Audit and Assurance Page 3 of 3

Q.10 (a) Briefly describe the term ‘Integrity’ in accordance with the Code of Ethics for
Chartered Accountants. (02)

(b) Briefly describe ‘advocacy threat’ and give an example thereof. (02)

(c) Briefly state the difference between ‘actual independence’ and ‘perceived
independence’. (03)

(d) The principle of confidentiality imposes an obligation on chartered accountants to

refrain from disclosing confidential information. State three key exceptions to the
above rule. (02)

(e) Briefly describe the term ‘systematic sampling’. (01)

(f) State the conditions under which it may be appropriate to send negative
confirmations. (02)

(g) State any three procedures which are generally adopted by the auditor to obtain
evidence in review engagement. (02)

(h) State the auditor’s responsibility with respect to events between the end of the
reporting period and the date of the auditor’s report. (02)

(i) Give any three audit procedures to ensure completeness of list of related parties
provided by the management. (02)

(j) State any two factors which the auditor should consider to ensure reliability of audit
evidence. (02)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

Ans.9 (i) Training on applicable policies, department policy/ procedures:

It is a preventive controls, as the individuals are trained to perform their duties as
per the applicable policies and procedures that are in place.

(ii) Batch totals:

It is a detective control as program will report any discrepancy between the
manually counted batch total and its own batch total, as an error report.

(iii) Segregation of duties:

It is a preventive control as it involves assigning different people the responsibilities
of authorising and recording transactions and maintaining the custody of assets.
This reduces the likelihood of an employee being able to both carry out and conceal
errors or fraud.

(iv) Contingency planning:

It is a corrective control as it involves the corrective measures to be adopted in case
of any mishap.

(v) System logs:

It is a detective control as this generates an audit trail that can be used to understand
the activity of the system and to diagnose problems.

(vi) System backup:

It is a corrective control as it will involve any retrieval measures in case of any
damage to the original data.

Ans.10 (a) Integrity:

Members should be straightforward and honest in all professional and business
relationships. Integrity implies not just honesty but also fair dealing and
truthfulness.

A chartered accountant should not be associated with reports, returns,

communications or other information which according to him is materially false or
misleading.

(b) Advocacy threat:

Advocacy threat occur when members promote a position or opinion on behalf of a
client to the point that subsequent objectivity may be compromised.

Example:
Acting as an advocate for an assurance client in litigation or dispute with third
parties.

(c) Actual Independence:

Actual independence means that the auditor should not be influenced by anything
which results in compromising his professional judgement while expressing an
opinion.

Perceived independence:
The auditor must be seen to be independent, i.e. the auditor should avoid facts and
circumstances due to which a third party may conclude that his integrity, objectivity
or professional skepticism had been compromised.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2014

(d) The following are circumstances where chartered accountants are or may be
required to disclose confidential information:

Disclosure is permitted by law and is authorized by the client.

Disclosure is required by law.
There is a professional duty or right to disclose, when not prohibited by law:

(e) Systematic sampling:

It is a method of sampling whereby a random starting point is chosen from the
population and then items are selected with a standard gap between them (for
example, every 10th item).

(f) Conditions required to be met for sending external confirmations:

It may be appropriate to send negative confirmation request if all of the following
conditions are met:
The risk of material misstatement is low and controls have been tested.
The population comprises of large number of small account balances or
transactions.
A very low exception rate is expected.
There is no specific reason which would cause the respondent to ignore the
confirmation request.

(g) Procedures of review engagement:

The procedures for the review of financial statements will usually include:
Inquiry
analytical procedures
Agree and reconcile Interim Financial Information with the accounting
records.

(h) Auditor’s responsibility with respect to events between the end of the reporting
period and the date of the auditor’s report:
The auditor is required to obtain sufficient appropriate evidence that all subsequent
events that require adjustment or disclosure in the financial statements:
have been identified, and
are suitably reported in the financial statements.

(i) Audit procedures to ensure completeness of related parties

The procedures to ensure completeness of related parties will generally include:
review of prior year working papers
review of company’s procedures for identification of related parties
review shareholder’s records

(j) The auditor should consider the source of audit evidence, effectiveness of related
controls, form of audit evidence etc.

