that purchases cut-off has been correctly carried out at the year-end;
c) ensure that sundry payables and accruals are correctly stated.
(ICAP’s Official Question Bank for CAF 09 Q 18)

1 Comment on audit Procedures:
i) This procedure is not relevant to test understatement of payables.it is relevant for checking
occurrence /accuracy of transactions already recorded in payable accounts.
(ii) Confirmation usually verifies recorded transactions; hence this procedure is not relevant to test
understatement of payables. Auditor may overlook a payable not recorded in payable ledger.
iii) This procedure is relevant to ensure completeness of payables, provided these subsequent
payments are also traced to liabilities recorded at balance sheet date.
iv) This is a relevant procedure to test understatement of creditors.
Further Procedures:
1. Perform cut-off test on purchases.
2. Inspect pending GRNs (ie. goods received but suppliers’ invoices not received) and ensure
they are recorded at balance sheet date.
3. Compare account statements sent by suppliers with their respective ledger accounts.
4. Review the list of creditors and compare with previous year to identify any major suppliers
 which have been omitted.
 whose balance has have declined significantly. Inquire reason of decline.
2 Audit Procedures regarding development cost capitalized:
 Development cost should be recognized only if criteria by IAS 38 Is met.
 Auditor should discuss with management and confirm whether resources are available to
finance the further cost needed to complete the project.
 There is an inconsistency between board’s view and production management's view. Auditor
should discuss the matter with them to resolve the disagreement.
 Review revised marketing plans on the basis of increased prices to confirm whether project is
still commercially profitable.
 Auditor should investigate nature of technical problem and whether the project is still
technically feasible.
 Auditor may also engage auditor’s expert.
 For a sample of costs, inspect supporting documents e.g., development contracts, billing and
timesheets.
 Review development cost to verify that cost is appropriately classified and does not include
research expenses.
 Obtain representation from management regarding intention to complete the project, and to
use it.
If criteria by IAS 38 is not met, auditor shall request management to expense out the development
cost capitalized.
Implication on audit report: if management does not expense out development cost capitalized,
this will be a misstatement and auditor shall express adverse opinion as amount of misstatement
is likely to be pervasive i.e. Rs. 78 million (40+38) is more than 75 million (50% of profit). Nature of
misstatement should be explained in the basis of qualified opinion section. If financial statements
are appropriately adjusted, auditor may include this matter in Key Audit Matter section in his
report.
3 a)
i) Audit Procedures:
Inspect BOD minutes.
Inspect Correspondence with third party & legal counsel, Send Letter of Inquiry to legal counsel.
Consider need to engage auditor's expert.

Consider Legal precedent on the matter.
Obtain Written Representation from management.
Check Subsequent Status of the case.
Ensure Adequacy of disclosures.
Implication on report: There is a major tax litigation against company. As outflow of benefits is
not probable (based on tax advisor), this matter should be disclosed in financial statements as
contingent liability.
As matter is disclosed, there is no misstatement and auditor shall express unmodified opinion.
However, auditor should include Emphasis of Matter Paragraph in his report to draw users’
attention.
(ii) Audit Procedures:
Loss by Fire:
1. Ascertain financial impact of loss of assets (discuss with management, local press, surveyor’s
report, BOD minutes)
2. Read disclosure in F/S for appropriateness.
Recoverable from Insurance:
1. Read Insurance Policy to ensure it covers the loss.
2. Inspect correspondence with insurance company (to confirm likely recovery).
3. Record only, if virtually certain (i.e. acknowledged by Insurance Co.)
This is a non-adjusting event requiring disclosures in financial statements.
If event is not disclosed in financial statements, this will be a misstatement in financial statements.
As effect is material (100 million > 500* 5% = 25 million), auditor shall express Qualified opinion
on financial statements.
If event is disclosed in financial statements, auditor shall express Unmodified opinion on financial
statements. However, auditor shall include Emphasis of Matter paragraph in his report to draw
user attention to significant subsequent event.
b) IFRS requires to include disclosure in financial statements, otherwise this will be a
misstatement. As effect is material (75million>500*5%=25 million) auditor shall express Qualitied
Opinion.
Qualified Opinion:
We have audited the financial statements of Beluga Limited, which comprise the statement of
financial post on at August 31 2019, and the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
section of our rt financial statements give true and fair view of financial position of Beluga Limited
at August 31, 2019 and its performance and cash flow for the year then ended in accordance with
IFRS.
4 (i) A customer has filed a claim against malfunctioning of company’s product. Issue is material as
amount of Rs. 25 million greater than materiality of Rs. 3 million (60 million * 5%).
Following evidence will be obtained to ensure this claim is appropriately accounted for and
disclosed in financial Statements:
Inspect agreement with MML and terms and conditions relating to warranty.
Check quality control procedures of client regarding testing of equipment.
Obtain legal confirmation from lawyers to inquire whether any liability is probable and
measurable,
Inquire management about the basis of provision recorded.

Examine response of other customers to whom similar equipment has been sold.
(ii) There has been significant losses on disposal of equipment which is an indication of
undercharging of depreciation, following evidence will be obtained to ensure depreciation charge
is appropriate:
Check whether depreciation. rates are reasonable (considering use of asset by company), and are
correctly applied.
Observe working conditions and repair and maintenance policy of the organization, which may
require revision in useful life,
Discuss with directors’ possibility of impairment of fixed assets (e.g., due to physical damage, or
declining demand of products).
Obtain opinion of independent expert regarding useful life, residual value of the asset.
Check whether equipment has been sold on arm’s length basis, or any related parties are
involved.
5 1. Review sale agreements to verify the terms and provisions of warranty coverage.
2. Test estimated costs to complete warranty by:
 Comparison of estimate made for prior periods with actual results for those periods to
confirm appropriate rate of goods claimed for warranty. (i.e. historical accuracy).
 Recalculate provision using formula used by company. Use expert, if formula is complex
 Reviewing whether provision for warranty is based on latest rates.
 Review supporting documents for evidence of repair cost by component (material, labor
and overhead).
3. Discuss with management identification of defects in inventory.
4. If there are new products added, determine whether the Company has developed a reasonable
basis for providing warranty costs.
5. Review whether subsequent events confirm the appropriateness of provision recorded at year
end (e.g. number of products returned; cost incurred to repair)
6. Obtain representation letter from management on adequacy of provision for warranty
(Formula to calculate provision for warranty = Units Sold * Defect Ratio * Cost to repair * Number of Years)
6 Audit procedures to be performed:
The company is facing a potential legal claim from PL. Following procedures will be performed
appropriately accounted for and disclosed in financial statements.
 Inspect agreement with PL to evaluate conditions to determine extent of liability.
 Obtain legal confirmation from lawyers to inquire whether any liability is probable and
measurable.
 Obtain written representation from management regarding the expected outcome and
possibility of out-of-court settlement.
 Review the correspondence with PL to confirm that the amount they are willing to accept is in
fact Rs. 5 million.
If on the basis of the above procedures the auditor concludes that a settlement shall ask the
management to make a provision.
Impact on audit report:
If management refuses to record provision, it will be a misstatement in financial statements .
Auditor shall express qualified opinion (if effect is material) or adverse opinion (if effect is
pervasive). Auditor shall describe nature of misstatement in basis for qualified/adverse opinion
section.
7 a)
Inspection/Vouching: (Sales invoices, GDN, sales order, correct prices/discounts etc.)
Cut-off: (on GDN)

Scan Ledger:
Classification, Presentation & Disclosures: (involves properly classified, policies properly
disclosed)
b)
8 a)
In audit of trade payables, greatest inherent risk is in assertion of Completeness because:
 Management may understate purchases to improve profits
 Management may understate creditors to improve liquidity to facilitate additional finance or
renew existing borrowing agreements.
 There may be some goods received, which have not been yet invoiced by suppliers.
(b)
In audit of trade payables, confirmation is usually not considered to provide sufficient appropriate
evidence because;
 Confirmation is sent to recorded payables, therefore it does not provide evidence about
completeness.
 In payables, external documentary evidence is also available which is more reliable (e.g.
suppliers’ invoices).
(c)
Agree F/S with records: (list of creditors from purchase ledger)
Reconciliation: (control account with subsidiary ledger)
Scan Ledger: (large transactions immediately before or after year end)
Inspection/Vouching: (Purchase invoices, GRN, Purchase Orders)
External Confirmation:
Presentation and Disclosure: (e.g. related parties)
Subsequent clearance: (cash paid after year end, inquire unusual delay)
(d)
Inspection/Vouching: (pending GRN, subsequent payments, compare list of suppliers and their
balances)
Cut-off:
Analytical Procedures: (compare with last year, creditors’ turnover ratio).
9 (a) check suppliers’ statements to the balances on the purchase ledger;
 Select a sample of suppliers and inspect their statements, agree them with balance in
purchase ledger.
 If statement of some suppliers are not available, we can confirm the amount by contacting
them through phone.
 If there is difference in amount of statement and amount recorded in purchase ledger,
investigate the difference
This may be due to:
 Temporary difference (e.g. goods in transit, or cash in transit). If so, check supporting
documents and subsequent recording in their accounts.
 Misstatement in supplier's record.
 Misstatement in client's record.
(b)
At year-end, auditors should select the last goods receipt note (GRN) made on last day of the year.
He should then select further a sample of GRN for receipts immediately before and after the last
GRN. The sample of GRNs should be matched to the associated purchase invoices to ensure that:
 Receipts before year end have been posted in this year’s purchase, and related inventory is
included at year end.
 Receipts after year end have been posted in next year’s purchase, and related inventory is
excluded at year end.
(c)
Agree F/S with records: (list of all accruals)
Analytical Procedures (check for all likely items, compare with last year)
Inspection/Vouching (with supporting documents) Subsequent clearance
Chapter 11 | Related Parties

1 During the audit of Cedar Limited (CL), your audit team observed that CL has sold one of its
freehold lands to Maple (Private) Limited (MPL) at a loss of Rs. 10 million. Your team’s further
investigation of the matter and reading of the minutes of the board of directors’ meeting
revealed that:
(i) a director of CL holds 20% shareholdings in MPL which makes this entity as CL’s
related party; and
(ii) MPL would pay 30% of the consideration in cash and the remaining amount over a
period of five years.
Required: Evaluate the above related party transaction and suggest any eight key audit
procedures that your team should perform in this respect. (10)
2 The draft statement of financial position of ABC Company includes an amount of Rs. 300,000
owed by DE Company. The total assets of ABC Company are Rs.200 million.
The auditor has obtained the following audit evidence:
 DE Company is controlled by the chairman of ABC Company, who is its majority
shareholder.
 The draft financial statements of ABC Company do not provide any disclosures about the
Rs. 300,000 transactions, on the grounds that it is immaterial.
 There is no information about the nature of the transaction, but the Rs. 300,000 had
been included in receivables at the end of the previous financial year.
Required: What further measures should the auditor take? (04)
(ICAP’s Official Study Text for CAF 09 - Page # 212)
3 You are the audit manager on the audit of Gold Limited. During the planning phase of the audit,
the audit senior had a meeting with the CFO of the company. While discussing matters such as
performance of the company, financial ratios and the overall audit strategy etc., the CFO
informed that there were no related party transactions during the year. He also acknowledged
that management is responsible for identification and disclosure of related parties. In view of the
above, the audit senior feels that there is no need to prepare audit program in respect of related
parties.
Required:
Comment on the conclusion drawn by the audit senior and give brief explanation of the auditor's
responsibility in respect of related party transactions. (04)
4 During your planning meeting with the finance director of Medlar Ltd for the year ending 31
December 2006, he informed you that his wife, an interior designer, had provided consultancy
services in relation to the refurbishment of the company’s head office.
State why this should be considered by the auditor. (01)
5 Your audit firm has conducted the external audit of JJ Ltd. for the past 4 years and issued an
unqualified opinion each year. JJ provides flight services to travel companies, mainly in western
Canada. Last year, profits declined because of a sudden increase in the price of fuel. This year,
the company president retired and, under the guidance of the new president, J] acquired 100%
ownership of a small oil company called X-OIL Inc. to protect its profits from increases in fuel
prices. XOIL was for sale because its production of fuel was too small to compete with the larger
multinational companies in that industry. J] expects better profits in the future because it can be
guaranteed a steady supply of fuel for its airplanes.
Required:
Explain any concerns you would have as the auditor regarding the action taken by JJ to protect its
profits.
(CGA - Canada, March 2009)

1 Evaluation of the transaction
This is a significant transaction with related parties. Terms of the transactions (loss of Rs. 10
million, along with delayed payment) indicate that transaction is not on arm’s length basis and
indicates a risk of fraud.
Key Audit Procedure:
1. Auditor shall inquire management about business rationale of such transactions.
2. Auditor shall read contract of this sale, to obtain complete understanding of transaction.
3. Auditor shall obtain evidence for appropriate authorization of the transaction. (e.g. special
resolution of members for investment in associated company).
4. Auditor shall evaluate whether this transaction has been appropriately accounted for (e.g.
discounting of long term receivable, and classification between short-term and long-term).
5. Auditor shall evaluate whether this transaction has been appropriately accounted for
disclosed in financial statements.
6. Auditor shall engage an expert to evaluate whether fair value of asset and other terms are
consistent with market transactions.
7. If management has not communicated this transaction to auditor, risk of completeness of
related parties will also increase. If omission is intentional, risk of fraud will increase.
8. Auditor shall ensure that further transactions with MPL are also identified and disclosed in
2 First Action/Measure: Determine whether it is a related party transaction: The auditor should
first establish whether DE Company is a related party of ABC Company. From the information
available it would seem that it is a related party, because the chairman of ABC Company, as a
majority shareholder in DE Company, would appear to be in a position of influence in both
companies.
Second Action/Measure: Determine amount involved is material: Although the amount
receivable is not material in terms of value (in relation to the value of total assets of ABC), the
materiality of related party transactions should not be judged only on the basis of value. The
nature of the transaction is also relevant for judging materiality. Considering nature, it is
material.
Third Action/Measure: Determine whether amount is recoverable: The auditor should review
the written terms of the transaction (if there are any), and should obtain a written
representation from the chairman about the nature of his influence over DE Company, whether
the amount receivable by ABC Company is likely to be recoverable and when it is likely to be
paid. The auditor should also review board minutes of ABC Company for any recorded
discussions by the board of the transaction with DE Company.
Fourth Action/Measure: Whether transaction is appropriately disclosed in financial statements:
Disclosure is required of the nature and amount of the transaction. Since the amount was
receivable one year ago, the auditor should also consider the expected date of payment, and
whether the balance is more in the nature of a long-term loan receivable than a current asset.
3 Comments on conclusion:
Conclusion of audit senior is inappropriate. Auditor should not omit audit procedures regarding
identification of related party relationships and transactions simply on the basis of
representation by CFO. It is auditor's responsibility to obtain Sufficient appropriate audit
evidence that related party relationships/transactions have been appropriately identified,
accounted for and disclosed in accordance with AFRF.
Auditor's responsibilities regarding related parties:
Auditor is responsible to evaluate:

1. whether related party relationships/transactions have been appropriately identified,
accounted for and disclosed in accordance with AFRF,
2. whether fraud risk factors exist arising from related party relationships, and
3. whether financial statements present true and fair view in respect of related party
relationships.
4 This is a related party transaction which requires disclosure in the financial statements.
5 Auditor's concern is that X-OIL is now a related party of JJ Ltd. Auditor will have to ensure that all
transactions with related parties are identified by client, appropriately accounted for and
adequately disclosed in financial statements in accordance with AFRF.
Chapter 12 | Reliance on Others

1 Malta Limited (ML) has been facing problems tn running an effective internal audit department.
The directors of ML hag shared with you a brief structure, functioning, roles and responsibilities
of the current internal audit department, which are as follows:
 The internal audit department is headed by Hina Akram, a Chartered Accountant. She works
in close coordination with CFO and CEO. She prepares audit plan for each quarter by herself
All the internal audit findings are first discussed at length with both the CFO and the CEO and
are then presented to the audit committee.
 Hina’'s internal audit team comprises of three members, Usman, Kashif and Amna. Usman is
responsible for the audit of treasury and payments, Kashif is responsible for the audit of
procurement, payables and production and Amna is responsible for the audit of revenues,
receivables and assets, for the last three years. Hina believés that the continued involvement
of her team in the same areas has helped them to develop expertise in their assigned areas.
This also helps her and her team to design internal controls for the above-mentioned areas in
an effective manner.
Required: Identify the deficiencies relating to independence of internal audit department and
recommend measures which should be taken to protect the independence. (07)
2 Matalas has an internal audit department of six staff, all of whom have been employed at
Matalas for a minimum of five years and some for as long as 15 years. In the past, the chief
internal auditor appoints staff within the internal audit department, although the chief executive
officer (CEO) is responsible for appointing the chief internal auditor. The chief internal auditor
reports directly to the finance director. The finance director also assists the chief internal auditor
in deciding on the scope of work of the internal audit department.
All accounting systems are computerized, with the internal audit department frequently advising
and implementing controls within those systems.
Required: Explain the issues which limit the independence of the internal audit department in
Matalas Co. Recommend a way of overcoming each issue. (03)
3 You are manager responsible for the audit of Bamboo Limited. Your team has asked for your
guidance whether to involve an auditor's expert for:
(i) Valuation of provision for doubtful debts. The provision has significantly reduced by Rs.100
million as compared to previous year.
(ii) Fixed asset revaluation. The management has recently revalued its fixed assets. The
revaluation surplus has increased by Rs.80 million. The draft financial statements show a profit
before tax of Rs.500 million.
Required: Guide your audit team about involvement of an auditor's expert. (06)
4 An audit junior of your firm has inquired about the following matters relating to an audit.
(i) Is there any need to evaluate the adequacy of expert's work, if the procedures retested to
competency and independence of the auditor's expert have been performed?
(ii) Can an audit firm Include a reference to the expert's work in the audit report so that the audit
firm’s responsibility may be reduced in the areas in which the audit firm does not have expertise?
Required: Comment on the above queries raised by audit junior in the light of International
Standards on Auditing. (06)
(ICAP, CAP 09 Level - Spring 2020)
5 While performing audit of Mehran Chemicals Limited you used the work of an expert for
valuation of work-+n-process and raw material inventory. Expert’s report shows substantial
differences in valuation of both You have decided to qualify your report on the basis of the
expert’s opinion. Narrate the important matters that you should ensure while implementing the
above decision. (04)
6 Will you rely on the work of an internal auditor who reports to the Finance Manager of company
who largely carries out certain pre-audit functions such as checking of invoices prior to
payments? (03)
(ICAP, CFAP 06 Level -Summer 2002)
7 M & B Limited is an unquoted public company engaged in the manufacture and marketing of
textile products. Its production facility and head office is located in Karachi. Sales are made
through a network of merchants across the country. The audit of the company is in planning
stage and you, in your capacity as audit sensor have been assigned the task of evaluating the
internal audit function of the Company.
The Company has an adequately manned internal audit department (IAD). Scope and objectives
of the LAD are determined by the Audit Committee, which reports directly to the Board of
Directors of the Company.
Major functions of IAD include:
(i) Systems review and compliance testing;
(ii) Review of monthly management accounts including variance, trends and ratio analysis; and
(iii) Substantive testing as per the overall internal audit plan.
(iv) The internal audit planning is performed by the head of internal audit department and
approved by the Audit ; Committee;
(v) The work and reports of the IAD are reviewed by the Audit Committee on a quarterly basis.
Required:
(a) Explain why an auditor should consider internal audit activities while planning the audit. (02)
(b) Based on the above, perform preliminary assessment of internal audit. Also state further
information, if any regarding the internal audit function that you may require. (05)
(c) Assuming you have planned to rely on the work of the internal auditor, describe what would
you consider in evaluating specific work of the internal auditor. (03)
8 Following a discussion with the management at Tirrol Co you now understand that the internal
audit department are prepared to assist with the statutory audit. Specifically, the chief internal
auditor is prepared to provide you mth documentation on the computerised inventory systems
at Tirrol Co. The documentation provides details of the software and shows diagrammatically
how transactions are processed through the inventory system. This documentaton can be used
to significantly decrease the time needed to understand the computer systems and enable audit
software to be written for this year’s audit.
Required: Explain how you will evaluate the computer systems documentation produced by the
internal audit department in order to place reliance on it during your audit. (03)
120b)
9 Your audit client Aqeeq Limited, a large manufacturing company that has substantial investment
in plant and machinery, ~ has used the services of Mr. Samad Hussain, a qualified engineer, for
assessing the remaining useful life of a major plant. This plant, which was installed during the
year, is expected to double the production capacity of the company. The assessment of useful
life of the plant will have significant impact on estimation of depreciation expense for the year.
You noted that Mr. Hussain has been in the employment of the company for the last four years.
Brief your audit team about using the above work of Mr. Hussain. (03)

1 Deficiency Recommendation
Head of internal audit department works in This may create familiarity threat. Personal
close coordination with CFO and CEO. relationships between management and staff
of internal audit should be avoided.
internal audit team has been involved in the Internal auditors should be rotated
same area for last three years. periodically to avoid familiarity threat after
e.g. every 3 to 5 years.
internal audit team is involved in design of This may create self-review threat. Internal
controls. audit function should be free from conflicting
responsibilities not be involved in desi n of
control.
2 Issue with Independence Recommendation

