Table of Content Page 1

Table of Contents (ICAP Question Bank)

Topics Questions Answers
Risk Assessment
- Mix Questions 3 218
- Audit Risk Questions (From ICEAW) 32 272
- Analytical Procedures (ISA 520) 41 282
- ISA 315 & Controls 44 285
- ISA 240 47 291
- ISA 550 49 294
- ISA 570 51 299

Implication of Audit Report

- ISA 700 57 309
- ISA 701 57 310
- ISA 705 & 706 59 316
- ISA 710 66 327
- ISA 720 68 331
- Mix (700 Series) 70 334

Code of ethics 78 349

Appointment of Auditors
– Legal Consideration - Companies Act, 2017 95 384
– Legal Consideration- Code of Corp Governance & Listing Reg 96 385

Audit procedures on specific areas (Knowledge of IAS & IFRS) 98 388

Miscellaneous 110 408

200 Series (Remaining)

ISA 200 117 421
ISA 210 117 422
ISA 220 118 424
ISA 250 120 428
ISA 265 121 433

300 Series (Remaining)

ISA 320 122 434

400 Series (Remaining)

ISA 402 123 435
Table of Content Page 2

500 Series (Remaining)

ISA 500 124 437
ISA 501 126 441
ISA 505 128 445
ISA 510 129 447
ISA 530 131 451
ISA 540 131 452
ISA 550 131 454
ISA 560 132 455
ISA 580 133 457
600 Series
ISA 600 134 458
ISA 610 137 465
ISA 620 138 467
800 Series
ISA 800 139 468
ISA 805 139 469
ISA 810 139 470
ISREs
ISRE 2400 141 473
ISRE 2410 142 474

ISAEs
Framework for Assurance Engagement 143 476
ISAE 3000 144 477
ISAE 3400 146 482
ISAE 3402 155 495
ISAE 3410 155 496

ISRSs
ISRS 4400 156 497
ISRS 4410 159 504
ISQC 1 160 505
Substantive Procedures (and 330) 161 506

Multiple Standard Questions (Other Professional Bodies)

163 512
- Additional Practice during the Last Month
Mock 618 624
Past Paper Analysis Page 1 Audit, Assurance & Related Services
Past Paper Analysis Page 2 Audit, Assurance & Related Services
Risk Assessment (Mix Question) Page 3 ICAP Past Papers

Risk Assessment (ISA 315,240,550,520 & 570)

Risk Assessment (mix questions)

Q.1 - Summer 23
Your firm Asim Ghani & Company, Chartered Accountants has been appointed as the auditor
of Sparrow Limited (SL), which is listed on the Pakistan Stock Exchange and engaged in the
business of software development and trading. The appointment was made due to the board
of directors’ dissatisfaction with the previous auditor’s performance. The previous auditor
was removed after only two years. The board of directors believed that the previous auditor
was inefficient in their work and that the changes recommended by them often proved
erroneous, as SL's management rarely agreed to them.

During the first meeting with the SL’s management, they have shared the following extracts
from the draft financial statements for the year ended 31 March 2023 with your team:
2023 2022
--------- Rs. in '000 ---------
Extracts from statement of financial position
Property and equipment 218,503 73,115
Intangibles 1,000,732 566,870
Contract assets 878,980 444,687
Cash & cash equivalents 357,665 565,880

Share capital 1,000,000 1,000,000

Extracts from profit or loss

Revenue 5,899,750 3,477,800
Gross margin 773,203 455,790
Operating profit 365,151 215,250
During the meeting, your team has also been informed as follows:
(i) SL’s revenue is derived from various sources, primarily through sale of off-the-shelf
software, bespoke software projects, regular software updates, and end-to-end solutions
in the form of short-term and long-term projects. SL secured two large development
projects from a financial institution based in the Middle East, leading to a major increase
in contract assets by year-end.
(ii) Until March 2022, 95% of SL’s business came from North American clients. However,
during the year ended 31 March 2023, SL has witnessed substantial growth in business
from the Middle East and Pakistan. Despite this increase, during the year ended 31 March
2023, 50% of income is still generated from North America, 35% from Middle East, and
15% from Pakistan. This rise in sales is mainly attributed to SL’s strategic decision to
establish a dedicated division catering to clients in Pakistan and Middle East.
Risk Assessment (Mix Question) Page 4 ICAP Past Papers

(iii) To promote foreign exchange inflow in Pakistan, the government has granted SL a land
and building for expanding its operations. The government has set a sales target of USD
100 million to be achieved within five years. The increase in property and equipment is
mainly a result of this grant.
(iv) Increase in intangible assets can be attributed to two reasons. Firstly, during the year, SL
has revalued its intangible assets, which were previously carried at cost, resulting in a
revaluation surplus. These intangibles primarily consist of customer support software
acquired by SL in 2018. Secondly, the development of a state-of-the-art website has also
contributed to the increase. This website has enabled SL to showcase its projects and
collect client’s data for bespoke projects.
(v) Due to a high turnover of key development staff, SL has implemented a new scheme of
offering interest-free loans for the purchase of vehicle and for housing-related expenses,
such as purchasing or constructing a house. These loans are payable over a maximum
period of 20 years.

Required:
Discuss the audit risks that exist in the above scenario. (20 marks)

Q.1 - Winter 22
You are the audit manager responsible for the audit of Alpha Communication Limited (ACL)
for the year ending 31 December 2022. ACL has been operational in Pakistan since 2012 and
is a subsidiary of a public listed company incorporated in China. ACL’s principal activity is to
manufacture, distribute and provide servicing of smart phones, tablets, accessories and allied
products.

In a recent audit planning meeting with the Chief Financial Officer, following information has
been provided to you:
(i) Extracts of statement of financial position:
Forecasted Audited Audited
2022 2021 2020
---------------- Rs. in '000 ----------------
Trade receivables 873,370 419,572 361,974
Loan from parent company 1,650,000 1,650,000 1,950,000

(ii) Extracts of income statement:

Forecasted Audited Audited
2022 2021 2020
---------------- Rs. in '000 ----------------
Sales revenue 2,680,000 1,963,346 2,330,097
Interest expense (264,000) (245,000) (234,000)
Exchange loss - (7,084) (33,464)
Risk Assessment (Mix Question) Page 5 ICAP Past Papers

(iii) The increase in current year’s sales revenue is mainly due to a large order from the
government for procurement of 100,000 android tablets at Rs. 13,000 each, for
conducting census throughout the country. Another order of 100,000 android tablets is
expected to be received in January 2023 which would be required to be delivered within
30 days. Considering the tight delivery timeline, the management has decided to
manufacture the tablets in December 2022.
(iv) During the year, a manufacturing plant malfunctioned several times and consequently
several orders were fulfilled by importing the smart phones from the parent company.
This plant was purchased at the commencement of operation in 2012.
(v) During the last two years, the staff turnover in the accounts department has been high
due to job stress and long working hours. Except the Chief Financial Officer and the Senior
Cost Accountant, all three remaining employees have not stayed with the company for
more than two years. Temporary employees are often hired in the department to ensure
that the recording of daily transactions are kept up-to-date.
(vi) In May 2022, ACL has installed and commissioned fixed asset and human resource
modules but none of the modules has yet been integrated with the general ledger system.
(vii)ACL is presently negotiating with its bank to renew the existing running finance facility
which is being expired on 15 December 2022.

Required:
Identify and discuss the audit risks that exist in the above scenario and how you would
respond to these risks. (20 marks)

Q.3 - Summer 22
You are the manager responsible for the audit of Casper Limited (CL), for the year ending 30
June 2022. CL manufactures parts for medical equipment.

CL has been facing issues related to toxic emissions in its manufacturing process. In the last
five years, a Government Environmental Agency (GEA) imposed fine between Rs. 3 million to
Rs. 5 million each year.

In May 2022, CL has installed a new filter in its manufacturing plant at a cost of Rs. 20 million,
to process toxic emissions. The new filter is expected to reduce the toxic emissions by over
95%. It is expected that installation of this new filter will prevent imposition of fines by GEA.
Annual inspection by GEA is scheduled to take place in the month of August 2022.

During a meeting with the chief financial officer, she informed you the following:
(i) The filter is a new product of the filter manufacturer and CL is the first buyer of this
product. Therefore, the filter manufacturer:
 provided significant discount to CL on purchase of this filter;
 has been providing excellent after sales service to CL; and
 has provided a guarantee to CL that the filter will significantly reduce the toxic
emissions.
Risk Assessment (Mix Question) Page 6 ICAP Past Papers

(ii) The existing provision for fines to GEA has been reversed as the new filter is most likely
to prevent imposition of the fine.
(iii) The useful life of CL’s manufacturing plant has been increased from 10 years to 15 years.
CL had engaged an external independent engineering firm to review the useful life. She
also informed that the cost of the new filter has been expensed out as it was not the
reason to increase the useful life of the existing manufacturing plant.

Required:
Evaluate the possibility of misstatement which may occur in the above scenario. Also state
the audit procedures that should be carried out by your audit team in this regard. (13 marks)

Q.1.a - Summer 22
You are the audit manager of Maryam & Company, Chartered Accountants, responsible for
planning the audit of Turbo Pakistan Limited (TPL) for the year ending 30 June 2022. TPL is
engaged in selling branded motorcycles which it imports from China.

After obtaining the preliminary understanding and performing the related procedures, your
audit team has presented the following significant matters:
(i) TPL provides one-year warranty on the motorcycles. The warranty covers free of cost
repair of any defect and replacement of any faulty part. Up to last year, TPL maintained a
warranty provision of 6% of total sales.
The management has informed that the quality of motorcycles has significantly been
improved over the period and they are considering the reduction in warranty provision.
The audit team reviewed the last year provision and observed that actual claims were
slightly higher than the provision.
(ii) During the year, in order to boost sales, TPL has relaxed its credit policy from 30 days to
60 days. This relaxation is expected to increase the sales by at least 10% as compared to
last year. Up to last year, TPL maintained provision for bad debts at 5% of the total
debtors balance at year-end. The management has informed your audit team that TPL
will continue to maintain the same level of provision for current year as well.
(iii) The internal auditors of TPL reported that cash collected from certain small dealers were
not recorded and deposited in the bank on timely basis and they have recommended to
avoid cash collections from dealers.

Required:
Identify and discuss the audit risks from the above information and explain auditor’s
response to each risk in planning the audit of TPL. (Reporting implications are not required)
(12 marks)

Q.2 - Winter 21
Your firm has been appointed as the auditor of a recently launched innovative food business
venture by the name of Macaw Foods (Private) Limited (MPL). Extracts from draft financial
statements for the year ended 31 October 2021, provided by the management are as follows:
Risk Assessment (Mix Question) Page 7 ICAP Past Papers

Rupees
Statement of profit & loss:
Joining fee – non refundable 12,500,000
Service charges 50,000,000
Profit on supply of ingredients 7,500,000

Statement of financial position:

Current assets:
Inventory 12,000,000
Cash and bank 10,000,000
Current liabilities:
Payable to restaurants (net of service 10,000,000
charges and profit on ingredients)
Equity:
Share capital 300,000,000

Following additional information is available regarding MPL:

Background
Marium and Mujtaba are the co-founders of MPL and are also involved in the entity’s
operational activities. They had approached a venture capital fund (the fund) for financing
the start up. The fund financed MPL in return of a 40% equity stake in the business. Being a
high risk investment for the fund, they have a superior right on MPL’s assets and payouts
over other stakeholders. Remaining amount was raised through a Rs. 100 million bank loan.

Operations
MPL has established large shared kitchens in the key localities of the city where MPL offers
restaurants to scale up and have immediate presence in that locality. If a restaurant brand
joins MPL, all it needs to do is to share its recipe with MPL’s team. On receiving the order,
MPL will be responsible for sourcing of ingredients, cooking with care to packaging and
delivering it to the customers. The restaurants thus save huge costs of setting up their own
infrastructure through partnership with MPL.
To partner with MPL, restaurants have to enter into a three year contract under which they
are required to pay a non-refundable joining fee of Rs. 100,000 and a 30% service charge for
order delivered by MPL and 25% service charge for order delivered by any third party food
delivery company. In addition, restaurants are also charged for the cost of commonly used
ingredient on a standard rate communicated to all restaurants on the first day of the month.
However, specialized ingredients are required to be supplied by the restaurants themselves.
MPL purchases ingredients in bulk quantity and resultantly obtains huge discounts. MPL’s
management has presented profit on ingredients in its financial statements on a net basis as
they believe that they are acting as an agent for restaurants.
Risk Assessment (Mix Question) Page 8 ICAP Past Papers

Invoicing
An electronic data interchange system has been set up which directly connects MPL with the
restaurants ordering system. Weekly invoices are also automatically shared with restaurants.
Restaurants which do not operate an online ordering system are catered manually. A
separate ledger is maintained for each restaurant in which all receipts and payments are
recorded. Each restaurant is invoiced weekly on the basis of their ledger balance. Being a
recent start up, MPL is a bit understaffed as there are only two accountants who are
responsible for managing, processing and recording all cash inflows, outflows and
preparation of management reports.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of identified risks. (23 marks)

Q.2 - Summer 21
You are the audit manager in a firm of chartered accountants responsible for the statutory
audit of Hackney Pharma Limited (HPL) which is principally engaged in the business of
manufacturing and sale of pharmaceutical products.

Extracts from HPL’s statement of profit or loss for the year ended 31 May 2021 are as follows:

2021 2020
Description
-----------Rs. in '000 -------------
Sales 3,343,214 3,213,435
Sales returns (72,519) (73,202)
Sales - net 3,270,695 3,140,233
Cost of sales (1,895,590) (1,860,579)
Selling & marketing expenses (94,089) (93,629)

During the planning meeting for the year ended 31 May 2021, HPL’s management informed
you about the recall notice issued in respect of HPL’s flagship product ‘Azteca’. The notice
was published in a local newspaper on 1 May 2021. The notice was issued on the advice of
the drug regulatory authority following complaints received with regard to development of
unexpected side effects in some users of the product.

Azteca is a patent product under the licensing agreement with Global Healthcare
Laboratories (GHL), a multinational company, signed in year 2017. Under the agreement, HPL
manufactures and sells Azteca for 10 years against payment of upfront license fee of Rs. 300
million. HPL is also subject to penalties in case of use of substandard raw material in the
manufacture of Azteca. The raw material is imported from foreign countries. Currently, GHL
is investigating the reason for the defect/unexpected side effects.
Risk Assessment (Mix Question) Page 9 ICAP Past Papers

The management has also informed you that this product recall has not only affected HPL’s
sales but has also created working capital issues. HPL took immediate steps such as
commenced negotiation with the bank for financing working capital and launched aggressive
marketing campaign in May 2021 to boost the sale of its other products.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of identified risks. (22 marks)

Q.1 - Winter 20
You are the audit manager at Haroon Rahim and Company, Chartered Accountants
responsible for the audit of Fit Bit Limited (FBL) for the year ended 30 November 2020. FBL
is a listed company and is engaged in the manufacturing of fitness equipment and related
accessories. FBL sells its products all over the country through a chain of distributors.
The extracts from the draft financial statements for the year ended 30 November 2020 are as
follows:
2020 2019
------ Rs. in million ------
Revenue from sale of fitness equipment 71,000 70,000
Revenue from subscription of plans 30,000 -
Profit before tax 500 400
Property, plant and equipment 6,600 6,900
Intangible assets 1,000 250
Advance from customers 10,000 200
Stock in trade 16,000 15,800

During the month of October 2020, due to faulty pad used in a newly manufactured fitness
equipment, 60 accidents were reported where FBL had paid compensation aggregating Rs.
30 million. Upon identification of fault, the sale of this equipment was immediately
suspended until the matter was resolved in a month’s time. The entire compensation amount
paid to customers has been reported in the financial statements as receivable from a supplier
who had supplied such faulty pads.
On 1 January 2020, FBL launched a mobile application that generates personalized exercise
and diet plans considering an individual user’s physical and medical conditions. The
application has received an overwhelming response as large number of domestic and foreign
customers have subscribed for it. Following information is available in this respect:
(i) The application was developed in-house with the support of a leading software house.
(ii) Each customer has an option to subscribe biannual or annual plan.
(iii) All the subscription plans are paid in advance; however, each subscriber has an option to
cancel the plan within 30 days and claim the refund of the entire subscription amount.
Risk Assessment (Mix Question) Page 10 ICAP Past Papers

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of the identified risks. (22 marks)

Q.7 - Winter 19
While conducting the audit of financial statements of Ghurair Limited, it has been discovered
that the company has received a material amount in bank, recorded as sales. On inquiry, the
finance department has informed that this amount represents a price increase claim received
from a foreign customer. It has also confirmed that there is no previous history of receiving
such claim from any foreign customer. Documentary evidence relating to the transaction has
been requested but has not been provided yet.
Required:
Discuss the implications of the above transaction on the completion of the audit. Also
recommend the action(s) in this regard which the firm should take. (05 marks)

Q.3 - Winter 19
You are the audit manager assigned to the audit of Astron Computers Limited (ACL) for the
year ended 30 November 2019. Following information is available:

(i) The main business of the company is the importation of servers, laptops, desktop
computers, LCD screens and related accessories for sales to large customers and
retailers. ACL was incorporated in 2002 and operated profitably until 2016 when it
turned into a loss-making entity due to increased availability of refurbished computers
in the market.

(ii) Extracts from the draft profit and loss account:

2019 2018
Rs. in million
Sales 430 648
Cost of sales (388) (583)
Loss before taxation (32) (64)

(iii) Draft statement of financial position:

2019 2018 2019 2018

Assests Equity & liabilities
Rs. in million Rs. in million
Non-current assets Equity and reserves
Fixed assets 45 51 Share capital 6 6
Deferred tax 27 24 Reserves 27 50
72 75 33 56
Risk Assessment (Mix Question) Page 11 ICAP Past Papers

Current assets Non-current liabilities

Inventories - in hand 97 90 Warranty provision 9 16
Inventories - in transit 12 7
Trade receivables 90 81 Current liabilities
Cash and bank 1 2 Payables 50 30
200 180 Provisions 172 138
Running finance 8 15
230 183
272 255 272 255

(iv) In June 2019, ACL decided to discontinue import and sale of desktop computers and LCD
screens and to concentrate selling servers and laptops. It also decided to introduce an
All-In-One PC which is not currently available in the refurbished market. To further boost
the sales, ACL has started offering extended warranties in addition to a two-year
warranty period for all of its products at a nominal increase in price. ACL is presently
negotiating with its bank to enhance the running finance facility in order to meet the
additional working capital requirements.

(v) In September 2018, ACL had entered into contracts with two leading chains of schools
for supplying 20,000 desktop computers and LCD screens at a nominal margin. ACL has
already supplied 6,000 units before deciding to discontinue this product segment. ACL is
presently negotiating with the management of both schools to change the contract from
the supply of desktop computers and LCD screens to All-In-One PC. One of the schools
has agreed to this change while negotiations with other school is in progress. In case, the
other school does not agree to the change, ACL would either terminate the contract by
paying a penalty of Rs. 6 million or procure the remaining units from any other supplier
whose cost might be even more than the contract price.

(vi) In May 2019, ACL ordered desktop computer accessories at a landed cost of Rs. 20
million from a company based in Hong Kong. Due to the political unrest in Hong Kong,
the shipment was delayed for more than five months despite the ordered units were
manufactured on time. On discontinuance of the business of desktop computers and LCD
screens, ACL asked the manufacturer to cancel the order. However, the manufacturer
refused to cancel the order. In November 2019, the manufacturer shipped the ordered
units which were received by ACL on 2 December 2019. CEO has informed that
they are under negotiation with a local distributor to dispose of the entire desktop
computer accessories.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
that you would perform to address those risks. (22 marks)
Risk Assessment (Mix Question) Page 12 ICAP Past Papers

Q.1 - Summer 19
Your firm has been appointed as the auditor of Best Industries Limited (BIL) for the year
ending 30 June 2019. BIL is a listed company and has three production plants. Plants A and B
manufacture industrial chemicals whereas Plant C is used in manufacturing of various
cosmetic and skin care products.

The following information has been gathered by the audit team:

(i) Ghufran is the CEO and holds, directly and indirectly, majority of the shareholdings in
BIL. There are seven other directors on the board who meet four times a year to approve
the quarterly financial statements and endorse the decisions taken by Ghufran during
the quarter.
(ii) Considering the decline in demand of the products, BIL has taken the following decisions
during the year:
 Close Plant B with effect from 31 August 2019. The public announcement of this
decision was made on 15 April 2019.
 Introduce a new incentive package for distributors in January 2019 to boost the sales
of industrial chemicals. The sales commission rate is dependent on achieving the
various annual target levels set by the BIL’s management.
 Launch a customer loyalty program in February 2019 in which customers are
awarded loyalty points on each purchase of cosmetic and skin care products from
selected retail outlets and online stores. The management believes that this initiative
would increase the demand of cosmetic and skin care products.

(iii) Staff at production and marketing departments are hired at low salaries but they are
given high annual bonuses on achieving their targets.

(iv) Last year, BIL was selected for tax audit in which the income tax department had
disallowed certain business expenditures. BIL filed an application against the order
issued by the income tax department. However, it lost the first appeal and has recently
filed a second appeal to the relevant income tax authority.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
that you would perform to address those risks. (24 marks)

Q.1 - Winter 18
You are the engagement manager in Hasan Abdali and Company, Chartered Accountants. One
of your clients is Falcon Limited (FL) which owns six shopping malls and four office building
complexes in different cities for rental purposes. FL also constructs and sells residential
apartments in major cities of Pakistan.

The following matters were discussed in the planning meeting of the audit for the year ending
31 December 2018:
Risk Assessment (Mix Question) Page 13 ICAP Past Papers

(i) CFO informed that FL has implemented a new enterprise resource planning system
(ERP). He stated that FL has successfully revamped the entire accounting system through
this new ERP.
(ii) A shopping mall located in Multan has been witnessing low turnout of customers. FL has
been trying to persuade its tenants for not vacating their shops and have offered that
they pay 50% of the rent and pay the remaining amount when conditions improve. Some
of the tenants have accepted FL’s offer and have formally negotiated a two-year
relaxation period.
(iii) FL’s head office was shifted to a central location in a newly constructed building. Two
floors of the building which were surplus to FL’s need have been rented out to MM
Limited (MML) which is owned by a director of FL. MML provides maintenance services
to various building projects. FL and MML have agreed that FL will not charge any rent for
the two floors in consideration for free maintenance of Multan shopping mall and the
head office.
(iv) Construction of four residential projects started during the year. The projects are in
various stages of completion. About 70% of the apartments have already been booked.
FL offers different terms to its customers depending upon which option they choose.
(v) The balcony of one of the apartments constructed in 2012 fell off, severely injuring three
persons. The news surfaced in the media and caused severe criticism on FL and a show-
cause notice was also received by FL from a regulatory authority. FL’s management is of
the view that the construction was up to the required standards and the residents had
made some modifications which caused this incident.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of the identified risks. (23 marks)

Q.1 - Summer 18
You are the audit manager of Saqib Shaukat and Company, Chartered Accountants,
responsible for the audit of Modern Electronics Limited (MEL) for the year ended 31
May 2018. MEL is a listed company and is engaged in manufacture of wearable sports sensors,
smart watches, GPS navigation systems, vehicle cameras and fleet management system, and
sells it through a chain of distributors throughout the country.
The extracts of segment information as disclosed in the draft financial statements for the year
ended 31 May 2018 is as follows:
GPS navigation Wearable sports All other
Total
system sensors segments
2018 2017 2018 2017 2018 2017 2018 2017
--------------------- Rs. in million ----------------
Revenue 6,323 7,978 4,119 5,319 3,480 2,346 13,922 15,643
Cost of (3,830) (5,158) (3,234) (4,149) (2,749) (1,643) (9,813) (10,950)
sales
Risk Assessment (Mix Question) Page 14 ICAP Past Papers

Gross profit 2,493 2,820 885 1,170 731 703 4,109 4,693
Net profit 1,141 1,244 257 351 133 282 1,531 1,877
Fixed assets 1980 2,329 2,395 2,661 2,777 1,662 7,152 6,652
Debtors 633 685 361 488 334 196 1,328 1,369
Inventory 640 665 378 444 294 196 1,312 1,305

The following information is also available:

(i) MEL was witnessing a shift of customers from wearable sports sensors to smart watches
which have additional features as compared to the features being offered by sports
sensors. Therefore, to maintain its customer base MEL started developing its own smart
watch and successfully launched it in 2018. MEL intends to expand its product range in
the smart watch segment by expanding its manufacturing facility which would be
financed through a right issue.
(ii) On 10 April 2018 MEL publicly announced that it was closing an old (fully depreciated)
plant which was used to manufacture a component used in the wearable sports sensors
and will instead import it from China at cheaper rates. The management is considering
various options in respect of this plant. However, the affected employees were
communicated about the decision on the same date and negotiations with the labour
union were started for agreeing on the termination payments.
(iii) A significant portion of the sale of GPS navigation system consists of sale to the tourism
industry. The government had made it mandatory for all tour operators to install GPS
navigation system. The compliance has to be made by all tour operators over a period of
four years. Association representing the country’s tour operators had signed a four-year
agreement in April 2016 with MEL under which discounted sale price has been offered
to the tour operators which cannot be raised. A natural disaster destroyed the supplier’s
plant which supplied several components of the GPS navigation system and consequently
MEL has to import these components from Malaysia at twice the cost of local purchase.
At the year-end 200 contracts for supply of 4,000 GPS navigation systems are still
pending.

Required:
Identify the audit risks in the above situation and specify the key audit steps which you will
perform in respect thereof. (20 marks)

Q.1 - Winter 17
You are the audit manager of Mehmood Auto Limited (MAL), a listed company, for the year
ending 31 December 2017. MAL assembles and manufactures a wide range of motor vehicles.
All motor vehicles sold by MAL are under warranty up to a mileage of 50,000 km and are also
eligible for free service every quarter for two years.

The extracts from the draft financial statements prepared by the management are as follows:
Risk Assessment (Mix Question) Page 15 ICAP Past Papers

2017 2016
Rs. in million
Revenue from sales of motor vehicles 54,000 70,000
Revenue from sales of spare parts 1,500 1,000
Cost of sales (49,950) (63,190)
Gross profit 5,550 7,810

2017 2016
Assets Rs. in million
Property, plant and equipment 6,600 4,510
Deferred tax 233 194
Instalment sales receivables 1,200 700
Stock in trade 16,000 13,000
Other assets 13,817 15,476
37,850 33,880
During the course of the audit, you came to know that there have been 37 instances of serious
accidents involving newly manufactured cars where MAL had to pay compensation
aggregating Rs. 145 million plus cost of repairs amounting to Rs. 14 million.
An investigation into the matter has revealed that 15 such accidents were because of failure
of the brakes. The management has assured you that the fault has been identified and
appropriate corrective measures have been taken in this regard. However, you have noted
that the entire compensation amount is being shown as receivable from a supplier who has
provided the brake system.

Required:
Identify the audit risks in the above situation and specify the key audit steps which you will
perform in respect thereof. (20 marks)

Q.1 – Summer 17
Your firm is the external auditor of Namura Limited (NL), a listed company. Following
information has been made available to you at the planning stage:

Extracts from statement of comprehensive income

for the year ended 31 March 2017
2017 2016
Rs. in ‘000
Profit/(loss) before tax 161,990 (241,075)
Taxation (50,000) 74,000
Profit/(loss) after taxation 111,990 (167,075)
Risk Assessment (Mix Question) Page 16 ICAP Past Papers

Extracts from statement of financial position

as at 31 March 2017
2017 2016
Assets Rs. in ‘000
Property, plant and equipment 1,472,690 1,475,000
Intangible assets 650,000 750,000
Investment in PCL Limited 75,000 250,000
Deferred tax asset 175,000 199,000
Current assets 850,000 723,015
3,222,690 3,397,015

Equity and liabilities

Share capital 700,000 700,000
Reserves (378,010) (490,000)
Long term debt 1,652,000 1,920,000
Current liabilities 1,248,700 1,267,015
3,222,690 3,397,015

In February 2017, the company has increased its product prices by 20% after consultation
with it’s legal advisor, which has resulted in additional revenue of Rs. 200 million. However,
in March 2017, a Regulatory Authority has issued a show cause notice against the price
increase and has fixed a date for hearing at 28 June 2017.

In 2013, NL had developed a product, Vital, at a cost of Rs. 350 million. Vital is a premium
product which has a very large market with no significant competition. It was registered with
the patent registration authority in the same year. The total useful life of the intangible is
estimated as 10 years. A competitor has recently announced the successful development of a
product which is expected to reduce the market share of Vital. NL’s marketing director has
informed that the product would be launched by the end of next year.

Required:
(a) Specify the information which you would like to obtain for evaluating the key issues
arising from the above scenario. (10 marks)
(b) Assuming that all matters identified by you have been resolved to a larger extent and you
intend to issue an unqualified report, draft points to be included in the letter to those
charged with governance specifying the significant matters which you would like to
highlight. (10 marks)

Q.3 - Winter 16
Your firm has been appointed as the auditor of New Cement Limited (NCL), for the year ended
30 November 2016. NCL is a listed company which owns one of the largest cement plants in
the country. 60% of the company’s shares are owned by the same family. The CEO, CFO and
Risk Assessment (Mix Question) Page 17 ICAP Past Papers

Director Operations belong to the family. Following are the extracts from the draft financial
statements:
Extracts from statement of financial position
Assets Rs. in million
Property, plant and equipment 21,115
Deferred tax 270
Trade debtors 4,700
Other current assets 2,753

Equity and liabilities

Share capital 6,500
Reserves (1,462)
Surplus on revaluation of fixed assets 2,000
Non-current liabilities 13,000
Current liabilities 8,800

Extracts from statement of comprehensive income

Turnover – net 17,210
Gross profit 1,417
Operating loss (164)
Other income 223
Finance cost (1,560)
Loss before taxation (1,501)

Other information:
(i) Sales have declined during the past two years because of lower exports, however,
the decline in exports has been partially offset by slightly higher local sales. The
management is hopeful of a significant increase in local sales in the coming years.
(ii) NCL’s debtors have increased by 25%. The debtors include an amount of Rs. 330
million due from a government owned entity. The amount became due on 30 June
2016. However, the amount has been rescheduled and is now recoverable in 6 equal
instalments over a period of three years.
(iii) On 1 November 2016, the management entered into a contract with a new supplier
for supply of its main raw material. The new supplier has offered 15% lower prices.
The contract with the previous supplier has been terminated. The audit team has
also been informed that a senior member of purchase department was fired in
September 2016.
(iv) NCL revalues its plant and machinery after every three years. The last revaluation
was carried out in 2014.
Risk Assessment (Mix Question) Page 18 ICAP Past Papers

(v) The internal audit department comprises of five staff members including Chief
Internal Auditor, who is a Chartered Accountant. The Chairman of the audit
committee is an independent director. The internal audit department has carried out
number of assignments. The reports of the internal auditor include many good
suggestions for improving the efficiency of the operations; however, they do not
contain any serious deficiencies/adverse comments in any area.

Required:
(a) Briefly evaluate the overall control environment of the company. (05 marks)
(b) Based on the above information identify areas of risk for the audit and the planned
audit approach. (15 marks)
(Note: Detailed audit procedures are not required)

Q 7b Summer 16
During the course of audit of a brokerage house, following observations were documented in
the working papers.
(i) Journal vouchers were not pre-numbered. (01 marks)
(ii) There was no mechanism for recording the phone lines of equity traders. (02)
(iii) Margin requirements in case of certain individual clients were below the normal margin
requirements of 30%. (02 marks)

Required:
Identify the implications of the above matters which are to be included in the management
letter.

Q.1 Winter 15
You are the audit manager of Diversified Products Limited (DPL), a listed company.
Following are the extracts from the draft financial statements for the year ended 30
September 2015.
Rs. in billion
Sales 95.0
Cost of sales 62.0
Total assets 150.0
Net equity 15.0
Creditors * 10.4
Debtors * 10.5
Deferred tax asset 1.2
*Debtors and creditors have normal credit terms of 40 days
The company is engaged in polyester, pharmaceutical and fertilizer businesses. Performance
of each segment is discussed below:
Risk Assessment (Mix Question) Page 19 ICAP Past Papers

(i) Polyester Business (PB)

Major source of revenue is the export of polyester to European countries. PB has been
incurring losses since last five years. In 2014-15, PB incurred a loss of Rs. 600 million. During
the previous year, DPL had made a provision of Rs. 3.5 billion for impairment of existing plant.
The major reason for losses is non-availability of gas. Accordingly, DPL had started a project
to convert its plant from gas to coal. The original completion date of the project was 31
January 2015 but it has been extended by two years due to delay in financing arrangements.
A cost of Rs. 1.5 billion has been incurred on the project up to 30 September 2015.
(ii) Pharmaceutical Segment
The major source of revenue is the sale of medicines imported from Xanax International
Plc (XIP). Segment profit for 2014-15 amounted to Rs. 200 million. DPL is currently
negotiating with various suppliers to replace XIP because during the past few years XIP has
significantly increased the prices and has expressed its intention to increase it further at the
time of renewal of the contract, which is due in March 2016.
(iii) Fertilizer Business
The main source of income is the supply of fertilizers and pesticides. Segment profit for
2014-15 amounted to Rs. 700 million. Due to major floods in August 2015, the Government
has requested the fertilizer manufacturers to reduce their prices to support the farmers in
the flood affected areas and as an incentive, it has guaranteed the regular supply of gas for
the fertilizer factory.
Required: Discuss the audit risks based on the above situation. (12)
Q.1 Summer 15
You are the manager responsible for the audit of Chaudhry Packaging Limited (CPL) a listed
company, for the year ended 31 March 2015.
During the planning stage, the audit team has presented the following points for your
consideration:
i). During the year, after the death of previous chief executive, his son was appointed as
the new chief executive.
ii). Sales of the company declined significantly during the first 10 months on account of
general economic downturn. However, sales in the last month showed improvement
and were 20% higher than the average sales of the previous months.
iii). Deferred tax recognized on losses amounted to Rs. 170 million.
iv). Scrap sales showed significant increase during the year.
v). CPL experienced significant turnover in its management team.
vi). Initial test of controls reveal that list of approved suppliers is not maintained. The
management is of the view that in order to get the lowest quotes any supplier is allowed
to quote prices and therefore a formal list of suppliers is not prepared.

Required: In light of the above facts identify the audit risks and the key audit steps to address
them. (15)
(Note: While describing the key audit steps, the answer should be restricted to a maximum of 3
major points in case of each risk)
Risk Assessment (Mix Question) Page 20 ICAP Past Papers

Q.4 Winter 14
You are the auditor of Reliable Generators Limited (RGL) for the year ended 30
September2014. RGL is primarily engaged in the business of manufacturing and sale of
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 (Draft)
-----(Rs. In '000')------
Revenue 60,222 59,638
Purchase 42,676 40,848
Gross Profit 21,249 19,681

Statement of Financial Position as at 30 September

2014 (Draft) 2013 (Draft)
-----(Rs. In '000')------
Trade Payable 1,653 1,895
Provision for Warrant Claims 1,265 1,193

Other related information is as follows:

(i) Effective 01 October 2013, in order to match its competitors, RGL has increased the
warranty period from 3 to 5 years.
(ii) A discount of 20% was offered to address issue of reduced demand witnessed in 3rd
quarter. As a result of discount situation improved significantly, during 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.
However, return was recorded in September 2014 on receipt of supplier’s credit note.
(iv) Scanning of the suppliers’ 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 risks in the above situation and how you would
respond to these risks. (15 marks)
(Note: Routine verification steps may not be mentioned)
Risk Assessment (Mix Question) Page 21 ICAP Past Papers

Q.7 Summer 14
You have been appointed as a manager in the audit department of Sachal Sarmast & Company,
which is a medium size firm of chartered accountants. The audit of Consumer Products
Limited has been assigned to you. This audit was previously assigned to another manager
who has resigned. The predecessor manager has identified a number of risks. Two such risks
along with their classification and related assertions are discussed in the working paper files.
The relevant extracts are as follows:

S. No. Risk Factor Type of Risk Related Assertions

(1) Decentralized operating Inherent Risk Presentation and disclosures–
structure supported by occurrence and right and
different IT applications obligation and completeness

(2) Financial Crises Significant Risk • Accounts payable–rights

and obligations, valuation
and completeness;
• Property and equipment–
rights and obligations;
• Accounts receivable–
valuation;
• Inventory–valuation;
• Cash–valuation;
• Turnover –occurrence

Required:
Do you agree with the above risk assessments? Discuss. (10)

Q.3 Winter 13
You are the manager responsible for the annual audit of Tameer Limited (TL) for the year
ending 31 December 2013. TL is a listed company and is engaged in the business of
construction, renting and selling of apartments and office buildings to individuals, businesses
and government departments.

Extracts from TL’s draft Profit and Loss Account are as follows:
2013 2012
(Up to Nov)
---Rs. In million----
Revenue 1,520 1,883
Operating Expenses 1,165 -1,470
Operating profit 355 413
Financial charges 190 -225
Profit before tax 165 188
Risk Assessment (Mix Question) Page 22 ICAP Past Papers

During planning stage, audit team has presented following points for your consideration:
(i) On 31 January 2014 tenancy agreements of office buildings rented to municipal
corporations in 15 small cities in the province of Sindh, are expiring. The concerned
departments have informed TL that they would not renew the agreements. These
properties are also held as security with the company’s bankers.
(ii) In August 2013, an apartment block which was completed and sold in 2009 was
severely damaged in an earthquake. The residents have filed a claim for damages
against TL amounting to Rs. 400 million. The company denies any liability in this
regard. However, to maintain its goodwill TL has agreed to compensate the residents
by making a payment of Rs. 100 million in four quarterly installments and accordingly
this amount has been provided in the accounts. The residents have rejected the offer
and filed a suit against the company.
(iii) During the year, construction equipment costing Rs. 300 million was acquired on lease.
The lease rentals were allocated to the contracts on the basis of time utilized. Lease
rentals pertaining to idle time were charged to financial expenses.
(iv) During the year TL sold a two story office building to Ali Limited. According to the
contract of sale, TL is entitled to construct further offices on the third and fourth floors.

Required:
Identify the audit risks that exist in the above scenarios and describe the manner in which
you would address those risks. (18)

Q.6 Summer 13
You are the job in charge on the audit of Ghalib Petroleum Limited (GPL) for the year ending
30 June 2013. GPL is engaged in the exploration and production of crude oil. The last year’s
audit file contains the following information
 In 2005, GPL had entered into an agreement with the Government for exploration and
production of oil for fifteen years. The license for exploration was granted at a fee of Rs.
600 million.
 Under a separate agreement Mir Petroleum Limited (MPL), a 100% government owned
entity, had guaranteed the purchase of all crude oil to be produced by GPL for a period of
ten years from the start of commercial production i.e. 2008.
 The plant and equipment was imported in 2006 at a total cost of Rs. 6 billion which
includes a decommissioning provision of Rs. 500 million. The cost of the plant was
financed by GPL’s parent company by way of a long-term foreign currency loan.

During the current year’s planning stage, you have observed the following conditions:
(i) The problem of circular debts has become severe and as a result GPL as well as MPL have
accumulated huge receivables and payables.
(ii) An environmental control agency has filed a suit alleging that at the time of abandoning
one of its oil wells, GPL has failed to restore the site in accordance with the prescribed
standards. The company believes that it has met all its obligations and plans to contest
the case strongly.
Risk Assessment (Mix Question) Page 23 ICAP Past Papers

(iii) Due to law and order situation the Government has not been able to provide
infrastructure facilities as were agreed in the exploration agreement.
(iv) The management had budgeted a profit of Rs. 200 million for the current year but latest
estimates suggest that profit would be somewhere between Rs. 100 to Rs. 120 million.

Required:
Identify and evaluate the audit risks in the above situation and specify the audit procedures
that you would perform to address those risks. (16 marks)

Q.1 Winter 12
You are the Audit Manager of Mustafa and Company, Chartered Accountants, responsible for
the audit of Standard Home Appliances Limited, a listed company.

Extracts from the company’s financial statements are presented below:

30- Sept- 2014 30- Sept- 2013
-----(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 receivables 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 borrowings 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
Risk Assessment (Mix Question) Page 24 ICAP Past Papers

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 marks)

Q.1 Summer 12
You have been appointed as the auditor of Tee Pharmaceuticals Limited (TPL) for the year
ended31 March 2012. An extract from the draft financial statements is presented below:
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.
 A new 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 (ii) Intangibles(iii) Trade receivables (iv) Liquidity issues (19 marks)

Q.1 Winter 11
Your firm has recently been appointed as the statutory auditor of Chaudhry Limited (CL) for
the year ending 31 December 2011. The previous auditors, from whom your firm has
received professional clearance, did not wish to be re-appointed as auditors.

CL is involved in the supply of imported consumer products. The company has its own retail
outlets in all major cities. It also supplies goods to large retailers most of whom are allowed
45 days credit.
Risk Assessment (Mix Question) Page 25 ICAP Past Papers

Time required to import the goods is approximately two months. 50% of the amount is paid
at the time of booking of order and the remaining amount is paid at the time of receipt of
goods. The goods are required to be insured by CL.

CL’s suppliers are mainly based in Middle East. Due to political disturbances, a major supplier
has recently ceased its operations.

All imported goods are initially placed in a warehouse in Karachi. Supplies are made against
orders which are mostly received over telephone by the sales department. The warehouse
in-charge prepares a summary of all dispatches which is approved by the sales manager, on
a daily basis. Stock records are computerized. Physical stock taking is carried out on a regular
basis, at the warehouse as well as retail outlets. Therefore, a 100% physical count is not
undertaken at the year-end.

Day to day expenses of the retail outlets are paid out of cash receipts from customers. Balance
cash is deposited into the bank on a daily basis.

The management accounts show that the company has not been able to achieve the sales
target for the current year although the sales have increased by 12% as compared with the
same period in 2010.Stocks and trade debtors have significantly increased and the
management attributes this to be on account of increase in sales.

CL is planning to expand its business and intends to fund the expansion through a bank loan.
CL’s existing bankers have declined to increase the borrowing limits and therefore, the
company has approached another banker for the loan. The management has requested you
to complete the audit by 15 February 2012 to enable it to submit the audited financial
statements to the new bankers.

Required: Identify and evaluate the audit risks in the above situation and specify the audit
procedures that you would perform to address those risks. (22 marks)

Q.2 Summer 11
You are the audit manager responsible for the audit of Laila Pharmaceuticals Limited (LPL),
a listed company, for the year ended March 31, 2011. During your initial meeting with the
chief executive officer and the chief financial officer of the company the following issues have
been brought to your attention:

(i) At the year end, the net assets of LPL have reduced to Rs. 270 million (2010: Rs. 310
million). A comparison of the draft income statement with the declared results for the
nine months ended December 31, 2010 is as follows:
Risk Assessment (Mix Question) Page 26 ICAP Past Papers

Nine month ended Year ended

December 31, 2010 March 31, 2011
----- (Rs. in Million) ------
Revenue 500 530
cost of sales -400 -477
gross profit 100 53
operating expenses -70 -90
financial charges -15 -20
operating profit /(Loss) 15 -57
gain on sale of property 0 20
net profit/(Loss) 15 -37

(ii) On April 1, 2010 LPL had acquired 45% shareholdings in Sohni (Private) Limited (SPL).
The spouse of a director of LPL is a director in SPL.
(iii) On May 1, 2010 LPL purchased new office premises from SPL for Rs. 40 million. In
January 2011these premises were sold to Anarkali Limited (AL), an associated
undertaking of LPL, for Rs. 60million. Subsequent to the sale, LPL signed a five years’
agreement with AL to acquire the office premises on a rent of Rs. 12 million per annum.

Required: Assess the above matters and discuss how you would address the related
implications during the course of the audit. (20 marks)

Q.5 a.b Summer 11

You are planning the statutory audit of the financial statements of Mahiwal Limited (ML) for
the year ending June 30, 2011. ML sells and distributes networking equipment and
accessories to corporate and retail customers. Since January 1, 2009 ML has exclusive
country-wide distribution rights of ‘Bisco’ and ‘Portel’, which are the leading international
brands of networking equipment.
Your review of the prior year’s working papers has disclosed that ML has expanded its
operations significantly after securing the distribution rights of ‘Bisco’ and ‘Portel’. By June
30, 2010 there had been a 60% increase in its customer base whereas the number of its
branches had increased from 3 to 10and the number of employees had risen from 30 to 115.
The latest available draft financial statements show that the sales of ‘Bisco’ and ‘Portel’
represent 90% of its total sales.

During a recent meeting with the finance director, you have been informed as follows:
(i) ML has shifted its warehouse and customer service center to larger premises in order to
handle increased inventory level and the rising level of after sales warranty claims.
(ii) ML has witnessed a slight fall in sales of ‘Bisco’ and ‘Portel’ because of tough competition
from other low priced brands.
Risk Assessment (Mix Question) Page 27 ICAP Past Papers

A review of the draft financial statements has also disclosed that ML had revalued a property
in accordance with the requirements of the International Financial Reporting Standards. The
property was acquired many years ago to earn rental income.

Required:
(a) Identify and evaluate the audit risks in the above situation. (12 marks)
(b) Discuss an audit strategy to take into account identified risks in overall audit plan.(03
marks)

Q.1 Winter 10
You are the manager responsible for the statutory audit of Parrot Limited (PL), a listed
company engaged in the business of manufacture and sale of sports goods. It has three
factories located at Karachi, Lahore and Sialkot.

Summarized statement of financial position as of September 30, 2010 (unaudited) and

2009(audited) are as follows:
2010 2009
-----(Rs. In Million)------
Assets
Property, Plant and Equipment 1960 2130
Investment in a subsidiary 520 590
2,480 2,720
Stocks 720 510
Debtors 530 330
Other current assets 280 210
1,530 1,050
Total assets 4,010 3,770

Equity and liabilities

Paid-up capital 1,800 1,800
Accumulated losses -1,650 -1,350
150 450
Long-term bank borrowings 2,350 2,310
Creditors and other payables 1,510 1,010
Total equity and liabilities 4,010 3,770

Following further information is available:

(i) PL acquired a subsidiary in 2005 which is engaged in the business of manufacture and
export of sportswear. The investment is recorded in PL’s financial statements under the
equity method. The last dividend was paid by the subsidiary in 2007.
Risk Assessment (Mix Question) Page 28 ICAP Past Papers

(ii) During the physical count of stocks at Karachi on September 30, 2010 it has been
observed that stocks worth Rs. 100 million is obsolete and would require a provision of
20% to 30% of the carrying value.
(iii) During the year, PL and its bank agreed to reschedule the loan on the following terms:
 Repayment date was extended from 3 years to 6 years.
 Rate of interest was increased from 1-year KIBOR + 3% to 1-year KIBOR + 4%.
 PL shall be required to maintain a current ratio of 1:1. In the event of non-compliance
of this requirement, the loan would become immediately payable. However, on
October 25, 2010, the bank agreed to waive this requirement.