(THE END)

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 Audit and Assurance Page 2 of 3

Q.3 You are the audit partner in a firm of chartered accountants. Some of the audits are in the
finalization stage and presently the following matters are under your consideration:

(a) The management of Sohni Limited has changed its revenue recognition policy. As the
audit engagement partner you are satisfied with the accounting and disclosures related
to change in accounting policy. Further, the impact of the change is significant. (04)

(b) There is a legal dispute between Marvi Limited and one of its customers. In this regard,
the legal advisor has confirmed the stance of the management in a meeting with you.
However, he has refused to provide a written confirmation thereon. (02)

(c) The management of Laila Limited is not willing to make certain disclosures. The
management is of the view that these disclosures will not add any value to the financial
statements. Further, the information required to make these disclosures cannot be
compiled before the deadline for completion of the audit. (04)

Required:
Discuss the possible impact on the audit report and specify the procedures (if any) which
you would undertake in the above situations.

Q.4 Discuss the categories of threats and related safeguards in each of the following situations:

(a) An unlisted audit client which has recently been incorporated has requested your firm
to assist the finance department in the preparation of financial statements. (03)

(b) Saleem has recently been promoted as a partner and the audit of TTL has been
assigned to him. TTL owns and operates a chain of restaurants. The following matters
are under his consideration:

(i) Asif has been involved in the audit of TTL as audit senior for the last three years.
He has recently qualified as chartered accountant and Saleem wants to appoint
him as audit manager.
(ii) TTL’s management has requested Saleem to include Rashid, a semi-senior, in the
audit team. Rashid is the son of TTL’s Marketing Director.
(iii) The firm has long cordial relationship with the management of TTL. Saleem has
noticed that the firm often uses the restaurants run by TTL for conducting its
internal functions. (07)

Q.5 You are the audit senior on the audit engagement of Farhan Foods Limited and assigned to
attend the inventory count.

Required:
(a) State what matters you would consider while observing the inventory count. (05)
(b) State the procedures to be performed during the final audit in relation to the cut-off
assertions for sales and purchases. (03)

Q.6 (a) List any four situations that may require revision in the terms of audit engagement
letter. (04)

(b) Discuss the concepts of stewardship and accountability in the context of a limited
company and fair presentation (true and fair view) in relation to the financial
statements. (06)

(c) Discuss the course of action which may be adopted by the auditor if pre-conditions of
audit are not present. (04)

(d) State the factors which determine the extent to which an auditor may use Analytical
procedures as a form of substantive audit evidence. (04)
 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

(b) Express Limited

The auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, the matter has
come to the knowledge of the auditor and bankruptcy of customer is indicative of
condition that existed at balance sheet date as no recovery has been made from the
debtor after the balance sheet date. Had the bankruptcy been known to the auditor
at the date of the auditor's report, it may have caused the auditor to amend the audit
report, therefore, he shall:
ƒ discuss the matter with management and, where appropriate, those charged
with governance.
ƒ determine whether the financial statements need amendment and, if so
inquire how management intends to address the matter in the financial
statements.
ƒ carry out the necessary audit procedures on the amendment.
ƒ review the steps taken by management to inform about the situation to
anyone who received the original financial statements and audit report.
ƒ extend the review of subsequent events up to the date of the new audit report
ƒ if management does not agree to change the financial statements, the auditor
should consider the available alternative to him.

Ans.3 (a) Change in accounting policy has to be reported as a key audit matter. For this
purpose it is necessary that it should be discussed with those charged with
governance. In the key audit matter section, the auditor shall:
ƒ include a reference to the related disclosure(s), if any, in the financial
statements
ƒ state why the matter was considered to be one of most significance in the audit;
and
ƒ specify how the matter was addressed in the audit.

(b) The verbal confirmation from the legal advisor cannot be taken as sufficient
appropriate audit evidence and on account of inability to obtain sufficient
appropriate audit evidence. The auditor may consider to qualify or disclaim an
opinion on the financial statements

(c) If in the opinion of the auditor the non-disclosure of information results in material
misstatement in the financial statements, he shall:
ƒ discuss the non-disclosure with those charged with governance;
ƒ describe in the ‘Basis for opinion section’ the nature of the omitted
information; and
ƒ issue a qualified opinion on the basis of inability to obtain sufficient
appropriate audit evidence.