The chief internal auditor reports to the Internal auditor should re ort to audit
finance director. committee.
The scope of work of internal audit is decided Scope of work of the internal audit
by the finance director. department should be decided by the chief
internal auditor, perhaps with the assistance
of an audit committee.
All internal audit staff at Matalas has been This may create familiarity threat. Existing
employed for at least five years. staff should be rotated on periodic basis (say
3 years).
The chief internal auditor is appointed by the Chief internal auditor should be appointed by
chief executive officer CEO. an audit committee or board of directors.
Internal audit department frequently advises Internal auditor should be free from
and implements controls within the system. conflicting responsibilities. He should not be
involved in design and implementation of
control. He should only monitor controls.
3 An audit expert is used knowledge. areas requiring specialized knowledge and skills, other than
accounting and auditing
(i) Provision for doubtful debts has reduced by a material amount (Rs. 100 million > Rs. 25 million
i.e. 500*5%)
Evaluation adequacy of provision for bad debts is an area which can be verified using typical
audit procedures. An expert cannot have been used in this area. Auditor himself should perform
procedures to obtain sufficient appropriate audit evidence on provision for bad debts.
(ii) Revaluation surplus recorded by management is a material amount (Rs. 80 million > Rs. 25
million i.e. 500*5%) Revaluation of fixed assets is a complex area, requiring knowledge of
valuation methods and techniques which are usually complex. An auditor cannot be expected to
possess such skills. Therefore, an expert should be used in this area
4 (i) Yes. Auditor is required to assess whether work of expert constitutes sufficient appropriate
audit evidence. Auditor shall determine adequacy of work by evaluating:
1. Accuracy, Completeness, and Relevance of significant source data.
2. Relevance and reasonableness of significant assumptions and methods.
3. Reasonableness of expert's findings and conclusions, & consistency of these conclusions with
other audit evidence.
(ii) Auditor has sole responsibility to express opinion on audit report. His responsibility is not
reduced even uses a report which has been prepared by others (e.g. expert) as evidence. Use of
expert does not affect auditor’s responsibility. Therefore, auditor cannot include reference to to
the work of expert in audit report. This reference is allowed only if:
 It is required by Law or Regulation, or
 such reference is relevant to explain nature of modification to the auditor's opinion.
5 Auditor has to decide whether to refer to the work of expert in his report. Auditor has to refer to
the work of expert in his audit report if such reference is relevant to understand nature of
modification to the auditor's opinion in such circumstances, the auditor may need the permission
of the auditor's expert before making such a reference
if such reference is included in report, the auditor's report shall indicate that the reference does
not reduce the auditors responsibility for audit opinion.
6 No, we will not rely on work of internal auditor in such case because internal auditor is not
independent as:
1. He reports to Finance Manager, instead of Board of Directors.
2. Further, he is engaged in conflicting responsibilities as checking of invoices is a control activity
which is responsibility of management. Internal auditor should not design or implement controls,
rather he should monitor controls.
7 a) Some of the tasks performed by internal auditor and external auditor are similar. Therefore,
external auditor considers whether he can rely on work of internal auditor. If so, external
auditor's audit procedures can be reduced.
(b)
Assessment criteria Assessment Further Information needed
Level of Competence Department has adequate Knowledge, qualification,
manpower. experience competence of
internal auditors.
Objectivity Scope and objectives are Rotation of internal auditors.
determined by audit committee. Human resource decisions.
Reportable to Board of Directors.
Non Conflicting responsibilities.
Systematic and Work is planned by Head of Quality control programs
Disciplined Approach internal audit and department.
Work and reports are reviewed
by audit committee periodically.
c)
Auditor shall perform sufficient audit procedures on the body of work to determine its adequacy
for audit purposes, including evaluating whether:
 The work was properly planned, performed, supervised, reviewed and documented.
 Sufficient appropriate evidence was obtained to enable the function to draw reasonable
conclusions.
 Conclusions reached are appropriate and reports prepared by function are consistent
with results of work performed.
 Any exceptions or unusual matters were properly resolved.
8 1. Auditor shall inquire operation staff, engaged in processing of inventory transactions,
whether system documentations are the same as are in operation.
2. Auditor shall observe the system (or perform walk through) to obtain understanding of
the system from start to end.
3. Auditor shall use Test Data technique to obtain evidence whether system is working as
intended.
9 In this situation, management's expert's objectivity seems to be impaired as he has been an
employee of the company (as there is Intimidation Threat). Auditor should evaluate whether
client's quality control policies and procedures allow Management's expert to work with
objectivity.
If quality control policies and procedures in the work environment of client are not adequate,
auditor should not use his work as evidence for the purpose of audit. Rather, auditors should
appoint auditor's expert in this situation.
Chapter 13 | Ethics
1 Haris Awan has recently been appointed as a partner in HBC Chartered Accountants. Haris has
been assigned the audit of Hemlock Limited (HL). HL has been the firm's client for the past 15
years. Haris has asked Babar Raza, Manage, responsible for the audit of HL for the last seven
years, to assist him in the planning phase. Babar has informed him that:
i) attitude of HL's Chief Financial Officer (CFO) has been very aggressive towards audit team
members, particularly at times when questioned on any of his judgements in relation to
accounting matters.
(ii) CFO normally gives us a short deadline for completion of the audit.
(iii) one of the previous audit team members has recently joined HL as Manager Finance and has
ensured us his full cooperation towards the timely completion of the audit.
Required: Discuss the possible threat(s) which may arise in the above situation, their significance
and the safeguards required to mitigate those threats. (12)
2 Your firm has just been appointed as the auditor of Get Fit Gym Limited (GFG) which operates a
chain of high end gyms and fitness centers across the country. The managing director of GFG is a
close friend of the audit manager and the audit was awarded to your firm through this
connection. In a recent meeting, the managing director of GFG has offered to grant membership
to all the staff members of your firm at 50% discount.
Required:
Evaluate the threat(s) which may arise in the above situation. Also discuss the safeguards
required to mitigate such threat(s). (08)
3 (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 (07)
(ii) Shayan resigned from PL with effect from 30 June 2018
(b)
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. (04)
Required: Identify the threats(s) in the above scenario and suggest appropriate safeguards.
4 You are the audit manager at a client Exim (Private) Limited (EPI). 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 its 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)
5 a) Discuss the threat 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)
(ICAP, CAF 09 Level - Spring 2018) (ICAP’s Official Question Bank for CAF 09 - Q. # Sb&c)
6 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)
7 Discuss the threat(s) that may be involved and the 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) Saleem has noticed that the firm often uses the restaurants run by TTL for
conducting its internal functions. (07)
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 ARC (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.
(b) Nasir is the audit manager on the audit of Diamond Limited (D1) for the year ended 30 June
2016. Nasir, has earned that his father owns 10 000 shares in DL.
(ICAP, CAF 09 Level Autumn (ICAP’s Official Question Bank for CAF 09 33)
9 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 auditor. Affan Was the audit manager. He has recently joined DBL as GM finance.
(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.
(ICAP, CAF 09 Level - Spring 2019) (ICAP’s Official Question Bank for CAF 09-Q 31)
10 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 tam members have resigned recently.
(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)
11 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 & MPL for many years, in the capacity of a consultant.
(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. (4)
(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)
(ICAP, CAF 09 Level - Spring 2015) (ICAP’s Official Question Bank for CAF 09 - Q # 15)
12 Discuss the categories of threats that may be involved in each of the following independent
situations and advise the partners of the concerned firm with regard to the possible course of
action that may be followed, in each case;
(a) Burewala Bank Limited (BBL) is a listed audit client of Umer and Company, Chartered
Accountants (UCC). BBL M granted a house loan of Rs. 5 million to a partner in UCC. (04)
(b) Kamal was the audit manager during the last year’s annual audit of Faisalabad Textile Mills
Limited (FTML). He has joined FTML as their Manager Finance, prior to the commencement of
the current year’s audit.
(ICAP, CAF 09 Level - Autumn 2010 (ICAP’s Official Question Bank for CAF 09 - Q.#6)
13 Mustansar is the audit manager of a team engaged on the audit of a unlisted company. During
his initial discussion with the chief executive officer (CEO) of the company, he was informed that
depressed economic conditions have badly affected the company and its liquidity. Due to
uncertainty about the future of the company, certain key employees have jeft including several
staff members of accounting and finance department. Consequently, the accounting records are
in a bad shape and the management is making efforts to complete the draft accounts quickly. He
therefore requested Mustansir to carry out necessary accounting work and to help prepare the
annual financial statements at a fee to be agreed mutually.
Required:
Briefly describe the guidelines contained in the ICAP’s Code of Ethics and the extent of support
that can be offered by the auditors, in the above situation. (06)
(ICAP, CAF 09 Level - Spring 2009) (ICAP’s Official Question Bank for CAF 09 - Q. # 1b)
14 Shams Uddin a newly qualified chartered accountant has recently established his practice in the
name of Shams Uddin & Co. Chartered Accountants. He is continuously trying to expand his
practice and in this process he came across the following situations:
(i) One of his friends, who is the owner of an advertising agency has offered to provide significant
discount for publicity of his new practice.
(ii) Fashion Limited, a private limited company, which has suffered heavily on account of recent
financial turmoil, has informed him that it is willing to appoint him in the forthcoming annual
general meeting (AGM) of the company in place of the existing auditors, if he can quote a fee
below the existing audit fee.
(iii) Design Limited has contacted Shams Uddin and informed him that they are willing to appoint
him as their external auditor in the next AGM at a fee of Rs. 200,000 if he completes the audit in
a month. However, in case of delay in the audit work the audit fee will be reduced to Rs.150,000.
(iv) Shams Uddin receives an offer of appointment as auditors from Style Enterprises, a sole
proprietorship, who wants to remove the existing auditors before completion of their term of
office. Required: Shams Uddin is inclined to accept the above offers. Discuss the options
available with him in each of the above situations. (10)
15 Mr. Omar is in charge of the quality control department of an audit firm. While reviewing the
working papers relating to some audit engagements of the firm he came across the following
situations:
(i) The spouse of a partner in the firm is a legal consultant and is assisting an audit client
of that firm in filing its tax return.
(ii) The audit manager engaged on the audit of a company has been offered a job by that
company. He has been asked to join on March 1, 2010 when the current CFO would
retire. The audit is expected to be completed on December 15, 2009.
(iii) A meeting of the CEO of ABC & Company Limited and the audit engagement partner
was held to discuss the draft financial statements of the company for the year ended
September 30, 2009. Serious difference emerged between the two sides on the
accounting treatment and the disclosures of certain items and consequently the CEO
informed the engagement partner that unless the auditors agree to the company’s point
of view, they would not be reappointed for the next year.
(iv) The engagement partner on the audit of XYZ Limited has been its engagement
partner for the past six years.
Required: Identify the category of threat involved in each of the situations described above. Also
explain the responsibility (if any) of the firm and the concerned member of the audit team. (11)
(ICAP, CFAP 06 Level- Winter 2009)
16 A friend of yours, Iqbal, is a qualified Chartered Accountant, practicing as a partner in a firm of

Chartered Accountants. Because of your relationship with him, you are aware that he has
invested a substantial amount of his savings in a company owned by one of his clients. A
common friend, who happens to be a broker by profession, recently took you into Confidence
and informed you that Iqbal had passed on to him some confidential information about this
company where Iqbal had invested his savings. As a result of this information, your broker friend
was able to influence the price of the Share of this company in the local stock exchange due to
which the price escalated, resulting in a considerable appreciation in the value of shares owned
by Iqbal.
lqbal has indulged in such activities more than often and appears to have a reputation of not
being straight forward to dealings with clients and have been careless in rendering services
thereto to the point that at times he shows UD to Won at the last minute to initial his report,
generally finalized by his staff.
Recently, he has been accused of being completely out of touch with the latest developments in
the Profession and is least bothered about it in fact, he has been found to have openly carried
out activities which you regard ag high objectionable.
Required:
identify and discuss the Fundamental Principles which Iqbal has failed to observe in order to
achieve the objectives of the accountancy profession.
17 Jack is a chartered accountant specialized in accounting, auditing and related services. Jill is a
lawyer in tax and other corporate related matters. Both decided to form a private company in
the name of “jack n Jill” (Private) Limited” in Lahore. The opening of the business office was
announced in a full-page advertisement in newspaper of Lahore,
Their first statutory audit client was “Al-Azhar Textile Mills Limited” (a listed company on Lahore
Stock Exchange). As Jill is already providing legal services to the same client, Jack offered 20%
special discount in fee charged by previous auditor.
In the course of the audit, Jack found that company’s building with a book value of Rs. 6,400,000
was pledged as a Security for a 10-year term loan in the amount of Rs. 2,000,000. The client's
statement did not mention that the building was, pledged as security. However, as the failure to
disclose this did not affect either the amount of the assets or the amount of the liabilities, and
the audit was satisfactory in all other respects, Jack rendered an unqualified opinion on
company’, financial statements. Due to liquidity problems, half fee was paid at start of the audit
by issuing shares of the company to Jack and half is still outstanding.
About two months after the date of his opinion, Jack learned that a bank was planning to lend
company Rs. 1,500,000 in the form of a mortgage loan secured against building. Realizing the
bank was unaware of the existing charge on the building, Jack notified the bank of the fact that
company’s building was already mortgaged for a term loan.
Shortly after the events described above, Jack was charged with several violations of legal,
ethical and professional requirements.
Required: Identify and discuss legal, ethical and professional violations by Jack. (08)
(American Institute of Certified Public Accountants, Amended)
18 You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, which
has been an audit client for four years and specializes in manufacturing luxury mobile phones.
During the planning stage of the audit, you have obtained the following information. The
employees of LV Fones Co are Entitled to purchase mobile phones at a discount of 10%. The
audit team has in previous years been offered the same level of staff discount.
During the year the financial controller of LV Fones was ill and hence unable to work. The
company had no spare staff able to fulfill the role and hence a qualified audit senior of Jones &
Co was seconded to the client for three months. The audit partner has recommended that the
audit senior work on the audit as he has good knowledge of the client. The fee income derived
from LV Fones was boosted by this engagement and along with the audit and tax fee, now
accounts for 16% of the firm’s total fees.
From a review of the correspondence files you note that the partner and the finance director
have known each one socially for many years and in fact went on holiday together last summer
with their families. As a result of this friendship ghe partner has not yet spoken to the client
about the fee for last year’s audit, 20% of which is still outstanding,
Required:
a) Explain the ethical threats which may affect the independence of Jones & Co's audit of
LV Fones Co; (05)
b) For each threat explain how it might be avoided. (05)
(ACCA, Fundamentals Level F8 - June 2010)
19 You are a manager in the audit firm of Ali & Co; and this Js your first time you have worked on
one of the firm’s established chents, Stark Co. The main activity of Stark Co is providing
investment advice to Individuals regarding saving for retirement, purchase of shares and
securities and investing in tax efficient savings schemes. Stark is regulated by the relevant
financial services authority.
You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in Ali & Co Mr
Son has been the engagement partner for Stark Co, for the previous nine years and so has
excellent knowledge of the client. Mr Son has informed you that he would like his daughter Zoe
to be part of the audit team this year; Zoe is currently studying for her first set of fundamentals
papers for her ACCA qualification. Mr Son also informs you that Mr Far, the audit senior,
received investment advice from Stark Co during the year and intends to do the same next year.
In an initial meeting with the finance director of Stark Co, you learn that the audit team will not
be entertained on Stark Co's yacht this year as this could appear to be an attempt to influence
the opinion of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of
the expense of using the yacht and hopes this will be acceptable. The director also states that
the fee for taxation services this year should be based on a percentage of tax saved and trusts
that your firm will accept a fixed fee for representing Stark Co in a dispute regarding the amount
of sales tax payable to the taxation authorities.
Required:
(i) Explain the ethical threats which may affect the auditor of Stark Co. (06)
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated. (06)
(ACCA, Fundamentals Level F8 - December 2008) (ICAP’s Official Question Bank CAF 09 Q #20)
20 Your firm is the auditor of Sun Co. which is a savings and investment company. Sun Co. Is
regulated by an independent body, responsible for regulating the financial services industry.
During last year’s audit your firm identified a breach of the financial regulations by Sun Co. and
reported It to the regulator without first obtaining the permission from Sun Co.
The Board of Directors of Sun Co. believes that this breaches the auditor’s duty of confidentiality
and has asked the engagement partner to meet with them to discuss this matter.
Required: Explain whether your firm has breached their duty of confidentiality in relation to Sun
Co. (02)
(PIPFA - Summer 2018)
21 The audit engagement partner for Goofy Co (audit client) has been in place for approximately six
years and her son has Just accepted a job offer from Goofy Co as a sales manager; this role
would entitle him to shares in Goofy Co as part of his remuneration package. Goofy Co has
suggested that the external audit fee should be renegotiated with at least 20% of the fee being
based on the profit after tax of the company as they feel that this will align the interests of
auditor and Goofy Co.
Required: From the above information, explain the ethical threats which may affect the
independence of auditor in respect of the audit of Goofy Co, and for each threat explain how it
may be reduced. (06 marks)
(ACCA, Fundamentals Level F8 - June 2011)
1 Babar Raza has been manager for audit of Hl. for seven years:
Threat:
If an individual is involved in an audit engagement over a long period of time (e.g. using same
team members for more than 3 years), Familiarity Threat and self-Interest Threat is created.
Factors in evaluating Level of Threats:
1. Length of time
2. Role of individual
3. Nature of the engagement.
Safeguards:
1. Changing the role of the individual on the audit team, or the nature and extent of the tasks
the individual performs.
2. Appoint an appropriate reviewer to review the work performed by individual
3. Performing regular independent internal or external quality reviews of engagement.
Attitude of CFO has been aggressive towards audit team members:

Threat:
This creates Intimidation Threat.
Safeguards:
 Matter should be discussed with TCWG.
 Experienced and senior team members should be included in engagement team.
Short deadline for audit:
Threat: There is a threat to professional competence and due care, as team may not be able to
obtain sufficient appropriate audit evidence.
Safeguards:
 Agree realistic timeframe for performance of the engagement.
 Appoint an appropriate reviewer to review the work performed.
Threats:
If a former member of the firm joins client as director, officer etc., it creates a self-interest,
familiarity or intimidate” threat.
Factors in evaluating Level of Threats:
1. Current position in client
2. Former position in firm
3. The length of time passed
4. Any involvement of individual with the audit team.
Safeguards:
1. No significant connection should remain between firm and individual.
2. Modify the audit plan.
3. Assign individuals to the audit team who have sufficient experience relative to individual who
joined the client.
4. Conducting an additional review of the work of individual who joined the client.
2 The managing director is a close friend of the audit manager:
Threats:
Family and Personal relationships with client personnel create Self-Interest Threat, Familiarity
Threat, or intimidation threat.
Evaluation:
Relevant factors in evaluating threats include:
 Nature of relationship between individuals.

 Position of individual at client.
 Role of audit team member,
Safeguards:
 Restructure the responsibilities so that audit team member does not deal with matters that
are within the responsibility of the individual with whom member has close relationship.
 Engage an appropriate reviewer to review the audit work performed.
 Remove the individual from the audit team.
Offer of 50% discount in membership:
Threat:
Offer of Inducement from client creates Self-Interest, Familiarity Threat or Intimidation Threat.
Safeguards:
 Offer of discount should not be accepted as it appears significant.
 This offer should be disclosed to senior management of the firm, and should be
documented.
 He should be removed from engagement team, and his work should be reviewed by
appropriate reviewer.
3 a)
Threats:
If an audit team member has recently served as a director or officer or employee of the audit
client, it creates Self-Interest, Self-review, or Familiarity Threat.
(i) If Shayan resigned from PL with effect from 30 June 2019:
Shayan has served client during the period covered by the audit report. Therefore, he shall not
be included in the audit team.
(ii) If Shayan resigned from PL with effect from 30 June 2018:
Shayan served client prior to period covered by the audit report, factors to evaluate threat
include:
 Position of the individual at client.
 Role of individual as audit team member.
 Length of time since the individual left the client.
Safeguards include:
Engage an appropriate reviewer to review the audit work performed.
(b)
Threats:
Loan of personnel to an audit client creates Self-review threat, Advocacy threat and Familiarity
threat.
Safeguards:
Firm will not loan personnel to audit client unless:
 Such assistance is only for a short period of time.
 Personnel do not assume management responsibilities.
If personnel are lent to audit client, following safeguards may be applied:
 Firm should not include the loaned-staff in assurance team.
 If loaned-staff is included in assurance team, he should not be given responsibility for
any function or activity that he performed during temporary staff assignment.
 Conducting an additional review of the work performed by the loaned personnel.
4 Threats:
A close business relationship with audit client or its management creates Self-interest Threat or
Intimidation Threat. If individual does not have required competence, it creates threat to
professional competence and due care.
Safeguards:
 It business relationship is significant for client or audit junior, remove the individual from
the audit team.
 Engage an appropriate reviewer to review the audit work performed.
 Client should be informed limitations of junior's advice.
5 (a)
(i) Threats:
Acceptance of gifts from client create familiarity threat and self-interest threat.
Safeguards: Significant gifts should not be accepted.
(ii) Threat:
If engagement team member is willing to join client in future, it creates Self-Interest threat.
Course of Action by Firm:
 Firm should remove the Akram from audit of DL.
 For work done prior to removal, firm should involve an independent chartered accountant to
review the work done and significant judgments made; or otherwise advise as necessary.
b)
i) Threat ii) Course of Action
Threat to professional competence and due Team members should be given opportunities
care (as Amjad does not have in-depth to for professional development.
knowledge of IFRS).
Threat to confidentiality (as Amjad shares Confidentiality requirements should be
confidential information to others outside communicated to team members. Disciplinary
engagement team) action should be taken on violations.
Advising client about accounting treatment Routine nature advice can be provided.
creates self-review threat. Managerial decisions should not be made on
behalf of client.
6 a)
Threat:
Anwar has been an employee of client in past. If he is appointed as engagement team member, it
will create Familiarity threats, and Self-review threat, and Self-interest threat.
Safeguard:
Individual shall not be included in audit team if he served client in same year. If he served client
in previous years, review the work performed by him.
(b)
Threat: Our firm gets property from audit client on rent. Obtaining goods or services from client
may create Self-interest threat.
Safeguard:
There will be no threat if following conditions are met:
1. Renting property is within normal course of business of audit client (which is mentioned in
given information),
2. Rent is at market rate (therefore at arm’s length basis), and 3. Magnitude of transaction is
immaterial for both firm and client.
(c)
Preparing or reviewing tax return of audit client does not create a threat to independence if
management takes responsibility for the returns including any significant judgments made.
7 (a)
Threat:
Providing an audit client with bookkeeping and accounting services, such as preparing
accounting records or financial statements, creates Self-Review Threat.
Safeguards if services are offered:
1.Individual performing non-assurance engagement should not be part of audit engagement
team.
2.Firm should involve an independent chartered accountant to review the work done to ensure
significant reliance is not placed on work of non-assurance service.
(b)
(i) Threat:
Using the same audit manager on an audit engagement over a long period of time may create
Familiarity Threat and Self-interest Threat
Safeguards:
 Firm should remove the concerned team member from assurance engagement.
 If any work is performed by individual on assurance engagement, firm should involve an
independent chartered accountant to review the work done and significant judgments
made; or otherwise advise as necessary.
 Regular quality control review should be conducted by firm.
(ii) Threat:
Family relationship between team member and marketing director creates Familiarity threat, or
Intimidation threat, or Self-interest threat
Safeguards:
 Team member should notify firm about his relation.
 Firm should remove engagement partner.
 Review the work performed by engagement partner.
(iii) Threat:
Purchase of goods or services from assurance client may create Self-Interest Threat because
transaction may not be on arm’s length basis.
Safeguards:
Firm should use restaurants run by TTL only if transaction is:
 In the ordinary course of business of client.
 On arm’s length basis.
 Immaterial for both parties.
If not, firm should not use restaurants run by TTL.
8 a)
Threat: An assurance team member, Kamran, has been employee of client, which creates
Familiarity threats, or Self-review threat, or Self-interest threat
Safeguard:
Individual shall not be included in audit team if he served client in same year. If he served client
in previous years, review the work performed by him.
(b)
Threat:
Holding of shares by relative of an audit manager creates Self-interest threat.

