Certificate in Accounting and Finance Stage Examination

The Institute of 4 September 2018

Audit and Assurance

“The auditor has expressed an unqualified opinion. Since the auditor must have
arrived at his opinion after testing majority of the transactions, therefore the financial
statements are correct in all respects. Since no control deficiencies and fraudulent
conduct had been reported by the auditor, I can safely invest further amount of money
in the company because there is no risk that I will lose my money due to fraudulent
conduct of management or misrepresentations in the financial statements.”

Required:
Write a letter to your friend to remove his misconceptions related to the audit of financial
statements including brief explanation of your point of view. (08)

Q.2 (a) You are the audit senior at FSY Limited (FSY) for the year ended 30 June 2018. FSY
manufactures and supplies toys to wholesalers, super stores and distributors. Different
prices are charged from each customer depending upon their credit rating and amount
of purchases.

Your team has made a plan for test of details for verification of sales. The sampling of
invoices would be made as per the following plan:
(i) Sales reported in the financial statements is Rs. 800 million net of sales returns.
This would be used for determining the sample size.
(ii) 50% of the net sales represents sales to distributors, 40% to super stores and 10%
to wholesalers.
(iii) FSY sells its toys to 10 super stores only, who are invoiced on a monthly basis.
The audit team would test all the invoices of June and December because
invoices prepared close to period end are more prone to overstatement. In
addition, 2 invoices would be checked for each of the other 10 months.
(iv) 100 sales invoices to distributors and wholesalers would be selected haphazardly
from invoice files. The number of invoices to be checked has been determined
considering that expected rate of deviation is low. The expectation regarding rate
of deviation is based on the fact that overall audit risk has been assessed as low.

Required:
Identify the weakness in the sampling approach planned by the audit team and suggest
appropriate changes. (10)

(b) Following matters arose during the performance of test of details on sales:
(i) Three invoices of superstores could not be found in the record room. The staff
explained that it would require a lot of time to find them and requested your
team to select some other invoices. Scrutiny of the ledger revealed that total
amount of these missing invoices was Rs. 6 million.
(ii) Five of the invoices issued to distributors were booked at the rate of
Rs. 1,725 per carton instead of Rs. 1,275 per carton. The quantity involved was
3500 cartons.

Required:
Explain how you would resolve the above issues.
(Impact on the audit report is not required) (05)
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Q.3 You are the audit manager responsible for the audit of Hub Mills Limited (HML). At the
planning stage, materiality level was determined at Rs. 8 million.

Audit team has completed the audit field work for the year ended 30 June 2018 and has
presented the following issues identified during the audit for your review:
(i) Goods worth Rs. 3 million were returned by a customer on 5 July 2018 due to poor
quality. Since the goods were returned subsequent to year end, no adjustment has
been recorded by the management.
(ii) HML is facing liquidity issues which has resulted in adverse key financial ratios. To
address the issue, HML has sold one of its offices to a company managed by a director
of HML. The office was sold for Rs. 40 million. Since the management had correctly
recorded the disposal, no specific disclosures related to this sale have been made in the
financial statements. Directors are confident that these sale proceeds would solve the
cash flow problems of HML.
(iii) A customer who owed Rs. 11 million at year-end, was declared bankrupt on
15 August 2018. The management had already provided 50% of the balance in the
financial statements.

Revenue for the current year is Rs. 800 million (2017: Rs. 950 million) and loss before tax is
Rs. 22 million (2017: Rs. 7.6 million).

Required:
(a) In respect of each of the audit issues identified by your team, mention the impact
(if any) which these might have on the audit report along with proper justification. (10)
(b) What matters would you want to include in the management representation letter,
with regard to the above issues. (05)

Q.4 You are the audit senior on the audit of Ormara (Pvt.) Limited (OPL). During the planning
phase of the audit, you have identified that OPL has adopted the revaluation model for
buildings for the first time. The valuation was carried out by an independent well established
external valuer.

Required:
Identify and assess the risks of material misstatement at assertion level and briefly state the
key audit procedures to mitigate these risks. (05)
(Procedures for assessing the competence and objectivity of the expert are not required)

Q.5 (a) You have recently been promoted as a partner in the assurance department of a firm of
chartered accountants. Your portfolio of clients includes Shah Motors (Pvt.) Limited
(SML), a leading car dealer. Qaiser, a senior manager assurance in your firm, has been
auditing SML for the past 7 years. While updating you about SML, Qaiser informed
about the following:
(i) On the request of an audit team member, CFO of SML has helped the team
member’s brother in securing early delivery of a vehicle ordered by him on
preferential basis.
(ii) SML has hired a new Head of Marketing. His son Amjad is expected to be
included as a junior team member in SML’s audit team.

Required:
Discuss the possible threats which may arise, their significance and the safeguards
required to mitigate those threats. (10)

(b) State the circumstances where a chartered accountant may be required to disclose the
information obtained during the audit. (03)
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Q.6 Imran is the audit senior responsible for the audit of Pasni Garments Limited (PGL). During
the audit he noticed that PGL made significant transactions with related parties.

Required:
(a) State the audit procedures which should be performed to check whether all related
parties have been disclosed. (05)
(b) What steps should Imran perform if he identifies any related party transactions which
were not identified and disclosed by the management? (06)
(Impact on the audit report is not required)

Q.7 (a) Briefly describe what is a system log file and give any four types of information that
may be generated by a system log. (03)

(b) Differentiate between General IT controls and Application controls. (04)

(c) Advanced Limited (AL) uses an in-house developed integrated system for all its
accounting and operational needs. AL has been facing following issues in transaction
processing:
(i) While processing a batch of 50 purchase invoices, it was noticed that 3 invoices
of suppliers were posted twice in the accounts.
(ii) Some instances have been identified in which AL’s accountant had posted the
amount received from the customers in some other customer’s account due to a
typing error of the customer code.
(iii) While processing the payments, the accountant often fails to mention the cheque
number, due to which it takes a lot of time to trace the payment in bank
statement.
(iv) While recording inventory movement, the accountant had used incorrect
inventory codes. Since those codes did not exist, the system posted the
transaction in suspense account.

Required:
Identify and briefly describe one specific application control in respect of each of the
above type of errors, to reduce the risk of such errors. (08)

Q.8 (a) The auditor should be cognisant of the fact that fraudulent financial reporting often
involves management override of controls. State any four techniques which the
management may use for fraudulent financial reporting. (04)

(b) Under the Companies Act, 2017 identify the situations in which the Commission may
appoint a person to fill the vacancy of an auditor. (03)

(c) Briefly discuss the steps an auditor would need to take if management refuses to allow
him to send confirmation request to a debtor. (05)

(d) Mention any six tests of controls which an auditor may perform in respect of dispatch
of goods and invoicing in an organisation where all related documents are prepared
manually. (06)

(THE END)