Required:
(a) Identify the risks that may result in material misstatements in PL’s financial statements.
(b) Discuss the key areas on which you should place emphasis upon, to address the risks
identified in (a) above. (20 marks)

Q.1 Summer 10
You are the manager in-charge on the annual audit of Decimal World Limited (DWL) for the
year ended December 31, 2009. DWL is a leading manufacturer of electrical appliances.35%
of its shares are held by Binary Pakistan Limited (BPL). However, with the help of some
consenting shareholders, BPL has been able to nominate 5 out of 8 directors on the Board.

During the planning phase of the audit you became aware of the following matters:
a) A foreign investor has made a public offer to purchase 51% shares of DWL at a price of
Rs. 13 per share. The share price has ranged between Rs. 12 to Rs. 14 per share during
the past six months.
b) The company’s statement of financial position includes a deferred tax asset of Rs.
30million on account of unutilized tax losses which have accumulated during the
lossmaking period 1999-2004. The management is of the view that future taxable profits
would be sufficient to utilize the available tax losses.
c) DWL has established an e-commerce division to sell its products through internet. This
new division is administered centrally by the head office. This step has been quite
successful as the online sales have risen to 20% of the total sales during the year.

Required:
Identify and explain the audit risks which the auditor should consider while planning the
audit of DWL. Also highlight the key areas on which the auditor should place emphasis upon,
to address the above risks. (12 marks)

Q.1 Winter 09
Mr. Ansari who represents ABC & Company, Chartered Accountants, is the manager
responsible for the first year audit of Stello Limited (SL) for the year ending December 31,
2009. Previously the financial statements were audited by a very well reputed audit firm.
Risk Assessment (Mix Question) Page 29 ICAP Past Papers

ABC & Company has now been appointed as the auditors, in pursuance of SL’s policy
according to which the statutory auditors are to be rotated after every five years.

While reviewing the working papers at the planning stage, Mr. Ansari became aware of the
following facts:
Background
The main business of the company is the operation of smelting plants that produce steel from
iron ore. The company was founded almost five years ago by a group of entrepreneurs. Its
managing director is Mr. Sami who has vast experience of working in reputed national and
international companies. Since inception, the company has experienced exceptional growth.
To generate funds for some of its future plans, the management is considering to get the
company listed before December 2010. The management expects to raise Rs. 700 million by
issuing 50 million ordinary shares at a premium of Rs. 4 per share.

Management Policies
The company has developed a sound system of Corporate Governance. Most of the executive
heads are experienced professionals. The company believes in employing a satisfied
workforce. In addition to competitive market based salaries, it also offers performance based
bonuses at all levels, including the senior management.

System of Accounting and Controls

The review of working papers indicates that the company has developed a sound accounting
and reporting system. The company has recently installed a state of the art accounting
software. However, as regards the system of disposal of scrap, the concerned engagement
team member had made the following observations:

 The sale and disposal of scrap is managed by Mr. Sultan who is an Assistant Manager and
reports to the Senior Manager Marketing.
 The scrap generated is collected by a local merchant on a daily basis. The rate is
negotiated by Mr. Sultan once every three months.
 Only Mr. Sultan is authorized to sign the gate pass but quite often, in his absence, it is
signed by the delivery clerk.

Operating Results and Projections

The compound annual growth in company’s earnings over the last three years has
exceeded20% per annum and the projected earnings growth for the year ending December
31, 2009 is in excess of 35%. The growth is mainly on account of profitable contracts which
the company has secured with two local manufacturers. Some of the important events that
have taken place during the current year are as follows:
Risk Assessment (Mix Question) Page 30 ICAP Past Papers

Acquisition of Neptune Enterprise

On July 1, 2009 Stello Limited acquired 80% shares of Neptune Limited, a company based in
Argentina. This company manufactures steel products that are sold in its local markets. The
purchase was financed by means of a foreign currency loan. The loan is repayable in five equal
annual installments, commencing on July 1, 2010. The financial year-end of Neptune Limited
is June 30.
Major Capital Expenditure
The company has increased the production capacity of one of its plant. Land was acquired for
the purpose from a company in which a friend of Mr. Sami is the majority shareholder. Plant
and machinery was supplied by Big Manufacturer (Pvt.) Ltd. (BMPL). Although a lower quote
was received from another supplier, the Board decided in favour of BMPL as ithad a long
standing business relationship with Stello whereas the other supplier was considered to be
too inexperienced.

Required:
A. Evaluate the above situation and briefly discuss the key risk areas that Mr. Ansari should
consider while planning the audit. (19 marks)
B. List three key audit procedures which the auditors may like to undertake, in the above
circumstances, in respect of each of the following:
i). Foreign currency loan
ii). Capital expenditure (06 marks)

Q.4 #Summer 09
You are involved as a senior in auditing the financial statements of Blue Limited (BL), a listed
company, for the year ended December 31, 2008. While reviewing draft financial statements
you have noted that BL has material investments in two local private limited companies and
a joint venture company operating in the UAE. You have identified the following risk
indicators:
 the investee companies have different year end than the investor company;
 one of the investee is a foreign operation;
 significant transactions between the investee and investor companies;
 poor operating results and financial condition of one of the investee company;
 the investor has guaranteed the debts of one of the investee company;
 one of the investee’s financial statements are audited by another firm.

Required:
In view of the above Risk Indicators, identify the possible implications that might be of
significance to the audit team in assessing the risk of misstatements affecting the investments
made by the company. (09 marks)
Risk Assessment (Mix Question) Page 31 ICAP Past Papers

Q.1 Winter 08
Sea view Limited is a manufacturing company. Behroze& Co., Chartered Accountants are their
auditors. The audit of financial statements of the Company for the year ended November 30,
2008 is in progress. Sami, the senior in charge on the audit has received the first draft of the
financial statements from Kamil, the CFO of the Company.
The abridged financial information of the Company for the year ended November 30, 2008 is
as follows:
2008 2007
-----(Rs. In '000')------
Property, Plant and Equipment 2,325 1,210
intangible assets 100 50
inventories 650 460
trade debts 210 80
sales 4,300 6,700
cost of sales 3,800 5,100
gross profit 600 1,600

Sami had a meeting with the CFO of the Company which revealed the following matters:
(i) The Company’s sales have suffered on account of depressed economic conditions in the
country;
(ii) The Company has introduced a new product ‘Cherry’ during the year in place of‘ Merry’
and incurred substantial cost in the acquisition of property, plant and equipment; and
(iii) This year’s physical verification of stocks had not been carried out on November 30on
the plea that the relevant staff was on leave. The stock check will now be carried out on
December 15, 2008.

Required:
Given the above data and circumstances, identify the following:
(a) the risks that may result in material misstatements in the financial statements; and
(b) The implications of the risks identified along with audit procedures that would be most
suitable to mitigate those risks. (15 marks)

Q.9 a Summer 08
The financial statements of Modern Equipment (Pvt) Limited reveal that the company has
paid a donation of Rs. 15 million to a charitable organization where one of the directors of
the company is a trustee. The company has earned a gross profit of Rs. 40 million. The selling
and administration expenses including the donation amount to Rs. 60 million and as a result
the company has incurred a net loss of Rs. 20 million.

Required:
(a) Discuss the significance of the above donation, to the auditor and design appropriate audit
procedures to address the issue. (06 marks)
Risk Assessment (Mix Question) Page 32 ICAP Past Papers

Audit Risk Questions (From ICEAW)

Question No. 1
Your firm has recently been appointed external auditor of Media Ltd. (Media) for the year
ended 30 November 2008. The previous auditors were not re-appointed because Charles
Smith, the managing director, was dissatisfied with their services. He is particularly unhappy
about the amount of tax he and the company have had to pay in recent years.

Charles is keen to expand the business and has suggested that a partner in your firm’s
corporate finance department join the board of Media as a non-execute director. The
appointment would require the partner to attend and participate in monthly board meetings
as well as continuing as a partner in your firm.

All of the shares in Media are owned by Charles Smith and his wife Camilla. They are actively
involved directors are entitled to a bonus once profit has reached a specified level. Any bonus
is paid 30 days after the audit report to a bonus once profit has reached a specified level. Any
bonus is paid 30 days after the audit report has been signed. The company is very profitable,
has no borrowings and has built up significant retained earnings.

Media is an independent production company which produced films in customers’ chosen

format (DVDs and other media). Films are commissioned by businesses for staff training
purposes or to advertise their products and services. Media agree a fixed fee at the start of
each contract and terms of payment require customers to pay 50% prior to the
commencement of ay work and the balance on completion. Films can take between a few days
and up to two months to complete.

Each film has a project manager who is responsible for monitoring costs against budget. All
direct costs relating to each film are recorded in the company’s job costing system. These
records are used by the finance director to estimate the value of work in progress for the
monthly management accounts and the year-end financial statements. For the work in
progress valuation, a percentage is added to the direct cost to cover overheads.

Media completed over 150 films for customers based in the United Kingdom and overseas
during the year ended 30 November 2008, the largest of which was for a Spanish company
which owns a chain of hotels and golf courses. This contract is now completed and the
company is awaiting final payment prior to releasing the DVDs. The final payment was
invoiced in euro in September 2008 and is still outstanding.

Media purchases its own camera and sound equipment which have useful lives of between
three and five years. There is an equipment register which is reconciled with the nominal
ledger each month. However, there are no periodic physical comparisons of the equipment
with the register.
Risk Assessment (Mix Question) Page 33 ICAP Past Papers

The payroll is processed in-house and all staff are paid monthly by bank transfer. The payroll
function was brought in-house in June 2008 after having been outsourced to a service
provider, Payroll Ltd. (Paypro). In April 2006 Media had entered into a five year contract with
Paypro, but in June 2008 the directors of Media withdrew from the contract as they were not
satisfied with the service. The company acquired an off the shelf payroll package to process
payroll and two of the accounts staff have been trained by the supplier to use it.

Media uses self-employed actors who are paid at a daily rate which is negotiated by their
agents who invoice Media at the end of each month. These invoices are required to be
authorised by the invoice if the project manager is away on location.

Media operates from premises leased from Realty Ltd, a commercial property company, in
which Charles has a majority shareholding.

Requirements:
(a) Indentify, from the information provided in the scenario, the principal audit risks in
respect of the financial statements of Media for the year ended 30 November 2008. For
each risk:
(i) list the factors which have led you to identify that risk; and
(ii) outline the procedures that should be included in the audit plan in order to address
the risk.
You should present your answer in a two-columnar format using the headings (i) audit risk
and factors; and (ii) procedures to address the risk. (25 marks)

Question No. 2
Your firm has recently been appointed external auditor of Comfy Ltd (Comfy) for the year
ending 31 December 2009. The previous auditor did not seek reappointment. Your firm has
also been invited to provide tax planning and compliance work for the company.

All of the shares in Comfy are owned by the Chesterfield brothers, Peter and Martin. They are
the only directors and spend on average three days a week managing Comfy as they have
other business interests. The company employs a full-time qualified accountant but does not
have a finance director. Peter and Martin have plant to grow the business and with to recruit
a finance director. They have asked your firm to assist with the recruitment of a suitable
candidate and advise on the remuneration package.

Comfy’s principal activity is the manufacture and sale of high quality leather sofas, chairs and
other forms of seating which are sold to the public, clubs, hotels and restaurants. Items are
produced by hand in the company’s workshop which is located in the North of England.
Customers place their orders by telephone or over the internet and pay by credit or debit
card. All sales are transacted in UK sterling.
Risk Assessment (Mix Question) Page 34 ICAP Past Papers

The company’s terms of trade require a 50% deposit with the order. Once the order is
completed, the balance must be paid five days prior to delivery. Typical production time is
three to four weeks. Customers are required to check the items on delivery and have even
working days to return the items if not completely satisfied. All items are sold with a one-
year guarantee. At peak times the company uses subcontractors to assist with the
manufacture of the seating. These sub-contractors are required to invoice Comfy at the end
of each month.

The company does not supply goods from inventory as all items are made to customer order.
Furnished goods in the workshop relate to items awaiting despatch to customers. The
company does not have continuous records for raw materials inventory and undertakes a full
count of raw materials at each month end including at the year end. The quantities are
recorded on inventory sheets and are subsequently costed by the company accountant. Peter
Chesterfield estimates the value of work in progress and finished goods awaiting despatch.

Raw materials are sourced from a number of suppliers based in the UK and overseas. All of
the timber used in the frames for the sealing is purchased from Timb Ltd. which is owed by
Peter and Martin’s mother, Sharon Chesterfield.

There has been steady growth in sales in recent years and, in November 2009, Comfy
acquired the premises adjacent to its existing workshop to allow expansion of its
manufacturing capacity. The new premises are not yet in use as they are currently
undergoing extensive refurbishment in order to make them fit for purpose.

The acquisition was funded by a bank loan repayable in quarterly instalments over ten years,
the existing workshop, which is owned by the company and included in the financial
statements at cost less accumulated depreciation, was revalued by an external valuer in
October 2009. The directors wish to incorporate the revalued amount in the financial
statements for the year ending 31 December 2009.

Requirements
(a) Identify, from the information provided in the scenario, the principal areas of audit risk
in respect of the financial statements of Comfy for the year ending 31 December 2009.
For each risk:
(i) list the factors which have led you to identity that risk; and
(ii) outline the procedures that should be included in the audit plan in order to address
the risk.

You should present your answer in a two-columnar format using the headings (i) audit risk
and factors; and (ii) procedures to address the risk. (24 marks)
Risk Assessment (Mix Question) Page 35 ICAP Past Papers

Question No. 3
Your firm is the external auditor of Lagg Ltd. (Lagg) for the year ended 30 November 2010.
The principal activity of Lagg is the installation of thermal and acoustic insulation systems
for a wide range of industries.

The manager responsible for the audit of Lagg has received a phone call from Lagg’s finance
director who requested that the audit is completed by 31 January 2011. The company is
seeking to increase its overdraft facility and the company’s bank requires the audited
financial statements to available prior to agreeing the new facility. The finance director has
also requested that a member of your firm assists with the preparation of the financial
statements so that the 31 January deadline can be met.

The finance director has performed an assessment of the company’s ability to continue as a
going concern, including profit and cash flow forecasts which indicate that the company can
continue to trade profitably and met its debts as they fall due in the year ending 30 November
2011. The forecasts assume that the company’s overdraft facility will be increased.

During the year ended 30 November 2010, the company experienced a decline in demand for
its services, mainly due to a fall in demand from the construction sector and competition from
other companies which are undercutting Lagg’s prices. The company has managed to pay its
trade suppliers and stay within the current overdraft facility by delaying payments to HMRC.
The finance director has recently agreed a deferred payments plan with HMRC to pay off the
arrears of payroll taxes over the next four months.

All contracts entered into by Lagg are fixed-price and require the customer to pay the full
contract price with seven days of the invoice date. The invoice is raised once the work has
been completed and signed off by the customer. It is company policy to recognise revenue
when a customer has signed off the work as having been completed satisfactorily. However,
one customer who signed off the work as having been completed and was invoiced in
September 2010 has not yet paid. The amount due represents 12% of Lagg’s year-end
receivables balance.

Lagg’s inventory of raw materials consists of consumable materials held in its stores
department and unused insulating materials at customer’s premises. The value of these items
is not material to Lagg’s financial statements, the insulating materials required for each
contract are only ordered once a contract has been agreed and are delivered directly to the
customers’ premises.

All direct costs (labour and materials) relating to each contract are recorded in the company’s
job costing system which is integrated with the purchases and payroll applications. The job
costing records are used by the finance director to estimate the value of work in progress for
the monthly management accounts and the year-end financial statements. For the work in
progress valuation, a percentage is added to the direct costs to cover overheads. The finance
Risk Assessment (Mix Question) Page 36 ICAP Past Papers

director determines the percentage by taking the overheads figure in the management
accounts as a percentage of direct costs in the management accounts.

Many of the contracts entered into by the company require the removal of existing insulation
material. Some of this material is classes as hazardous waste (harmful o health and the
environment). The company is legally obliged to dispose of this waste in a safe manner. The
company is currently being investigated by the regulatory authority for alleged illegal
disposal of hazardous waste.

Lagg’s freehold premises were valued by an external valuer in October 2010. The premises
are currently included in the accounting records at cost less accumulated depreciation. The
directors wish to recognise the revalued amount in the financial statements for the year
ended 30 November 2010.

The audit manager has asked you to consider the following key areas of audit risk:
(1) Going concern
(2) Trade receivables
(3) Work in progress
(4) Property, plant and equipment.

Requirements
(a) Justify why the items in (1) to (4) above 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. (20 marks)

Question No. 4
Jane Evans has been the manager responsible for the external audit of Freightco Ltd.
(Freightco) since 2002. She has just received a phone call from John Brown, the finance
director of Freightco, 31 July 2008. This is because the company is seeking to increase its
overdraft facility and the company’s bank requires the audited financial statements prior to
reviewing the facility. John also mentioned that he is retiring in September 1998 and the
board of directors would like to recruit Jane as his replacement, because of her experience
with the Freightco audit. Jane is very interested in the proposal and has agreed to meet John
to discuss it in more detail.

The principal activities of Freightco are the provision of distribution and warehousing
services. Approximately 90% of revenue is generated from customers with renewable
contracts covering periods of between three to five years. These customers are connected to
Freightco via remote computer links enabling them to input orders, at source, for the services
required. Once the service has been provided, Fireightco invoices the customer and the terms
of trading then require payment to be made within 30 days. The company’s largest customer
generates 35% of Freightco’s revenue and its contract is due for renewal in October 2008.
Risk Assessment (Mix Question) Page 37 ICAP Past Papers

The following information has been extracted from the financial statements for years ended
31 May:

Extracts from the income statement

Draft 2008 Actual 2007
£’000 £’000
Revenue 25,417 23,867
Cost of sales (21,895) (20,924)
Gross profit 3,522 2,943
Administrative expenses (2,205) (2,011)
1,317 932
Loss on sale of vehicles and trailers (232) -
Profit from operations 1,085 932
Finance cost (302)
Profit before tax 740 630
Extracts from the balance sheet
Non-current assets
Property, plant and equipment 6,528
Current assets
Trade receivables 2,681
Non-current liabilities
Borrowings - bank loan 2,500
Current liabilities
Trade payables Borrowings: 1,553 1,922
- Overdraft 499 454
- Bank loan 500 250

The carrying amounts of property, plant and equipment at 31 May are as follows:

Draft 2008 Actual 2007

£’000 £’000
Land and buildings 2,986 2,312
Plant and machinery 85 79
Fixtures and fittings 44 41
Motor vehicles 4,872 4,096
7,987 6,528

The company uses the revaluation model for land and building which were last valued in
April 2008 by a firm of chartered surveyors. The company uses its own vehicles and trailers
which are serviced and repaired by Servit Ltd, a company in which the managing director of
Frieghtco has a controlling interest. During the year ended 31 May 2008, Frieghtco replaced
some of the older vehicles and trailers in the fleet funding the replacements by borrowings.
Risk Assessment (Mix Question) Page 38 ICAP Past Papers

Requirements
(a) Identify, from the circumstances described above, the key audit risks and for each risk:
(i) list the factors which have led you to identify that risk; and
(ii) outline the procedures that should be included in the audit plan in order to address
the risk.
You may present your answer in two-columnar format using the headings (i) audit risk and
factors; and (ii) procedures to address the risk. (31 marks)

Question No. 5
Your firm has been engaged by the management of Bambi Ltd. (Bambi) to undertake a review
of and provide an assurance report on the interim financial information of Bambi for the six
months ended 30 November 2010. The terms of the engagement are restricted to making
enquires of management and applying analytical procedures to the financial information. The
business was started in 1998 and has grown steadily with no outside investors. Management
wishes to increase the rate of expansion and has identified a potential investor who has asked
for assurance on the interim financial information.

Historically, the principal activity of Bambi has been the retailing of high quality and stylish
children’s clothing. However, in July 2010, the company launched a new range of up-market
accessories which includes children’s chairs, prams cots and bedding. The company holds a
limited amount of inventory of the most expensive accessories, but guarantees delivery of
any item ordered within six weeks of the order date. The clothing is sourced from suppliers
in the UK and more recently Portugal. The accessories are sourced from suppliers in
Germany.

Sales are made through the company’s eight retail outlets, by mail order and over the
internet. Seven of the retail outlets are in the UK and one, which was opened in April 2010, is
in Paris, France. Revenue has grown steadily at between 4% and 6% per annum over the five
years ended 31 May 2010.

To assist management with its objective to increase the rate of expansion, the company
entered into a contract, in October 2010, to lease a purpose-build warehouse facility and, in
November 2010, it upgraded its IT infrastructure.

The following is an extract from Bambi’s financial information.

Income statement
Six months ended 30 November
2010 2009
£’000 £’000
Current assets
Inventories 1,780 1,388
Current liabilities
Trade payables 701 771
Risk Assessment (Mix Question) Page 39 ICAP Past Papers

Your preliminary analytical procedures have identified the following as matters of

significance to discuss with management:
Six months ended 30 November
2010 2009
£’000 £’000
Increase in revenue 10.8% 6%
Gross profit margin 44% 42%
Operating margin 15% 19%
Inventory days 86 days 72 days
Trade payables days 34 days 40 days

Requirements
(a) Prepare briefing notes on the maters which you wish to discuss with the management of
Bambi in respect of the information provided in the scenario. Your notes should include
reference to the results of your preliminary analysis procedures. (12 marks)
You are not required to calculate any additional ratios.

Question No. 6
Your firm has been engaged by the directors of Progear Inc (Progear), a company based
overseas, to undertake a review of and provide a limit assurance report on the financial
information of its UK branch. The term of the engagement include making enquiries of
management and applying analytical procedures to the financial information. The review is
to cover the financial information for the six months ended 30 September 2009.

Progear manufactures specialist protective clothing which is used by organisations operating

in the medical, research and energy sectors. All products sold by the branch are supplied by
Progear and the branch normally sells them at a mark-up of 25% on cost to the branch.
However, quantity discounts are available for orders above specified levels. All customers are
required to pay with 30 days but customers are offered an early payment discount if they pay
within seven days of invoice date. In the previous three years, branch sales have increased
steadily at rates between 4% and 6% in the corresponding six-month period.

You are preparing for your planning meeting with the financial controller of the branch and
have obtained, in advance of the meeting, a copy of the draft financial information for the six
months ended 30 September 2009. During your preliminary review, you identified the
following extracts from the financial information of the branch as matters to discuss at that
meeting.

Income statement
Six months ended 30 September
2009 2008
£’000 £’000
Revenue 5,353 4,907
Risk Assessment (Mix Question) Page 40 ICAP Past Papers

Cost of sales (4,472) (3,974)

Gross profit 881 933
Operating expenses (747) (646)
Profit from operations 134 287

Statement of financial position (balance sheet)

As at 30 September
2009 2008
£’000 £’000
Current assets
Inventories 994 951
Trade receivables 812 806

Requirements
(a) prepare briefing notes on the matters which you wish to discuss with the financial
controller of the branch in respect of the information provided in the scenario. Your notes
should refer to the results of your analytical procedures. (13 marks)
Risk Assessment (ISA 520) Page 41 ICAP Past Papers

Analytical Procedures (ISA 520)

Q.4 Summer 16
You are the engagement manager of Saleem Electronics Limited (SEL). SEL is engaged in
manufacturing and selling of electronic appliances including air conditioners, washing
machines, refrigerators, electric lights and bulbs. The results of analytical review carried
out by your team, based on the draft financial statements, are summarised below:

Profit and loss account

31-12- 31- Increase/
Note
2015 12-2014 (decrease)
reference
Rupees '000' %
Sales 85,661 78,793 6,868 9 Note (i)
Cost of sales (56,650) (51,029) 5,621 11 Note (ii)
Gross profit 29,011 27,764 1,247 4
Administration expenses (13,594) (14,841) (1,247) (8) Not material
Other operating income 11,000 13,000 (2,000) (15) Not material
Other expenses (24,095) (8,450) 15,645 185 Note (iii)
Interest expense (12,785) (10,716) 2,069 19 Not material
(Loss)/profit before taxation (10,463) 6,757 (17,220) (255)
Taxation (3,690) (1,880) 1,810 96 Note (iv)
(Loss)/profit after taxation (14,153) 4,877 (19,030) (390)

Balance sheet
31-12- 31-12- Increase/ Note
2015 2014 (decrease) reference
----------Rupees in '000'--------- %
PPE 190,903 195,003 (4,100) (2) Note (v)
Current assets:
Receivables 19,961 18,313 1,648 9 Note (vi)
Inventories 45,721 44,403 1,318 3 Note (vii)
Cash and bank 7,985 8,068 (83) .(1) Not material
73,667 70,784
Total assets 264,570 265,787
-
Share capital 182,000 150,000 32,000 21 Note (viii)
Retained earnings (36,830) (22,677) (14,153) 62 see P&L
145,170 127,323
Risk Assessment (ISA 520) Page 42 ICAP Past Papers

Long term liabilities:

Loan from related parties 48,192 80,000 (31,808) (40) Note (viii)
Deferred tax liabilities 14,806 12,398 2,408 19 Note (iv)
62,998 92,398
Current liabilities:
Provisions 8,567 9,253 (686) (7) Note (ix)
Creditors and accrued 47,835 36,813 11,022 30 Note (x)
expenses
56,402 46,066
Equity and liabilities 264,570 265,787
Audit team’s notes/comments:
(i) The increase in revenue is due to increase in sale of air conditioners by Rs. 12.6
million because of introduction of instalment sales, which are made at 10% above
the normal price. The price is recovered in 12 equal monthly instalments.
(ii) The increase is in line with the increase in revenue.
(iii) Other expenses include a loss of Rs. 5 million on disposal of assets of services
department. Remaining amount represents cost of warranty.
(iv) The matter has been discussed with our tax team who would give its views shortly.
(v) The decrease is due to the disposal of assets of services department of air
conditioner’s division. The services department was outsourced last year.
(vi) The increase in receivables is in line with the increase in sales.
(vii) The inventory balance is in line with prior year.
(viii) The company has converted the loan from related party into equity and issued
shares amounting to Rs. 32 million.
(ix) Last year’s provision includes provision for impairment in assets of services
department. The remaining increase of Rs. 1.3 million is immaterial.
(x) In December 2014 all the employee related expenses were paid before year end.
Required:
Comment on the analytical review performed by the audit team and specify which
explanations in the analytical review seem unreasonable and/or incomplete. (18 marks)

Q.6 Winter 14
You are involved in audit of Modern Furniture Limited (MFL), for year ended30 September
2014. The client has provided you a draft profit and loss account which is as follows:
30- Sept- 2014 30- Sept- 2013
Sales 223.14 196.54
cost of sales (151.74) (147.4)
Gross profit 71.4 49.14
operating expenses (43.78) (31.52)
profit before interest and financial charges 27.62 17.62
Financial Charges (3.82) (3.04)
Profit before taxation 23.8 14.58
Taxation (6.8) (4.96)
Profit after taxation 17 9.62
Risk Assessment (ISA 520) Page 43 ICAP Past Papers

Certain other information obtained from the management is given below:

(i) MFL mainly sells its products through its own retail outlets and franchises. During the
period under review, MFL had established five new retail outlets in different cities.
(ii) After a lapse of 18 months, MFL had increased the price of its products by 12%effective
1 April 2014.
(iii) The raw material prices increased by 5% in October 2013.
(iv) Effect of annual increment in salaries was 8%.
(v) Salaries of non-manufacturing employees have increased from Rs. 22 million to Rs.
28.2 million. There were 120 such employees on the payroll on 30 September2014. 15
new employees were hired for new retail outlets whereas one employee retired during
the year.

Required:
Evaluate the above financial data in the context of information provided by the
management and specify the matters requiring further explanations from the
management. (10 marks)
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ISA 315 & Controls

Q.1.b - Summer 22
During the planning phase, your audit team has been informed that TPL has been investing
heavily in Information Communication Technology (ICT) infrastructure. This has helped
them to grow substantially and they have established their presence across 30 cities in
Pakistan. For this purpose, TPL has formed a separate department for managing the ICT’s
operations including identification and management of the possible risks and threats to the
ICT infrastructure and processes.

This department is also subject to the oversight of the internal audit department that carries
out the risk assessment whenever asked by the audit committee. The latest risk assessment
was carried out by the internal audit department in 2021, in which they had identified and
established updated mapping of the business functions, roles and supporting processes to
identify interdependencies related to ICT and security risk. The next such exercise is planned
to be conducted in 2023, in which they intend to classify the identified business functions,
supporting processes and information assets in terms of criticality.

Required:
Identify the control weaknesses in the above situation and suggest the improvements that
TPL should introduce in order to overcome these weaknesses. (08 marks)

Q.3 - Winter 20
You are the audit manager at Moosa and Company, Chartered Accountants responsible for
the audit of Beta Bank Limited (BBL). While planning the audit for the year ending 31
December 2020, you come across a news published in a national newspaper that BBL has
suffered a cyber-attack which has resulted in theft of depositors’ confidential data.

Required:
Discuss the course of action you should plan in response to cyber-attack. (12 marks)

Q.7 a - Summer 18
Kiran is the audit senior responsible for the audit of Xengen Limited. She has noticed that a
large number of journal entries were processed near the year end.

Required:
(a) What controls should she expect to be in place for recording and processing of journal
entries? (07 marks)

Q.6.b - Summer 17
The Board of Directors of an insurance company is very concerned about the increasing
incidents of fraud in verification of claims by the surveyors.
Risk Assessment (ISA 315 & controls) Page 45 ICAP Past Papers

Required:
Suggest controls that should be implemented by the company for claim verification. (05)

Q.4.f - Summer 15
You are carrying out the audit of Akhtar Autos Limited (AAL) for the year ended 31 March
2015, a listed company, engaged in the business of manufacture of spare parts for trucks,
buses and tractors. Extracts from the draft financial statements are as follows:

2015 2014
-----(Rs. In '000')------
Sales 1,250,000 1,440,000
Loss before taxation -70,000 -15,000
Current assets 325,000 350,000
Other assets 145,000 135,000
Total assets 470,000 485,000
Current liabilities 345,000 305,000
Other liabilities 175,000 160,000
Total liabilities 520,000 465,000
Equity -50,000 20,000
Previous year’s audit report was qualified on account of inability to obtain sufficient and
appropriate audit evidence with respect to stores and spares, as ledger of stores and spares
contained many negative balances.

The following further information has been obtained during the audit:
i). Agreements with two local distributors contain clauses that offer a significantly higher
percentage of discounts which are above normal market rates. Due to the tough
competition in the local market, the management of the company is currently
negotiating with certain foreign customers for export of company’s products.
ii). In May 2015, court notices from two major customers were published in the
newspapers, alleging the company of supplying inferior quality spare parts in the month
of April 2015 and claiming damages of Rs. 150 million. The management is of the view
that the allegations are baseless.
iii). A supplier of the company has become bankrupt. The company owes an amount of Rs.
138 million to the supplier. However, the liquidator has lodged a claim of Rs. 140 million.
iv). AAL is a family owned company. Out of its seven directors, four are executive directors.
The non-executive directors have been elected on the board for the 4th time.
v). The Board has formed a three member Audit Committee, which is chaired by a non-
executive director, who is also the maternal uncle of the chief executive.
vi). The half yearly accounts were not finalised because of a legal dispute. The company had
informed SECP in respect of such non-compliance.
vii). Internal audit department includes only one person who is a chartered accountant and
is engaged on a part time basis.
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viii). The warehouse from where goods are dispatched is under the management of sales
department.

Required:
f. Give suggestions for improvement in the control environment. (04 marks)

Q.6 - Summer 14
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 marks)

Q.2 – Winter 11
You are the engagement partner on the audit of Faraz Industries Limited. The company has
recently started using internet to carry out its business activities and the share of business
conducted through e-commerce is growing rapidly.

Required:
(a) Identify the matters that you believe would be relevant while updating your knowledge
of the company’s business. (04 marks)
(b) Identify the business risks related to the company’s e-commerce activities. (09 marks)
(c) Identify the matters that need to be addressed in order to ensure the integrity of the
transactions carried out through the company’s website. (07 marks)
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ISA 240
Q.5.b Winter 15
Our firm is the auditor of Daud Limited (DL), a listed company, since last four years. DL
is a low risk client with a very cooperative management. At year-end you have noticed
significant increase in the number of journal entries. The management has given various
reasons for the same which appear to be reasonable.

Required:
(i) Identify the characteristics of entries which involve fraudulent adjustments. (08 marks)
(ii) Discuss how would you deal with the above situation.(05 marks)

Q.4 - Winter 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. Final approval was made by
the managing director.

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.
A review of inventory sheets indicates that large quantities of spare parts are still lying in
inventory.

Required: Identify the control weaknesses in the above situation which may have enabled
the perpetration of fraud. (06 marks)

Q.5 - Summer 13
Zubair & Shahid Limited is a distributor of personal care products. Its sales manager had
committed a fraud by making sales to fictitious customers. Cheques received from various
genuine customers were credited to these fictitious accounts to keep their balances within
reasonable limits. The sales manager had the outstanding amounts, appearing against
fictitious and genuine customers, written off by convincing the sales director that those
customers were unable to pay their remaining balances. A total of 38 invoices amounting to
Rs. 7.2 million were issued over a period of seven months. The fraud was detected when the
sales manager had left the company’s employment.
Risk Assessment (ISA 240) Page 48 ICAP Past Papers

Required:
Identify the usual controls which may have been lacking in the aforementioned situation.
(06 marks)

Q.6 b,c - Summer 10

Beta Construction Company Limited (BCCL) is involved in the construction of large buildings
and shopping plazas. The company commenced its business in 2004 by establishing an office
in Karachi and has grown rapidly. It currently has offices in five major cities of the country
and as many as 25 projects are in various stages of execution.

A substantial portion of the work is done through sub-contractors. Payment to

subcontractors is based on certificate of work completion which is issued by the supervisor
in charge of each project. The certificate is sent through email to the finance department. The
payment is credited directly into the bank accounts of the sub-contractors.

Recently, the management has discovered that the project supervisor of a large project had
issued a fraudulent work completion certificate. The preliminary investigation indicated that
some other sub-contractors have also been paid fraudulently in the past and the practice was
ongoing for the past two years.

The management of BCCL has asked your audit firm to conduct an investigation into the
matter. Your initial discussion with the client has revealed the following:
(i) For the past four years the external auditors of the company are Alpha & Co., Chartered
Accountants. They had issued unqualified audit reports for all those years and had not
reported any internal control weakness in their management letters.
(ii) Prior to approaching your firm, BCCL wanted to give this assignment to Alpha & Co.
However, they expressed their inability to undertake the investigation work.

Required:
(b)State the basic objectives of the above investigation.(03 marks)
(c)Recommend the controls which the management should put in place, to avoid such frauds
in future.(09 marks)
Risk Assessment (ISA 550 & 570) Page 49 ICAP Past Papers

ISA 550
Q.7.b - Winter 16
You are the audit manager responsible for the audit of Mechanic Engineering Limited, (MEL)
which provides mechanical parts to different industries. The draft financial statements for
the year ended 30 September 2016 show profit before taxation of Rs. 150 million (2015: Rs.
200 million) and total assets of Rs. 1.2 billion (2015: Rs. 1.1 billion).

Presently following matters are under your consideration:

During the year, MEL has sold one of its buildings to Natasha (Private) Limited (NPL) at a loss
of Rs. 20 million. The building was purchased at a cost of Rs. 80 million seven years ago and
was depreciated @ 5% per annum on straight line basis. The minutes of the meeting of the
Board of Directors at which the sale was approved indicate that a director of MEL holds 20%
shares in NPL. However, the minutes also indicate that he did not vote on the transaction due
to conflict of interest. (09 marks)

Required:
Evaluate the above situations and determine the course of action in respect of each of the
above independent situations. (Reporting implications are not required)

Q.1 c Summer 16
Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit
teams have brought the following matters to his attention:

(c) During the audit of Moon Limited, it has been noted that 40% sales are made to an
associated company on credit. The management claims that the prices charged by the
company to the associated company are set in accordance with the prevailing market. (06)

Required:
Explain how the audit teams should deal with the above situations.

Q.1.b Winter 14
ABC and Company, Chartered Accountants, have been appointed as the auditor of Neptune
Limited (NL). During the audit it has been revealed that:
(b) NL’s operation involves significant and frequent transactions with related parties. (09)

Required: Discuss the overall audit approach and related audit procedures to address the
above issues. Also state the possible implications on the audit report.

Q.3.a Summer 14
Diversified Businesses Limited is a listed company engaged in the business of manufacturing
paints, pharma and chemicals. During the planning stage of an audit, the auditor has found
that:
Risk Assessment (ISA 550 & 570) Page 50 ICAP Past Papers

(a) The company has advanced a significant amount of Rs. 2.5 billion to a related party, for
construction of an office tower. In the notes to the financial statements, it has been stated that
transactions with related parties were carried out on arm’s length basis. (08)

Required:
Evaluate and discuss how the auditor should deal with the above situations.

Q.4 Winter 11
As the audit partner responsible for the audit of Mubashar Limited (ML), you have recently
issued an audit report on ML’s annual financial statements.

The audit senior involved in the audit of another client Salman Limited (SL) has informed you
that SL’s records indicate that it has made purchases worth Rs. 37 million from ML. Since the
same audit senior was also involved in the audit of ML he knows that SL and ML are
associated companies and ML had not disclosed any related party transactions in its financial
statements. This fact has also been confirmed from the working papers of both the
companies. Payments against these purchases were made in the name of ML by way of
crossed cheques.

Required:
Discuss the factors that you will consider with reference to above and specify the action that
you would take in this regard. (20 marks)
Risk Assessment (ISA 550 & 570) Page 51 ICAP Past Papers

ISA 570
Q.5.b(ii) - Summer 19
The following situations have arisen at different audit clients of your firm. The year-end in
each case is 31 March 2019:
(ii) Gems Limited (GL) is a leading manufacturer of jewelry made from precious stones. GL
sources the stones from three suppliers located in Khyber Pakhtunkhwa (KPK).
On 10 May 2019, a severe earthquake struck KPK destroying the mines and the stone
extraction units located in KPK. GL’s plant was also partially damaged due to the
earthquake.

Upon discussion with the management, you came to know that one of the GL’s plants was
affected by the earthquake and due to adequate insurance, they would be able to claim
the loss amount from insurance company. They further informed that GL could continue
to use the other plants for production. (10 marks)

Required:
Discuss your firm’s course of action along with the implications on the audit report.

Q.2.a - Winter 16
You are the audit manager of Bolan Pharmaceuticals Limited (BPL) a listed company. For the
year ended 30 September 2016, BPL has prepared its financial statements which indicate a
net operating loss, current ratio of 0.79 and significant amount appearing as capital work in
progress comprising of expenses incurred on acquisition and installation of plant and
machinery.
The following information is also available:
(i) The operations of BPL are currently suspended due to Balancing, Modernization and
Replacement (BMR) work.
(ii) The decision to carry out BMR was approved by the Board of Directors in 2015 with
a completion deadline of 31 March 2016.
(iii) Due to certain technical issues, BPL has not been able to complete project to date.
(iv) Because of the above situation, loan from a bank became overdue on 1 September
2016. Further, BPL had also not complied with certain key covenants.
(v) In this difficult situation BPL has requested its major shareholders to inject additional
equity.

Required:
You have asked the client to give a comprehensive plan explaining the steps to counter the
above situation. Briefly discuss what kind of details you would expect in above plan. (12)

Q.1 b Summer 16
Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit
teams have brought the following matters to his attention:
Risk Assessment (ISA 550 & 570) Page 52 ICAP Past Papers

(b) There are multiple uncertainties which impact the ability of Link Telecom Limited to
operate as a going concern. An important assumption in the working provided by the client
is the continuous financial support from the parent company. The team incharge wants
guidance as to how the validity of this assumption can be evaluated. (05)

Required:
Explain how the audit teams should deal with the above situations.

Q.4 b - Summer 15
You are carrying out the audit of Akhtar Autos Limited (AAL) for the year ended 31 March
2015, a listed company, engaged in the business of manufacture of spare parts for trucks,
buses and tractors. Extracts from the draft financial statements are as follows:

2015 2014
-----(Rs. In '000')------
Sales 1,250,000 1,440,000
Loss before taxation -70,000 -15,000
Current assets 325,000 350,000
Other assets 145,000 135,000
Total assets 470,000 485,000
Current liabilities 345,000 305,000
Other liabilities 175,000 160,000
Total liabilities 520,000 465,000
Equity -50,000 20,000

Previous year’s audit report was qualified on account of inability to obtain sufficient and
appropriate audit evidence with respect to stores and spares, as ledger of stores and spares
contained many negative balances.

The following further information has been obtained during the audit:
i). Agreements with two local distributors contain clauses that offer a significantly higher
percentage of discounts which are above normal market rates. Due to the tough
competition in the local market, the management of the company is currently
negotiating with certain foreign customers for export of company’s products.
ii). In May 2015, court notices from two major customers were published in the
newspapers, alleging the company of supplying inferior quality spare parts in the
month of April 2015 and claiming damages of Rs. 150 million. The management is of
the view that the allegations are baseless.
iii). A supplier of the company has become bankrupt. The company owes an amount of Rs.
138 million to the supplier. However, the liquidator has lodged a claim of Rs. 140
million.
iv). AAL is a family owned company. Out of its seven directors, four are executive directors.
The non-executive directors have been elected on the board for the 4th time.
Risk Assessment (ISA 550 & 570) Page 53 ICAP Past Papers

v). The Board has formed a three member Audit Committee, which is chaired by a non-
executive director, who is also the maternal uncle of the chief executive.
vi). The half yearly accounts were not finalised because of a legal dispute. The company
had informed SECP in respect of such non-compliance.
vii). Internal audit department includes only one person who is a chartered accountant and
is engaged on a part time basis.
viii). The warehouse from where goods are dispatched is under the management of sales
department.

Required:
What further information/documents would you require from the management in respect of
matters described in (i), (ii) and (iii) above? State the main reason for acquiring such
information/documents. (05 marks)

Q.6 - Winter 13
Kabul (Private) Limited (KPL) has advanced Rs. 100 million to Qandhar Limited (QL), one of
its suppliers of raw material. KPL and QL have recently signed an agreement whereby the
above advance has been converted into a loan and QL has agreed to pay mark-up on the
outstanding balance at prevailing market rates. QL has confirmed the amount of loan and the
interest accrued thereon. However, you have acquired some information which suggests that
QL is facing financial difficulties.

Required:
Discuss how you would deal with the above situation and possible implications thereof on
the audit report. (10 marks)

Q.1 - Summer 13
Qasmi Steels Limited (QSL) is a manufacturer of steel and iron products. During the year the
company has incurred a net loss of Rs. 306 million. The following information is also
available:
(i) At the year end, the company’s accumulated losses amounted to Rs. 17 million whereas
its net equity was Rs. 283 million.
(ii) During the year, QSL has defaulted in repayment of a loan. The management is however
quite hopeful that the lender would agree to a rescheduling.
(iii) The management believes that the company’s profitability has been hampered on
account of soaring electricity prices along with a fall in demand for steel which have
had a negative impact on the prices of its finished products. Moreover, its production
has also suffered on account of the prevailing energy crisis. Consequently, the
management has decided to discontinue its operations temporarily.
(iv) To counter the impact of high electricity prices, the company intends to convert its
plant to run on gas as well.
(v) The management has informed you that it would need to install a gas converting unit
which would be imported at a cost of Rs. 30 million. However, as the process of
Risk Assessment (ISA 550 & 570) Page 54 ICAP Past Papers

installing the gas conversion unit and completing the necessary formalities would take
at least a year, therefore the management is negotiating to lease the plant to Nadeem
Enterprises for a period of one year.

Required:
(a) Evaluate the above situation and state the procedures which you would perform as an
auditor in the above situation. (10 marks)
(b) Describe the implications of the above issues on the audit report. (10 marks)

Q.3.b - Winter 12
Identify and explain the shortcomings in the following paragraph of the draft audit report of
Javed Limited:

Emphasis of Matter:
We draw attention to 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 the company may be unable to continue as a going concern. (04 marks)

Q.1 - Summer 11
You are the engagement partner responsible for the audit of Saleem Auto Parts Limited
(SAPL), a listed company. SAPL supplies auto parts to three large motor car assemblers which
are listed on the Karachi Stock Exchange. Your review of the working paper files has disclosed
that the company has been facing liquidity issues for the last few months. You have also been
informed that subsequent to the year-end, SAPL has defaulted on one of its long term loan
installments.
SAPL’s directors have assured that this liquidity crunch is for a short span of time. To
substantiate their assertion they have provided cash flow projections for the next four years.
An important assumption in the cash flow projections is that agreements with all the motor
car assemblers would continue for the foreseeable future. However, during the year, one of
the motor car assemblers, Pannu Motors Limited(PML), has incurred substantial losses and
has announced to close down one of its plants.

Required:
(a) State the audit procedures which your firm should perform in the above situation. (05
marks)
(b) Identify and explain the implications of the above issues on the audit report. (09 marks)

Q.1(i,ii) - Summer 09
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 December31, 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:
Risk Assessment (ISA 550 & 570) Page 55 ICAP Past Papers

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.

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. (05 Marks)

Tutor’s Note:
ISA 560 should also be consulted while answering the above question.

Q.2 - Summer 09
You are the manager in charge on the audit of financial statements of Haroon Private Limited.
During the course of audit you noticed certain conditions which created significant doubts
about the validity of the going concern assumptions.

You have discussed the issue with the client which further revealed that the management has
developed certain plans to cope with the situation but on the basis of your assessment of their
plans, you concluded that the going concern assumption is no more appropriate.