Safeguard:
 dispose-off shares, or remove concerned member.
 review the work performed by relevant member.
9 (a) Threat:
A former audit manager has joined client as manager finance, which creates Familiarity threat, or
Intimidation threats.
Course of Action:
 no significant connection should remain between firm and individual.
 modify the audit plan.
 assign experienced staff
 additional extensive review of the work of individual.
(b) Threat:
Obtaining loan from an audit client creates Self-interest threat.
Course of Action:
Loan can be obtained only from a bank under normal lending procedures and terms and
conditions. Otherwise, loan should be repaid by partner, or firm should remove partner from
engagement.
10 (a) Threat: Self-interest threat.
Purchase of goods from client at discounted rates create Self-Interest Threat because transaction
may not be on arm’s length basis.
Safeguards:
Discount vouchers should be accepted only if transaction is:
 In the ordinary course of business of client.
 On arm’s length basis. # Immaterial for both parties.
If not, relevant team members should be removed.
(b)
Threat:
The lending of staff by a firm to an audit client will create a self-review threat.
Safeguards:
 Management decisions will not be made on behalf of audit client., and
 Audit client shall be responsible for directing and supervising the activities of the loaned
staff.
 Firm should not include the loaned-staff in assurance team.
 If loaned-staff is included in assurance team, he should not be given responsibility for
any function or activity that he performed during temporary staff assignment.
 Firm should involve an independent chartered accountant to review the work done and
significant judgments made by individual; or otherwise advise as necessary.
(c) Threat:
Using the same audit manager on an audit engagement over a long period of time may create
Familiarity Threat and Self-Interest Threat
Safeguards:
Firm should remove the concerned team member from assurance engagement.
 Regular quality control review should be conducted by firm.
Note:
Threat is not reduced with the rotation of engagement partner only, because long association of
manager also creates threat to independence.
11 a) Threat:
Providing accounting services to client creates Self-review threat.
Long association with client creates Familiarity threats, and Self-interest threat.
Safeguards:
Individual shall not be included in audit team if he served client in same year.
If he served client in previous years, review the work performed by him.
b)
Threat:
Holding of shares by relative of an audit manager creates Self-interest threat.
Safeguard:
 dispose-off shares, or remove concerned member.
 review the work performed by relevant member.
c)
Threat:
If engagement team members are willing to join client in future, it creates Self-Interest threat.
Course of Action by Team Members:
Immediately communicate his willingness to accept offer to firm.
 Firm should remove the relevant individuals from current engagement.
 For work done prior to removal, firm should involve an independent chartered
accountant to review the work done and significant judgments made; or otherwise
advise as necessary.
12 a) Threat:
Obtaining loan from an audit client creates Self-interest threat.
Course of Action:
Loan can be obtained only from a bank under normal lending procedures and terms and
conditions. Otherwise, loan should be repaid by partner, or firm should remove partner from
engagement.
b) Threat:
A former audit manager has joined client as manager finance, which creates Familiarity threat,
and Intimidation threats.
Course of Action:
 no significant connection should remain between firm and individual.
 modify the audit plan.
 assign experienced staff
 additional extensive review of the work of team.
13 Threat:
Assisting audit client in preparation of accounting records or financial statements, creates Self-
Review Threat.
Services that can be offered: A firm can provide bookkeeping and accounting services of routine
or mechanical nature to audit client (e.g. recording, transaction, posting transactions or
preparing F/S from trial balance).
However, firm cannot provide services which involve management decisions (e.g. approving
transactions, Making accounting estimates, or selection of accounting policies).
Safeguards:
If services are offered:
1. Managerial functions/decisions should not be taken by firm/individuals.
2. Obtaining the client's acknowledgement of responsibility for the results of the work
performed by the firm /individual.
3. Individual performing non-assurance engagement should not be part of audit engagement
team.
4. Firm should involve an independent chartered accountant to review the work done to ensure
significant reliance is not placed on work of non-assurance service.
14 (i)
Threat:
Advertisement for solicitation and undue publicity by a chartered accountant in practice create
Self-interest threat and Threat to Professional Behavior.
Option available to Shamsuddin:
Shamasuddin should not make advertisement/publicity of his services in the manner as is done
by other normal businesses.
Shamasuddin can use appropriate newspaper/magazine only to inform public about
establishment of his new practice provided such announcement is limited to bare statement of
fact.
(ii) Threat:
Accepting a fee which is significantly lower than predecessor auditor presents undercutting and
creates Self-interest Threat and Threat to Professional competence and due care.
Shamasuddin can quote a fee lower than previous auditor only if:
 Scope and Quantum of work differs from previous audit, and
 Appropriately qualified staff and appropriate time is assigned to engagement, and
 All applicable standards, QCR, and guidelines will be complied.
(iii) Threat:
Accepting a fee which is linked with meeting deadline represents contingent fee and creates Self-
Interest Threat.
Contingent fee is not allowed for assurance as well as non-assurance services. Fee should be
based on required time an experience to complete job.
(iv)
shamsuddin should immediately inform ICAP about offer of appointment and should accept the
offer after obtaining clearance from ICAP. ICAP usually gives clearance within 15 days of
communication.
Shamasuddin should also send professional clearance letter to predecessor auditor to know any
reason affecting decision bf acceptance of client.
15 (i)
Threat:
Preparing tax return of audit client by spouse of partner does not create a threat to
independence if management takes responsibility for the returns including any significant
judgments made.
(ii) Threat:
If audit manager is willing to join client in future, it creates Self-Interest threat.
Course of Action by Audit Manager:

Immediately communicate his willingness to accept offer to firm.
 Firm should remove the individual from current engagement.
 For work done prior to removal, firm should involve an independent chartered
accountant to review the work done and significant judgments made; or otherwise
advise as necessary.
(iii) Threat:
If client threats auditor to remove the existing auditor over disagreement, it creates Intimidation
Threat, or self-interest threat.
Course of Action/Safeguards to reduce significant threat to acceptable level:
 Perform procedures to ensure that firm's exposure to any risk is limited e.g. seek advice
from lawyers and other partner.
 Consider withdrawal from engagement (as threat by management indicates lack of trust
and management integrity)
 Independent internal quality control review of work done and significant judgments.
 Ethical issue should be discussed with TCWG (e.g. audit committee).
(iv)
Using the same engagement partner on an audit engagement over a long period of time may
create Familiarity Threat and Self-Interest Threat.
Possible Course of Action/Safeguards:
Significance of threat should be evaluated, and following safeguards should be applied:
 Firm should remove the concerned team member from assurance engagement.
 Ethical issue should be discussed with TCWG (e.g. audit committee).
16 1. Iqbal has violated the fundamental ethical principle of Objectivity as he has invested in a
company owned by one of his client which creates Self-interest Threat.
2. Iqbal has also violated the Confidentiality Principle as he passed on confidential information
about his client to his friend who used it for personal advantage.
3. Iqbal has also violated the principle of Integrity as he is not being straight forward in his
dealing with clients.
4. Iqbal has also violated the principle of Professional Competence and Due Care as he has been
careless in rendering services and is out of touch with latest developments in profession.
5. Iqbal has also violated principle of Professional Behavior as he has openly carried out activities
Which g regarded as highly objectionable.
17 Violation of Companies Act. 2017:
1) Jack and Jill have formed a body corporate whereas Companies Act, 2017 disqualified a person
as Statutory auditor if it is a body corporate.
2) Jill is not a chartered accountant. Companies Act, 2017 requires majority partners of a firm to
be chartered accountant.
3) Jack accepted shares of audit client as fee. Companies Act, 2017 also disqualifies a person as
auditor if he holds shares in audit client.
Violations of Code of Ethics:
1) Jacked violated Code of ethics by engaging in Under-cutting because he accepted audit fee
lower than charged by predecessor auditor.
2) Jack violated fundamental ethical principle of Confidentiality because he disclosed confidential

information to bank without obtaining permission of client.
3) Jack violated ethical requirements regarding advertisement by making advertisement for
solicitation and undue publicity of his practice.
4) Jack violated Code of Ethics as statutory auditor cannot provide legal services to their audit
clients, without appropriate safeguards.
Violation of ISAs:
1) jack issued unmodified opinion instead of Qualified or Adverse Opinion because non-
disclosure or wrong disclosure in financial statements amount to misstatement. Hence, financial
statements were materially misstated.
18 i) Identification and Explanation of Threat ii) How to avoid threat
Purchase of goods from client creates self- Audit team should not accept significant
interest threat if transaction is not made on discount from client.
arm’s length basis.
The lending of staff by a firm to an assurance Firm should not include the loaned-staff in
client will create a self-review threat. assurance team, or loaned-staff should not be
given responsibility for any function that he
performed during temporary staff
assignment.
firm is generating large portion of its revenue 1. Firm should take necessary steps to
(e.g. more than 15%) from LV Fones Co, it reduce this proportion e.g. increase
creates Self-Interest Threat and Intimidation client-base or withdraw from some of
Threat (because of undue economic services.
dependence). 2. Firm should involve an independent
chartered accountant to review the work
done
Close relationship between partner and Significance of threat should be evaluated,
finance director creates Familiarity Threat firm should remove the partner from audit
and Self-Interest Threat. engagement
As last year’s audit fee is unpaid for a long Firm should discuss the matter with audit
period of time, it creates Self-interest Threat committee and TCWG and should insist that
and Intimidation Threat. fee of previous year's audit should be paid
before issuance of current year’s assurance
report.
19
i) Threat and Description ii) How to mitigate the effect of threat
Using the same engagement partner on audit Mr. Son should be rotated from engagement.
over a long period of time may create
Familiarity Threat and Self-Interest Threat.
Using Zoe as part of time will create Zoe should not be part of engagement team.
Familiarity threat because of relationship of
her father with client.
Obtaining of services from client creates Self- If investment advice obtained is material or is
Interest Threat if transaction is not on arm's not on arm’s length basis, Mr. Far should be
length basis or magnitude of transaction is removed from engagement and other team
material.
members should be advised not to obtain

advice.
Accepting balloon flight from an audit client Audit team should not accept balloon flight
will be a significant gift/hospitality, which from client.
creates Self-Interest and Familiarity threats.
Tax fee on the basis of percentage of tax Contingent fee should not be accepted. Fee
saved is a Contingent fee and creates Self- should be based on required time and
Interest Threat. experience to complete job.
If auditor assists client in resolution of a tax Individual involved in resolution of tax
dispute, advocacy or self-review threat is dispute, should not be part of engagement
created team.
20 In such a situation, firm is required to obtain legal advice. If such a disclosure is required by law,
then firm has not breached duty of confidentiality. However, if disclosure was not required by
law, firm has breached duty of confidentiality
21 Ethical Threat How to reduce threat
Using the same engagement partner on audit Firm should remove the engagement partner
of Goofy Co over a long period of time may from the audit team of Goofy Co.
create Familiarity Threat and Self Interest
Threat.
Shareholding in audit client by son of a Son should dispose-off the shares or
partner Creates Self Interest Threat. concerned engagement partner should be
removed from engagement team.
A fee based on profit is a contingent fee and Contingent fee should not be agreed with
creates self-interest threat. Goofy Co. Fee should be based on required
time and experience to complete job.
Chapter 14 | Audit Finalisation and Reporting
1 The following is an extract from an independent auditor's unmodified report on a profit forecast:
Based on our examination of the evidence supporting the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for
the forecast.'
Describe the level of assurance provided by this statement and explain how and why it differs from
the level of assurance provided by an audit on annual historical financial statements. (03)
(ICAEW Adapted)
2 An article has appeared in a non-financial Magazine, the extracts of which are as follows:
"A Company's annual reports and accounts known as financial statements will include a
certificate by the Company's Auditors who have been appointed by the directors. The certificate
has to be signed before the directors approve the accounts and it must be read out by the
auditors at the extra-ordinary general meeting Before the commencement of work, auditors will
normally prepare two other documents which are in the form of letters to the shareholders. One
is known as letter of weaknesses and deals with matters where audit evidence is weak and the
auditor has had to place reliance on verbal assurances given to him by management or directors.
It would also deal with the matters relating to improper appointment of auditors. during the
audit which ought to be notified to the shareholders."
The other document is referred to as the engagement letter in which the auditor's report any
matters that came to light Enumerate atleast five errors in the above extract. (05)
3 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:
Walter to your friend to remove his misconceptions related to the audit of financial statements
including brief explanation of your point of view. (08)
(ICAP. CAF 09 Level - Autumn 2018, Q. # 1)
4 The directors report of XCP Limited states without any further explanation that the 20% increase
in profit as compared to the previous year is due to increase in sales. The income statement
verified by auditor) for the year shows that profit has screased because costs have reduced
mainly on account of reduction in import duty on certain raw materials
Required
Decide whether editor should issue unmodified opinion or modified opinion, in this situation?
(03)
(Adapted from ICAP's Official Question Bank 2018 - Q.# 153b)
5 Following is an extract from audit report
"We have acted the financial statements of Al-Qasim Limited, which comprise the statement of
financial position as at 30.2023. and the statement of profit or loss and other comprehensive
income the statement of changes in equity, for the year the cidad, notes to the financial
statements.
Required:
Identify the errors in the above parent (02)

[Note: You are not required to red at the report)
(Adapted from ICAP's Official Question Bank 2018 - Q.151)
6 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
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)
7 You are the audit partner in a firm of chartered accountants. Some of the audits are in the
finalization stage and presen, tly the tullowing matters are under your consideration:
(a) The management of Sobni 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.
8 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 {f 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)
9 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. (03)
(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)
Required:
Discuss the possible impact on the audit report.
(ICAP, CAF 09 Level - Autumn 2015) (ICAP’s Official Question Bank for CAF 09 - Q. # 140 a &b)
10 The following situations have arisen on different clients of your firm. The year end in each
instance is 31 December 2012.
(a) In November 2012, Wazir Limited (WL) entered into a five-year contract with Safeer Limited
(SL), for supply of specific parts. The supply was to commence on 1 April 2013. In December 2012
WL purchased plant and machinery specifically for the contract with SL at a price of Rs. 150
million with useful life of five years. However, in January 2013 SL incurred heavy losses in a
natural disaster and went into liquidation.
During 2012 sale to SL amounted to Rs. 5 million and the amount receivable from SL at the
yearend was Rs 450,000.
For the year ended 31 December 2012, WL had earned profit before taxation of Rs. 125 million.
The turnover for the year was Rs. 900 million and the net assets as of that date were Rs. 1.2
billion. (04)
(b) As the auditor of Mianwali Tracking Company Limited (MTCL), you have noticed that proper
cash book has not been maintained by the company due to shortage of staff. However, MTCL has
provided you with summaries showing party wise receipts and payments and you have been able
to trace them to the company’s bank statements. (05)
(c) During the year, Jhelum Limited (JL) paid 10% dividend to the shareholders. On account of an
error, Zakat could not be deducted from some of the shareholders. The amount involved was Rs.
22,000 which was deposited by JL in the Central Zakat Fund and charged as other expenses. (03)
Required:
Discuss the impact of each of the above matters on your audit report.
11 As the engagement partner, you have reviewed the audit working papers of Samarkand Limited
(SL). The audit team has highlighted the following matters in the working papers.
a) Twenty percent of the company’s recorded turnover compromises of cash sales. Proper
Records of cash sales have not been maintained. Consequently, the audit team was
unable to design audit procedures to the cash sales.
b) During the current year, the company changed the method of charging depreciation on
its fixed assets from the straight line to the diminishing balance method. However, all the
required disclosures have been Included in the financial statements
c) The previous year’s financial statements were audited by another firm of chartered
accountants which has issued an un-modified opinion on those financial statements.
Required:
Discuss the impact of each of the above matters on your audit report
12 You are the audit manager of MM Electronics (Private) Limited. The company markets Its
products through retail outlets in nine major cities. The draft financial statements for the year
ended 30 June 2011 show a profit after tax of Rs. 20 million and net assets of Rs. 150 million. The
audit team has noted the following matters for your consideration:
a. During the year the company has changed its policy of valuation of property, plant and
equipment from historical cost to revalued amount. For this purpose, the services of
Professional Valuers (Private) Limited were hired. They have issued valuation reports of
three outlets indicating a revaluation surplus of Rs. 10 million, which has been
recognized in the financial statements. The management has informed you that the
valuation reports of the remaining properties are expected to be issued in December
2011.
b. The company was sued for breach of contract by a customer claiming damages of Rs. 10
million. The legal advisor has confirmed the management's assertion that no liability
existed at the balance sheet date. However, while reviewing the customers’ files, you
found an email from the Manager (Legal Department) addressed to the Chief Executive
in which he has opined that the company will have to pay at least 50% of the damages
claimed.
c. With effect from 01 July 2010, the company has introduced a policy of providing one-
year warranty on its television sets. No warranty is provided on the other products. Sales
of television sets aggregated Rs. 20 million, whereas the total sales for the year
amounted to Rs. 80 million.
The company has a customer support department which provides after sales services on
all products. For defects not covered under the warranty, the company bills the
customers at 25% above cost. The management has included a note in the draft financial
statements stating that no provision has been made in respect of the warranty, as the
amount cannot be measured reliably.
d. The directors have decided not to disclose earnings per share as the same had reduced
significantly on account of issuance of 100% bonus shares. The disclosure was however
made in all previous financial statements.
Required:
Express your views on each of the above situations and discuss the impact thereof on the audit
report. (14)
13 As the engagement partner, you have reviewed the audit working papers of Apricot Engineering
Limited (AEL). The audit team has highlighted the following matters in the working papers.
(i) The company has issued a bank guarantee to one of its related parties after the balance
sheet date. No disclosure in this regard has been made in the draft financial statements.
(ii) AEL has paid a dividend after many years. Zakat has been appropriately deducted and
deposited in the Central Zakat Fund.
(iii) Subsequent to the year end, a major debtor has declared bankruptcy. The company
expects to recover only 20% of the outstanding amount. The management has refused to
make a provision but is ready to disclose the fact by way of a note.
(iv) With effect from January 1, 2010, AEL has:
 Changed the method of charging depreciation on its fixed assets from the
‘straight line’ to the ‘diminishing balance’; and
 Revised its estimate of useful lives of vehicles from 6 years to 4 years.
Required: Discuss the impact of each of the above matters on your audit report. (10)
(ICAP, CAF 09 Level - Spring 2011) (ICAP’s Official Question Bank for CAF 09 - Q. # 157b)
14 You have completed the audit of financial statements of Pride Limited showing profit before tax
and total assets of Rs. 74 million and Rs. 582 million respectively. Following issues are still
unresolved:
(i) Subsequent to year end, an employee left the company without settling a loan of Rs. 0.5
million. Management has refused to make provision but is ready to give a disclosure.
(ii) The revenue recognition policy is not consistent with the relevant International
Accounting Standard (IAS). Had it been in accordance with the IAS, the profit before tax
would have been Rs. 79.2 million.
(iii) The contract with a major customer is about to expire after three years. Certain internal
documents show that the company might have to face a very difficult situation
thereafter.
(iv) Personal files of many senior executives do not contain any documentary evidence of
their qualification. Salaries paid to such executives are Rs. 24 million.
Required:
Discuss the impact of each of the above matters on your audit report. (08)
15 The auditors of Porters Limited had a disagreement with the management on application of
certain accounting policies. The audit adjustments suggested by the auditors in this respect were
refused by the management. Describe with reasons the possible modifications in the audit report
of the company. (03)
16 Suggest how would you modify the audit report in the following situations:
(i) A client of your firm has a history of tax contingencies arising out of appeals pending at various
levels. The company has disclosed all such contingencies along with the estimated amounts in
accordance with the accounting standards. Assume that the aggregate sum of these
contingencies is material.
(ii) You are appointed as the auditor of a company after the year-end Le. June 30, 2005. Hence,
you have not been able to physically observe the counting of inventories at the year-end.
Further, alternative audit procedures could not be performed due to the nature of the
company’s records. (05)
17 You, as external auditor, have received a direct communication from the company’s legal advisor
about a claim of Significant amount which was provided for and included in the sundry claims
payable accounts. The communication States that the relevant court of Jaw has, subsequent to
the year end, issued judgment in favour of the company. The matter was discussed with the
management but they are not willing to reverse the provision on the ground that the decision of
the court was delivered after the financial year end. What will be the impact on your audit
opinion on management's reluctance to reverse the above provision? (03)
18 Analyze the following situations and state under which condition an auditor would most likely
issue a disclaimer of opinion:
i. Presentation of short-term investment as long term.
ii. There are certain indications that the company may not be a going concern. However,
management has adequate plans to mitigate such problems.
iii. Management's refusal to furnish written representations in respect of an item for which
no other evidence is reasonably expected to exist.
iv. The terms and conditions of a long-term loan have been incorrectly disclosed. (08)
19 You are the auditor of certain companies, audits of which have been finalized and audit opinions
are expected to be shortly issued. Significant issues concerning these audits are as follows:
Company A
Subsequent to the year end, a debtor from whom a significant balance is due initiated winding
up proceedings. (04)
Company B
The company is a shipping line with more than 6 ships as its assets. Subsequent to the year-end,
one of its high value ship, carrying huge stock for other parties, sank in high seas. (04)
Company C
Audit of the year ended 31st December 2003, would need to be finalized by 4“January 2004.
The credit period for trade receivables is 3 months. You noted that significant sales were made
in late December 2003. You have requested the company to provide the evidences for such sales,
which request has been sent by them to Its field office. However, the company considers that
these evidences may not be timely available by 4 January 2004 due to law-and-order situation in
the area where the field office is situated. (04)
As an audit engagement partner of above companies, what would be your suggestions to the
company’s management regarding the above circumstances on the financial statements of the
companies? Also explain the type of opinion you would issue, if the companies management do
not agree with your suggestions.
20 What types of audit opinion should be expressed in the following circumstances?
(a) A listed company has accounted for a finance lease as an operating lease and accordingly has
not recognized the asset and liability in this respect. The impact of this accounting treatment is
significant to the financial statements. (03)
(b) The appointment of auditors was such that they have not been able to observe the physical
stock count. However, they have satisfied themselves through alternative audit procedures. (04)
(c) The management has not accounted for the full liability in respect of gratuity. The
management is of the view that it is a deferred liability and not a current one. The impact is
material but not pervasive in relation to the financial statements. (03)
21 You are a partner {n a firm of Chartered Accountants. Annual audits of various clients are at
finalization stage and since this is the first time that ISA related to Key Audit Matters is to be
applied, several issues have been referred to you for guidance. These include:
(a) An adverse report is being issued in the case of Muneer Limited. The draft report also
contains certain matters as Key Audit Matters, (02)
(b) A qualified report has been drafted by the audit manager of Nadir Limited as the company
has failed to make adequate provision of contingency. The details of qualification are mentioned
in the Key Audit Matters section. (03)
(c) The Key Audit Matters section of audit report of Zia Limited includes details of Key Audit
Matters of only the current Peal However, the opinion has been expressed on current as well as
prior year. (03)
Required:
Advise the concerned partners/managers with respect to the above matters.
22 Identify and explain the shortcomings in the following paragraph of the draft audit report of
Javed Limited:
Emphasis of Matter:
We draw attention to the fact that the company has accumulated losses of Rs. 115,436,540
(2011: Rs. 85,365,479) and certain payments against long term loans were overdue as at the
reporting date. As at 30 September 2012, its total liabilities exceeded its total assets by Rs.
15,450,300 (2011: Rs. 11,542,200). These conditions indicate the existence of a material
uncertainty that may cast significant doubt on the company’s liability to conrinue as a going
concern. (03)
(ICAP, CFAP 06 Level – Winter 2012)
23 The following situations have arisen at different audit clients of your firm:
a) Zafar Technology Limited (ZTL), a listed company, is engaged in the manufacture of
compressors used in electrical appliances. During the conduct of the audit for the year ended 31
March 2012, a team member has discovered a letter dated 18 March 2012 from Sartaj
Electronics Limited (SEL) which states that SEL will not pay the current outstanding invoices as
according to it the compressors supplied by ZTL are of an incorrect specification.
ZTL's Technical Director believes that the problems arose due to changes in the design of
appliances produced by SEL and not because of faulty production by ZTL. However, both the
companies have agreed to refer the matter to arbitration.
Sales to SEL account for approximately 25% of the revenue of ZTL and the balance due from SEL
as at 31 March 2012 amounted to Rs. 3.12 million. The profit after taxation of ZTL is Rs, 25million
with an asset base of Rs, 150 million. (07)
b) The directors’ report of XCP Limited states without any further explanation that the 20%
increase in profit as compared Previous year is due to increase in sales and austerity measures
introduced by the management. The income statement for the year shows an increase in profits
and sales amounting to Rs. 20 million and Rs. 8 million respectively whereas the costs have
reduced by Rs. 12 million, A review of your working papers however indicates that costs have
reduced mainly on account of reduction in import duty on certain raw materials. (04)
(c) IPL is a manufacturer of diversified products and has factories in seven major cities of the
country. The demand for some of its products has been falling and the company wants to
concentrate on its core products only. Consequently, it has decided to close three of {ts factories
and has made a provision of Rs. 30 million in respect of redundancies and restructuring. The
directors’ report for the year ended 31 May 2012 comprehensively discusses the restructuring
plan and states that the factories in Lahore and Multan would be closed in the months of July
and September 2012 respectively. The third factory will be closed before December 2012
however the location of that factory will be decided in November 2012.
The profit after taxation of IPL according to its draft financial statements for the year ended 31
May 2012 Is Rs. 80 million. (06)
Required:
Discuss the matters which the auditor should consider for each of the above situations and the
possible impact thereof on the respective audit reports.
(ICAP, CFAP 06 Level - Summer 2012) (ICAP’s Official Question Bank for CAF 09 - Q. # 153)
24 Ranjha Limited (RL), a listed company, is engaged in the manufacture of fast moving consumer
goods. The draft financial statements for the year ended March 31, 2011 show a profit before
taxation of Rs. 12 million and total assets of Rs. 300 million.
As the audit manager, you are reviewing the following issues which were brought to your notice
by the audit team:
i) On June 1, 2010 RL acquired a plant at accost of Rs. 50 million. The plant has a useful life of 10
years with no residual value. RL follows the policy to depreciate the plant on the straight line
method. On January 1, 2011 the plant suffered physical damage due to a fire in the factory. The
technician from the manufacturer has inspected the plant and reported that the damage has
affected its production capacity which has now been reduced by 30%.
ii) During the year a petition has been filed against RL by one of its customers for recovery of Rs.
20 million, alongwith mark-up, damages and compensation, on the ground that materials
supplied by RL were defective. RL has filed a written statement in the court denying the
allegations.
RL’s legal advisor is of the view that the final liability of the company may range from 0% to 50%.
However, at this point of time, it is not possible to determine the amount with reasonable
degree of accuracy. No provision in this regard has been made in the draft financial statements.
(iii) In April 2007, RL acquired a high-tech production management software for Rs. 10 million.
The useful life of the software is 10 years. During the year It was discovered that In the past the
software was erroneously amortised assuming a useful life of 20 years.
The management has decided to adjust the amount short provided, over the remaining useful
life of the software.
Required: Discuss the matters that may be of significance to you as an auditor in respect of each
of the above issues. Also explain their implication on the audit report. (12)
(ICAP, CFAP 06 Level - Summer 2011) (ICAP’s Official Question Bank for CAF 09 - Q, # 156)
25 You are the senior responsible for the audit of Iqra Industries Limited (IIL). During the course of
the audit you became aware that a legal action has been instituted against IIL by some of its
customers, on account of disputes related to performance of its products. In response to your
request for an opinion, the company’s lawyer has simply stated “We are totally unable to give
any estimate”.
No provision was made in the financial statements for the possible loss as a result of the claims
(which are considered to be material) or for the related legal expenses, although details of those
legal claims were fully disclosed in the notes.
Required:
Comment on the implication of the above matter on the auditors’ report and the financial
statements of IIL. (04)
(ICAP, CFAP 06 Level - Winter 2009) (ICAP’s Official Question Bank for CAF 09 - Q. # 159)
26 Items (i) to (xiv) listed below present various situations an auditor might encounter in conducting
an audit of financial statements. For each situation, identify the impact on audit report i.e.
unqualified opinion, emphasis of matter, other matter, qualified opinion, disclaimer of opinion,
adverse opinion.
Do not draft qualifications.
(i) The financial statements of a listed company do not disclose significant related party
transactions.
(ii) A client changes its accounting policy for valuation of inventories from FIFO to
Average Cost Method. The auditor concurs with the change.
(iii) An auditor is appointed to audit a client's financial statements after the annual
physical inventory count. The accounting records are not sufficiently reliable to
enable the auditor to become satisfied as to the yearend inventory balances.
(iv) Aclient has significant amount of deposit ina bank which ts pnder liquidation.
Pending completion of liquidation proceedings of the bank, no provision has been
made in the accounts. This matter is adequately disclosed in the financial
statements.
(v) The financlal statements of a listed company do not disclose remuneration paid to
chief executive, directors and executives of the company.
(vi) Due to losses and adverse key financial ratios, an auditor has substantial doubt about
a client's ability to continue as a going concern for a reasonable period of time. The
client has adequately disclosed Its financial difficulties in a note to its financial
statements.
(vii) The chief executive officer refuses the auditor access to minutes of board of
directors’ meetings.
(viii) The auditor is unable to obtain financial statements of a consolidated subsidiary.
(ix) Previous year’s financial statements were audited by another firm of chartered
accountants who issued an unqualified audit opinion thereon.
(x) Certain material transactions cannot be tested because of management's retention
policy related to records.
(xi) Management changes its accounting policy from Cost model to Revaluation model.
The auditor does not concur with the change.
(xii) The client refuses to permit the auditor to confirm certain significant accounts
receivable or apply alternative procedures to verify these balances.
(xiii) The chief executive officer is unwilling to sign the management representation letter.
(13)
27 An extract from the draft audit report produced by an audit junior Is given below:
Auditor's responsibility
‘We conducted our audit in accordance with Auditing Standards. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures In the financial statements.
It also includes an assessment of Ali the estimates and judgements made by the directors in the
preparation of the financial statements, and of whether the accounting policies are appropriate
to the company's circumstances, consistently applied and adequately disclosed.
‘We planned and performed our audit so as to obtain as much Information and explanation as
possible given the time available for the audit. We confirm that the financial statements are free
from material misstatement, whether caused by fraud or other irregularity or error. The
directors however are wholly responsible for the accuracy of the financial statements and no
liability for errors can be accepted by the auditor. In forming our opinion, we also evaluated the
overall adequacy of the presentation of information in the company's annual report.’
Required: Identify and explain the errors in the above extract. (10)
Note: You are not required to redraft the report.
163b)
28 Al-Badr & Company, Chartered Accountants, have conducted the statutory audit of the financial
statements of Al-Qasim Limited, a listed company, for the year ended June 30, 20X3 under the
requirements of the Companies Act, 2017. The job in charge has drafted the following audit
report:
Auditors’ Report to the Directors
Opinion
We have audited the annexed financial statements of Al-Qasim Limited, which comprise the
statement of financial position as at June 30, 20x3, and the statement of profit or loss and other
comprehensive income or the Income and expenditure statement, the statement of changes In
equity, for the year then ended, and notes to the financial statements, including a summary of
significant accounting policies and other explanatory information, and we state that we have
obtained all the information and explanations which, to the best of our knowledge and belief,
were necessary for the purposes of the audit.
In our opinion and to the best of our information and according to the explanations given to us,
the statement of financial position, statement of profit or loss and other comprehensive Income
or the Income or expenditure statement, the statement of changes {n equity and the statement
of cash flows together with the notes forming part thereof conform with the accounting and
reporting standards as applicable in Pakistan and give the information required by the
Companies Act, 2017 (XIX of 2017), in the manner so required and respectively give a true and
fair view of the state of the Company's affairs as at June 30, 20x3 and of the profit or loss and
other comprehensive income or loss, or the surplus or deficit, the changes In equity and its cash
flows for the year then ended.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for
the Audit of the Financial Statements section of our report. We are independent of the Company
in accordance with the International Ethics Standards Board for Accountants" Code of Ethics for
Professional Accountants as adopted by the Institute of Chartered Accountants of Pakistan (the
Code) and we have fulfilled our other ethical responsibilities in accordance with the Code. We
believe that the audit evidence we have obtained Is sufficient and appropriate to provide a basis
for our opinion.
Responsibilities of Management and Board of Directors for the Financial Statements
Management Is responsible for the preparation and fair presentation of the financial statements
in accordance with the accounting and reporting standards as applicable in Pakistan and the
requirements of Companies Act, 2017(XIX of 2017) and for such internal control as management
determines Is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, management Is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Board of directors are responsible for overseeing the Company’s financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted. In accordance with ISAs ag applicable in Pakistan will
always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material tf, individually or in the aggregate, they could reasonably be
expected to Influence the economic decisions of users taken on the basis of these financial
statements.
As part of an audit In accordance with ISAs as applicable in Pakistan, we exercise professional
judgment and maintain professional skepticism throughout the audit,
We also:
 Identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may Involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
 Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control.
 Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the Company’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditor's report. However, future
events or conditions may cause the Company to cease to continue as a going concern.
 Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
We communicate with the board of directors regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide the board of directors with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships
and other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
From the matters communicated with the board of directors, we determine those matters that
were ‘of most significance in the audit of the financial statements of the current period and are
therefore the key audit matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because
the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Report on Other Legal and Regulatory Requirements Based on our audit, we further report that
in our opinion:
a. the statement of financial position, the statement of profit or loss and other comprehensive
income or the Income and expenditure account, the statement of changes in equity and the
statement of cash flows together with the notes thereon have been drawn up in conformity with
the Companies Act, 2017 (XIX of 2017) and are in agreement with the books of account and
returns;
b. investments made, expenditure incurred and guarantees extended during the year were for
the purpose of the Company’s business; and
c. no Zakat was deductible at source under the Zakat and Ushr Ordinance.
[Signature]
[Place/ location)
[Date]
Required: Identify and explain (where necessary) the wrong in the above audit report. (07)
(Note. You are not required to redraft the rapurt)
(ICAP, CAF 09 Laval -Autumn 2010, Amended) (ICAP’s Question Bank , CAF 09 -Q #151)
29 The audit of Alpha Public Limited (APL) has completad for the yaar ended March 31, 2017, Asif
and Co has carried out the audit of APL. You are Audit Munayer and apprisad your audit Jn
Charge to draft audit report for APL Following extract of report has been produced by the audit
In-Charge for your review:
We have reviewed the complete pages of financial statements of APL for the year ended on
March 31, 2017.
Management's Responsibility’s
Management of the company Is responsible to express an opinion on the truth and fairness of
above said financial statements in accordance with the International Financial Reporting
Standards (IFRS) and the requirements of the Companies Act, 2017.
Auditor's Responsibility:
Our responsibility is to prepare these financial statements based on our experiences, We
conducted our audit in accordance with some significant International Standards on Auditing
(ISAs), These standards require that we plan and perform the audit to obtain maximum
assurance about whether the above said statements are free from all material misstatements
whether caused by fraud or error.
An audit involves performing procedures to obtain evidence about the amount and disclosures in
the financial statement. The procedures were selected on the basis of last year working papers
and the knowledge of senior audit team members. We considered internal control relevant to
the entity and express an opinion on the effectiveness of internal controls, An audit also includes
consideration of the reasonableness of any new accounting estimates and policies made by the
management.
Asif and Co, Dated June 15, 2017 Engagement Partner
Required:
Identify any four errors in the above extract and also indicate the amendments required to
rectify these errors. (08)
(ICMA Pakistan - Summer 2017)
30 Your firm is the external auditor of Macho Ltd (Macho) for the year ended 31 December 2013.
On 12 January 2014, Macho’s warehouse was destroyed resulting in the loss of its entire
inventory and an inability to fulfill customers’ outstanding orders for the foreseeable future. Your
firm has concluded that the financial statements should be prepared on a break-up basis.
State, with reasons, the Implications for your firm’s audit report on Macho's financial statements
for the year ended 31 December 2013 if the directors of Macho:
(i) prepare the financial statements on a break-up basis and adequately disclose the basis of
preparation in the notes to the financial statements; or
(ii) prepare the financial statements on a going concern basis. (04)
(Institute of Chartered Accountants In England and Wales, Professional Level - 2014 March}
31 You are planning the external audit of Steady Eddy Ltd (Steady Eddy) whose principal activity {s
the provision of road haulage services. You have been provided with the following Information in
respect of the year ended 31 May 2007.
The company made a loss for the year to 31 May 2007. This Is mainly due to the loss of a major
customer to 4 competitor and exceptional costs incurred in relocating to new premises, in
previous years the company has been profitable but has recently experienced reduced margins
due to the high cost of fuel.
Despite its poor trading results, the company has managed to stay within its overdraft limit of
£500,000. This was achieved by the managing director temporarily lending the company
£200,000 and delaying payments to creditors. The overdraft facility is to be reviewed by the bank
in September 2007 after the audited financial statements are available. The company has a loan
installment falling due in October 2007 which it plans to repay with the proceeds from
therecently vacated premises which are currently for sale.
The company has fallen behind with its payments to HM Revenue & Customs, but the directors
have successfully negotiated a scheme for settling the arrears over a period of four months. A
condition of this concession granted by HM Revenue & Customs Is that the company pays all its
future monthly tax liabilities on the due dates.
Requirements
(a) Explain what Is meant by the going concern concept and why the auditor should consider
whether a company is a going concern. (05)
(b) Explain the circumstances particular to Steady Eddy which may indicate that it {s not a going
concern. (08)
(Institute of Chartered Accountants {n England and Wales, Professional Level - 2007 June)
32 You are an audit manager in Brown & Co and you are nearing completion of the audit of Paprika
& Co (Paprika). The audit senior has produced extracts below from the draft audit report for
Paprika.
Auditor's responsibility
(1) Our responsibility is te express an opinion on all pages of the financial statements based
on our audit. We conducted our audit in accordance with most of the International
Standards on Auditing.
(2) Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain maximum assurance as to whether the financial statements are free
from all misstatements whether caused by fraud or error.
(3) We have a responsibility to prevent and detect fraud and error and to prepare the
financial statements in accordance with International Financial Reporting Standards.
(4) An audit involves performing procedures to obtain evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the
availability and experience of audit team members. We considered Internal controls
relevant to the entity; and express an opinion on the effectiveness of these internal
controls.
(5) We did not evaluate the overall presentation of the financial statements, as this is
management's responsibility. We considered the reasonableness of any new accounting
estimates made by management. We did not review the appropriateness of accounting
policies as these are the same as last year. In order to confirm raw material inventory
quantities, we relied on the work undertaken by an independent expert.
The extracts are numbered to help you refer to them in your answer.
Required: For the above audit report extracts, Identify and explain SIX elements of this report
which require amendment.
Note: Redrafted audit report extracts are not required. (12)

