Audit and Assurance Page 2 of 3

Q.4 (a) Specify the procedures that an auditor should perform to ensure completeness of the
list of related parties provided by the directors. (06)

(b) As part of audit procedure you have requested the management of Energy Limited to
provide specific representation relating to completeness of related parties and related
party transactions.

The management is of the view that since the auditor has carried out a detailed review
in which no undisclosed transactions were identified, a written representation is not
necessary.

Required:
Evaluate the above situation, comment on the management’s stance and suggest the
appropriate course of action available to the auditor. (06)

Q.5 In relation to the audit report on financial statements and the contents thereof (under
revised/new ISAs), discuss the appropriateness or otherwise of the following statements:

(a) The management is only responsible for preparation of financial statements in

accordance with the financial reporting framework and for such internal controls as
management determines are necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error. (03)

(b) Reasonable assurance is a high level of assurance and is a guarantee that if audit is
conducted in accordance with ISAs, it will always detect a material misstatement
whenever it exists. (03)

(c) The auditor obtains an understanding of controls relevant to the audit in order to
design audit procedures that are appropriate in the circumstances and also for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control. (03)

(d) The description of the auditor’s responsibilities for the audit of the financial statements
should be included within the body of the auditor’s report. (03)

(e) The audit report can only be signed in the personal name of the auditor. (02)

(f) Key audit matters are determined from the matters communicated with the
management of the entity that required significant auditor’s attention in performing
the audit. In making that determination, the auditor shall take into account the effects
on the audit of significant events or transactions that occurred during the current year
and prior period presented. (03)

Q.6 Briefly state test of details for verifying the valuation assertion of tangible non current assets
where the company follows revaluation policy for valuation of such assets. (08)

Q.7 Daud and Company, Chartered Accountants (DC), has received an offer for appointment as
auditor of Jamal Limited (JL). Wife of Daud is a Shareholder and Director in Royal
Limited (RL).

Required:
In accordance with the requirements of the Companies Ordinance, 1984, state whether and
under what circumstances DC could accept the audit, under each of the following situations:
(a) JL holds 51% shareholding in RL. (03)
(b) JL is an associated company of RL. (05)
(c) One of the directors in JL also holds 10% shareholding in RL. (02)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

A.6 Test of details for verification of valuation assertion of tangible non-current assets:
ƒ Check the cost in the financial statements against the purchase invoices/contracts for the
assets.
ƒ Check that the purchase expenditure is analysed reasonably between land, buildings and
equipment.
ƒ Review the allocation of total expenditure on non-current assets between capital and

Verify amounts in the financial statements with the valuer’s report.

revenue amounts.
ƒ
ƒ Obtain an understanding of the work of the expert through considering the reasonableness of
valuations/assumptions used in valuations.
ƒ Evaluating the competence, capabilities and objectivity of the expert.
ƒ Check that valuations are regularly updated.
ƒ Check that all the assets of the similar class are revalued.

A.7 (a) JL holds 51% shareholding in RL:

directorship and shareholding of partner’s wife in RL, DC cannot be appointed as the

As Daud & Co. (DC) is not qualified for appointment as the auditor of RL due to

auditor of any of its holding company i.e. JL.

(b) JL is an associated company of RL:

associated company. However, since Daud’s wife holds shares prior to the appointment,
DL is ineligible to act as the auditor of JL, as the spouse of the partner holds shares in the

DC can be appointed as auditor of JL subject to comply with the following requirements:

ƒ Disclose this fact to JL at the time of appointment as auditor.
ƒ Divest her investment in RL within 90 days of appointment.

The directorship of Daud’s wife in RL is not relevant for the appointment of DC as the
auditor of JL.

(c) One of the directors in JL also holds 10% shareholding in RL:

Daud and Company can be appointed as the auditor of JL as there is no disqualification
with respect to common shareholding in another company, which is neither a subsidiary
nor an associated company of the prospective audit client.