Required:
(a) Advise the client as to what should be done in the above circumstances.
(b) What procedures would you perform if the management agrees to your proposals?
(c) If the management does not agree, draft appropriate modifications for inclusion in the
audit report. (You may assume necessary details) (10 marks)

Q.2 – Winter 08
During the audit of a manufacturing company, you have noted certain conditions that cast
significant doubt on the company’s ability to continue as a going concern. You had a meeting
with the CEO of the Company to discuss the issue and communicated your decision that at
least an emphasis of matter paragraph in the Audit Report is inevitable. The CEO disagreed
with your opinion and shared with you the management’s plan to deal with the potential
going-concern uncertainty. The plan mainly constitutes the following measures:
Risk Assessment (ISA 550 & 570) Page 56 ICAP Past Papers

i). the Company is guaranteed a continuous financial support by the parent company;
ii). it has recently rescheduled its borrowing facilities;
iii). the management has plans to reduce overheads and administrative expenses;
iv). the management has decided to discontinue a segment with non-profitable operations;
v). the management has plans to increase equity; and
vi). the management is expecting profitable operations in the next year.

Required: Describe the audit procedures that should be performed to gather sufficient
appropriate audit evidence to support the validity of the CEO’s claims and assess the viability
of the above measures being taken by the management. (16 marks)
Audit Report (ISA 700,701,705 & 706) Page 57 ICAP Past Papers

Implication of Audit Report (ISA 700,701, 705, 706 710 & 720)

ISA 700
Q.4 - Winter 16
Identify the differences between the auditor’s report on financial statements of a listed
company as compared to an unlisted company, based on International Standards on Auditing
(04 marks)

ISA 701
Q.6 - Winter 20
You are the audit manager of Zafar Iqbal & Company, Chartered Accountants. You have asked
one of the team members assigned on the audit of Brown Sugar Limited to draft the Key Audit
Matter section of the audit report for the year ended 30 June 2020. The extracts from the
draft report are as follows:

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters. In addition
to the matter described in the Basis for Adverse Opinion section, we have determined the
matter described below to be the key audit matter to be communicated in our report.

Key audit matter How our audit addressedkey audit matter

In the course of conducting a sales Our key audit procedures in this area included
tax audit for the period from amongst others were:
January 2019 to December 2019,  We reviewed the correspondence of the
FBR raised certain issues with company with relevant tax authorities and tax
respect to the company’s sales. On advisors including judgements or orders
May 2020, the company received an passed by the competent authorities.
order in which demand of Rs. 100  We also obtained and reviewed confirmations
million was raised. The company from the company’s external tax advisor for the
has filed an appeal with the latest status of the case.
appellant board and is confident  We involved internal tax experts to assess and
that it would be decided in review the management’s conclusion on this
company’s favour. matter.
 We verified all the journal entries posted in the
ledgers related to legal expenses.
Audit Report (ISA 700,701,705 & 706) Page 58 ICAP Past Papers

Due to the materiality and  We obtained representation from the

significance of the above matter we management regarding the favourable
have considered this tax outcome of the matter.
contingency as a key audit matter. Based on the procedures performed, we concluded
that there is no material misstatement and
contingency has been adequately disclosed.

Required:
Critically analyse the Key Audit Matter section of the audit report. (13 marks)

Q.7 - Summer 19
During the audit of consolidated financial statements of Voltage Limited (VL), for the year
ended 31 May 2019, you have identified the following matters which will be reported as key
audit matters in the audit report:
(i) VL has acquired 65% shares in Pyrus Limited.
(ii) VL has entered into a major project in relation to the development and maintenance of
its electricity transmission infrastructure which is expected to be completed over a three
year period.

Required:
Draft the key audit matters section to be included in the audit report of VL’s consolidated
financial statements. (You may assume necessary details where required) (10 marks)

Q.6 b - Summer 18
During the audit of a listed client Pixel Limited (PL), you became aware that a legal action has
been instituted against PL by a competitor, on account of infringement of patent rights. The
company’s lawyer was not able to give any estimate about the outcome of the case.
No provision was made in the financial statements for the possible loss as a result of the
claims (which are considered to be material), although details of those legal claims were fully
disclosed in the notes.
Required:
Draft how the above matter would be reported in the key audit matter section of the audit
report. (You may assume necessary details) (05 Marks)

Q.5 - Winter 17
You have recently completed the audit of the financial statements of Rose Limited (RL), a
listed company having a net profit of Rs. 1,500 million. You have identified following matters
which will be reported as key audit matters in the audit report:
(i) RL has pending tax litigation in which tax department has raised demand aggregating
Rs. 175 million. The demand has been challenged by RL and the decision in respect of
this matter is currently pending. The amount is disclosed as a contingent liability in the
financial statements.
Audit Report (ISA 700,701,705 & 706) Page 59 ICAP Past Papers

(ii) RL makes significant purchases from related parties and also incurs significant
advertising expenses through related parties. These transactions are properly
disclosed as related party transactions in the financial statements.
(iii) RL has decided to sell a manufacturing facility located in Faisalabad having a carrying
value of Rs. 300 million and would replace it with another facility in Gujranwala. The
manufacturing facility has been classified as non-current assets held for sale.

Required:
Draft the key audit matters section to be included in the audit report of RL relating to the
above matters. (You may assume necessary details where required) (15 marks)
Q.1 - Winter 16
You are a partner in 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 marks)
(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
qksualification are mentioned in the Key Audit Matters section. (03 marks)
(c) The Key Audit Matters section of audit report of Zia Limited includes details of Key
Audit Matters of only the current period. However, the opinion has been expressed
on current as well as prior year. (03 marks)
(d) At one of the listed clients, investigation by a Government agency against some of its
staff members is in progress. Due to sensitivity of the matter the management has
requested you to not to include such information in the Key Audit Matters section.
(03 marks)

Required:
Advise the concerned partners/managers with respect to the above matters.

ISA 705 & 706

Q.3 b - Winter 18
You are the audit partner of Mansoor Noorani and Company, Chartered Accountants.
Following are the audit issues being faced on different clients:

(b) The management of DC Limited has informed you that they have not disclosed a
material litigation relating to an oil spill from its vessel as the disclosure would be
detrimental to the legal defence of the entity.

Required:
Discuss the auditor’s course of action along with implications on the audit report. (06 marks)
Audit Report (ISA 700,701,705 & 706) Page 60 ICAP Past Papers

Q.3 – Summer 18
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, Non–Current 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 analyse the audit report drafted by Aslam. (11 Marks)

Q.2.b - Winter 17
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)

Q.6.a – Summer 17
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 of the loans have been breached but subsequent to the year end the banks have
confirmed verbally that they will not demand immediate repayment.
Audit Report (ISA 700,701,705 & 706) Page 61 ICAP Past Papers

Required:
Evaluate the above situation and draft the modification, if required, for inclusion in the audit
report. You may assume necessary details. (06 marks)

Q.4.b - Winter 15
Assume that after performing the audit procedures, the auditor is not satisfied with the
valuation and has finally decided to modify the audit report.

Required:
Draft an appropriate basis of modification paragraph in the above situation, for inclusion in
the audit report. (Assume necessary details) (06 marks)

Q.2.b - Winter 14
You are the engagement partner on the audit of Mars Limited, for the year ended 30
September 2014.
On commencement of the review of working paper file, the audit manager has informed you
that the audit report would need modification. The following draft modification is available
in the file:
“We draw attention to note 10 to the financial statements that fully explains that amount of
Rs. 70 million due from Utopia Limited (UL), that is outstanding since September 2013, is not
recoverable as UL is in the process of winding up from 20 December 2013. Therefore, the said
amount has been fully provided for in the financial statements of the current year due to
which the company has incurred loss during the year. As the revenue from UL amounts to
40% of total revenue of 2013, we are of the view that it is fundamental to users’
understanding of the financial statements. Our opinion is not qualified in respect of this
matter. The financial statements for the year ended 30 September 2013 were audited by
another auditor who expressed an unmodified opinion on those statements on 25 December
2013.”
The draft financial statements show a loss of Rs. 92.4 million (2013: Profit of Rs. 16.4 million)
and total assets of Rs. 395 million (2013: Rs. 410 million).

Required:
Making necessary assumptions on the basis of the above information, draft an appropriate
modification on any one matter, to be included in the audit report. (05)

Q.1 - Summer 14
You are the manager responsible for the audit of Health and Beauty Brands Limited (HBBL)
for the year ended 31 March 2014. HBBL has been selling its products through its own retail
outlets only. However, during the year under review, HBBL had entered into an agreement
for sale of its products at JDS, a chain of departmental stores.
Following information is available in respect of the above:
 According to the agreement, JDS would make payments within 30 days of the sale to
customers. Any unsold/expired products would be returned to HBBL.
Audit Report (ISA 700,701,705 & 706) Page 62 ICAP Past Papers

 The stock sheets provided by JDS to HBBL revealed differences as compared to the
balances appearing in the HBBL’s inventory system. According to JDS these were due to
posting errors in the system of JDS, and have been subsequently corrected. HBBL’s
management is of the view that such differences are not material as compared to sales
made through JDS.
 There is a significant improvement in the operating results of HBBL. The management
considers that the agreement with JDS has played a major role in such improvement.
 The confirmation sent to JDS was not received. Alternatively, audit team had examined
partial payment amounting to 65% of the outstanding balance upto 31 May 2014.

Required:
Discuss with reasons, what course of action you would adopt in the above situation and the
possible impact thereof on the audit report. (14 marks)

Q.7 - Summer 13
(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 in each of the
following situations:
(i) The impairment of Rs. 12 million is recorded in the financial statements.
(ii) The impairment is not recorded. (06 marks)

(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. (04 marks)

Q.2a,c - Summer 12
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
ended31 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.
Audit Report (ISA 700,701,705 & 706) Page 63 ICAP Past Papers

ZTL’s Technical Director believes that the problem 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.
25 million with an asset base of Rs. 150 million. (07 marks)

(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 its
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, 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 ended31
May 2012 is Rs. 80 million. (06 marks)
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.

Q.5(ii) - Summer 12
A regulatory body has recently revised certain requirements pertaining to the information to
be disclosed in the financial statements of one of your existing clients. These requirements
may be in conflict with the financial reporting framework being followed by the client.
You have informed the client that in view of the possible conflict, the audit report may require
a modification. However, the client has expressed its reservations over the issue and
requested you to avoid modifying the report.
Required:
(ii) Assuming that you decide to modify the audit report, on grounds as you consider
appropriate, draft the basis for modification paragraph to be included in that report. (06
marks)

Q.6(i) - Winter 11
You are the manager responsible for the audit of Hafiz Limited (HL), a listed company, whose
fieldwork in respect of the statutory audit is in progress. You are reviewing the following
issues which were brought to your attention by the audit team:
(i) HL’s parent company is registered in a foreign country and has asked your firm to also
provide an audit report on a separate set of financial statements which have been
prepared under the accounting framework prevalent in that country.
Audit Report (ISA 700,701,705 & 706) Page 64 ICAP Past Papers

Required:
Discuss how would you deal with each of the above issues and what may be the implications
thereof on your audit report. (06 Marks)

Q.4 - Summer 11
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. 12million 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 a cost of Rs. 50 million. The plant has a useful life
of 10years 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. 20million, along with 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 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 amortized 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 marks)

Q.3(i, ii) - Winter 10

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. 15million which relate to qualifying assets.
Audit Report (ISA 700,701,705 & 706) Page 65 ICAP Past Papers

(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 million. There is no reference of
this matter in the draft financial statements.
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. (09 Marks)
Q.2(b) - Winter 09
(b) 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 that “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 marks)
Q.1 (iii,iv) - Summer 09
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 December31, 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:
(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.
(iv) During the year, the company has commercially imported certain branded products
amounting to Rs. 200 million, which are subject to FTR at import stage. The final tax paid
at import stage amounted to Rs. 4 million and the entire amount has been recognized as
expense, in the current period. However, goods costing Rs. 50 million remained unsold
and are included in the stock-in-trade
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. (05 Marks)
Audit Report (ISA 710) Page 66 ICAP Past Papers

ISA 710
Q.3 a - Winter 18
You are the audit partner of Mansoor Noorani and Company, Chartered Accountants.
Following are the audit issues being faced on different clients:
(a) The previous year’s audit report of RP Limited was qualified by the predecessor auditor
for not recording impairment loss of Rs. 67 million on plant and machinery. However, the
management has recorded the impairment in the current year. Profit before tax for
current and prior year is Rs. 500 million and Rs. 300 million respectively.

Required:
Discuss the auditor’s course of action along with implications on the audit report. (06
marks)

Q.4.c - Summer 15
Previous year’s audit report was qualified on account of inability to obtain sufficient and
appropriate audit evidence with respect to stores and spares, as ledger of stores and spares
contained many negative balances.

(c) Discuss the possible implications on audit report with respect to previous year’s
modification. (05 marks)

Q.2.a - Winter 14
You are the engagement partner on the audit of Mars Limited, for the year ended 30
September 2014.
On commencement of the review of working paper file, the audit manager has informed you
that the audit report would need modification. The following draft modification is available
in the file:
“We draw attention to note 10 to the financial statements that fully explains that amount of
Rs. 70 million due from Utopia Limited (UL), that is outstanding since September 2013, is not
recoverable as UL is in the process of winding up from 20 December 2013. Therefore, the said
amount has been fully provided for in the financial statements of the current year due to
which the company has incurred loss during the year. As the revenue from UL amounts to
40% of total revenue of 2013, we are of the view that it is fundamental to users’
understanding of the financial statements. Our opinion is not qualified in respect of this
matter. The financial statements for the year ended 30 September 2013 were audited by
another auditor who expressed an unmodified opinion on those statements on 25 December
2013.”
The draft financial statements show a loss of Rs. 92.4 million (2013: Profit of Rs. 16.4 million)
and total assets of Rs. 395 million (2013: Rs. 410 million).

Required:
Evaluate all the facts from the information available above and state the actions the auditor
needs to take on the basis of evaluation. (12 Marks)
Audit Report (ISA 710) Page 67 ICAP Past Papers

Q.5 - Winter 12
(a) Describe the implications on the audit report where the prior year’s audit has been
conducted by another auditor. (04 Marks)
(b) You are the audit manager of Wasim Limited for the year ended 30 June 2012. The
previous year’s audit was performed by another firm of chartered accountants who have
expressed an unmodified opinion. The following issue has been brought to your notice
byte audit team:
The company has written off intangible assets amounting to Rs. 30 million in the current
year because the new CEO believes that the expenditure does not meet the criteria for
capitalization as per the International Financial Reporting Standards. The said amount
was capitalized during the year ended 30 June 2011. The profit before tax for the year
ended 30June 2012 is Rs. 52 million (2011: Rs. 91 million).

Required:
Describe the steps which the auditor needs to take in the above situation and explain the
implications on the audit report assuming that the auditor is satisfied with the valuation of
intangibles as on 30 June 2012. (11 Marks)

Q.7 - Winter 09
You are the auditor of Blue Sky Limited (BSL). The draft consolidated financial statements of
BSL and its subsidiary Sea Green Limited (SGL) for the year ended September 30, 2009show
a profit before taxation of Rs. 10.5 million (2008: Rs. 9.4 million) and net assets of Rs.55.2
million (2008: Rs. 50.7 million). You have performed the audit procedures you considered
necessary for the year ended September 30, 2009 and are satisfied with the results of those
procedures.

However, your firm is also the auditor of Sea Green Limited (SGL). You were appointed as
SGL’s auditors for the year ended September 30, 2009 after BSL acquired 90% shares of SGL
on June 30, 2008. SGL’s draft financial statements for the year ended September 30, 2009
show profit before taxation of Rs. 0.7 million (2008: Rs. 1.7 million) and net assets of Rs. 16.1
million (2008: Rs. 16.6 million). Both the companies are exempt from tax.

The previous auditors’ report on SGL’s financial statements, for the year ended September30,
2008 was unmodified. However, during the audit of SGL it was discovered that due to an
error, the inventory as appearing in the audited financial statements for the year ended
September 30, 2007 was overvalued by Rs. 5.7 million. This amount is now being adjusted by
SGL over a period of three years i.e. over the years ended September 2008 to 2010.

You have approached the management advising them to adjust the full amount in the current
year. However, the management is not willing to accept your point of view.
Required:
Draft the modification paragraph of the report which you would issue on the consolidated
financial statements, in the above situation. (A full report is not required) (11 marks)
Audit Report (ISA 720) Page 68 ICAP Past Papers

ISA 720
Q 5 b Summer 16
While reviewing the draft of the director’s report of NPL you have observed that projections
of future profitability in the director’s report with respect to the Health Care Division show
much higher amounts as compared to the amounts shown in the working related to the
impairment of patents. The CFO has explained that on the basis of prudence and to avoid any
overstatement of intangible assets, projections in the working related to impairment have
been kept on the lower side.

Required:
Evaluate above scenario and explain how auditor should deal with the above situation. (07)

Q.7.c - Winter 14
The following situations have arisen at different audit clients of your firm. The year end in
each case is 30 September 2014.
(c) Your firm has issued an audit report on the financial statements of Earth Limited. In the
published annual report which was received along with the notice of annual general
meeting, you noted that certain disclosures that were agreed to be included in the
directors’ report were missing. (07 marks)

Required:
Discuss the matters which the auditor should consider and the steps that he may need to take,
in each of the above situations.

Q.2.b - Summer 12
The following situations have arisen at an audit client of your firm:
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 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 marks)

Required:
Discuss the matter which the auditor should consider for the above situation and the possible
impact thereof on the audit report.
Audit Report (ISA 720) Page 69 ICAP Past Papers

Q.3(iii) - Winter 10
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:
(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. (04 Marks)

Q.3 - Summer 08
On reviewing the published financial statements of RRK Limited, their auditors, Ahmad
Mobeen and Company, Chartered Accountants, noted the following:
(i) It has been mentioned in the directors’ report that a material amount which was
provided as a bad debt had been recovered after year end.
(ii) Director’s report states that decline in sales, was due to general economic conditions.
However, the auditors’ feel that it was due to inappropriate strategies adopted by the
management.
(iii) A graph in the published report depicted the value of last year’s inventory at Rs.
326million, which according to the corresponding figures given in audited financial
statements amounted to Rs. 250 million.
(iv) Directors’ report stated that negotiations for expansion of production facilities by
acquiring a sick unit had been finalized, whereas the auditors have definite information
that the company could not strike the deal.

Required:
Explain how the auditor should resolve each of the above issues. What steps would the
auditor need to take in case the client does not agree with his recommendations? (10 marks)
Audit Report (700 series Mix) Page 70 ICAP Past Papers

Mix (700 Series)

Q.3 - Summer 23
You are the audit partner of Naseer Jokhio & Company, Chartered Accountants. The following
significant matters have arisen at different audit clients of your firm, where the audit field
work for the year ended 31 March 2023 has been completed:
(a) Nightingale Limited (NL) had recorded the setup of its production line as capital work in
progress in its financial statements for the year ended 31 March 2022, amounting to Rs.
500 million. Your firm expressed a qualified opinion as it believed that the setup of the
production line should have been transferred to property, plant and equipment,
considering that it was available for use from 1 October 2021.

However, in the financial statements for the year ended 31 March 2023, NL has recorded
depreciation for the complete year at a rate of 10% using the straight-line method. As a
result, the written-down value of the production line as at the year-end was Rs. 450
million. NL’s profit before tax was Rs. 300 million and Rs. 220 million for the years ended
31 March 2022 and 31 March 2023 respectively. (08 marks)

(b) Dove Limited (DL) has financing arrangements that are set to expire and outstanding
amounts are payable on 19 June 2023. However, DL’s management has not made any
assessment regarding how the company would manage without these financing
arrangements. Further, no disclosures have been made regarding the uncertainty that
may arise from this situation. (08 marks)

(c) Hawk Automobile Limited (HAL) has experienced significant growth during the year,
primarily attributed to the introduction of a highly anticipated vehicle in January 2023.
HAL offers a 3-year warranty or 50,000 km, whichever comes earlier, on all its vehicles.
As a standard practice, HAL records a warranty provision of 0.2% for all its sales, which
has proven to be fairly reliable in previous years.
However, your audit team has noticed significantly high amount of part replacement
claims for the newly launched vehicle in the months of April 2023 and May 2023. (04
marks)

Required:
Evaluate each of the above matters and advise the course of action. Also suggest the
implications, if any, on the audit report.
(Audit procedures are not required)

Q.6 - Winter 22
You are the audit manager responsible for the audit of Progressive Terminal Limited (PTL),
a listed company, for the year ended 30 June 2022. On completion of audit work, the audit
team presented the audit working papers including draft audit report to be issued to the
shareholders of PTL. Following are the extracts from the draft audit report:
Audit Report (700 series Mix) Page 71 ICAP Past Papers

Opinion
We have audited the annexed financial statements of Progressive Terminal Limited (the
Company), which comprise the statement of financial position as at June 30, 2022, and the
statement of profit or loss and other comprehensive income, the statement of changes in
equity, the statement of cash flows 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, except for the effects of the matter described in the Basis for Opinion section of our
report the statement of financial position, the statement of profit or loss and other
comprehensive income, the statement of changes in equity, the statement of cash flows
and 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) as at June 30, 2022.

Basis for Opinion

The Company’s property, plant and equipment are carried in the statement of financial
position at Rs. 33,379 million. Management has not recorded an impairment loss of Rs. 400
million, which constitutes a departure from IFRSs. The Company’s records indicate that,
had management recorded the impairment, the property, plant and equipment and the net
profit would have been reduced by Rs. 400 million and Rs. 284 million respectively.

We conducted our audit in accordance with International Standards on Auditing (ISAs) as

applicable in Pakistan. 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.

Key Audit Matters

We have determined that there are no key audit matters to communicate in our report.

Other Information
[Reported in accordance with ISA 720]

Emphasis of Matter
We draw attention to Note 5 of the financial statements, which describes the effects of
acquisition of two subsidiaries which took place on April 15, 2022 and July 15, 2022. Our
opinion is not modified in respect of this matter.
Audit Report (700 series Mix) Page 72 ICAP Past Papers

Required:
Identify and explain the shortcomings in the audit report drafted by the audit team. (13
marks)
Note:
 Ignore the shortcomings related to Other Information.
 You are NOT required to re-draft the extracts from the auditor’s report.

Q.5.a.b.c - Winter 22
You are an audit partner in a firm of Chartered Accountants. The following independent
matters are currently under your consideration:
(a) In the draft auditor’s report of Galaxy Limited (GL), a listed company, your firm has
expressed a qualified opinion with regards to incorrect application of an accounting
policy resulting in overstatement of revenue and profit for the year.
While reviewing the draft annual report of GL, you observed that the directors’ report
has shown the figures of revenue and profit as per the statement of profit or loss.
Required:
Discuss the reporting implication(s) due to the above matter. (03 marks)

(b) Your firm has been the statutory auditor of Mamta Oils Limited (MOL) for the year ended
30 June 2022. Your firm issued the audit report for the year ended 30 June 2022 in which
you included a paragraph on “Material uncertainty related to going concern”.
MOL is a subsidiary of a company incorporated in England. MOL needs to submit its
financial statements to its holding company, prepared in accordance with the guidelines
issued by the holding company. After the conclusion of the annual audit, MOL has
prepared its financial statements for the year ended 30 June 2022, in accordance with the
guidelines given by the holding company. MOL has approached your firm to issue an audit
report on the financial statements that are prepared in compliance with the guidelines
issued by the holding company.

Required:
Discuss the changes that need to be made in the audit report in comparison to the
statutory audit report issued earlier to MOL. (08 marks)

(c) Your firm has issued an adverse opinion on the financial statements of Alpha Limited
(AL) for the year ended 30 June 2022 because of misstatements in inventory, revenue
and receivables. On 30 November 2022, AL has approached your firm to issue an audit
report on AL’s property, plant and equipment as at 30 June 2022, for the purpose of
submission to AL’s lenders.

Required:
Discuss the opinion to be expressed, considering the fact that you have obtained
sufficient appropriate evidence that there is no material misstatement in property, plant
and equipment. (04 marks)
Audit Report (700 series Mix) Page 73 ICAP Past Papers

Q.2 - Winter 22
You are the audit manager responsible for the audit of Apparel (Pvt.) Limited for the year
ended 30 September 2022.

During the audit, your team has observed that some unusually high amounts of cash sales
were made to distributors, against which only distributors’ purchase orders, sales invoices
and cash receipts are available for audit verification. On inquiry, your team observed that the
management had a defensive and unusual stance in responding to audit team’s questions.
The team has also noted that these distributors had similar delivery addresses and were
mostly located in the residential areas.

Required:
(a) Analyse your team’s observation regarding above cash sales transactions and advise the
course of action that your team should follow. (11 marks)
(b) Discuss the implication(s) of the above, on the audit report. (06 marks)

Q.2 - Summer 22
You are the audit partner of Mansoor Akram and Company, Chartered Accountants. Following
significant matters have arisen at different audit clients of your firm where audit field work
has been completed:
(a) The management of Popeye Limited (PL), a listed company, has informed you that one of
its competitors has initiated a legal action against the company on grounds of
infringements of patent rights and is seeking damages of Rs. 200 million. In the draft
financial statements, PL has made the following disclosure in this regard:
Litigation is in the process against the company relating to a dispute with a
competitor who alleges that the company has infringed patents and is seeking
damages of 200 million. The information usually required by IAS 37 is not disclosed
on the grounds that it can be expected to prejudice seriously the outcome of the
litigation. The directors are of the opinion that the claim can be successfully resisted
by the company.
Being an area of higher assessed risk of material misstatement which involved significant
judgement, the audit team has made substantial efforts to review the details of litigation.
(10 marks)
(b) During the course of audit of Buzz Limited (BL) for the year ended 31 March 2022, your
audit team identified that there were three overdue instalments of the long term loans.
On enquiry, the management informed your team that they were negotiating a loan
restructuring agreement with its banks since February 2022 and had formally signed it
with the bank on 7 April 2022. Under the agreement, payment of principal amount has
been relaxed in accordance with BL’s cash flow forecast and outstanding interest has
been converted into a two-year loan. The first repayment of principal is now due in July
2023. All the amounts have been adjusted and disclosures have been made in the
financial statements on the basis of the restructuring agreement. (05 marks)
Audit Report (700 series Mix) Page 74 ICAP Past Papers

(c) During the physical stock count at the audit of Captain Limited (CL), certain expired stock
items were identified which were included in the year-end stock balance at their carrying
value. The management represented that they have maintained a 10% general provision
of Rs. 15 million for slow moving and obsolete stocks in the financial statements and
consequently no specific provision is required for expired stock items identified during
physical count. On further enquiry, the management informed that this provision has
been maintained for last many years but they failed to substantiate the basis of this
provision.

The carrying value of stock in trade at year-end was Rs. 55 million net of general
provision. (05 marks)
(d) During the year, Winnie Limited (WL) has obtained an office building under a three-year
lease period for relocating its head office. According to lease contract, WL has the right to
cancel the lease anytime by giving one-month notice. Furthermore, after the lease, WL
has incurred substantial leasehold improvement costs on the office building.

Considering the lease cancellation option, the management has not recorded right of use
assets and related lease obligations as they were of the view that since WL has the right
to cancel the lease anytime, it is not a long term lease. Similarly, all leasehold
improvement costs were expensed out immediately. (05 marks)

Required:
Discuss the auditor’s course of action along with implications on the audit report.
(Audit procedures are not required)

Q.4 - Winter 21
Your firm is the external auditor of Antilope Limited (AL) for the year ended 30 September
2021. AL is in the fishing business and it operates various fishing trawlers.

On 1 November 2020, a new fishing license worth Rs. 10 million was given to AL by the
government at a nominal amount of Rs. 100,000 for a period of four years in consideration of
the following conditions:

(i) AL should help Fisheries Department in protecting the endangered marine species.
(ii) AL should not hunt and catch any of the endangered marine species.
(iii) AL should educate other fishermen in adopting the practices which would help in
preservation of the endangered marine species.

On receipt of license, AL recorded it at its fair value of Rs. 10 million.

Your audit team has performed various audit procedures and obtained management
representation to ascertain that the conditions for grant of the license have been met. After
completing audit field work, you have provided an initialled draft audit report.
Audit Report (700 series Mix) Page 75 ICAP Past Papers

After issuance of initialled audit report, a media report has surfaced which indicates that
some employees of AL are involved in selling the endangered marine species, caught by AL’s
trawlers, in the fish market.

Required:
Evaluate the above matters and discuss your firm’s course of action. Also briefly mention the
related reporting implications. (17 marks)

Q.1 - Winter 21
Your firm has been appointed as the auditor of Harrier Limited (HL), a public unlisted
company, for the year ending 31 December 2021. HL is in the business of textile and allied
products. The previous year’s audit was performed by another firm of chartered accountants
who expressed an unmodified opinion.
HL has provided you its draft annual report which includes following graphical analysis
regarding the profitability of its business. The audited financial statements are made part of
this annual report which will be shared with all stakeholders.

Export sales represents sales of scuba diving suits mostly to various European countries.
Total assets used for the calculation of ratios relating to export sales include a manufacturing
plant acquired for producing scuba diving suits in October 2018 at a cost of Rs. 100 million
and had an expected useful life of 20 years. As at 30 September 2021, this plant is appearing
in HL’s book at Rs. 85 million.
On inquiry with the management regarding the decline of export sales, they informed that in
the third quarter of 2020, European Union withdrew the GSP + status of Pakistan. This
resulted in cancellation of all future orders from European countries. They further informed
that the plant remained idle several times in the current year due to lack of export orders as
there is a minimal demand of such products in Pakistan and some other Asian countries.
Audit Report (700 series Mix) Page 76 ICAP Past Papers

The profit before tax as per draft financial statements is Rs. 200 million.

Required:
(a) Critically evaluate the issue discussed above and advise the course of action that your
team should take. (08 marks)
(b) Discuss all the possible reporting implications if:
(i) the management agrees to account for as per the applicable financial reporting
framework.
(ii) the management does not agree to account for as per the applicable financial
reporting framework. (16 marks)

Q.3 b - Summer 21
You are the audit manager responsible for the audit of Kamran Limited (KL) for the year
ended 31 May 2021. On 1 October 2020, KL raised Rs. 400 million by issuing convertible
bonds (having par value of Rs. 100 each). The bonds are convertible to KL’s ordinary shares
in 5 years' time at the option of bond holders. The convertible bonds carry coupon rate of 5%
payable on 30 September each year.

KL’s total shareholders equity as at 31 May 2021 was Rs. 3,250 million.

Required:
(b) Discuss the reporting implication(s), assuming that KL believes that at least 30% of the
bonds would be converted to equity at the end of year 5 and have therefore recorded Rs.
120 million as equity and the remaining amount as liability. (03 marks)

Q.5 - Winter 19
Your firm has been appointed as the auditor of Helsinki Limited (HL), a listed company, for
the year ended 30 September 2019. The previous year’s audit was performed by another firm
of chartered accountants who expressed an unmodified opinion. In a recent meeting with the
client, it has been agreed that audit report will be signed on or before 20 December 2019.

The materiality has been determined at Rs. 10 million. Your audit team has brought the
following significant matters to your notice on the completion of audit field work:
(i) A receivable balance of Rs. 6 million with a related party has been identified which has
not been disclosed in the financial statements. HL’s management is of the view that since
the balance is not significant, there is no need to disclose the amount, nature of
transaction and nature of relationship.
(ii) While reviewing the previous year’s annual report, your team has noticed that there were
number of reports and analysis which formed part of the annual report. On asking the
management regarding the date when the current year’s information would be available
to the audit team, the management responded that directors’ report would be provided
on 10 December 2019 and all remaining reports would be provided on 18 December
2019.
Audit Report (700 series Mix) Page 77 ICAP Past Papers

(iii) While reviewing the provision for employees’ compensated absences, the audit team has
noticed that the working is prepared on the basis of basic salary, whereas the employees
are entitled for compensated absences on the basis of gross salary. On further
investigation it is found that the same error was made in the last year as well. The
management has agreed to adjust the entire amount in current year.

Required:
Evaluate the above matters and discuss your firm’s course of action along with implications
on the audit report, if any. (20 marks)
Q.6a - Summer 18
The following information relates to the audit of Apex Fertilizer Limited (AFL) for the year
ended 31 March 2018:
 AFL has incurred gross loss which is mainly because AFL’s plant was not running on
optimum capacity due to severe shortage of gas supply from the government. However,
AFL has recently made arrangements with a privately owned company for supply of gas.
Management expects that continuous supply of gas would help AFL to convert its gross
loss into gross profit, although achieving net profit would require more efforts.
 Several instalments of the long term loan appearing on the balance sheet were overdue.
AFL entered into a restructuring agreement with the bank on 7 April 2018 whereby the
outstanding interest has been converted into a loan of three years and principal
payments have also been relaxed. The first payment of principal is now due in July 2019
and the amounts have been reclassified on the basis of the restructuring agreement.
 The method for the depreciation of plant and machinery has been changed from straight
line to units of production method.
 The directors’ report includes the following information:

“We have entered into a gas supply arrangement with Karim Gas Limited from August 2018.
A continuous gas supply will help us to attain the optimum production level and record
profits in the next financial year. Furthermore, several cost saving measures have been
taken, as a result of which fixed costs have reduced by 15%.
The company has entered into a restructuring agreement whereby the lenders considering
the potential of the company’s vision and strategies have further extended and relaxed the
terms of future payments. As a result, our liquidity position has improved which is depicted
by a much improved current ratio.”

Required:
(i) As the audit manager what issues would you like to discuss with the management in
respect of the above (other than the issue of going concern)? (10 marks)
(ii) What could be the possible impact on the audit report if the management does not agree
with your point of view about the issues raised in (a) above? (04 marks)
Code of Ethics Page 78 ICAP Past Papers

Code of Ethics
Q.4 - Summer 23
Pelican Limited (PL) is audited by Faraz Naeem Rajput & Company, Chartered Accountants.
Faraz Paracha, PL's engagement partner, became ill during the engagement for the year
ended 31 March 2023 and was replaced by Raja Jibran, who had recently joined the firm as a
partner. Raja Jibran formerly worked as a senior manager audit at Kareem & Company,
Chartered Accountants.

The engagement is nearing to the finalization stage, and the audit team has identified that the
management has capitalized initial operating losses on a new production plant as a trial run
loss. Upon further inquiry with PL’s management, they informed that the business feasibility
and cash flow projections of the new production plant were undertaken by Kareem &
Company. The new production facility started commercial production, and the management
identified that an important cost element was missed by Kareem & Company, which resulted
in initial operating losses. On the advice of Kareem & Company, PL had capitalized these
losses in the cost of the plant.

Furthermore, PL’s management expressed surprise that the audit team identified this issue
at the finalization stage, as Raja Jibran was part of Kareem & Company team and should have
considered this earlier. Raja Jibran was upset and furious with the audit team that why they
had not discussed the issue with him before bringing it up with the client. He has strictly
instructed the audit team members not to discuss any audit issues with others before
discussing it with him.

Required:
In light of ICAP’s Code of Ethics, identify and evaluate the threats involved in the above
situation and explain the course of action that should be taken to resolve the issue. (15
marks)

Q.3 - Winter 22
You are the audit engagement partner for Canister Products Limited (CPL) which is a
subsidiary of a local group.

During the audit, your team has identified that some payments posted in the marketing
expense ledger, were made to few customers. On investigation, it was revealed that there
were breaches of the customers’ data which was in non-compliance with the requirements of
the confidentiality agreement signed with these customers and data protections laws. The
management has informed you that these payments were made as compensation to
customers in order to avoid any negative public attention which may affect CPL’s reputation
and business.
Code of Ethics Page 79 ICAP Past Papers

Required:
In the light of ICAP’s Code of Ethics, identify and evaluate the threats involved in the above
situation and explain the course of action which should be taken to resolve the issue. (15
marks)

Q.4 - Summer 22
Ayesha Khalid & Co., Chartered Accountants (the firm) is planning the audits of its clients for
the year ending 31 December 2022. For this purpose, the firm is considering to appoint
certain partners responsible for some of the listed clients. The name of relevant partners’
along with their association with the clients are as follows:
(i) Faizan Rashid has served five years as the engagement partner on the audits of various
clients including Dalmatian Limited (DL). The firm has transferred him to taxation
department as part of the firm’s rotation policy, where he would also be responsible for
filing of DL’s annual tax return.
(ii) Saad Akbar has recently been promoted as partner from senior manager. He has been in
various managerial roles for the audit of Aladin Limited (AL) for the last five years before
being promoted to partner. The firm is considering to appoint Saad as the engagement
partner of AL.
(iii) Sara Kareem had been the engagement quality control partner of Shifu Limited (SL) from
2012 to 2015 and 2018 to 2020. During 2016 and 2017, Sara was on a service break due
to her illness. The firm is now considering to appoint her as SL’s engagement partner.
(iv) Raheem Shafique has served as the engagement partner of Panda Limited (PL) for five
years. The firm is now considering to appoint him as the engagement partner of Hoper
Limited, holding company of PL.

Required:
Discuss whether the partners can be appointed in the roles being considered by the firm. (10
marks)

Q.5 - Winter 21
You are the quality assurance manager in Asghar & Company, Chartered Accountants.
Following matter has been brought to your attention:

Your firm has deputed two staff members to perform the following tasks in Badger (Private)
Limited (BPL):
 Raising purchase orders.
 Raising customer orders.
 Calculating depreciation on fixed assets.
 Posting transactions coded by the client to the general ledger.

On 15 November 2021, BPL has appointed your firm as external auditor for the year ending
30 June 2022. Your firm informed BPL that they will not be able to continue the above
mentioned services from the date of appointment as it would affect firm’s independence and
Code of Ethics Page 80 ICAP Past Papers

objectivity. BPL accepted your firm’s point of view. However, BPL’s management has
requested your firm to assist them in shortlisting the candidates for the roles which your
firm’s personnel were performing.

Required:
Discuss the categories of threats involved in the above situation and advise the possible
course of action that may be followed. (14 marks)

Q.1 - Summer 21
(a) MF Momin, Shams & Company is a firm of chartered accountants (the firm) which was
initially registered with two partners namely Momin and Shams, in the year 2011 with
offices in Karachi and Islamabad. In 2020, the firm got affiliation with a reputed
international firm namely Missouri Fox (MF) which resulted in increase in clientele of
the firm especially in the province of Punjab. As a result, the firm has established its new
office in Lahore.

You are the quality control partner in the firm. While reviewing the annual revenue
earned by the firm for the year ended 31 December 2020, you have extracted the
following information from the firm’s books of accounts:

Firm’s offices Firm’s partners

Clients Karachi Islamabad Lahore Momin Shams Others
---------------------------Rs. in ‘000 ------------------------------
Audit and assurance
services
Pervez Limited (PL) 2,730 - - - 2,730 -
Amin (Pvt) Ltd (APL) - - 1,680 - - 1,680
Salman Limited (SL) - 4,000 - 4,000 - -
Tania Limited (TL) 1,100 - - - 1,100 -
Other clients 3,800 3,000 6,000 3,000 1,800 8,000
Consultancy and
other services
Pervez Limited (PL) 500 2,000 500 - - 3,000
Amin (Pvt) Ltd (APL) - - 1,480 - - 1,480
Salman Limited (SL) 1,500 - 1,300 - - 2,800
Tania Limited (TL) 200 - - - 200 -
Other clients 4,170 6,000 2,040 3,000 3,170 6,040
14,000 15,000 13,000 10,000 9,000 23,000

Other information:
(i) PL, SL and TL are listed companies whereas APL is the first multinational client of
the firm.
Code of Ethics Page 81 ICAP Past Papers

(ii) All the clients have already re-appointed the firm for their subsequent statutory
audit.
(iii) Shams is also entitled to 20% additional commission of the total fees earned from
PL.

Required:
In the light of ICAP’s Code of Ethics for Chartered Accountants, evaluate the implications
of revenue earned from PL, APL, SL and TL on the firm and suggest the safeguard(s), if
any, available to the firm and partners. (12 marks)

(b) Other clients in (a) include Hafiz Limited (HL) and Chand Limited (CL) which have not
yet paid the audit fees for the year ended 30 June 2020. The audit report for HL was
issued three months ago but HL has still not paid the balance 50% of audit fee, while the
audit report for CL has not been issued due to certain pending issues.

Required:
Discuss the course of action available to the firm in the above situation. (03)

Q.5 - Winter 20
Salman Qasim is an audit senior of Ibrahim & Company, Chartered Accountants. He joined the
ongoing audit of Kalam Limited (KL) which was under completion stage. During the audit, he
came to know that the newly appointed Chief Financial Officer (CFO) is a close friend of the
audit manager which was not disclosed by him to the firm. He decided to disclose this matter
to the engagement partner; however, he came to know that the engagement partner has been
out of country for last one month and has not yet discussed the progress of the audit with the
audit team. He then wrote an email to the firm’s quality control partner and brought all such
observations in his knowledge.

Required:
Discuss the professional and ethical issues arising in the above situation and advise the
course of action that the firm’s quality control partner should take. (13 marks)

Q.6 - Winter 19
Your firm, Hatim Manzoor and Company, Chartered Accountants is the auditor of Paints
Limited (PL) for the year ending 31 December 2019. On 1 December 2019, PL has acquired
controlling interest in Brush Limited (BL). Your firm also has a contract with BL for providing
accounting and bookkeeping services until 31 December 2020. BL has requested your firm
to keep providing the services until an alternate solution is worked out.

Required:
Evaluate the threat(s) in the above scenario and discuss whether the firm can continue
providing the services to both the clients till conclusion of the audit. (10 marks)
Code of Ethics Page 82 ICAP Past Papers

Q.4 - Summer 19
Alpha Textile Limited (ATL) is a long standing listed audit client of your firm. Haris has been
the audit engagement partner of ATL for the last five years. The firm is considering to appoint
Munir as ATL’s engagement partner and Haris either as ATL’s quality control review partner
or client relationship partner.
Required:
In the light of Listed Companies (Code of Corporate Governance) Regulation, 2017 and ICAP’s
Code of Ethics, discuss the validity of Haris’s appointment either as ‘quality control review
partner’ or ‘client relationship partner’. (08 marks)

Q.5 - Winter 18
(a) You are the quality control partner in a firm of chartered accountants. Your firm has been
approached by Beta (Private) Limited (BPL) for appointment as the auditors for the year
ending 30 June 2019.

Your firm was also hired by BPL for valuation of its investment in an unlisted company on
August 2018. The valuation engagement had concluded in September 2018 and the amount
of investment is material to BPL’s financial statements.

Required:
Being the quality control partner, advise whether the audit of BPL could be accepted by the
firm. Also discuss the relevant threats, if any. (06 marks)

(b) You are the statutory auditor of two listed companies, Alpha Limited and Gama Limited.
Both the companies are in conflict with each other and involved in two major litigations.

Required:
Identify the threats involved in the above situation and also suggest related safeguards, if any.
(06 marks)

Q.5 - Summer 18
Nisar Khalid & Co. Chartered Accountants (NKC) has been approached by Hector Limited
(HL) a listed company, for appointment as HL’s auditors for the year ending 30 April 2019.

The core departments of NKC along with the names of the partners are as follows:

Quality Control Tax & Corporate

Assurance Department
Department Advisory Department
Nisar Ali Khalid
Hashmat Usman Ovais
Moin Hasan
Rashid
Arif
Code of Ethics Page 83 ICAP Past Papers

NKC intends to appoint Rashid as the engagement partner. As part of the client acceptance
procedures, an email was circulated to all the staff of the firm to disclose any investment in
HL and its related parties by any partner/employee or their family member(s).
A summary of response of Rashid and his staff is as follows:
 Rashid has confirmed that he does not hold any shares in HL although his wife has
invested Rs. 2 million in a mutual fund. The mutual fund has invested 14% of its total
investment in shares of HL.
 Zahid has been working as an audit manager with Rashid. Zahid has disclosed that he has
invested Rs. 50,000 in the shares of Troy Limited (TL). HL owns 20% shareholding in TL.
Response by other partners of the firm are as follows:
 Ali has invested Rs. 45,000 in the shares of Achilles Limited, which is the holding company
of HL.
 vais has confirmed that his son has invested Rs. 500,000 in the debentures issued by HL.
Response by other staff of the firm:
 Some of the junior audit staff who are not working with Rashid and the staff of the firm’s
accounts department have confirmed holding in shares of HL of nominal amounts ranging
from Rs. 5,000 to Rs. 60,000.
Required:
In the light of Code of Ethics for Chartered Accountants, evaluate the above situation and
discuss the threats (if any) in each case along with the available safeguards if NKC decides to
accept the assignment. (15 Marks)

Q.6 - Winter 17
You are the quality control partner of Lotus & Co. Chartered Accountants. You have been
assigned additional responsibilities for assessment of risks associated with the firm’s clients.
At present, the following matters are under your consideration:
(a) Clean Limited (CL) has failed to pay the fee for review of its half yearly accounts for the
six month ended 30 June 2017. The issue was discussed with the management in the
planning meeting for the audit of the year ending 31 December 2017. The management
has assured that the amount would be paid in about 30 days. During the discussion,
the audit manager was also informed that CL has been facing liquidity issues and it has
closed two of its plants. The management has also requested for a reduction in the
audit fee for the year ending 31 December 2018 because of the decline in the volume
of business. Further, the management has requested the firm to consider some relief
as regards audit fee for the current year. (10 marks)
(b) During the review of working papers of Daffodil Limited (DL), the engagement manager
came to know that a large consignment of import of raw material is stuck with the custom
authorities. On his query he was informed that the DL’s clearing agent was unable to
resolve the matter. However, now DL has approached another custom clearing agent for
clearing the said consignment and the matter with the custom authorities would be
resolved shortly. DL has agreed to pay 1.4% of the value of consignment to the clearing
agent. A junior member of the team has informed the engagement manager that clearing
agent appointed by DL is the brother of the audit senior. (05 marks)
Code of Ethics Page 84 ICAP Past Papers

Required:
Discuss the categories of threats involved in each of the above situations and advise the
possible course of action that may be followed.

Q.3 – Summer 17
(a) An audit client of Akbar Ali & Co. has approached your firm for appointment as
internal auditor. Your firm and Akbar Ali & Co. Chartered Accountants have a
common quality control department and share common quality control policies and
procedures.
Required:
Discuss the above scenario in the light of Code of Ethics assuming the said client is a
public interest entity. (07 marks)

(b) Sameer works as manager assurance in your firm. He has close personal relationship
with Saqib, who is the CFO at one of your audit client. However, you haven’t assigned
that client to Sameer.
Required:
Evaluate the above situation and identify threat(s), if any, and related safeguards.
(03 marks)

Q.8 - Winter 16
You are the partner in a firm of Chartered Accountants and presently following matters are
under your consideration:
(a) Annual audit of Kamran Limited (KL) for the year ending 31 December 2016 is due to
commence in a few weeks. Jamal has been an audit team member for eleven years; two
years as the job incharge, three years as manager and six years as partner.
KL was listed on the Pakistan Stock Exchange in July 2016.

Required:
(i) Identify the threats in the above situation and discuss the significance thereof. (06)
(ii) Discuss the need for rotation of engagement partner in each of the following
situations:
 The firm has adequate resources and personnel who can replace Jamal as
engagement partner but Jamal does not want to leave this assignment.
 The firm is unable to find a suitable replacement. (03 marks)

(b) Your firm has received request from a listed audit client to assess the quality of the
internal audit function and give recommendations as regards improving the structure of
the internal audit department and the quality of its staff.
Required:
Evaluate the above situation and identify threats, if any and related safeguards. (03
marks)
Code of Ethics Page 85 ICAP Past Papers

Q.3 Summer 16
You are the partner in a firm of Chartered Accountants having three partners. Presently,
following matters are under your consideration:
(a) Your firm is conducting the audit of Tahir Limited (TL). A partner in your firm is a close
friend of Kashif, who is the financial controller in TL. (05)
(b) Your firm has been approached by Javed Limited for advice regarding investment in
Kamran Limited (KL). The spouse of a partner of the firm holds 500,000 shares in KL.
(05 marks)

Required:
Evaluate threats involved in the above situations and suggest related safeguard(s), if any.

Q.3 - Winter 15
You are the manager in Quality and Risk Management department in a firm of Chartered
Accountants. A partner of the firm has informed you about the following:
a. Audit of Nadir Limited (NL), a non-listed company, is in the finalization stage as almost
85% of the field work has been completed. NL has acquired 51% holding in Hamid
Limited (HL), a listed company, few days ago. A partner of the firm holds 500,000
shares valuing Rs. 20 million in HL. The partner has agreed to sell the shares; however
it would take some time as the shares of HL are not actively traded. (08 marks)
b. An audit manager of the firm has effectively negotiated a non-assurance assignment
with an audit client. Such deals are usually considered in the annual appraisal of the
managers. (06 marks)
c. Zaheer Limited has approached your firm for transaction advisory services related to
acquisition of Javed Limited, which is your audit client. (07 marks)

Required:
Give your views on each of the above situations with regard to Code of Ethics.

Q.3 - Summer 15
You are the partner incharge of quality control department of Mian and Company,
Chartered Accountants. The following independent matters are under your consideration:
a) Engagement partner’s brother-in-law has joined as CFO on an audit client. (04 marks)
b) Your firm has been asked to verify the results of an award competition being organized
by an audit client. (04 marks)
c) On an unlisted audit client, the audit engagement team prepares financial statements
from the trial balance and proposes adjusting entries. (04 marks)

Required:
Identify and evaluate the threats involved (if any), in each of the above situations and explain
the actions which should be taken as regards the above matters.
 Code of Ethics Page 86 ICAP Past Papers

Q.1 Q.3 - Winter 14

Q.2 Your firm has been appointed as an advisor to Jupiter Limited (JL) an unlisted public
company, which is an assurance client of your firm. JL wants to dispose of its shares in Pluto
Limited, to a foreign buyer. As part of the assignment, your firm is required to act as an
intermediary between the foreign buyer and JL, negotiate the payment terms, receive
payments on behalf of JL and ultimately make disbursement to JL after the transfer of shares.
R
S Required:
T Identify the nature of threat(s) involved and explain how you would meet your professional
obligations and responsibilities while carrying out the above assignment (10 Marks)

Q.5 - Winter 14
(a) An audit client has approached your firm for advice on various issues concerning a
financing arrangement. The client has provided you information regarding terms of
financing offered by three different financial institutions including draft agreements
which the client may be required to sign.

Required:
Identify threats involved in the above case and also suggest related safeguards, if any. (06
marks)

(b) Assuming that two of the above financial institutions are audit clients of your firm,
explain whether such situation would result in a conflict of interest, under the Code of
Ethics for Chartered Accountants. (04 marks)

Q.2 - Summer 14
You are the quality control partner in a firm of chartered accountants. The following
independent situations are under your consideration.

a. Kamal, a manager in the firm is assigned on deputation for training of the newly hired
staff in the accounts department of a brokerage house. The brokerage house is also an
audit client of your firm. (04 marks)
b. Your firm has received a proposal from an audit client for implementation of a new IT
system which the company has acquired. (08 marks)
c. The client has written a letter of appreciation showing their gratitude for the
involvement and guidance provided by an audit manager on various issues regarding
application of accounting standards. (05 marks)

Required:
Identify and evaluate the threats involved and explain what actions should be taken in the
above circumstances including the steps required, if any, to reduce the risks to an acceptable
level.
Code of Ethics Page 87 ICAP Past Papers

Q.5 - Winter 13
(a) Dynamic (Private) Limited (DPL) is a client of your firm. At the finalization stage of annual
audit, it was discovered that a senior member of the assurance team is the co-owner of a
property, for the possession of which DPL has filed a legal case. On investigation, the
member informed that the said case is pending for the last three years and he did not
consider necessary to disclose it at the time of commencement of audit.

Required:
Discuss the matters that should be considered and the course of action which may be
followed in the above situation. (07 marks)

(b) Murree Limited (ML) and Bhurban Limited (BL) are listed assurance clients of your firm.
BL has filed a claim of Rs. 50 million in the court in respect of low quality of goods
delivered by ML. Upto last year ML had not acknowledged the claim of BL. However, in
the planning phase, you were informed by ML’s management that in order to avoid bad
reputation in the market and to continue its business relationship with BL, ML intends to
settle the dispute by making a payment of Rs. 20 million to BL. The debt of Rs. 50 million
is fully provided in the books of BL.

Required:
Being the auditor of both the companies, identify and evaluate the threats for the firm
and explain how these can be reduced to an acceptable level. (06 marks)

Q.7.a - Winter 13
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 marks)
(ii) What would be the retiring auditor’s responsibilities with respect to the above and the
responsibility of ABC and Company, in case the retiring auditor does not fulfil its
responsibility? (05 marks)

Q.4 - Summer 13
You are the quality control partner of Nasir and Company, Chartered Accountants (NCC)and
presently following matters are under your consideration:
a) Your firm has issued an unmodified opinion on the financial statements of Salim Limited
(SL) for the year ended 31 December 2012. The tax authorities have recently launched
an investigation against SL, alleging that SL has under declared its income for the year
ended 31 December 2012. NCC is also acting as the tax advisor of SL.(09 marks)
Code of Ethics Page 88 ICAP Past Papers

b) While appreciating the services rendered by your firm, the managing director of a client
has informed the engagement partner that an audit trainee has helped him in the
purchase of a plot of land. On investigation, the engagement partner was able to establish
that the trainee works part-time in an estate agency and receives 0.5%commission on all
deals.(05 marks)
c) Josh Limited (JL), an unlisted audit client of your firm has approached your firm to recruit
a chartered accountant for the position of finance director in JL. In response to an
advertisement published in the newspaper, NCC received various applications which
include individuals working at some of your clients and some of your ex-employees. (05)

Required:
Identify and evaluate the threats involved and explain what actions you would take in the
above circumstances including the steps required, if any, to reduce the risks to an acceptable
level.

Q.2 - Winter 12
Identify and evaluate the threats involved and explain how these threats can be reduced to
an acceptable level, in each of the following situations:
(a) During the year, Jamil Limited (JL) had acquired Sarfraz Limited (SL) and the companies
were subsequently merged. The due diligence exercise for the acquisition was performed
by the same firm which carries out the annual audit of JL. At the time of planning, the
auditor found that a significant provision has been made against SL’s inventories and
accounts receivables. The management informed the auditor that the fact that the value
of these assets was impaired came to its knowledge after taking control of SL. JL and SL
are unlisted public companies. (10 marks)
(b) A limited assurance engagement has been accepted at a fee which is lower than the fee
charged by the predecessor auditor.(03 marks)

Q.3 - Summer 12
You are the quality control partner in Wiew and Company, Chartered Accountants. You have
been assigned additional responsibilities for assessment of risks associated with the firm’s
existing and proposed clients. At present, the following matters are under your
consideration:

a) The government has invited ‘expression of interest’ for selling its strategic shares in Iqbal
Limited (IL). One of your clients’ Zain Limited is interested in the deal and has requested
your firm to carry out a due diligence exercise. Mian Limited has also approached your
firm for carrying out a business valuation of IL.
b) JKL Limited, a listed audit client of your firm, has been in dispute with a supplier. JKL is
of the view that it has suffered losses on account of breach of contract by that supplier.
JK Lintends to file a suit in a civil court and has asked you to estimate the amount of
damages that may be claimed and provide a detailed calculation thereof.
Code of Ethics Page 89 ICAP Past Papers

Required:
Discuss the categories of threats involved in each of the above situations and advise the
partners as regards the possible course of action that may be followed. (16 marks)

Q.7 - Summer 12
Mr. Mahmood is the engagement partner for the audit of Khyber Limited (KL), a listed
company. In a meeting of the partners of the firm he had declared that Better Life Trust (BLT),
in which he is a trustee, intends to purchase fifty thousand shares of KL from the open market.

Required:
(a) State how should the firm deal with the above situation. (07 marks)
(b) What would the firm’s response be if Mr. Mahmood inadvertently fails to disclose the
above fact before the purchase of shares and it comes to the knowledge of the firm after
the shares have been purchased? (05 marks)

Q.3 - Winter 11
You are the quality control partner in Pirzada and Company, Chartered Accountants. The
following matters are under your consideration:

i). Your firm has been approached for appointment as external auditors of Watto Limited
(WL), a listed company. Your firm has been providing valuation services to WL.
ii). To evaluate the network security system of Babar Limited (BL), your firm had acquired
the services of a Systems Auditor. The Finance Director of BL has accused the Systems
Auditor for compromising information relating to the company’s customers and
providing their contact details to a competitor.
iii). Your finance department has issued an invoice to Qamar Software Services (QSS) against
referral fees for recommending services of QSS to an assurance and a non-assurance
client. Your permission has been sought before sending the bill to QSS.

Required:
Identify and evaluate the threats involved and explain what action would you take in the
above circumstances including the steps required, if any, to reduce the risk to an acceptable
level. (16 marks)

Q.6 - Summer 11
You are the audit manager in Farhad and Company, Chartered Accountants. You have specific
responsibility for assessing the risks associated with the firm’s existing and proposed listed
clients. Presently the following matters are under your consideration:

i). Romeo Supermarket Limited (RSL), a large chain of super markets, has approached your
firm to perform financial due diligence of one of your audit client, Juliet Limited (JL),
which is a listed company. RSL intends to acquire 80% shareholding in JL.
Code of Ethics Page 90 ICAP Past Papers

ii). Sherbano Limited (SL) has requested your firm to provide a consent letter for acting as
its auditors. The wife of a partner in your firm is the Director Marketing in SL.
iii). One of your assurance clients has requested your firm to provide consultancy services in
relation to a proposed transaction with a company based in Singapore. As your firm does
not have the expertise to undertake that assignment, it is considering to refer the
assignment to Marvi & Company, Chartered Accountants. It is expected that your firm
would receive a commission of15% of the assignment fee from Marvi & Company.

Required:
Discuss the categories of threats involved in each of the above situations and advise the
partners as regards the possible course of action that may be followed. (15 marks)

Q.6.a - Winter 10
Eagle Limited (EL) is an unlisted company and operates a chain of 30 restaurants. The
management has established effective internal controls especially over cash receipts and
payments to employees and suppliers. The internal audit department of EL has been playing
an important role in continuous evaluation and monitoring of these internal controls.
However, the chief internal auditor (CIA) has recently resigned along with his two assistants.

Your firm has been the auditor of Eagle Limited (EL) for the last many years. The CEO of EL
has approached your firm for help in resolving the situation and has proposed the following
alternatives:
i). EL would outsource its internal audit department to your firm.
ii). Your firm would recruit an individual for the position of CIA to fill the vacancy.
Inconsideration, EL would pay a fee equivalent to two months’ gross salary of the CIA.
iii). EL would recruit the CIA and your firm would provide audit staff on secondment for six
months to assist the CIA in understanding and accomplishing the tasks. The CEO has
showed his inclination to hire Mr. Kiwi, the manager responsible for the audit of EL.

Required:
Comment on each of the above alternatives as follows:
(a) Discuss the threat involved and explain the safeguards, if any, available to the firm which
may eliminate or reduce the threat to an acceptable level. (15 Marks)

Q.2 - Summer 10
You are a chartered accountant in practice. The following situations have arisen in connection
with two of your clients:
(a) A multinational company (MNC) which is planning to establish a place of business in
Pakistan by forming a public limited company under the Companies Ordinance, 1984,has
requested your firm to provide the following services:
(i) Receive the funds remitted by the MNC.
(ii) Make disbursements in accordance with the instructions of the MNC.
Code of Ethics Page 91 ICAP Past Papers

Required:
Explain how you would meet your professional obligations and responsibilities while
carrying out the above assignment. (07 marks)

(b) Your firm is the external auditor of a listed company. Recently the management of the
company has requested your firm to provide the following services:
(i) Reconciling the creditors’ ledger with the statements submitted by the suppliers.
(ii) Estimating the compensation payable to the employees who were seriously injured
while carrying out the trial run of the plant.

Required:
Explain the threats involved in accepting the above assignments and identify the steps
the firm should take to fulfill its professional responsibilities and obligations. (10 marks)

Q.4 - Summer 10
You are the quality control partner in a medium size audit firm and have been asked to give
your views on the following situations:
a) Pentagon Limited, an unlisted assurance client, has requested your firm to assist them in
the recruitment of the Chief Financial Officer (CFO) of the company. While shortlisting
the candidates, it was found that the applicants include CFOs of two of your existing
assurance clients.
b) One of your firm’s large clients, a listed company, has requested that the current year’s
audit should be carried out by the same team which audited the last year’s financial
statements. The request has been justified on the grounds that the accounts department
is extremely busy on a special assignment and a new team would take a lot of their time.
You have also been informed that Mr. Shams has been the manager in charge of that audit
during the last three years.

Required:
Discuss the category of threat involved in each of the above situations. Also explain the
safeguards available with the firm which may eliminate or reduce the threat to an acceptable
level. (14 marks)

Q.3 – Winter 09
Mr. Omar is incharge 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.
Code of Ethics Page 92 ICAP Past Papers

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 and explain
how would it affect the objectivity and independence of the auditor. Also explain the
responsibility (if any) of the firm and the concerned member of the audit team. (11 marks)

Q.6 – Summer 09
You have worked as a job in charge on the audit of financial statements of a multinational
listed company, engaged in pharmaceutical business. During the course of your audit, you
became aware of various facts and details about the company.

It was a long engagement for which you had to move out of the city of your residence.
Consequently, a number of people around you, including family, friends and colleagues, are
aware of the fact that you were job in charge on the said audit. Some of them are interested
in having certain information as discussed below:
a) One of your close relative has got an offer for appointment as director marketing of the
said client. He wants to be aware of the levels of remuneration at comparable positions
in order to negotiate his remuneration properly.
b) A manager in your firm (other than the engagement manager for the said client) has
inquired about the internal controls in place, in respect of a specific process. Assuming
that the same would be effective, he intends to recommend the same as best practice to
a local pharmaceutical client.
c) Your sister has asked you about the ingredients of a specialized nutritional product for
children, being marketed by the company, which she is using for her child. You are aware
of all the details about the said product, as you got the opportunity to perform tests on
the costing of that product.
d) One of your friends is working in the Ministry of Health, Government of Pakistan. He has
asked you as to whether the company has complied with certain statutory requirements.
You are aware of the fact that the company is not complying with the same and you have
already included the matter in the management letter. With reference to specific
provisions of law, he has convinced you that it is his duty to enquire about the same, and
you are responsible to disclose the relevant information to the Ministry. He has also
informed you that in case of no response, you may be served with a legal notice.
Code of Ethics Page 93 ICAP Past Papers

e) Your younger brother intends to commence distribution business. He has asked you
about the rate of commission and volume rebates being allowed by the said client to its
distributors, as he wants to work out the feasibility of business.
f) Your father invests his surplus funds in the capital market. Being aware of the fact that
companies like that always have a five to ten year’s plan in place. He has asked you about
the trend of earnings per share of the said company for the last five years, and the
expected growth in the net profits for the next five years.

Required:
Discuss each situation to conclude as to whether or not you can provide the requisite
information and the extent to which the same can be disclosed without compromising the
professional ethics. Support your conclusions, with appropriate arguments. (10 marks)

Q.8 i,ii– Summer 09

You are the partner in charge of your Firm’s risk management department and in the said
capacity your responsibilities interlaid include advising the firm’s engagement partners
/managers on different aspects of the assurance and non-assurance services, in accordance
with the applicable regulatory and independence framework. You have been requested for
guidance on the following issues:
i). Olive Limited has approached your firm to act as their advisors to the first public issue of
the company which shall be used to finance a new project. Your responsibilities would
include drafting the prospectus, assistance in completing listing formalities and
negotiations with and appointment of Bankers to the issue. Previously you have also
carried out a due diligence exercise in respect of the said project. Olive limited has
suggested different fee levels corresponding to the amount of eventual subscription
received.
ii). Crimson Limited, an unlisted audit client has engaged a software company to automate
its accounting and finance functions. The company wants to engage your firm to help in
the implementation of the system.

Required:
(a) Advise the concerned partners/managers as regards the acceptance of the above
assignments.
(b) Suggest possible modification in the scope or terms of engagement or possible
safeguards, if any, to avail the opportunities within permissible limits. (08 Marks)

Q.4.b – Winter 08
The financial statements of Walter Limited (WL) a public unlisted company, for the year
ended 30 June 2007 were significantly delayed and were finalized in April 2008. After
finalization of financial statements, a meeting of the board of directors (BOD) of WL was held
in May 2008 and Annual General Meeting (AGM) was held on June 18, 2008.
Code of Ethics Page 94 ICAP Past Papers

Due to delay in holding the AGM, the Securities and Exchange Commission of Pakistan (SECP)
has imposed a penalty and has advised WL that no such delay shall be entertained in future.

In the AGM, the shareholders of WL appointed your firm as the statutory auditors and the fact
has been communicated to you by the Company Secretary through his letter dated June 22,
2008 which was faxed to you on the same date.

The company’s financial year is closing on June 30, 2008 and the management wants to
commence the audit immediately in order to ensure timely financial reporting and holding of
AGM.

Required:
What other steps would you like to take before commencement of the audit? (05 Marks)
Appointment (Companies Act, 2017) Page 95 ICAP Past Papers

Appointment of Auditors – Legal Considerations

Companies Act 2017
Q.8(iii) - Summer 09
You are the partner in charge of your Firm’s risk management department and in the said
capacity your responsibilities interlaid include advising the firm’s engagement partners /
managers on different aspects of the assurance and non-assurance services, in accordance
with the applicable regulatory and independence framework. You have been requested for
guidance on the following issues:

(iii) Your firm has availed credit facility from Rose Bank Limited. You have a long association
with the bank and it has also been providing various other services to your firm and its
partners. The amount of loan to the firm is approximately one percent of the firm’s total
assets. The management of the bank has approached the firm for appointment as
statutory auditors.

Required:
(a) Advise the concerned partners/managers as regards the acceptance of the above
assignments.
(b) Suggest possible modification in the scope or terms of engagement or possible
safeguards, if any, to avail the opportunities within permissible limits. (04 Marks)

Q.9 b Summer 08
The financial statements of Modern Equipment (Pvt) Limited reveal that the company has
paid a donation of Rs. 15 million to a charitable organization where one of the directors of
the company is a trustee. The company has earned a gross profit of Rs. 40 million. The selling
and administration expenses including the donation amount to Rs. 60 million and as a result
the company has incurred a net loss of Rs. 20 million.

Required:
(b) Discuss the possible impact of the above issue on the auditor’s report. (04 marks)
Appointment (Code & Listing regulations) Page 96 ICAP Past Papers

Code of Corporate Governance & Listing regulations

Q.2.b - Winter 15
Continuing with the above situation, assume that you have been appointed to investigate the
affairs of GL and the following further information has come to your knowledge during the
field work:

The advisory department of the audit firm assisted the company in the preparation of
three year forecast supporting the going concern assumption. The budget envisages
financial support from the parent company which was unanimously approved by the
Board of Directors.

The responsibilities of the CS and the IA were assigned to the staff deputed by the audit firm
on secondment, till the appointment of their replacements.
Both appointments were made on the recommendation of the auditors.

Required:
(iii) Describe the key governance issues that you would like to report to the regulator. (04)
(iv) Identify matters that should be considered in evaluating the role of auditors in the above
situation. (05 marks)

Q.3.b - Summer 14
Diversified Businesses Limited is a listed company engaged in the business of manufacturing
paints, pharma and chemicals. During the planning stage of an audit, the auditor has found
that:

(b) The audit committee meetings were not held during the year, because all audit committee
members remained out of country. Consequently, the interim financial statements were
issued by the company without being reviewed by the audit committee. (04 marks)

Required:
Evaluate and discuss how the auditor should deal with the above situations.

Q.6.b - Winter 10
Eagle Limited (EL) is an unlisted company and operates a chain of 30 restaurants. The
management has established effective internal controls especially over cash receipts and
payments to employees and suppliers. The internal audit department of EL has been playing
an important role in continuous evaluation and monitoring of these internal controls.
However, the chief internal auditor (CIA) has recently resigned along with his two assistants.

Your firm has been the auditor of Eagle Limited (EL) for the last many years. The CEO of EL
has approached your firm for help in resolving the situation and has proposed the following
alternatives:
Appointment (Code & Listing regulations) Page 97 ICAP Past Papers

(i) EL would outsource its internal audit department to your firm.

(ii) Your firm would recruit an individual for the position of CIA to fill the vacancy.
Inconsideration, EL would pay a fee equivalent to two months’ gross salary of the
CIA.
(iii) EL would recruit the CIA and your firm would provide audit staff on secondment for
six months to assist the CIA in understanding and accomplishing the tasks. The CEO
has showed his inclination to hire Mr. Kiwi, the manager responsible for the audit of
EL.

Required: Comment on each of the above alternatives as follows:

(b) In the light of the Code of Corporate Governance, explain whether you would have
accepted the proposals, had EL been a listed company. (5 marks)

Q.6 – Winter 08
You are the audit engagement partner for Mubarak Limited (ML), a listed company which is
the subsidiary of a company registered in USA. You have received an email from your firm’s
tax partner based in Lahore. He has informed you that in a recent meeting with the Chairman
of ML in Lahore, he discussed an opportunity to pursue major assignments for the Company.
He strongly urged you to have an urgent meeting with the CEO of ML as the company is in
discussion with other firms also and is due to take a final decision soon.

The services include Internal Audit Outsourcing and Corporate Finance Services (CFS).CFS
mainly involve negotiating the terms of restructuring / re profiling of long-term borrowings
obtained by ML from one of its lenders. However, as the audit engagement Partner of
Mubarak Limited you are of the opinion that it would not be possible for you to provide the
above services.

Required:
Write a comprehensive letter to the client explaining your point of view, giving appropriate
reasons and references to the relevant standards and regulations. (10 marks)
Audit Procedures (IAS & IFRS) Page 98 ICAP Past Papers

Audit procedures on specific areas

(Knowledge of IAS & IFRS)
Q.5 – Summer 23
Your firm is the auditor of Swan Energy Limited (SEL) for the year ended 31 March 2023. SEL
is engaged in the business of renewable energy. SEL started its business in 1980 by
purchasing land of 100 acres on a 50-year lease. SEL kept installing wind turbines in phases
and finally reached 2 megawatt electricity production in 1999. Wind turbines have a useful
life of 20 years. Upon completion of the lease term, the government requires SEL to remove
wind turbines and associated infrastructure, and restore the site.

SEL has commissioned three new wind turbines in October 2022 at a cost of Rs. 300 million,
which includes their purchase price and installation cost.

SEL depreciates wind turbines over 20 years.

Required:
Evaluate the implications of the purchase of the new wind turbines and state the audit
procedures that should be performed in this respect. (10 marks)

Q.6 – Summer 22
You are the manager responsible for the audit of Amber Holding Limited (AHL) and its
consolidated financial statements for the year ended 31 December 2021. This is your first
audit of AHL although AHL has been your firm’s audit client since last three years. Your firm
is also the auditor of AHL’s both subsidiaries namely Dany Limited (DL) and Genie Sugar Mills
Limited (GSM).

During the initial meeting with the CFO, following matters have been discussed:
(i) The year-end of AHL and DL is 31 December whereas the year-end of GSM is 30
September.
(ii) DL is a leading producer of savoury snacks which include a wide variety of packaged
chips and crackers. Effective from 1 December 2021, DL has expanded its business by
commencing production of confectionery snacks. Sugar is one of the major raw materials
used in the production of confectionary snacks which is being procured from GSM. It has
been agreed between DL and GSM to make payment of the invoices within 45 days.
(iii) DL values its inventory on FIFO basis whereas GSM values its inventory on weighted
average cost basis. Value of closing sugar inventory appearing in DL’s record amounted
to Rs. 30 million.
(iv) At year-end, a payable amount of Rs. 15 million was appearing in the books of DL and a
corresponding receivable amount was appearing in the books of GSM.
Audit Procedures (IAS & IFRS) Page 99 ICAP Past Papers

Required:
Comment on above matters discussed with CFO and state the audit procedures that should
be performed in this respect. (17 marks)

Q.6 – Winter 21
You are planning the audit of Jackal Power Limited (JPL) for the year ending 31 December
2021. JPL owns and operates an electricity generation power plant of 1500 MW. JPL sells all
the electricity produced to a government entity National Power Distribution Limited (NPDL).
There have been continuous delays in clearing the invoices raised to NPDL. This has resulted
in significant increase in trade receivables.

JPL’s management has informed you that on 21 August 2021, all the electricity producers
have signed a Memorandum of Understanding (MoU) with the Government of Pakistan (GoP)
under which:
(i) the GoP has provided its guarantee for all invoices pertaining to year 2013 and onwards;
and
(ii) a payment of 30% will be made on 31 December 2021 and the remaining 70% payment
would be made over a period of 3 years;
(iii) late payment surcharge will be charged on KIBOR basis which was earlier charged at an
annual rate of 15%.

Required:
Discuss the audit procedures which need to be performed by the audit firm in order to obtain
sufficient and appropriate audit evidence for receivables from NPDL. (07 marks)

Q.3 a – Summer 21
You are the audit manager responsible for the audit of Kamran Limited (KL) for the year
ended 31 May 2021. On 1 October 2020, KL raised Rs. 400 million by issuing convertible
bonds (having par value of Rs. 100 each). The bonds are convertible to KL’s ordinary shares
in 5 years' time at the option of bond holders. The convertible bonds carry coupon rate of 5%
payable on 30 September each year.

KL’s total shareholders equity as at 31 May 2021 was Rs. 3,250 million.

Required:
(a) Specify the matters to be considered by the auditor while planning the audit of
convertible bonds. Also suggest the related audit procedures. (09 marks)

Q.4 – Winter 20
You are the audit manager responsible for the audit of Kekra Pakistan Limited (KPL). KPL has
various production facilities across the country. Your audit team has brought the following
matters to your notice which require your guidance:
Audit Procedures (IAS & IFRS) Page 100 ICAP Past Papers

(i) KPL is required to decommission its production facilities and restore the site at the end of
their economic life. Notes to the financial statements for the year ended 30 September
2020 contain the following disclosures related to decommissioning provision:
Rs. in million
Balance at the beginning of the year 7,126
Provision made during the year 371
Reversal due to changes in estimates (1,471)
Unwinding of discount 720
Balance at the end of the year 6,746

(ii) As a result of decrease in demand, the management adjusted its medium-term and long-
term price assumptions and discount rates, which had a significant impact on asset
valuation. At 30 September 2020, KPL recognized an impairment of Rs. 2,184 million
against the carrying value of cash generating unit.

Required:
Brief the audit team regarding the significance of the above matters and the audit procedures
to be performed in this respect. (15 marks)

Q.1 a – Winter 19
HT Ragib and Company, Chartered Accountants (HTRC) is a member firm of an international
firm of chartered accountants, HT Network. HTRC has offices in Karachi, Lahore and
Islamabad.
You are the audit manager at Karachi office of HTRC. You are responsible for the audit of
Health Pharma Limited and its group financial statements for the year ended 30
November 2019. The extracts of the draft planning memorandum for the group audit
prepared by the audit senior are as follows:
Profit/(loss) Total
Revenue Materiality
Name of company before tax Assets Remarks
------------------ Rs. in million ------------------
Health Group
(Consolidated) 70,127 4,764 58,304 286
Health Pharma Limited Refer
(HPL) 38,487 5,850 36,563 322 note 1
Fair Cosmetics Limited Refer
(FCL) 24,773 (2,371) 24,484 129 note 2
Services (Private) Refer
Limited (SPL) 273 (47) 155 2 note 3
Quality Chemicals Refer
Limited (QCL) - - - - note 4
Audit Procedures (IAS & IFRS) Page 101 ICAP Past Papers

Note 1: HPL is the holding company and owns 100% shareholdings in FCL and SPL.
Note 2: FCL is audited by HTRC’s Lahore office. Since FCL is being audited by HTRC’s Lahore
office, no further procedures have been planned for obtaining the understanding of
the component auditor.
Note 3: SPL was incorporated in 2014 in United Arab Emirates (UAE) and is being audited
by a member firm of HT Network in UAE. Since SPL operates in foreign jurisdiction,
detailed audit procedures have been planned and confirmation will be sent to assess
the component auditor’s ethics, competence and the regulatory environment.
Note 4: HPL has disposed-off its entire shareholdings in QCL, a wholly owned subsidiary on
30 June 2019 at a gain of Rs. 450 million. QCL is being audited by HTRC’s Islamabad
office. Since QCL is no more part of the group as at 30 November 2019, no procedures
have been planned at the group level.

Required:
(b) Suggest five key audit procedures to verify the disposal of the subsidiary. (05 marks)

Q.4 – Summer 18
Chester Limited (CL) has introduced an equity settled share based payment plan for its
executives on 1 April 2017. Under the plan, 50 of its executives have received 100 share
options each, which will vest on 31 May 2022 if the executives remain in employment at that
date and CL’s share price increases to Rs. 180 at 31 May 2022.
Required:
Mention the key audit procedures for share based payment options described above,
assuming that evaluation of the competency and integrity of the management expert
has already been tested. (06 Marks)

Q.3 - Winter 17
You are the audit manager in GMP Chartered Accountants. The following matters are under
your consideration for the year ended 30 September 2017:
(i) Kamran Limited (KL) is in the business of manufacturing generators. On 1 October 2016,
KL acquired 750,000 ordinary shares of HL (which supplies generator components to
KL), constituting 75% of the issued, subscribed and paid-up capital against a gross
consideration of Rs. 700 million. KL paid Rs. 500 million on the date of acquisition
whereas Rs. 200 million was paid on 1 October 2017.
At the acquisition date, the identifiable net assets were recognized at their carrying
amount which was approximately equal to the fair value of Rs. 670 million, except the
building and leasehold land whose fair value was assessed at Rs. 130 million above their
carrying amount. The fair value of NCI at the date of acquisition was assessed at Rs. 155
million.

KL recognised goodwill amounting to Rs. 45 million on acquisition of HL, under the full
goodwill method.
Audit Procedures (IAS & IFRS) Page 102 ICAP Past Papers

(ii) Waris Limited has changed its accounting policy for property, plant and equipment from
historical cost to revaluation model.

Required:
Guide your audit team on key audit procedures with regard to the above information. (15)
(Audit procedures related to verification of property, plant and equipment are not
required)

Q.7.a - Winter 16
You are the audit manager responsible for the audit of Mechanic Engineering Limited, (MEL)
which provides mechanical parts to different industries. The draft financial statements for
the year ended 30 September 2016 show profit before taxation of Rs. 150 million (2015: Rs.
200 million) and total assets of Rs. 1.2 billion (2015: Rs. 1.1 billion).

Presently following matters are under your consideration:

MEL has recognized a late payment surcharge of Rs. 2.5 billion on amount due from
Government agencies. Last year, the audit report was qualified with respect to the
recognition of late payment surcharge. The management has informed you that the
Government authorities have conveyed their willingness to pay Rs. 2 billion instead of Rs. 2.5
billion and has provided you a written representation with respect to the said amount. MEL
however wants to preclude you from sending a confirmation to the relevant agency. (07)

Required:
Evaluate the above situations and determine the course of action in respect of each of the
above independent situations. (Reporting implications are not required)

Q.2.b - Winter 16
You are the audit manager of Bolan Pharmaceuticals Limited (BPL) a listed company. For the
year ended 30 September 2016, BPL has prepared its financial statements which indicate a
net operating loss, current ratio of 0.79 and significant amount appearing as capital work in
progress comprising of expenses incurred on acquisition and installation of plant and
machinery.
The following information is also available:
(i) The operations of BPL are currently suspended due to Balancing, Modernization and
Replacement (BMR) work.
(ii) The decision to carry out BMR was approved by the Board of Directors in 2015 with a
completion deadline of 31 March 2016.
(iii) Due to certain technical issues, BPL has not been able to complete the project to date.
(iv) Because of the above situation, loan from a bank became overdue on 1 September 2016.
Further, BPL had also not complied with certain key covenants.
(v) In this difficult situation BPL has requested its major shareholders to inject additional
equity.
Audit Procedures (IAS & IFRS) Page 103 ICAP Past Papers

Required:
Besides the issue of going concern, state the other key matters that the auditor should
consider with respect to the above situation. (05 marks)

Q 5a Summer 16
You are the engagement manager of National Pharmaceuticals Limited (NPL). The company’s
intangible assets include patents amounting to Rs. 100 million belonging to the company’s
Health Care Division.
It is the company’s policy to value the intangible assets at cost less accumulated impairment.
NPL has recorded an impairment loss on the basis of impairment review which contains
certain projections regarding future profits.

Required:
List the procedures which you would perform to verify the working prepared by the
management. (10 marks)
[

Q.5.a.i - Winter 15
The following situations have arisen at different audit clients of your firm. The year-end in
each case is 30 September 2015.
i). 40% of client’s operations are in a foreign country which has been impacted severely by
political and law and order situation since March 2015. (05 marks)

Required:
Evaluate the above situations and briefly explain the steps that the auditor would be required
to carry out in each of the above situations. (Impact on audit report is not required)

Q.6 - Summer 15
You are the audit incharge of Domestic Appliances Limited, a listed company, for the year
ended 31 March 2015. The draft financial statements disclose profit before tax of Rs. 1.2
billion (2014: Rs. 0.98 billion) and total assets of Rs. 15.5 billion (2014: Rs. 13.8 billion)

Company’s products are covered under warranty arrangements for twelve months. The
company has changed its policy for recording warranty expense from cash basis to accrual
basis. The company has made provision for warranty claims equal to twelve times the actual
warranty claims of March 2015.

Required:
Analyse the above situation and discuss how you would deal with it in your audit. (07 marks)

Q.5.b - Summer 15
Your audit firm has been appointed as auditor of Lucrative Industries Limited (LIL) a listed
company for the year ended 31 March 2015. LIL’s financial statements for five years depict
the following:
Audit Procedures (IAS & IFRS) Page 104 ICAP Past Papers

2015 (draft) 2014 2013 2012 2011

--------------------------- Rupees in millions ---------------------------
Sales 1,570 1,276 1,064 980 859
Profit before tax 1,159 212 190 165 155
Profit after tax 815 130 135 106 110
Total assets 1,521 1,344 1,270 1,188 1,100

Following further information is available:

2015 2014
Rupees in millions
Sales revenue-exports 1,057 944
Sales revenue- local supplies 513 332
Cost of sales and administrative expenses -1,299 -1,049
Gain on sale of office building 901 -
Other provisions / write offs -11 -13
Other charges -2 -2
Profit before taxation 1,159 212
Profit after taxation 815 130
Intangible assets 350 362
The results for the current year include the impact of following items:
i). During the year, an increase in export and local sales was noticed due to new agreement
with foreign customers and supplies made to Government for flood affected people. Sales
to new customers and Government amount to Rs. 105 million and Rs. 225 million
respectively. Mark-up on such sales was 15%.
ii). Administrative expenses include loss of raw material amounting to Rs. 210 million,
which was destroyed due to fire. Raw material was not insured.
iii). During the year, the head office of the company was shifted to new premises and the old
building was sold for Rs. 1.2 billion.

Required:
Enumerate audit procedures to be performed on opening balance of intangible assets. (07)

Q.7 a.b Winter 14

The following situations have arisen at different audit clients of your firm. The year end in
each case is 30 September 2014.
(a) Galaxy Limited has a policy to carry its building at revalued amounts. In the financial
statements for the year ended 30 September 2014, the revalued amounts were stated on
the basis of valuation report issued by Buildings Valuation Experts (BVE).However,
during the audit it was accidentally discovered that prior to valuation by BVE, another
valuation exercise was carried out, which was done by Accurate Valuers Enterprise. (07
marks)
Audit Procedures (IAS & IFRS) Page 105 ICAP Past Papers

(b) The financial statements of Modern Technologies Limited, a company involved in

manufacturing of customized machinery and parts, reveal that the company has paid an
advisory fee of Rs. 100 million to a non-executive director according to an agreement
approved by the board of directors. The advisory services were rendered in connection
with an agreement with Burewala Tractors Limited, for supply of customized parts. Total
operating expenses amount to Rs. 282 million (2013: Rs. 161 million). The profit before
taxation is Rs. 350 million (2013: Loss before taxation of Rs. 120 million) (07 marks)

Required:
Discuss the matters which the auditor should consider and the steps that he may need to
take, in each of the above situations.

Q.4 – Summer 14
You are the audit manager responsible for audit of consolidated as well as separate accounts
of Five Star Limited (FSL) and its subsidiaries. In the initial meeting, the financial controller
has informed you that during the year:
(a) the group has changed its policy for valuation of plant and machinery from cost to
revalued amount. The revaluation has been carried out by a global firm of professional
valuers, who have been advising FSL for the last several years. (08 marks)
(b) One of FSL’s subsidiary has incurred substantial losses. Deferred tax has been recognized
on these losses. The financial projections prepared by the CFO show that as a result of
planned re-structuring, the subsidiary would be able to recoup the losses during the next
three years. (05 marks)

Required:
Describe the steps that you would take in each of the above situations.

Q.1 - Winter 13
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
matters arose during the course of audit and are under your consideration:
a) 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. (10)
b) As part of the Dengue Control Program, the Government had provided a conditional grant
of Rs. 150 million to RPL for development of Dengcol. Under the terms of the grant, RPL
was required to sell 40% of the total production to the Government Hospitals subject to
a minimum of 1,000,000 vaccines per annum, for the next five years. (06)

Required: Identify the matters that you should consider in the above situations, 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.
Audit Procedures (IAS & IFRS) Page 106 ICAP Past Papers

Q.2(i) - Summer 13
You are the manager responsible for the audit of Dilawar Paints Limited (DPL). draft financial
statements for the year ended 31 March 2013 show revenue of Rs. 1,250 million (2012: Rs.
1,175 million), profit before taxation of Rs. 100 million and total assets of Rs. 1.2 billion.
The audit incharge has noted the following points for your consideration:
(i) In May 2012 a chemical leakage from one of the tanks in the factory caused a fire which
damaged the plant and machinery and the premises. DPL has incurred Rs. 3 million in
cleanup costs, Rs. 10 million for modernisation of tanks to prevent future leakages and a
fine of Rs. 500,000 to a regulatory agency. The fine has been expensed whereas the
remaining costs have been capitalized. (08)

Required: Discuss the matters that you would consider and how would you obtain the
necessary audit evidence

Q.3.b - Summer 11
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 audit manager at JL following issues arose during audit and now require attention:
i). 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.
ii). 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:
(b) 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 marks)

Q.5c Summer 11
You are planning the statutory audit of the financial statements of Mahiwal Limited (ML)
for the year ending June 30, 2011. ML sells and distributes networking equipment and
accessories to corporate and retail customers. Since January 1, 2009 ML has exclusive
country-wide distribution rights of ‘Bisco’ and ‘Portel’, which are the leading international
brands of networking equipment.

Your review of the prior year’s working papers has disclosed that ML has expanded its
operations significantly after securing the distribution rights of ‘Bisco’ and ‘Portel’. By June
30, 2010 there had been a 60% increase in its customer base whereas the number of its
Audit Procedures (IAS & IFRS) Page 107 ICAP Past Papers

branches had increased from 3 to 10and the number of employees had risen from 30 to
115. The latest available draft financial statements show that the sales of ‘Bisco’ and
‘Portel’ represent 90% of its total sales.

During a recent meeting with the finance director, you have been informed as follows:
(iii) ML has shifted its warehouse and customer service center to larger premises in order
to handle increased inventory level and the rising level of after sales warranty claims.
(iv) ML has witnessed a slight fall in sales of ‘Bisco’ and ‘Portel’ because of tough
competition from other low priced brands.
A review of the draft financial statements has also disclosed that ML had revalued a
property in accordance with the requirements of the International Financial Reporting
Standards. The property was acquired many years ago to earn rental income.

Required:
(c) Enumerate the key audit procedures to be conducted to assess the appropriateness of
the revaluation of property and the accounting treatment thereof. (08 marks)

Q.3 - Summer 10
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) The diluted earnings per share of Rs. 36.60 has been calculated without taking into
account the share options held by three directors. To justify the above calculations, these
directors have confirmed in writing that they do not intend to exercise the share option.
Had the share options been considered, the diluted earnings per share would have been
Rs. 35.60. The review of subsequent events revealed that four of the remaining directors
had exercised their share options following the balance sheet date. The share options are
available upto December 31, 2010.

b) 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 able to complete the assignment
to date. However, he has submitted two interim reports as described below:
Interim Report
First Second
Date of report 31/12/2009 20/02/2010
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
Audit Procedures (IAS & IFRS) Page 108 ICAP Past Papers

c) 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
recognised 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. (16 marks)

Q.2.a – Winter 09
Red Sea Company Limited (RSCL) builds ships and constructs oil rigs for the offshore oil
industry. Under one of the contracts with Black Oil Company Limited, RSCL was required to
construct a rig for drilling oil, off the coast of Makran. The oil rig should have been completed
by April 30, 2009 but on account of delays and technical problems, it is not expected to be
completed until February 28, 2010. Consequently Black Oil Company Limited has cancelled
the contract and lodged a claim for damages amounting to Rs. 150 million. This claim for
damages was lodged by Black Oil Company Limited on August 29, 2009 and it has been
disclosed as a contingency, in RSCL’s financial statements for year ended September 30, 2009.

Required:
Describe the work that the auditor should carry out in the above situation, to determine
whether the accounting treatment and related disclosures, if any, in the financial statements
of Red Sea Company Limited for the year ended September 30, 2009 are appropriate. (12)

Q.3 – Summer 09
Narrow Street Limited is an auto parts manufacturing company. The Company offers product
warranty to its customers. You are senior incharge 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 Rs. 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:
(a) Describe the matters that should be discussed with the senior management while
carrying out the above verification. (05 marks)

(b) State the audit procedures to be performed in order to conclude that product warranty
liabilities are fairly stated in the financial statements of the Company. (10 marks)
Audit Procedures (IAS & IFRS) Page 109 ICAP Past Papers

Q.5 – Summer 08
Trade Limited has been engaged in sales of product X for a long time. In January 2007, it
started trading of product Y which was sold with money-back guarantee being exercisable
within 120 days of sale. Consequently, the sale of Y far exceeded the company’s expectation
and eventually constituted 40% of the total sales of the company in the year 2007. An extract
from the Trading Account of product Y for the year ended December 31, 2007 is as under:

Particulars Rs. (in Million)

Gross sales 650
Sales return and allowances 13
provision for sales return- Gross 18
cost of sales 400

On account of money-back guarantee a provision has been made, for sales return subsequent
to year end. The provision is three times the actual sales returns during the first 15 days of
January 2008.

As the time available for presenting financial statements is limited, the management has
decided to adopt it as a consistent accounting policy to be followed each year.
The audit is to be finalized by February 15, 2008. The team member who was assigned to
verify the provisions believes that in such situation the auditor is compelled to rely on
management’s estimate. Therefore, a simple procedure of recalculation will be appropriate.

Required:
Explain the appropriate audit procedures to verify the provision for sales returns in the light
of relevant International Standard on Auditing. (08 marks)
Miscellaneous Page 110 ICAP Past Papers

Miscellaneous
Q.2 - Summer 23
(a) Raven Limited (RL) has developed an e-commerce platform to sell apparel, daily wear,
and footwear. The platform sells RL’s products as well as those of other retailers. During
the course of audit, the audit team has identified the following matters:
(i) RL maintains stocks of its own products at its warehouses and also at suppliers’
facilities located throughout the country. All orders are sent to RL warehouses for
quality check and packaging before being dispatched to customers.
(ii) A few years back, RL had launched a reward points program for its customers. For
every purchase of Rs. 100, customers are entitled to one reward point equivalent to
Rs. 2, which can be redeemed in the form of cash credits against future purchases.
Each point expires after six months.
Required:
Evaluate the above matters identified by the audit team and state the audit procedures
that should be performed in this respect. (13 marks)
(b) Due to the alarming surge in cyberattacks, RL has requested your firm’s assistance in
suggesting effective controls to mitigate the risk posed by such attacks to its business.
(07 marks)

Q.3 - Winter 21
Tortoise Publishing (Pvt.) Limited (TPL) is a publisher of children books which is part of
curriculum for major schools in Pakistan. TPL is planning to expand its business and diversify
into Educational Technology Business. For this purpose, TPL is considering to acquire a
business namely Swan Technology Enterprise (STE). TPL has requested your firm to carry
out a due diligence for acquisition of STE.
After initial discussion for the due diligence exercise, your team has brought the following
matters to your attention:
(i) In 2018, STE was formed as a partnership concern by two software graduates, Saleem
and Sabir. Initially, they had designed and developed the application for schools which
included Student Management System and Learning Management System. This
application manages all the data related to curriculum learning material, billing to
students, student educational records and tracking of assignments given to students. Due
to shortage of funds, they were not able to market its application properly and were able
to sell the application to few schools only.
In early 2019, Saleem and Sabir had secured significant funds from an investor to finance
the growth and expansion. Thereafter, a marketing team was recruited at attractive
packages to market the application and an administrative team was also set up to look
after the accounts and other administrative tasks. However, the marketing team has not
been able to penetrate into the market as expected.
Miscellaneous Page 111 ICAP Past Papers

(ii) TPL believes that since it has good connection with many schools due to its publishing
business, they can not only market the application in a more aggressive way but can also
exploit synergies by using TPL’s marketing, finance and administrative teams. TPL also
has a plan to market this application to schools situated in under developed countries.

Required:
Identify and explain any six matters which you may consider in your due diligence review.
Also recommend any three additional information that you may need in respect of each
matter identified by you. (15 marks)

Q.7.a - Winter 20
You are employed as an audit manager in Bashir and Company, Chartered Accountants. One
of your clients, Davidsons Pharma Limited (DPL), is considering to acquire 60% shareholding
in Sehat Healthcare (Pvt.) Ltd. (SHPL) and has requested your firm to carry out a due
diligence.

During the fieldwork of due diligence exercise, your team has brought the following matters
to your attention:
(i) A major customer which accounts for 10% of SHPL’s annual sales has refused to place
further sale orders. On inquiry, it was revealed that competitor has offered significant
discount of 12% to increase its market share.
(ii) DPL has central distribution model where single distributor has non-exclusive rights
countrywide with commission rate of 5%. All sales made to the distributor on 30 days’
credit. On the Other hand, SHPL has a regional distribution model where multiple
distributors are involved country wide with commission rates ranging from 2% to 4%.
Under this model, all sales are made on cash.

Required
Discuss how the above matters are to be investigated for due diligence review and also
recommend the additional procedures to be performed in this respect. (12 marks)

Q.2 - Winter 20
You are the audit manager at HTC and Company, Chartered Accountants. Following matters
relating to a joint audit of Petro Oil Limited are brought into your attention by audit team:

(a) The joint auditors have agreed upon an audit strategy through which they have
segregated audit areas for both the firms.

Required:
Discuss how your firm can ensure before finalization of the audit report that the work
carried out by the other joint auditor has been in accordance with the agreed audit
strategy. (05 marks)
Miscellaneous Page 112 ICAP Past Papers

(b) There is a difference of opinion on impairment of intangible assets. Your firm wants to
issue a qualified report whereas the joint auditor is convinced with the management’s
explanation and intend to issue an unmodified report.

Required:
Discuss the course of action available to your firm. (04 marks)

Q.2 - Summer 18
Your firm has been approached by Eagle Courier Limited (ECL) to provide due diligence
review on a potential acquisition. ECL is a leading courier service company having a network
of offices throughout the country. ECL has a vast fleet of delivery vans and motorcycles.

ECL intends to use its courier industry experience and expand into food delivery business by
using its current fleet of motorcycles. However, it would require bringing on board a vast
number of restaurants and build its own online food ordering website, of which they do not
have any expertise and experience.

For this purpose, ECL has identified an online food ordering business Foodi.com (FC) for
acquisition. FC is a partnership concern and was set up by three college friends in 2014. FC
received the best ‘start-up business’ award in 2015. Founders of FC had borrowed funds from
two individual investors, which are to be repaid in 10 years.

IT, restaurant relation, customer support and administrative departments are led by the
partners. Being an online service business, the only major assets of FC are a fleet of
motorcycles obtained on an operating lease of 5 years and computers.

Apart from 500 riders, FC employs 30 staff, out of which 10 are related to IT department, 10
belong to customer support, 5 belong to restaurant liaison and the remaining 5 are
responsible for the accounts, HR and administration of the business.

Extracts from audited profit or loss statement for four years are as follows:

2017 2016 2015 2014

--------------Rs in million------------
Revenue 55,000 50,000 20,000 10,000
Operating expenses (34,650) (30,000) (16,000) (15,000)
Lease rentals (5,750) (4,600) (2,875) (1,150)
Operating profit/(loss) 14,600 15,400 1,125 (6,150)
Finance cost (3,075) (3,155) (1,615) (1,615)
Profit/(loss) for the year 11,525 12,245 (490) (7,765)
Miscellaneous Page 113 ICAP Past Papers

Required:
Identify and explain the matters you would focus on in your due diligence review. Also
identify any additional information / document you would require during the review. (15
Marks)
Q 7 a Summer 16
ABC and Company, Chartered Accountants are faced with the following situations:
(i) On the audit of Jalal Holdings Limited, the auditor of a subsidiary has issued a qualified
report.
(ii) On a joint audit, there is a difference of opinion whereby ABC wants to issue a qualified
report whereas the joint auditor are convinced with the client’s explanation and intend
to issue an unmodified report.
Required:
Explain how the above situations should be dealt with. (06 marks)

Q.2 Summer 16
XYZ Limited has been an audit client of your firm for the last several years. The engagement
has been assigned to you and you have received the following briefing from the engagement
partner:
(i) The recovery of fee on this client has become very low over the years.
(ii) In the past few years, audit managers have been rotated twice on the request of the client.
(iii)Over the years, several significant decisions were taken by the company which were
communicated to audit teams at the time of finalisation of audits.
Required:
As the audit manager what will be your strategy to improve the relationship at this client?
(09 marks)
Q.4.d,e - Summer 15
You are carrying out the audit of Akhtar Autos Limited (AAL) for the year ended 31 March
2015, a listed company, engaged in the business of manufacture of spare parts for trucks,
buses and tractors. Extracts from the draft financial statements are as follows:
2015 2014
-----(Rs. In '000')------
Sales 1,250,000 1,440,000
Loss before taxation -70,000 -15,000
Current assets 325,000 350,000
Other assets 145,000 135,000
Total assets 470,000 485,000
Current liabilities 345,000 305,000
Other liabilities 175,000 160,000
Total liabilities 520,000 465,000
Equity -50,000 20,000
Miscellaneous Page 114 ICAP Past Papers

Previous year’s audit report was qualified on account of inability to obtain sufficient and
appropriate audit evidence with respect to stores and spares, as ledger of stores and spares
contained many negative balances.

The following further information has been obtained during the audit:
(i) Agreements with two local distributors contain clauses that offer a significantly higher
percentage of discounts which are above normal market rates. Due to the tough
competition in the local market, the management of the company is currently
negotiating with certain foreign customers for export of company’s products.
(ii) In May 2015, court notices from two major customers were published in the
newspapers, alleging the company of supplying inferior quality spare parts in the month
of April 2015 and claiming damages of Rs. 150 million. The management is of the view
that the allegations are baseless.
(iii) A supplier of the company has become bankrupt. The company owes an amount of Rs.
138 million to the supplier. However, the liquidator has lodged a claim of Rs. 140
million.
(iv) AAL is a family owned company. Out of its seven directors, four are executive directors.
The non-executive directors have been elected on the board for the 4th time.
(v) The Board has formed a three member Audit Committee, which is chaired by a non-
executive director, who is also the maternal uncle of the chief executive.
(vi) The half yearly accounts were not finalised because of a legal dispute. The company had
informed SECP in respect of such non-compliance.
(vii) Internal audit department includes only one person who is a chartered accountant and
is engaged on a part time basis.
(viii) The warehouse from where goods are dispatched is under the management of sales
department.

Required:
d. Suggest appropriate measures to improve compliance with the Code of Corporate
Governance. (08 marks)
e. Explain the impact of information contained in para (vi) on the reporting responsibilities
of the auditor with respect to Code of Corporate Governance. (03 marks)

Q.6 – Winter 09
While reviewing the working papers to assess compliance with the Code of Corporate
Governance, the auditors of Fair Limited (FL), a listed company, came across the following
information:
i). The Board of Directors of FL comprises of ten directors. Mr. Muneer and Mr. Sualahare
the only non-executive directors on the Board. The chairman of the Board is Mr. Saleem,
who is also the chief executive of the company.
ii). During the year, the board met four times. Due to his preoccupation, Mr. Kamal who is
the chief financial officer of the company could not attend an important board meeting
in which the half yearly accounts were approved.
Miscellaneous Page 115 ICAP Past Papers

iii). One of the directors purchased 16% of FL’s shares on March 17, 2009. He communicated
this information to the Board of Directors in the meeting held on March26, 2009.
iv). FL has an audit committee which comprises of three members, including its chairman,
Mr. Wear. The company’s internal audit department is headed by a Chartered Accountant
who reports to the audit committee.

Required:
(a) Draft the concluding paragraph of the review report to the members on the company’s
Statement of Compliance with the Best Practices of the Code of Corporate Governance,
including qualifications (if any). A full report is not required. (08 marks)
(b) Give brief reasons to support your point of view, in respect of matters which have not
been considered for reporting as a qualification. (04 marks)

Q.5 - Winter 08
Your firm has completed the audit of financial statements of Flora Limited (FL), a public listed
company, as of June 30, 2008 and has issued the audit report on September 30, 2008. While
preparing to attend the Annual General Meeting (AGM), you noted that a particular sub-note
was altogether missing from the published financial statements On scrutiny; you found that
the original signed copy of the financial statements available in your records did contain note.

Required:
(a) Explain the auditor’s responsibility in such a situation if the amount involved is
considered material.
(b) What difference would it make if the amount is immaterial? (06 marks)

Q.8 – Winter 08
You are employed as the Chief Internal Auditor of MNQ Commercial Bank Limited. Recently
the Central Bank has taken serious action against some of the banks for their failure to detect
money laundering activities.

Required: For the guidance of the management and staff, develop a list of situations which
may indicate the involvement of money laundering activities. (10 marks)

Q.1 - Summer 08
Wood Limited (WL) is a listed company. SMSF Chartered Accountants have been the auditors
of the company for the last three years. In November 2007, with substantial change in
shareholding a new Board of Directors was elected. The new Board made significant changes
in the senior management within a week of taking charge.

On February 10, 2008, after completing the field work, the auditors sent the financial
statements along with initialed draft audit report, to WL’s board for its approval. On the same
date, a senior partner was assigned to carry out an engagement quality control review. During
the review he noted the following:
Miscellaneous Page 116 ICAP Past Papers

i). Management representation letter contains a paragraph that “We have taken charge
from the previous management on 28 November 2007 and after taking charge, we
commenced valuation exercise in respect of plant and machinery in various factories
owned by WL. To date, thirty percent of plant and machinery has been valued. The
exercise carried out so far shows that fair value of the assets is 20% less than the carrying
value, for which an impairment loss has been accounted for. In view of this situation, we
are not confident about the fair value of the plant and machinery as presented in the
financial statements.”
ii). The valuation is being carried out by the production manager who is a qualified engineer.
He had been responsible for year-end valuation review for many years. This is the first
time when he has reported impairment.
iii). The issue of impairment loss, which is of material amount, was a contentious matter
between a team member and the job in charge. On inquiry Mr. Manzoor Nazar, the
engagement partner, informed that he had accepted the job in charge’s view point.
iv). This matter was also reported to the stock exchanges on December 5, 2007 resulting in
a sharp decline in share prices of WL, which otherwise had a good price-growth history.
v). Subsequent to year end, WL has been awarded a very profitable long-term supply
contract by Timber Limited (TL), a reputable industrial undertaking. No direct
confirmation was obtained from TL.
vi). WL announced a 100% right issue in December 2007 at market price. Because of
discouraging response from the minority shareholders, the directors and their associates
purchased a large number of right letters from the open market.
vii). The firm’s record reveals that Mr. Manzoor had applied twice for a job in WL during last
one and half years. However, there is no current information about his intention.

Required: Write a review report on behalf of the reviewer indicating the deficiencies noted
in the audit as well as the policies of the firm and submit your recommendations. (16 marks)

Q.2 - Summer 08
You are the engagement partner of a listed company. After completing audit field work, you
have provided the draft audit report along with the draft financial statements prepared by
management to the Board of Directors with a cover letter stating that the firm will issue its
audit report after the Board has approved the financial statements.

Your manager has brought to your knowledge that last week the client has published its
annual report including Financial Statements and audit report (which had not been signed by
the firm). Notice of Annual General Meeting (AGM) has also been published in the
newspapers.

Required:
Explain what course of action should the firm take in the above situation. (06 marks)
ISA 200 & 210 Page 117 ICAP Past Papers

ISA 200
Q.7- Winter 08
You were the engagement partner on the audit of a commercial bank which has a network of
more than 200 branches, across the country. During a recent meeting, a member of the audit
committee referred to an instance of irregularity in a branch, whereby the Branch Manager
had extended credit to a close relative without following the bank’s credit disbursement
procedures. The member criticized the auditors for their failure to highlight such instances.

Required:
As an engagement partner, write a letter to the audit committee explaining your point of view
in detail with specific references to the International Standards on Auditing, wherever
applicable. (09 Marks)

ISA 210
Q.3 - Summer 19
You are a partner in a firm of chartered accountants. Your firm has recently been approached
by an off-shore entity incorporated in British Virgin Island for appointment as an auditor for
the year ending 30 September 2019. The entity is following locally developed accounting
standards in the preparation of its financial statements.

On your query regarding availability of records and information, the entity has informed you
that they will electronically send the scanned copies of the records/information required for
the audit purpose.

Required:
Discuss the matters that your firm should consider before accepting the above audit
engagement. (11 marks)
Q.5(i) - Summer 12
A regulatory body has recently revised certain requirements pertaining to the information to
be disclosed in the financial statements of one of your existing clients. These requirements
may be in conflict with the financial reporting framework being followed by the client.

You have informed the client that in view of the possible conflict, the audit report may require
a modification. However, the client has expressed its reservations over the issue and
requested you to avoid modifying the report.

Required:
(i) Based on the requirements of the relevant International Standards on Auditing draft an
appropriate response to the client, explaining the possible reasons for modification and
the circumstances in which such a modification may be avoided. (07 marks)
ISA 220 Page 118 ICAP Past Papers

ISA 220
+

Q 6 Summer 16
As the Quality Control partner of a newly established medium sized firm of Chartered
Accountants, prepare the following:
a) Checklist for assessing quality of audit engagements with regard to planning of audit.
(any ten points) (05 marks)
b) Checklist for pre-engagement activities. (any eight points) (04 marks)

Tutor’s Note (for this question):

Student should develop the answers considering the requirements of ISA 220 and the pre
engagement activities identified by ISA 300. The suggested answer by ICAP regarding this
question contain generic discussion, nevertheless we can easily identify solution from Open
Book.
Q.3.b - Summer 13
The following matters relating to different clients are under the consideration of Mr. Jameel,
who is the engagement partner:
(b) Abdullah was the audit senior assigned to the audit of Insha (Private) Limited. During the
course of the audit, Abdullah had resigned from the firm. While reviewing the audit files
Mr. Jameel has noticed that the audit fieldwork was completed in almost half the time
than is usually required.(06 marks)

Required:
Evaluate each of the above situations and briefly describe what course of action the
engagement partner would be expected to adopt.

Q.6.a - Summer 10

Beta Construction Company Limited (BCCL) is involved in the construction of large buildings
and shopping plazas. The company commenced its business in 2004 by establishing an office
in Karachi and has grown rapidly. It currently has offices in five major cities of the country
and as many as 25 projects are in various stages of execution.

A substantial portion of the work is done through sub-contractors. Payment to

subcontractors is based on certificate of work completion which is issued by the supervisor
incharge of each project. The certificate is sent through email to the finance department. The
payment is credited directly into the bank accounts of the sub-contractors.

Recently, the management has discovered that the project supervisor of a large project had
issued a fraudulent work completion certificate. The preliminary investigation indicated that
some other sub-contractors have also been paid fraudulently in the past and the practice was
ongoing for the past two years.
ISA 220 Page 119 ICAP Past Papers

The management of BCCL has asked your audit firm to conduct an investigation into the
matter. Your initial discussion with the client has revealed the following:
(i) For the past four years the external auditors of the company are Alpha & Co.,Chartered
Accountants. They had issued unqualified audit reports for all those years and had not
reported any internal control weakness in their management letters.
(ii) Prior to approaching your firm, BCCL wanted to give this assignment to Alpha & Co.
However, they expressed their inability to undertake the investigation work.

Required:
(a) State the matters your firm should consider and the procedures that should be followed
prior to the acceptance of this assignment. (07 marks)

Q.4.a - Winter 08

The financial statements of Walter Limited (WL) a public unlisted company, for the year
ended 30 June 2007 were significantly delayed and were finalized in April 2008. After
finalization of financial statements, a meeting of the board of directors (BOD) of WL was held
in May 2008 and Annual General Meeting (AGM) was held on June 18, 2008. Due to delay in
holding the AGM, the Securities and Exchange Commission of Pakistan (SECP) has imposed a
penalty and has advised WL that no such delay shall be entertained in future.

In the AGM, the shareholders of WL appointed your firm as the statutory auditors and the fact
has been communicated to you by the Company Secretary through his letter dated June 22,
2008 which was faxed to you on the same date.

The company’s financial year is closing on June 30, 2008 and the management wants to
commence the audit immediately in order to ensure timely financial reporting and holding of
AGM.

Required:
(a) Explain the client acceptance procedures that you would like to perform in the above
situation. (07 marks)
ISA 250 & 265 Page 120 ICAP Past Papers

ISA 250
Q.5.b(i) - Summer 19
The following situations have arisen at different audit clients of your firm. The year-end in
each case is 31 March 2019:
(i) Afzal Limited is a listed company. During its audit of financial statements, the provincial
sales tax authority has seized the accounting records of the company on the charges of
tax evasion. (05 marks)

Required:
Discuss your firm’s course of action along with the implications on the audit report.

Q.2 - Winter 18
During the audit of Leather Goods Limited (LGL), it came to the knowledge of the audit team
that LGL has been dumping its chemical waste in an open area outside the city, without
proper treatment as per the required standards. When confronted, the Chief Financial Officer
did not consider it a serious issue and informed that LGL has managed to receive the required
certificate from the relevant regulatory authority.

Required:
Evaluate the above situation and explain what course of action the auditor would need to
take. (14 marks)

Q.3.a - Summer 13
The following matters relating to different clients are under the consideration of Mr. Jameel,
who is the engagement partner:
(a) The management of Muneer Limited had been illegally dumping its chemical waste in the
neighboring plot of land. When confronted, the chief financial officer, instead of providing
an assurance to address the issue, informed the audit senior that the management is least
bothered about the minor fines that may be levied by the regulatory agencies.(07 marks)

Required: Evaluate each of the above situations and briefly describe what course of action
the engagement partner would be expected to adopt.

Q.6(ii) - Winter 11
You are the manager responsible for the audit of Hafiz Limited (HL), a listed company, whose
fieldwork in respect of the statutory audit is in progress. You are reviewing the following
issues which were brought to your attention by the audit team:

HL has paid a substantial amount of consultancy fee to a firm in another foreign country. The
management of HL is unable to provide a convincing explanation for such a payment. An
employee of HL has unofficially informed the audit senior that the amount was paid to avoid
paying a fine. However, the management has denied this allegation.
ISA 250 & 265 Page 121 ICAP Past Papers

Required:
Discuss how would you deal with each of the above issues and what may be the implications
thereof on your audit report. (07 Marks)

Q.4 - Winter 09
You are the manager incharge responsible for the audit of Day Pharma Limited, a subsidiary
of a multinational pharmaceutical company. One of the drugs being imported/marketed by
the company is VITABE. It was introduced a few months back but contributes significantly to
the company’s revenues. While the audit was in progress, you came across a news item in a
well-known publication, according to which the authorities in many countries have banned
the use of VITABE as some of its ingredients were considered dangerous for human health
and required further testing. While going through some files you have discovered that the
parent company had informed Day Pharma Limited about the harmful effects of the drug.
However, it had not given any further instruction in this regard. You have discussed this
matter with the CEO who has informed you that the company had not called off the medicine
nor has it provided any information in this regard to the users of the drug or the general
public as the management is of the view that there is very limited risk of any harm being
caused by the drug. However, you had discussed this matter with a senior physician who
believes that these types of products are also banned in Pakistan.

Required:
Assess the above situation and describe what measures the auditor should take in such
circumstances. (14 marks)

ISA 265
Q.7 b - Summer 18
Kiran is the audit senior responsible for the audit of Xengen Limited. She has noticed that a
large number of journal entries were processed near the year end.

Required:
(b) What course of action should the audit team take if serious deficiencies are identified
during the control testing process? (07 marks)
ISA 320 Page 122 ICAP Past Papers

ISA 320
Q.5.a - Summer 15
Your audit firm has been appointed as auditor of Lucrative Industries Limited (LIL) a listed
company for the year ended 31 March 2015. LIL’s financial statements for five years depict
the following:
2015 (draft) 2014 2013 2012 2011
--------------------------- Rupees in millions ---------------------------
Sales 1,570 1,276 1,064 980 859
Profit before tax 1,159 212 190 165 155
Profit after tax 815 130 135 106 110
Total assets 1,521 1,344 1,270 1,188 1,100

Following further information is available:

2015 2014
Rupees in millions
Sales revenue-exports 1,057 944
Sales revenue- local supplies 513 332
Cost of sales and administrative expenses -1,299 -1,049
Gain on sale of office building 901 -
Other provisions / write offs -11 -13
Other charges -2 -2
Profit before taxation 1,159 212
Profit after taxation 815 130
Intangible assets 350 362

The results for the current year include the impact of following items:
iv). During the year, an increase in export and local sales was noticed due to new agreement
with foreign customers and supplies made to Government for flood affected people. Sales
to new customers and Government amount to Rs. 105 million and Rs. 225 million
respectively. Mark-up on such sales was 15%.
v). Administrative expenses include loss of raw material amounting to Rs. 210 million,
which was destroyed due to fire. Raw material was not insured.
vi). During the year, the head office of the company was shifted to new premises and the old
building was sold for Rs. 1.2 billion.

Required:
(a) Determine the materiality for the financial statements as a whole and also discuss the
basis/benchmarks adopted by you in this regard. (10 marks)
ISA 402 Page 123 ICAP Past Papers

ISA 402
Q.6 a(ii)– Winter 18
Your firm Gul Khan and Company, Chartered Accountants (GK) is the auditor of Yameen
Corporation Limited (YCL), a listed company which has three subsidiaries. In the planning
meeting, the Chief Financial Officer of YCL informed you about the following developments
which took place during the year ending 31 December 2018:
(ii) There was a major reshuffle in one of the business segments of YCL which resulted in
several employees being laid off. The reshuffling was carried out when several ghost
employees were identified by the internal audit department. Consequently, the
management of YCL decided to outsource its payroll processing department along with
few other activities related to the finance department to another company.

Required:
In light of the above mentioned information what considerations should be taken into
account while devising the over-all audit strategy. (06 marks)
Note: Audit procedures are not required

Q.5 – Summer 17
Your audit client Mars Pakistan Limited (MPL), is a multinational company. At the group level,
a decision has been taken whereby the payroll function of all group companies has been
outsourced to a payroll processing firm PayPro situated in London.

According to the terms of the contract, after processing, the payroll is sent to MPL for
authorisation. PayPro shares type 1 report with all of its clients on an annual basis. Due to
resource constraints for this engagement, it might not be possible for you to visit PayPro for
testing their controls.

Required:
Evaluate the above situation and explain how would you test the operating effectiveness of
controls over payroll applied by PayPro? (10 marks)

Q.5.a.ii - Winter 15
The following situations have arisen at different audit clients of your firm. The year-end
in each case is 30 September 2015.
(ii) Certain management functions of the audit client had been outsourced. Most of the
outsourced functions are performed at the service organizations’ premises .(07 marks)

Required:
Evaluate the above situations and briefly explain the steps that the auditor would be
required to carry out in each of the above situations. (Impact on audit report is not
required)
ISA 500 Page 124 ICAP Past Papers

ISA 500
Q.2.a - Winter 17

You have been the auditor of Venus Limited (VL) for past few years. During the current year’s
audit, the report of the valuation expert shows that the fair value of buildings of VL is slightly
above their carrying amount. However, during the course of audit, you discovered a copy of
a draft report by the same valuer in which the value assigned to the buildings was lower by
Rs. 20 million. While investigating the matter, the audit senior has identified that had the
assets been valued on the basis of the unsigned valuation report, it would have resulted in
breach of a loan covenant. You have also noted that the same valuer has been used by VL for
the last many years.

Required:
Specify the steps that you would take in the above situation and discuss the possible effects
on the audit report, if the materiality limit on this audit is Rs. 80 million. (10 marks)

Q.4.a - Winter 15
Rentals Limited (RL) is a real estate company engaged in the business of renting of office
buildings and shopping centers across the country. The investment properties are carried at
fair value. The fair values are determined by an internal valuer at the end of each reporting
period.

Required:
Considering the inherent complexities involved in the determination of fair values of
investment properties, discuss the key controls that RL is expected to employ while carrying
out the valuation internally.(09 marks)

Q.2 - Summer 15
You are the audit manager of Dreams Limited (DL), a listed company, for the year ended 31
May 2015. DL has significant investments in two securities, which are listed on the Over the
Counter (OTC) market.

While planning the audit procedures, it has been observed that there was a liquidity concern
in the OTC market and therefore no trading has been witnessed in these securities since 26
March 2015. Consequently, DL has finalised the valuation of these securities on the advice of
a company, which specializes in providing pricing services. The company has used a pricing
model which it uses at majority of its clients.

Required:
Explain how the auditor would obtain sufficient and appropriate audit evidence in the above
scenario. (Implications on audit report are not required) (12 Marks)
ISA 500 Page 125 ICAP Past Papers

Q.6 - Summer 12
You are the audit manager of Paidar Tameerat Limited (PTL) for the year ended 31 May 2012.
PTL is a listed company and is engaged in the construction of high rise buildings including
residential and commercial complexes.

Last year serious differences of opinion had arisen with the management of PTL while
determining the stage of completion of certain projects. The matter was ultimately resolved
after an independent value had rendered a report and on which the auditor had placed
reliance. This year the management has employed an engineer to monitor the various
projects. The engineer has reported minor discrepancies in the estimates provided by various
project managers.

Required: Assess the above situation and discuss how you would address the related issues
during the course of the audit. (07 Marks)
ISA 501 Page 126 ICAP Past Papers

ISA 501
Q.4 a - Summer 15
You are carrying out the audit of Akhtar Autos Limited (AAL) for the year ended 31 March
2015, a listed company, engaged in the business of manufacture of spare parts for trucks,
buses and tractors. Extracts from the draft financial statements are as follows:
2015 2014
-----(Rs. In '000')------
Sales 1,250,000 1,440,000
Loss before taxation -70,000 -15,000
Current assets 325,000 350,000
Other assets 145,000 135,000
Total assets 470,000 485,000
Current liabilities 345,000 305,000
Other liabilities 175,000 160,000
Total liabilities 520,000 465,000
Equity -50,000 20,000
Previous year’s audit report was qualified on account of inability to obtain sufficient and
appropriate audit evidence with respect to stores and spares, as ledger of stores and spares
contained many negative balances.
The following further information has been obtained during the audit:
i). Agreements with two local distributors contain clauses that offer a significantly higher
percentage of discounts which are above normal market rates. Due to the tough
competition in the local market, the management of the company is currently
negotiating with certain foreign customers for export of company’s products.
ii). In May 2015, court notices from two major customers were published in the
newspapers, alleging the company of supplying inferior quality spare parts in the
month of April 2015 and claiming damages of Rs. 150 million. The management is of
the view that the allegations are baseless.
iii). A supplier of the company has become bankrupt. The company owes an amount of Rs.
138 million to the supplier. However, the liquidator has lodged a claim of Rs. 140
million.
iv). AAL is a family owned company. Out of its seven directors, four are executive directors.
The non-executive directors have been elected on the board for the 4th time.
v). The Board has formed a three member Audit Committee, which is chaired by a non-
executive director, who is also the maternal uncle of the chief executive.
vi). The half yearly accounts were not finalised because of a legal dispute. The company
had informed SECP in respect of such non-compliance.
vii). Internal audit department includes only one person who is a chartered accountant and
is engaged on a part time basis.
viii). The warehouse from where goods are dispatched is under the management of sales
department.
ISA 501 Page 127 ICAP Past Papers

Required:
Specify the procedures to be performed in case of litigation and claims with respect to
matters mentioned above. (Impact on auditor’s report is not required) (04 marks)

Q.8 - Summer 14
Shakeel Foods Limited (SFL) manufactures a variety of food products. The incharge of the
audit team at SFL has requested you to advise on the following issues:
a. During an informal discussion with a company’s employee, he came to know that SFL is
in litigation with one of its competitors. However, the said case was not included in the
list of cases provided by SFL nor was it mentioned by the legal advisor in his
confirmation. On being confronted, the management has informed that they are in the
negotiation phase with the competitor and intend to settle the dispute through payment
of Rs. 150 million. (10)
b. Stock in trade valuing Rs. 65 million is placed in a warehouse owned by Hameed Limited
(HL). According to news reports, FIA has recently initiated an enquiry against HL for
evading import duties and taxes. HL has confirmed the quantities of stock at year end.
(06)

Required:
Discuss how the auditor should deal with the above situations.

Q.2(ii) - Summer 13
You are the manager responsible for the audit of Dilawar Paints Limited (DPL). The draft
financial statements for the year ended 31 March 2013 show revenue of Rs. 1,250 million
(2012: Rs. 1,175 million), profit before taxation of Rs. 100 million and total assets of Rs. 1.2
billion.

The audit incharge has noted the following points for your consideration:
(ii) While the tanks in the factory were undergoing modernisation, DPL had made
arrangements with a nearby factory for storage of its chemicals. At the time of stock check
you were informed that it is not possible to segregate DPL’s stock from that of the other
factory. According to DPL’s record, the value of its stock of chemicals as at 31 March 2013
which is lying in the nearby factory is Rs. 200 million. The value of stock of chemicals as at 31
March 2012 was Rs. 120 million. (08 marks)

Required:
Discuss the matters that you would consider and how would you obtain the necessary audit
evidence.
ISA 505 Page 128 ICAP Past Papers

ISA 505
[

Q.5.a.iii - Winter 15
The following situations have arisen at different audit clients of your firm. They year-end
in each case is 30 September 2015.
iii) 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.(03 marks)

Required:
Evaluate the above situations and briefly explain the steps that the auditor would be
required to carry out in each of the above situations. (Impact on audit report is not
required)

Q.7 - Winter 12
The audit of Karim Limited (KL) is in progress. The audit team has requested you to advise
on the following issues:

(a) The confirmation request sent to a customer who owed Rs. 35 million was responded by
an e-mail addressed to KL’s CFO.

(b) The management of KL is not allowing auditors to send confirmation to Fareed Limited
(FL), on account of certain disputes, as the sending of confirmation will undermine the
ongoing negotiations with FL. However, the management has offered to provide specific
written representation on the matter.

Required: Discuss how the auditor should deal with the above situations. (17 marks)
ISA 510 Page 129 ICAP Past Papers

ISA 510
Q1 a Summer 16
Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit teams
have brought the following matters to his attention:
(a) On the first audit of Nasir Limited (NL), the Chief Finance Officer of NL has revealed that
due to an error, a material liability was understated in the preceding financial year. (08)

Required:
Explain how the audit teams should deal with the above situations.

Q.1.a - Winter 14
ABC and Company, Chartered Accountants, have been appointed as the auditor of Neptune
Limited (NL). During the audit it has been revealed that:
(a) The previous auditor’s working papers are available; however, they are not of required
standards. (08 marks)

Required:
Discuss the overall audit approach and related audit procedures to address the above issues.
Also state the possible implications on the audit report.

Q.7.b - Winter 13
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, during the course 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. (09 marks)

Q.3.a - Summer 11
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:
ISA 510 Page 130 ICAP Past Papers

i). 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.
ii). 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:
Describe the principal audit procedures to be carried out for verifying the opening balances
of the financial statements of Jugnu Limited for the year ended April 30, 2011. (04 marks)

Q.9 - Winter 08
Your firm has been appointed as the auditors of Antarctica Limited for the year ended June
30, 2008. The Company was incorporated in the year 2000. Since then, its financial
statements have been prepared in accordance with the approved accounting standards as
applicable in Pakistan and have been audited by a highly reputable professional auditing firm.
Since the previous auditors had never expressed a modified audit opinion, the audit team
feels that there is no risk in respect of comparatives and accordingly did not perform any
work in this respect.

Required: Describe the auditor’s responsibility as regards the verification of opening

balances and the steps that may be needed in the above situation. (10 marks)
ISA 530, 540 & 550 Page 131 ICAP Past Papers

ISA 530
Q.8 - Summer 08
You have recently joined a medium size chartered accountants firm as their audit manager.
While reviewing the firm’s audit methodology you have observed that the firm follows
standard set of audit work programs. These work programs have been used by the firm for
the last many years and rely extensively on traditional judgment sampling. You are of the
opinion that by following the statistical sampling techniques, you would be able to carry out
a more effective and efficient audit.

Required: Briefly narrate the advantages and disadvantages of judgmental and statistical
sampling. (07 marks)

ISA 540
Q.2 – Summer 17
Alpha Petroleum Limited (APL) has obtained a loan in foreign currency from Asian
Development Bank. APL has entered into currency swaps contract to hedge foreign currency
risk. APL carries it’s currency swap contract at fair value in the financial statements.

APL also has significant amount of staff retirement benefit liability (defined benefit plan) on
the statement of financial position.

Required:
(a) Specify the matters to be considered by the auditor in planning the audit of currency
swap contract. (06 marks)
(b) Recommend the audit procedures in respect of the defined benefit plan liability and for
valuation of currency swap contract. (09 marks)

ISA 550
Q.6 b – Winter 18
You have been assigned the area of related parties in an audit of the financial
statements of a listed company where there are significant related party transactions.

Required:
Highlight what controls you would expect to be present in the company for the related party
transactions. (05 marks)
ISA 560 Page 132 ICAP Past Papers

ISA 560
Q.3.a - Winter 12
The audit report of Bhit Gas Limited (BGL) was qualified on account of recognition of mark-
up on delayed payment from Salim Enterprises Limited (SEL) amounting to Rs. 2.7billion,
because at the time of signing of audit report, SEL had not acknowledged its liability towards
mark-up due to BGL and the matter was pending in the Court.

After the issuance of the financial statements, the matter was decided by the Court and SEL
was ordered to settle the mark-up by paying Rs. 1.5 billion. After the Court’s decision, BGL
had filed an appeal against the order for the remaining amount of Rs. 1.2 billion and the
management has requested the auditor to remove the qualification and issue a revised audit
report. The management has also informed the auditor that subsequent to the Court’s
decision, it has decided to revise the financial statements by making a 25% provision against
the remaining amount of mark-up.

Required:
Discuss the factors that the auditor should consider with reference to the above and specify
the steps that he should take under each of the following circumstances:
i). The management and those charged with governance are prohibited by law and
regulation from restricting the amendment and approval of the financial statements to
the effect of the above event.
ii). The management and those charged with governance are not prohibited by law and
regulation from restricting the amendment and approval of the financial statements to
the effect of the above event. (17 Marks)
ISA 580 Page 133 ICAP Past Papers

ISA 580
[

Q.3 - Winter 08
Your firm has been appointed as the auditors of Star Limited, a well-established consumer
goods manufacturing company. During the audit you were provided with various oral
representations during meetings and discussions. While finalizing the audit you requested
the management to provide such representations in writing.

The management has however informed you that they are not accustomed to providing any
representations to the external auditor in writing. The management is of the view that it has
provided full access to whatever records, documents and evidences were available with it
without any exception and that now it is the auditor’s responsibility to correlate the same
with the oral representations.

The management has further informed that the only signed documents which it will be
providing to you would be the signed copy of the financial statements and the certified true
copy of the resolution of the BOD approving the financial statements and other significant
matters, in line with the requirements of the corporate law.

Required: You are required to explain the following:

(a) Is there any relevance of oral representations for the External Auditors?
(b) What are the situations in which written representation from the management is
mandatory?
(c) What course of action would you like to take in the above circumstances? (12 marks)
ISA 600, 610 & 620 Page 134 ICAP Past Papers

ISA 600
Q.6 – Summer 21
You are the audit manager at Salman, Pervez and Company, Chartered Accountants. You are
responsible for the audit of United Health Limited and its group financial statements for the
year ended 31 May 2021. Following information have been provided to you by the audit team:

Revenue Profit before

Name of company tax Total assets
-------------- Rs. in million -----------------
United Health Group (Consolidated) 75,000 11,000 69,000
United Health Limited 24,773 2,900 24,484
Quality Labs Limited 54,000 8,100 44,000

United Health Limited (UHL):

Due to COVID-19 pandemic, UHL has witnessed significant decline in sales. In order to meet
the sales target, UHL entered into five large contracts with its customers for supply of its
products. All these customers carried risks of either non-payments or delayed payments.

In addition to the above, UHL also entered into a contract for supply of lab equipment. UHL
had agreed to a pricing model in which 80% of the contract amount will be received as the
regular price of the equipment and 20% will be received as performance bonus subject to
timely delivery of equipment. UHL has always been able to deliver all its equipment within
the agreed time. However, due to COVID-19 lockdown in the country of import, UHL may not
be able to receive the lab equipment on time and consequently UHL may not be able to timely
supply it to the customer.

Quality Labs Limited (QLL):

Up to last year, the group audit team made local site visit to the component auditor team in
Spain to review key audit working papers and attended closing meetings with local
management as Spain does not allow the cross border sharing of health data. However, due
to COVID-19, Spain has imposed a strict lockdown and has placed travel restrictions which
may continue for at least next 30 days.

Required:
(a) Critically evaluate the issues brought to your notice and advise the course of action. (17
marks)
(b) Discuss the reporting implications on the group financial statements due to the auditor’s
inability to obtain sufficient appropriate audit evidence regarding QLL’s financial
statements. (07 marks)
ISA 600, 610 & 620 Page 135 ICAP Past Papers

Q.1 a – Winter 19
HT Ragib and Company, Chartered Accountants (HTRC) is a member firm of an international
firm of chartered accountants, HT Network. HTRC has offices in Karachi, Lahore and
Islamabad.

You are the audit manager at Karachi office of HTRC. You are responsible for the audit of
Health Pharma Limited and its group financial statements for the year ended 30
November 2019. The extracts of the draft planning memorandum for the group audit
prepared by the audit senior are as follows:

Profit/(loss) Total Materialit

Revenue Remark
Name of company before tax Assets y
s
------------------ Rs. in million ------------------
Health Group
(Consolidated) 70,127 4,764 58,304 286
Health Pharma Limited Refer
(HPL) 38,487 5,850 36,563 322 note 1
Fair Cosmetics Limited Refer
(FCL) 24,773 (2,371) 24,484 129 note 2
Services (Private) Refer
Limited (SPL) 273 (47) 155 2 note 3
Quality Chemicals Refer
Limited (QCL) - - - - note 4

Note 1: HPL is the holding company and owns 100% shareholdings in FCL and SPL.
Note 2: FCL is audited by HTRC’s Lahore office. Since FCL is being audited by HTRC’s Lahore
office, no further procedures have been planned for obtaining the understanding of
the component auditor.
Note 3: SPL was incorporated in 2014 in United Arab Emirates (UAE) and is being audited
by a member firm of HT Network in UAE. Since SPL operates in foreign jurisdiction,
detailed audit procedures have been planned and confirmation will be sent to assess
the component auditor’s ethics, competence and the regulatory environment.
Note 4: HPL has disposed-off its entire shareholdings in QCL, a wholly owned subsidiary on
30 June 2019 at a gain of Rs. 450 million. QCL is being audited by HTRC’s Islamabad
office. Since QCL is no more part of the group as at 30 November 2019, no procedures
have been planned at the group level.

Required:
(a) Critically evaluate the extracts of the planning memorandum prepared by the audit
senior and advise the course of action. (15 marks)
ISA 600, 610 & 620 Page 136 ICAP Past Papers

Q.7 b – Winter 18
You are the audit manager in a firm of chartered accountants. The audit of a client TC Limited
(TCL) is in the finalisation stage. TCL has a foreign subsidiary, WCL.

The financial statements of WCL are not in compliance with IFRS-15 as the regulator in
foreign country has deferred adoption of IFRS-15. Your audit team has asked TCL’s
management to assess the impact due to non-adoption of IFRS-15 and revise the financial
statements accordingly. According to the management of TCL, the local auditor of WCL has
expressed an unqualified audit report on WCL’s financial statements. They believe that the
auditor should rely on the report issued by WCL’s auditor. In this respect they have referred
to previous year’s audit report which clearly states that the firm’s opinion was based solely
on the report issued by the subsidiary’s auditor.

Required:
Discuss how you will respond to the argument presented by TCL’s management. (05 marks)

Q.7 a (i) – Winter 18

Your firm Gul Khan and Company, Chartered Accountants (GK) is the auditor of Yameen
Corporation Limited (YCL), a listed company which has three subsidiaries. In the planning
meeting, the Chief Financial Officer of YCL informed you about the following developments
which took place during the year ending 31 December 2018:
(i) Asia Power Limited (APL) was incorporated in a foreign country named Blueland in
January 2018. YCL is the main sponsor and holds 75% shares in APL. Rest of the shares
are held by a local sponsor. APL is being audited by a firm in Blueland.
APL is providing project management services to a power plant in Blueland. The fee for
project management services is agreed at USD 30 million while the expected cost is USD
22.5 million. The revenue is being recognized on identified milestone basis in the books
of APL.

Required:
In light of the above mentioned information what considerations should be taken into
account while devising the over-all audit strategy. (07 marks)
Note: Audit procedures are not required

Q.7 – Summer 17
Your firm is the auditor of Noor Group of Companies which has three subsidiaries namely
Venus Limited, Jupiter Limited and Sun Limited. Your firm is the auditor of all the group
companies except for Sun Limited, which is incorporated in a foreign country.

Required:
Explain the procedures you would perform to decide the extent of reliance on the work of the
auditor of Sun Limited. (10 marks)
ISA 600, 610 & 620 Page 137 ICAP Past Papers

Q.6 - Winter 15
You are the audit manager of a listed company having seven subsidiaries. Three of them
are audited by other audit firms.

Required:
State the key matters / instructions which you would communicate to the component
auditors (08 marks)

ISA 610
Q.5.d - Winter 22
You are an audit partner in a firm of Chartered Accountants. The following independent
matters are currently under your consideration:
(d) Your firm has been engaged by Accenture Human Resource Limited (AHRL) to provide
an assurance report on the description, design and operating effectiveness of the controls
at AHRL.

AHRL is in the business of providing human resource management and payroll services
to various corporate clients. AHRL has established an independent and effective internal
audit function to ensure operating effectiveness of the controls. Considering the
effectiveness of the internal audit function, your team has used the work of internal
auditor during the assurance engagement.

Required:
Discuss whether a reference to the work of internal auditor can be made in the assurance
report. (05 marks)

Q.7 - Summer 15
Salman Limited (SL), a listed company, is engaged in the manufacturing and sale of Fast
Moving Consumer Goods. SL has approached your firm for conduct of internal audit.

Required:
Write a letter to SL to briefly explain the scope of the proposed internal audit assignment.
(You may assume necessary details) (08 marks)
ISA 600, 610 & 620 Page 138 ICAP Past Papers

ISA 620
Q.2 - Winter 10
Quail & Company, Chartered Accountants has recently been appointed as the external auditor
of Penguins Limited (Penguin) for the year ending December 31, 2010. Penguin uses a fully
automated integrated accounting system which meets all its operational and financial
reporting requirements. Quail & Company is considering to hire a firm of consultants to assist
it in evaluating the IT related controls and procedures in order to attain a level of comfort
over the IT controls employed by Penguin.

Required:
(a) List any five important matters which Quail & Company should consider while deciding
upon the need to hire a firm of IT consultants.
(b) Specify the important matters which should be clarified in the agreement with the
consultants.(16 marks)
ISA 800, 805 & 810 Page 139 ICAP Past Papers

ISA 800
Q.4 Winter 19
Basit and Company, Chartered Accountants has been appointed as auditor of Toys Pakistan
Limited, a subsidiary of a listed company incorporated in China, for the year ended 30
September 2019.
Basit and Company is required to audit following two sets of financial statements:
(i) Financial statements prepared to meet the statutory requirements of Pakistan. The audit
report is expected to be issued on 10 December 2019.
(ii) Financial statements prepared to meet the requirements of consolidation in China. These
financial statements would only be used by the group management in China. The
framework that has been used for the preparation of these financial statements is a
special purpose framework. The audit report is expected to be issued on 20
December 2019.

Required:
Discuss the additional matters that Basit and Company may include in its audit report on the
financial statements prepared for consolidation purpose. (06 marks)

ISA 805
Q.4 Winter 12
The statutory auditor of Mighty Limited (ML) has expressed an adverse opinion in the audit
report on the financial statements of ML for the year ended 30 June 2012. After the issuance
of the annual report, ML has approached the auditor for reporting on the trade debts of the
company as on 30 June 2012. This report is required for submission to the bank which has
provided financing facilities to ML. The audit working papers reveal that the trade debts have
been reported correctly in the financial statements.

Required: Discuss what may be the auditor’s response in the above situation. (06 marks)

ISA 810
Q.4 b - Summer 21
Saleem & Company, Chartered Accountants is the statutory auditor of Duo Limited (DL). The
management of DL has prepared summary financial statements, which have been derived
from DL’s statutory financial statements for the year ended 31 December 2020. The
management intends to make a statement that the summary financial statements have been
derived from the financial statements for which audit report was issued by Saleem &
Company on 25 February 2021.
ISA 800, 805 & 810 Page 140 ICAP Past Papers

Required:
Discuss whether DL can include such a statement in the summary financial statements and
the course of action that the firm should take in this regard. (06 marks)

Q.5.a - Summer 19
On 25 March 2019, your firm issued the audit report on the financial statements of Noor
Limited (NL) for the year ended 31 December 2018. During the first week of June 2019, NL’s
management has requested you to issue the report on summarized financial statements for
the year ended 31 December 2018 for the use of its potential investor after incorporating the
effect of a material litigation decided in favor of NL on 31 May 2019.

Required:
Discuss your firm’s responsibility in respect of gathering the audit evidence and issuing a
report on summarized financial statements. (05 marks)

Q.8 - Summer 16
You are the engagement partner of Ghalib Limited (GL) whose audit report for the year ended
31 December 2015 was issued on 20 February 2016. The management of GL has now
approached your firm to report on summary financial statements pertaining to the same
period.

Required:
Discuss the nature of risks involved in carrying out/reporting on such assignment. (07)

Q.5 - Winter 11
Ghulam Limited (GL) is a listed company. You have issued an audit report on GL’s financial
statements for the year ended 30 June 2011. In November 2011, the management of GL has
approached your firm to provide a report on their summary financial statements for the year
ended30 June 2011.
Following information is available:
i). The audit report on the annual financial statements had been qualified on account of
management’s failure to capitalize borrowing costs of Rs. 15 million, on the construction
of a building for GL’s own use. The building is in use of the company since January 2011.
ii). Under a local regulation which has recently been introduced, you are required to issue a
report on the summary financial statements. However, there are no established criteria
for the preparation of summary financial statements. The management has developed
the criteria but which is not acceptable to you.
iii). The summary financial statements include a note which explains the reasons for decline
in the profitability of the company. You concur with the reasons given in the note but it
did not form part of the annual audited financial statements.

Required: Evaluate each of the above situations considering them to be independent of each
other and discuss what measures would you take in each case. (09 mark)
ISRE 2400 Page 141 ICAP Past Papers

ISRE 2400
Q.4 - Winter 10
Vulture Limited (VL) is planning to acquire 100% shares in Sparrow (Private) Limited (SPL)
which is a small company and is not required to have a statutory audit. In order to satisfy VL
about the company’s financial statements, the directors of SPL have appointed your firm,
Pigeon &Company, Chartered Accountants, to undertake a review engagement. According to
the terms of engagement, your firm is required to review SPL’s financial statements for the
year ended September 30, 2010 and provide a report to the directors.

While performing the review you have observed that SPL has not carried out a physical
inventory count as at September 30, 2010. SPL’s inventory records were last updated on
August 31, 2010. The valuation of inventory was based on quantities determined by the store
manager using the goods receipt and dispatch notes that he had kept since the last count.
However, he is not confident that all goods receipt and dispatch notes have been recorded.
Your firm has not been able to verify the quantity of inventory through any other means. The
carrying amount of inventory is material to SPL’s financial statements.

Required:
Draft a review report on the financial statements, for submission to the directors of SPL.
(11 marks)
ISRE 2410 & Framework for assurance Page 142 ICAP Past Papers

ISRE 2410
Q.2.b - Summer 19
You are the audit manager of a listed company, Brace Limited (BL). During your discussion
with the audit team deputed on the review assignment of BL’s interim financial statements
for the half year ended 31 May 2019, the following matters are highlighted:
(i) Auditor was not asked to attend the stock count at the end of the period. Consequently,
the audit team relied on the physical count sheets provided by the management.
(ii) BL has significant accumulated losses and its current liabilities exceed the current assets.
(iii) Provision for bad debts is in line with the prior period. However, age-analysis of debtors
has not been used.
(iv) Due to time constraints, the review of subsequent events has not been carried out by the
audit team.

Required:
Discuss how you would deal with the above matters and the possible implications of each of
the above matters on the review report. (10 marks)

Q.4 - Summer 08
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 is a significant item of the balance sheet but the auditor 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). SL has executed many contracts with its customers for long term future deliveries at
different prices, amounting to Rs. 1,200 million. To avoid loss on account of price
fluctuation, short term futures had been bought in international market against future
deliveries valuing Rs. 300 million only. Such futures are carried-over on maturity.
Remaining deliveries have been left open.
iii). 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.
iv). 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.
v). Due to time constraints the review of subsequent event was not carried out by the audit
team.

Required: Discuss the above issues and their implications on your report. (11 marks)
ISRE 2410 & Framework for assurance Page 143 ICAP Past Papers

Framework for Assurance Engagement

[

Q.5 - Summer 14
(a) You are a partner in a firm of chartered accountants, looking after the audit and advisory
services department. One of your clients has approached you for services in relation to
certification of compliance with a specific control framework, with regard to their
production process. Required: What are the different types of reports that you can offer
to the client, clearly specifying the key characteristics of each form of report. (08 marks)

(b) Your manager has identified that the client should prepare a statement of compliance
with the said control framework and your firm can only issue a report on that statement.
Required: Identify the type of assurance engagement to which the manager is referring
to and the key characteristics of such engagement. (03 marks)
ISAE 3000 Page 144 ICAP Past Papers

ISAE 3000
Q.4 - Winter 17
Aster Textile Limited (ATL) manufactures industrial grade safety garments. It uses certain
chemicals whose waste needs to be disposed of in a certain manner to prevent any harm to
the environment.

The government has prescribed the safety standards which are required to be adhered to,
with regard to disposal of these chemicals. ATL has its own internally developed standards
which have been approved by some of its international customers. These customers require
that ATL as well as all its suppliers should comply with these standards. However, the
standards set by the government are far more comprehensive and stringent as compared to
ATL’s internally developed standards.
ATL has approached your firm to report on compliance with its internally developed
standards. ATL has informed you that the report would be submitted to the concerned
international customers.

Required:
In the light of the relevant international standards on assurance engagements:
(a) Discuss what steps would you take before deciding to accept the above assignment. (12)
(b) Assuming that you have accepted the engagement, what matters would you like to
include in your report to ensure that it is not misleading for the intended users. (03
marks)

Q.6 - Winter 16
Your firm has been hired by Sensitive Products Limited (SPL), for an assurance engagement
regarding compliance with regulatory requirements. SPL is engaged in the production of
highly sensitive products and is required to comply with strict regulatory requirements. In
this regard a report is submitted by SPL to the regulatory authority which contains certain
information.

Required:
Draft a limited assurance report to be issued to the regulatory authority regarding the
information provided to the authority by SPL. The report should contain a qualification and
mention atleast three procedures performed by your firm. (14 marks)
(You may assume necessary details, however any annexures to the report are not required)

Q.6 - Summer 08
To ensure the continuity in supply of cement required for development projects in far flung
areas, the Provincial Government sought application from cement producers for a three years
supply contract. Cement Limited (CL), a relatively new cement producer, was also interested
in filing the said application, as it could bring provincial government as a secured and
committed customer. CL also has a similar contract with Local Government for last two years.
ISAE 3000 Page 145 ICAP Past Papers

One of the requirements of the Provincial Government is that CL should submit a report by
their independent auditors on CL’s compliance with certain covenants of their agreement
with the Local Government i.e. those related to capital adequacy, price computation,
minimum level of inventory and any other matter directly related to financial reporting. SSZ
Chartered Accountants have been the statutory auditors of CL for the last three years. They
were appointed to carry out the engagement at a fee of Rs. 100,000. Mr. Sharif, engagement
partner of the last annual audit, discussed the scope of work with the management. The
discussion revealed the following matters:
i). The report is supposed to cover the period November 03, 2004 to December 31,2007.
ii). The agreement (Referred to as XYZ/2004 dated November 03, 2004) consisted of
voluminous annexures and attachments; and contained references to a number of rules
and regulations contained in various legislations.
iii). Certain disputes have erupted over the period, some of which still remain unsettled.
iv). Mr. Sharif assessed that the assignment would take around twenty working days. The
management felt the estimate unreasonable, as the said agreement had already been
reviewed by the auditors during the annual audits.
The firm accepted the offer and Mr. Sharif performed the engagement in fifteen working days.
He is now preparing the required compliance report with the following information in hand:
(i) Two significant disputes were raised by the Local Government relating to capital
adequacy and price computation of ‘Quick-set Cement’. Both were resolved through
negotiations as confirmed by the officials of the Local Government verbally; however a
written confirmation was refused. The records show that CL convinced the Local
Government authorities by producing the opinion of a legal expert, based on Regulation
JKL of 1961.
(ii) The management is confident that this compliance report will also support their
viewpoint in their dealing with the Local Government, although the engagement letter
does not contain such an understanding.
(iii) Minimum level of inventory was actually kept by three distributors of CL under binding
contracts clearly citing the purpose of the arrangement. The management is of the view
that this practice is in conformity with the interpretation given in Regulation referred to
above
(iv) CL was also required to provide a performance guarantee of Rs. 24 million issued by a
scheduled bank. However, this facility was not renewed after the first year. As a result,
CL is exposed to a general penalty as provided in the agreement.

Required:
Based on International Standards on Auditing and ICAP’s Code of Conduct:
(a) Explain how the above issues should be dealt with in the compliance report.
(b) Draft a Report on Compliance with the Agreement.
(c) Explain your view point in response to the management’s comments regarding
assignment completion time.
(d) Comment on the firm’s decision to appoint Mr. Sharif, for carrying out this engagement.
(20 marks)
ISAE 3400 Page 146 ICAP Past Papers

ISAE 3400
Q.6 - Summer 23
Kiwi Dairy Farms Limited (KDL) sells milk to corporate tetra packed milk brands
(corporates), restaurants and also through its retail outlets.
KDL has recently approached your firm to obtain an independent assurance opinion on a cash
flow forecast being prepared for its bankers in support of a loan application. The loan is to be
repaid over 4 years.
The cash flow forecast prepared by KDL is as follows:
Actual Forecasted cash flow
31-Dec-2022 31-Dec-2023 31-Dec-2024 31-Dec-2025 31-Dec-2026
----------------------------- Rs. in '000 -----------------------------
Receipts
Sales to corporates 2,200,000 2,134,000 2,240,700 2,352,735 2,470,372
Sales to restaurants 307,500 315,000 330,750 347,288 364,652
Retail sales
– Milk 704,000 720,000 756,000 793,800 833,490
– Cheese - 990,000 1,039,500 1,091,475 1,146,049
Long-term loan - 600,000 - - -

Payments
Operational and
administrative (2,890,351) (3,837,420) (4,029,292) (4,230,756) (4,442,294)
expenses
Capital
expenditure for - (857,200) - - -
cheese business
Finance costs (10,000) (49,000) (70,850) (51,615) (32,504)
Repayment of loan - (75,000) (150,000) (150,000) (150,000)
Dividends paid (51,384) (66,544) (69,871) (73,365) (77,033)
Taxation (64,230) (83,180) (87,339) (91,706) (96,291)
Cash flow for the year 195,535 (209,344) (40,402) (12,144) 16,441
Opening cash 60,000 255,535 46,191 5,789 (6,355)
Closing cash 255,535 46,191 5,789 (6,355) 10,086

The following information is also available:

(i) Around 70% of KDL’s sales was to corporates. However, KDL has been experiencing
declining margins within this segment. As a result, KDL has decided to reduce the sale of
milk to corporates and instead utilize it for cheese production. KDL plans to produce both
fresh and aged cheese. The production process for fresh cheese typically takes around 3
to 4 days, while aged cheese requires a longer maturation period of 6 months to a year.
However, the sale price of aged cheese is significantly higher. All the necessary
equipment required for cheese production can be obtained locally and will be ready for
use starting from July 2023.
ISAE 3400 Page 147 ICAP Past Papers

(ii) KDL currently has an overdraft facility of Rs. 100 million and has approached the bank
with a loan request amounting to Rs. 600 million. The loan is expected to carry an interest
rate of 12% per annum. It is intended to be repaid over a period of 4 years, with payments
made in 8 equal instalments. KDL expects to receive the loan funds by 30 June 2023.
(iii) All sales through retail outlets are cash sales, whereas sales to restaurants and corporates
are made on credit. For credit sales, 15% is paid in the month of the sale, 50% is paid
after 30 days, 20% is paid after 60 days, and 10% is paid after 90 days.
(iv) Operational and administrative payments mainly include employee salaries and feed cost
of animals.
(v) KDL receives an early payment discount of 8% from its suppliers if payment is made
within 21 days of receiving the inventory. It is KDL’s policy to avail the early payment
discount.
(vi) KDL is subjected to a final tax regime and pays a 2% tax on its sales receipts.

Required:
Specify the key examination procedures that your firm would perform in respect of above
information. (15 marks)

Q.4 - Winter 22
You are the audit manager responsible for the audit of Active Sports Limited (ASL) for the
year ending 31 December 2022. ASL specializes in the manufacture and sale of sportswear
and sports equipment. ASL has separate manufacturing facilities for sportswear and sports
equipment located in Faisalabad and Sialkot respectively.

During the planning meeting, you have been informed that on 1 November 2022, ASL’s board
of directors announced to discontinue the sportswear business. Following are the key
decisions taken in the board meeting:
(i) Sell the manufacturing facility in Faisalabad. However, the machinery for packing of
finished goods would be shifted to Sialkot in January 2023 and would be deployed in the
plant for manufacturing of sports equipment.
(ii) Recognize a provision of Rs. 90 million for expected restructuring costs, including
contract termination benefits and relocation (including machinery) expenses. Except for
a few, all the employees would be laid off. As compensation, they would be paid lump sum
amount and would also be entitled to receive a specified amount of ASL equity shares,
which will be calculated based on the last drawn salary. The employees which are not
laid off would be relocated to Sialkot.

Required:
Evaluate the key decisions taken in the board meeting and state the audit procedures that
should be performed in this respect. (15 marks)
ISAE 3400 Page 148 ICAP Past Papers

Q.5 - Summer 22
You are the manager in Saira Saeed & Company, Chartered Accountants (the firm). Saira has
forwarded you the following email received from Fashion Limited (FL), in which they have
asked the firm to submit their proposal for the proposed engagement:

To: Saira
From: Junaid Sheikh
Subject: Audit of Prospective Financial Information
Date: 9 June 2022

Hi Saira,

Our company has witnessed a substantial growth in export sales of our textile products.
Owing to this, we have been planning to increase our production capacity by 30% as
there are many export orders which we have to turn down. Considering this, we are
planning to install an additional manufacturing plant within the existing factory
premises. The only major expenditure in this respect is to procure and install the
manufacturing plant. Procurement of manufacturing facility is expected to start
immediately after sanctioning of loan and the plant would be operational in twelve
months’ time.

In addition to the above, we are also in a very advanced stage of introducing smart
clothing in partnership with a US company. The smart clothing contains modern
technology. For example, it will contain the features like meshed wiring woven into
fabric which connects via Bluetooth to an iOS or Android smartphone.

The US company has more than 5 years of experience of manufacturing smart clothing.
30% of the capital would be provided by that company whereas the rest would be
raised through bank loans. We are expecting that this would be an instant success in
the market as no such products are available in the Pakistani market. We are expecting
that we would recoup our investment within a five-year period.

For the capacity expansion and the new product, we are preparing Prospective
Financial Information (PFI) which needs to be audited, for submission to US company
and the banks with whom we are in negotiations.

PFI includes cash flow statement, profit or loss statement and details of assumptions
taken. PFI for the capacity expansion is required for a three-year period and for the new
product is required for the time until investment is recouped. Since the amount of loan
required is substantial, it is highly dependent on good projections.
ISAE 3400 Page 149 ICAP Past Papers

I would like your firm's services for auditing PFI prepared by our management. It would
be great if you could provide us with your quote.
Regards,

Junaid Sheikh
CFO
Fashion Limited

Required:
Write an email to Saira in which you identify and evaluate the matters that should be
considered before accepting the engagement to report on Prospective Financial Information.
(Ignore the requirements of ICAP’s Code of Ethics for Chartered Accountants) (15 marks)

Q.5 - Summer 21
Gama Pakistan Limited (GPL) is planning to expand its business by manufacturing
telecommunication accessories. For this purpose, GPL intends to obtain financing from a
bank for the planned expansion. To meet the bank’s requirement, GPL has prepared a five
years’ cash flow forecast based on management’s estimates. GPL has requested your firm to
review the forecast and furnish a report thereon.

Following information is available to you in respect of the forecast:

(i) GPL has secured agreement with two mobile phone manufacturers under which it would
be able to sell 30% of its production capacity. The mobile phone manufacturers would
pay to GPL after selling the accessories to the wholesalers.
(ii) The telecommunication accessories would be sold to mobile phone manufacturers with
one-year warranty.
(iii) During the first year, the supplies to the customers would be made through delivery
trucks; however, in order to reduce the delivery cost to other cities, cargo train would be
used from second year of production. Negotiations with railway authorities are
underway.
(iv) Royalty would be paid to a foreign company for acquiring the right to manufacture
certain accessories.
(v) A significant reduction in the cash outflows on account of income tax has been forecasted
in the years 3, 4 and 5. The management has placed a comment in support of this
reduction that the taxation authorities have principally agreed to reduce tax rates for
companies manufacturing ‘telecommunication equipment and related accessories’ and
the announcement of the reduction in tax rates will be made in the next budget.

Required:
Discuss the key examination procedures that your firm would perform in respect of the above
information. Also discuss the reporting implication(s), if any. (14 marks)
ISAE 3400 Page 150 ICAP Past Papers

Q.8 - Winter 19
Masala (Pvt.) Limited (MPL) produces a range of packed spices for last many years. Currently,
MPL sells its products in Karachi and Lahore only. MPL is now planning to expand its business
to all major cities of Pakistan and United Arab Emirates. For this purpose, it intends to seek a
financing of Rs. 2 billion from a local bank. MPL’s CFO has prepared a five year cash flow
forecast and has presented it to your firm for review.

The following further information is available:

(i) MPL signed a three-year contract with a distributor, Asif Brothers (AB) under which AB
was given exclusive right of distribution in Karachi and Lahore. The contract is about to
expire in June 2020. AB makes payment to MPL within 45 days from the date of sales.
The contract specifies AB’s rights to bonus on achieving the sales target.
(ii) MPL is in negotiation with many distributors in Islamabad, Peshawar, Quetta, Multan and
Dubai for distribution of its packed spices. The directors wish to sign a five-year contract
with a credit period of 30 days. It is expected that contract will be finalised by February
2020.
(iii) In order to meet the additional demand to be raised through expansion, MPL is planning
to set up additional manufacturing facility in Karachi.

Required:
Discuss the key examination procedures that your firm would perform in respect of the
information from (i) to (iii). (10 marks)

Q.4 – Winter 18
Dildar Textile Limited (DTL) has a factory situated in Faisalabad. DTL has been facing acute
shortage of power supply, due to which it has not been able to fulfil its orders within the
committed time. Directors of DTL have decided to install gas driven power plant, to resolve
the issue of power breakdown and has approached its bank for a loan of Rs. 500
million to finance the required expenditure.

To meet the bank’s requirement, DTL has prepared a forecast cash flow for the next three
years. The following further information is available:
(i) DTL intends to supply the surplus electricity produced to the national grid. Directors
expect an increase in the cash flow due to the proceeds of sale of electricity.
(ii) DTL plans to procure a vacant plot next to its facility for installation of the plant.
(iii) The installation of plant is expected to be completed by 30 June 2019.
(iv) Currently, 40% of the production is exported and the rest is sold locally. DTL is expecting
a rise in export as well as local orders by 30% and 20% respectively.
(v) Other major outflows pertain to raw material, payroll cost and marketing costs.

Required:
DTL has asked your firm of chartered accountants to provide a report on the forecast. State
the key examination procedures to be used in respect of the cash flow forecast. (10 marks)
ISAE 3400 Page 151 ICAP Past Papers

Q.8 – Summer 17
Delicacy Foods Limited (DFL) produces and sells ice cream and juices. It’s ice cream plant is
quite old and the management is planning to invest in an advanced technology for
manufacturing ice cream, which would result in lowering the costs and would also enable the
company to launch a new range of premium flavours. DFL has sufficient cash to fund 50% of
the necessary capital expenditure and has approached its bank for a loan of Rs. 400 million
to finance the remaining amount.

To meet the banks requirement DFL has prepared a forecast comprising of statement of
comprehensive income for the next three years. It has asked your firm to provide a report on
the forecast.
The following information is available to you in respect of the above:
(i) The machinery is expected to be available for commercial production from 1 January
2018.
(ii) DFL is expecting a decrease in production cost by 20% and plans to sell the new premium
flavours at 30% above the price of regular flavours.
(iii) Operating expenses mainly include staff cost, depreciation, repairs and maintenance.

Required:
State the examination procedures to be used in respect of the above forecast. (12 marks)

Q.2 - Winter 13
Fawad Limited (FL) is a manufacturer of personal care products. FL intends to diversify its
operations by entering into the packaged food business. For this purpose it intends to seek a
financing of Rs. 2 billion from Ameen Commercial Bank Limited (ACBL). The company’s CFO
has prepared a five year cash flow forecast and has presented it to the bank. ACBL has
requested your firm to review the forecast in consultation with FL and furnish a report
thereon. On reviewing the cash flow projections, you have noted the following:
(i) Cash sales constitute 80% of the total sales of the new business. Debtors turnover days
related to current business are projected to be reduced from 75 days to 30 days.
(ii) In the forecast, 24% of the income is under the head “Income from an associate”, which
is the management’s estimate of the company’s share of the associate income. The
associated company has confirmed the amounts which are incorporated in the forecast;
however no other details are available with FL to support this assumption.

Required:
(a) Comment on the above situations and briefly discuss the steps that you would take in the
given circumstances. (12 marks)
(b) Assuming that your firm decides to modify the report on prospective financial
information, draft the basis for modification paragraph and opinion paragraph to be
included in the report. (You may assume necessary details and choose to base the
modification either on para (i) or para (ii) above) (06 marks)
ISAE 3400 Page 152 ICAP Past Papers

Q.4 - Summer 12
(a) XYZ Company Limited intends to seek a financing of Rs. 250 million from their bankers in
order to implement board’s latest expansion proposal. The company’s CFO has prepared a
five years ‘cash flow forecast’ based on management’s estimates for presentation to the
bankers company has requested your firm to review the forecast and furnish a report
thereon.

Required: Explain the matters which your firm would consider before accepting the above
engagement.(10 marks)

(b) Assuming that your firm has accepted the above engagement and during the course of the
review, a significant reduction in the cash outflows on account of income tax has been noted
in the years 3, 4 and 5. The management has informed that the taxation authorities have
principally agreed to reduce tax rates for companies operating in the ‘industrial zone’ in
which the company is situated and the announcement of the reduction in tax rates will be
made in the next budget. However, the management has not provided any evidence to
support their claim. The impact of this assumption is Rs. 5 million for each year.
The management has justified its stance by stressing that the assumption related to the tax
rates has been clearly disclosed in the prospective financial information.

Required:
Evaluate above situation and briefly discuss the steps that your firm should take. (06 marks)

Q.5 - Summer 10
Sigma Pakistan (Pvt.) Limited (SPPL) manufactures telecommunication accessories. The
management of SPPL is negotiating with one of its competitors to acquire a factory, at an
estimated purchase price of Rs. 350 million. SPPL intends to obtain financing from a venture
capital company (VCC) for the proposed acquisition.

Your firm, Gamma & Co., has been approached by SPPL to provide a report on the following
cash flow forecast, which would be provided to VCC:

Quarter Ending (Rupees in Million)

June. 2010 Sep. 2010 Dec. 2010 Mar. 2010
Cash inflows
Cash sales i 188 203 210 251
Receipts from credit sales ii 870 900 938 1,249
1,058 1,103 1,148 1,500
Cash outflows
Operating
Payments to vendors iii 600 635 655 803
Salaries 140 140 140 140
Factory overheads iv 263 263 263 263
Others - - - -
ISAE 3400 Page 153 ICAP Past Papers

Purchase of fixed assets - - 45 54

Dividend - 120 - -
Royalty v - - - 53
Advance income tax 18 18 20 29
Purchase of factory - - 350 -
1,021 1,176 1,473 1,342
-
Cash flow for the quarter 37 -325 158
73
Opening cash balance 150 187 114 -211
-
Closing cash balance 187 114 -211
53

The following information is available:

i). Cash customers are allowed discount @ 3% when they purchase goods worth Rs.100,000
or more.
ii). 60% of the amount billed is collected within one month, 25% by the end of the second
month and 13% by the end of the third month. Bad debts are estimated at 2%.
iii). Payment against purchase of raw material is made within 30 days, in order to avail cash
discount @ 5%. Payments for other materials are made within 45 days.
iv). Factory overheads include property rentals, utility bills, insurance premium and general
office expenses.
v). Royalty is paid to a foreign company, for availing the right to manufacture certain
accessories.

Required:
(a) Outline the key procedures that your firm should undertake in order to provide a report
on the cash flow forecast. (16 marks)
(b) Draft an unmodified report for submission to the Board of Directors. (06 marks)

Q.7 - Summer 08
In 2005 the management of Fiber Limited presented before the Board of Directors, the plan
of a new business segment, quite different from existing business of FL. The approval was
granted in the same year.

In December 2007, even after over two years of operation, the bottom line of cash flow was
negative. Some of the Board members are convinced with the management’s explanation that
the initial projections were correct, nevertheless, the periodic pattern of cash flows is not
according to the expectations. Others, who are in majority, feel that the initial projections
were materially misstated. The Board has therefore directed the management to submit
prospective financial statements relating to the segment for next five years. The management
submitted the projection with the following assumptions:

(i) The company will be able to sell a large piece of land in the heart of the city, in 2008, to
set up a factory in a different city on hired premises.
ISAE 3400 Page 154 ICAP Past Papers

(ii) The factory will attain 70% capacity within six months of its establishment. Whole
production will conveniently be sold in that city and FL will not have to incur any
transportation cost.
(iii) The transportation cost, which is one of the main contributors of negative cash flow, will
be reduced substantially byusing cargo train in place of trucks. Negotiations with railway
authorities are in final stage.
(iv) Administrative expenses will grow at 5% per annum.
After examination by an independent auditor, the board intends to publish the abridged
form of such financial statements in the news letter of the company which is circulated
to shareholders each month.
ABUK Chartered Accountants have been contactedby the Board to examine the prospective
financial statements and submit their report within ten days.

Mr. Umer is a partner in the firm and has expertise in such assignments. When asked by the
firm to take up the offer as engagement partner, he informed that his wife is the daughter of
the Chief Financial Officer of FL and also holds 75,000 shares of the company.

Required:

(a) Discuss the points which the firm should consider while accepting the engagement and
assigning the job to Mr. Umer. (04 marks)
(b) Assuming that the engagement is accepted, draft an appropriate audit report. (04
marks)
(c) Explain how the historical financial statements can be used by the auditor in performing
the engagement. (04 marks)
ISAE 3402 & 3410 Page 155 ICAP Past Papers

ISAE 3402
Q.6 a - Winter 18
(a) Explain the difference between:
(i) Type 1 report and type 2 report. (03 marks)
(ii) Scope of assurance engagement under the ‘Inclusive Method’ and under the
‘Carve out Method’ (03 marks)

ISAE 3410
Q.5 - Winter 16
Dawood Limited (DL), a listed company, has approached your firm to provide a limited
assurance on sustainability report of the company and presently you are verifying the
following statement related to carbon emissions:

“Carbon emissions were within the limits allowed by the regulator.”

Required:
Determine how you would verify the above claim. (06 marks)
ISRS 4400 & 4410 Page 156 ICAP Past Papers

ISRS 4400
Q.7.b - Winter 20
Your firm has been approached by Agar Products Limited for audit of accounts receivable
and accounts payable reported in the financial statements. The financial statements were
prepared in accordance with the general purpose framework and is audited by another firm
of chartered accountants.

Required:
Discuss the matters you would consider before accepting the above assignment. (04 marks)
(Ignore the ethical considerations for the acceptance of the audit)

Q.7 - Winter 17
Bluebell Foundation (BF) is a non-profit organisation. It is in the process of receiving a grant
from the federal government. To receive such grant BF has to submit a report of factual
findings on the projects being run by BF. The trustees approached your firm and on their
request you provided a specimen of the report that may be issued in the given situation.

Subsequently, you have received a letter from the trustees in which they have requested to
remove the statement from the report, “this report is not to be distributed to any other parties
other than the federal government”, as BF also intends to distribute the report to its current
corporate donors.

Required:
Discuss how the firm should deal with the request of the trustees. (05 marks)

Q.4 – Summer 17
Spectrum Limited has patented a manufacturing process for the production of Product X. It
has allowed Lava Company Limited (LCL) to produce and market product X against a royalty
of 4% of the sales value. LCL is a large manufacturing concern and sells a number of products.
It issues serially numbered invoices and each invoice contains a number of products.
Different prices are charged from different categories of customers, according to price lists
duly approved at the start of the year.

Spectrum Limited has engaged your firm to carry out agreed upon procedures relating to
verification of the amount of royalty.

Required:
Draft a report of factual findings in accordance with the relevant standard. The report should
contain at least three procedures and three findings. You may assume necessary details
wherever required. (12 marks)
ISRS 4400 & 4410 Page 157 ICAP Past Papers

Q.2.a - Winter 15
Your firm has received a Request for Proposal from a regulator to investigate the affairs
of Ghalib Limited (GL), a listed company. The investigation has been initiated on complaint
of fraud from a shareholder. The annual reports of the company contain the following
information:
2015 2014 2013
------------- Rs. in ‘000 -------------
Sales 923,215 875,471 863,215
Cost of sales (757,388) (608,950) (533,476)
Gross profit 165,827 266,521 329,739
Selling and administration expenses (585,194) (436,582) (242,455)
Profit/(loss) before tax (419,367) (170,061) 87,284
80% of raw material is purchased from a related party.

The audit reports of 2014 and 2015 contain emphasis of matter paragraphs discussing the
going concern issues.

The Board consists of 5 members from the parent company and 2 executive directors,
excluding the chief executive officer.

The Company Secretary (CS) and Internal Auditor (IA) resigned in March 2015. The
replacements of CS and IA were appointed in August 2015 and approved by the CEO and the
Board of Directors respectively.

Required:
Prepare paragraph(s) for inclusion in the proposal, describing the scope of work. (07)

Q.6 - Winter 12
TFL has recently applied for listing on a Stock Exchange in Pakistan. Following information
has been extracted from TFL’s financial statements for the year ended 30 June 2012.
Rs.in000
Issued, subscribed and paid up capital-Ordinary shares 4,000,000
Issued, subscribed and paid up capital-Nonredeemable preference shares 600,000
Share deposit money- Nonredeemable preference shares 3,000
Un-appropriated profit 30,000
Unrealized gain on re-measurement of available for sale investments 500,000
(net of tax)
Surplus on revaluation of fixed assets 120,000
Unpaid dividend on preference shares 75,000

The face value of both types of shares is Rs. 10 each. Preference shares are convertible into
ordinary shares at any time after listing of ordinary shares. The conversion price shall be Rs.
10per ordinary share. For the purpose of conversion, unpaid dividend on preference shares,
ISRS 4400 & 4410 Page 158 ICAP Past Papers

accumulated up to the date of announcement of conversion by the company, shall also be

taken into account for determining the number of ordinary shares to be issued upon
conversion.
Required: On behalf of the auditors of the company, draft a report on factual findings on
break-up value of shares for submission to the client (16 marks)

Q.5 - Summer 09
You have recently completed the audit of Rubi Limited (RL), a multinational company, for the
year ended December 31, 2008. The Chief Financial Officer (CFO) of the company has now
approached you for a report on book value per share, as of December 31, 2008 for submission
to the regulatory authorities.

Following is an extract from the audited balance sheet of RL as at December 31, 2008:

Rupees
Issued, subscribed and paid-up share capital 4,000,000
(400,000 ordinary shares of Rs.10 each)
Accumulated profits 2,000,000
Unrealized gain on revaluation of investments 500,000
Surplus on revaluation of fixed assets–net of tax 600,000

The auditor’s opinion on the financial statements for the year ended December 31, 2008was
qualified as deferred tax asset amounting to Rs. 5 million was not recognized in the financial
statements.

Required: Draft a report for submission to the client. Show necessary calculations related to
the figures disclosed in the report. (15 marks)
ISRS 4400 & 4410 Page 159 ICAP Past Papers

ISRS 4410
Q.2.a - Summer 19
Your firm has been hired by Pedro Limited to assist the management in preparation of certain
financial information. You are in disagreement with some of the adjustments made by the
management in the financial information and consider these to be inaccurate.

Required:
Discuss how you would resolve the disagreement along with the implication, if any, on the
report. (05 marks)

Q.7 - Summer 09
You are employed as audit manager in Saleem and Company, Chartered Accountants, who
have been appointed by Indigo Private Limited to prepare certain financial information. The
management has informed that the information would be submitted to prospective private
investors in a foreign country and the fact that the information has been prepared by your
firm shall also be disclosed therein.

While preparing the financial information you identified that current maturity of a long term
loan amounting to Rs. 100 million has been shown as a long term liability, in the books of
account. The management disagrees with your observations and believes that the amount
should be disclosed as a long term liability. To support their point of view they have informed
you that their negotiations with the lenders are at the advanced stages and the agreement for
restructuring will be signed soon after the date on which the information is due for
submission.

Required: Draft a suitable report to address the above situation. (07 marks)
ISQC 1 & Substantive Procedures Page 160 ICAP Past Papers

ISQC 1
Q.5 – Winter 09
Raza & Company, Chartered Accountants is an old and well reputed audit firm. It has been
growing at a rapid pace with the result that the partners of the firm had been unable to devote
much time to various important issues. In view of your experience, they have inducted you
as a partner, with the primary responsibility of improving the firm’s systems and procedures.

The major issues that have attracted your immediate attention relate to human resources,
audit documentation and client acceptance and retention procedures.

Required:
(a) How would you evaluate the firm’s HR requirements and what steps would you take to
ensure that adequate human resources are available within the firm? (05 Marks)
(b) Identify the situations under which you would recommend declining an assurance
engagement or consider resigning from the current engagement. (03 Marks)
(c) Recommend how an engagement team member should evaluate as to what type of audit
documentation is required to be prepared in a particular situation. (03 marks)
ISQC 1 & Substantive Procedures Page 161 ICAP Past Papers

ISA 330 & Substantive Procedures

Q.4 a - Summer 21
You are the audit manager in a firm of chartered accountants responsible for the statutory
audit of Fazal Limited (FL) for the year ended 31 March 2021.

During the audit, your audit team was informed that on 1 January 2021, FL entered into a sale
and leaseback agreement with Arabian Leasing Company (ALC) for its head office property
situated at premier commercial hub. FL sold the property to ALC at fair value with useful life
of thirty years as assessed on the date of sale. Subsequently, ALC leased back the property to
FL for a period of ten years.

Required:
State the audit procedures which may be performed in respect of the above transaction. (07
marks)

Q.6 - Summer 19
During the audit of Shahid Limited, your IS audit team has reported the following issues:

(i) The client did not have an approved business continuity plan.
(ii) There were several program changes made during the year which were not approved by
the higher management. However, a complete log of program changes was maintained.
(iii) IDs of the employees who have left the company are not deleted on a timely basis.

Required:
Discuss the possible course of action that you may take in respect of the above identified
issues. (Reporting implications are not required) (12 marks)

Q.5 - Winter 10
Develop audit programmes in respect of contingent liabilities and taxation (including
deferred taxation) stating therein the audit objectives and substantive audit procedures. (20
marks)

Q.9 – Summer 09
Develop audit work programs in respect of dividend to shareholders stating therein the
related assertions, audit objectives and substantive audit procedures. (12 marks)
Additional Practice Page 162 Other Professional Bodies

Multiple
Standard
Questions
(Taken from Other
Professional Bodies)

As an Additional Written
Practice during the Last Month
(after coverage of all standards)
Additional Practice Page 163 Other Professional Bodies

Multiple Standard Questions (Other Professional Bodies)

- Additional Practice during the Last Month
Question No. 1
You are a manager in the audit firm of Frank and Co. One of the firm’s partners has read in
the press about the increasing responsibilities placed on professional firms for the detection
and reporting of money laundering activities.

He has asked you to prepare a paper for the partners covering the meaning of money
laundering, the firm’s obligations in respect of money laundering, and the steps that the firm
should take in order to meet those obligations.

Required
Set out the points to be included in your paper for the partners.

Question No. 2
You are a manager in a four partner firm. The directors of Borderlines, a listed company, wish
to dismiss their auditors. The directors of Borderlines have approached your firm to act as
auditors and have stated that they are prepared to pay Rs.100,000 as an audit fee, plus a
bonus of 1% of the profits after taxation.

Borderlines manufactures and retails window frames. The directors have a poor reputation
as regards employee welfare and there is a high turnover of employees. The company’s
business practices have previously been investigated by the authorities but no action was in
fact taken against the directors or the company.

Required
Comment on the ethical and other professional issues you would take into account before
deciding whether or not your firm should indicate its willingness to accept nomination as
auditors of Borderlines.

Question No. 3
Gnasher Investigations is an entity specialising in conducting investigations for corporate
clients. It employs ex-police officers, security consultants, IT and fraud specialists. Gnasher
Investigations has recently parted company with its firm of auditors and has approached
your firm to undertake the audit. You have been provided with the following information:
 Gnasher Investigations is a major service provider to your firm, particularly in the
provision of IT and fraud consultancy.
 Gnasher Investigations has parted acrimoniously with their previous auditors and are
withholding fees, pending the resolution of a number of issues in particular relating to
their accusations on the competence of the auditors provided.
Additional Practice Page 164 Other Professional Bodies

 Gnasher Investigations is facing a hostile take-over at present from the Technical

Investigations Group, a company you also audit.

Required
(a) Explain the impact of each of the three pieces of information provided above and how
these would influence your decision to accept the nomination of auditor for Gnasher
Investigations.
(b) Describe the other factors that you would consider in making a decision as to the
acceptance of Gnasher Investigations as a client.
(c) Describe the steps you would take if you decided to accept the nomination as auditors
for Gnasher Investigations.

Question No. 4
Dreams Yachting and Marina (DYM) have a marina on the South Coast of Pakistan and a large
sales operation dealing in yachts and speedboats. You are responsible for the audit of DYM
and have found some potential causes of concern that could indicate fraudulent activity or
financial misconduct within the company. In particular:

 30% of the yachts on sale by DYM are supplied through one of the major international
boating companies with a special finance arrangement deal. However, DYM have also
obtained separate finance on these yachts, which are therefore in effect being ‘double
financed’.
 Ten yachts shown as assets by DYM cannot be located, with no explanation other than
that they have not been sold. These yachts together are worth approximately Rs.50
million.
 Long delays have occurred in performing reconciliations with the last four months of
reconciliations still not completed. At the time of the last reconciliation, material
differences had been identified upon which no action appears to have been undertaken.

Sales have been overstated by Rs.100 million in the current financial statements.

The finance director has been off sick with stress for the last five months and therefore has
not been available to discuss any of the issues identified.

Required
(a) Explain the difference between fraud and error and how the issues shown here could be
categorised as fraud or error.
(b) Discuss the role of management and the role of the auditor in the prevention and
detection of fraud and error.
(c) Describe what steps you would take to further investigate and then report on the matters
referred to above.
Additional Practice Page 165 Other Professional Bodies

Question No. 5
Pavlova Publications (Pavlova) is a long-established publishing company. In the last two
years, it has made significant losses as a result of its investment in technology and in
particular, the high-tech environment of e-commerce. This investment and the company’s
sound future prospects have led to a good Stock Exchange rating since they are generally seen
as leading edge in this field, with good preliminary sales and strong feedback on the ease of
use and marketability of their web site.

Pavlova’s investments have been funded through use of their reserves built up over many
years. However, two weeks ago, Pavlova’s shares were suspended, having fallen by 90% on
rumours that reserves had been significantly overstated and that they were no longer
financially viable. Your firm, as the auditors, has come in for significant criticism and is being
accused of negligence. Your firm is also being threatened with legal action in relation to the
lack of due care in preparation of the accounts.

Required
Explain the legal position of your firm, the requirements for due care and the steps and
procedures the firm could have taken to prevent such a situation occurring.

Question No. 6
Your firm was the auditor of Ryan Engineering, a civil engineering contractor, until it was
taken over by the Platinum Corporation in October 20X4. The audit opinion on Ryan
Engineering for the year ended 30th April 20X4 was unmodified, and was signed in August
20X4.

Your firm has recently received a letter from the firm of solicitors which represents both Ryan
Engineering and the Platinum Corporation. The letter is as follows:

‘It has come to our clients’ attention that an employee of Ryan Engineering has been
defrauding the company over a period of many years.
Evidence has also emerged that the existence or value of certain assets at 30th April 20X4
may not have been able to be substantiated and that liabilities at that date may have been
understated.
Our clients are continuing to investigate the matter and we will advise you in due course if it
is decided to commence proceedings against your firm.’

The senior partner of your firm has asked you to review the files on Ryan Engineering and to
report whether there could be any grounds for a claim against the firm.

Required
(a) Identify to whom your firm could be liable in these circumstances, on what grounds such
a liability could arise, and what any plaintiff would have to establish in order for their
claim to succeed.
Additional Practice Page 166 Other Professional Bodies

(b) Set out the principal concerns that you would address in your review of the files on Ryan
Engineering for the senior partner.

Question No. 7
Increasingly, the auditing profession is finding itself on the receiving end of large negligence
suits.

Required
Discuss what measures could be taken within individual firms, by the profession as a whole,
or by governments to reduce the size or incidence of such claims.

Question No. 8
You have just joined the partnership of a small firm of Chartered Accountants ‘Steeple
Accountants & Partners’, and have been asked to prepare a communication brief for
distribution to all staff which will then be followed by a presentation with a question and
answer session. The communication brief required is regarding quality control procedures
and audit working papers.

ISA 220 requires quality control procedures to be implemented at the engagement level, and
ISQC 1 requires them to be implemented at the level of the audit firm. The partners are
concerned that the firm’s quality control procedures may not be satisfactory, as they have
never been reviewed since they were first implemented five years ago. In addition, although
staff are able to read the policies and procedures in the staff manual, there are currently no
other ways in which the information is communicated to them.

Required
(a) Prepare a communication brief for distribution to all staff which sets out:
(i) why quality control policies and procedures are necessary
(ii) the areas that should be covered by quality control policies
(iii) procedures that would be required to ensure that the policies are met.
(b) Answer the following queries which were asked at the question and answer session.
(i) What is the difference between an Engagement Quality Control Review (EQCR) and
a monitoring review and why are both necessary?
(ii) Why is it so important that all audit reasons and justifications are documented in the
working papers when it should be obvious from test results what the key issues are?
(iii) Why do audit working papers have to be standardised; surely this inhibits auditors
exercising their skills and experience in the most effective way?

Question No. 9
You are the senior audit manager for a medium sized firm of accountants. Your firm has just
lost two clients which have gone into receivership and has now been invited to tender for the
audit of Lahore Leisure. The audit fees have been initially estimated at Rs.600,000.
Additional Practice Page 167 Other Professional Bodies

Lahore Leisure is a medium sized manufacturing organisation which has existed for 35 years
and has generally made consistent profits. However, in the last two years, profits have fallen
by approximately 10% in each year, although the market sector in which Lahore Leisure
operates is expanding. The company has also stated that they would like some consultancy
support regarding business strategy in order to try and reverse the current profit downturn,
and have set aside Rs.3m for this.
You have ascertained the following from a brief discussion with the managing director:
 There has been no investment in non-current assets in the last 10 years. The company
was intending to start a program of investment two years ago but this was cancelled due
to the reduced profits, and maintenance and repair costs have increased significantly
over the last year.
 Staff wages have been frozen, and there has been some discussion with unions as staff
morale is very low and several staff have already left. So far, industrial action has been
avoided.
 The financial director was dismissed three months ago, and hasn’t been replaced; he is
currently suing Lahore Leisure for unfair dismissal.
 The managing director is due to retire next year; a replacement has not yet been
considered.
 There is an outstanding litigation case as an employee is suing Lahore Leisure due to an
accident whilst in the workplace, and the authorities have written a detailed report about
the case.
Your firm’s total fee income last year was Rs.21m, including Rs.1.5m from the lost clients.

Required
Prepare a document for discussion with the partners covering the following:
(a) The advantages and disadvantages of tendering for the audit of Lahore Leisure,
highlighting any key risks to your firm.
(b) Although the initial estimate of the audit fee was Rs.600,000, further work needs to be
done before a figure could be included in the tender document. List the factors which
should be taken into account when calculating this fee.
(c) An outline of the matters which should be included in the tender document if the firm
does decide to tender.

Question No. 10
You have recently been seconded to Bugles & Co. (Bugles), a firm of Chartered Accountants
in Pakistan, as a consultant to help review engagement quality. Your team has selected a
sample of Bugles’ engagements for review which are performed by a range of different staff
and engagement partners.

One of the engagements selected for review is the audit of Scratcher Ltd. (Scratcher), which
became a new audit client of Bugles in January 20X6. The audit team is led by the audit
manager (Amir), an audit senior (Malik) and three trainees. Due to unforeseen circumstances,
fieldwork for the year-end audit only started in mid-March 20X6.
Additional Practice Page 168 Other Professional Bodies

The trial balance of Scratcher for the year ended 31 December 20X5 shows the following:
 Turnover: Rs. 359.6 million (20X4 Rs. 222.8 million)
 Gross assets: Rs. 102.6 million (20X4 Rs. 63.8 million)

At your recent meeting with the audit team you noted the following:
 Year-end trade receivables were Rs. 57.8 million (20X4: Rs. 25.7 million). Umar (one of
the trainees) has just sent initial requests for direct (negative) confirmations to the 10
customers with the largest outstanding trade receivable balances as at 31 December
20X4 plus a random selection of 5 other customers.
 Malik raised a file note about a prior year legal case. The financial statements to 31
December 20X4 included a Rs. 11.9 million provision against pending litigation.
Scratcher was fully insured against the loss and received Rs. 11.9 from their insurers on
2nd March 20X5. The prior year audit was completed on 19th March 20X5 and a clean
audit report issued. However, the published financial statements to 31 December 20X4
made no mention of the insurance claim/income which was subsequently recognised in
the year to 31 December 20X5. Malik is aware that management receive a variable bonus
linked to year on year increase in profit before tax.
 Malik has not discussed this with Scratcher’s management who seem unaware of the
error.
 Malik has written ‘not applicable’ next to the analytical procedures section in the audit
planning checklist (which has not been signed-of as reviewed by Amir).

Required
Explain any issues and quality control implications of these findings for Bugles & Co.

Question No. 11
You are senior manager in Grobbelar & Co (Grobbelar), a firm of Chartered Accountants in
Pakistan. You have recently been seconded to the audit quality monitoring team to assist
them in performing annual reviews of a number of existing clients.

The following situations were noted regarding recent clients:

(i) Hikmet Ltd. exports high quality sports equipment for use in corporate and hotel gyms
across Africa. A junior member of the audit team noticed that Hikmet pays Rs. 820,000
per month into an account in Macau, describing the transactions in the general ledger as
‘payments for security consultancy services’. Other than the security services, Hikmet
has no other business dealings with Macau.

The client explained this relates to extra security for the sports equipment of a
particularly important customer to ensure it is not impounded on arrival in central
Africa. Whilst the expense does not appear in Hikmet’s tax return the audit junior, Umar,
closed the working paper as he considered the item immaterial.

Materiality for the last three audits has been set at Rs. 10 million.
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(ii) Grobbelar was appointed as auditor of Shadow Ltd. (Shadow) last year. Grobbelar also
provided tax advice and valuation services for Shadow for the last two years.

Grobbelar recently issued an unmodified audit report on the financial statements for the
year ended 31 December 20X5. Subsequently it came as a shock to Mr Khan, the CEO of
Shadow, to receive a letter from the tax authorities announcing the launch of an
investigation into Shadow’s tax affairs following an anonymous tip from a whistleblower
regarding the overstatement of tax-deductible expenses.

Required
Explain any ethical or professional issues raised by each of these matters and the action, if
any, that Grobbelar should now take.

Question No. 12
You are the manager in charge of the audit of Haydock Aviation, a small airfield which
provides fuel, maintenance services, long and short term tie down, hangar facilities and flying
tuition in the company’s five light aircraft.

Haydock Aviation is a family owned company. The two principal shareholders/directors are
mainly involved in flying tuition. Other employees are a part-time bookkeeper, a receptionist,
two full-time mechanics and other part-time flying instructors.

Required
(a) Set out the principal control risks for Haydock Aviation and suggest internal controls
which would mitigate those risks.
(b) Justify an appropriate audit strategy.

Question No. 13
Your firm has been invited to tender for the audit of Super Stores, a chain of twenty stores
operating a sophisticated computerised inventory control and re-ordering system. Four
other firms have also been invited to tender. As part of the tendering process, you have been
asked to produce a written presentation.

Given the complex systems within its business, Super Stores is particularly anxious to
establish the ability of your audit procedures to deal with the business risks and has asked
you to set out as part of your presentation, your approach concerning the following:
(1) Audit risk, and how your procedures would seek to address it to their business.
(2) Materiality, and how this might be applied.

Required
Draft the sections of the presentation to Sunshine Stores which deal with these two aspects
of the audit approach.
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Question No. 14
Tidy Toys is a prestigious toy retailer trading from a single city centre location. The accounts
and administration offices are above the shop. The company is the wholly-owned subsidiary
of a major department store chain. Tidy Toys is headed by its dynamic managing director,
John Smith, aged 70.

At John Smith’s insistence, your firm, as local to Tidy Toys, has recently been appointed as the
auditor. Tidy Toys is now the only group company not to be audited by the group auditors.

The following matters have come to light during the preliminary discussions with John Smith
and those members of his staff to whom he has allowed you access:
(1) The parent company wishes Tidy Toys to develop operations in a number of out-of- town
shopping centres. John Smith regards this as unacceptable because it would destroy the
goodwill and prestige built up over 150 years of quality retailing.
(2) The company has approximately 30,000 lines of inventory. Contrary to group accounting
instructions, no physical count is planned for the year end. The company intends to rely
on the continuous inventory system which commenced operation in March 20X5.
Two major problems have occurred with the system to date. Firstly, a trainee failed to
enter all the inventory lines before the system went live. Secondly, due to a dispute with
the software house, there has been no maintenance service for five months.
(3) John Smith has just returned from a toy fair at which he placed an order for 50,000 dolls
produced by a little known student co-operative led by his only granddaughter. The chief
buyer is said to be fuming over the incident.
(4) In the year to 31st January 20X5, John Smith received a bonus of Rs.2m, but you were
unable to obtain any information in respect of the calculation and authorisation of the
bonus. No other director of Tidy Toys received a bonus in that year and the next highest
paid director received a total emoluments package of Rs.300,000.
(5) There is a dispute with a major supplier over the credit facilities offered to Tidy Toys.
The supplier manufactures and supplies 30% of the Tidy Toys’ purchases and claims that
Tidy Toys has continually exceeded its credit period and that its accounting staff are
impatient and incompetent.
(6) The company’s overdraft limit of Rs.2.5m is due for renegotiation in April 20X6.

Required
Identify the potentially high risk areas of the audit.

Question No. 15
Your firm has recently been appointed auditor of White Recruitment, a small company set up
two years ago by the managing director, Roy White, who was previously an investment
banker. The initial capital was provided equally by Roy and the bank. The bank loan and the
current overdraft facility are secured on the company’s assets. The overdraft is running just
under its limit.
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The company places highly qualified personnel in management positions. Roy employs the
following staff:
A senior recruitment consultant, Greta Green. Three other recruitment consultants.
An office manager, Bob Blue. A bookkeeper, Paula Pink.

Greta places clients in employment and supervises and trains the other recruitment
consultants.
Bob is in charge of all office administration. He raises invoices for fees when Roy instructs
him to do so and pays invoices when Roy tells him to. Roy is the sole cheque signatory.

Paula maintains the accounting records on a PC located in the general office. The PC is
regularly backed up and copies retained in a drawer under the desk on which the PC stands.

Required
Identify, from the situation outlined above, circumstances that should be taken into account
when planning the audit. Explain why these matters should be taken into account.

Question No. 16
You are the audit manager responsible for visiting potential new audit clients. You are visiting
an electrical wholesaler, Sparky Electrical Suppliers (Sparky), a limited liability company. The
managing director and majority shareholder, Mr Smith, has asked your firm to make a
proposal for their audit and the provision of financial advice with a view to obtaining a
quotation on the local Stock Exchange.

You make the following notes from your initial meeting:

Revenue has grown from Rs.2 million to Rs.3.5 million in the last two years and the company
is very profitable. Finance is needed, in order to:
(1) establish a nationwide customer base by making some of the company’s products
available to the public through builders merchants; and
(2) set up a subsidiary in France to purchase supplies. No sales would be made there as the
company faces strong competition.

Mr Smith is the main contact with suppliers and customers and negotiates prices directly
with both. Mr Smith is in charge of buying, sales and stores. A senior bookkeeper has recently
been recruited (not a qualified accountant) to help with credit control and to set up more
formal accounting systems and procedures. There is a recently installed computer which
provides basic payroll, sales, receivables and inventory information. Mr Smith’s former
brother-in-law has specifically written the software to fit Sparky’s requirements. Purchasing
is recorded manually because of the complexity of foreign currency conversion (many
purchases of materials are from European suppliers). The purchase costs and quantities are
fed into the inventory records system which can then generate a current listing of electrical
parts in inventory.
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Higher than expected growth has caused the annual budget set at the start of the period to
significantly understate actual sales and expenses. Management accounts are produced
infrequently. The cost of sales used for the management accounts is computed as a
percentage of sales value for different product groups. In the past, this method has proved
reasonably reliable when compared to the results which incorporate the annual physical
inventory count. However, margins on product lines have recently become much more varied
because of negotiations with individual customers and suppliers. The company is also
experiencing a high level of returns because of faulty products; these are put back into
inventory if they cannot be sold at a discount for cash over the trade counter. There are also
small un-reconciled amounts (which vary each month) on the sales and purchase ledger
control accounts.

As a result of the growth of the business, the company now requires new premises. Mr Smith
is negotiating a loan from his bank to cover the cost of new premises to be built to his
specification for which contracts were recently signed. The design stage is complete and
building work has commenced. His bank is waiting for a profit forecast before giving final
approval to a Rs.1 million loan to finance the building work.

Due to the growth of the company, cash flow problems have arisen. The company has an
overdraft which has increasingly tended to exceed the agreed limit – hence the employment
of the senior bookkeeper to improve credit control. Mr Smith indicates that a large receipt
from a major customer, expected at the beginning of next month, is to be used to clear some
of the tax arrears as well as repaying his loan account of Rs.50,000.

Mr Smith is recently divorced. The settlement with his former wife has left him without a
home and he needs to increase his emoluments to provide himself with new accommodation.
Mr Smith is dissatisfied with his existing firm of accountants who prepare and audit the
annual financial statements. His dissatisfaction is partly because of the un- reconciled
amounts on the ledgers and partly because his accountants have failed to suggest how he can
take increased emoluments to meet his personal needs.

Required
Write a memorandum to the intended audit partner which highlights:

(a) the principal business risks for Sparky Electrical Suppliers identified from an analysis of
the above information;
(b) the factors that should influence the partner in deciding whether or not the firm should
make a proposal for this engagement;
(c) the principal risks you would identify if planning the first audit of Sparky Electrical
Suppliers; and
(d) two significant steps which could be taken by the company to improve accounting
procedures and financial controls prior to the next audit.
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Question No. 17
Your firm has just been appointed the first auditor to the Lahore branch of Laroupe, an Indian
manufacturer of household furniture. The branch has only been in existence for thirteen
months. The branch is involved in importing and distributing the furniture through
wholesalers and major retailers in Pakistan. The auditors of the Indian company are a
medium sized Indian firm. There is no legal requirement for a branch audit, but management
has expressed concern about the Lahore operations.

A complex computerised accounting and inventory control system is maintained. You have
ascertained that the mainframe installation is in India. The terminals in Pakistan (Lahore) are
linked to the mainframe by private telecommunications lines. All input is performed in
Lahore with overnight batch processing and output the following day.

The software used is a Indian package and all user manuals are written in Hindi; there are
nine volumes (nine manuals) in total. The IT personnel in Lahore are competent users of the
system but none of the staff has a detailed knowledge of the actual software.
The Lahore branch has been expanding rapidly and problems have been experienced because
its IT department has been unable to keep pace with developments.

An internal auditor is employed and he reports directly to the manager of the branch, who
has set down his programme of work. The internal auditor is not a qualified accountant and
his working papers and reporting are not very formalised. He performs daily checking of
certain areas and has an audit programme. The programme of work is structured in such a
way that a specific area is examined each month.

Required
Identify and comment on the issues raised as they affect your planning of the audit of the
Lahore branch.

Question No. 18
Mega Cars (MC) sells motor vehicles and spare parts, and also provides servicing and repairs
for vehicles. It operates from seven sites, having expanded recently from just four sites. Each
site has a showroom for new and used automobiles, a store for spare parts and a service
workshop.

Many of the second-hand vehicles sold by MC are vehicles that have been traded in by
customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single manufacturer and are delivered on consignment. MC
pays the agreed purchase price plus 2.5% interest four months after delivery. MC has a legal
right to return unsold cars to the manufacturer, but in practice never does so.
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New cars are sold with a two-year warranty from the manufacturer and used cars are sold by
MC with a one-year guarantee. All repairs under warranty or guarantee are carried out by MC
in its service workshops.

Each site carries a large amount of spare parts in its parts workshops. These operate under
the brand name ‘Powerparts’ and many parts are actually labelled with the Powerparts brand
name. A perpetual inventory system is used and storekeepers continually check inventories
of parts.

The car service workshops try to complete all jobs on the same day that they are started, and
are successful in about 80% of cases. Jobs are usually invoiced immediately after completion,
and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each site is able to use a new car, selected from each
consignment delivered from the manufacturer. These cars are used for business purposes
and as demonstration models. They are eventually sold second-hand as ex-demonstration
models.

MC purchased the Powerparts brand name for its parts stores. Senior management believe
that the cost of the brand name should not be amortised because they consider that the asset
has an indefinite useful life.
MC has recently established an internal audit section, although this has not yet done much
work.

Required
Using the information provided, identify and explain the audit risks that will have to be
considered and dealt with when planning the final audit of Mega Cars for the financial year
just ending.

Question No. 19
You have been assigned to the audit of Rumblers, a limited liability company in Pakistan, for
the year ending 30 November 20X5. The principal activities of the company include the
assembly, retailing, servicing and hiring out of mobile and portable generators used in the
building and construction industry. The generators are assembled from components bought
in from suppliers, most of which are located overseas. In addition to its assembly plant,
Rumblers has six trading outlets, each of which has a retailing, servicing and hiring out
section. The managing director who started the business five years ago is very keen to
innovate and as a result, is constantly striving to enhance the existing range of generators
and develop new models.

An area identified at the planning stage as high risk is the overstatement of inventory.
Inventory comprises:
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Components used in the assembly of generators and as spares for the servicing and repairing
of customers’ generators

Finished goods consisting of a range of models of generators; and Generators transferred to

retail inventory from the hire section

The generators used in the hire section are treated as non-current assets while available for
hire. They generally have a useful life of two years for hiring out purposes, after which they
are transferred to inventory in the retail section where they are sold at heavily discounted
prices.

Historically, the company has ascertained the inventory figure for the monthly and year-end
accounts by undertaking a full physical count. During the year the company introduced an
inventory control system consisting of computerised inventory records supported by
continuous counting of the components. As a result, there will be no physical count of
components at the year end. The inventory control system in respect of finished goods has
yet to be introduced and consequently there will be a full physical count of finished goods at
the year end.

Cost records are maintained, for each model of generator, detailing costs of components and
direct labour. For inventory valuation purposes, a percentage is allocated to cover overheads.
Work in progress at any point in time is not material.

Required
(a) (i) Identify the ways in which Rumblers’s inventory of components and finished goods
might be overstated; and
(ii) Outline the audit procedures, other than obtaining directors’ representations, you would
undertake in order to obtain evidence that inventory is not overstated.
(b) Rumblers is considering making an acquisition in Indonesia that should give better
margins. What further auditing issues might this present?

Question No. 20
Your firm has recently been appointed the statutory auditor of Tapas, a limited liability
company in Pakistan, for the year ended 31 December 20X5. The previous auditors, from
whom your firm has received professional clearance, did not wish to be re-appointed as
auditors.

The principal activities of the company are the distribution and retail of fine Spanish food
products. All products are imported from suppliers based in Spain and delivered to Tapas’s
central warehouse in the south of Pakistan. The company has its own retail outlets but also
supplies national supermarket chains and small independent retailers in Pakistan. Sales
through Tapas’s retail outlets are on a cash basis and sales to supermarkets and independent
retailers are on a credit basis.
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The company maintains computerised inventory records for inventories held at the
distribution centre and retail outlets. The inventory records are supported by continuous
counting procedures and as a result the company does not undertake a physical count at the
year end.

Tapas’s retail outlets are equipped with computerised tills. As each sale is recorded the
computer updates the quantity sold and the inventory balance. The manager at each outlet is
responsible for banking the takings on a daily basis.

During the year the company engaged consultants to design and implement the company’s
new website with online ordering facilities. Under the terms of the contract, the website was
scheduled to be operational by the end of September 20X4 in order to take advantage of the
high seasonal demand at this time of the year. Due to technical problems, the website was not
launched until the end of November 20X4. The consultants have been paid in full for their
work. However the company has commenced legal proceedings for breach of contract.

Despite failing to meet its sales targets in respect of online sales, the management accounts
for the 11 months to 30th November 20X5 indicate an increase in sales revenue of 12%
compared with the same period in 20X4. Inventory and receivables balances are significantly
higher than the previous year as a result of the increased level of activity.

Management is planning to expand the retail activities of the business by opening additional
retail outlets. It is hoping to fund the expansion with a bank loan and has approached the
company’s bankers to provide the funding. The bankers require the audited financial
statements before making a decision. Management is keen to have the funding in place to
progress with the expansion and would like to have the audit completed by 28 February
20X6.

Required
Identify, from the circumstances described above, the key business risks and for each risk:
(i) List the factors which have led you to identify that risk; and
(ii) Outline the audit work you would perform to address the risk

Question No. 21
The Haroon Art Gallery and Museum (HAGM) is in the centre of a city that is popular with
tourists. About 65% of its income comes from admission fees and annual memberships, and
about 30% of its income comes from sponsorship of special exhibitions by companies. Most
of the remaining income comes from a small café and gift shop in the art gallery and museum.

Admission fees come from sales of tickets to daily visitors and from annual membership
subscriptions from ‘Friends of HAGM’ who are entitled to free entry to the art gallery and
museum at any time.
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Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at HAGM’s
website on the Internet. Alternatively, day tickets can be bought with cash or credit card at
the ‘door’ on the day of the visit. Reduced prices are available for children, students and
individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two
adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors,
particularly transport companies (bus companies and railway companies) sell advertising to
HAGM.
The management of HAGM have identified the following applicable risks that need careful
attention. They believe that these risks should be managed actively.
1. There is a failure to attract more visitors because of the poor condition of many of the
paintings in the art gallery and of the items in the museum. Paintings must be restored
regularly because their condition deteriorates. HAGM has just one specialist restorer,
who is unable to keep up with the required volume of work. The management of HAGM
recognise that investment in new items and the restoration of existing items is
inadequate, but blame the lack of income for the problem.
2. Some corporate sponsorship agreements may not be invoiced due to poor
communication between the sponsors, HAGM’s sponsorship managers and the accounts
department of HAGM.
3. Some sponsorship agreements are not invoiced at their correct amount. This happens
often when a sponsor is also a company that provides advertising for HAGM. Normal
practice is for these sponsors to deduct their advertising charges from the amount they
pay to HAGM in sponsorship. However, the accounts department in HAGM are not given
the details of these set-off arrangements.
4. Some of the cash received from day visitors at the door may be stolen (or lost, or used by
management for business expenses) and does not reach HAGM’s cashier.
5. The on-line booking system for buying tickets in advance on the HAGM website is not
always available because the website is ‘down’.

Required
(a) Describe appropriate internal controls to manage each of the applicable risks described
above.
(b) Explain the financial statement risks that arise from each of these applicable risks.

Question No. 22
You are the audit manager of Pendulum Ltd (Pendulum) and are planning the audit for the
year ended 31 December 20X6.
Pendulum develops medicine for use on animals in both the commercial and consumer
markets. In the commercial market, medicine is used by veterinary practices during their
daily treatment of animals, for example in pet clinics and when visiting farms to tend sick
animals. In the consumer market, Pendulum sells certain medicines directly to consumers
(i.e. pet owners) via mail order and through concessionary stalls in a number of large
supermarket chains.
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Pendulum’s pre-tax profit for the year is Rs. 2.543 million.

During a recent visit to Pendulum to discuss the forthcoming audit, Pendulum’s finance
director raised the following issues:

(a) On 14 November 20X5, Pendulum was notified by its lawyers that a group of farmers had
raised a claim against Pendulum following the death of over 1 million chickens linked to
one of Pendulum’s medicines.
No provision was made in the financial statements for the period ending 31 December
20X5 because neither the likelihood nor success of the claim was known at that time.

The case remains ongoing as at December 20X6 year-end. However, the lawyers have
now advised Pendulum’s directors that the claimants are highly likely to succeed with
their claim and that the estimated award against Pendulum will be around Rs. 15 million.

(b) Pendulum launched a ‘love your pet’ voucher scheme during December 20X6. Each
voucher entitles the ‘lucky recipient’ (e.g. a pet dog) to a full health check plus a half- day
‘pet-pampering’ session.

Vouchers are sold through veterinary clinics, directly to consumers over the internet and also
via the concessionary stalls across the supermarket network. Vouchers can be redeemed at
any one of Pendulum’s network of pet care centres.

Vouchers were promoted on a ‘buy one get one free’ basis during January targeting pet
owners for the forthcoming annual ‘National Pet’s Day’ in early February 20X7.

Previous voucher schemes have proved highly popular with a very high take-up. The
directors expect the total voucher issuance for the current scheme to reach Rs. 40 million
with an 75% take-up. They have therefore recognised Rs. 30 million in revenue for the year
ending 31 December 20X6.

Required
For each of the above issues:
(i) What are the matters you should consider during planning for the audit? and
(ii) Describe the audit procedures you would plan to perform in response to each of the
issues.

Question No. 23
Barnet Removals is a removals company. In the year ended 31st December 20X5 the company
made a trading profit of Rs.800k. You are the manager in charge of the audit. The following
issues have arisen:
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(1) A customer is suing the company for Rs.1m for damage caused to antique furniture. The
company is defending the claim and believes that the furniture was reproduction as
opposed to antique and therefore worth only Rs.100k.
(2) A balance due from Safe Storage in respect of sub-contract work, of Rs.300k, has been
outstanding for over six months. Your firm has been asked by Barnet Removals’
accountant not to write to Safe Storage for direct confirmation of this amount as the latter
company objects to such letters. You have been assured by the accountant that the
relationship between the two companies is good and that the outstanding balance will
be paid.
(3) Barnet Removals has recently invested in four new removal vans and is currently
carrying out extensive refurbishment of its premises. As a result of this expenditure the
company has reached its overdraft limit of Rs.500k.

Required
For each of the above issues:
(a) state, with reasons, the audit work that you would expect to find in undertaking your
review of the audit working papers for the year ended 31 December 20X5
(b) draft the relevant sections dealing with these issues of the written representation letter
you would wish the directors to sign.

Question No. 24
Fluffies retails women’s clothes through a chain of over 30 stores. Each of these stores is
located in prime city-centre sites. The company is growing rapidly.

You are the audit manager in the firm that has recently been appointed as auditor to Fluffies.
The audit partner has asked you to review a number of the company’s accounting policies
and practices. These are set out below.
(1) The majority of the company’s sites are acquired on short leases (typically 10 to 25
years), with rent reviews usually every five years. A premium is usually paid to secure
the lease, although this is normally associated with a period of reduced rent. Such
premiums are capitalised and amortised over the life of the lease on a straight line basis.
(2) Before a new site can be opened for business it undergoes extensive refurbishment.
During the refurbishment period, costs incurred (including rates and services as well as
contractors’ fees) are debited to a holding account. On completion of the refurbishment,
the costs are transferred to short leaseholds.
(3) Fluffies is very aware of the importance of image in the retail fashion industry. Following
a survey by independent consultants, all the existing shops are to be restyled to project
a new image. These costs will be capitalised.

Required
(a) Identify and comment on the accounting and auditing issues raised by the above.
(b) List the further information that you require in order to be able to form an opinion on
the above practices.
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Question No. 25
BZ Supermarkets (BZS) has 200 stores throughout Pakistan, with around 20 stores across
Asia. BZS have been trying to compete with the large out of town supermarkets for the last
five years but have recently taken the decision to move into the smaller stores in towns. Their
aim is to be specialist in the type of value for money ‘quality’ products that cannot normally
be obtained in local shops. BZS has also moved into sales via the internet. They receive orders
through the internet and arrange for the closest local store to distribute the shopping to the
customer.

You have been assigned to the audit of BZS this year. You have obtained the following
information:
(1) The internet sales service has proved very successful with a 100% increase in sales on
last year. However, there have been complaints about the quality of deliveries and that
customers are failing to receive all items ordered.
(2) There have been interruptions to the internet sales service caused by the higher than
expected levels of sales. There have also been concerns over the confidentiality and
security of information accessed via the internet.
(3) Problems have arisen with two of the new sites selected by BZS for expansion.
In respect of Site A, there has been substantial local opposition accompanied by
environmental concerns over potential contamination of the site.
In respect of Site B, planning permission has not yet been obtained and has been deferred
due to an alternative application in the locality by a major competitor. This looks likely
to delay planning decisions for a significant period of time.
(4) BZS acquired Jingo Supermarkets last year as part of their business strategy. Initially, the
decision was taken to continue to operate Jingo separately and integrate the stores on a
phased basis over a two year period. This would involve rebranding Jingo, investing and
upgrading stores and ensuring the same quality of staff as BZS. Jingo managers were
retained to continue managing stores and to ensure continuity. As the integration has
commenced, a number of problems have now become apparent with Jingo operations.
These include the following:

Jingo employees have not been receiving the legal minimum wage.

No records have been maintained of the number of hours worked by employees,

although anecdotal evidence has been received that in some areas they have been
regularly working 60 hour weeks.

There are three ongoing complaints for unfair dismissal. Staff retention has been a major
difficulty.

Investigations are underway by the authorities over allegations of false labelling of sales
items.
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An investigation is underway over the sale of meat products in one store that appear to
have resulted in a local outbreak of food poisoning. The most likely cause for this
outbreak is the poor refrigeration and maintenance of the products and sales beyond
‘sell by’ dates. Some local press comment has already arisen.

Required
Explain the risks facing BZ Supermarkets in respect of the above, the controls you would
expect to operate in the scenario, the further work you would undertake and the potential
impact on the financial statements and the audit.

Question No. 26
You are the manager in charge of the audit of Magical Manufacturing. Your subsequent events
review for the year ended 30 June 20X5 has identified the following events, all of which took
place after the reporting period:
(1) A third of the sales force was made redundant. Provision has been made in the financial
statements for the year ended 30 June 20X5 for redundancy payments of Rs.5m.
(2) One of Magical Manufacturing’s largest customers, Rafters Retail, notified its intention to
go into liquidation with an outstanding debt of Rs.2.5m. The directors consider that the
current general provision for bad debts will cover any potential loss.
(3) A writ has been issued against the company by a former sales director who is claiming
Rs.1.2m for breach of his service agreement following his dismissal during the year
ended 30 June 20X5. No provision has been made in the financial statements for the year
ended 30 June 20X5 in respect of this claim.
(4) A fire at the company’s warehouse destroyed its entire inventory. The inventories had a
book value of Rs.20 million. This loss has not been included in the financial statements
for the year ended 30 June 20X5.

Required
State the enquiries you would make and the evidence you would seek in order to reach a
conclusion on the accounting treatment of the above in the financial statements for the year
ended 30 June 20X5.

Question No. 27
The Cinnamon Group is an international business, made up of ten subsidiaries and a head
office. You are the manager in charge at the firm undertaking the group audit, but there are
separate local auditors for the Cayenne subsidiary in the United States, the Habenaro
subsidiary in Mexico and the Hybrid subsidiary in Columbia. You are aware of the following
information:
(1) Hybrid is a loss-making subsidiary, with losses at the current year end totalling Rs.27
million. There are significant control problems, high levels of bad debts and 25% staff
turnover. The local auditors have already stated their intention to give a qualified
opinion for the year just ended because of the material issues found.
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(2) Cayenne is operating to a different financial year to that of the group as a whole, being
October 20X5 rather than December 20X5.
(3) Shortly after the year end, in January 20X6, the Cinnamon Group announced the sale of
Habenaro for Rs.250 million and this disposal is currently underway.
(4) The Cinnamon Group is guaranteeing loans of approximately Rs.100 million for its
subsidiaries.

Required
(a) Set out how you would plan and control the group audit of the Cinnamon Group.
(b) Consider the impact of each of the above issues on the group audit.
(c) Explain the nature of the relationship between your firm and the auditors of the
subsidiaries, making particular reference to the extent to which your firm may rely on
the component auditors’ work and to the considerations involved where joint audits are
conducted.

Question No. 28
The following diagram shows the structure of the Saturn Holdings group, a listed company
with subsidiaries both locally and overseas. All subsidiaries are wholly-owned. All of Saturn
Holdings’ overseas operations are run via Trojan.

Saturn

During the year ended 31 December 20X5 the board of Saturn Holdings decided to
restructure the group and the following events took place:
(1) Mars was sold on 1 August 20X5 to an Australian competitor, Venus. The consideration
was in the form of shares in Venus, such that Trojan now owns 30% of Venus.
(2) Pluto was sold on 30 November 20X5 to Helena. The consideration was Rs.100 million
settled in cash.
(3) To stimulate the operations of Helena and Pluto, 26% of the Helena group was sold to
Interesting Investments on 1 December 20X5.
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You are the audit manager on the Saturn Holdings audit. In addition to the main group
financial statements, Helena is also required by Interesting Investments to prepare
group financial statements. Your office audits the Saturn Holdings group, Helena and
Pluto. Your Swiss associate audits Trojan. Mercury (which is not material to the group)
is not audited, and Venus and Mars are audited by a small Australian practice. With the
exception of Mercury, all members of the group are material.

Required
Prepare notes for a planning meeting with the engagement partner setting out the significant
matters which need to be considered at this stage in respect of:
(a) the Helena audit
(b) the Saturn Holdings audit.

Question No. 29
(a) Explain the difference between the internal and external audit functions.
(b) List the advantages and disadvantages of a company outsourcing its internal audit
function to its external auditors.

Question No. 30
You are the audit manager in charge of the audit of Nibbles, a company which runs a chain of
snack bars operating in a number of seaside holiday resorts. Your firm has been the auditor
for a number of years and has always had to substantively test cash sales because of a lack of
control over the recording of takings. The audit reports to date have been unmodified.

You have recently been informed that the company has taken on a newly qualified chartered
accountant as chief internal auditor and an unqualified assistant internal auditor. Since their
appointment half way through the year ended 31st December 20X5 the two have spent most
of their time carrying out substantive tests on cash sales.

The directors are hopeful that your audit fee this year will decrease because you will be able
to rely on the work carried out by the internal auditors.

Required
Explain the issues that will be relevant to your firm in deciding:
(a) whether you can rely on the work performed by the internal auditors
(b) how much reliance to place on that work

Question No. 31
Wahab was recently promoted to audit manager in Shah & Co (Shah), a firm of Chartered
Accountants in Karachi. Wahab has been asked to manage the audit of Wasp Co (Wasp). Wasp
provides affordable internet services via satellite networks to customers living in remote
locations in Asia and Africa who are not yet connected to the internet via ground- based
communications. This is a fiercely competitive and rapidly growing market.
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With the aim of increasing shareholder value by delivering significant synergies within
revenue models, operations and capital expenditure plans, Wasp purchased Fly Co (a local
competitor in Asia) in February 20X6.
Prior year actual and current year forecast consolidated results for the new Wasp group are
as follows:
12 m/e 31 12 m/e 31
Rupees million Dec 20X6 Dec 20X5
(Forecast) (Actual)
Revenue 9,558 5,945
Cost of sales (4,974) (2,787)
Research and development costs (36) (29)
Distribution costs and administrative expenses (3,726) (2,346)
Depreciation and amortisation (1,418) (945)
Interest expense (364) (309)
Loss before taxation (960) (471)
Customers 18.6 mln 10.4 mln
Average revenue per customer (ARPC) Rs.514 Rs.572

Wasp is eager to sustain growth. Its management are committed to continuing investment
both organically and through acquisition and remain fully supportive of the group’s research
and development team.

Wasp’s growth strategy led it to purchase an Australian company, OzCom Ltd. (OzCom), in
November 20X6 (whose results are excluded from the above analysis) where it hopes to build
on its strong brand and corporate image in the Australasia region.
Shah has no local representation in Australia and therefore the 20X6 audit of OzCom will be
performed by a local firm of Chartered Accountants.

Required
(a) Describe the role that ‘support letters’ play (also referred to as ‘comfort letters’) as audit
evidence in the audit of consolidated financial statements.
(b) Identify and explain the key business risks faced by the Wasp group.
(c) Identify and explain the impact that the acquisitions will have on the planning of the
audit of the consolidated financial statements of Wasp group for the year ending 31
December 20X6.

Question No. 32
(a) ISA 500 Audit Evidence identifies the different audit procedures that can be performed
in order to obtain audit evidence.

Required
State, and briefly explain, five testing procedures that can be performed to obtain audit
evidence.
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(b) ISA 610 Considering the work of Internal Auditing explains the criteria against which the
effectiveness of the internal audit function should be assessed.

Required
State the four criteria that the external auditor should examine when assessing the
internal audit function.

(c) ISA 320 Audit Materiality provides guidance to the auditor on the concept of materiality
and its relationship with audit risk.

Required
State a brief definition of materiality and state the two stages of the audit at which the
auditor should explicitly consider materiality.

Question No. 33
Your firm, Harkness & Co, has recently been engaged as the group auditor of Herald Plc
(Herald), a listed company that produces a range of paints and varnishes used in home
furnishings. Herald’s head office and a number of subsidiaries are located in Pakistan whilst
three subsidiaries are located overseas.

The subsidiaries are involved in both the manufacture and distribution of paints and
varnishes specifically targeted at local markets.

During the year Herald acquired a 49% share of Angel Ltd, a medium-sized retailer of
gardening equipment. The next largest individual shareholder owns 18% of Angel.

Required
As the audit senior responsible for planning the group audit, explain the critical areas you
need to consider during planning and the key audit procedures you would expect to perform
on the consolidation process.

Question No. 34
You are involved as a senior in auditing the financial statements of Yellow Limited (YL), a
listed company, for the year ended December 31, 20X6. While reviewing draft financial
statements you have noted that YL has material investments in two local private limited
companies and a joint venture company operating in the UAE. You have identified the
following risk indicators:
 the investee companies have different year-ends than the investor company;
 one of the investees is a foreign operation;
 there are significant transactions between the investee and investor companies;
 one of the investee companies has poor operating results and a weak financial condition;
 the investor has guaranteed the debts of one of the investee companies;
 one of the investee’s financial statements are audited by another firm.
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Required
In view of the above risk indicators, identify the possible implications that might be of
significance to the audit team in assessing the risk of misstatements affecting the investments
made by the company.

Question No. 35
You are the external auditor of Eddie Electronics.
A written representation letter has been prepared in which the directors have been asked to
confirm that all sales income has been included in the financial statements and that when
there is weak evidence of expenditure, the expenditure has been for the benefit of the
company and not for the personal benefit of any employee or director.

Required
(a) Discuss the reliability of audit evidence provided by directors in the written
representation letter and whether you should rely wholly on the representations of the
directors or whether you should obtain other evidence.
(b) Describe the action you would take and the conclusions you would reach if the directors
refused to sign a written representation letter. Your answer should specifically consider
the statements in the letter concerning completeness of sales income and validity of
expenditure.

Question No. 36
Explain the key characteristics of the following audit-related services:
(a) A review engagement
(b) Agreed-upon procedures
(c) A compilation engagement

Question No. 37
‘The growth in assurance-type work provides a great money spinning opportunity for audit
firms to provide a lower level of assurance, involving less work and reduced engagement
risks, compared to the standard audit.’

Required
Discuss this statement.

Question No. 38
You are one of three audit managers working for a medium-sized firm of accountants which
has just taken on the audit of Armstrong Designs. Armstrong Designs retails designer clothes
through its two shops located in busy towns 30 kilometres apart.
The clothes sold are very exclusive. They are designed by the company’s owner, Mrs Smith,
who is also the managing director. 50% of the company’s clothes are made to order, with the
remainder being produced as inventory for the two shops. Each hand made piece can take up
to three months from commencement of design to finishing and can sell for up to Rs.100k.
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Mrs Smith splits her time equally between the two shops. She employs two shop managers,
two assistants, and other staff who make up her designs in workrooms above each shop.
There are two other directors: Mr Smith, her husband, the finance director, and Ms Craft, her
sister, who is the marketing director.
The following is an extract from the financial statements:

Year ended Year ended

30 September 20X6 30 September 20X5
(draft) (actual)
Non-current assets Rs. Rs.
Intangible (goodwill) 675,000 750,000
Property, plant and equipment 400,000 450,000
Current assets
Inventories
Finished goods 1,500,000 2,100,000
Work in progress 450,000 750,000

Note to the draft accounts

There is a legal claim pending. However, the directors consider that it is so unlikely to succeed
that no provision has been made for it in the financial statements.

The goodwill figure arose when Armstrong Designs, which was originally a partnership,
incorporated to become a limited company in July 20X2.

Required
(a) State the evidence you would require from Armstrong Designs in order to verify the year
end inventories figures and justify your answer.
(b) Briefly describe what audit work you would perform to verify the figure for goodwill in
the financial statements.
(c) Explain what is meant by an ‘accounting estimate’ and describe what work you would
perform to verify whether or not the figure for the legal claim pending should be included
in the financial statements.
(d) Armstrong Designs has approached its bank to discuss raising finance for a new exciting
12 month partnership venture with a major clothes designer. The bank has asked for a
five year forecast to be examined and reported on by an accountant. Briefly describe
what work you would carry out in connection with the forecast, including the contents
of your firm’s report.

Question No. 39
Lahore Communications operates via a head office and several branches. The company has a
mainframe computer at its head office, which is linked via a communications network to
terminals at its branches.
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You are a manager at a firm which has been asked to carry out a systems reliability review
over the general controls operating in Lahore Communications’ computer system. Your initial
work has identified the following weaknesses:
(1) There is no physical restriction at every site to the rooms in which the terminals are kept.
(2) Staff can change passwords at their discretion.
(3) In the computer room at the head office there are no fire extinguishers or air
conditioning.
(4) There is no formal disaster recovery plan.
(5) Back-up media is held on site.

Required
Identify the possible consequences of the above weaknesses and suggest recommendations
to remedy them, clearly describing how the control procedures should operate.

Question No. 40
Your audit client, Clegg Co (Clegg), is a national education group that owns and runs a number
of schools, colleges and universities. Clegg’s accounting policies are rigorously applied, the
accounting functions are very well managed and the group has significant cash resources.
The financial year-end is 30th June.

Clegg has been seeking to acquire a construction company for some time in order to bring in-
house the building and refurbishment of various buildings in its portfolio such as classrooms,
dormitories, cafes, libraries and sports facilities.

Clegg’s directors have recently identified Terry Construction Ltd (Terry) as a potential target
and has urgently requested that you undertake a limited due diligence review lasting three
days next month.

Further to their preliminary talks with Terry’s management, Clegg has provided you with the
following brief on Terry Construction Ltd:
 The company has an established reputation for delivering quality constructions and its
name is well-known and considered a strong brand.
 The finance director, CEO and Operations director are all major shareholders of Terry.
They are also related family members.
 The CEO and Operations director are going to be asked to stay on for a period post-
acquisition.
 The auditor’s report on Terry’s financial statements for the year to 31 Dec 20X4 was
signed, without modification, in Sept 20X5.
 Due to a recession in the construction industry the company has been operating at its
overdraft limit for the last two years and has been close to breaching debt covenants on
a number of occasions.
 Terry’s accounting policies are considered to be less prudent than those of Clegg (e.g.
assets are depreciated over longer estimated useful lives).
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 Contract revenue is recognised on the percentage of completion method, measured by

reference to costs incurred to date.
 Provisions are made for loss-making contracts.
 The company’s management team includes an experienced quantity surveyor who
qualified with a reputable national professional body. The surveyor’s main
responsibilities include:
• determining profits and losses by contract at each year end.
• supervising bi-annual physical counts at the most significant construction sites
• comparing costs to date against bi-annual rolling budgets

 Much of the labour is provided by temporary workers and subcontractors.

 All construction work is supervised by full-time site managers.
 In February 20X5, Terry received a claim that a site on which it built an apartment block
in 20X1 is now subsiding as it was not properly drained. Residents are demanding
rectification and claiming damages.
 Terry subcontracted the site preparation work in 20X1 to Pavel Services Ltd, denied all
liability and referred the matter to its lawyers.
 Subsequently, no provisions have been made in respect of the claims, nor has any
disclosure been made in Pavel’s financial statements.

Required
(a) Identify and explain the specific matters to be clarified in the terms of engagement for
this due diligence review of Terry Construction Ltd.
(b) State, with reasons, the principal additional information that should be made available
for your review of Terry Construction Ltd.

Question No. 41
You are the audit manager in charge of the audit of Adele’s Juices, a company which imports
and distributes juices. In recent years the company has become less profitable due to the large
range of juices now carried by supermarkets. The draft financial statements for the year
ended 30 November 20X5 show that current liabilities exceed current assets by Rs.2m.

The company’s major source of finance is a bank loan of Rs.5m which is due for repayment in
full on 31 October 20X6. The company is currently negotiating with its bankers for a
replacement long-term loan of Rs.10 million. They intend to use some of the loan to reposition
themselves in the marketplace to establish the superiority of their juices over those sold in
supermarkets.

The directors submitted a profit forecast with their loan application and are optimistic that
their application will be successful. However, they do not expect negotiations to be completed
before the annual general meeting in March. Your firm has been asked not to approach the
bank directly.
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Required
(a) Set out the audit procedures you would perform in order to establish the status of Adele’s
Juices as a going concern.
(b) Discuss the alternative audit opinions that might be relevant to the financial statements
of Adele’s Juices together with the circumstances in which each would be appropriate.

Question No. 42
You are the manager responsible for the audit of two, unrelated, audit clients. In each case
you are currently reviewing the audit working papers and the audit seniors’
recommendations for the type of audit report to be issued. Details are as follows:

(1) Charlie’s Cars is a subsidiary of Verity Vehicles. Serious going concern problems have
been noted during this year’s audit. Charlie’s Cars will be unable to trade for the
foreseeable future unless it continues to receive financial support from Verity Vehicles.
A letter of support has been received and a copy is filed on the current audit file.
The audit senior has suggested that, due to the seriousness of the situation, the audit
opinion should be modified.

(2) During the year, Diamond Doors has made a small loan to one of its directors but this has
not been disclosed in the financial statements. Such disclosure is required by local
legislation. Your audit report gives an opinion on compliance with such legislation.
The audit senior has suggested that, as the amount involved is small, an unmodified
opinion should be issued.

Required
For each client, comment on the suitability or otherwise of the seniors’ proposals for the audit
reports. Where you disagree, indicate what kind of modification (if any) should be given
instead.

Question No. 43
Described below are situations which have arisen in two unrelated audits and which are
considered material.

(1) Gorgeous Goods

Although you are satisfied that closing inventories this year are fairly stated, the audit
report on the previous year’s financial statements was modified due to a restriction on
the scope of the audit work in respect of the closing inventory figure. This led to a
qualified opinion.
(2) Conrads Contracts
The financial statements disclose the fact that a provision may be required to reduce
inventories to their net realisable value if a contract with a major customer, representing
60% of the company’s revenue, is not renewed. A decision on this by the customer is not
expected until after the accounts are due to be signed.
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Required
(a) State what is meant by, and explain the relationship between, the concepts of materiality
and true and fair.
(b) State, with reasons, the effect on the audit reports of the situations described above.

Question No. 44
You are the manager in charge of the audit of Iceberg Publishing which publishes a number
of specialist monthly magazines. Most readers take out an annual subscription, which can
commence in any month of the year. The company’s revenue is made up of 40% from sales of
magazines and 60% from advertising revenue.

On review of the audit working papers, you have come across the following file note points:
(1) Details of readers and their subscription renewal dates are stored on the computerised
database. The client has allowed routine database maintenance work to slip badly behind
schedule. At the final audit there is a backlog of new subscriptions and notification of
cancelled subscriptions and changes of addresses which have not been input onto the
database.
(2) The advertising manager has been under considerable pressure due to staff shortages in
the advertising department. In order to sell sufficient advertising space he has been
offering a variety of special deals to advertisers. The negotiations all take place over the
phone and the manager keeps notes of the conversations in his desk drawer. Towards
the year end, the manager was so busy that he had no time to send out the usual
confirmation letters. The confirmation letters are used as the basis for allocating
advertising space.

Required
Set out, in a manner suitable for inclusion in a report to management, the weaknesses arising
from the above, the consequences of those weaknesses and recommendations for
improvement.

Question No. 45
During the course of your audit of Hazard Electronics for the year ended 30th April, you
establish that the company did not carry out a year-end physical inventory count at one of its
retail branches and there are no alternative procedures that can be applied to confirm the
quantities. The directors have estimated the branch inventory value.

At the conclusion of your audit you decide that the problem is material, but not pervasive, to
the view given by the financial statements.

Required
(a) Explain the different types of modified audit opinions, giving an example of situations
which may give rise to each type.
(b) Set out the main elements of the audit report for the situation set out above.
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Question No. 46
Mystical Perfumes has been in existence, importing perfume from Tanzania, for a number of
years. The managing director had built up the business using contacts he already had in the
industry. The company imports only one brand of perfume which is manufactured exclusively
by one company. The perfume is distributed via Mystical Perfume Kiosks at 20 branches of a
well-known store. Under this agreement, Mystical Perfumes pays a percentage of its takings
to the store, with a minimum annual payment of Rs.100,000 per store.

The audit is nearing completion but you have just heard that the Tanzanian manufacturer is
facing serious financial difficulties and that supplies have ceased.

Required
(a) Set out the further information the auditor would require before reaching his audit
opinion.
(b) Set out the possible forms of report that the auditor may issue.

Question No. 47
Read Computers sells personal computers (PCs) to independent shops. You are the external
auditor of Read Computers. Your interim audit revealed the following issues:
(1) The half year physical inventory count revealed that some PCs supposed to be in
inventory were missing and that other machines which had been returned by customers
were in inventory but had not been recorded as having been returned. A few of the
missing PCs have been traced to directors who borrowed them for use at home.
(2) Two customers had been allowed to exceed their credit limits and new customers in the
last year had not been allocated credit limits.

Required
Draft the section of your report to management dealing with the above weaknesses. Set out
the weaknesses, their implications and your recommendations for improvement.

Question No. 48
You are responsible for the audit of Marrakech, a limited liability company, for the year ended
31 December 20X5. The principal activity of Marrakech is the provision of high quality
packaging services for manufacturing companies. The company was established 3 years ago
and has significantly exceeded its growth targets in each subsequent year.

Historically, the packaging process was labour intensive but in September 20X5, in an effort
to reduce labour costs and increase efficiency, the company invested in an enhanced
automated packing system. The investment was funded by a loan repayable in monthly
instalments over four years. The loan covenant agreement includes a covenant specifying
that the company’s debt: equity ratio should not exceed 1:1.
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A comparison of the draft accounts for the year ended 31 December 20X5 with the previous
year indicates a significant increase in revenue with a small increase in profitability. The
company is currently trading in excess of its overdraft limit and is negotiating an increase in
its facility with the bank. Management has prepared, in support of its negotiations, profit and
cash flow forecasts based on the assumptions that the anticipated increase in efficiency and
reduction in labour costs will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind with its payments
to the taxation authorities. It has also failed to comply with the terms of the lease in respect
of the factory premises and has not paid the last 3 months’ instalments.

Required
(a) Identify, and explain, from the information provided above, factors which indicate that
Marrakech may not be a going concern.
(b) Outline the matters to which you would direct your attention in the period after the end
of the reporting period in order to determine whether Marrakech can continue as a going
concern for the foreseeable future.

Question No. 49
Yasir is the manager responsible for a portfolio of audit clients of Rodney & Co, a firm of
Chartered Accountants in Pakistan.Yasir is currently reviewing the audit seniors’
recommendations for the auditors’ reports for a number of clients with a 31 December 20X6
year-end as follows:
(a) The Chairman’s statement in the directors’ report of Sunshine Ltd., an international
holiday company, states that income from sub-letting long-term vacant real-estate in its
hotel portfolio to other businesses forms a major part of revenue. The report also states
that that Sunshine Ltd. will continue to exploit this lucrative and significant revenue
stream.
The segmental information note in the financial statements shows that sub-let real-
estate income represents just 1.2% of current year revenue. However, the audit senior
recommends an unmodified audit report should be issued because the segmental
information is correct and the audit opinion only relates to the financial statements, not
the directors’ report.
(b) When reviewing after-date bank transactions as part of the audit work on trade
receivables, the audit senior noticed the transfer of an immaterial amount of cash to
Twinkle Ltd., a company based in Bermuda. When questioned about this, the finance
director explained that Twinkle Ltd. had been set up on 5 February 20X7 as a wholly-
owned overseas subsidiary of Star as part of the companies’ expansion into Central
America.
Despite no other audit evidence having been obtained, the audit senior concluded that
the explanation was reasonable and recommends that an unmodified audit report is
issued. This is because the matter does not impact on the current year’s financial
statements and the amount is immaterial.
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(c) Serious going concern problems have been identified during the audit of Manta Co
(Manta). Manta will be unable to trade beyond the next quarter unless it receives
continued financial support from its parent company, Shark Co (Shark).
Despite a letter of support (‘comfort letter’) having been issued to Manta by Shark, the
audit senior is insistent that, due to the seriousness of the situation, ‘at least’ a qualified
opinion (on an ‘except for’ basis) should be issued due to the gravity of the situation.

Required
Comment on the appropriateness (or otherwise) of the audit senior’s proposed audit report
for each of the situations above.
Indicate if/how the audit report should be modified where you disagree with the audit
senior’s proposals.

Question No. 50
Stokey Co (Stokey) is involved in supplying a range of fresh meat products (such as meat pies,
sausages, frozen beef burgers and minced meat) to 300 supermarkets located within 250
kilometres of Lahore. Products are manufactured in a factory then stored in a nearby cold
storage warehouse rented by Stokey before being distributed to the supermarkets.

Stokey’s meat products are perishable – they have an average shelf-life of six days and
maximum shelf-life of 14 days.

The annual audit for the year ending 31 December 20X6 is nearly complete. However, the
audit work on subsequent events has just uncovered the following issues:

(a) In February 20X7 a consignment of meat pies produced by Stokey was found to contain
traces of poison. Over 350 consumers suffered food poisoning after eating one (or more!)
of Stokey’s pies. Understandably the press coverage has been hugely damaging. 150
supermarkets have already cancelled orders for the foreseeable future and another 60
are considering their options.
Stokey has been served with a legal claim prepared by lawyers acting on behalf of the
affected consumers which may lead to a substantial claim for damages against Stokey.
(b) On 26th January 20X7 around 55% of inventory held for resale in the rented warehouse
spoilt and was subsequently destroyed following local floods and a resultant 72-hour
loss of power to the refrigeration systems.

Required
For each of the events above:
(i) Describe the further audit procedures that should be performed;
(ii) Explain the possible impact these events might have on the financial statements and the
audit report.
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Question No. 51
An audit report is the final part of an audit. An unmodified audit opinion reflects the fact that
the auditor believes that the financial statements are true and fair. Should he believe that the
financial statements are not true and fair, the audit opinion will be modified.

There are two reasons for a modified opinion and there are two levels of severity for each
modification. The appropriate nature of the modified opinion depends on these two reasons.

Required
In the following scenarios, please supply which you think to be the most appropriate audit
opinion and explain how you arrived at your answer.

Your audit firm, Danube, has many ongoing audits which are nearing their end for the year
ended 31 December 20X5. The following situations have arisen with four audit clients, all
limited liability companies.
(a) Rabbit (profit before tax Rs.150,000)
There is a depreciation charge contained in the income statement of Rs.55,000. The
computation of this is satisfactory. However, the directors of Rabbit have decided that
this year, motor vehicles should be depreciated on a reducing balance basis. Previously
this has been done on a straight line basis. Profits have fallen by Rs.18,000 as a result.
(b) Turtle (profit before tax Rs.200,000)
A competitor of Turtle wrote a damaging article about one of its products. Having
consulted its solicitors, Turtle has decided to take legal action and is suing the competitor
for Rs.500,000. The court case will be heard in September of this year and Turtle’s
solicitors have informed them that there is an 80% chance of success. As a result, Turtle
has adjusted its profits upwards by Rs.100,000.
(c) Eagle (profit before tax Rs.120,000)
On 10 February 20X6, Eagle were informed that one of their leading customers had gone
into liquidation. At 31 December 20X5, the balance owed was Rs.45,000. The directors
thought they had better reflect this in the financial statements so they disclosed this in
the notes to the financial statements.
(d) Flamingo (profit before tax Rs.400,000)
During the valuation of inventory it was discovered that a line of inventory had been
valued under LIFO. This had resulted in an error of Rs.8,000. A further line of inventory
was clearly obsolete and should not have been included at all. In the financial statements,
this had been included at a valuation of Rs.4,000.

Question No. 52
(a) The following information relates to the audit of Apex Fertilizer Limited (AFL) for the
year ended 31 March 2018:

AFL has incurred gross loss which is mainly because AFL’s plant was not running on
optimum capacity due to severe shortage of gas supply from the government. However,
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AFL has recently made arrangements with a privately owned company for supply of gas.
Management expects that continuous supply of gas would help AFL to convert its gross
loss into gross profit, although achieving net profit would require more efforts.

Several instalments of the long term loan appearing on the balance sheet were overdue.
AFL entered into a restructuring agreement with the bank on 7 April 2018 whereby the
outstanding interest has been converted into a loan of three years and principal
payments have also been relaxed. The first payment of principal is now due in July 2019
and the amounts have been reclassified on the basis of the restructuring agreement.

The method for the depreciation of plant and machinery has been changed from straight
line to units of production method.

The directors’ report includes the following information:

“We have entered into a gas supply arrangement with Karim Gas Limited from August
2018. A continuous gas supply will help us to attain the optimum production level and
record profits in the next financial year. Furthermore, several cost saving measures have
been taken, as a result of which fixed costs have reduced by 15%.
The company has entered into a restructuring agreement whereby the lenders
considering the potential of the company’s vision and strategies have further extended
and relaxed the terms of future payments. As a result, our liquidity position has improved
which is depicted by a much improved current ratio.”

Required:
(i) As the audit manager what issues would you like to discuss with the management in
respect of the above (other than the issue of going concern)?
(ii) What could be the possible impact on the audit report if the management does not
agree with your point of view about the issues raised in (a) above?

(b) During the audit of a listed client Pixel Limited (PL), you became aware that a legal action
has been instituted against PL by a competitor, on account of infringement of patent
rights. The company’s lawyer was not able to give any estimate about the outcome of the
case.

No provision was made in the financial statements for the possible loss as a result of the
claims (which are considered to be material), although details of those legal claims were
fully disclosed in the notes.

Required:
(i) Draft how the above matter would be reported in the key audit matter section of the
audit report. (You may assume necessary details)
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Question No. 53
The current practice of many audit firms offering substantial non-audit services to their audit
clients compromises the integrity of the auditing profession and is not in the interests of
management.

Required
Discuss the above, indicating whether factors such as client size and listed status would make
any difference to your opinion.

Question No. 54
There is a view held by some, that small businesses are un-auditable by their very nature.
However, others would say that because the auditor of a small business is much more closely
involved with his client, his knowledge of that client is extensive and he is therefore better
placed to audit it, whereas larger audits are much more mechanical.

Required
Discuss.

Question No. 55
In recent years, many commentators have been placing increasing emphasis on the
importance of the environment. Perhaps as a consequence of this, companies have begun to
recognise their environmental responsibilities and environmental issues now often have
important implications for companies. Such implications cannot be ignored by company
auditors. The profession needs to show an awareness of the possible impact of environmental
issues on clients’ financial statements.

Required
Discuss.

Question No. 56
You are the external auditor of Farley Ltd (Farley), a manufacturer of car brake pads. You
have recently completed the majority of your audit fieldwork in respect of the year ended 31
December 2007 and are undertaking your audit completion procedures. The company’s pre-
tax profit for last year was £1.3 million and its total assets at 31 December 2007 were £8.5
million.

The following matters came to light during the course of the audit:
(1) During February 2008, Farley was informed that an administrator had been appointed at
Spade Ltd (“Spade”), one of its customers. Sales to Spade accounted for less than 1% of
the total sales of Farley last year, and the sum outstanding from Spade at the year end is
£25,000. Spade was due to commence a large five year contract in April 2008, supplying
motor parts to a major car manufacturer. The brake pad component of this contract was
to be subcontracted to Farley, in anticipation of which Farley had by 31 December 2007
Additional Practice Page 198 Other Professional Bodies

invested £1.5 million in new specialist plant and machinery and £350,000 in raw material
inventory ordered to Spade’s specifications. The plant and machinery was financed by
bank loans, repayment of which is due in six-monthly instalments commencing June
2008. Farley presented a business plan to the bank in support of its application for
funding, including profit and loss and cash-flow forecasts, prepared on the assumption
that the new contract would commence in April 2008.
This business plan has since been amended to reflect recent developments. You are
aware that the directors of Farley are currently in discussion with the company which
has now taken over the contract from Spade.

(2) During your audit the directors of Farley informed you of a potential legal action being
brought by a competitor for the alleged infringement of the patent on one of their brake
pad designs.

The competitor claims that the infringement has been going on for two years and is
claiming £2 million in damages. The directors of Farley have taken advice from their
patent attorney who considers that the competitor’s case is at best weak. Farley’s
solicitors have told the directors that if the matter is pursued further by the competitor,
the case is unlikely to come to court for at least eighteen months. For these reasons the
directors have not provided for the claim in the financial statements but have made
reference to it in the notes.

Requirements
(a) Describe the possible effects of the above matters on the financial statements of Farley for
the year ended 31 December 2007 and explain how they might affect your subsequent
events review. (14 marks)
(b) Discuss the effect, if any, that the matter detailed in (2) above will have on your audit
report on the financial statements of Farley for the year ended 31 December 2007. (6
marks)

Question No. 57
Described below are situations which have arisen in four unrelated external audit clients of
your firm. The year end in each case is 31 March 2008.

Milford plc (Milford)

Milford builds and operates underground pipelines which transport oil and gas. During the
year ended 31 March 2008 the company incurred costs of £4.1 million in respect of repairs
and maintenance to its pipelines. These costs have been capitalised and included in non-
current assets. The directors refuse to make any adjustments in respect of this matter.

The total assets of Milford at 31 March 2008 are £1,380 million and the profit before tax for
the year ended 31 March 2008 is £148.9 million.
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Button Ltd (Button)

On 20 April 2008, a liquidator was appointed at Hook Ltd (Hook), a customer of Button. The
balance due from Hook on 31 March 2008 was £241,000. In addition, work in progress
included £520,000, the cost of customised work relating to Hook. The directors of Button
refuse to make provision for the debt on the grounds that the liquidator was appointed after
the balance sheet date. They also refuse to make any provision in respect of work in progress
because they are planning to convert it into finished goods at an estimated cost of completion
of £300,000 as another customer has agreed to buy it for £700,000.

The total assets of Button at 31 March 2008 are £17.9 million and the profit before tax for the
year ended 31 March 2008 is £5.2 million.

Zep Ltd (Zep)

The balance sheet for Zep for the year ended 31 March 2008 includes £2.4 million under cash
and cash equivalents, which is held on deposit in the Caribbean Islands. Hurricanes have
severely disrupted the commercial and banking systems on the islands, and you have been
unable to obtain direct confirmation of the balance at 31 March 2008.

The total assets of Zep at 31 March 2008 are £10.9 million and the profit before tax for the
year ended 31 March 2008 is £5.2 million.

Freystrop Ltd (Freystrop)

The directors’ report contains a statement without amplification that “the company’s trading
for the period resulted in a 10% increase in profit over the previous period’s profit”.
However, the income statement shows that the company’s profit for the period includes a
profit of £35,000 which did not arise from trading but from the disposal of non-current assets
of a discontinued operation. Without this profit on the disposal of non-current assets, the
company would have reported a profit for the year of £75,000 representing a reduction in
profit of 25% over the previous period’s profit on a like- for-like basis. The directors are
unwilling to change the wording of the directors’ report.

Requirement
In each of the circumstances outlined above, reach a conclusion as to whether or not you
would modify the audit report. Give reasons for your conclusions and outline the
modifications, if any, to each audit report. (20 marks)

Question No. 58
Your audit firm is a medium-sized independent practice with 50 partners located in ten
offices across the UK. The firm acts as external auditor to the two companies described below.
Both companies are competitors within the same market sector. Your firm is currently
completing the audit of both companies’ financial statements for the year ended 30 June
2008.
Additional Practice Page 200 Other Professional Bodies

The following matters have come to light during the course of the respective companies’
audits:

Jagger Ltd (Jagger)

In December 2007, Jagger entered into a major fixed price contract with a customer Wood
plc, a major UK food retailer, for the supply and installation of electronic point of sale till
systems at a number of its supermarkets. The contract is due to be completed in January
2009. Due to currency fluctuations since the start of the contract the cost of the components
purchased by Jagger for the contract has increased making it likely that the contract will
result in an overall loss of £350,000. The directors of Jagger have refused to provide for this
loss in the financial statements for the year ended 30 June 2008 as they maintain that the loss
on this contract will be offset by profits on other contracts in the year ending 30 June 2009.
Jagger’s unadjusted pre-tax profit for the year ended 30 June 2008 was £2.5 million and its
total assets at that date were £45.8 million.

Richards Ltd (Richards)

In the early hours of 1 July 2008, there was a fire at Richards’ factory which resulted in the
destruction of both a substantial quantity of inventory and the computer system which was
used to maintain the company’s perpetual inventory records. This has resulted in the loss of
the company’s inventory records. You were due to attend the inventory count at the factory
later that day. The company’s finance director has estimated a figure for the destroyed
inventory of £230,000, and he has included this figure in the financial statements at 30 June
2008.

On 27 July 2008, Richards was notified that an administrator had been appointed at Watts
Ltd (Watts), a major customer of Richards. Sales to Watts in the year ended 30 June 2008
amounted to 40% of the company’s revenue and the balance due from Watts at 30 June 2008
was £175,000, of which £50,000 had been received by Richards as at 27 July 2008. The
administrator has not yet given a firm indication of the likely future prospects for Watts.

Richards’ unadjusted pre-tax profit for the year ended 30 June 2008 was £700,000 and its
total assets at that date were £1.8 million.

Requirements
(a) Explain the ethical issues arising within your firm caused by acting for both Jagger and
Richards, and the safeguards that your firm should have put in place to enable it to act
for both companies. (4 marks)
(b) Explain the possible effects of the situations described above on the financial statements
of Jagger and Richards for the year ended 30 June 2008 and discuss whether this will give
rise to a modification to their associated audit reports. (16 marks)
Additional Practice Page 201 Other Professional Bodies

Question No. 59
You are the senior in charge of the external audit of Turbo Ltd (Turbo), a company which
assembles turbines to customer specification. The draft financial statements for the year
ended 30 September 2008 show profit before tax of £1.1 million and total assets of £24.4
million.

The following issues were identified during the course of the audit of the financial statements
for the year ended 30 September 2008.
(1) On 6 October 2008, the company received an invoice for plant and equipment costing
£3.5 million with an estimated useful life of five years which was installed and brought
into use on 1 September 2008. The invoice was dated 5 October 2008 and had been
posted to the ledger accounts as an October 2008 transaction and as yet not included in
the financial statements for the year ended 30 September 2008.

(2) On 12 November 2008, a batch of turbines which had been rejected by a customer were
sold to another customer for £450,000. The turbines are currently included in work in
progress in the financial statements for the year ended 30 September 2008 at a cost of
£350,000. The turbines were completed during the first week of October 2008 at a
further cost of £150,000.

(3) On 25 November 2008, the company was advised by a tax specialist that because of the
complexity of the issues involved in the HMRC enquiry into the company’s tax affairs,
which was launched in September 2008, it is not possible to forecast the outcome of that
enquiry. However, the specialist has advised that the possible range of outcomes in
respect of the additional tax liabilities ranges between a zero liability and a £10 million
liability. There is currently no reference to this matter in the draft financial statements.

Requirements
For each of the issues outlined above:
(i) state, with reasons, the action you would take; and
(ii) discuss the implications for the audit report on the financial statements of Turbo and,
where appropriate, describe the modifications you would make to the audit report. (20
marks)

Question No. 60
(a) Kovash Ltd (Kovash)

Kovash, an external audit client of your firm, produces satellite navigation systems (sat-navs),
used to provide on-board navigation to drivers of vehicles. Kovash supplies sat-navs to
vehicle manufacturers for installation in their vehicles. Each range of sat-navs has been
designed to precise customer requirements and cannot be installed in other manufacturers’
vehicles.
Additional Practice Page 202 Other Professional Bodies

As part of your audit work on the trade receivables balance at 31 December 2008 you have
discovered a letter, dated 18 December 2008, from a car manufacturer, Sceptus plc (Sceptus).
The letter states that an unacceptably high proportion of sat-navs have been produced to an
incorrect size, making it impossible to install them into cars manufactured by Sceptus. The
letter also states that Sceptus will not pay the current outstanding invoices and threatens to
terminate the contract with Kovash unless the situation is resolved.

Your review of the contract with Sceptus identified that the contract is not due for renewal
until 31 December 2010. In addition, it contains a clause that allows Sceptus to terminate the
contract before this date if returns of sat-navs, resulting from errors in production, reach
specified levels.
Sales to Sceptus account for 30% of Kovash’s revenue and the balance due from Sceptus at
the year end represents 54% of trade receivables and 2½% of gross assets.

An initial investigation by Kovash found one small batch of sat-navs had been manufactured
incorrectly but the finance director tells you that Kovash believes some problems with fitting
relate to changes in the manufacture of Sceptus vehicles and not to errors in the production
of the sat-navs. Kovash is continuing to discuss the issue with Sceptus and further
investigation is being undertaken but a conclusion as to the extent of the problem is unlikely
to be reached before your audit report is signed.

Requirement
Discuss the possible consequences that the matter detailed above may have for your audit
opinion on the financial statements of Kovash for the year ended 31 December 2008. For each
consequence identified, describe how this should be presented in the auditor’s report. (7
marks)

(b) Asulu Ltd (Asulu)

Asulu operates a chain of eight gourmet sandwich outlets. All of the outlets are within a 40-
mile radius of each other. Sandwiches are made on demand for customers from a range of
fresh ingredients. Local suppliers deliver ingredients on a daily basis.

Asulu has engaged your firm to carry out a review of the purchasing process at each of its
outlets and to prepare a report detailing the weaknesses and consequences identified by your
review and your recommendations to address them.

As part of your review you observed that each outlet has its own preferred suppliers and
places its own orders to suppliers throughout each day. When a particular item is identified
as being low on quantity an order is placed by telephone. Suppliers note down each telephone
order and all items ordered are delivered the next morning. A number of employees at each
outlet have authority to place an order. No records of orders placed are maintained by outlet
staff at any of the outlets.
Additional Practice Page 203 Other Professional Bodies

When suppliers deliver ingredients the delivery driver takes them directly to the storeroom.
Outlet staff do not check the items delivered. The outlet manager signs the delivery note. The
delivery driver retains one copy and a second copy is given to the outlet manager. Each outlet
manager retains the delivery notes and forwards them to the head office accounts
department on a weekly basis.

Suppliers send invoices directly to head office where they are checked against the delivery
notes forwarded by each outlet manager.

Requirement
Using the information in the scenario, prepare extracts suitable for inclusion in the report
requested by Asulu. You should set out the weaknesses identified in the purchasing system
of Asulu and outline the possible consequence/s and provide a recommendation to remedy
each of the weaknesses. A covering letter is not required. (13 marks)

Question No. 61
The directors of Styleco Ltd (Styleco), an external audit client of your firm, are planning to
expand the business. The expansion is to be funded by borrowings and the directors have
been negotiating with the company's bankers in order to increase borrowings. The directors
have prepared profit and cash flow forecasts for the three years ending 31 March 2012 in
support of the request for funding. The company's bankers require this information to be
reviewed and reported on by independent accountants and the board of directors has
requested that your firm undertakes this review.

Styleco designs and sells high quality home accessories and clothing which are sold by mail
order and over the internet. Customers pay for goods at the time of order and the company
operates a policy whereby customers who are not satisfied with any purchase are entitled to
a full refund if they return the product, undamaged, within three months of receipt. In recent
years the level of returns has been approximately 8% of revenue. All products are made
exclusively for Styleco by suppliers based in the United Kingdom and overseas. It is company
policy to pay all suppliers 10 working days following the week of delivery of the goods.

The company currently operates from a warehouse in the south of England, but the directors
wish to expand the business by opening retail outlets in cities throughout England so that
customers can see and touch the products they are buying. The directors have identified three
potential properties, in the premier shopping areas of London, Bath and Chester. These are
leasehold properties with rent payable quarterly in advance. The directors intend to have the
properties fitted out to a very high standard in line with the company’s corporate image and
will use specialist contractors to undertake this work. There will be electronic point-of-sales
systems and customers will be able to pay by cash, credit or debit cards.

Each outlet will be run by a manager assisted by a mixture of full and part-time staff. One of
the company‘s objectives is to provide a high level of service and knowledgeable advice to its
Additional Practice Page 204 Other Professional Bodies

customers and the company aims to reflect this in the staffing levels and remuneration of its
employees. All outlet staff, including managers, will be paid at rates above those paid by other
companies in the retail sector and will be eligible for an annual bonus linked to the
performance of the outlet.

Requirements
(a) From the information provided above, identify the specific matters you would consider
when reviewing the reasonableness of the assumptions underlying the receipts and
payments included in the cash flow forecast for the three years ending 31 March 2012.
(13 marks)
(b) Compare the purpose and scope of a review of the profit and cash flow forecasts for the
three years ending 31 March 2012 with that of a statutory external audit. (7 marks)

Question No. 62
Described below are situations which have arisen in three unrelated external audit clients of
your firm. The year end in each case is 31 March 2009.

(1) Airedale Ltd (Airedale)

On 1 January 2009, Airedale introduced a quarterly rebate scheme under which customers
who purchase a specified volume of products would receive a rebate which is paid quarterly
in arrears. The first rebates, relating to the quarter ended 31 March 2009, amounted to
£35,000 and are due to be paid on 30 June 2009. No entries have been made in the financial
statements for the year ended 31 March 2009 in respect of these rebates. The directors, who
are minority shareholders, have refused to amend the financial statements as such an
amendment will cause the earnings figure to fall below the level that has to be achieved in
order to earn their bonuses.

The draft financial statements show that Airedale’s revenue is £12.6 million and profit before
tax is £825,000 for the year ended 31 March 2009.

(2) Cairn plc (Cairn)

The directors of Cairn have prepared the draft financial statements on the going concern
basis and have included the following note in the draft financial statements:

“The company incurred a net loss of £2,697,770 for the year ended 31 March 2009 and at that
date the company’s current liabilities exceeded its current assets by £4,088,015. The
directors are committed to returning the company to profitability and have made a number
of key changes in senior management to lead the operational and financial turnaround of the
company. The ability of the company to continue as a going concern is dependent on several
factors which include:
(i) the profitability and cash flows of the company over the next twelve months; and
(ii) the company continuing to receive support from financial institutions and other capital
investors.
Additional Practice Page 205 Other Professional Bodies

If the company is unable to continue in operational existence for the foreseeable future, the
company may be unable to discharge its liabilities in the normal course of business.
Adjustments may have to be made to reflect the fact that assets may need to be realised at
amounts which could differ significantly from the amounts at which they are currently
recorded in the statement of financial position (balance sheet). In addition, the company may
have to reclassify non-current assets and liabilities as current assets and current liabilities
respectively and to provide for further liabilities that may arise.”

(3) Patterdale Ltd (Patterdale)

Your audit work identified that there was no system of control over cash sales that could be
relied on for the purpose of the audit and there were no satisfactory audit procedures that
could be adopted to confirm that such sales were properly recorded. Cash sales comprise
15% of recorded revenue.

Requirements
(a) 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. (15 marks)
(b) Comment on the conduct of the directors of Airedale and explain why the integrity of the
directors should be considered by your firm when deciding whether to continue to act as
external auditor for future periods. (5 marks)

Question No. 63
Alina Devin is the audit senior on the external audit of Kelsi plc (Kelsi), a manufacturer of
office printers and camera equipment. The company’s year end is 30 June 2009. The audit
work is currently being finalised and the audit partner has requested that Alina reviews the
work of a junior member of the audit team, Joseph Yeo. Joseph completed his audit work on
trade receivables in August 2009.

The following extracts have been taken from the draft financial statements:
Draft 2009 Actual 2008
£’000 £’000
Revenue 212,220 196,500
Profit before tax
36,060 33,700

Trade receivables
56,110 35,470
Allowance for receivables (7,800) (6,400)

48,310 29,070
Additional Practice Page 206 Other Professional Bodies

The audit working papers show that the allowance for receivables comprises:
Draft 2009 Actual 2008
£’000 £’000
Allowance in respect of Sharpay plc 1,000 -
Allowances in respect of other customers 6,800 6,400

7,800 6,400

The working papers also include a photocopy of a letter from the liquidators of Sharpay plc
(Sharpay), a major customer of Kelsi, dated 27 July 2009. The letter explains that due to the
amount of preferential creditors, Kelsi will not receive any amounts owed to it by Sharpay.
Joseph has not spoken to the client about this matter.
Alina discussed the matter with the finance director who explained that he has allowed for
50% of the £2 million due from Sharpay at 30 June 2009. He refused to allow for any further
amounts in respect of Sharpay, stating it is company policy to never make allowance for the
full amount due on any trade receivable balance. When Alina referred to the letter from the
liquidators the finance director became aggressive and suggested that he would ask the audit
partner to remove her from the audit if she continued to be ‘unreasonable’. The next day the
finance director telephoned Alina to apologise and offered her and Joseph a free camera from
the current product range.

Requirements
(a) Identify Alina Devin’s objectives in respect of the review of Joseph Yeo’s work, requested
by the audit partner. (2 marks)
(b) Using the information provided, identify any issues that you would expect Joseph Yeo to
have addressed as part of the audit work on trade receivables and give reasons as to why
they should have been addressed. (7 marks)
(c) Explain the effect of the amount owed by Sharpay on the audit report on the financial
statements of Kelsi for the year ended 30 June 2009. (4 marks)
d) Using the information provided, identify any ethical issues arising in respect of the audit
of Kelsi. Explain the actions that Alina Devin should take and any actions or matters to be
considered by her firm. (7 marks)

Question No. 64
Described below are two situations that have arisen concerning unrelated clients of Efron &
Co, an audit and assurance firm. Zac Hudgen has worked at Efron & Co for six months and is
involved in work for both clients. The year end in each case is 30 June 2009.
(1) Mckessie plc
Mckessie plc (Mckessie) is considering acquiring all of the shares in Wild Ltd (Wild). The
directors of Mckessie have appointed Efron & Co to undertake a review engagement. The
terms of the engagement require Efron & Co to review Wild’s financial statements, for the
year ended 30 June 2009, for any material misstatements and provide a report, to the
directors of Mckessie, expressing the firm’s conclusion.
Additional Practice Page 207 Other Professional Bodies

Wild is a small company and is not required to have a statutory audit. In performing the
review, Efron & Co’s procedures were limited to inquiries of company personnel and
analytical procedures. Zac has discovered that Wild failed to perform a physical inventory
count at 30 June 2009. Wild’s inventory records were last updated three weeks before the
year end. The inventory figure in Wild’s financial statements was estimated by the warehouse
manager using the delivery notes and despatch notes he had kept since the last count,
however he has not retained these. Efron & Co has been unable to verify the quantity of
inventory through any other means. The carrying amount of inventory is material to Wild’s
financial statements.

(2) Danfurth Ltd

During Efron & Co’s external audit of Danfurth Ltd (Danfurth) Zac discovered that a
significant number of temporary employees are paid each day in cash. These cash payments
are recorded in the accounting records under “cleaning costs” but the employees in question
do not undertake cleaning. None of the legally required income taxes or other mandatory
taxes have been paid to the authorities in respect of these employees. The factory manager
told Zac that this has been standard practice for a number of years and, as a result, Efron &
Co has calculated that Danfurth’s tax liability in respect of these employees is material to the
financial statements. The directors are reluctant to recognise any liability in the financial
statements, as they are concerned it will mean the tax authorities will ask them to pay the
taxes due.

Requirements

(a) Explain how and why the levels of assurance provided by an audit and assurance firm
might differ for different types of assurance engagement. (3 marks)
(b) Discuss the implications for the report on the review of Wild’s financial statements as
requested by the directors of Mckessie. Clearly explain the nature of the report
conclusion that you consider Efron & Co should provide. (6 marks)
(c) Discuss the implications for the audit report on the financial statements of Danfurth and
describe any modifications you consider Efron & Co should make to its audit report. (8
marks)
(d) Identify Zac Hudgen’s responsibilities and the responsibilities of Efron & Co in relation to
the issues arising at Danfurth. (3 marks)

Question No. 65
Your firm has been engaged by the directors of Progear Inc (Progear), a company based
overseas, to undertake a review of and provide a limited assurance report on the financial
information of its UK branch. The terms of the engagement include making enquiries of
management and applying analytical procedures to the financial information. The review is
to cover the financial information for the six months ended 30 September 2009.
Additional Practice Page 208 Other Professional Bodies

Progear manufactures specialist protective clothing which is used by organisations operating

in the medical, research and energy sectors. All products sold by the branch are supplied by
Progear and the branch normally sells them at a mark-up of 25% on cost to the branch.
However, quantity discounts are available for orders above specified levels. All customers are
required to pay within 30 days but customers are offered an early payment discount if they
pay within seven days of invoice date. In the previous three years, branch sales have
increased steadily at rates between 4% and 6% in the corresponding six-month period.

You are preparing for your planning meeting with the financial controller of the branch and
have obtained, in advance of the meeting, a copy of the draft financial information for the six
months ended 30 September 2009. During your preliminary review, you identified the
following extracts from the financial information of the branch as matters to discuss at that
meeting.
Income statement Six months ended 30 September
2009 2008
£’000 £’000
Revenue
5,353 4,907
Cost of sales (4,472) (3,974)
Gross profit 881 933
Operating expenses (747) (646)
Profit from operations 134 287

Statement of financial position (balance sheet)

As at 30 September
2009 2008
£’000 £’000
Current assets
Inventories 994 951
Trade receivables 812 806

Requirements
(a) Prepare briefing notes on the matters which you wish to discuss with the financial
controller of the branch in respect of the information provided in the scenario. Your notes
should refer to the results of your analytical procedures. (13 marks)
(b) Describe the main contents of the limited assurance report to be issued following your
firm’s review of the financial information. (7 marks)
Note: You may assume that there are 180 days in a six month period

Question No. 66
Your firm has recently been appointed as the external auditor of Honex plc (Hxplc). Hxplc
owns and operates holiday villages located in the UK and France, through two wholly-owned
subsidiaries. HonexUK Ltd (HxUK) owns and operates all the UK holiday villages and
Additional Practice Page 209 Other Professional Bodies

HonexFrance SA (HxFrance) owns and operates the French holiday villages. All of the
companies in the group prepare financial statements to 31 December each year.

Your firm is the auditor of both Hxplc and HxUK but does not audit the financial statements
of HxFrance. HxFrance is material to the group financial statements and the company is
audited by the European audit firm Abielle & Miel. Your firm plans to use the audit work of
Abielle & Miel for the purposes of auditing the group’s financial statements. You are the audit
senior in charge of the audit of the financial statements of HxUK. Your manager is responsible
for all audit work on Hxplc and has said you do not need to consider this aspect of the
engagement.

HxUK rents out cottages in each of its holiday villages via the internet. Customers pay a 25%
deposit by debit or credit card at the time of booking and the balance is due eight weeks
before the holiday commences. Customers may book their holiday up to a year in advance.
Whilst reviewing the management accounts on 20 March 2010 you noted that deposits taken
up to that date were approximately 35% lower when compared with the equivalent figure
for 2009.

Each holiday village offers families a range of facilities including a swimming pool, a dry ski
slope, children’s play areas and a boating lake. Customers can eat at the restaurants available
in each village or cater for themselves in their cottages. HxUK employs a core team of
permanent staff throughout the year and additional temporary staff during the peak summer
months.

During the year ended 31 December 2009, HxUK undertook a programme of maintenance
and refurbishment in each of its holiday villages. This included repairing and redecorating
each of the cottages, re-equipping them with fixtures and fittings including new kitchens and
bathrooms and building a new children’s indoor play area in each village.

As part of your work to familiarise yourself with HxUK’s business you have undertaken some
research on the internet. You have found some recent press articles regarding a customer at
one of the UK villages who was hospitalised due to a serious infection resulting from
contaminated swimming pool water. The health and safety authority has closed the
swimming pool at the village in question and is undertaking a review of the procedures
surrounding all of the HxUK swimming pools. The results of its investigation will not be
known until after the financial statements are published.

Requirements
(a) Identify, from the information provided, the areas of audit risk in respect of the financial
statements of HxUK for the year ended 31 December 2009. For each risk:
(i) list the factors which have led you to identify that area of audit risk; and
(ii) outline the procedures that should be included in the audit plan in order to address
the risk.
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Present your answer in a two-columnar format using the headings (i) audit risk and
factors; and (ii) procedures to address the risk. (14 marks)

(b) Discuss the ethical and quality control issues that your firm should consider in relation
to its plan to use the audit work of Abielle & Miel, and state any actions that should be
taken. (6 marks)

Question No. 67
Described below are situations that have arisen in three unrelated external audit clients of
your firm. The year end in each case is 31 December 2009.

Buzzwell Ltd (Buzzwell)

Buzzwell purchased inventory on 15 December 2009 at a cost of £678,000 in anticipation of
fulfilling a large order for a customer. However, the customer went into liquidation on 31
January 2010 and was unable to complete any part of the transaction with Buzzwell. On 28
February 2010 Buzzwell sold the inventory at a market value of £475,000. The directors
intend to include this inventory in the year-end financial statements at its original cost.

The draft financial statements show that Buzzwell’s profit before tax is £5,075,000.

Pollen plc (Pollen)

Pollen is a pharmaceutical company specialising 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 licence 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 licence 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.
Additional Practice Page 211 Other Professional Bodies

Requirements
(a) Explain the two circumstances in which a modified audit report would include an
unmodified audit opinion. Provide one illustration of each circumstance. (3 marks)

(b) 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. (17 marks)

Question No. 68
The directors of Sparkleen Ltd (Sparkleen) are planning to reorganise the business as a result
of recent significant growth in revenue. The reorganisation will involve relocation of the
business premises, the acquisition of additional delivery vehicles and an upgrade of the IT
infrastructure for which quotes have been obtained from suppliers. The directors are
negotiating with the company's bank to fund the reorganisation with a loan and have
prepared cash flow forecasts for the three years ending 31 March 2013 in support of the
request for funding. The company's bank requires the cash flow forecasts to be examined and
reported on by independent accountants and the board of directors has requested that your
firm undertakes this work.

The company’s principal activity is the sale and distribution of cleaning materials to
customers in the retail, industrial and service sectors. All sales are on a credit basis and
Sparkleen’s terms of trading require payment within 30 days of invoice date. However, some
of the company’s smaller customers tend to take longer than this to pay. Sparkleen offers an
early payment discount but only a few customers take advantage of this facility.

The goods are purchased from a number of suppliers based in the UK and overseas. Two of
the company’s main suppliers operate a rebate scheme under which Sparkleen receives a
rebate, which is paid quarterly in arrears, when it purchases a specified volume of products.

The significant growth experienced in the current year is due to Sparkleen being awarded
two three-year contracts to supply two government bodies with all their cleaning materials.
This has resulted in Sparkleen having to expand its range of products and increase the level
of inventory held at any point in time. As a result, the company has outgrown its own
warehouse facilities and is temporarily renting additional premises to supplement its
existing facilities. Sparkleen is required to give three months’ notice of its intention to vacate
the temporary premises.

The directors plan to sell the warehouse, which the company owns, and move all of
Sparkleen’s operations to a larger purpose-built warehousing facility. This is a leasehold
property and rent is payable quarterly in advance. The directors will use the proceeds of the
sale of the existing warehouse to pay off the outstanding loan on that warehouse and reduce
the company’s overdraft.
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Requirements
(a) (i) Describe the matters to be included in your firm’s engagement letter for the
examination of the cash flow forecasts in respect of:
• management’s responsibilities;
• the purpose and scope of your firm’s work;
• limiting your firm’s liability; and
(ii) Explain why these matters should be included. (8 marks)
(b) From the information provided in the scenario, identify the key receipts and payments
that you would expect to be included in the cash flow forecasts prepared by the directors
of Sparkleen. For each receipt and payment, identify the specific matters you would
consider when reviewing the reasonableness of the assumptions underlying that receipt
or payment. (12 marks)

Question No. 69
Described below are situations which have arisen at three unrelated external audit clients of
your firm. The year end in each case is 31 March 2010.

Cableco Ltd (Cableco)

Cableco builds and operates fibre optic networks. During the year ended 31 March 2010, the
company incorrectly capitalised costs of £6.1 million in respect of repairs and maintenance
to its networks and included these costs in non-current assets. The directors refuse to make
any adjustments in respect of this matter as such an adjustment would cause the company to
breach a loan covenant.
The total assets of Cableco at 31 March 2010 are £1,050 million and the profit before tax for
the year ended 31 March 2010 is £142.6 million.

Fern Ltd (Fern)

Fern maintains continuous inventory records and consequently the company does not
perform a physical count at the year end. On 5 May 2010, a fire in the office at Fern’s
warehouse destroyed the company’s inventory records and despatch records. The physical
inventory was not damaged. There were no satisfactory alternative audit procedures which
could be performed. The company has included an estimated closing inventory figure of
£500,000 in the financial statements. This estimate represents 5% of Fern’s total assets and
20% of profit before tax.

Medlar plc (Medlar)

Medlar is reliant on the continuing support of its bank to fund its operations. The current loan
facility expires on 31 December 2010 and, although the directors expect to be able to renew
the facility on similar terms, they have no binding agreement with the bank. The directors
have prepared cash flow forecasts based on the assumption that the facility will be renewed.
These forecasts indicate that the company will be able to meet its liabilities as they fall due
for the foreseeable future. The directors have agreed to include a note to the financial
statements which fully discloses the situation. The audit report is due to be signed on 30
September 2010.
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Requirements
(a) Explain why the behaviour of the directors of Cableco should be considered by your firm
when deciding whether to continue to act as external auditor for the year ending 31
March 2011. (5 marks)
(b) In each of the three 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. (15 marks)

Question No. 70
Salt LLP, an audit and assurance firm based in the UK, has been approached by the directors
of Bucket Ltd (Bucket), to tender for the external audit of Bucket for the year ending 30
October 2010. Bucket is required to have an external audit under the Companies Act 2006
but Bucket’s previous external auditor is not seeking reappointment.

Bucket is a successful company selling cleaning equipment to hospitals. An increased focus

on cleanliness in hospitals has led to Bucket’s UK sales rising significantly and Bucket has also
expanded overseas into Russia and Greece.

Bucket was incorporated three years ago by Bill Golden, the managing director and Arthur
Ticket, the finance director. Bill and Arthur previously worked for a competitor as sales
managers. Bill and Arthur invested their own money in Bucket and all of the ordinary shares
in the company are held equally between them.

The following is a transcript of a telephone call made by Bill to Salt LLP on 1 September 2010:

“We are inviting a large number of firms to tender as we want enough competition to keep
the external audit fee low. I don’t really see that there is any value in Bucket having an
external audit – Arthur and I are the only shareholders and we know the business very well.

“Whoever wins the external audit contract will have to keep work to a minimum; we are too
busy running the business to answer lots of questions. I have been told that testing internal
controls is an efficient way to conduct an audit so we would want the successful firm to agree
to this audit methodology.

“Our expansion means we need some business advice on our strategy and we would be very
keen that the external auditors help with this and assist us in obtaining some finance for
further expansion. We really need the auditors to be part of the team here at Bucket. The
nature of this work would be much more valuable to us and we therefore expect to pay a
higher fee in respect of this assignment.

“We also need some help with implementing a new accounting information technology
system that can handle the growth in our business. The current system was bought when we
set up Bucket and it is no longer sophisticated enough for our business.
Additional Practice Page 214 Other Professional Bodies

We would like the successful firm to advise us as to whether we should purchase an ‘off-the-
shelf accounting package' or whether we should have a bespoke system designed for us. We
would also seek the firm’s services to implement the new system, including advice on design
of a bespoke system if this proves necessary.

“We think that the business advisory and information technology services that we wish to
purchase will mean that it is worthwhile tendering a lower fee for the external audit work.”

Requirements
(a) Outline the case for and against an owner-managed business such as Bucket, being
required to undergo an external audit.(2 marks)
(b) Explain any threats to objectivity and independence, and outline any appropriate
safeguards, that Salt LLP should consider with respect to:
(i) appointment as external auditors of Bucket;
(ii) provision of the business advisory services on strategy and financing; and
(iii) provision of advice on the new accounting information technology system. (12
marks)
(c) Identify additional factors that Salt LLP should take into consideration before deciding to
tender for the external audit of Bucket. Your answer should include any preliminary audit
risks identified from the information provided. (6 marks)

Question No. 71
a. You are the audit senior for the external audit of the financial statements of Teevee plc
(Teevee).
During the audit you have identified the following significant internal control deficiencies
to be reported to those charged with governance and management:
(1) References are not obtained for all new employees of Teevee.
(2) Authorisation had not been obtained for the purchase of an item of office equipment,
included in non-current assets, costing £28,000. It is company policy for all items of
capital expenditure over £20,000 to be approved by a director.
(3) When evaluating controls over telephone orders from customers you noted that
sales staff receiving the telephone orders did not check inventory quantities or
customer credit limits to the computerised inventory or sales ledger systems before
accepting the order.

Requirement
Prepare extracts suitable for inclusion in your firm’s report to those charged with
governance and management at Teevee. For each internal control deficiency identified,
you should outline the possible consequence(s) of the deficiency and provide
recommendation(s) to remedy each of the deficiencies.
You should present your answer in a two-columnar format using the headings (i)
consequences; and (ii) recommendations. You are not required to restate the internal
control deficiency. (12 marks)
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b. You are the audit senior responsible for the external audit of Gloop plc (Gloop) for the
year ended 30 June 2010. The audit report is due to be signed by your firm on 31 October
2010. Gloop assembles and sells vending machines and purchases all necessary
components from its supplier, Wonka Ltd (Wonka).

Wonka introduced a rebate scheme on 1 January 2010, whereby a rebate will be paid to
Gloop on 31 December 2010 if Gloop exceeds the purchase volumes specified in the
rebate agreement. In its financial statements for the year ended 30 June 2010, Gloop has
included an amount receivable in respect of the rebate scheme. The amount of the rebate
recognised in the year is material to the financial statements. Based on current and
forecast purchase volumes it is your firm’s opinion that Gloop is unlikely to be eligible for
a rebate on 31 December 2010.

Requirement
Explain the implications for your firm’s audit report if the rebate is recognised in the
financial statements of Gloop for the year ended 30 June 2010. (4 marks)

c. Your firm was appointed to examine cash flow forecasts, prepared by the directors of
Tinker Ltd (Tinker), for the three years ending 30 September 2013. Tinker is submitting
the cash flow forecasts to its bank in support of a loan application. The bank requested
that the cash flow forecasts be examined and reported on by independent accountants.
No issues have been identified during your firm’s examination.

Requirement
Identify the key differences between the components of your firm’s report on the cash
flow forecasts of Tinker and the components of an unmodified external audit report. (4
marks)

Question No. 72
Described below are situations which have arisen at three unrelated external audit clients of
your firm. The year end in each case is 31 March 2012.

Bergerac Ltd (Bergerac)

E-commerce development costs relating to a new website with online ordering and payment
facilities are included in the statement of financial position as at 31 March 2012. The
development of the website was undertaken by a company specialising in e-commerce
development, in conjunction with employees from Bergerac’s IT department. The capitalised
costs include £260,000 relating to time spent by Bergerac’s employees and are based on the
finance director’s estimates. There are no records supporting the time spent by Bergerac’s
employees and there are no other satisfactory audit procedures to confirm that labour costs
have been appropriately capitalised.
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The total assets of Bergerac at 31 March 2012 are £10.8 million and the profit before tax for
the year ended 31 March 2012 is £1.5 million.

Cadouin Ltd (Cadouin)

On 5 April 2012, a liquidator was appointed at Domme Ltd (Domme), a customer of Cadouin.
The liquidator has indicated that there are insufficient funds to pay unsecured creditors. The
balance due from Domme on 31 March 2012 is £180,000. In addition, work in progress
includes £380,000, the cost of customised work relating to Domme. The directors of Cadouin
refuse to make provision for the debt on the grounds that the liquidator was appointed after
the year end. They also refuse to write down work in progress because they are planning to
convert it into finished goods at an additional cost to complete of £265,000. Another
customer has agreed to buy the finished goods for £525,000.

The total assets of Cadouin at 31 March 2012 are £13.4 million and the profit before tax for
the year ended 31 March 2012 is £3.9 million.

Sarlat Ltd (Sarlat)

The financial statements include a note regarding a significant uncertainty about the going
concern status of Sarlat. You are satisfied that the note includes all the necessary disclosures
for users of the financial statements to understand the situation.

Requirements
(a) For each of the three situations outlined above, state whether you would modify the audit
opinion. Give reasons for your conclusions and describe the modification(s), if any, to
each audit report. (15 marks)
(b) Identify the parties to whom your firm may be liable if an inappropriate opinion is
provided on audited financial statements and describe the methods available to your firm
to limit its liability to such parties. (5 marks)