33 In respect of an audit client, the following were some relevant dates:
Accounting year end December 31, 2018
Completion of audit Including resolution of all queries and March 1, 2019
outstanding issues
Approval of the accounts by the Board of directors, March 5, 2019
Date of representation letter, March 7, 2019
What should be the date of auditor's report.
(ICAP, CAF 09 Level - Adapted)
34 You are carrying out an audit of a company engaged in the manufacturing of pharmaceutical
products. The company has two manufacturing plants, one of which has been temporarily closes
owing to lack of demand. The management contends that depreciation should not be charged on
the assets of the closed plant. The impact of not charging depreciation is material to the financial
statements.
What should be auditor do in this situation.
(ICAP, CAF 09 – Spring 2000)
35 Can an auditor modify his report if the accounts do not contain certain disclosure required by
law?
(ICAP, CAF 09 – Autumn 2000)
36 You have encountered following independent situations in conducting an audit of a
manufacturing company. For each situation select type of opinion you consider suitable and give
reasons for your choice. Assume that each situations have a material impact on the financial
statements.
a) You were appointed as auditor after the year end date and the accounting records are
not sufficiently reliable to ensure accuracy of the year-end inventory balances. (02)
b) A term deposit of Rs. 10 million with a bank carried in the financial statements at cost.
The bank has filed a voluntary liquidation petition subsequent to the yearend date and
the net realizable value of the deposit is not more than 20% of cost. (02)
c) The company changed its method of inventory valuation from FIFO to average. You
concur with the change. (02)
d) Financial statements do not include certain long-term obligations. (02)
(ICAP, CFAP 06 – Summer 2004)
37 What types of audit opinions should be expressed in the following circumstances?
(You are not required to draft the Opinion paragraphs)
(a) The major production facilities of the Company have been destroyed due to fire subsequent
to the balance sheet date. The plant facilities were not duly insured. No condition in this regard
existed at the balance sheet date. The management has not made any adjustments in the
financial statements. However proper disclosure of this fact has been made the financial
statements. (06)
(b) The management of the company has not allowed the auditors to send request letters to the
legal advisors. Accordingly, the auditors could not become aware of the status of all the
litigations against the company. On account of their prior experience the auditors believe that
there are significant claims against the Company (03)
38 Due to a major computer breakdown during the year the accounting records of the Company are
no more verifiable The company does not have proper manual records. Although the integrity of
the management is not in doubt, the auditor is not in a position to substantiate management’s
assertions contained in the financial statements. What type of opinion should be expressed in
these circumstances? (04)
(ICAP, CAF 09 Level – Autumn 2003)
39 You are responsible for answering technical queries from other managers and partners of your
firm. An audit partner left the following note on your desk this morning:
(i) ‘l am about to draft the audit report for my client, Sycamore Co, I am going on holiday
tomorrow and want to have the audit report signed and dated before I leave. The only
thing outstanding is the written representation from management - I have verbally
confirmed the contents with the finance director who agreed to send the
representations to the audit manager within the next few days. I presume this is
acceptable. (03)
(ii) ‘We are auditing Sycamore Co for the first time. The prior period financial statements
were audited by another firm. We are aware that the auditor's report on the prior period
was qualitied due to a maternal misstatement of trade receivables. We have obtained
sufficient appropriate evidence that the matter giving rise to the misstatement has been
resolved and I am happy to issue an unmodified opinion. But should I refer to the prior
year modification in this year’s auditor's report?’ (03 marks)
Required:
Respond to the audit partner’s comments.
(ACCA, Professional Level P? December 20112)
40 What Is the reporting responsibility of the auditor in the following circumstances:
(a) A major suit has been filed against the client which is pending in the Supreme Court. The
matter has been decided against the company in lower court. The management has not
made any provision against this case and is also refusing to disclose this case as a
contingency. (04)
(b) The company has investment in the shares of a listed company. The market value Is
significantly lower than the cost and the company has not made any provision for
diminution in value. However, the market value is properly disclosed in the financial
statements. The contention of the company is that the investment is long term in nature
and the present diminution is temporary. The effect of diminution in value is material.
(03)
(c) The company is using LIFO method for valuation of stocks. The effect of using the LIFO
method is disclosed in the financial statement which is a material figure. (01)
41 The following situations have arisen on different clients being audited by your firm. The year end
in each instance is 31 December 2011.
(a) The management of Dir Limited intends to present certain unaudited supplementary
information, with the audited financial statements, in order to comply with the
requirements of the parent company. Before signing the audit report, it has been
determined that some of the information is inconsistent with the information in the draft
financial statements. (03)
(b) Malakand Industries Limited (MIL) is engaged in the supply of customised machinery to
textile manufacturers. On 18 February 2012 one of its customers, who owed Rs. 9.6
million, went into voluntary liquidation. In addition to the above amount, a job was in
progress on behalf of that customer and on which MIL had already spent Rs. 13.9 million.
The directors have refused to make a provision against the debt on the grounds that the
liquidator was appointed after the balance sheet date. They have also refused to make
any provision in respect of the work in process as they are planning to sell the machinery
being manufactured to another customer for Rs. 15.7 million.
The profit after tax of MIL is Rs. 85 million. The materiality level is 10% of profit after
tax.(04)
Required:
In the light of the relevant requirements, discuss how should the auditor deal with the above
situations and describe the impact thereof on the audit report.
42 You are the senior in charge on the external audit of Brown Limited (BL), a company dealing in
consumer products. The draft financial statements for the year ended December 31, 2008 show
profit before tax of Rs. 30.1 million and total assets of Rs. 242.4 million. The following issues have
been identified during the course of the audit:
(i) On January 10, 2009, a liquidator has been appointed at Express Pakistan Limited (EPL),
a major customer of the company. Sales to EPL during the year under review amounted
to 35% of BL’s revenue and the balance due from EPL at December 31, 2008 was Rs. 5.89
million.
(ii) On January 25, 2009, a direct confirmation was received from BL’s lawyers. He had
informed that because of the complexity of the issues involved in one of the litigation
faced by the company, which was initiated in October 2008, it is not possible to forecast
its outcome. However, he has advised that the possible impact of an unfavorable
decision (if any), ranges between zero to Rs. 10 million. The draft financial statements do
not contain any disclosure in respect of this uncertainty.
(iii) During the year the company incurred costs of Rs. 1.1 million in respect of repairs and
maintenance of its machinery. These costs have been capitalized and included in the
carrying value of property, plant and equipment. The management has refused to make
any adjustments in the financial statement in respect of this matter.
Required:
Explain the possible effects of the situations described above, on BL's financial statements for the
year ended December 31, 2008 and discuss the implications thereof, if any, on the audit
report.(07)
43 (a) Haali Limited has a policy to carry its buildings at revalued amounts. At the balance sheet date
i.e. 31 December 2012, the valuer had finalised the valuation reports of only 3 out of a total of 8
properties. According to these reports these properties were assigned a valuation of Rs. 50
million as against the carrying amount of Rs. 62 million.
Required:
Evaluate the above condition and discuss the impact on the audit report if the impairment of Rs.
12 million is recorded in the financial statements. (04)
(b) During the year ended 31 December 2012 Chiragh Limited has changed its policy for valuation
of investment in a subsidiary from the ‘fair value’ to ‘cost’. Had the company continued with its
previous policy for valuation of investment at ‘fair value’, the subject value would have been
reduced by Rs. 50 million.
Required:
Discuss the matters which you should consider in respect of the above situation and the possible
impact thereof on the audit report. (03)
44 You are the audit manager at the client Lavender Product Limited (LPL). Your team had proposed
various adjustments including the impairment of a plant. LPL’s CFO has agreed to record all the
adjustments including the impairment loss. However, the CFO is reluctant to disclose in the
financial statements, the circumstances that lead to the impairment of plant and machinery.
Required:
Evaluate the above situation and state the implications on the audit report, if any. (05)
45 You are engaged in the audit of a listed manufacturing concern as audit senior. The audit field
work has been completed and you have completed your review. The following issues have
remained unresolved after your final meeting with the Finance Director of the client:
(a) Company has incurred certain expenses on the launch of a new product. The company has
recognized only one third of the expenses in the profit and loss account while the remaining
expense are being deferred over a period of three years. The amount of expense being
deferred is Rs. 20 million which {is material in the context of the company’s financial
statements. (06)
(b) The company has provided interest free loan amounting to Rs.25 million to its associated
company without obtaining the approval of its shareholders. The Finance Director has
indicated to you that the company does not intend to disclose this loan separately in the
financial statements. (06)
Required:
Prepare a Memorandum for your Audit Partner giving your opinion about these issues, keeping
in view the requirements of the relevant International Accounting Standards and provisions of
the Companies Act, 2017.
46 The draft accounts of Kingfisher Pharmaceutical Limited (KPL) for the year ended September 30,
2010 show a profit before taxation of Rs. 115 million and total assets of Rs. 450 million. Being the
audit manager you are currently reviewing the following matters:
(i) The basis of preparation of financial statements states that these have been prepared in
accordance with the International Financial Reporting Standards. However, the
accounting policy note for borrowing costs states that all borrowing costs are expensed
as incurred. Results of audit tests show that borrowing costs expensed during the year
include Rs. 15 million which relate to qualifying assets.
(ii) On October 17, 2010 the Income Tax Department issued amended assessment orders for
the tax years 2006 to 2009 in which an aggregate tax of Rs. 40 million has been
demanded. KPL has filed appeals against the orders before the Income Tax Appellate
Tribunal. KPL’s tax consultant has advised that it is not possible at this stage to give a
reasonably accurate estimate of the amount of tax that the company may ultimately be
required to pay but it would range between Rs. 10-35 Mullion. There is no reference of
this matter in the draft financial statements.
(iii) The directors’ report contains a statement that “current year's increase in profit before
taxation by over 10% is Primarily due to the improved operating performance of the
company”. However, the income statement shows that KPL’s Profit before taxation
includes a gain on sale of a factory amounting to Rs. 30 million. In the absence of this
gain, the Company would have reported a reduction in operating profit by 19%.
Required:
In respect of each of the above matters:
a. State with reasons what action you would take; and
b. discuss the implications on the audit report, if any. (13)

47 You are the audit senior on the external audit of Dug Ltd (Dug) for the year ended 31 January
2011. In January 2011 Dug sold some office equipment to the wife of Dug’s managing director.
The audit junior has noted that the sale has not been disclosed in the note to the financial
statements detailing related party transactions and has suggested the inclusion of an emphasis
of matter paragraph in the audit report to highlight this issue.
Comment on the suitability or otherwise of the audit junior’s suggestion. (04)
(ICAEW Professional, March 2011)
48 The notes to the financial statements of Eaton Ltd disclose that the company has only operated
profitably as a result of a significant amount of trading with its parent company. The auditors
consider that this disclosure is necessary for a proper understanding of the company’s financial
statements and draw attention to it in their audit report.
State, with reasons, the type of opinion that should be included in the audit report. (02)
(ICAEW Professional, June 2006)
49 During the audit of financial statements of an investment advisory company, for the year ended
31 December 2005, you noted the following:
(a) The company has accumulated losses at the close of financial year amounting to Rs. 50
million which have eroded the company’s capital of Rs. 30 million.
(b) During the financial year, the company provided loan of Rs. 250 million to its directors for
their personal business. The receivable from directors at year-end Is NIL.
Explain how would you deal with the above matters while finalizing the audit of the company.
Suggest a suitable modification in audit report if the same is considered necessary. (08)
50 You are the manager in charge on the audit of Hexa Garments Limited (HGL). The company is
listed on the Karachi Stock Exchange and has nine directors. It is engaged in the manufacture and
sale of fancy garments through its own retail outlets. You are considering the following matters
in respect of the audit for the year ended December 31, 2009:
(a) According to the draft financial statements the total assets of the company are valued at Rs.
375 million. These include value of ten retail outlets amounting to Rs. 175 million. The
valuation is based on historical cost less accumulated depreciation. During the year ended
December 31, 2009, the management had decided to revalue all the retail outlets. The valuer
appointed by the management has not been abie to complete the assignment to date.
However, he has submitted two interim reports as described below:
Interim Dividend
First Second
Date of report 31-12-09 20-02-10
Number of shops revalued 3 4
Book value as on 31/12/2009 (Rs. in million) 40 60
Revalued amount (Rs. in million) 70 100
(b) During the year HGL has developed two new brands “Deebal” and “Kalachi” and has
launched an aggressive marketing campaign for their promotion. The company has
recognized the cost incurred on the campaign amounting to Rs. 10 million as an intangible
asset. It is being written off over the estimated useful life of the brands i.e. four years.
Required:
Discuss the matters that may be of significance to you as an auditor, in respect of the above
issues. Also explain their implications on the audit report.