Ans.4 (a) Assisting financial statement audit client in matters such as preparing accounting
records or financial statements may create a self-review threat when the financial
statements are subsequently audited by the firm.

The related safeguards are as follows:

ƒ Arrange for such services to be performed by an individual who is not a
member of the audit team.
ƒ If such services are performed by a member of the audit team, use a partner or
senior staff member with appropriate expertise who is not a member of the
audit team, to review the work performed by such person, during the audit.

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 Audit and Assurance
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

(b) (i) As Asif is associated with the client since last three years it will create a
familiarity threat, an appropriate safeguard would be to exclude Asif from the
engagement team.
(ii) Independence of Rashid can be threatened as Rashid is a close family member
of marketing director. Although marketing director is not directly related to
the preparation of financial statements, however, he could be tempted by
management for not identifying errors due to influence of his father. In order
to provide safeguard against the threat the firm should not include Rashid in
the audit team.
(iii) Independence of audit firm can be compromised if extra ordinary benefits is
obtained for conducting internal functions at restaurants of TTL. As a
precaution, the firm should avoid using the restaurants of TTL.

Ans.5 (a) During the count, the auditor should consider:

ƒ whether or not the count is being conducted in accordance with the written
instructions of the client’s management
ƒ the condition of the inventory, in order to identify items where NRV might be
below cost (and in particular, inventory that seems to have deteriorated in
condition)
ƒ whether or not inventory not owned by the client entity is properly identified
and labelled (for example, inventory owned by customers but held on the
entity’s premises)
ƒ whether or not, during the count, production of new inventory and the
movement of inventory are controlled and properly documented, in
accordance with management’s instructions for the count
ƒ At the end of the count, whether or not all inventory items have been counted
and tagged accordingly.

(b) Cut-off at final audit:

The audit team should take last few receiving and delivering notes on either side of
the year-end and trace these to invoices and ledgers and inventory record to ensure
that sales and purchases have been included in the correct periods and related
receivables and payables are booked accordingly.

Ans.6 (a) Situations that may require revision in the terms of engagement letter are as
follows:
ƒ Any indication that the entity misunderstands the objectives and scope of the
audit;
ƒ Any revised or special terms of the audit;
ƒ A recent change in the senior management/ ownership;
ƒ A significant change in nature or size of the entity’s business;

(b) Stewardship:
The directors have a stewardship role. They look after the assets of the company
and manage them on behalf of the shareholders.

Accountability:
As agent of the shareholders, the board of directors is accountable to the
shareholders. The directors show their accountability to the shareholders by
preparing annual financial statements and presenting them to the shareholders for
discussion and approval.

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 Audit and Assurance Page 2 of 4

Q.4 (a) You are the audit partner at BLC & Company, Chartered Accountants. The following
matters are under your consideration:

(i) Artificial Technologies Limited (ATL) has recognised an intangible asset of

Rs. 100 million in respect of development costs relating to a software which
ATL expects to market in future.

The market research conducted by ATL indicates a promising demand for such
software. However, the expected cost required to complete the software has
increased significantly and ATL requires further Rs. 50 million to complete the
project. Since ATL has already utilised its existing credit limit on other projects,
it is facing difficulties in raising financing for the above software.

ATL’s draft financial statements show profit before tax of Rs. 270 million. (05)

(ii) RL is involved in the manufacturing and supply of beverages throughout

Pakistan, through its plant situated in Lahore. During the year, a fire occurred at
RL’s plant due to which a significant portion of the plant has been destroyed.
The management has written off the plant and recorded an insurance claim
amounting to Rs. 400 million. The written down value of the plant at the time of
fire was Rs. 390 million.

RL is negotiating the purchase of another plant and order is expected to be

placed soon after receiving the insurance claim.

RL’s draft financial statements show profit before tax of Rs. 300 million. (07)

Required:
Discuss how you would deal with each of the above situations and the possible
implications of the above on the audit report. (Drafting of audit opinion is not required)

(b) While reviewing the list of ‘trade and other payables’ at BAC Limited, you have
noticed that one of the trade creditors is not in the list. State any two audit procedures
to be performed in relation to the completeness assertions for trade payables. (02)

Q.5 (a) Discuss the threats and the related safeguards in each of the following situations:

(i) Saleem is the audit senior at Mango Industries Limited (MIL). MIL’s finance
manager has requested him to provide the residential addresses of the
engagement manager and the engagement partner. The finance manager wants
to send them one of MIL’s latest product. (03)

(ii) Akram is the audit senior engaged on the audit of Dragon Limited (DL). He has
informed the audit manager that he has been offered a job by DL and that he
would be joining DL from 1 April 2018. The audit is expected to be completed
on 15 March 2018. (03)

(b) Amjad is the audit senior at Orange Limited (OL), a software house. OL has adopted
IFRS 15 ‘Revenue from Contracts with Customers’ for preparation of its financial
statements for the year ending 31 March 2018. However, the manager finance of OL
is indecisive as regards revenue recognition on certain contracts.

He has asked Amjad to suggest accounting treatment of such contracts in accordance

with IFRS 15. Amjad does not have in-depth knowledge of this IFRS and therefore,
he has consulted his friend who has recently attended a workshop on IFRS 15.

Required:
(i) Discuss the threats in the above situation. (03)
(ii) What actions the firm should take to ensure that such situation is avoided in
future? (03)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

ƒ In case going concern basis is appropriate but material uncertainty exists

and the management has not made appropriate disclosures, we will express
a qualified or adverse opinion depending upon the materiality and
pervasiveness of the situation.
ƒ If the management has made appropriate disclosures in the financial
statements regarding material uncertainty, we will express an unmodified
opinion and will draw attention to the disclosure through a separate section
under the heading material uncertainty related to going concern.

(b) ƒ Review the list to identify major suppliers i.e. regular suppliers of frequently-

Compare the list of trade payables with the listing of the previous year’s audit.
purchased items who are not in the listing of trade payables.
ƒ

current year’s listing.

Look for explanations as to why any major supplier is not appearing on the

ƒ Apply other analytical procedures and obtain explanations for any significant
differences identified while carrying out the above tests.

Ans.5 (a) (i) Accepting of gift may create self-interest and familiarity threats.

If the value of the gift is not clearly insignificant, the threat to independence
cannot be reduced to an acceptable level by the application of any safeguard.

Consequentially in such situation, the members of the audit team should be

instructed not to accept the gift.

(ii) A self-interest threat is created when a member of the audit team participates
in the audit engagement while knowing that he / she may join the client
sometime in the future.

On receiving such notification, the significance of threat shall be evaluated

and following safeguards could be applied:
ƒ Removing the individual from the audit team; or
ƒ A review of any significant judgments made by that individual while on
the team.

(b) (i) Following are the threats in the mentioned situation:

ƒ Suggesting the client about accounting treatment would create a self-
review threat, because that accounting treatment will also be the subject

ƒ Even though Amjad’s friend has attended the workshop on IFRS-15, it

matter of the assurance engagement.

does not necessarily mean that he is competent enough to advise the client
regarding the accounting treatment under IFRS-15, as it could involve
significant judgment. It would create a threat to professional competence
and due care.
ƒ Sharing of information with his friend may create threat to confidentiality.

(ii) Following actions could be taken by the firm to avoid such a situation in
future:
ƒ Regularly conduct professional development of its staff for any recent
changes or updates in professional pronouncement.
ƒ Circulate documented internal policies and procedures requiring
compliance with the fundamental principles.
ƒ Implement an effective disciplinary mechanism to promote compliance
with policies and procedure.
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 Audit and Assurance Page 3 of 3

Q.8 Identify the threats which may be involved and suggest appropriate safeguards, if any, in
each of the following scenarios:

(a) The planning phase of the annual audit of ABC (Private) Limited for the year ended
30 June 2016 is in progress. The engagement partner intends to include Kamran as a
member of audit team who joined the firm last month. Before joining the firm
Kamran was employed in the finance department of ABC. (05)

(b) Nasir is the audit manager on the audit of Diamond Limited (DL) for the year ended
30 June 2016. Nasir has informed that his father owns 10,000 shares in DL. (04)

Q.9 State any eight key procedures which are performed during a review engagement of
historical financial statements. (08)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2016

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

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

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

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

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

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

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

(b) JL is an associated company of RL:

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

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

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

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

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

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

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

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

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

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

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