AUDIT & ASSURANCE IMPORTANT TOPICS FOR THEORY

Q1: Mr. Faiq is conducting audit of Yasir Limited. The company had not provided depreciation on any
non-current asset for three years, the effect of which if corrected would be turn to an accumulated
profit into a significant accumulated loss.

Required:

State the effect on your audit report in the above situation.

Answer:

– The auditor would still disagree with the lack of depreciation on non-current assets so a modified
opinion on the grounds of disagreement would be required.

– As the financial statements need significant amendment (profit becoming a large loss) then the auditor
may conclude that the financial statements do not show a true and fair view and issue an adverse report
(rather than an ‘except for’ report).

Q2: Mr. Sarfaraz, an audit partner of Ramsha Associates is reviewing the audit documentation for one
of its client. Being an experienced auditor having no previous connection with the audit, what
information he should be able to understand with the audit documentation prepared by the auditor.

Answer:

According to ISA 230, The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to
understand the following:
AUDITING
(a) The nature, timing and extent of the audit procedures performed to comply with the ISAs and
applicable legal and regulatory requirements;

(b) The results of the audit procedures performed, and the audit evidence obtained; and

(c) Significant matters arising during the audit, the conclusions reached thereon, and significant
professional judgments made in reaching those conclusions.

Q3: The auditor is required to identify and assess the risk of material misstatement at both the
financial statement and assertion level. State what is meant by the risk at financial statement and
assertion level.

Answer:

According to ISA 315, The objective of the auditor is to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels, through
understanding the entity and its environment, including the entity’s internal control, thereby providing a
basis for designing and implementing responses to the assessed risks of material misstatement.

Risks of material misstatement at the financial statement level refer to risks that relate pervasively to
the financial statements as a whole and potentially affect many assertions. Risks of this nature are not
necessarily risks identifiable with specific assertions at the class of transactions, account balance, or
disclosure level.

The risk of material misstatement on an assertion level is composed of an assessment of inherent risk
and control risk – inherent risk being the auditor’s statement regarding the client’s susceptibility of an
assertion to being materially misstated. Control risk is the auditor’s assessment of the risk that material
misstatement could be the product of an assertion, and not be properly identified and corrected by the
client’s internal controls.

Q4: Explain the provisions of “Minutes of meeting” as per regulation 12 of the corporate governance
regulation, 2019.

Answer:

As per Regulation 12 of the Listed Companies (Code of Corporate Governance) Regulations, 2019

(1) The Chairman shall ensure that minutes of the meetings of the Board are kept in accordance with the
requirements of section 178 and 179 of the Act.

(2) The company secretary shall be secretary to the Board.

(3) Where a director of a company is of the view that his dissenting note has not been satisfactorily
recorded in the minutes of a meeting, the matter may be referred to the company secretary for
appending such note to the minutes and where the company secretary fails to do so, the director may
file an objection with the Commission in the form of a statement to that effect within 30 days of the
date of confirmation of the minutes of the meeting.

Q5: Ms. Sanam is conducting the audit of speed limited. Explain what matters would be relevant for
her in planning attendance at physical inventory count in accordance with ISA 501.

Answer:

As per ISA 501, following matters would be relevant in planning attendance at physical inventory count:

• Inspecting the inventory to ascertain its existence and evaluate its condition, and performing test
counts;

• Observing compliance with management’s instructions and the performance of procedures for
recording and controlling the results of the physical inventory count; and

• Obtaining audit evidence as to the reliability of management’s count procedures.

Q6: You have been appointed as an auditor of Glimpse Limited (GL). Describe the audit work you
would undertake in order to ascertain whether GL is able to meet its debts as they fall due.

Answer:

When performing risk assessment procedures as required by ISA 570, the auditor shall
consider whether events or conditions exist that may cast significant doubt on the entity’s ability to
continue as a going concern. In so doing, the auditor shall determine whether management has
already performed a preliminary assessment of the entity’s ability to continue as a going concern,
and:

(a) If such an assessment has been performed, the auditor shall discuss the assessment with
management and determine whether management has identified events or conditions that,
individually or collectively, may cast significant doubt on the entity’s ability to continue as a
going concern.

(b) If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of accounting, and
inquire of management whether events or conditions exist that, individually or collectively,
may cast significant doubt on the entity’s ability to continue as a going concern.

(c)The auditor shall remain alert throughout the audit for audit evidence of events or conditions that
may cast significant doubt on the entity’s ability to continue as a going concern.

Q7: Discuss the possible implication on the audit report, with respect to modification to the opinion in
the predecessor auditor’s report.

Answer:

As per ISA 510, If the predecessor auditor’s opinion regarding the prior period’s financial statements
included a modification to the auditor’s opinion that remains relevant and material to the current
period’s financial statements, the auditor shall modify the auditor’s opinion on the current period’s
financial statements in accordance with ISA 705 and ISA 710.

In some situations, a modification to the predecessor auditor’s opinion may not be relevant and material
to the opinion on the current period’s financial statements. This may be the case where, for example,
there was a scope limitation in the prior period, but the matter giving

Q8: ISA 705 (Revised), sets out the different types of modified opinion. State two types in which an
auditor’s opinion may be modified and briefly explain each modification.