51 Sher Khan Limited (SKL) had announced a major restructuring in the year 2011 and a provision of
Rs. 120 million was made against the cost of restructuring and redundancies. During 2012 all
known claims and liabilities relating to the restructuring were settled for Rs. 90 million.
However, as a matter of prudence, the company has not written back the excess amount of
provision in view of a suit filed by certain staff members against termination of their
employment. SKL’s legal counsel is of the view that the possibility of an adverse decision against
the company in this matter is remote.
The audit senior does not agree with the management's contention and has drafted the
following modification in the audit report:
“An amount of Rs. 30 million has been provided in respect of the expected amount which the
company may be required to pay to the employees whose employment was terminated during
the year. The management is of the view that in case the company is required to pay the amount
to those employees, the said provision would be utilized. In our opinion, the company’s decision
to make the above provision is not in accordance with International Accounting Standards. Had
the liabilities been recognized correctly the profit for the year would have increased by Rs. 30
million. Because of the effects of the matters discussed above, the financial statements do not
give a true and fair view of the financial position of the company as at 30 September 2012.”
Profit before taxation and net assets of SKL are Rs. 145 million and Rs. 350 million respectively.
Required:
Comment on the decision of the audit senior and identify the shortcomings, if any, in the
modification drafted by him. (08)
52 You are the audit manager of Zia Yaqoob & Company Chartered Accountants. You have asked
Aslam, one of the team members assigned on the audit of Black Sugar Limited to draft the audit
report for the year ended 31 May 2018. The extracts from the draft report are as follows:
Adverse Opinion
In our opinion, except for the effects of the matter described in the Basis for Adverse Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects the financial position of the Company as at 31 May 2018, and its financial performance
and its cash flows for the year then ended.
Basis for Adverse Opinion

The Company’s stores and spares consist of capital spares of machineries for smooth and
uninterrupted production of sugar during the crushing season. These are carried at lower of cost
and net realisable value as per IAS-2. The Company's Chief Financial Officer has refused to
reclassify it as capital stores and spares as per IAS-16 as it would adversely affect the current
ratio, as prescribed by the financial institutions. We verified the Company’s records: and
ascertained conclusively the value of the capital spare at Rs. 100 million. Had the management
stated them as capital spares, NonCurrent assets would have increased by Rs. 100 million and
consequently Current Assets would have reduced by the same amount.
Emphasis of Matter Paragraph

We draw attention to note 2 to the financial statements, which describes the early adoption of
IFRS-2. However, due to time limitation, certain disclosures required by IFRS-2 could not be
provided in the financial statements. Our opinion is not modified in this respect.
Required:
Critically analyses the audit report drafted by Aslam. (06)

53 You are carrying out an audit of a large trading company. The company has an amount of Rs. 45
million receivables from one customer who has been declared as bankrupt. The management of
the company has refused to make provision against this amount. The audit partner has decided
that audit report should be qualified. Draft a suitable qualification in this respect. (You are not
required to write the entire report). (05)
54 You have recently completed the audit of Naveed Limited, a listed company.
Significant matters concerning the audit include classification of certain debts as long term. The
debt covenants loans have been breached but subsequent to the year end the banks have
confirmed verbally that they will not demand immediate repayment.
Required:
Evaluate the above situation and draft the modification, if required, for inclusion in the audit
report. You May assume necessary details.
55 The directors of Denzil Ltd are preparing the financial statements for the year ended 31 May
2001, and have approached the auditors for advice because they are unsure whether the
company can be considered a going concern.
Describe the effect on the financial statements if the company:
(i) is considered a going concern although there are significant doubts about this; and
(ii) is not considered a going concern. (04)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2001 June)
56 Described below are situations that have arisen in two unrelated external audit clients of your
firm. The yearend in each case is 31 December 2009.
Pollen pic (Pollen)

Pollen is a pharmaceutical company specializing in the manufacture of drugs for hay fever
sufferers. It currently manufactures the market-leading drug, Hiveal, which accounts for 65% of
the company’s annual revenue. High numbers of sufferers have recently experienced adverse
side effects when using Hiveal and a government committee is now investigating this. Pollen’s
license to manufacture Hiveal has been temporarily suspended until the investigation is
complete.
The investigation by the government committee will not be concluded until after the financial
statements for the year ended 31 December 2009 have been published, The directors have
disclosed this matter in a note to the draft financial statements, stating that if the license Is not
reinstated there would be significant doubts over Pollen's ability to continue to trade,
Bloome plc (Bloome)

Bloome purchased a new manufacturing plant on 1 January 2009 for £2.8 million. The plant was
capable of being operated at this date but production did not commence until 30 June 2009 due
to a worldwide shortage of an essential raw material for the production process. The plant is
being depreciated, using the straight-line method, over 10 years and the directors have charged
six months’ depreciation on cost in the income statement for the year ended 31 December 2009.
The draft financial statements show that Bloome’s profit before tax is £1.3 million.
Requirements:
In each of the situations outlined above, state whether you would modify the audit report. Give
reasons for your conclusions and outline the modifications, if any, to each audit report. (08)
57 You are the Manager engaged in the audit of Pluto Limited. The audit fieldwork has been
completed but the following points required your attention;
 Included in the balance sheet are non-current assets at a cost of Rs. 5 million which have
been constructed by the company during the year. The costs include own labor capitalized
amounting to Rs. 1.5 million. The labor costs are based on the director's estimates of time
spent by employees on the construction work, which are unsupported by time records.
There are no satisfactory audit procedures to confirm that labor costs have been
appropriately capitalized.
 Out of total inventory value of Rs. 2 million appearing in the balance sheet, you have been
unable to physically verify Rs. 150,000 which is lying in the Muzaffargarh Branch of the
Company. The Branch was damaged due to excessive flooding.
 The Company is involved in a legal dispute with one of its customers, who has demanded Rs.
2 million as damages for supply of defected goods. The Company's legal advisors believe that
the amount may eventually have to be paid as the Company's case is not strong. However,
the management has not recorded any liability in relation to this case in the balance sheet.
Assuming the company has materiality level of Rs. 850,000 describe what course of action you
should take in relation to the above matters and in case the matters remain unresolved, what
type of Audit Opinion is likely to be issued.
(PIPFA - Winter 2011)
58 Explain, with reasons, the possible audit opinion which may be given in case of each of the
following cases (each part is to be treated independently and answered separately):
(a) Inventories as per physical count performed in the presence of auditor differ from inventories
recorded in the Financial Statements by a material amount. (02)
(b) The company does not account for provision for environmental damages in its Balance Sheet.
As per prevailing laws of the city, a fine of Rs. 1 million is imposed if chemical released in
drainage system of the city is more than 1 ton. As per estimates, the chemical released for the
year is 2.4 tons The company’s profit for the year is Rs. 10 million. (02)
(c) A beverage-manufacturing company formed a year ego has not tested its fixed assets for
impairment (02)
(d) The management does not permit the auditor to send confirmation letters to trade
receivables, which are material item on the balance sheet. (02)
(e) A company applies straight-line basis for recording of depreciation whereas the commonly
used basis in the industry is the Reducing Balance Method. (02)
59 You are the partner in an audit firm, currently engaged in the audit of Alpha Limited (AL). The
draft financial statements for the year ended 31st December, 2016 show profit before tax of Rs
30 million and total assets of Rs. 112. The following issues have been highlighted by the senior in
charge of the team. Discuss the impact of the below issues on the auditor's report.
(a) Sales tax refundable amounting Rs.10 million is appearing in the Financial Statements. In the
auditor's opinion, input tax amounting to Rs. 8 million is time-barred and the company will not
be able to claim an adjustment against it. The management, however, is unwilling to write back
the refund. (03)
(b) The company was charging depreciation on equipment’s using straight line method in
previous years. Thus year the company changed its method to reducing balance method and the
auditor concurs with the change (03)
(PIPEA Winter 2017)
60 ABC Sugar Mills Limited is preparing its financial statements for the year ended 30 September
2017 As at 3 September 2017, it has a trade receivable balance of Rs. 25,000 000 from XYZ
Limited. On 15 September 2017 XY Limited has issued a press release to close the operations of
the company due to significant financial difficulties. On 15 September 2017, XYZ Limited was
declared bankrupt with no assets left to settle the third parities liabilities. Explain how this will
affect the financial statements of ABC Sugar Mills Limited tor the year ended 30 September
2017? (02)
(ICMA Pakistan Summer 2018)
61 Asim & Co. an audit firm has a number of clients. Certain matters related to different clients
were brought into the Notice of a partner of the firm for review and advise as to which type of
audit report are to be issued in each of the following cases:
(i) Milestone Technology Limited (MTL) is a renowned company for manufacturing
specialized machineries on order. One of the customers sued the company for the worst
quality of material used in machinery specially customized for him. The amount that is
being sued was not substantial but material in nature and the case could go either way.
The company did not mention this amount in the financial statements.
(ii) Rashid & Sons, one of the customers of Shalimar Corporation went bankrupt just after
the year end but the company did not provide for bad debts. The details are as follows:
Rupees
Amount of bad debts of Rashid & Sons 300,000
Total trade receivables 1,300,000
Profit for the year 3,000,000
(iii) Amir Brothers Limited is undergoing a major court case that would bankrupt the
company if lost. The directors assessed and disclosed the case as a contingent liability in
the financial statements. The auditors agreed with the treatment and the disclosure.
(iv) conduct their inventory count. However, there was insufficient evi million is correct.
Sales revenue and profit for the year were as follows:
Sales revenue 40 million.
Profit 17.5 million
(v) Mehreen Enterprises is a retailer, deals in Fast Moving Consumer Goods (FMCGs). The
company supplies its product on cash basis but there is no system to confirm the
accuracy of cash sales.
Required:
State what type of audit report should be issued in each of the above cases and also explain the
reason for selection of such type of report. (10)
(ICMA Pakistan – Summer 2017 Extra Attempt)
62 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)
63 You are the audit partner of XYZ & Company, Chartered Accountants. The following matter is
under your consideration.
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.
Required:
Analyse the above situation and explain how you would proceed in the above matter. (03)
64 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
advertently omitted.
Required:
Discuss the appropriateness of management representation and how would you deal with the
above situation. (05)
65 The following points have arisen during the audit for the year ended 30 June 20X6 of Compo, a
nationwide dealer in used cars,
(a) During the year, five of Compo’s properties were revalued by an independent surveyor.
(b) One property was sold during the year to the marketing director.
(c) The directors have refused to make provision against a bad debt.
required Explain whether or not each of the above would be referred to in the letter of
representation for the year ended 30 June 20X6.
(ICAP’s Official Study Text for CAF 09 - Page # 253)
66 You are the manager in charge of the audit of Crighton-Ward, a public limited liability company
which manufactures specialist cars and other motor vehicles for use in films. Audited turnover is
$140 million with profit before tax of $7-5 million. All audit works up to, but not including, the
obtaining of management representations has been completed. A review of the audit file has
disclosed the following outstanding points:
Lion’s Roar
The company is facing a potential legal claim from the Lion’s Roar company in respect of a
defective vehicle that was supplied for one of their films. Lion’s Roar maintains that the vehicle
was not built strongly enough while the directors of Crighton-Ward argue that the specification
was not sufficiently detailed. Dropping a vehicle 50 metres into a river and expecting it to
continue to remain in working condition would be unusual, but this is what Lion's Roar expected.
Solicitors are unable to determine liability at the present time. A claim for $4 million being the
cost of a replacement vehicle and lost production time has been received by Crighton-Ward from
Lion’s Roar. The director's opinion is that the claim is not justified.
Depreciation
Depreciation of specialist production equipment has been included in the financial statements at
the amount of 10% pa based on reducing balance. However, the treatment is consistent with
prior accounting periods (which received an unmodified auditor's report) and other companies in
the same industry and sales of old equipment show negligible profit or loss on sale. The audit
senior, who is new to the audit, feels that depreciation is being undercharged in the financial
statements.
Required: For each of the above matters discuss whether or not a paragraph is required in the
representation letter. (05)
161bi)
67 You are responsible for answering technical queries from other managers and partners of your
firm. An audit partner left the following note on your desk this morning:
‘lam about to draft the audit report for my client, Sycamore Co. I am going on holiday tomorrow
and want to have the audit report signed and dated before | leave. The only thing outstanding is
the written representation from management - I have verbally confirmed the contents with the
finance director who agreed to send the representations to the audit manager within the next
few days. I presume this is acceptable?’
Required: Respond to the audit partner's comments. (03)
(ACCA, Professional Level P7 - December 2011)
68 Greenfields Co specialises in manufacturing equipment which can help to reduce toxic emissions
in the production of chemicals. The company has grown rapidly over the past eight years and this
is partly due to the warranties tl ¢ the company gives to its customers. It guarantees its products
for five years and if problems arise in this period it undertakes to fix them, or provide a
replacement product.
You are the manager responsible for the audit of Greenfields and you are performing the final
review stage of the audit and have come across the following two issues.
Receivable balance owing from Yellow mix Co
Greenfields has a material receivable balance owing from its customer, Yellowmix Co. During the
year-end audit, your team reviewed the ageing of this balance and found that no payments had
been received from Yellowmix for over six months, and Greenfields would not allow this balance
to be circularised. Instead management has assured your team that they will provide a written
representation confirming that the balance is recoverable.
Warranty provision
The warranty provision included within the statement of financial position is material. The audit
team has performed testing over the calculations and assumptions which are consistent with
prior years. The team has requested a written representation from management confirming the
basis and amount of the provision are reasonable. Management has yet to confirm acceptance of
this representation.
Required:
(a) For each of the two issues above:
(i) Discuss the appropriateness of written representations as a form of audit evidence; and (04)
(ii) Describe additional procedures the auditor should now perform in order to reach a
conclusion on the balance to be included in the financial statements. (06)
(b)
The directors of Greenfields have decided not to provide the audit firm with the written
representation for the warranty provision as they feel that it is unnecessary.
Required: Explain the steps the auditor of Greenfields Co should now take and the impact on the
audit report in relation to the refusal to provide the written representation. (05)

69 Siskin Ltd conducts all its sales on a cash basis. The managing director and majority shareholder
of Siskin Ltd has provided a written representation in respect of the completeness of cash sales.
What additional matters would you consider in determining whether or not you would rely on
this representation? (03)
(ICAEW Adapted)
70 Reliance Ceramics Limited (RCL) has purchased shares of “Rupali Polyester Limited” (RPL). This
investment is classified as Non-current asset in balance sheet of RCL and constitutes 22% of total
assets.
You have obtained the written representation from management that "it intends to retain
ownership of its investment in RPL and has no intention to dispose off it in near future.
Required:
(a) Is management's written representation sufficient evidence in this matter?
(b) What procedures are usually performed by auditors when an auditor obtains a
representation from client which is based on its intention or judgment.
(c) Suppose, before signing auditor's report, you read fn a financial magazine that RCL is
negotiating a deal with a local business tycoon to sell his investment in RPL. What will be
implication of this news on your audit.
71 For each of the following independent situations, briefly describe the most appropriate course of
action that the auditors should take.
a) Client's year ends on December 31, 2012. Auditor receives signed representation letter from
client dated March 9, 2013. From 9 March to 14 March, auditor completed some remaining
items of the audit and signed auditor’s report on March 15, 2013.
b) Chent’s year ends on December 31, 2012. Audit report was signed on February 23, 2013.
During a subsequent noninsurance assignment, auditor came to know that a lawsuit was settled
out of court on February 19 and auditor was not informed of this.This case was filed before year
end and as amount to be settled was not determinable, only disclosure was made in the financial
statements.
c) Auditor identified many misstatements during the audit. All of these were immaterial and
none of them was indicative of fraud, hence auditor ignored these misstatements and decided
not to adjust financial statements.
72 For each of the following matters, specify whether it:
 is required to be included in representation letter.
 is not required but may be included in representation letter if auditor considers
necessary
 shall not be included in representation letter
a. Management acknowledgement of its responsibility for the fair presentation of the financial
statements in conformity with applicable financial reporting framework.
b. A list of pending or threatened litigation against the client.
c. A description of recommendations that allows the client to improve the efficiency and
effectiveness of its operations
d. Availability of all financial records and related data.
e. Management's intention to dispose off fixed assets in the near future. f. Disclosure to auditor
of all deficiencies in internal control.
g. Information concerning fraud involving management and employees who have significant
roles in internal control.
h. Management's judgment whether client's accounting policies are appropriate.
j. Information about violations of laws or regulations affecting financial statements.
j. A list of uncorrected misstatements.

k. Management's representation that documents lost by fire during the year were correct and
complete in all material respects.
73 You are the auditor of Wild Ltd and are in the process of completing the audit for the year ended
30 June 2010. The following two outstanding matters have been highlighted in your firm’s
completion documentation.
(a) You have heard rumors that Wild Ltd is planning to merge with a competitor. If accurate, this
will have disclosure implications. Management have advised you that although they have had
several meetings with the management of the competitor in question, no such merger is
currently planned. Management has offered to make written representations confirming their
point of view.
(b) The invoices to support the cost of a significant purchase of plant and machinery cannot be
traced. Management has offered to make written representations confirming the cost of the
plant and machinery.
Required:
Are the client’s written representations sufficient to resolve the two outstanding matters noted
above? Justify your answer. If representation is not sufficient in any case, what other audit
procedures will you apply to obtain sufficient appropriate audit evidence.
74 Consider each of the following independent situations:
(i) Spruce Limited issued its financial statements on 15 September 2020 for the year
ended 30 June 2020. On 22 September 2020, your audit team came to know that a
major debtor has filed bankruptcy due to destruction of its production facility in a
terrorist attack on 20 August 2020.
(ii) During the audit of Larch Limited (LL) for the year ended 30 June 2020, the audit
team noticed that the - management of LL had worked out the net realisable value
(NRV) on the basis of the sales price at year-end. Since NRV was greater than cost, LL
recorded the inventory in the draft financial statements at cost. However, after
reporting period, LL is facing difficulties in selling the inventory at current price level
and therefore considering to revise its prices.
Required:
In each of the above situations, evaluate the need for amendment in the financial statements
and suggest the au Procedures, if any, which the auditor would need to perform. (09)
75 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
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)
76 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. The inventory against the above order is lying in the warehouse and requires an expense
of Rs. 105 million in
(ii) 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)
77 Humphries Co operates a chain of food wholesalers across the country and its year end was 30
September 2011. The final audit is nearly complete and it is proposed that the financial
statements and audit report will be signed on 13 December. Revenue for the year is $78 million
and profit before taxation is $7-5 million. The following events have occurred subsequent to the
year end.
Receivable
A customer of Humphries Co has been experiencing cash flow problems and Its year-end balance
is $0-3 million The company has just become aware that its customer is experiencing significant
going concern difficulties. Humphries believe that as the company has been trading for many
years, they will receive some, if not full, payment from the customer; hence they have not
adjusted the receivable balance.
Lawsuit
Key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to
the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent
liability in the notes to the financial statements; however, correspondence has just arrived from
the supplier indicating that they are willing to settle the case for a payment by Humphries Co of
$0-6 million. It is likely that the company will agree to this.
Warehouse
Humphries Co has three warehouses; following extensive rain on 20 November significant rain
and river water flooded the warehouse located in Bass. All of the inventory was damaged and
has been disposed of. The insurance company has already been contacted. No amendments or
disclosures have been made in the financial statements.
Required: For each of the three events above:
(i) discuss whether the financial statements require amendment;

(ii) describe audit procedures that should be performed in order to form a conclusion on
the amendment; and
(iii) explain the impact on the audit report should the issue remain unresolved. (15)
78 You are the audit manager in a Chartered Accountants Firm. Following matters are still
outstanding and required your attention:
(i) A fire broke in godown of one of your audit clients on 01 June 2017, damaging 70% of the
inventory of hardware equipment’s. At any balance sheet date, inventory is a material item to
the Financial Statements of that company. Year-end date is 31st May, 2017.
(ii) On 10% May 2017, one of the major customers of another client went into liquidation and
there is no chance of any recoverability. The amount due from single customer is material to
Financial Statements. Yearend date is 30% April 2017.
Required: Discuss the effect of above events on the Financial Statements and on the audit
opinion, if Management does not agree to incorporate these in the Financial Statements. (08)
79 Your firm has completed the external audit of the financial statements of Roses Ltd (Roses) for
the year ended 31 December 2009 and an unmodified audit report was signed by the
engagement partner on 1 March 2010. Your firm’s audit report has been provided to the
directors who plan to issue the financial statements and audit report to the shareholders on 30
March 2010. Whilst reading today’s newspaper, 23 March 2010, you discover that Meadow Ltd
(Meadow), a major customer of Roses, went into liquidation on 15 March 2010. You were the
audit senior on the audit of Roses and you recall that Meadow owed a material amount to Roses,
at 31 December 2009, for goods purchased. This amount remained outstanding at the conclusion
of the subsequent events review. You have informed the engagement partner of your discovery.
Discuss the issues arising as a result of the newspaper article and state what, if any, action your
firm should take. (04)
80 Grains 4U Co (Grain) manufactures breakfast cereals and has three factories four warehouses
and three distribution depot spread across North America The audit for the year ended 31
December 2015 is almost complete and the financial statements and audit report are due to be
signed shortly Profit before taxation is $7 9 million The following events have occurred
subsequent to the year end and no amendments or disclosures have been made in the financial
statements
Event 1 Fire
On 1 February 2016 a fire occurred at the largest of the distribution depots The fire resulted in
extensive damage to 40 of the company s vehicles used for dispatching goods to customers,
however, there have been no significant delay to customer deliveries The company estimates the
level of damage to the vehicles to be in excess of $650000. Only a minimal level of inventory,
approximately $25,000, was damaged Grains insurance company has started to invest gate the
fire to assess the likelihood and level of payment, however, there are concerns the fire was
started deliberate y a d ¢ true would invalidate any insurance cover
Event 2 - Inventory
On 18 February 2016, it was discovered that a large batch of Grain’s new cereal brand ‘Loopy
Green Loops held m inventory at the year end was defective, as the cereal contained too much
green food colouring. To date no sales of this new cereal have been made The cost of the
defective batch of inventory 1s $915,000 and the defects cannot be corrected. However the
scrapped cereal can be utilised as a raw material for an alternative cereal brand at a value of $50
Required:
For each of the two subsequent events described above:
(i) Based on the information provided, explain whether the financial statements require
amendment; and
(ii) Describe audit procedures which should now be performed in order to form a conclusion on
any required amendment. Note The total marks will be split equally between each event. (10)
(ACCA, Fundamentals Level F8 - Marjun 2016)
81 You are the auditor of Central Chemical Company Limited, a public listed company which is
engaged in the manufacture and sale of Chemicals. The production is carried out at five different
locations throughout Pakistan. The customers include a number of local as well as foreign
buyers.
You are required to explain the action you would take in each of the following independent
situations with respect to audit for the year ended June 30, 2004:
(a) On August 10, 2004, a competitor introduced a low cost product which was a very good
replacement of one of the company’s product being marketed under the brand name “Dello”.
The Marketing Manager was of the view that the company would not be able to sell Dello, unless
the price is reduced to Rs. 40 per kg i.e. 20% below its present cost Wh e the management was
considering how to reduce the cost, it was decided to sell all the inventory in hand at Rs. 40 The
stock of that product as on August 10, 2004 was 100,000 kgs, out of which 5000 kgs, had been
produced after the year end You become aware of the situation on August 11, 2004, when the
accounts have already been finalised but prior to the signing of the audit report. The
management is of the view that the matter need not be adjusted in the financial statements nor
any disclosure is needed. (06)
(b) After the audit report has been issued you come to know that one of the factories have
caught fire causing a loss of machinery worth Rs 250 million. On inquiry you are informed that
the loss is covered by insurance policy but the factory will have to remain closed till the new
machinery is installed The installation may take six to eight months. The financial statements
have not yet been published or circulated to the shareholders. (08)
(c) After the financial statements have been issued, there was a significant decline in the market
value of investments (03)
82 Post balance sheet events are categorized as being either “adjusting events” or “non-adjusting
events” Define these events and state with reasons whether the following events are adjusting
events” or “non-adjusting events even
(i) The receipt of information concerning changes in taxation including rates.
(ii) The discovery of errors or frauds which show that the financial statements were incorrect.
(iii) Changes 1n rates of foreign exchange.
(iv) Loss of fixed assets or stocks as a result of fire or flood occurred after the year end but before
issuance of audit report.
(v) A valuation report of property received after year end, which provides evidence of a
permanent diminution in value of property.
(vi) Allotment of shares and debentures. (06)
83 Financial year of “Shield Garments Industries Limited” ends on December 31. Audit report was
signed on February 05, 2013 and financial statements were issued to shareholders on February
15, 2013.
On March 3, during an external quality control review of the audit firm, it was discovered that
audit firm did not address following matters during audit:
1. A lawsuit was filed against company on January 12, 2013. Confirmation Letter from lawyer did
not identify this.
2. Company declares cash dividend @20% to its shareholders on January 28, 2013.
3. Company obtains additional borrowings of significant amount from a local bank on February
25, 2013. 4. Reviewing audit documentation, it does not appear that any tests were conducted to
evaluate the need for impairment of the carrying value of company’s property, plant, and
equipment.
Required: For each of the matter described above, describe effect of the matter on financial
statements and course of action auditor should adopt now.
84 You are finalizing the audit of Galaxy Limited for the year ended June 30, 2013 and expected date
of issuance of financial statements is August 20, 2013. What will be effect of following
independent situations on financial statements and audit.
(a) You have come to know that a fire occurred in the factory of the company on June 27, 2013
and destroyed almost all of its inventory and building.
(b) Facts same as in ‘a’ above except that fire occurred on July 27, 2013.
(c) Facts same as in ‘a’ above except that fire occurred on August 27 2013.
85 Following events occurred after balance sheet date but before auditor’s report. State whether
these events are adjusting or non-adjusting
1.Govt. approved construction of a highway and expropriated land of company.
2. Company sold 40% of its property, plant and equipment.
3. In an out-of-court settlement, company paid Rs. 1 million to an employee who filed case last
year against company
4.This case was appropriately disclosed in financial statements but liability was not accrued as
outcome was uncertain. 4 Because of a flood, main factory remained closed for 1 month.