A.8 (a) Self-interest, self-review and familiarity threats will be created, as Kamran has served as an
employee in ABC.

Safeguards:
ƒ Conducting a review of the work performed by Kamran as a member of the audit
team,
ƒ Not including the member in the audit team.

(b) As the father of Nasir is a close family member, having a direct financial interest in DL, a
self-interest threat is created.

Safeguards:
ƒ Disposing as soon as practicable, of all the shares by Nasir’s father (a close family
member)
ƒ Having a professional accountant review the work of Nasir;
ƒ Replacement of Nasir from the Audit team.

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 Certificate in Accounting and Finance Stage Examinations
The Institute of 8 March 2016
Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit and Assurance

Q.1 You are the Audit Incharge of Rehan Limited for the year ended 31 December 2015. While
reviewing the working papers and discussion with audit team, you have noted the following:

(i) The audit team did not send balance confirmation requests for amounts below
Rs. 100,000 because according to the client, lot of efforts were required to follow up
the customers and the balances were also not material.

(ii) One of the conclusions drawn as per the working papers is “there are no unrecorded
liabilities, as confirmations have been received from all selected parties and no
differences were noted. Hence, no further test is required.”

Required:
(a) Discuss with reasons whether you agree with the approach adopted/conclusion drawn
by the audit team. (03)
(b) Provide brief guidance to the audit team in respect of each of the above situations. (05)

Q.2 You are the CFO of a newly incorporated company which has recently established five
super markets in the city. One of your responsibilities is to implement internal controls.

List six key controls:

(a) over cash sales and cash handling; (06)
(b) to reduce possibility of misappropriation of inventory. (06)

Q.3 (a) Because of its ability to exert influence, management is in a position to perpetrate
fraud and prepare fraudulent financial statements.

Identify six different ways in which fraud may be committed by management through
overriding of controls. (06)

(b) Briefly state the audit procedures which may be performed to identify the risks of
material misstatement due to fraud. (05)

Q.4 Justify giving reasons whether the appointment of auditors in the following cases is in
compliance with the requirements of Companies Ordinance, 1984.

(a) Kashif and Company, Chartered Accountants (KC) has received an offer for
appointment as the auditor of National Electricity Limited (NEL). On the request of
one of the partners of KC, NEL has allowed him to pay his last month’s electricity bill
amounting to Rs. 150,000 in monthly instalments of Rs. 15,000 each. (03)

(b) Zubair and Company, Chartered Accountants (ZC) has received an offer for
appointment as auditor of Haroon Limited (HL). Saima, who is the wife of a partner
of ZC, is the chief executive of Jameel Limited (JL). JL is an associated company of
HL. Saima also holds 100,000 shares in JL. (03)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2016

Ans.3 (a) (i) Forging or altering accounting records or supporting documentation which form the
basis of the financial statements
(ii) Misrepresenting or intentionally omitting events or transactions from the financial
statements
(iii) Intentionally misapplying accounting principles
(iv) Concealing or not disclosing, facts that could affect the amounts recorded in the
financial statements.
(v) Engaging in the complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
(vi) Embezzling receipts (for example, diverting them to personal bank accounts)
(b) The auditor is required to perform the following procedures to identify the risks of material
misstatement due to fraud:

ƒ Make inquiries of management in respect of:

- their assessment of the risk of material fraud
- their process in place for identifying and responding to the risks of fraud
- any specific risks of fraud identified or likely to exist

regarding management’s views on business practices and ethical behaviour)

- any communications within the entity in respect of fraud (including to employees

ƒ Make inquiries of management and others within the entity as to whether they have
any knowledge of any actual, suspected or alleged frauds and to obtain views about
the risks of fraud.
ƒ Evaluate any unusual or unexpected relationships identified in performing analytical
procedures which might indicate a risk of material fraud.
ƒ Evaluate information obtained from other risk assessment procedures to see if any
fraud risk factors exist.

Ans.4 (a) The appointment of KCC is valid, as 90 days have not lapsed in case of outstanding bill.
However, the concerned partner should be requested to settle the amount of bill before the
expiry of 90 days as it will result in disqualification of KCC as auditors of NEL.

(b) ƒ Appointment of Zubair and Company is valid.

ƒ Under the Companies Ordinance, 1984, there is no restriction on the appointment of
spouse of chief executive of an associated company as the auditor.
ƒ The holding of 100,000 shares by Saima is required to be disclosed at the time of
appointment. Further, these shares should be disposed off within 90 days of the
appointment.

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 Audit and Assurance Page 4 of 5

Q.7 Sawari Limited (SL) is engaged in the business of assembling motorcycles. Following IT
related matters are under consideration of the management:
(i) SL uses Inventory Management System (IMS) which is connected with the systems of
all its suppliers. IMS generates and sends purchase orders to the suppliers automatically
when the inventory reaches the reorder level. SL has recently been receiving the
complaints of short deliveries. On further inquiry it was revealed that the supplier
received different quantity orders than those actually generated by IMS. Initial
investigation revealed that data was changed during transmission to the suppliers.
(ii) SL’s IT data room maintained at its head office caught fire. All data including last

damaged due to this incident. Consequently, SL’s IT operations suffered a downtime of

month backup kept within the premises was lost and critical hardware was also slightly

ten days.

Required:
Suggest any three mitigating controls against each of the above matters. (06)

Q.8 Wealthy Bank Limited (WBL) is considering to appoint external auditor for the year ending
June 2020. WBL has shortlisted the following three audit firms for appointment as external
auditor and has presented certain matters relating to each of them for your consideration:

Rao Arif & Company, Chartered Accountants

The firm has recently admitted a new partner who worked as CFO till June 2017, of
Noor Engineering Limited, a subsidiary of WBL.

Hatim Tughlaq & Company, Chartered Accountants

One of the partners in the firm has obtained a loan from WBL of Rs. 5 million. The firm has
informed that the partner would not be able to repay the loan till 2021.

Rashid Kareem & Company, Chartered Accountants

Rashid, one of the partners in the firm, has several commercial properties in Lahore. He has
rented out five properties to WBL for its branch operations.

Required:
In the light of the Companies Act, 2017 discuss whether any of the above firms can be
appointed as external auditor of WBL. (06)

Q.9 (a) You are a partner in a firm of chartered accountants. You have received a letter from a
special investigation committee formed by the government to investigate the affairs of
Naqshbandi Limited (NL). Your client Rahim Limited (RL) is the subsidiary of NL.
The investigation committee requires you to submit the details of all the transactions

firm to report the transaction value and the arm’s length value of all the transactions.
carried out by RL with NL and its related parties. The committee also requires your

Required:
In the light of Code of Ethics for Chartered Accountants, discuss any three factors that
your firm should consider while disclosing client information to the investigation
committee. (03)
(b) Your firm has just been appointed as the auditor of Get Fit Gym Limited (GFG) which
operates a chain of high end gyms and fitness centers across the country. The
managing director of GFG is a close friend of the audit manager and the audit was
awarded to your firm through this connection.
In a recent meeting, the managing director of GFG has offered to grant membership to
all the staff members of your firm at 50% discount.

Required:
Evaluate the threat(s) which may arise in the above situation. Also discuss the
safeguards required to mitigate such threat(s). (08)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

Evaluation
Sales return subsequent to the year-end can be an adjusting event which needs to be adjusted in
the financial statements.

Steps to perform
ƒ Check the return of goods with the relevant goods receipt document.
ƒ Inquire from the management the reasons for the return of good and assess whether it is
an adjusting event.
ƒ If it is established that it is an adjusting event than ask the client to reduce the sales and
receivables and incorporate corresponding effects in cost of sales and inventory.
ƒ Consider the fraud risk that whether the sales were made for overstating the sales for the
year end.

Additional steps (overall)

Since there are doubts over the reliability of the confirmation response, the auditor should also
perform the following alternate audit procedures to gather audit evidence:
ƒ Subsequent receipt of the amount should be checked.
ƒ If no payment has been received, the outstanding sales invoices should be checked with
purchase order issued by the customer and delivery note duly acknowledged by the
customer.

A.7 (i) ƒ Firewalls to prevent intrusion into the programs that send and receive data.
ƒ Restricting access to source data that is transmitted.
ƒ Using check sums and check digits to ensure that data received is intact.

(ii) ƒ SL should also store its backup data at some other location.
ƒ SL should develop disaster recovery plans, such as an agreement with another entity to
make use of its computer center in the event of a disaster such as a fire or flood.
ƒ The company should make suitable maintenance and service agreements with
software companies, to provide technical support in the event of operating difficulties
with the system.

A.8 Rao Arif & Co.

Under the provision of Companies Act, 2017, a person who is, or at any time during the preceding
three years was a director, other officer or employee of the company is not eligible for
appointment as auditor.

Furthermore, a person will not be qualified for appointment as auditor of a company if he is

disqualified for appointment as auditor of any other company which is that company s subsidiary
or holding company.

Therefore, being the former CFO of WBL s subsidiary will make Rao Arif & Co. ineligible for
appointment as external auditor.

Hatim Tughlaq & Co.

Under the provision of Companies Act, 2017, a person who is indebted to the company other than
in the ordinary course of business of such entities cannot be appointed as the auditor.

Since it is in the ordinary course of WBL to grant loan therefore HatimTughlaq & Co. can be
appointed as external auditor WBL.
Rashid Kareem & Co.
Page 5 of 7
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2020

A person or a firm who, whether directly or indirectly, cannot be appointed as auditor if it has
business relationship with the company other than in the ordinary course of business of such
entities.

If properties are rented out in the ordinary course of business than Rashid Kareem & Co. can be
appointed as the external auditor of WBL.

A.9 (a) ƒ Whether the interests of all parties, including third/related parties whose interests
may be affected, could be harmed if the client consents to the disclosure of
information.
ƒ Whether all the relevant information related to the related parties is known and
substantiated, to the extent it is practicable.
ƒ Since the requirement of the committee involves reporting on the arm s length price of
the transaction which generally involves unsubstantiated facts or unsubstantiated
conclusions, professional judgment shall be used in determining the type of disclosure
to be made, if any.

(b) Threat
Close friendship of the audit manager with the managing director would cause a familiarity
threat, because the audit manager would be biased towards the managing director and
would sympathetic to his interest or too accepting of his work.

Safeguard
ƒ Structure the audit manager s responsibilities to reduce any potential influence over
the assurance engagement; or
ƒ Review the assurance work from a chartered accountant; or
ƒ Remove the audit manager from the engagement.

Threats
ƒ Offering of membership at reduced rate could cause a self-interest threat to the audit,
because the recipients may not want to lose their benefit, and therefore be biased in
their audit work or not seek adjustments where there are material issues in the
financial statements.
ƒ An intimidation threat may also arise because the audit client may threaten to make
such offers public to degrade the firm s reputation.

Safeguards
Auditors are not allowed to accept such benefits unless their value is trivial and
inconsequential. In this case, the value of a reduced membership of a high end gym is
unlikely to be trivial and inconsequential to audit staff members and therefore the firm
should reject this discounted offer of MD.

A.10 (a) In response to assessed risk of material misstatement due to fraud, the auditor shall:
ƒ emphasize to the audit team the need to maintain an attitude of professional
skepticism.
ƒ assign more experienced staff or increased supervision of staff.
ƒ to the extent not already done, the auditor shall obtain an understanding of the
entity s related controls, relevant to such risks.
ƒ evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may
be indicative of fraudulent financial reporting resulting from management s effort to
manage earnings.
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