Answer:

This ISA establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion,
and a disclaimer of opinion.

Type of Modification to the Auditor’s Opinion

Qualified Opinion

The auditor shall express a qualified opinion when:

(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but
the auditor concludes that the possible effects on the financial statements of undetected misstatements, if
any, could be material but not pervasive.

Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements

Q9: In the light of ISA 600, enlist example of conditions or events that may indicate risk of material
misstatements of the group of financial statements.

Answer:

Examples of Conditions or Events that May Indicate Risks of

Material Misstatement of the Group Financial Statements

The examples provided cover a broad range of conditions or events; however, not all conditions or
events are relevant to every group audit engagement and the list of examples is not necessarily
complete.

• A complex group structure, especially where there are frequent acquisitions, disposals or
reorganizations.

• Poor corporate governance structures, including decision-making processes, that are not transparent.

• Non-existent or ineffective group-wide controls, including inadequate group management information

on monitoring of components’ operations and their results.

• Components operating in foreign jurisdictions that may be exposed to factors such as unusual
government intervention and in areas such as trade and fiscal policy, and restrictions on currency and
dividend movements in exchange rates.

• Business activities of components that involve high risk, such as long-term contracts or trading in
innovative or complex financial instruments.

Q10: Mr. Aadil has been appointed as cost auditor of Yahya Limited (YL). State any eight audit
procedures that he should perform to check job order cost system of the company.

Answer:
Cost audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with
cost accounting principles, plans, procedures and objectives. A cost audit of job order costing system
comprises the following;

1. Verification of the cost accounting records such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and costing technique
2. Examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objective
3. To report to the government on optimum utilization of national resources
4. To verify that cost accounts/records are accurate.
5. To detect all errors or frauds in cost records.
6. To introduce some sort of internal audit with a focus on costs to reduce the work of financial
auditor.
7. Cost system must be different for different objectives and the cost auditor designs a system
which works best and quickest.
8. To see that the organization maintains proper cost books, accounts and records either required
by law or otherwise as a managerial decision.

Q11: Your firm has been appointed auditors of Cross Limited after the previous auditors were
removed following a dispute with the board of directors. The dispute related to certain costs
capitalized by the directors which the auditors believed should have been written off. (Last year’s
auditor report was qualified because of the disagreement). State the procedures you would carry out
regarding the opening balances.

Answer:

As per ISA 510, The nature and extent of audit procedures necessary to obtain sufficient appropriate
audit evidence regarding opening balances depend on such matters as:
• The accounting policies followed by the entity.
• The nature of the account balances, classes of transactions and disclosures and the risks of material
misstatement in the current period’s financial statements.
• The significance of the opening balances relative to the current period’s financial statements.
• Whether the prior period’s financial statements were audited and, if so, whether the predecessor
auditor’s opinion was modified.

Q12: Mr. Raza is conducting the audit of Zara Limited. Explain the factors that Mr. Raza may identify
when considering whether misstatements in qualitative disclosures could be material in accordance
with ISA 320?

Answer:

Factors that may indicate the existence of one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than materiality for the financial
statements as a whole could reasonably be expected to influence the economic decisions of users taken
on the basis of the financial statements include the following:
• Whether law, regulation or the applicable financial reporting framework affect users’ expectations
regarding the measurement or disclosure of certain items.
• The key disclosures in relation to the industry in which the entity operates
• Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed
in the financial statements

Q13: From what sources of information can auditors obtain a knowledge of the entity they are about
to audit and the industry in which that entity operates?

Answer:

The auditor should perform the following risk assessment procedures to

obtain an understanding of the entity and its environment, including its
internal control:
a) Inquiries of management and others within the entity;
b) Analytical procedures; and
c) Observation and inspection.
d) Observation of entity activities and operations.
e) Inspection of documents (such as business plans and strategies), records,
and internal control manuals.
f) Reading reports prepared by management (such as quarterly management
reports and interim financial statements) and those charged with
g) governance (such as minutes of board of directors’ meetings).
h) Visits to the entity’s premises and plant facilities.
i) Tracing transactions through the information system relevant to financial
reporting (walk-throughs).

Q14: State any six rights of an auditor, excluding those related to resignation and removal.

Answer:

 Right to Access to Books of Accounts.

 Right to Obtain Information and Explanations.
 Right to make Suggestions to the Board.
 Right to Visit Branches.
 Right to Receive Notice and Attend Meetings.
 Right to Sign the Audit Report.
 Right to Remuneration.
 Right to be indemnified.

Q15: ISA 500 explains that reliability of audit evidence is influenced by its source and by its nature.
Comment on the following external confirmation:
  Bank confirmation.
 Receivable confirmation.

Answer:

According to section A18 of ISA 500,

External Confirmation
A18. An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or
other medium. External confirmation procedures frequently are relevant when addressing assertions
associated with certain account balances and their elements.
However, external confirmations need not be restricted to account balances only. For example, the
auditor may request confirmation of the terms of agreements or transactions an entity has with third
parties; the confirmation request may be designed to ask if any modifications have been made to the
agreement and, if so, what the relevant details are. External confirmation procedures also are used to
obtain audit evidence about the absence of certain conditions, for example, the absence of a “side
agreement” that may influence revenue recognition. See ISA 505 for
further guidance.

Q16: While conducting the audit of Sarfaraz Limited (SL), Mr. Kamil considered risk of overstatement
in revenue as significant risk and also communicated the matter to those charged with governance.
Discuss whether the risk of over statement in revenue should be included in the key audit matters
section of the audit report or not?

Answer:

According to ISA 701, The ideal key audit matters need to refer and leverage relevant disclosures in the
financial statements in explaining why the auditor considered that matter to be one of most significance
and how the matter was addressed in the audit.
However, this may not be the case for all significant risks. For example, ISA 240 presumes that there are
risks of fraud in revenue recognition and requires the auditor to treat those assessed risks of material
misstatement due to fraud as significant risks. In addition, ISA 240 indicates that, due to the unpredictable
way in which management override of controls could occur, it is a risk of material misstatement due to
fraud and thus a significant risk. Depending on their nature, these risks may not require significant auditor
attention, and therefore would not be considered in the auditor’s determination of key audit matters in
accordance with paragraph 10 of ISA 701.

Q17: ISA 700 (Revised), indicates the basic element that will ordinarily be included in the audit report.
Explain any five basic elements of an auditor’s report.

Answer:

According to section 42 of ISA 700,

Specific layout or wording of the auditor’s report, the auditor’s report shall refer to International
Standards on Auditing only if the auditor’s report includes, at a minimum, each of the following
elements:
(a) A title;
(b) An addressee, as required by the circumstances of the engagement;
(c) An introductory paragraph that identifies the financial statements audited;
(d) A description of the responsibility of management (or other appropriate term, see paragraph 24) for
the preparation of the financial statements;
(e) A description of the auditor’s responsibility to express an opinion on the financial statements and the
scope of the audit, that includes:

Q18: In January 2019, an equipment of Expert Limited (EL) malfunctioned which caused severe injuries
to some of the workers. EL had paid compensation to the workers but a case for violation of safety
regulations had also been filed by the regulator. On the basis of legal advice, EL had recorded a
provision of Rs. 5 million in its financial statements for the year ended December 31, 2019. The Board
of Directors approved the financial statements on March 1, 2020 and on the same date your firm
expressed an unmodified opinion. EL plans to issue the financial statements on March 5 2020. On
March 3, 2020 the court imposed a penalty of Rs. 15 million on EL. Management of EL informed the
auditor accordingly.

Required:

Evaluate the need for amendment in financial statements and state the procedures which the auditor
would need to perform in the above situation.

Answer:

Need for amendment in financial statements:

According to IAS 37, Provision is recorded for increase in present or constructive liability. In this
situation, Expert Limited has rightly created a provision that was probable at the time of litigation. Since,
according to IAS 10, The adjusting events after the reporting period should be recognized and it will have
material impact on financial statement, since provision is already created and related disclosure about
contingent liability is made accordingly, company shall increase the amount of allowance by passing
adjusting journal entry.

Procedure performed by the auditor:

The opinion of auditor will not change (unmodified opinion) since there is no qualitative or quantitative
material misstatement of amount or disclosure requirement. Auditor can add a Emphasis of matter
paragraph matter paragraph to demonstrate the difference between actual court decision and stated
value of contingent liability.

Q19: Explain how the adequacy of a cost accounting system may be determined.

Answer:

Following are the basic requirements that make compliance more understandable and attainable
that companies should implement and document in written policies and procedures.
Capability Requirement #1 – Organized Chart of Accounts

Regardless of the accounting process being utilized, manual or electronic, there is a need to set-
up chart of accounts identifying both direct contract costs and indirect costs not identifiable to
any one final cost objective to facilitate construction and analysis of indirectrate calculation.

Capability Requirement #2 – Labor Collection – Total-Time Accounting

Labor is one of the biggest cost a company will incur. This includes all productive and non-
productive time and appropriate accounts should be set-up in accounting system (i.e. chart of
accounts) to collect these labor costs as they are incurred.

Capability Requirement #3 – Job Cost Accounting

All costs including direct labor, direct material, other direct costs are assigned charge numbers
associated with each job order. These direct costs must be accounted for accumulated and
reported in the same, or greater, detail than proposed allowing the ability to match proposed vs.
actual costs.

Capability Requirement #4 – Indirect Rate Development

Companies should develop strategic indirect rate structure that will equitably allocate all indirect
costs, collected in homogeneous cost pools, to direct costs on a beneficial or causal relationship.
To facilitate the calculation of these indirect rates all indirect costs should be recorded in specific
accounts.

Capability Requirements #5 – Unallowable Cost Identification, Segregation and

Elimination

Companies must establish a process for the identification of these unallowable costs identified in
IFRS. Once identified these costs, whether direct costs or indirect costs, must be identified,
either as incurred or after initial recording and before being billed, claimed or proposed. These
costs need to be recorded in separate accounts set-up in the general ledger.

Q20: The control environment sets the tone of an organization, influencing the control consciousness
of its people. In accordance with ISA 315 (Revised), explain how the following elements of control
environment may be relevant when obtaining an understanding of the control environment of a
company.

i. Commitment to competence.

ii. Organizational structure.

iii. Assignment of authority and responsibility.

iv. Human resource policies and procedures.

Answer:

Elements of the control environment that may be relevant when obtaining an understanding of the
control environment include the following:

Commitment to competence – Matters such as management’s consideration of the competence levels

for particular jobs and how those levels translate into requisite skills and knowledge.

Organizational structure – The framework within which an entity’s activities for achieving its objectives
are planned, executed, controlled, and reviewed.

Assignment of authority and responsibility – Matters such as how authority and responsibility for
operating activities are assigned and how reporting relationships and authorization hierarchies are
established.

Human resource policies and practices – Policies and practices that relate to, for example, recruitment,
orientation, training, evaluation, counselling, promotion, compensation, and remedial actions.

Q21: Explain how the auditor would approach the audit of an allowance for doubtful debts.

Answer:

Following are the techniques used to evaluate and audit the allowance for doubtful debts.
Aging is the most common technique used to value receivables. However, several other analysis
techniques can provide information regarding the accuracy of prior estimates and the effectiveness of the
estimation process.

Comparing bad debt expense each year to write-offs during that year is one measure of the
accuracy of bad debt estimates. Calculating the ratio over multiple periods, rather than a single year,
provides the most useful information.

Comparing the beginning allowance for doubtful accounts to subsequent write-offs determines
the adequacy of the existing allowance. Lower ratios indicate the allowance may be too low, while higher
ratios may signify the accumulation of excessive allowances.

The allowance exhaustion rate is the amount of time it takes to write off an allowance. A corporation
may be accumulating excessive allowances if it takes several years to exhaust its allowance for doubtful
accounts receivable balance.

Evidence suggests that some companies have great difficulty in estimating collectability.
Accountants potentially benefit by using additional tools that shed light on the accuracy of past estimates.

Q22: Aalim foundation is a large charity based organization, engaged in providing education to needy
children at a fee of Rs. 800 per child. It receives donations for its activities both in cash and cheques.
The major expenditure relates to payment to teachers and petty cash. Enlist the key controls which
you as an auditor expects to find in respect of receipt.

Answer:

The following points need to be considered by an Auditor while conducting audit of receipts of
Charitable Institutions whether in cash or through cheques:

 Auditor should obtain list of members to verify the amount of subscriptions and list of regular
donors to know the nature and purpose of donation of regular donors.
 Auditor should vouch the amount of subscription and donations from counterfoils of receipts,
members list, donation register and cash book, etc.
 Ensure that the funds received for a specific purpose are being utilized for the same purpose or
not.
 Verify nature of donation and accounting treatment of such donations. Capital and revenue
donations should be treated separately.
 Verify the provisions for subscription due but not received. Subscription receivable for last year
whether received or not in the current year should also be verified.

Q23: In accordance with ISA 600, suggest the steps that a group engagement partner should take if he
concludes that it will not be possible for the group engagement team to obtain sufficient appropriate
audit evidence due to restrictions imposed by group management.

Answer:

According to section 13 of ISA 600,

The group engagement partner shall either:

(a) in the case of a new engagement, not accept the engagement, or, in the case of a continuing
engagement, withdraw from the engagement, where withdrawal is possible under applicable law or
regulation; or
(b) where law or regulation prohibits an auditor from declining an engagement or where withdrawal
from an engagement is not otherwise possible, having performed the audit of the group financial
statements to the extent possible, disclaim an opinion on the group financial statements

Q24: The audit engagement letter specifies objective and scope of audit, responsibilities of auditor
and management , appropriate financial reporting framework and form and content of audit report.
State any four additional matters that may be included in the engagement letter.

Answer:

According to section 7 of ISA 210,

The form and content of audit engagement letters may vary for each client, but they would generally
include reference to:
• The objective of the audit of financial statements;
• Management’s responsibility for the financial statements;
• The scope of the audit, including reference to applicable legislation, regulations, or pronouncements
of professional bodies to which the auditor adheres;
• The form of any reports or other communication of results of the engagement;
• The fact that because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unrestricted access to whatever records,
documentation and other information requested in connection with the audit; and
• Management’s responsibility for establishing and maintaining effective internal control.

Q25: Explain the situations in which an auditor may disclose confidential information about a client.

Answer:

IFAC code of ethics provides for three circumstances where professional

accountants are required, or may be required, to disclose confidential information:
• Disclosure is permitted by law and is authorized by the client or employer;
• Disclosure is required by law;
• There is a professional duty or right to disclose when not prohibited by law.

Q26: In accordance with ISA 402, what particulars shall be included in the contract or service level
agreement between a user identity and service organization.

Answer:

The SLA should include components in two areas: services and management.

Service elements include specifics of services provided, conditions of service availability, standards such
as time window for each level of service, responsibilities of each party, escalation procedures, and
cost/service tradeoffs.

Management elements should include definitions of measurement standards and methods, reporting
processes, contents and frequency, a dispute resolution process, an indemnification clause protecting
the customer from third-party litigation resulting from service level breaches, and a mechanism for
updating the agreement as required.

Q27: Furqan Limited is responsible for the conduct of group audit of Sarim Group of Companies.
Discuss the matter that the group engagement team shall communicate with those charges with
governance of Saim Group as per ISA 600.

Answer:

The group engagement team shall communicate the following matters with those charged with
governance of the group, in addition to those required by ISA 260:
(a) An overview of the type of work to be performed on the financial information of the components.
(b) An overview of the nature of the group engagement team’s planned involvement in the work to be
performed by the component auditors on the financial information of significant components.
(c) Instances where the group engagement team’s evaluation of the work of a component auditor gave
rise to a concern about the quality of that auditor’s work.
(d) Any limitations on the group audit, for example, where the group engagement team’s access to
information may have been restricted.
(e) Fraud or suspected fraud involving group management, component management, employees who
have significant roles in group-wide controls or others where the fraud resulted in a material
misstatement of the group financial statements.

Q28: Being the cost auditor of Hamza Limited (HL) explain the particulars of cost auditor’s report as
per Rule 4 of the Companies (Audit of Accounts) Rules, 1998 to the Chief Financial Officer (CFO) of HL.

Answer:

According to rule 4 of Companies (Audit of Accounts) Rules, 1998:

a. proper cost accounting records as required by rules, have been / have not been kept by the company;
b. proper returns, statements and schedules for the purpose of audit of cost accounts have / have not
been received from branches not visited by me/us;
c. the said books and records give/do not give the information required by the rules in the manner so
required; and in my/our opinion and, subject to best of my/our information -
a. the annexed statement of capacity utilization and stock-in-trade are/are not in agreement with the
books of account of the company and exhibit true and fair view of the company's affairs; and
b. cost accounting records have/have not been properly kept so as to give a true and fair view of the
cost of production, processing, manufacturing

Q29: Farhan Limited has been appointed for the audit of Shahbaz Limited. The audit partner is
concerned that some assets have been misappropriated by the management of the company. Suggest
the ways in which management may accomplish misappropriation of assets.

Answer:

 Misappropriation of assets can be accomplished in various ways, including embezzling receipts,

stealing assets, or causing an entity to pay for goods or services that have not been received.
 Misappropriation of assets may be accompanied by false or misleading records or documents,
possibly created by circumventing controls.

Q30: Mr. Faris is of the view that audit sampling has not provided a reasonable basis for conclusions
about the population that was tested during the audit of Good Oils Limited. Suggest the steps that the
auditor may take in the above situation as per ISA 530.

Answer:

If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about
the population that has been tested, the auditor may:
• Request management to investigate misstatements that have been identified and the potential for
further misstatements and to make any necessary adjustments; or
• Tailor the nature, timing and extent of those further audit procedures to best achieve the required
assurance. For example, in the case of tests of controls, the auditor might extend the sample size, test
an alternative control or modify related substantive procedures.
Q31: Mr. Mirza is conducting the audit of Shahmeer Limited. He determined that the two-way
communication between him and those charged with governance is not adequate and the situation
cannot be resolved. Suggest the steps that he can take in this situation in accordance with ISA 260.

Answer:

According to ISA 260, the auditor is not responsible for communication between management and
those charged with governance. It is appropriate for the auditor to alert those charged with governance
to possible deficiencies in management’s communication, but that should not extend to a requirement
to make management’s disclosures.

Q32: ISA 500 “Audit Evidence” identifies the different audit procedures that can be performed in order
to obtain audit evidence. State and briefly explain five testing procedures that can be performed to
obtain audit evidence.

Answer:

Audit procedures to obtain audit evidence can include inspection, observation, confirmation,
recalculation, re-performance, and analytical procedures, often in some combination, in addition to
inquiry.
a) Inspection: It involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection of records and
documents provides audit evidence of varying degrees of reliability, depending on their nature and
source.

b) Observation: Observation consists of looking at a process or procedure being performed by others,

for example, the auditor’s observation of inventory counting by the entity’s personnel.

c) External Confirmation: An external confirmation represents audit evidence obtained by the auditor as
a direct written response to the auditor from a third party (the confirming party).

d) Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records.

Recalculation may be performed manually or electronically.

e) Re-performance: Re-performance involves the auditor’s independent execution of procedures or

controls that were originally performed as part of the entity’s internal control.

Q33: Your firm has just been appointed auditors of cross limited after the previous auditors were
removed following a dispute with the Board of Directors. The dispute related to certain costs
capitalized by the Directors, which the auditors believed should have been written off. (Last year’s
auditor’s report was qualified because of the disagreement). State the procedures you would carry
out regarding the opening balances.

Answer:
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances
is to obtain sufficient appropriate audit evidence about whether:

(a) Opening balances contain misstatements that materially affect the current period’s financial
statements; and

(b) Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements, or changes thereto are appropriately accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting framework.

Q34: List assertions relevant to the audit of tangible non current assets and state one audit procedure
which provides appropriate evidence for each assertion.

Answer:

Tangible non-current assets – assertions:

i) Completeness – ensure that all non-current assets are recorded in the non-current asset register by
agreeing a sample of assets physically verified back to the register.

ii) Existence – ensure non-current assets exist by taking a sample of assets from the register and
physically seeing the asset.

iii) Valuation and allocation – ensure assets are correctly valued by checking the reasonableness of
depreciation calculations.

iv) Rights and obligations – ensure the company owns the asset by seeing appropriate document of
ownership for example, a purchase invoice.

v) Presentation and disclosure assertions – ensure all necessary financial statements disclosures have
been made by reviewing the financial statements and ensure non-current assets are correctly
categorized in those financial statements.

Q35: GBS associates, a Chartered Accountant firm conducted the audit of Colors Limited (CL) and
expressed a qualified opinion. The details of the qualification are also mentioned in the key audit
matters section. Elucidate whether it is appropriate to do so or not.

Answer:

Different subjects involved in key audit matters can be classified from the following two aspects. The
first category is directly related to the financial report:
1) areas of significant risk assessed by the auditor;
2) areas of management's major judgments designed in financial reports.
Key audit matter paragraph must not be used to mention reasoning related to auditor’s opinion.
Q36: Why should the auditor ordinarily disclaim an opinion if the client imposes significant scope
limitations on the audit procedures?

Answer:

If the client imposes significant scope limitations on the audit procedures then it will result in following
two aspects which will render the disclaimer of opinion:

1) Auditor will not be able to collect sufficient appropriate evidence.

2) The effect of the above reason will be material and pervasive.

Hence the auditor will ordinarily disclaim the opinion.

Q37: Discuss the possible implications on the audit report with respect to modification to the opinion
in the predecessor auditor’s report.

Answer:

If the prior period’s financial statements were audited by a predecessor auditor and there was a
modification to the opinion, the auditor shall evaluate the effect of the matter giving rise to the
modification in assessing the risks of material misstatement in the current period’s financial
statements in accordance with ISA 315.

Q38: Aaalam Limited (AL) has incorporated a liability for gratuity payable to its employees on the
basis of actuarial valuation carried out by Talha Limited (TL). As an audit partner of AL you are not
satisfied with the valuation report prepared by TL and has decided to appoint (Pearl Limited) to carry
out the valuation exercise again. Being the auditor of AL state the matters that you would consider
regarding the competence, capabilities and objectivity of PL.

Answer:

The Competence, Capabilities and Objectivity of the Auditor’s Expert:

The auditor shall evaluate whether the auditor’s expert has the necessary competence, capabilities and
objectivity for the auditor’s purposes. In the case of an auditor’s external expert, the evaluation of
objectivity shall include inquiry regarding interests and relationships that may create a threat to that
expert’s objectivity.

Obtaining an Understanding of the Field of Expertise of the Auditor’s Expert:

The auditor shall obtain a sufficient understanding of the field of expertise of the auditor’s expert to
enable the auditor to
(a) Determine the nature, scope and objectives of that expert’s work for the auditor’s purposes; and
(b) Evaluate the adequacy of that work for the auditor’s purposes.

Q39: Subsequent to the financial statements date the major production facilities of Ashfaq Limited
have been destroyed due to fire. The plant facilities were not insured. No condition in this regard
existed at the financial statements date. Management has not made any adjustment in the financial
statements. However a proper disclosure to this fact has been made in the financial statements.

Required:

What type of audit opinion should be expressed in the above circumstances?

Answer:

(a) If the auditor’s report has not yet been provided to the entity, the auditor shall modify the opinion as
required by ISA 705 and then provide the auditor’s report; or

(b) If the auditor’s report has already been provided to the entity, the auditor shall notify management
and, unless all of those charged with governance are involved in managing the entity, those charged
with governance, not to issue the financial statements to third parties before the necessary
amendments have been made. If the financial statements are nevertheless subsequently issued without
the necessary amendments, the auditor shall take appropriate action to
seek to prevent reliance on the auditor’s report.

Q40: It has been determined that father of the trainees of Hayat & Co. a chartered accountant firm,
posted on the audit engagement of Nadeem Limited (NL) has a financial interest in NL. Identify the
threats involved in the above situation and suggest possible course of action to Hayat & Co.

Answer:

Self-Interest Threat

A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or
depends on the client for a major fee that is outstanding. Hence there is a self interest threat in the case
mentioned of Hayat & Co. a chartered accountant firm.

Course of action:

There are several safeguards that audit firms can employ to protect against self-interest threats. The
audit firm can rotate a specific member of the team that faces this threat. On top of that, if the threat
endangers the audit firm, it is best to discuss it with those charged with the client's governance.

Q41: You are the CFO of Rafiq Limited (RL), a newly incorporated manufacturing concern. One of your
responsibilities is to implement internal controls. List down any eight controls to reduce possibility of
misappropriation of inventory.

Answer:

i. Segregation of duties so that different people are in charge of ordering, recording, reconciling,
and safeguarding inventory.
 ii. Regular Inventory Counts of New inventory from a vendor must be immediately counted and
reconciled with the packing list to confirm that there are no mismatches, clerical errors, or
vendor fraud.
iii. Rotating job assignments is one way to prevent employees from engaging in long-term schemes
to steal inventory.

iv. Implement Strong Security Strong physical security measures can deter inventory shrinkage,
particularly due to theft.
v. Restrict deliveries to loading docks;
vi. Limit access to interior areas such as storage areas to authorized personnel only;
vii. Segregate high-demand or expensive items in a separate storage area with more robust fencing,
strong locks, and controlled access;
viii. Establish a system to document and track any stock taken out of the storage area to another
area.

Q42: In the light of ISA 265, describe the term “Deficiency in internal control” and “significant
deficiency in internal control”.

Answer:

(a) Deficiency in internal control – This exists when:

(i) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect
and correct, misstatements in the financial statements on a timely basis; or
(ii) A control necessary to prevent, or detect and correct, misstatements in the financial statements on a
timely basis is missing.

(b) Significant deficiency in internal control – A deficiency or combination of deficiencies in internal

control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention of
those charged with governance.

Q43: Mr. Sammad is conducting audit of Saqib group of industries. In the light of ISA 250, discuss the
ways in which he can obtain an understanding of the legal and regulatory framework, and how the
company complies with the framework.

Answer:

a) In the context of laws and regulations, the potential effects of inherent limitations on the auditor’s
ability to detect material misstatements are greater for such reasons as the following:

• There are many laws and regulations, relating principally to the operating aspects of an entity, that
typically do not affect the financial statements and are not captured by the entity’s information systems
relevant to financial reporting.

• Non-compliance may involve conduct designed to conceal it, such as collusion, forgery, deliberate
failure to record transactions, management override of controls or intentional misrepresentations
being made to the auditor.

• Whether an act constitutes non-compliance is ultimately a matter for legal determination by a court of
law.

b) To obtain a general understanding of the legal and regulatory framework, and how the entity
complies with that framework, the auditor may, for example:
• Use the auditor’s existing understanding of the entity’s industry, regulatory and other external factors;
• Update the understanding of those laws and regulations that directly determine the reported amounts
and disclosures in the financial statements;
• Inquire of management as to other laws or regulations that may be expected to have a fundamental
effect on the operations of the entity;
• Inquire of management concerning the entity’s policies and procedures regarding compliance with
laws and regulations; and
• Inquire of management regarding the policies or procedures adopted for identifying, evaluating and
accounting for litigation claims.

Q44: In the light of ISA 706 enlist those instances which are excluded from other matter paragraph in
an audit opinion.

Answer:

An Other Matter paragraph does not deal with circumstances where the auditor has other reporting
responsibilities that are in addition to the auditor’s responsibility under the ISAs (see Other Reporting
Responsibilities section in ISA 700 or where the auditor has been asked to perform and report on
additional specified procedures, or to express an opinion on specific matters.

Q45: There is a legal dispute between Summayah Limited (SL) and one of its customers. In this regard
the legal advisor has confirmed the stance of management in a meeting with you. However he has
refused to provide a written representation thereon. Discuss the impact on the audit report and
specify the procedures (if any) which you would take in the above situation.

Answer:

If management does not provide one or more of the requested written representations, the auditor
shall:

(a) Discuss the matter with management;

(b) Reevaluate the integrity of management and evaluate the effect that this may have on the reliability
of representations (oral or written) and audit evidence in general; and
(c) Take appropriate actions, including determining the possible effect on the opinion in the auditor’s
report in accordance with ISA 705, having regard to the requirement

Q46: The auditor obtains evidence about the operating effectiveness of internal controls from tests of
controls. What matters should be considered in determining extent of such tests?
Answer:

Matters that could affect the necessary extent of testing of a control in relation to the degree of reliance
on a control include the following:

 The frequency of the performance of the control by the company during the audit period;
 The length of time during the audit period that the auditor is relying on the operating
effectiveness of the control;
 The expected rate of deviation from a control;
 The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control;
 The extent to which audit evidence is obtained from tests of other controls related to the
assertion;
 The nature of the control, including, in particular, whether it is a manual control or an
automated control; and
 For an automated control, the effectiveness of relevant information technology general
controls.

Q47: Farooq Limited (FL) has incorporated a liability for gratuity payable to its employees on the basis
of actuarial variation carried out by Marshal Limited (ML). As an audit partner of FL you are not
satisfied with the valuation report prepared by ML and have decided to appoint Rizwan Limited (RL)
to carry out the valuation exercise again. Being the auditor of FL discuss how you would evaluate
adequacy of RL’s work and the course of action in case you are not satisfied with the work performed
by RL.

Answer:

Information regarding the competence, capabilities and objectivity of an auditor’s expert may come
from a variety of sources, such as:
• Personal experience with previous work of that expert.
• Discussions with that expert.
• Discussions with other auditors or others who are familiar with that expert’s work.
• Knowledge of that expert’s qualifications, membership of a professional body or industry association,
license to practice, or other forms of external recognition.
• Published papers or books written by that expert.
• The auditor’s firm’s quality control policies and procedures

Q48: Mr. Rajab is performing the cost audit of Marvi Limited. Discuss how he may obtain cost audit
evidence by performing “inspection” and observation procedure?

Answer:

Inspection:
i) Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection of records and
documents provides audit evidence of varying degrees of reliability, depending on their nature and
source.
ii) Some documents represent direct audit evidence of the existence of an asset. Inspection of such
documents may not necessarily provide audit evidence about ownership or value. In addition, inspecting
an executed contract may provide audit evidence relevant to the entity’s application of accounting
policies, such as revenue recognition.
iii) Inspection of tangible assets may provide reliable audit evidence with respect to their existence, but
not necessarily about the entity’s rights and obligations or the valuation of the assets. Inspection of
individual inventory items may accompany the observation of inventory counting.

Observation:
Observation consists of looking at a process or procedure being performed by others, for example, the
auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control
activities. Observation provides audit evidence about the performance of a process or procedure, but is
limited to the point in time at which the observation takes place, and by the fact that the act of
being observed may affect how the process or procedure is performed. See ISA 501 for further guidance
on observation of the counting of inventory

Q49: Recommend the alternative audit procedures to the auditor in the following situations in case of
non-responses from the confirming party in the light of ISA 505.

 For accounts receivables balances.

 For accounts payables balances.

Answer:

Examples of alternative audit procedures the auditor may perform include:

• For accounts receivable balances – examining specific subsequent cash receipts, shipping
documentation, and sales near the period end.
• For accounts payable balances – examining subsequent cash disbursements or correspondence from
third parties, and other records, such as goods received notes.

Q50: On January 1, 2019 Jafer Limited purchased computers amounted to Rs. 3 million. The company
has a policy to depreciate the asset over a useful life of 10 years. While the auditor of the company is
of the view that due to rapid innovation the computers may become obsolete after five years. The
management of the company refused to change its depreciation policy as it is of the view that asset
should be depreciated over its useful life.

Explain the appropriate course of action available to the auditor.

Answer:

In the circumstances stated above, the matter falls under criteria of key audit matters under IAS 706.
The opinion of the auditor will not change due to judgemental values such as rate of depreciation due to
change in estimated useful life.

Key audit maters are included in emphasis of matter paragraph for the understanding of the users of the
financial statements.
When the Emphasis of Matter paragraph relates to the applicable financial reporting framework,
including circumstances where the auditor determines that the financial reporting framework
prescribed by law or regulation would otherwise be unacceptable,11 the auditor may consider it
necessary to place the paragraph immediately following

Q51: Safina Limited runs five operating segments in different cities within Pakistan. In the light of ISA
501 explain how the auditor shall obtain sufficient appropriate audit evidence regarding the
presentation and disclosure of segment information in accordance with the applicable financial
reporting framework.

Answer:

The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure
of segment information in accordance with the applicable financial reporting framework by:
(a) Obtaining an understanding of the methods used by management in
determining segment information, and
(i) Evaluating whether such methods are likely to result in disclosure in accordance with the applicable
financial reporting framework; and
(ii) Where appropriate, testing the application of such methods; and
(b) Performing analytical procedures or other audit procedures appropriate in
the circumstances.

Q52: Ms. Maheen is conducting the audit of Samana Limited. Being an engagement partner for this
audit engagement explain the responsibilities of Ms. Maheen in accordance with ISA 220.

Answer:

The engagement partner shall take responsibility for the overall quality on each audit engagement to
which that partner is assigned.

Throughout the audit engagement, the engagement partner shall remain alert, through observation and
making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by
members of the engagement team.

The engagement partner shall form a conclusion on compliance with independence requirements that
apply to the audit engagement. In doing so, the engagement partner shall:

 Obtain relevant information from the firm and, where applicable, network firms, to identify and
evaluate circumstances and relationships that create threats to independence;
 Evaluate information on identified breaches, if any, of the firm’s independence policies and
procedures to determine whether they create a threat to independence for the audit
engagement;
Q53: Accounting estimate in an approximation of monetary amount in the absence of a precise means
of measurement. This term is used for an amount measured at fair value where there is an estimation
uncertainty. Enlist the situations where fair value accounting estimates may be required in accordance
with ISA 540.

Answer:

Additional examples of situations where fair value accounting estimates may

be required include:
• Complex financial instruments, which are not traded in an active an open market.
• Share-based payments.
• Property or equipment held for disposal.
• Certain assets or liabilities acquired in a business combination, including goodwill and intangible
assets.
• Transactions involving the exchange of assets or liabilities between independent parties without
monetary consideration, for example, a non-monetary exchange of plant facilities in different lines of
business.

Q54: Areeb and Co. has accepted the audit engagement of Jamal Limited for the financial year ended
June 30, 2021. As per ISA 210, explain the particulars that shall be recorded in an audit engagement
letter in respect of the above audit engagement.

Answer:

The form and content of audit engagement letters may vary for each client, but they would generally
include reference to:
• The objective of the audit of financial statements;
• Management’s responsibility for the financial statements;
• The scope of the audit, including reference to applicable legislation, regulations, or pronouncements
of professional bodies to which the auditor adheres;
• The form of any reports or other communication of results of the engagement;
• The fact that because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of internal control, unavoidable risk that even some material misstatement may
remain undiscovered;
• Unrestricted access to whatever records, documentation and other information requested in
connection with the audit; and
• Management’s responsibility for establishing and maintaining effective internal control.

Q55: Explain the particulars to be included in respect of raw material in the cost audit report.

Answer:

Following particulars must be included in respect of raw materials in the cost audit report:

(a) The cost of major raw material consumed both in terms of quantity and value. Where the cost of
transport, etc., of raw material is significant, specify the same separately.
(b) Consumption of major raw material per unit of production compared with the standard
requirements, if any.

(c) Explanations for variances, if any, in the consumption of major raw material per unit of production as
compared to the preceding two years, and with standard requirement, if any.

(d) Comments on the method of accounting followed for recording the quantities and value of receipts,
issues and balances of material directly used in production