1 Level of assurance provided by this statement:
Limited or Moderate or Negative level of assurance.
How it differs from assurance provided by an audit:
Limited assurance is provided in negative form of conclusion. Whereas, in audit assurance is
provided in positive form of conclusion
Why it differs from audit:
In limited assurance, less procedures are performed
In audit, more procedures are performed
2  Auditor never ever relies on verbal statement by management,
 Auditor signs report after approval of financial statements by directors,
 Usually auditor is appointed by shareholders, not by directors.
 Auditor is appointed in AGM (not in EOGM).
 Letter of weakness deals with deficiencies in internal control and not wherc audit
evidence is weak).
 Letter of weakness is given to management/directors, and not to shareholders.
 Engagement letter contains terms and conditions of engagement, and not matters which
came to attention of auditor.
3 Following are the misconceptions in the comments:
1. Auditor does not test majority of transactions. He tests only sample of transactions.
2. Auditor does not provide assurance that financial statements are correct in all respects. He
provides reasonable assurance that financial statements are correct in material respect.
3. Auditor does no report internal control deficiencies in audit report. Further, there are always
some limitations of internal control even if auditor does not report them.
4. Auditor is not responsible to report fraud in audit report.
5. Audit report is not a guarantee that investment will be safe. Financial statements may contain
errors or fraud even after audit because of inherent limitations of audit.
6. Further, auditor report is not a guarantee that entity will continue as going concern in future
too.
4 Auditor should issue unmodified opinion, because directors’ report is misstated which is not
included in complete set of financial statements. Therefore, financial statements give true and
fair view.
5 The word “Cash flow statement” has been omitted
6 i) Issue: Return of poor quality goods:
Return of poor quality goods after the year is an adjusting event. Sales should be reversed by Rs.
3 million, and inventory should be written down to NRV.
Implication on Report (if financial statements are not corrected):
 Misstatement is immaterial quantitatively (Rs. 3 million < Rs. 8 million).
 If misstatement is immaterial on qualitatively as well as when aggregated with other
misstatements, auditor shall express unmodified opinion.
(ii)
 Liquidity issues, adverse key financial ratios and operating losses cast doubt on entity’s
ability to continue as going concern.
 Auditor should perform procedures to assess whether material uncertainty exists, or going
concern assumption is appropriate.
Implication on Report:
If material uncertainty exists and is adequately disclosed, auditor shall include “Material
Uncertainty relating to Going Concern”.
If material uncertainty exists and is not adequately disclosed, auditor shall include Qualified or
Adverse opinion.
Sale of office to a company managed by director:
This is a related party transaction, which should be disclosed in financial statements. e If
management does not disclose it, this will be a misstatement. Auditor shall express Qualified
Opinion (if effect is material), or Adverse opinion (if effect is pervasive).
(iii) Issue: Bankruptcy of debtor
Subsequent bankruptcy of debtor is an adjusting event. Management should further record
provision for remaining 5.5 million (11 m. * 5%).
Implication on Report (if financial statements are not corrected): Effect is immaterial (as Rs. 5.5
million < 8 million). Auditor shall express unmodified opinion on financial statements.
7 a) This matter will be reported in Key Audit Matter section. Auditor shall discuss following in
KAM section:
o Why the matter was considered most significant in audit.
o How the matter was addressed in audit?
o Reference to related disclosure in F/S (if any).
Auditor shall also communicate the KAM with TCWG.
(b)
 Verbal confirmation from lawyer is less reliable evidence, and is not a sufficient appropriate
audit evidence.
 Auditor should request lawyer to confirm response in writing.
 If written confirmation is not obtained, it will be a scope limitation.
 Auditor shall express Qualified Opinion (if effect is material), or Disclaimer of opinion (if
effect is pervasive).
 Auditor shall also discuss the issue with TCWG, before expressing modified opinion.
(c)
 If a disclosure is required by IFRS, it must be included in F/S.
 Auditor should request management to include disclosure in F/S, and extend deadline for
completion of audit, if necessary.
 If management does not agree, this will be a misstatement in F/S. Auditor shall:
 express Qualified Opinion {if effect is material), or Adverse Opinion (if effect is
pervasive).
 describe the nature of omitted disclosure in “basis for qualified/adverse section”.
 Auditor shall also discuss the issue with TCWG, before expressing modified opinion
8 (a)This statement incorrect because under ISAs management is also responsible to assess the
entity's ability to continue as a going concern, and for appropriate accounting or disclosing
matters relating to going concern (if any). Further, management is also responsible to provide
auditor with relevant information for the purpose of audit.
(b)This statement {s Incorrect because reasonable assurance is a high, but not absolute, level of
assurance. It is not a guarantee that an audit conducted in accordance with ISAs will always
detect a material misstatement whenever it exists; and misstatements can arise from fraud or
error which could be material.
(c)This statement Is partly correct in that auditor obtains understanding of control to assess risk
of material misstatement and to design audit procedures. However, auditor does not express
opinion on effectiveness of entity's internal control.
(d) This statement is correct but incomplete. Description of auditor's responsibilities may also 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 on a website of an appropriate authority, where law, regulation or national auditing
standards expressly permit the auditor to do so, in which case the auditor's report shall
include a specific reference to the location of such a description.
(e) This statement is wrong. The auditor's signature is either in the name of the audit firm, or the
personal name of the auditor or both, as appropriate.
(f) These statements are wrong.
 Key audit matters are determined from matters communicated to those charged with
governance, and not to management.
 In determination of key audit matters, auditor takes into account significant events or
transactions of current year only. Prior year events and transactions are not considered.
9 (a)
1. Management is still responsible for F/S even if provision is based on expert's advice.
2. It will be a scope limitation if management does not provide written representation.
3. Auditor shall express qualified opinion on F/S (if effect is material) or disclaimer of opinion (if
effect Is pervasive).
(b)
1. Management's point of view ts incorrect because contingent assets are disclosed only if they
are probable.
2. This is a misstatement in F/S.
3 Auditor shall express qualified opinion on financial statements (if effect is material) or adverse
opinion (If effect is pervasive) Auditor shall also describe nature of misstatement In Basis for
Qualified/ Adverse Opinion paragraph.
10 (a)
1. This is a non-adjusting event because customer became bankrupt because of natural disaster
which is non adjusting.
2. Impairment loss is material as Rs. 150 million >6.25 million (= 125 million * 5%). Therefore, it
should be disclosed in F/S.
3. If disclosure is made in financial statements:
Auditor shall express unmodified opinion on financial statements. However, as this is a significant
subsequent event, auditor shall include emphasis of matter paragraph in his report.
4. If disclosure is not made in financial statements:
It will be a misstatement in financial statements. Auditor shall express Qualified Opinion on
(b)
1. There is no scope limitation as auditor has obtained evidence from alternative procedures,
2. Auditor shall express unmodified opinion on financial statements.
3. However, auditor shall state in report that “proper books of account have NOT been kept by
the Company as required by the Companies Act, 2017 in respect of this matter”.
(c)
Auditor shall state in report that “Zakat deductible at source under the Zakat and Ushr Ordinance
Rs. 22,000 was not deducted by the company. However, it was deposited by company
subsequently in Central Zakat Fund”.
11 (a)
4. This is scope limitation.
5. Auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect
is pervasive).
6. Auditor shall also state in report that “proper books of account have NOT been kept by the
Company as require by the Companies Act, 2017 in respect of this matter”.
(b)
 This is a change in estimate (not a change in accounting policy).
 If change in estimate is appropriately disclosed and recorded, auditor shall express
unmodified opinion on F/S.
 If change in estimate is not appropriately disclosed and recorded, this will be a
misstatement. Auditor shall express qualified opinion on F/S (if effect is material) or
adverse opinion (if effect is pervasive).
(c)
2. Auditor shall include Other Matter Paragraph in his report to communicate that prior period
were audited by the predecessor auditor who express unmodified opinion.
12 a) Views:
 If revaluation model is used, IFRSs require to revalue entire class of assets.
 Selective revaluation is a misstatement. Management should be asked either to revalue
entire class.
 Effect is material as Rs. 10 million > Rs. 1,000,000 (20,000,000 * 5%)
Impact on Audit Report:
 if company returns to Cost basis, auditor shall express unmodified opinion.
 If company revalues all assets, auditor shall express unmodified opinion. However,
matter shall be discussed in “Key Audit Matter” Section of audit report.
 If company continues to use selective revaluation, auditor shall express Qualified
Opinion.
b) Views
 There is a contradiction between evidence from different sources.
 Auditor should perform further audit precedures to resolve this inconsistency.
 If it is probable that company will have to pay any damages, a provision should be
recorded for probable outflow and disclosure should be given for amount not probable
to be paid.
 If provision is not recorded or disclosure is not included in financial statements, it will be
a misstatement.
 Effect is material as Rs. 10 million > Rs. 1,000,000 (20,000,000 * 5%)
If provision is not recorded or disclosure is not included, auditor shall express Qualified opinion
(c) Views:
 Management's point of view that amount of warranty cannot be measured reliably is
incorrect.
 It is management's responsibility to make reasonable estimates in preparation of F/S.
 Not recording provision for warranty Is a misstatement.

Auditor shall express qualified opinion on financial statements (if effect is material) or adverse
opinion (if effect is pervasive). Auditor shall also describe nature of misstatement in Basis for
Qualified/Adverse Opinion section.
Auditor shall express Qualified Opinion (if effect is material), or Adverse Opinion (if effect is
pervasive).
(d) Views:
 An Unlisted company fs not required to disclose EPS.
 There is no misstatement in F/S if EPs is not disclosed.
Auditor shall express unmodified opinion on F/S.
13 i)
1. This is a misstatement in F/S, because bank guarantee fs a non-adjusting event which should
be disclosed in F/S
2. Auditor shall express Qualified Opinion (if effect is material) or Adverse Opinion (if effect is
pervasive) on financial statements.
ii)
Auditor shall state in his report that “Zakat deductible at source under the Zakat and Ushr
Ordinance was deducted by the company and deposited in the Central Zakat Fund”.
iii)
1. This is a misstatement in F/S because bankruptcy of debtors after year end is an adjusting
event. Disclosure {s not a substitute of correct accounting treatment.
2. Auditor shall express Qualified Opinion (if effect is material) or Adverse Opinion (if effect is
pervasive) on financial statements.
iv)
1. Both of these cases are change in accounting estimates.
2. If changes in estimates are reasonable, and correctly recorded and disclosed, there will be no
misstatement.
14 i)
 This is a misstatement in F/S.
 Effect is immaterial, as Rs. 500,000 million < Rs. 3,700,000 (=74,000,000 * 5%).
 Auditor shall express unmodified opinion on F/S.
ii)
 Effect is material, as Rs. 5,200,000 (79,200,000 - 74,000,000) > Rs. 3,700,000
(=74,000,000 * 5%).
 Auditor shall express Qualified opinion on F/S.
iii)
 This is an event/condition which Is indication of going concern problem.
 As difficult situation will arise after twelve months, there is no need to include “Going
Concern relating to Material Uncertainty” paragraph in audit report.
iv)
 This is a weakness in Internal control.
 It does not affect audit report.
 Auditor shall express Qualified Opinion (if effect {s material), or Adverse Opinion (if
effect is pervasive.
 Auditor shall also explain nature of misstatement in “Basis for Opinion” section in Audit
Report.
15  There is no misstatement in financial statements.
 Auditor shall express unmodified opinion.
 However, considering complexity and subjectivity involved in the matter, auditor may
Include it as a “Key Audit Matter” In his report.
16  There is a scope limitation.
 Auditor shall express Qualified Opinion (if effect is material), or Disclaimer of Opinion (if
 Auditor shall include Other Matter Paragraph in his report to communicate that prior
period were audited by the predecessor auditor.
17  Subsequent decision of legal case {s an adjusting event (whether against or in favor).
 If management does not reverse the provision, this will be misstatement in F/S.
 Auditor shall express Qualified Opinion (if effect is material), or Adverse Opinion (if effect
is pervasive).
18 i)
 This is a Misstatement.
 Auditor shall express Qualified opinion (if effect {s material), or Adverse opinion (if effect
is pervasive).
(ii)
 Auditor shall express unmodified opinion.
 Auditor shall include “Material uncertainty relating to going concern” paragraph in
report if there is material uncertainty relating to going concern which is adequately
disclosed in financial statements.
(iii)
 This is a Scope limitation.
 Auditor shall express Qualified Opinion (if effect is material), or Disclaimer of opinion (if
(iv)

This is a Misstatement.

Auditor shall express Qualified opinion (if effect is material), or Adverse opinion (if effect
is pervasive).
19 Company A:
Suggestion to Company:
This is an adjusting event. Management should record provision for bad debt in F/S.
Type of opinion if management does not agree with suggestion:
1. This will be a misstatement in F/S.
2. Auditor shall express qualified opinion on financial statements (if effect is material) or adverse
opinion (if effect is pervasive).
Company B:
This s a non-adjusting event requiring disclosure. Management should disclose it in F/S.
1. This will be a misstatement in F/S.
2. Auditor shall express qualified opinion on financial statements (if effect is material) or
adverse opinion (if effect is pervasive),
Company C:
Management should be requested to provide details of sales either before 4% of January (data
may also be provided electronically) or date of audit report should be extended until details are
received.
1. This will be a scope limitation.
disclaimer of opinion (if effect is pervasive).
20 a) This is a misstatement in F/S. Auditor shall express Qualified Opinion (if effect is material) or
Adverse Opinion (If effect is pervasive).
(b) Unmodified Opinion.
However, auditor shall also include Other Matter Paragraph in his report to communicate that
prior period were audited by the predecessor auditor who express unmodified opinion.
(c) This is a misstatement in F/S. Auditor shall express Qualified Opinion (if effect is material)
21 (a) There is no issue in this situation. Key Audit Matters can be included In Audit Report, even if
Adverse Opinion is expressed. However, in such case adverse opinion will be because of different
matter and Key Audit Matter will be because of different matter.
(b) This treatment Is incorrect. If a matter requires modification in opinion, then it should be
discussed in basis for modified opinion and not in key audit matter section.
(c) There {s no issue in this situation. Auditor is required to communicate only those matters as
Key Audit Matters which significantly affect current year’s financial statements. Therefore, non-
inclusion of Key Audit Matters of prior period is appropriate.
22 1. This matter should be discussed in “Material Uncertainty relating to going concern” instead of
“Emphasis of Matter “paragraph.
2. A reference to the notes to the accounts should be given which fully describe this event.
3. Phrase “Our opinion is not modified in respect of this matter.” is missing.
23 b) Discussion of Significant Matters:
There are two issues:
o Provision for bad debts due to dispute with major debtor.
o Loss of major customer creates doubt on going concern.
 Auditor shall perform appropriate procedures to determine appropriate amount of provision
for bad debts e.g.
o Reading correspondence between ZTL and SEL. o Confirm the updated status of the case
from legal counsel.
o Check Cash received from SEL after the year. ° Effect is material as amount of receivable
Rs. 3.12 million {s greater than materiality level Rs. 1.25 million (25 million * 5%).
 If appropriate amount of provision {s recorded, auditor shall express unmodified opinion on
financial Statements. However, auditor shall include “material uncertainty relating to going
concern” paragraph in his report.
 If appropriate amount {is not recorded, this will be misstatement in F/S. Auditor shall express
Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive).
(b) Discussion of Significant Matter:
 There is a material inconsistency between directors’ report and financial statements.

Auditor shall discuss the matter with management, and request management to amend
directors’ report.
 If management does not correct Other Information, there is no misstatement in F/S.
Auditor shall express unmodified opinion on F/S.
 However, auditor shall mention in ‘Information Other than the Financial Statements and
Auditor's Report Thereon’ that relevant information In directors’ report is misstated.
c) Discussion of Significant Matters:
As plan to close factories have been announced publically, there is a constructive obligation of
company and provision for redundancies and restructuring should be recorded for two factories.
Provision should not be recorded for third factory, because company has not identified yet which
third factory would be closed, However, this decision should be disclosed in F/S.
Effect is material as amount of receivable Rs. 30 million is greater than materiality level Rs. 4
million (80 million * 5%).
Impact oy audit Report:
 If the provision relates to two factories, there is no misstatement in F/S. Auditor shall express
unmodified opinion.
 If the provision relates to three factories, auditor shall ask management to reverse the
provision for third factory. If provision is not reversed, this will be a misstatement. Auditor
shall express Qualified Opinion on F /S.
24 Discussion of matter and Its significance:
 This Is an indication that plant may have been impaired due to physical damage by fire.
Management should test and record impairment loss.
 Effect is material as expected impairment loss Rs. 15 million (i.e. 50 million * 30%) is greater
than materiality level Rs. 0.6 million (12 million * 5%).
Implication for report:
If management does not test and record impairment loss:
 This will be a misstatement.
 Auditor shall express qualified opinion on financial statements.
If management records impairment loss,
 Auditor shall express unmodified opinion on financial statements.
 However, auditor shail include Emphasis of Matter paragraph in his report to draw users’
attention towards the major disaster significantly affects entity's financial position.
(ii) Discussion of matter and its significance:
 This Is a pending litigation, whose outcome cannot be measured reliability. Management
should disclose it in F/S.
 Effect is material as Rs 10 million > Rs. 06 million (= 12 million * 5%)
Implication for report:

 If matter is disclosed in financial statements auditor shall express unmodified opinion on
However, auditor shall include Emphasis of Matter paragraph in his report.
 If matter is not disclosed in the financial statements this is a misstatement in financial
statements Auditor express Qualified Opinion on financial statements.
25  This is a case of exceptional litigation whose outcome cannot be measured reliably.
 It should be disclosed in financial statements (no provision is required).
 As matter is fully disclosed in financial statements, there is no misstatement. Auditor

shall express unmodified opinion on financial statements.
 Auditor shall also include emphasis of matter paragraph in his report to draw users’
attend 9 to exceptional litigation.
26 i. Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive).
ii. Unmodified Opinion. Matter should be discussed as Key Audit Matter in report.
iii. Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive)
Auditor shall also include “Other matter paragraph”.
iv. Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive)
v. Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive)
vi. Unmodified opinion. Auditor shall also include “Material uncertainty relating to Going
Concern”
vii. Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive)
viii. Disclaimer of Opinion (because effect is likely to be pervasive as it would affect ensure
financial statements, almost all account balances included therein).
ix. Unmodified Opinion. Auditor shall also include “Other matter paragraph”.
x. Qualified Opinion (if effect is material).
xi. Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive)
xii. Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive)
xiii. Disclaimer of opinion.
27 1. Report does not state which auditing standards are used Phrase “as applicable in Pakistan”
should be added to auditing standards.
2. Auditor is responsible to assess “significant” estimates, and not “all” estimates
3. Audit 1s planned and performed to obtain all information and explanation which is necessary
for the purpose of audit. Responsibility to obtain evidence is not limited/reduced by time
availability
4. Auditor provides reasonable assurance on financial statements and does not “confirm
certify” or guarantee” about financial statements.
5. Directors’ liabilities are stated in a separate paragraph; and are not included in auditor s
responsibility paragraph.
6. Auditor cannot limit its liability by stating that it cannot accept responsibility for any error.
7. Auditor evaluates presentation of financial statements; and not presentation of whole
annual report.
8. First sentence of the auditor's responsibility is wrongly given under this heating; it should
have been classified under the basis of opinion section of the report.
9. Heading should be “Auditor's Responsibilities for the Audit of the Financial Statements”
instead of “Auditor’s Responsibility”.
28 2. Audit report should be addressed to “Members”, instead of Directors.
3. In the opinion paragraph, “Cash flow statement” has been omitted from complete set of F/S
4. Al-Badr & Company is a listed company, but Key Audit Matter section is not included in audit
report
5. In the basis for opinion, words “as applicable in Pakistan” should have been added after the
statement that “we conducted our audit in accordance with ISAs”.
6. In auditor's responsibility section, responsibility to evaluate accounting policies and
estimates has been omitted.
7. In the “Report on Other Legal and Regulatory Requirements” section, opinion whether
“proper books of Coney have been kept by the Company as required by the Companies Act”
is omitted.
8. Name of engagement partner is not mentioned.

29 1. In the first line, auditor should state “we have audited”, instead of “we have reviewed”.
2. In the first line, all components of financial statements should be identified i.e. statement of
financial Position statement of comprehensive income, the statement of changes in equity,
the statement of cash flows, and Notes to the financial statements.
3. Management is not responsible to express opinion on F/S. It is responsible to prepare F/S.
4. Auditor is not responsible to prepare F/S. He is responsible to express opinion on F/S.
5. Audit is conducted in accordance with all ISAs, not in accordance with significant ISAs.
6. Auditor obtains reasonable assurance, not maximum assurance.
7. Audit procedures are not based on last year’s working paper or audit senior’s knowledge.
Audit procedures are based on auditor's judgment and his risk assessment (considering
internal control).
8. Auditor considers internal control for risk assessment, and does NOT express opinion on
effectiveness of internal control.
9. Auditor examines significant estimates and policies, and NOT just new estimates and policies.
30 i)
Auditor shall express unmodified opinion on financial statements because there is no
misstatement or scope limitation on financial statements, However, auditor shall include
emphasis of matter paragraph in his report to draw users’ attention to the basis of preparation
and the note in the financial statements.
(ii)
There is a misstatement in financial statements. Effect is pervasive, as basis of preparation of
financial statements is not correct. Auditor shall express adverse opinion. Auditor shall explain
nature of misstatement in basis for adverse opinion section.
31 (a) What is meant by the going concern concept:
Going concern means entity has an ability to continue its operations in foreseeable future
(usually 12 months) and does not have intention or necessity to liquidate its operations.
Why auditor should consider whether a company Is a going concern:
ISA 570 requires auditor to obtain sufficient appropriate audit evidence about the
appropriateness of management's use of the going concern assumption. ISA 570 also requires
auditor to conclude whether there is a material uncertainty about the entity's ability to continue
as a going concern.
If going concern assumption is not appropriate, it may have implications on both financial
statements and audit report e.g. financial statements may have to be prepared on alternative
basis (i.e. liquidation or break up basis) auditor should emphasize this in his report.
If there is going concern uncertainty, financial statements should disclose it and auditor should
also emphasize it in his report.
(b)
Loss of major customer causing loss for the year:
Future revenue stream has been lost. This will have adverse impact on company’s ability to
generate cash in future.
Increased competition:
Company is losing its revenue to competitors. A tough competition may further cause company
to lose its customers and revenue.
Reducing profit margins due to high cost of fuels:
Company's profitability will further reduce in future.
Delaying payments to creditors:
Creditors may withdraw credit facilities and may change terms of transactions (e.g. from credit to
cash).
Overdraft facility is subject to review in September 2007:
Bank may not approve overdraft facility for next term, and company may not have sufficient cash
to pay it.
Loan installment falling due in October:
Lender may file petition to court to wind-up company.
Default in payment to HM Revenue & Customs:
HM Revenue & Customs may file petition to court to wind-up company if obligations not met as
agreed.
32 Extract 1:
 Name of each element of financial statements is not mentioned.
 Audit is conducted in accordance with all relevant ISAs, not in accordance with most of ISAs
Extract 2:
 Auditor obtains reasonable assurance, not maximum assurance.
 Auditor obtain assurance with financial statements are free from Material misstatements,
not from all misstatements.
Extract 3:
 Auditor does not have responsibility to prevent fraud and errors, or to detect all frauds and
errors. This is the responsibility of management.
 Auditor does not have responsibility to prepare financial statements. This is the responsibility
of management.
Extract 4:
 Procedures selected by auditor depend on his risk assessment and judgment. Procedures do
not depend on time and resources availability.
 Auditor does not express opinion on effectiveness of internal control.
Extract 5:
 It is Auditor's responsibility to evaluate overall presentation of financial statements
 Auditor considers reasonableness of significant estimates, not only of new estimates.
 It is Auditor’s responsibility to review appropriateness of accounting policies.
 Use of work of expert is not mentioned in auditor's report.
33 Audit report should be dated when auditor has obtained sufficient appropriate evidence,
including approval of F/S by directors. Therefore, auditor should date audit report on or after
March 07, 2019.
34 1. This is a case of misstatement.
2. Auditor shall request management to correct this misstatement.
3. If misstatement is corrected, auditor shall express unmodified opinion on financial
statements.
4. If misstatement is not corrected, auditor shall express Qualified opinion on financial
statements
Note: There will be no misstatement if Units of Production method of depreciation is used.
35 Yes.
This will be a misstatement.
36 (a)
 This is a scope limitation.
 Auditor shall express qualified opinion on financial statements.
 Auditor shall also include “other matter paragraph” as previous year’s financial statements
have been audited by another auditor.
(b)
Bankruptcy of bank after B/S date is an adjusting event. Provision should be recorded for
estimated amount of bad debt (i.e. 80% of cost).
If management does not adjust this event:
 Auditor shall express Qualified Opinion on financial statements.
(c)
 This is a change in accounting policy.
 There is no misstatement If change is appropriately accounted for retrospectively, and
disclosed.
 Auditor may include it as “Key Audit Matter” in his report.
(d)
1. This is a misstatement in financial statements.
2. Auditor shall express qualified opinion on financial statements.
37 (a)
This is a non-adjusting event requiring disclosure. There is no misstatement as management has
disclosed this in F/S Auditor shall express unmodified opinion on F/S.
However, there are events and conditions casting doubts on entity’s ability shall include
“Material Uncertainty Related to Going Concern” paragraph in his report to:
 Draw user's attention to note that discloses the events/conditions.
 State that these events/conditions indicate that material uncertainty exists.
 Auditor's opinion is not modified in respect of this matter.
(b)
1. This is a scope limitation.
disclaimer of opinion (if effect is pervasive).
38  This is a scope limitation
 Effect is likely to be pervasive as whole of the record Is destroyed.
 Auditor shall express disclaimer of opinion on F/S.
 Auditor shall also state in report that proper books of accounts have not been kept as requ
red by Companies Act 2017.
39 (i) ISAs require that date of audit report should not be earlier than the date on which auditor
obtains sufficient appropriate evidence on which his report is based. As written representations
are a necessary piece of audit evidence therefore audit report should not be signed before
receiving representation letter.
(ii) Auditor shall include Other Matter paragraph in his report. The Other Matter paragraph
should contain a statement that the financial statements of the prior period were audited by the
predecessor auditor, the type of opinion expressed (along with reason for modification if opinion
was modified), and the date of that opinion.
40 a) Auditor should obtain confirmation from lawyer about expected outcome.
 Auditor should ask management to record provision (if outflow is probable), or disclose
(if outflow is not probable or is uncertain)
 This will be misstatement if not management does not record or disclose it as

appropriate.
 Auditor shall express Qualified Opinion (if effect is material), or Adverse Opinion (if effect
is pervasive).
(b)
Investment should be recorded at market value. If management does not record it at market
value, it will be a misstatement and auditor shall express Qualified Opinion on F/S.
(c)
This is a misstatement. Auditor shall express Qualified Opinion on F/S.
41 a) If there is inconsistency, auditor shall discuss with management and investigate which
information is correct.
 If financial statements are incorrect and supplementary information is correct, this will
be a misstatement Auditor shall express qualified or adverse opinion.
 If financial statements are correct and supplementary information is incorrect, auditor
shall express unmodified opinion. However, he shall include in the auditor's report an
‘Information Other than the Financial Statements and Auditor’s Report Thereon’
describing the inconsistency.
(b) Bankruptcy of customer after B/S date is an adjusting event. There is no need to record
inventory at NRV, as NRV of inventory (15.7 million) is more than its cost (13.9 million).
 Effect is material i.e. Rs. 9,600,000 > Rs. 8,500,000 (85,000,000 * 10%).
42 (i)
Effect on Financial Statements:
Bankruptcy of customer after B/S date is an adjusting event. Debtors and Profit before tax should
be reduced by the amount not recoverable from debtor.
Effect on Auditor’s Report:
 Effect is material i.e. Rs. 5.89 million > Rs. 1.505 million (30.1 million * 5%).
If management adjusts this event:
 There will be no misstatement. Auditor shall express unmodified opinion
 Auditor shall also include “material uncertainty relating to going concern” paragraph in
his report because of major customer (35% of firm's sales were to lost customer) is an
indicating of going concern problem.
(ii)
As it is not possible to estimate its outcome, no provision is to be recorded. Company should
disclose this litigation contingency in financial statements.
If management does not disclose this event:
 Effect could be material i.e. Rs. 10 million > Rs. 1,505 million (30.1 million * 5%).

If management discloses this event, auditor shall express unmodified opinion with Emphasis of
Matter Paragraph.
(iii)
Repair & Maintenance expense of Rs. 1.1 million should be excluded from carrying value of
property, plant and equipment and should be recognized as expense in profit and loss account.
If management does not record repair as expense:
 Effect is immaterial, as Rs. 1.1 million < Rs. 1.505 million (30.1 million * 5%).
43 (a)
If revaluation model is adopted, IFRSs require to revalue entire class of an asset. Company has
not made revaluation of remaining 5 property, which is a misstatement in F/S. All properties
should be stated at revalued amount.
If management does not revalue entire class of properties, auditor shall express Qualified
Opinion (if effect is material) or Adverse Opinion (if effect Is pervasive).
(b) Significant Matters to be considered:
Whether company has changed accounting policy in accordance with AFRF.
It accounting policy has been changed in accordance with AFRF:
 There is no misstatement.
 Auditor shall express unmodified opinion on F/S.,
 Auditor may discuss this matter in Key Audit Matter section in audit report.
If accounting policy has NOT been changed in accordance with AFRF:
 This will be a misstatement in F/S.
 Auditor shall express Qualified Opinion (if effect is material), or Adverse opinion (if effect
is pervasive).
44 Evaluation of Situation:
 This disclosure is required by IFRS.
 Auditor should communicate this to TCWG and should request them to correct it.
 If disclosures not included, this will be a misstatement in F/S.
Implication on Audit Report:
 If disclosure not included in F/S, auditor shall express Qualified Opinion (if effect is
material), or Adverse Opinion (if effect is pervasive).
 If disclosures is included in F/S, auditor may include this matter in “Key Audit Matter”
section in audit report.
45 a)
1.This is a misstatement in financial statements because. IFRSs require that all expenses on the
launch of new product should be expensed out in profit and loss account.
2. Auditor shall express Qualified Opinion on financial statements (as effect 1s material but not
pervasive) Auditor also describe nature of misstatement in Basis for Qualified Opinion Section.
(b)
1. This is a misstatement in financial statements because IFRSs require that all related party
transaction should be disclosed separately in financial statements.
2. Auditor shall express Qualified Opinion (if effect is material) or Adverse opinion (if effect is
pervasive) on financial statements. Auditor shall also describe nature of misstatement in Basis for
Qualified/Adverse Opinion Section.
46 i) Actions:
IFRSs require to capitalize all borrowing cost on qualifying assets.
Management should be requested to capitalize 15 million.
Implications on Report:
If management does not capitalize 15 million, this will be a misstatement.
Effect is material, Rs. 15 million > 5.75 million (= 5% * 115). Auditor shall express Qualified
opinion on financial statements.
ii) Actions:
IFRSs require that a provision should be recorded if outflow is probable and measurable,
otherwise it should be disclosed as contingent liability.
Auditor should request management to record provision for 10 million and disclose 25 million in
notes.
If management records provision and make disclosure, auditor shall express unmodified opinion.
However, auditor shall include Emphasis of Matter paragraph to draw users’ attention towards
disclosure. If management does not record provision or make disclosure, it shall be
misstatement. Effect is material, Rs. 10 million > 5.75 million (= 5% * 115). Auditor shall express
Qualified opinion on financial statements
iii) Actions:
This is an inconsistency between Directors’ report (i.e. Other Information) and financial
statements. If there is Misstatement in Other Information, auditor shall request management to
correct other information.
If Other Information is not corrected, auditor shall express unmodified opinion on F/S. However,
auditor shall State in “Information Other than the Financial Statements and Auditor’s Report
Thereon” Section that other information is materially misstated.
47 Audit junior’s suggestion is not correct. Not disclosing related party transaction is a
misstatement. Emphasis of Matter paragraph is not a substitute of correct accounting treatment.
As related party transactions are qualitatively material, auditor shall express Qualified Opinion
48 Auditor shall express unmodified opinion on financial statements, as the matter is disclosed in
financial statements. However, to draw users’ attention, auditor shall include Emphasis of Matter
paragraph in his report.
49 (a)
How to deal with the matter:
This is a condition casting doubt on entity’s ability to continue as going concern. Auditor shall
perform procedures to confirm whether going concern assumption is appropriate or material
uncertainty exists.
 If material uncertainty exists, auditor should request management to disclose it in notes
to financial statements.
 If Going concern assumption is not appropriate, auditor should request management to
prepare financial statements on alternate basis.
Modification in report:
If material uncertainty exists:
 If management discloses it in financial statements, auditor shall add paragraph “Material

Uncertainty relating to Going Concern” in his report to draw users’ attention.
 If management does NOT disclose it in financial statements, it will be a misstatement and
auditor shall express Qualified Opinion (if effect is material), or Adverse Opinion (if effect
is pervasive).
If Going concern assumption is not appropriate:
 If management prepares financial statements on alternate basis, auditor shall express
unmodified opinion on financial statements and shall also add Emphasis of Matter
Paragraph in his report to draw users’ attention to alternate basis.
 If management prepares financial statements on going concern basis, this shall be a
misstatement and auditor shall express Adverse opinion
b)
This is a related party transaction which should be disclosed by management in financial
statements.
If management does not disclose it, this will be a misstatement and auditor shall express
Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive).
50 (a)
If a revaluation model is adopted, IFRSs require to revalue entire class of assets. Auditor should
request management to either:
 Make available revaluation report of entire class of assets by the end of audit, or
 Reverse the valuation and adopt Cost Model.
Matter is material as amount of revaluation recorded Rs. 70 million > 3.75 million (= 1% * 375)
 If management revalues entire class, auditor shall express unmodified opinion. However,
matter may be discussed in “Key Audit Matter” Section.
 If management does not revalue entire class of assets, this will be a misstatement and
auditor shall express Qualified Opinion on financial statements.
(b)
Matters of Significance:
IFRSs require to expense out marketing expenses on launch of new products. Matter is material
as amount of expenses recorded Rs. 10 million > 3.75 million (= 1% * 375)
If management does not make adjustment, this will be a misstatement and auditor shall express
Qualified Opinion on financial statements.
51 Decision of the audit senior
Decision of the audit senior regarding reversal of the provision is correct because legal counsel is
of the view that there is remote possibility for adverse decision. However, as the matter is
material (i.e. 30 million is greater than materiality level determined using rule of thumb 7.25
million = 145 * 5%), but not likely to be pervasive as it does not affect substantial portion of
financial statements, therefore, auditor should express qualified opinion instead of adverse
opinion on financial Statements.
Shortcomings in audit Report:
1. A reference of notes to the accounts should have been made where details regarding
provision can be found
2. Management’s view Is given in the audit report, whereas, it should be excluded from the
report and should be included in notes to the accounts.
3. Basis tor opinion” and “opinion” both are given in the same paragraph. They should he
separated.
4. Quantification of financial effect is not made completely e.g. effect on income tax, net
income and equity has not been mentioned.
5. Words “in our opinion” are omitted from opinion section.
6. Auditor should express qualified opinion, instead of adverse opinion on financial
statements.(as discussed above).
52 Adverse Opinion:
While drafting opinion, auditor has used wording of Qualified opinion instead of Adverse
opinion.
Basis for Adverse Opinion:
 Auditor obtains persuasive evidence, NOT conclusive evidence.
 Auditor report does not include management's arguments. Therefore, reference of CFO's
argument should not be included.
 Financial effect of misstatement has not been completely discussed. This misstatement
would also affect depreciation expense.
 In audit report, full title of IAS/IFRS should be mentioned, instead of only number.
Emphasis of Matter Paragraph:
Inclusion of Emphasis of Matter for early adoption is correct, however, if certain disclosures have
not been included then this would be a misstatement which should be included in basis for
modified opinion paragraph.
53 Qualified Opinion:
section of our report, the balance sheet, profit and loss account, ......... give a true and fair view
of ………..
Basis for Qualified Opinion:
Management has not recorded provision for bad debts on a bankrupt debtor, which is a
departure from IFRS. Had management recorded the provision for bad debts, debtors would
have been reduced by xxx, and income tax, net income and shareholders’ equity would have
been reduced by xxx, xxx and xxx, respectively.
54 Evaluation of situation:
 Company has breached debt covenants at year end, therefore this debt should be
classified as current, because bank may recall loan any time if conditions are breached.
 Confirmation of bank not to demand loan after year end, is a non-adjusting event.
 If management does not classify the loan as current liability, it will be a misstatement in
financial statements rafting of modification.
Drafting of Modification:
Qualified Opinion:
section of our report, the balance sheet, profit and loss account, ......... give a true and fair view
of……….
Basis for Qualified Opinion:
The debt covenants of the loans as at 30 June 20XX have been breached by the company.
Accordingly, the long term loans reflected in the statement of financial position of the company
amounting to Rs. XXX million should have been classified as “current liabilities” as the terms of
the loan require immediate repayment of loan in case of breach of debt covenants.
55 (i)
Financial statements should adequately disclose the events and conditions casting doubt on
going concern (along with plans and actions taken).
(ii)
Financial statements should be prepared on break up basis, and basis of preparation of financial
statements should be adequately disclosed in financial statements. [n preparing financial
statements on break up basis:
 Assets and liabilities should be reclassified as current.
 Assets will be recorded at recoverable amount.
 Additional liabilities for losses/redundancies may arise.
56 Pollen pic (Pollen)
1. Regulatory action pending against company fs a significant uncertainty which requires
disclosure in financial statements (not a misstatement if it is adequately disclosed in financial
statements).
3. Suspension of license casts doubt on entity's ability to continue as going concern as 65% of
firm's annual revenue is lost. Auditor shall include a separate section in audit report with heading
"Material uncertainty related to Going Concern" to:
 Draw attention to the note in the financial statements that discloses the matters; and
 State that these events or conditions indicate that a material uncertainty exists that may
cast significant doubt on the entity’s ability to continue as a going concern and
 State that auditor’s opinion is not modified in respect of the matter.
Bloome plc (Bloome)
1. This is a misstatement in financial statements because management has not recorded
depreciation which is required by IFRS.
2. Effect is material as amount of misstatement 140,000 (£2.8 million/10 * %) is greater than
materiality level determined using rule of thumb 65,000 (1,300,000 * 5%).
3. Auditor shall express qualified opinion on financial statements (as effect is material but not
pervasive). Auditor shall also describe nature of misstatement in Basis for Qualified Opinion.
57 Own labor capitalized:
 This is a scope limitation as time records are not available.
 Effect is material because amount of capitalization Rs. 1.5 million is greater than Rs.
850,000.
 Auditor shall express qualified opinion on F/S. Auditor shall also state in his report that
proper books of accounts have not been kept in respect of this matter.
(Student should note why this step is discussed in solution)
Unable to physically verify inventory:
 This is a scope limitation, if auditor is unable to obtain evidence from alternative
procedures, too.
 Matter is immaterial because amount of inventory Rs. 150,000 million is less than Rs.
850,000.
 Auditor shall express unmodified opinion on F/S.
Dispute with customer:
 As outflow is probable and amount is measurable, provision should be recorded in F/S.
 This will be misstatement if company does not record it.
 Effect is material because amount of damages claimed Rs. 2 million is greater than Rs.
850,000.
 Auditor shall express qualified opinion on F/S.
(Student should note why this step is discussed in solution) ‘
58 a)
 This is a misstatement in F/S, if inventory is not recorded at actual amount
 Auditor shall express Qualified Opinion on F/S.
b)
 As company has breached law, provision for fine should be recorded.
 This is a misstatement in F/S if provision is not recorded.
 Effect is maternal because amount of fine Rs. 1 000,000 million is greater than Rs 500
000 (= 10,000,000 * 5%)
c)
 There is no indication of impairment (and assets are also new), impairment testing is not
required Audit express unmodified opinion.
 However, if there is an indication and management does not test fixed assets for
impairment, this misstatement in F/S. Auditor shall express Qualified Opinion (if effect is
material) or Adverse Opinion is pervasive).
d)
 This is scope limitation, if auditor is unable to obtain evidence from alternative
procedures.
e)
 This is a change in estimate. There is no misstatement in F/S, because both methods are
allowed by IFRS Auditor shall express unmodified opinion on F/S.
59 a)
 This is a misstatement in F/S, because time barred sales tax should NOT be recorded as
refundable.
 Effect is material because amount of misstatement Rs. 8,000,000 million is greater than
Rs. 1500 dx - 30,000,000 * 5%).
b)
 This is a change in estimate. There is no misstatement in F/S, because both methods are
allowed by IFRS.
60 Subsequent bankruptcy of a debtor is an adjusting event. Provision for bad debts (or write-off) of
Rs. 25 000 000 should be recorded in F/S.
61 i)
 This is a material uncertainty relating to litigation against company, which should be
disclosed in F/S.
 This is a misstatement as management has not disclosed it in F/S.
 Auditor shall express Qualified opinion on F/S.
(ii)
Bankruptcy of a debtor after the B/S date is an adjusting event. Provision for bad debts (or write-
off) of Rs. 300,000 should be recorded in F/S.
Effect is material because amount of misstatement Rs. 300,000 million is greater than Rs.
150,000 (= 3.000 08 5%).
Auditor shall express Qualified Opinion on F/S.
(iii)
Auditor shall include “Material Uncertainty relating to Going Concern” Paragraph in audit report
to draw users’ attention towards this matter.
(iv)
 This is scope limitation; as sufficient appropriate evidence is not available to confirm
inventory.
 Effect is material as amount of inventory Rs. 3,500,000 million is greater than materiality
level 875,000 (17.5 million * 5%)
(v)
 This is scope limitation.
 Auditor shall express Qualified Opinion (if effect is material) or Disclaimer of Opinion (if
effect is pervasive)
 Auditor shall also state in his report that proper books of accounts have not been kept in
respect of this matter.
62 Sr. # Conclusion
i. Management representation shall be obtained.
Auditor is required to obtain written representation from Management that all events
subsequent to the date of financial statements, have been adjusted or disclosed.
ii. Management representation shall not be obtained.
Auditor should obtain evidence from supporting documents e.g. inspection of sale
invoice, reading of sale agreement inspection of request of customer, or direct
confirmation from customer.
iii. Management representation shall not be obtained.
This event is a violation of accounting policy and is a misstatement.
iv. Management representation shall be obtained. Auditor is required to obtain written
representation from Management that all known actual or possible litigation and
claims have been disclosed to the auditor, and have been accounted for and disclosed
in accordance with AFRF,
63 Audit report is signed on the date when sufficient appropriate audit evidence has been obtained,
including written representation. Auditor is required to obtain written representation regarding
related parties; therefore, audit report should not be signed unless the written representation
has been received.
If management does not provide the written representation, it will be a scope limitation by
management. Auditor shall express qualified opinion (if effect is material) or disclaimer of
opinion (if effect is pervasive). Further, auditor shall also evaluate integrity of management and
risk assessment.
64 Appropriateness of management representation:
Auditor is required to obtain representation from management that management has disclosed
to auditor noncompliance or suspected non-compliance with laws and regulations which may
affect financial statements. Therefore, management's representation is appropriate in this case.
How to deal with the situation:
Management's representation is inconsistence with other audit evidence.

1. The auditor shall discuss the matter with management, may revise risk and, shall perform
further procedures to resolve the matter.
2. if matter remains unresolved, auditor shall re-assess competence, integrity of management
and its effect on reliability of representations and other evidence (in general).
3. if auditor has serious concern about integrity of management, he may consider withdrawal
from audit.
65 (a) No. Representation regarding revaluation of property, plant and equipment is not included in
representation letter.
(b) Yes. Auditor is required to obtain written representation from Management that all related
party relationships and transactions (of which management is aware)
 have been disclosed to the auditor, and
 have been accounted for and disclosed in accordance with AFRF.
(c) No. Representations are not appropriate in case of misstatements, or scope limitation.
66 Lion’s Roar:
ISAs require auditor to obtain written representation from Management that all known actual or
possible litigation and claims:
 have been disclosed to the auditor, and
 have been accounted for and disclosed in accordance with AFRF.
Therefore, it is required to obtain written representation from management in respect of this
matter.
Depreciation
ISAs require auditor to obtain representation from Management that significant assumptions
and accounting estimates are reasonable.
This matter does not seem significant because: « Depreciation rate and method is consistent
with prior period and industry, and s There are no significant profit or losses on disposals which
indicate depreciation is not appropriate.
Therefore, this matter may not be included in representation letter.
67 This arrangement is not acceptable, because auditor can sign audit report only when sufficient
appropriate audit evidence has been obtained. Representation Letter is required evidence to be
obtained from client. Verbal representations are not substitute of written representations to be
obtained. Therefore, partner should sign report only after receiving representation letter from
client.
68 (a)
Receivable balance owing from yellow mix Co
(i)
Written representation is a form of internal evidence. Its reliability is also affected by the
competence and integrity of management. Therefore, it is weak evidence as compared to
confirmation which is more reliable as it is written, external and directly received by auditor.
Therefore, written representation is not appropriate in this case. Auditor should obtain other
evidence which is expected to exist, to verify this balance,
(ii)
1. Discuss with management the reason of refusal to send confirmation letter. Consider impact
on report if reason of-not sending confirmation letter is not acceptable.
2. Review if any cash have been received subsequent to the year. Also inspect sales
documentation (e.g. sales order, goods dispatch note, acknowledgement by customer).
3. Review correspondence of client with customer, to check reason for non-payment. If any
litigation is involved, check documentation related to litigation. Also estimate a reasonable
amount of provision. Consider impact on report if management does not record a reasonable
amount of provision.
Warranty provision
(i) ae Written representation in this case is appropriate, because ISAs require auditor to obtain
written representation from management that significant assumptions and accounting estimates
in financial statements are reasonable.
(ii)
1. Compare the amount of provision in current year with amount of actual claims by customers
in Subsequent period to assess reasonableness of the provision.
2. Check historical accuracy of the provision in previous years.
3. Inspect board minutes to assess whether any changes in calculation of provision are required.
4. Compare the estimates with industry (if practicable) to ensure consistency of estimates with
industry.
(b)
If management refuses to provide written representation to auditor, auditor shall discuss the
matter with management and shall inquire reason for refusal. Auditor shall try to convince
management to provide representation.
If representation is still not provided:
1. Auditor shall:
 Re-evaluate integrity of management and consequently revise risk of material
misstatement, including risk of fraud.
 Take appropriate actions, including considering effect on other audit procedures
(including other representations and evidence provided by management).
 If auditor has serious concerns about integrity of management, consider
withdrawing from the audit.
2. Not providing representation is a scope limitation. Auditor may express qualified opinion (if
possible, effect is material) or disclaimer of opinion (if possible, effect is pervasive).
69 If a representation has been provided by management, auditor has to consider its reliability by
evaluating:
1. Competence, and integrity of management, and
2. Whether representation is consistent with other evidence.
Even if representation Is reliable, auditor performs procedures to obtain other evidence which Is
expected to exist.
70 (a) No. Auditor should also obtain other evidence which Is expected to exist.
(b) When obtaining evidence about intentions, plans and judgments, auditor may also consider
one or more of following:
> Entity’s Past History in carrying out its intentions
> Entity’s Ability to pursue a specific course of action
> Entity’s Reason for choosing a particular course of action
> Information inconsistent with entity’s representation (e.g. subsequent events)
(c) In this situation, auditor has come to know an information which is inconsistent with entity's
representation 50 reliability of representation is in doubt now. Auditor should perform
procedures to resolve the matter i.e. discuss with management whether the news in media '
correct, and inquire reason of change in decision. 1. If necessity to dispose the investment arose
after the year end, this will be a non-adjusting event. 2. If circumstances show at balance sheet
date and company may not be able to hold investment for long period: a. It should be adjusting
event. Investment should be classified as Current Asset. its b. Further, due to misrepresentation,
auditor shall re-assess competence, integrity of management and effect on reliability of

representations and other evidence (in general).
71 (a) Written representations should be obtained after all other work has been completed and
should be dated as near as possible to the date of auditor's report. Therefore, auditor should
request management to sign representation letter on the day when all work is completed i.e.
March 15, 2013 to update representations obtained during audit
(b) This event should have been adjusted in financial statements. Auditor should ask
management to revise the financial statements and should issue new auditor's report on revised
(Note for Students: Further course of action depends on whether management agrees to amend
F/S or not)
(c) Even if misstatements are immaterial and not indicative of frauds, auditor should not ignore
them He should accumulate uncorrected misstatements and should evaluate whether aggregate
effect as material or not. Even if aggregate of all misstatements is immaterial, auditor is still
required to communicate any uncorrected misstatements to management and obtain written
representation that aggregate effect of these misstatements is immaterial.
72
Sr. Conclusion
a required to be included in re presentation letter
b List is not required to be included in representation letter. However, representation
regarding disclosure of litigations to auditor, and appropriate disclosure/accounting in
FS shall be included in representation letter.
c shall not be included in representation letter.
d required to be included in representation letter.
e Not required by ISAs, but this is an appropriate to be included in representation letter if
auditor considers necessary.
f Not required by ISAs, but this is an appropriate to be included in representation letter if
auditor considers necessary.
g required to be included in representation letter.
h Not required by ISAs, but this is an appropriate to be included in re representation
letter if auditor considers necessary.
i required to be included in representation letter
j required to be included in representation letter
k shall not be included in re representation letter. (this will be scope limitation)
73 (a) As the planned merger is a management intention, so written representation is important
evidence on the above matter, and will be obtained. However, auditor should consider reliability
of such evidence by considering following:
> Entity’s Past History in carrying out its intentions
> Entity’s Ability to pursue a specific course of action
> Entity’s Reason for choosing a particular course of action
> Any other information which is consistent or inconsistent with entity's judgment and intention
(b) Examination of invoice to verify the cost of an asset is a necessary audit evidence, hence in
this case management representation cannot be accepted as audit evidence. Representations
cannot substitute the necessary evidence which is expected to exist.
Alternate audit procedures from which evidence could be obtained includes:
- inspecting a copy of the purchase invoice from the supplier;
- obtaining written confirmation from the supplier that Wild purchased the plant and equipment
- inspecting a copy of cheque given to the supplier, and/or

-tracing the payment of cheque into bank statement.
If auditor is still unable to obtain sufficient appropriate evidence, it will constitute scope
limitation and auditor should modify its opinion.
74 (i) Bankruptcy of debtor:
Need for amendment in financial statements:
Bankruptcy of debtors after the year due to destruction of its production facility is a non-
adjusting event as its Condition did not exist at balance sheet date.
An adjustment in financial statements is not required, however, it should be disclosed in financial
statements as it is a major debtor and significant non-adjusting event requires disclosure.
Audit Procedures to be performed:
1. For adequate disclosure purposes, discuss expected amount of loss with managements.
2. Inspect correspondence between company and its debtor (or his liquidate) regarding
recoverability of debt.
3. Evaluate whether any payments have been received from debtor subsequent to destruction of
production facility.
(ii) Sale of Inventory:
Need for amendment in financial statements:
Sale of inventory below cost after the year confirms its NRV at balance sheet date, and is an
adjusting event.
Inventory should be written down to NRV at 30 June, 2020.
Audit Procedures to be performed:
1. Discuss the basis of revised selling price with management.
2. Check sale agreements after the year, to confirm selling price of inventory.
3. Ensure inventory is corrected valued at lower of cost and NRV at balance sheet date.
75 (a)
(i)
 Sales return due to poor quality indicates that there was a manufacturing defect at time
of sale.
 This is an adjusting event, as there is indication that NRV of inventory may be less than
its cost.
 Management should reverse the sales and debtors in financial statements and should
record inventory at its net realizable value.
 If management does not record adjustment, it will be a misstatement in financial
statements.
 Impact is immaterial as Rs. 3 million is less than materiality level Rs. 8 million.
Note: Materiality is given in the question, therefore, there is no need to calculate it.
ii)
 This is a related party transaction, which is required to be disclosed in financial
statements.
 If management does not disclose this transaction in F/S, it will be a misstatement. s
Auditor shall express qualified opinion.
 Further, auditor may consider to include “Material Uncertainty relating to Going
Concern” if there is still uncertainty about going concern status of entity.
(iii)
 This is an adjusting event as subsequent bankruptcy of debtor usually confirms that

condition existed at balance sheet date.
 Management should record appropriate amount of further provision, which may be
required in this situation.
 if management does not record further provision, it will be a misstatement in F/S.
 impact is material as expected further provision Rs. 5.5 million (11 million - 11 * 50%
million) is greater materiality level Rs. 8 million.
 Auditor shall express qualified opinion
(b)
Issue Matter to include representation
i) If immaterial misstatement is not corrected, auditor is required to obtain written
representation from Management that effects of uncorrected misstatements are
immaterial Individually and in aggregate.
ii) Related Party: Auditor is required to obtain written representation from Management
that all related party relationships and transactions have been disclosed to auditor,
and have been disclosed and accounted for in accordance with AFRE.
Going Concern:
Auditor is required to obtain written representation from Management regarding their
plans for future actions and the feasibility of these plans.
iii) Provision for bad debts is an area of accounting estimates. Auditor is required to
obtain written representation from Management those significant assumptions used in
making accounting estimates are reasonable.
76 This is a non-adjusting event requiring disclosure. Auditor does not have active responsibility to
perform procedures to identify subsequent events after auditor's report. However, as a
subsequent event has come into knowledge of auditor, auditor shall discuss the matter with
management/TCWG, and shall inquire how management intends to address the matter in the
If management amends financial statements:
1. Auditor shall carry out audit procedures on amendment.
2. Provide a new audit report on amended financial statements.
3. New audit report should be dated on or after the date of approval of amended financial
statements. Auditor shall extend his review of subsequent events up to the date of new audit
report.
If management does not amend financial statements:
1. Auditor shall notify management and TCWG not to issue report to third parties.
2. If despite such notification, management or TCWG issue audit report with financial
statements, the auditor shall obtain legal advice and shall take appropriate action to
prevent users from relying on auditor's report e.g. auditor can speak at AGM to inform
members.
77 Receivable:
(i) whether financial statements require amendment:
Bankruptcy of customer after balance sheet date usually confirms that condition existed at
balance sheet date. Therefore, this is an adjusting event and an appropriate amount of provision
should be recorded in financial statements.
(ii) audit procedures to form conclusion on amendment
Following audit procedures should be performed to conclusion on whether amount of provision
for bad debts is appropriate in respect of this customer:
1. Discuss with management as to why they feel an adjustment is not required.

2. The correspondence with the customer should be reviewed to assess whether there is any
likelihood of payment.
3. Review the post year-end period to see if any payments have been received from the
customer.
(iii)
impact on audit report if issue remains unresolved
1. This is a misstatement in financial statements (reason mentioned above).
2. Effect is immaterial, as amount of misstatement (0.3 million) is lesser than materiality
level determined using rule of thumb (0.375 million = 7.5 million * 5%)
4. However, auditor should include this misstatement in “summary of unadjusted
misstatements” and should report to management.
Lawsuit;
As per IAS - 10, settlement of a litigation subsequent to year end provides evidence that
obligation existed at balance sheet date, Therefore, this is an adjusting event and a provision for
$0-6 million should be recorded in financial statements,
(ii) audit procedures to form conclusion on amendment Following audit procedures should be
performed to conclusion on whether amount of provision is appropriate:
1. The auditor should contact the company’s lawyers to ask their view as to whether the
settlement is probable and whether $0-6 million is the likely amount.
2. Review the correspondence with the supplier to confirm that the amount they are willing to
accept is in fact $0-6 million. –
3. Discuss with management as to whether it is probable that they will pay this sum and obtain a
written representation confirming this.
(iii) impact on audit report if issue remains ‘unresolved
1. This is a misstatement in financial statements (reasons described above).
2. Effect is material as amount of misstatement (0.6 million) is greater than materiality level
using rule of thumb (0.375 million = 7.5 million * 5%)
3. Auditor shall express Qualified Opinion on financial statements. Auditor shall also describe
nature of misstatement in Basis for Qualified Opinion section.
Warehouse;
As per IAS- 10, this is a non-adjusting event as condition of the event did not exist at year end.
Financial statements do not require any adjustment. However, if the amount of loss is significant,
it should be disclosed in financial statements. If amount lé¢ immaterial, a disclosure is also not
required.
(The amount of damaged inventory is likely to be material; however, the company has insurance
and go It is only the uninsured level of inventory which should possibly be disclosed.)
(ii) audit procedures to form conclusion on amendment
1. Discuss the matter with the directors, checking whether the company has sufficient inventory
to continue trading in the short term,
2. Obtain a schedule showing the inventory destroyed and compare this to the average inventory
in the past and with other two warehouses to see If the amount claimed to be damaged Is
reasonable,
3. Review any correspondence from the insurers, confirming the amount of the insurance claim
to assess the extent of any uninsured amounts.
(iii) impact on audit report if issue remains unresolved If disclosures are not required, because
the uninsured loss is immaterial, then there will be no effect on audit report.
if disclosure of this subsequent event is required and management refuse to make these
disclosures, then auditor shall express qualified opinion (if effect is material) or adverse opinion
(if effect is pervasive).
78 i)
1. This is a non-adjusting event as condition did not exist at balance sheet date.
2. This should be disclosed in financial statements.
3. If management does not disclose it in financial statements, it will be a misstatement.
4. Auditor shall express Qualified Opinion on financial statements (as effect is material)
(ii)
1. This is an adjusting event as subsequent bankruptcy of debtor usually confirms that condition
existed at balance sheet date.
2.Full amount of receivable should be provided for (or adjusted) in financial statements.
3.If management does not record provision in its financial statements, it will be a misstatement.
Auditor shall express Qualified Opinion on financial statements (as effect is material).
79 Discussion on matter:
This is an adjusting event as bankruptcy of customer after year end usually confirms evidence
that condition existed at balance sheet date.
Action to take: Auditor shall discuss the matter with management and TCWG, and determine
whether financial statements need amendment. Thereafter, auditor shall inquire how
management intends to address the matter in the financial statements.
If management amends financial statements:
1. Auditor shall carry out necessary, audit procedures for verification of amendment in
2. Auditor shall extend his review of subsequent events up to the date of new audit report.
3. Provide a new audit report (on amended financial statements).
4. New audit report should be dated on or after the date of approval of revised financial
statements.
If management does not amend financial statements:
1. Auditor shall consider other methods to inform members e.g. auditor can speak at AGM to
inform members, of can resign and send representation to shareholders.
2. Auditor shall notify management and TCWG not to issue audit report to third parties,
3. If despite such notification, management or TCWG issue audit report with financial
statements, the auditor shall obtain legal advice and shall take appropriate action to prevent
users from relying on auditor's report.
80 Event 1 – Fire
This is a non-adjusting event as no condition of accident existed at balance sheet date. As it is a
significant event (650,009 * 25,000 = 675,000 > materiality level of 395,000 i.e. 7,900,000 * 5%),
therefore, this should be disclosed in financial Statements,
(ii)
1. Auditor should obtain information regarding financial impact of damage by fire from
management, local press company’s lawyer etc. Auditor should also inspect minutes of board
meeting and surveyors’ report.
2. Review any correspondence from the insurance company confirming the amount of the claim,
and the Current status of their investigation into the fire and any likely payments to assess the
extent of any uninsured amounts.
3. Auditor should ask management to disclose this event in the financial statements. 4. Auditor
should read the disclosure in financial statements to confirm that matter is adequately disclosed
in financial statements.
Event 2 - Inventory
This is an adjusting event because condition about NRV of inventory being lower than cost,
existed at year end. As amount involved is material (i.e. a provision of 865,000 = 915,000 - 50,000
should be recorded), financial statements should be adjusted.
(ii)
1. Auditor should physically inspect the material to determine physical condition and quantity of
affected material.
2. Auditor should check validity of determination of NRV of inventory.
3. Auditor should ask management to write down inventory to NRV.
81 (a) NRV of inventory has been reduced after the year end. This is a non-adjusting event as the
condition did not exist at balance sheet date. However, disclosure is required if matter is
significant. Auditor should request management to include disclosure in financial statements.
 If adequate disclosure is included in F/S, auditor shall express unmodified opinion.
Auditor may consider to include Emphasis of Matter Paragraph in report.
 If adequate disclosure is NOT included in F/S, it constitutes a misstatement in financial
statements. Auditor should express Qualified Opinion (if matter is material) or Adverse
opinion (if matter is pervasive)
(b) This is a non-adjusting event, which Is required to be disclosed in financial statements
(because event occurred before {issuance of F/S).
Auditor shall discuss the matter with management/TCWG, and inquires how management
Intends to address the matter in financial statements.
(Refer to notes for further procedures if management amends F/S or does not amend F/S)
(c) This is not a subsequent event affecting financial statements. Disclosure is not required
because event occurred after the financial statements have been issued.
82 Sr. Conclusion
i. Non-Adjusting because condition did not exist at balance sheet date.
ii. Adjusting because condition existed at balance sheet date.
iii. Non-Adjusting because condition did not exist at balance sheet date.
iv. Non-Adjusting because condition did not exist at balance sheet date.
v. Adjusting because condition existed at balance sheet date.
vi. Non-Adjusting because condition did not exist at balance sheet date.
83 1. Condition of event did not exist at balance sheet date, so it is non-adjusting event. However, if
the matter is significant, a disclosure would be required. Auditor should discuss with
management and ask them to amend financial statements.
2. Condition of event did not exist at balance sheet date, so it is non-adjusting event. However,
as the matter Is significant, a disclosure was required. Auditor should discuss with management
and ask them to amend financial statements,
3. This event does not affect financial statements as it occurred after issuance of financial
statements. No disclosure is required.
4. If subsequent to financial statements, auditor identifies a procedure which was required to be
performed, but was omitted, auditor shall perform the omitted procedure. If results of
procedures show that financial statements should be materially amended, auditor should ask
management to amend financial statements.
84 (a) Effect on Financial Statements:

 This event should be adjusted in the financial statements.
 Disclosure or appropriate provision should also be recorded if any people injured in the
fire (if any litigations are regulatory actions are expected).
 Going Concern Assumption should be re-assessed (if this was the only factory, and there
is no insurance),
Effect on Audit:
If going concern assumption is appropriate but material uncertainty exists, auditor shall express
unmodified opinion and shall include “Material Uncertainty relating to Going Concern
Paragraph” in his report.
If going concern assumption Is not appropriate and F/S prepared on going concern basis, auditor
shall express adverse opinion.
If going concern assumption is not appropriate and F/S prepared on non-going concern basis,
auditor shall express unmodified opinion and shall include “Emphasis of Matter Paragraph” in his
report.
(b) Effect on Financial Statements:
This is a non-adjusting event, but as the matter is significant, it is required to be disclosed in
Going Concern Assumption should be re-assessed (as discussed above).
Effect on Audit:
If matter has been adequately disclosed in F/S, auditor shall express unmodified opinion and
shall include “Emphasis of Matter Paragraph” in his report.
c)
This event does not affect financial statements as it occurred after the date of Issuance of
financial statements. No disclosure is required in financial statements.
85 1. Non adjusting event, Disclosure required.
2. Non adjusting event. Disclosure required.
3. Adjusting event.
4. Non adjusting event. Disclosure required.
Chapter 15 | ISRE
1 Karim & Company, Chartered Accountants are engaged in the review of interim financial
information of Babar Textiles Mills Limited for the half year ended June 30, 2008. The increase in
of] and energy prices and current inflationary trend prevailing in the country has resulted in
substantial losses and the Company’s outlook is negative. Moreover, in view of recessionary
pressures being faced by the US and many of the EU economies, some of the large customers in
those countries have not renewed their orders and many others are expected to follow.
Consequently, the company has decided to lay off 40 percent of its workforce gradually, over the
next few months.
The company’s management acknowledges the severity of the situation but is reluctant to
provide specific details in the interim financial information. However, it has given a note
containing general indications about the future prospects of the company.
Required:
Describe how the practitioner should address the above issue and the implications it may have
on the review report of interim financial information. (05)
2 You are the audit engagement partner of a listed company, Steel Limited (SL). The firm is
currently in the process of completing limited scope review of SL's interim financial statements
for the half year ended December 31, 2007. The audit team has recently concluded their work
with following findings for your decision:
(i) Inventory {s a significant item of the balance sheet out the practitioner was not asked to
attend the stock count at the end of the period. Consequently, the audit team relied on the
count communicated by the management.
(ii) A set up of the company in Lahore having carrying value of Rs. 235 million has been sold to an
associated undertaking for Rs. 240 million. The minutes of the Board of Directors show that the
transaction was carried out at an arm's length price. No explanatory note has been given in the
financial statements in this regard.
(iii) As a percentage of total debts, the provision for bad debts are in accordance with the
previous history of the company. However, due to time constraints the practice of using age-
analysis of debtors has not been used this time.
Required: Discuss the above issues and their implications on your report.

1 How practitioners should address the above issue:
Substantial losses, negative outlook of company in future, loss of key customers, lay off of
workforce are events and conditions which cast doubt on entity's ability to continue as going
concern.
Practitioner shall:
 discuss such events with management, and
 inquire what are management's plans to address them, and
 perform procedures to confirm whether material uncertainty exists, and whether going
concern assumption is appropriate.
 obtain written representation from management.
(Note for students: For a question of higher marks, “audit procedures to confirm whether
material uncertainty exists and whether going concern assumption is appropriate” can be
reproduced here)
Implications on Review Report:
If there is a material uncertainty relating to going concern which is disclosed in financial
statements, practitioner shall express unmodified conclusion and shall include paragraph in his
report to refer to draw users’ attention to going concern uncertainty. If there is a material
uncertainty which is not disclosed in financial statements, practitioner shall express qualified
conclusion (if effect is material) or adverse conclusion (if effect is pervasive).
2 (i) Practitioner is not required to observe the stock count in a review engagement. Therefore, this
is not a scope limitation. No implication on review report.
(ii)Related party transactions are required to be disclosed in financial statements. Therefore, this
is a misstatement in financial statements. Practitioner shall express qualified or adverse
conclusion.
(iii) Aging-analysis is not necessary if there are other means of assessing the adequacy of bad
debt provision. Therefore, this is not a misstatement. No implication on review report.
THE
END

Audit Case Study

Uploaded by

Copyright:

Available Formats

Audit Case Study

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Audit Case Study

Uploaded by

Copyright:

Available Formats

AUDIT| CAF8 | RANA NAVEED KHAN

Chapter 1 | Concept and need for assurance

1 Rao Arif & Company, Chartered Accountants

5. Management may not provide complete information to auditor.

Chapter 2 | Obtaining an Engagement

report at any time of

Chapter 3 | PLANNING AND RISK ASSESMENT

4 For each of the following scenarios determine: a) Planning materiality, b) Performance

2005 Forecast 2004 Actual

Inventory 200 1,278

Share Capital 1,000 1,000

Non-current Liabilities 1,000 2,058

controls. Auditor shall perform involves management, and is not

Chapter 4 | Audit Evidence ISA 500

(a) Assets i. Overstatement

Brown went into liquidation during the year.

(ICAP’s Official Study Text for CAF 09 – Page 79)

Number of Range of debt Total debt $ Current $ 1 to 2 More than 2

Balance Level Number of Balances Value

$1,001 to $10,000 600 9.1 4620000 33.4

(9,50) Balance per Books @ 31/12/0X

Balance per Bank @ 31 12/0X $20,200.22

If statistical sampling is being used, then

timely review and accuracy of evidence.

Chapter 5 | Internal Controls

Revenue 60,222 59,638

Other related information is as follows:

30-Sep -2012 30-Sep -2011

Statement of Financial Position

Equity and liabilities

Retained earnings 218 233

Statement of Financial Position 2012 2011

Retained earnings 1,170 1,100

June 2014 June 2013

PPE 18,770 20,460

Cash and Bank balances 45 6,430

Long term loans 5,000 1,000

Income statement for the year ended 30 November 2013(draft) 2012(audited)

(ICAP, CAF 09 Level -Autumn 2012)

For rest of debtors, risk is moderate as estimation of

 No internal audit department working in NFPO.

Assigning more experienced

Revenue may be recognized pre-mature at A sample of order at year-end, trace advance

Decrease in finance charge (77/642=11.99% as compared to last year 69/102=67.65%) indicates

Sales may be overstated due to recording of  Select a sample of significant revenue

2. A material amount of receivable  Inspect contract with Durcoal

25 Sr no Type of Control Justification

26 Sr no Type of Control Sr no Type of Control

27 Sr no Type of Control Justification

vi) Preventive Because it will prevent risk of misuse of passwords.

There is lack of system documentation of If sufficient documentation is not available,

33 (a)Advantages of using Computer-based information system in business:

Chapter 6 | Test of Controls

(iii) Pre-numbered purchase orders are generated in triplicate.

9 Control over Receipts:

13 No identification / approval of related party relationships and transactions:

14 a) Initial assessment at planning that controls not strong.

2. Inconsistent pricing could lead to customer dissatisfaction

31 (a) There should have been in place: