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Updated Audit Past Papers

Cost and Management Accounting (University of Central Punjab)

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AUDIT| CAF8 | RANA NAVEED KHAN

AUDIT| CAF8
Chapter Wise Past Papers with Solutions
Updated up to Autumn-2021 Attempt
Updated as per Revised Syllabus & Book by ICAP
Compiled By
Rana Muhammad Naveed Khan
CA(Final), LLB, MBA, M.Phil, MIPA(AUS), AFA(UK)

Available at CFE Book Shop

For Rs.450 Only with Binding
Bilal Ahmad
03240010288

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Chapter 1 | Concept and need for assurance

1 Briefly highlight the management9s responsibilities relating to the financial statements.(07) Q1 (a)
(A-09)
2 Comment on each of the following situations with reference to the appointment of Q1
external auditors in accordance with the requirements of the Companies Act, 2017: (S-10)
a) Farrukh& Co., Chartered Accountants, has received an offer to be appointed as the
external auditor of Ebrahim Gas Company. The firm is indebted to the company as it has
not paid the last two months9 bills amounting to Rs. 4,860.
b) After hundred days of incorporation, the directors of Rahman Limited (RL) decided to
appoint Mr. Shahid as the company9s statutory auditor. Mr. Shahid was employed by RL
before he started his own practice.
c) The directors of Fazal Limited (FL) have decided to appoint Syed & Company, Chartered
Accountants, as external auditor of the company. One of the partner9s spouse holds 1,000
shares in the subsidiary of FL.
d) The directors of Najam (Pvt.) Limited having paid-up capital of Rs. 4.5 million have
appointed Mr. Dawood to act as the external auditor of the company. Mr. Dawood has
been awarded a diploma in International Financial Reporting Standards by the Institute of
Chartered Accountants of Pakistan and has completed the mandatory period of training
from a leading firm of chartered accountants.
e) All directors of Hussain Associates (Pvt.) Limited are chartered accountants. The company
has recently received an offer for appointment as the external auditor of Masood (Pvt.)
limited which has a paid-up share capital of Rs. 1,000,000. (10)
3 Comment on each of the following independent situations in respect of appointment of Q4.
auditors, with reference to the applicable rules and regulations: (A-11)
a) Guava and Company, Chartered Accountants, have received a request for appointment
as auditor of Orange Bank Limited (OBL). Most of the partners of Guava and Company
maintain their accounts with OBL and are enjoying credit card facilities from them. The
maximum outstanding balance on the credit card facility, due from any partner is Rs.
399,000.
b) Apricot and Company, Chartered Accountants, have received an offer for appointment
as auditor of Banana Limited. Mr. Pumpkin who is a nominee director of the Government
on the Board of Directors of Banana Limited holds 25% shares in Water Melon Limited. The
spouse of a partner also holds shares in Water Melon Limited.
c) Mr. Zaheer, a legal practitioner, has received an offer for appointment as external
auditor of Lychee (Private) Limited (LPL). The paid up capital of LPL is Rs. 1,500,000 of
which 40% is owned by Blue Black Limited, a listed company.
d) Walnut and Company, Chartered Accountants, have received an offer for appointment
as external auditors of Wasim (Private) Limited (WPL), in place of the previous auditors,
who were removed before the completion of their term. You may assume that WPL has
completed all the legal formalities before removing the previous auditors.
e) Mr. Sadiq has recently joined your firm as a partner. He has served on the Board of
Directors of Strawberry Limited (SL) until 30 June 2009, as a Government nominee. In the
Annual General Meeting of SL held on 31 August 2011, a shareholder has proposed the name
of your firm for appointment as the external auditors for the year ending 30 June 2012. (11)

4 List three reasons why audit evidence is considered to be persuasive rather than Q5b
conclusive.(03) (S-11)

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5 Comment on each of the following independent situations with reference to the applicable Q8
rules and regulations. (A-12)
a) Zaman is a partner in a firm of Chartered Accountants and holds 5,000 shares in Mardan
Limited (ML). His firm has received an offer for appointment as auditors of Khanewal
Limited (KL). ML and KL are subsidiaries of Dera Khan Limited (DKL). (03)
b) Bilal and Company has received an offer for appointment as auditors of IJK Limited. The
total paid up capital of the company is Rs. 990 million whereas its ordinary share capital is
Rs. 130 million. Faryal, the wife of a partner in Bilal and Company, is a director in LMN
Limited which holds 50 million non-voting preference shares and 2 million ordinary shares
in IJK Limited. Faryal also holds 10,000 shares in LMN Limited. The par value of both types
of shares is Rs. 10 each. (04)
6 Comment on each of the following independent situations with reference to the Q6.
applicable rules and regulations. (S-12)
a) Waqar is a partner in Sohail and Company, Chartered Accountants, who are the auditors
of Wasim Limited for the year 2011. Aqib who was a partner of Waqar in 2008 in his food
business, has recently been appointed as a Director of Wasim Limited. (02)
b) Aleem, Asif and Company (AAC), Chartered Accountants, has accepted an offer for
appointment as auditors of Gul Limited (GL). Kamal who is a partner in AAC, held 5000
shares in GL. Within thirty days of acceptance, he gifted the shares to his son Kamran, who
is a manager in AAC. (06)
c) Sajid, Hameed and Company (SHC), Chartered Accountants, are the auditors of Mir
Hasan Limited (MHL). Kashif is a senior manager in SHC and is being promoted as a
partner. He teaches auditing in a college. The college is owned by a trust whose trustees
include two directors of MHL. (02)
d) Saleem is a partner in Orange and Company, Chartered Accountants. He also practices as
a sole proprietor and has received an offer for appointment as auditor of ABC Financial
Services Limited which is a subsidiary of DEF Bank Limited. The balance outstanding against
the credit card issued by DEF Bank Limited to a partner of Orange and Company is Rs.
1,110,500. (02)
7 1. Q1,5
Briefly describe the meaning of professional judgment and explain its importance in the (A-13)
context of an audit (04)
5.
Comment on each of the following independent situations in the light of the requirements
of the Companies Act, 2017:
a) Khan and Company, Chartered Accountants has received an offer for appointment as
auditors of Good Bank Limited (GBL). Shahid is a partner in Khan and Company. He has
obtained a personal finance of Rs. 450,000 from GBL and also holds GBL9s credit card. The
outstanding balance on his credit card is Rs. 100,000. (03)
b) Abid is a partner in AFL & Company, Chartered Accountants. AFL has accepted an offer
for appointment as auditors of Saima Limited (SL). Saima, the wife of Abid, owned 11%
shares in SL. She also works as SL9s General Manager Marketing. Saima disposed of the
shares held by her to Abid9s father, within 30 days of the appointment of AFL but
continues to remain employed in SL. (03)
8 Comment on each of the following independent situations with reference to the applicable Q3
requirements of the Companies Act, 2017. (S-13)
a) Jahangir (Private) Limited (JPL) has a paid-up capital of Rs. 2.5 million. Till recently, it was
a wholly owned subsidiary of Malik Limited (ML). Recently ML has disposed of 60% of its

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holding in JPL to Zubair Enterprises (ZE), a partnership firm. All the partners in ZE are on
the Board of Directors of ML. JPL intends to appoint Mr. Ahsan as its auditor. Mr. Ahsan is
an MBA and his brother is also a partner in ZE. (03)
b) A notice for appointment of Kashif and Company, Chartered Accountants (KCC) was
received by Khanewal Limited (KL), fourteen days before the AGM. The notice was served
by Mr. Iqbal, who is a holder of 500,000 non-voting preference shares. (02)
c) Mr. Khan is a partner in a firm of Chartered Accountants. He also holds 70% shares in
Khan Limited, (KL). Construction Bank Limited (CBL) has granted a loan of Rs. 10 million to
KL. Mr. Khan9s firm has received an offer for appointment as auditor of CBL. (02)
9 Comment on the following independent situations, with reference to the requirements of Q2.
the Companies Act, 2017. (S-14)
a) Mateen has recently joined Humayun and Company (HC), a firm of Chartered
Accountants, as a Director with a commitment of being promoted as a partner in due
course. HC is the auditor of Strawberry Limited (SL). Mateen was previously associated
with SL as a Director. He left that job in 2011 but still holds 1,000,000 shares in SL. (03)
b) Khawar is a partner in Ghalib and Company, Chartered Accountants. He writes
occasionally as a Free Lancer for 8Investment Times9, a leading Financial Magazine. Ghalib
and Company are the auditors of Financial Press Limited, publisher of Investment Times.
Khawar has received a remuneration of Rs. 20,000 for his articles published in the
magazine. (02)
c) Hamid is a partner in a Chartered Accountant firm and holds 100,000 Term Finance
Certificates in Sona Fertilizers Limited (SFL). Hamid9s firm is considering to accept the audit
of SFL. (02)
10 Your firm is the auditor of ABD Limited (ABDL). After the acquisition of majority Q2a.
shareholding in HG Motors (Private) Limited (HGM), ABDL has decided to replace the (A-14)
existing auditors of HGM in the next annual general meeting and has approached you for
appointment as HGM9s auditors for the next year.
Required: In the light of the Companies Act, 2017 explain the procedures to be followed and
formalities to be complied with for appointment of your firm as the auditor of HGM. Also
explain the rights of the existing auditors in this situation. (08)
11 The external auditors are normally appointed by the shareholders at the annual general Q1c
meeting (AGM) of the company. State the exceptions to this rule. (03) (S-15)
12 Comment on each of the following situations with reference to the appointment of Q2.
external auditors in accordance with the requirements of the Companies Act, 2017. (S-15)
a) ABC Limited and DEF Limited are associated companies on account of common
directorship. Salman and Company, Chartered Accountants (SCC) have received an offer
for appointment as the auditor in ABC. Salman, a partner in SCC is the spouse of Naveen,
who is an employee in DEF. (02)
b) All the partners of Kashif Associates are Cost and Management Accountants. The firm
has received an offer for appointment as the auditor of Nihal (Private) Limited (NPL). NPL
has a paid-up capital of Rs. 500,000 and 30% of its shares are held by Siyal Limited which is
a public company. (03)
13 Briefly explain with examples, the different levels of assurance that can be provided to an Q1g.
assurance client. (03) (A-15)
14 Justify giving reasons whether the appointment of auditors in the following cases is in Q4.
compliance with the requirements of Companies Act, 2017. (S-16)
a) Kashif and Company, Chartered Accountants (KC) has received an offer for appointment
as the auditor of National Electricity Limited (NEL). On the request of one of the partners

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of KC, NEL has allowed him to pay his last month9s electricity bill amounting to Rs. 150,000
in monthly installments of Rs. 15,000 each. (03)
b) Zubair and Company, Chartered Accountants (ZC) has received an offer for appointment
as auditor of Haroon Limited (HL). Saima, who is the wife of a partner of ZC, is the chief
executive of Jameel Limited (JL). JL is an associated company of HL. Saima also holds
100,000 shares in JL. (03)
15 Daud and Company, Chartered Accountants (DC), has received an offer for appointment as Q7.
auditor of Jamal Limited (JL). Wife of Daud is a Shareholder and Director in Royal Limited (A-16)
(RL)
Required: In accordance with the requirements of the Companies Act, 2017, state
whether and under what circumstances DC could accept the audit, under each of the
following situations:
(a) JL holds 51% shareholding in RL. (03)
(b) JL is an associated company of RL. (05)
(c) One of the directors in JL also holds 10% shareholding in RL. (02)
16 In relation to the audit report on financial statements and the contents thereof (under Q5b, c.
revised/new ISAs), discuss the appropriateness or otherwise of the following statements (A-16)
(b) Reasonable assurance is a high level of assurance and is a guarantee that if audit is
conducted in accordance with ISAs, it will always detect a material misstatement
whenever it exists. (03)
(c) The auditor obtains an understanding of controls relevant to the audit in order to design
audit procedures that are appropriate in the circumstances and also for the purpose of
expressing an opinion on the effectiveness of the entity9s internal control. (03)

17 Comment on each of the following situations with reference to the appointment of Q10
external auditors in accordance with the requirement of the Companies Act, 2017. (S-17)
(a) Bilal and Company, Chartered Accountants has received an offer for appointment as
auditor of Dawood Limited (DL). Ghalib, a partner in Bilal and Company holds 100,000
Term Finance Certificates of DL. (03)
(b) Zain and Company, a firm of Chartered Accountants, has received an offer for
appointment as auditor of Haris Limited (HL). Imran, a partner in Zain and Company is
also a partner in Pure Investment Associates, a partnership firm, which owns 100,000
shares in HL. (03)
18 Discuss the concepts of stewardship and accountability in the context of a limited Q6b
company and fair presentation (true and fair view) in relation to the financial statements (S-17)
19 In response to an audit engagement letter sent to Roof Limited (RL), Mr. Aziz Aslam, the Q1
new chief executive of RL has requested your firm to provide absolute assurance in the (A-17)
audit report.
Required: Draft an appropriate reply mentioning any four reasons why the above request
cannot be complied with. (05)
20 On 5 March 2018, HSB & Company, Chartered Accountants (HSB) has been offered Q1a.
appointment as external auditor of Tahir Limited (TL) for the year ending 31 December (S-18)
2018. TL is the subsidiary of Crypto Bank Limited (CBL), which is audited by another firm of
chartered accountants.
Hatim, a partner of HSB is using credit card of CBL and the balance outstanding against it
on 28 February 2018 was Rs. 1.1 million. Hatim plans to clear the dues by 30 July 2018,

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which is well before the commencement of audit. It is expected that the audit planning
activities will commence from 1 November 2018.
Required: Comment on the above situation in the light of Companies Act, 2017.
21 Under the Companies Act, 2017 identify the situations in which the Commission may appoint Q8b
a person to fill the vacancy of an auditor. (03) (A-18)
22 A friend of yours has invested in the shares of Ascender Limited. On receiving the Q1.
company9s annual report, he made the following comments: (A-18)
<The auditor has expressed an unqualified opinion. Since the auditor must have
arrived at his opinion after testing majority of the transactions, therefore the
financial statements are correct in all respects. Since no control deficiencies and
fraudulent conduct had been reported by the auditor, I can safely invest further
amount of money in the company because there is no risk that I will lose my
money due to fraudulent conduct of management or misrepresentations in the
financial statements.=
Required: Write a letter to your friend to remove his misconceptions related to the audit
of financial statements including brief explanation of your point of view. (08)

23 Aslam is a junior member of your audit team. During an informal discussion with your team Q2a.
members, Aslam has inquired you about the reasons of emphasizing on professional (A-19)
skepticism when honesty and integrity of the management is not questionable based on
prior experience.
Briefly respond to the inquiry of Aslam. (03)
24 Amjad is the chief executive and major shareholder of a newly incorporated private limited Q19.
company. He has offered your firm to be the first external auditor of the company. During (A-19)
a meeting, he was of the viewpoint that statutory audit exists because it has been legally
mandated and it does not add value to business. However, he believes that audit helps in
finding all major frauds within the company.
Required: Discuss how you will respond to the viewpoints of Amjad regarding the audit of
financial statements. (07)
25 (a) Under the Companies Act, 2017, state the procedure to be followed if the board of Q4
directors decides to recommend the reappointment of existing auditor for the next (S-19)
year.(02)
(b) The board of directors of Alpha Limited intends to re-appoint the existing auditor for
the next year. However, Javed, a shareholder of the company, wants to appoint a different
auditor.
Required: Briefly explain the procedure that Javed should follow. Also state the
responsibilities of the board in this regard. (06)
26 Briefly explain any four elements of an assurance engagement. (04) Q9c.
(A-20)
27 You are the audit manager responsible for the audit of Beachwood Textile Limited (BTL). At Q7.
the planning stage, your audit team has assessed that there is no significant risk of material (A-20)
misstatement due to fraud and management override of controls. The audit team9s
assessment is based on the fact that BTL has been an audit client of the firm for the last 10
years and no material misstatement had been reported in the previous years.
Required: Guide your audit team with regard to their assessment of risk. (08)
28 In the light of Companies Act 2017, describe the requirements for cost audit and person Q9b
authorized to conduct it. (04) (A-20)

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29 Wealthy Bank Limited (WBL) is considering to appoint external auditor for the year ending Q8.
June 2020. WBL has shortlisted the following three audit firms for appointment as external (S-20)
auditor and has presented certain matters relating to each of them for your consideration:
Rao Arif & Company, Chartered Accountants
The firm has recently admitted a new partner who worked as CFO till June 2017, of Noor
Engineering Limited, a subsidiary of WBL.
Hatim Tughlaq &Company, Chartered Accountants
One of the partners in the firm has obtained a loan from WBL of Rs. 5 million. The firm has
informed that the partner would not be able to repay the loan till 2021.
Rashid Kareem & Company, Chartered Accountants
Rashid, one of the partners in the firm, has several commercial properties in Lahore. He
has rented out five properties to WBL for its branch operations.
Required: In the light of the Companies Act, 2017 discuss whether any of the above firms
can be appointed as external auditor of WBL. (06)
30 Salman is the shareholder of Polkadot Limited (PL) and wants to appoint auditor other Q2a.
than the existing auditor as proposed by the board. (S-21)
Required: In the light of the Companies Act, 2017 briefly explain the process that Salman
should follow in the above situation. Also discuss the requirements that PL should follow.
(05)
31 Haris & Company, Chartered Accountants was appointed as the auditor of Cactus(Private) Q2a
Limited (CPL) for the year ending 31 December 2021. Haris, the only audit partner of Haris (A-21)
& Company, passed away on 5 September 2021. No other auditor has yet been appointed
by CPL.
Required:
State the requirements of the Companies Act, 2017 for the appointment of auditor in the
above situation. (03)

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Chapter 2 | Obtaining an Engagement

1 (a) A prestigious company has approached your firm to accept appointment as its external Q8.
auditor. State the matters that your firm should consider before accepting the (S-10)
engagement. (04)
(c) Your firm has been the auditor of Mujahid Limited (ML) for many years. Before the
commencement of the current year9s audit ML has requested that some changes be made
in the terms of engagement
Required:
(i) What are the circumstances which may lead to changes in terms of engagement? (03)
(ii) Discuss the important points which should be considered before accepting the changes
in the terms of engagement. (05)
2 List the circumstances in which it may become necessary to revise the terms of audit Q9.
engagement for a recurring audit. (07) (A-11)
3 Strawberry Pakistan Limited (SPL) was incorporated on March 1, 2011. The directors of SPL Q1.
are in the process of appointing the first statutory auditor of the company. They have (S-11)
requested your firm to submit a proposal for the statutory audit assignment. A partner of
your firm has asked you to draft the proposal after assessing whether the preconditions for
the audit exist.
Required: Briefly discuss the term 8preconditions for an audit9.
a) What are the steps that you would perform in order to ensure that preconditions for the
audit exist?
b) Discuss whether your firm may or may not accept the assignment if one of the
preconditions for the audit is not present. (10)
4 List the important matters that are required to be included in an audit engagement letter. Q9.
(06) (A-12)
5 An auditor may agree to a change in the terms of engagement provided there is a Q3.
reasonable justification for doing so. (S-12)
Required:
a) List the circumstances in which the management may request the auditor to change the
terms of an audit engagement.
b) What factors should be considered by the auditor before accepting a change in the
terms of the engagement?
c) List the steps that the auditor should consider, if he is unable to agree to a change in the
terms of engagement. (09)
6 Briefly describe the steps that an auditor should take in order to establish whether Q1b.
preconditions of an audit are present. (06) (A-13)
7 Khanewal Limited (KL) has requested your firm to submit engagement letter for KL9s Q1.
statutory audit. The engagement partner has asked you to establish whether preconditions (A-14)
for the audit of KL are present.
Required: What matters would you consider in order to ensure that preconditions for the
audit exist? (05)
8 Your firm is the auditor of ABD Limited (ABDL). After the acquisition of majority Q2b.
shareholding in HG Motors (Private) Limited (HGM), ABDL has decided to replace the (A-14)
existing auditors of HGM in the next annual general meeting and has approached you for
appointment as HGM9s auditors for the next year. Required: Explain the responsibilities of

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your firm and the existing auditors in the above situation under the Code of Ethics for
Chartered Accountants. (05)
9 Your firm has been re-appointed as the auditor of Elegant Limited (EL) for the year ended Q2.
30 June 2015. The firm has been the auditor of EL for the last five years. (A-15)
Required:
(a) How would you assess whether it is necessary to send an audit engagement letter to EL
for the year ended 30 June 2015? (5)
(b) State how you would proceed If EL requests your firm to change certain terms of
engagement. (4)
10 The audit engagement letter specifies objective and scope of audit, responsibilities of Q1b.
auditor and management, applicable financial reporting framework and form and contents (S-15)
of audit report. State any four additional matters that may be included in the engagement
letter. (04)
11 In relation to the audit report on financial statements and the contents thereof (under Q5a.
revised/new ISAs), discuss the appropriateness or otherwise of the following statements: (A-16)
The management is only responsible for preparation of financial statements in accordance
with the financial reporting framework and for such internal controls as management
determines are necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error. (03)
12 a) List any four situations that may require revision in the terms of audit engagement Q6
letter. (4) (S-17)
c) Discuss the course of action which may be adopted by the auditor if pre-conditions of
audit are not present. (4)
13 State the matters which an auditor should consider to establish whether the pre- Q1b.
conditions for an audit are present. (05) (S-18)
14 You are the audit manager in a firm of chartered accountants. Your firm has been Q6a.
appointed as the auditor of a listed company, Rustam Raees Limited (RRL) for the year (S-19)
ending 31 December 2019. RRL has been publishing their annual financial statements
within one month of the year end and have set strict deadlines for the completion of audit.
Further, this year, RRL has changed its accounting policy relating to property, plant and
equipment, from historical cost to revaluation model.
Required: List the matters (related to the given scenario only) which you would like to
include in the engagement letter, along with their justification. (04)
15 Discuss the auditor9s course of action when a client requests to change the existing terms Q9a
of the audit engagement. (03) (A-21)

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Chapter 3 | PLANNING AND RISK ASSESMENT

1 b) During the audit team planning meeting, a member of the audit team passed a comment Q1
that based on past experience with the client, he was confident that the management of (A-09)
the client was honest and there was no issue as regards management integrity or risk of
fraud in the Company. The audit manager responded that the auditor should always
maintain an attitude of professional skepticism throughout the audit. Required: Briefly
describe 8Audit Skepticism9 and elaborate on the response of the audit manager. (08)
2 During the course of audit an auditor is expected to be vigilant enough to develop Q2
understanding about the propriety of important transactions and to determine whether or (A-09)
not such transactions have appropriate business rationale. Required: Briefly describe the
situations in which a transaction is indicative of fraud or an attempt to conceal fraud or
fraudulent reporting. (07)
3 You are the Audit Manager on the audit of Al-Salam Pakistan Limited (ASPL) for the year Q1
ended June 30, 2010. ASPL is engaged in the manufacture of a wide range of plastic (A-10)
products. While reviewing the initial work performed by the audit team, the following
matters have come to your notice:
(i) The quantity of material scrapped during the year is materially different from the quantity
of scrap sold. The company9s records show nil balance both at the beginning and at the close
of the year. No reconciliation for the difference has been provided by the company.
(ii) Sales for the year have increased by 7% over the previous year. However, it has been
noted that sales in the last two weeks of June 2010 have been exceptionally high and
represent 15% of the annual sales. The audit working papers carry the following
observations in respect of the above:
 70% of the sales in the last two weeks of June were made to two new customers
whose credit assessment has not been formally documented;
 a significant portion of the goods sold to the above referred customers were
returned in the first week of July 2010; and
 management bonuses are linked to the operating performance of the company.
(iii) During the year, ASPL purchased a machine for Rs. 25 million. The payment voucher is
duly supported by the invoice from the supplier. However, the fixed assets schedule
provided by the client shows the amount capitalized as Rs. 2.5 million. Depreciation has
been charged on this amount. The difference of Rs. 22.5 million is appearing in the Bank
Reconciliation Statement.
Required:
(a) Analyze each of the above situations and assess whether it represents a fraud or an error.
(06)
(b) What action would you take to deal with the above matters? (09)
4 Al-Madad Foundation (AMF) is a charitable organization. It receives donations which are Q5
utilized to help the destitute persons in accordance with the rules and regulations (A-10)
prescribed by the AMF9s Trust Deed. The donations are received from the following sources:
(i) Cash collected from the general public through charity boxes placed at key points in
hospitals, airports, superstores etc.,
(ii) cash and cheques received from individuals and institutions at AMF9s office; and
(iii) cash from generous individuals who prefer to remain anonymous.

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Donations received in case of (ii) and (iii) above, often contain specific instructions for
utilisation of the donated amount for specific purposes e.g. for education of orphan
children.
Required:
(a) Identify the inherent risks in the operations of AMF. (03)
(b) Briefly discuss the effect of each of these risks on the audit of AMF. (03)
5 (a) Sajjad is the audit senior on the audit of Hameed Limited (HL). Upon his manager9s Q5
instruction Sajjad had determined the acceptable materiality level to be Rs. 10 million at (S-10)
the initial planning stage. However, at the time of evaluating the results of audit procedures
carried out at the interim stage, he has reduced the materiality level to Rs. 7.5 million.
Required:
(i) Identify the possible causes which motivated Sajjad to reduce the materiality level. (02)
(ii) Discuss the impact of reduction in the materiality level on audit risk and the audit
procedures to be performed. (05)
(b) During the course of an audit, both quantitative as well as qualitative misstatements
need to be considered. Give four examples of qualitative misstatements. (04 )
6 a) What is the difference between audit strategy and audit plan? (04) Q6
b) You have been appointed as the auditor of a company which was previously audited by (A-10)
another auditor. Being a new client, what additional considerations would you take into
account while performing the preliminary engagement activities prior to commencement
of the audit? (05)
7 (a) Briefly describe 8Preliminary Engagement Activities9 and 8Planning Activities9. (05) Q1
(b) You are the partner of Alamgir and Company, Chartered Accountants and have (S-14)
received an offer for appointment as auditor of Guava Limited (GL). The previous year9s
audit was carried out by Babur and Company, Chartered Accountants.
Required:
State the matters that you would consider:
(i) while deciding about the acceptance of audit of GL. (03)
(ii) in establishing the overall audit strategy, including matters which are to be considered,
being the initial audit engagement. (08)
8 An auditor is required to identify and assess the risks of material misstatements to provide Q4
a basis for designing and performing further audit procedures. (S-14)
Required:
(a) State factors which an auditor should consider while evaluating significance of audit
risks. (06)
(b) State the matters which you would include while documenting the risk identification and
risk assessment procedures. (06)
9 Management is in a unique position to perpetrate fraud because of its ability to manipulate Q10
accounting records and prepare fraudulent financial statements by overriding controls that (S-14)
otherwise appears to be operating effectively.
Required: Determine the audit procedures that may be performed by the auditor to address
the risks related to override of controls. (08)
10 Your firm is the auditor of Cell Phones (Private) Limited (CPPL), which operates a chain of Q3a
mobile phone retail outlets. About 25% of shareholding in CPPL is owned by Anwar and his (A-14)
wife. Anwar is the Chief Executive of CPPL and also looks after the finance and operations
of the company. There are five other directors and each of them holds 15% shares in CPPL.

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The Internal Audit Function comprises of three senior officers who are graduates. Their
duties include checking of accounting records, physical stock taking, preparation of bank
reconciliations, reviewing payments and verification of fixed and current assets.
During the planning phase, Anwar stressed the need for early completion of audit, in order
to be able to submit the audited financial statements for seeking a long term finance. He
was of the view that internal internal audit working papers would be of enormous help in
performing and early completion of the audit.
Required: Identify and briefly describe the fraud risk factors in the above scenario. (06)
11 You are the training manager in a firm of chartered accountants. Prepare brief presentation Q6c
for newly inducted trainees, on the following: (A-14)
Materiality and Performance Materiality. (05)
12 The auditor is required to identify and assess the risk of material misstatement at both the Q1a
financial statement and assertion levels. State what is meant by risk at financial statement (S-15)
level and assertion level. Give one example of risk at each level. (03)
13 While reviewing the audit files of four different clients you confronted the following Q9
situations: (S-15)
(i) Due to tough competition in the market, the company has been unable to increase the
prices of its products since last 5 years.
(ii) Addition to intangible assets, amounting to Rs. 500 million include research cost of Rs.
10 million which is duly supported by invoices from suppliers.
(iii) During the last three years, the Chief Executive and higher management has been
earning handsome bonuses, based on the profitability of the company.
(iv) Physical stock take on 31 December 2014 included goods sold but not despatched
amounting to Rs. 52 million. The delivering of goods was stopped on the request of a
distributor. Upto 20 January 2015, the distributor has taken delivery of goods amounting to
Rs. 2 million.
Required:
(a) In each of the above situations, identify with justification whether it represents a risk of
fraud. (06)
(b) Describe what actions are to be taken by an auditor on identifying a fraud risk factor.(04)
14 You are the Audit Manager on the audit of Durable Cement Limited (DCL). The information Q3
contained in the planning document includes the following: (A-15)
(i) DCL is presently operating in poor general economic conditions and is also faced with
tough competition, due to the availability of low priced imported cement.
(ii) In addition to the wholesalers, DCL supplies cement directly to various government
departments and real estate developers. The sale is authorized by the credit control
department; however, payments from government departments are often delayed.
(iii) During the year, DCL has made investment in securities of unlisted public companies.
(iv) A long-term loan was obtained in 2007 to finance the existing plant. The amount is
repayable in 10 annual installments.
(v) DCL operates a non-funded gratuity scheme for its employees.
Required: Assess the inherent risks (high, low or moderate) along with appropriate
justification, related to the following assertions:
 Valuation of factory plant
 Valuation of trade receivables
 Ownership right of finished goods inventory
 Valuation of unlisted securities
 Accuracy of long-term finance

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 Valuation of provision for gratuity. (09)

15 Because of its ability to exert influence, management is in a position to perpetrate fraud Q3
and prepare fraudulent financial statements. (S-16)
(a) Identify six different ways in which fraud may be committed by management through
overriding of controls. (06)
(b) Briefly state the audit procedures which may be performed to identify the risks of
material misstatement due to fraud. (05)
16 You are the audit manager of the Educational University (EU) for the year ended 31 Q11
December 2015. EU has a student base of 2,500 students. It follows a policy of receiving (S-16)
50% of the fees at the start of the semester and 50% in the middle of the semester.
However, 10% discount is allowed to those students who pay the entire amount in advance.
The cost of course material is included in the fees. The semester starts in December and
June each year. You have noticed that 30% of the students who were registered in
December 2015 had not claimed the course material till 31 December 2015.
Required:
Discuss the audit risks in the above scenario and how you would deal with them. (07)
17 e) Briefly discuss the concept of 8Professional skepticism9. (03) Q6
(S-16)
18 Determination of materiality level requires professional judgment on the part of the Q7
auditor. (S-16)
(a) Briefly describe the importance of materiality in the following stages of audit:
(i) Planning stage (01)
(ii) Reporting stage (02)
(b) What aspects of materiality should be documented by an auditor in the working
papers? (04)
19 (a) Discuss the external auditor9s responsibility relating to fraud in an audit of financial Q2
statements. (04) (A-16)
(b) Sometime the management9s attitude towards the audit/auditors is indicative of the
possibility of material misstatement in the financial statements due to fraud. Give four
examples of such attitude/circumstances. (04)
(c) You are the auditor of Information Limited (IL), which is engaged in the development of
customized software. During the last three years IL has become the leading software
developer in the industry due to completion of large number of projects. During the initial
meeting the client has informed that:
 IL has achieved a growth of 60% as compared to the growth target of 30% set for
the financial year ended 30 June 2016 and the board of directors are considering to
distribute 25% of the profit to the management staff as performance bonus.
 one of the competitors has shown its willingness to acquire IL.
Required: Identify the fraud risk factors in the above situations. (03)
20 You have been assigned the audit of Sukkur Limited (SL), a listed company, for the year Q1
ended 31 December 2016. The company engaged in the business of manufacturing security (S-17)
equipment for the local market. During the planning phase, while reviewing the previous
year9s audit file, you have noted that in 2015, due to introduction of many new equipment
in the market and changes in technology, SL faced stiff competition and its market share
reduced from 45% to 35%. However, the management has now informed you that SL has
made significant investment in technology which has helped the company to increase the
market share to 38% in 2016.

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The following information has been extracted from the draft financial statements:

Required:
(a) Identify any four fraud risk factors in the above scenario. (04)
(b) Identify four audit risks which the auditor should consider while planning the audit. (06)
21 Your firm has recently been appointed as the external auditor of Door Limited. The Q2
engagement partner has planned a meeting with the audit team to discuss the overall (A-17)
audit strategy and finalize the audit plan.
Required:
List the planning activities which you would need to discuss with the engagement partner
regarding the issues related to first year of audit engagement. (04)
22 You are the audit manager responsible for the audit of Clocks (Private) Limited (CPL). While Q6
reviewing the draft planning document prepared by the audit senior, you observed that he (A-17)
has assessed risk of material misstatement due to fraud and risk of management override
of control as low due to the fact that CPL has been an audit client of the firm for the last 10
years and no material misstatement had been reported in the previous years.
Required:
(a) Draft an email to be sent to the audit senior to guide him with regard to the above
matter. (06)
(b) Suggest appropriate procedures with regard to risk of material misstatement due to
fraud. (07)
23 Apart from profit before tax, list any four benchmarks which can be used to determine the Q7a
materiality at the financial statement level. (02) (A-17)
24 Briefly discuss the key benefits which may arise due to splitting of work between interim Q6a
and final audit. (02) (S-18)
25 Green Limited (GL) is a listed company engaged in the manufacturing of garments and Q8
apparels. During the audit planning meeting for the year ending 31 March 2018, the Chief (S-18)
Financial Officer of GL has provided the following information:
a) GL was previously exporting all its production under the brand name of 8Wearables9.
However, it has been facing the issue of decline in export orders and therefore has decided
to start focusing on the local market. Accordingly, it has made an agreement with BL,
according to which GL9s products would be sold to BL who would market them through BL9s
retail outlets spread throughout Pakistan. A director of GL holds major shareholding in BL.
b) Two of the directors of GL holding 16% and 13% shares in GL have informed the Board
that they intend to sell their entire shareholding in GL in order to concentrate on some of
their other businesses.

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c) While discussing some of the internal control deficiencies in the payroll processing
department, which were raised in the previous year9s management letter, the CFO has
informed that the matter has been referred to the internal audit department but is pending
because of the illness of the Chief Internal Auditor.
Required:
(a) Identify fraud risk factors in the above scenario. (04)
(b) Describe what actions an auditor should take on identifying a fraud risk factor. (05)
26 Following matters arose during the performance of test of details on sales: Q2b
(i) Three invoices of superstores could not be found in the record room. The staff (A-18)
explained that it would require a lot of time to find them and requested your team
to select some other invoices. Scrutiny of the ledger revealed that total amount of
these missing invoices was Rs. 6 million.
(ii) Five of the invoices issued to distributors were booked at the rate of Rs. 1,725 per
carton instead of Rs. 1,275 per carton. The quantity involved was 3500 cartons.
Required: Explain how you would resolve the above issues. (Impact on the audit report is
not required) (05)
27 The auditor should be cognisant of the fact that fraudulent financial reporting often involves Q8a
management override of controls. State any four techniques which the management may (A-18)
use for fraudulent financial reporting. (04)
28 Ameer Welfare Trust (AWT) is engaged in providing education and three daily meals to the Q6b
underprivileged citizens of the society. Donation collection kiosks have been established at (S-19)
various public spots which collect donations predominantly in cash.
The constitution of AWT states that administration costs should not exceed 10% of its
income. Due to this restriction, AWT has employed only one accountant who works on part
time basis.
The constitution further requires AWT to maintain separate bank accounts for donations
collected for education and meals. Donors are requested to mention the purpose of
donation. Donation received for a specific purpose cannot be spent for any other purpose.
Required: Identify the risks which AWT9s auditor would need to consider. (05)
29 (a) Discuss the term 8performance materiality9 and the purpose for which it is used. (03) Q7
(S-19)
30 Briefly describe any five inquiries that the auditor may make for identifying the risk of Q2c
material misstatement due to fraud. (05) (A-19)
31 Your firm is the statutory auditor of Teak Pakistan Limited (TPL) for the year ended 30 Q2b
June 2020. (A-20)
During the final review of audit work, your audit team informed you that TPL uses a third
party software for its payroll. While checking the tax calculation, they identified an error in
the calculation of monthly tax deduction from salary. The audit junior who performed the
test, extrapolated the error over the entire population. This resulted in an overall short
deduction of Rs. 920,985. She concluded that the error was not material because this
amount was less than the audit materiality set at the financial statement level i.e. Rs.
1,000,000.
Further, she discussed this matter with the TPL9s management who has agreed to deduct
the differential amount from the salary of the next month and will deposit it into
government exchequer. Therefore, she concluded that no accounting adjustment is
required for the year ended 30 June 2020.
Required:

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(i) Briefly discuss the conclusion made by audit junior regarding materiality of the
transaction and recording of the error.
(ii) State additional steps that you would suggest to your audit team. (Implications on
audit report are not required) (07)
32 You are the audit senior responsible for the audit of Dragon Pakistan Limited (DPL), a listed Q1
company. DPL operates in the pharmaceutical industry which is highly regulated by the (S-20)
government and heavy fines are placed on any non-compliance of the regulations. The main
product of DPL is Drug A. The raw material for the production of Drug A is imported from
Switzerland. Drug A has been underperforming for a number of years and is currently sold
at low margins. Last year, a competitor introduced a much-improved version of Drug A.
Considering the tough competition, all the companies in the pharmaceutical industry
including DPL have to continuously carry out research activities for development of new
drugs and improvement of the existing drugs
Required:
(a) Outline the business risks that exist in DPL. (02)
(b) Identify and briefly discuss the financial statement line items that could be misstated as
a result of the business risks outlined in (a) above. (06)
33 Your firm is the external auditor of Avian Limited (AL), a listed company, for the year ending Q2
31 March 2020. AL is engaged in the business of construction and selling of construction (S-20)
material.
During the planning stage, the audit team has noted the following points for your
consideration:
(i) AL9s CEO aggressively follows up with the departmental heads for meeting the
financial targets established by the directors. Performance of senior
management at AL is measured in terms of year-on-year profit growth. There is
an internal audit division of AL and it reports directly to the CEO.
(ii) AL is facing difficulties in fulfilling its contracts for supply of building blocks due
to a sudden rise in the cost of raw material, however no provision has been
made in the financial statements.
AL9s CFO explained that provision has not been made as amount cannot be determined
with certainty now and therefore provision will be made next year, if required. Audit
team was of the view that the provision has not been made because it would
significantly affect the profitability of the company.
Required: Briefly discuss the possible 8fraud risk factors9 from the above scenario. (09)
34 You are the manager responsible for the audit of a newly incorporated company, Trojan Q3a
Limited (TL). Following are the extracts from the first draft financial statements of TL for (S-20)
the year ended 31 December 2019:

Since this is the first year of operation, the profit before tax was quite low. However, as
per the management9s projection, the profit before tax would grow exponentially over the
next three years.

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Your audit team has determined the materiality on the basis of profit before tax for the
year ended 31 December 2019. In view of the audit team profit before tax is the main
performance indicator for TL9s board of directors.
Required: Discuss the appropriateness of the benchmark used by your team in
determining the materiality and suggest the alternative(s) available to your team. (06)
35 State any four actions that an auditor should take on identification of a fraud risk Q10a
factor.(04) (S-20)
36 b) Afaq & Co has been appointed as the auditor of Ethereum Limited (EL) in place of Q2
retiring auditor in the AGM. (S-21)
Required:
List the additional matters that you should consider in the first year of EL9s audit. (04)
c)
Your firm is the auditor of Monero Limited (ML).
ML9s financial statements were issued on 28 February 2021. However, after receiving a High
Court judgement on 2 March 2021, ML9s management assesses its impact and has decided
to revise its financial statements.
Required: Discuss the documentation that is necessary to be included in the audit working
file regarding the above matter. (03)
Note: Audit procedures are not required.
37 (a) You are the audit senior on the audit of Nano Footwear Limited (NFL) for the year ending Q5
31 March 2021. NFL is in the business of making a wide variety of footwear products. Your (S-21)
review of the last year working papers and initial meeting with the NFL management have
revealed the following:
i) Due to a high influx of low priced Chinese products in the local market, NFL has been
experiencing a decline in customers9 demand and high degree of competition. The sales
managers have been given aggressive sales targets during the year which are their key
performance indicators and are considered in their annual appraisals.
ii) All the management and policy decisions such as human resources, accounting estimates
and procurement are taken by the CEO himself.
Required:
(a) Briefly discuss the possible 8fraud risk factors9 from the above scenario. (06)
(b) Discuss what actions that an auditor should take on identification of the fraud risk
factors. (05)
38 State the auditor9s responsibility for identifying, detecting and responding to fraudulent Q9c
activities. (04) (A-21)
39 Khyber Foundation (KF) is a non-profit organization engaged in providing medicines and Q1
medical equipment free of cost or at substantially discounted rates to the underprivileged (A-21)
people of the society. KF has obtained the approval from the relevant regulatory authorities
to operate as a non-profit organization. Therefore, KF is entitled to tax exemption subject
to conditions that administrative expenses do not exceed 15% of total donations and all
withholding taxes are duly deposited with the taxation authorities.
During the financial year 2020-21, KF has received cash donations from the following three
sources:
 Corporate entities through banking channel; * Donation boxes placed in various
retail shops; and
 Collection kiosks placed in the major shopping malls as part of donation campaign
in Ramadan.
KF has also received medical equipment from donors which are recorded at fair value.

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Medicines and medical equipment are given only on a valid doctor9s prescription. This
facility is also available to KF9s employees.
KF has employed two accountants who are pursuing their bachelor9s degree. Both of them
are responsible for recording receipts, making payments, managing inventory and reporting
to the trustees.
Required: Identify the risks which KF9s auditor would need to consider. (07)

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Chapter 4 | Audit Evidence ISA 500

1 a) You are the audit manager on a client where an annual sale is Rs. 640 million. Q3
During the course of annual audit, the following table was developed by an (A-09)
audit team member, to categorize the annual sales:

Sohail, a team member, is of the view that if verification of all the transactions in
category A is carried out, there is no need to perform further procedures. However,
other team members do not agree and consider that proper sampling should be carried
out from the total population and categorization should be ignored.
Required: As an audit manager of the job, you are required to:
(i) Explain how audit efficiency could be improved by using the above table.
(ii) List other ways in which the sales population may be categorized and what
precaution should be taken while carrying out such categorization.
(iii) Give your opinion on the views expressed by Sohail & Other audit team members.
(11)
b) Describe the circumstances in which an auditor may decide to examine entire
population of items that make up an account balance. (03)
2 You work as assistant manager in one of the leading firm of chartered accountants. Q5
Your partner has asked you to prepare a presentation for some of the newly recruited (A-09)
staff. As part of this presentation, you are required to explain the nature and objectives
of maintaining 8Audit Documentation.(10)
3 The preparation of working papers is an integral part of the auditor9s responsibilities. Q4
Identify the factors that the auditor should consider while determining the form, (S-10)
content and extent of audit working papers. (07)
4 Explain the term <Sufficient and Appropriate Audit Evidence=. (04) Q7a
(A-10)
5 (a) Differentiate between the following: Q3
(i) Statistical and non-statistical sampling (S-11)
(ii) Sampling and non-sampling risk (05)
(b) You are the audit manager on Apple Distribution Limited (ADL). While reviewing the
audit planning documentation, you found that the audit team has selected 100 out of a
total of 2,550 debtors for balance confirmation. The details are as follows:
- 50 largest debtors constitute approximately 40% of total debtors. Out of these,
10 have been selected.
- 90 other debtors were selected through haphazard sampling.
- All debtors below Rs. 5,000 were ignored as immaterial.
- Balances due from government and some of the related parties were ignored as
prior years working papers showed that they never responded to requests for
confirmation.
Required:
(i) Comment on the sampling approach adopted by the audit team.

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(ii) Suggest alternative means of selecting the sample in which the material balances
have a greater probability of selection. (04)
6 You are the training manager at Guava & Co., Chartered Accountants. Some trainees in Q6
the firm have requested you to clarify the following issues: (S-11)
a) Can the auditor discard any audit document, forming part of his opinion, after the
issuance of the auditor9s report?
b) The changes that can be incorporated during the final file assembly process citing
three such examples.
c) The circumstances under which it becomes necessary to modify the existing audit
documents or add new audit documents after the issuance of the auditor9s report and
the matters that should be documented in such a situation.
Required:
Offer appropriate explanations for each of the above issues. (11 )
7 Differentiate between the following: Q5c
(ii) Tolerable mis-statement and performance materiality (05) (S-12)
8 Briefly explain any six methods for collecting audit evidence. (12) Q1b
(A-13)
9 Narrate the circumstances under which the auditor would resort to the following Q7a
techniques while selecting items for tests of details and controls: (A-13)
Selecting all items of a population. (03)
10 e) Briefly Describe the term 8systematic sampling9. (01) Q10
(A-14)
j) State any two factors which the auditor should consider to ensure reliability of audit
evidence. (02)
11 What are the matters which the auditor should consider while designing an audit Q1g
sample, determining its size and selecting the sampling units? (03) (S-15)
12 While reviewing the final audit file of XYZ Limited for the year ended 30 June 2014, you Q6
have identified that certain amendments were made in the final audit file after the date (S-11)
of the auditor9s report.
Required:
Comment on the above situation in the light of International Standards on Auditing.(07)
13 (a) List any four ways in which the debtor balances may be stratified. (02)
(b) You are the audit incharge on the audit of Opportunity Limited (OL). OL deals in fast
moving consumer goods. For sending of confirmations, an audit team member has
stratified the debtors as follows:

During a meeting some of the team members have expressed divergent views, as
follows:
(i) Verification of balances of category A and B will provide sufficient coverage and
evidence; therefore, there is no need to cover other categories.
(ii) Selection should be done on haphazard basis, as under this method all items of
population have equal chance of selection.
(iii) Selection of sample should be done systematically, whereby items constituting 10%
of the amounts in each category should be selected in descending order.

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Required:
Discuss the appropriateness of options discussed in the meeting and give your
suggestion in this regard. (05)
14 (a) State the auditor9s responsibility in respect of 8Assembly of final audit file9. (03) Q3
(b) The audit report of Salim Limited was signed on 30 April 2016. After issuance of the (A-16)
audit report, the auditor was informed that a major debtor has become bankrupt.
Required: Specify the matters that the auditor would be required to document in the
above situation. (03)
15 Briefly describe how an auditor evaluates the sufficiency of audit evidence (04) Q6b
(S-16)
16 You are the audit senior at FSY Limited (FSY) for the year ended 30 June 2018. FSY Q2a
manufactures and supplies toys to wholesalers, super stores and distributors. Different (A-18)
prices are charged from each customer depending upon their credit rating and amount
of purchases.
Your team has made a plan for test of details for verification of sales. The sampling of
invoices would be made as per the following plan:
(i) Sales reported in the financial statements is Rs. 800 million net of sales returns. This
would be used for determining the sample size.
(ii) 50% of the net sales represents sales to distributors, 40% to super stores and 10% to
wholesalers
(iii) FSY sells its toys to 10 super stores only, who are invoiced on a monthly basis. The
audit team would test all the invoices of June and December because invoices prepared
close to period end are more prone to overstatement. In addition, 2 invoices would be
checked for each of the other 10 months.
(iv) 100 sales invoices to distributors and wholesalers would be selected haphazardly
from invoice files. The number of invoices to be checked has been determined
considering that expected rate of deviation is low. The expectation regarding rate of
deviation is based on the fact that overall audit risk has been assessed as low.
Required:
Identify the weakness in the sampling approach planned by the audit team and suggest
appropriate changes. (10)

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Chapter 5 | Internal Controls

1 Briefly explain the components of internal control as referred to in the International Q7a
Standards on Auditing. (09 ) (S-10)
2 You are the training manager in a firm of chartered accountants. Prepare brief Q6
presentation for newly inducted trainees, on the following: (A-14)
a) Control Environment and its elements (04)
b) Walk through tests and why these are performed (03)
3 Classify the following controls as preventive, detective, or corrective controls. Give Q9
brief reasons to justify your answers. (A-14)
(i) Training on applicable policies, department policy/ procedures
(ii) Batch totals
(iii) Segregation of duties
(iv) Contingency planning
(v) System logs
(vi) System backup (06)
4 Deehan Super Stores has launched a sales promotion scheme. Accordingly, the Q8
customers who purchase a loyalty card gain reward points on every purchase. The (A-14)
points may be redeemed by adjusting the value of the available points in any
subsequent purchase.
Required:
Draw a flow chart showing the payment process including point accumulation and
point redemption. (09)
5 International Standards on Auditing require an auditor to evaluate the control Q1b
environment and assess its effectiveness. State the factors that the auditor should (A-15)
consider in evaluating the control environment. ( 04)
6 Following IT related controls are being employed at Vision Limited: Q5
(i) The general ledger system is automatically updated with sub-ledger transactions (A-15)
(e.g. Accounts Receivable) every night through batch processing.
(ii) The system automatically maintains second copies of all programs and data files.
(iii) Access to programs and data files is restricted using passwords.
(iv) Invoices that are entered into the system are physically counted.
(v) Firewalls (software and hardware) are installed to restrict unauthorized access.
(vi) Screen warnings are displayed as regards incomplete processing.
(vii) Vision Limited has service level agreements with reliable software companies, for
technical support.
(viii) Review of output against expected values.
Required:
c) In respect of each control, determine whether it is a preventive, detective or
corrective control. (04)
d) Also classify each of the above between general IT controls and application
controls.(04)
7 a) Differentiate between Symmetric key ciphers and Asymmetric key ciphers in Q8
relation to data encryption techniques. (02) (A-15)
b) Identify any four types of information that can be extracted from system logs. (02)
8 Controls over data transmission help to ensure that transmitted data is complete, Q10
secure and unaltered. (S-15)
Required:

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State any five controls over data transmission which help to ensure that the data is
secure and unaltered. (04)
9 List six physical access controls over an IT system. (3) Q6d
(S-16)
10 Briefly describe the following concepts: Q10a
Audit trail in a computerized environment (03) (S-16)
11 (a) You are working in IT department of a firm of Chartered Accountants. The partner Q1
is concerned about the confidentiality of client data which is electronically (A-16)
transmitted by firm9s staff from the clients9 offices.
Required: Suggest controls over data transmission to ensure confidentiality of data.
(03)
(c) In the context of control activities explain what is included in 8Performance
reviews9. (03)
(e) Specify any four main categories of general controls that an auditor would expect
to find in a computer based information system. (04)
12 a) Differentiate between General IT controls and Application controls. Also give Q9
two examples of each type of control. (S-17)
b) Discuss the effects on Application controls where General IT controls are
ineffective.
13 Your firm is the auditor of Bell Limited (BL) which is engaged in manufacturing and Q4
assembling of vehicles. BL has been encountering frequent stock-outs. To address this (A-17)
issue, it has developed an Inventory Management System (IMS) and connected it with
the systems of all the suppliers. IMS generates and sends purchase orders to the
suppliers automatically when the inventory reaches the reorder threshold.
Required:
a) Discuss the risks to be considered due to the introduction of the above mentioned
solution. (04)
b) What controls would you expect in IMS to mitigate the above risks? (05)
14 TS Limited is a small software house. Due to the nature of the business no significant Q5
human resources are required except the programmers and system analysts. The (A-17)
Managing Director (MD) oversees all the operations. Besides the programmers and
system analysts there is only one manager, who reports to the MD.
Required:
Describe the key characteristics of such organizations with respect to internal controls
and the risk which the auditor may face in such audits. (06)
15 State any four controls that an auditor expects over data transmission. (03) Q6e
(S-18)
16 You have been assigned the audit of Pacific Shipping Limited (PSL) for the year ended Q7
31 December 2017. During the audit, you have noted that the invoicing system was (S-18)
not operational for four days in January 2017. Upon inquiry, you were informed that
some changes were made by one of the three programmers working in the IT
department, merely on the request of a sales officer.
The change caused the whole invoicing system to malfunction and it had to be closed
down. During these four days, all invoices were generated manually.
Required:
Identify any three control weaknesses in the above situation and suggest any two
mitigating controls against each weakness. (09)

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17 (a) Briefly describe what is a system log file and give any four types of information Q7
that may be generated by a system log. (03) (A-18)
(b) Differentiate between General IT controls and Application controls. (04)
(c) Advanced Limited (AL) uses an in-house developed integrated system for all its
accounting and operational needs. AL has been facing following issues in transaction
processing:
(i) While processing a batch of 50 purchase invoices, it was noticed that 3 invoices of
suppliers were posted twice in the accounts.
(ii) Some instances have been identified in which AL9s accountant had posted the
amount received from the customers in some other customer9s account due to a
typing error of the customer code.
(iii) While processing the payments, the accountant often fails to mention the cheque
number, due to which it takes a lot of time to trace the payment in bank statement.
(iv) While recording inventory movement, the accountant had used incorrect
inventory codes. Since those codes did not exist, the system posted the transaction in
suspense account.
Required:
Identify and briefly describe one specific application control in respect of each of the
above type of errors, to reduce the risk of such errors. (08)
18 Mention any four general controls over development of new computer information Q2b
systems and applications. (04) (A-19)
19 Plover Limited has recently developed an integrated system for maintaining its Q9
financial records. During testing, following input and processing errors were identified (A-19)
in the system:
Input errors
(i) A non-existent product number was mentioned on the online order form.
(ii) Inward movement of inventory was recorded in some other inventory account.
Processing errors
(i) Salaries of few employees were processed twice.
Required: Identify and briefly describe one application control in respect of each of
the above type of errors that would have been effective in either preventing or
detecting the error. (08)
20 (a) Chand Travels (CT) is a tour operator, which provides airline ticket bookings, hotels Q9
reservations and customized tour packages. CT has recently implemented a software (S-19)
for maintaining its financial records.
Required:
What do you understand by logical access controls? Briefly describe four logical
access controls that CT should employ. (07)
(b) Describe four controls which CT may employ to reduce the possibility of disruption
of operations. (04)
21 Sawari Limited (SL) is engaged in the business of assembling motorcycles. Following IT Q7
related matters are under consideration of the management: (S-20)
(i) SL uses Inventory Management System (IMS) which is connected with the systems
of all its suppliers. IMS generates and sends purchase orders to the suppliers
automatically when the inventory reaches the reorder level. SL has recently been
receiving the complaints of short deliveries. On further inquiry it was revealed that
the supplier received different quantity orders than those actually generated by IMS.

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Initial investigation revealed that data was changed during transmission to the
suppliers.
(ii) SL9s IT data room maintained at its head office caught fire. All data including last
month backup kept withsin the premises was lost and critical hardware was also
slightly damaged due to this incident. Consequently, SL9s IT operations suffered a
downtime of ten days.
Required: Suggest any three mitigating controls against each of the above
matters.(06)
22 (b) What do you understand by logical access controls? Briefly describe any four Q10
logical access controls. (06) (S-20)
(c) Briefly discuss the key characteristics of small sized organizations with respect to
internal controls and risks which the auditor may face in such audits. (06)
23 (a) Differentiate between general IT controls and application controls. (04) Q6
(b) The internal auditor of Cyprus (Private) Limited has identified some discrepancies (A-20)
in the sales revenue. After investigation, it was identified that some unknown changes
were made to the master price-list which resulted in such discrepancies.
Required:
Suggest any three general IT controls and three application controls to prevent
occurrence of such error. (06)
24 (a) Describe any four limitations of flow chart as a tool of system documentation. (04) Q8
(b) Companies having large in-house developed software, have a risk that new (S-21)
programs might be introduced without proper authorization. Briefly discuss any four
general IT controls to mitigate this risk. (04)
(c) Discuss effects on application controls where general IT controls are
ineffective.(02)
25 The management of Rose (Private) Limited (RPL) seeks your guidance for the Q8
following matters: (A-21)
(a) RPL is developing a sales invoicing system both for its cash and credit
customers. The system would record customer9s name, email address, cell
number, NTN number etc., at the time of sale.
Required: Briefly discuss any four application controls, with the help of examples,
which should be incorporated in the system to ensure completeness and accuracy
of data. (06)
(b) RPL9s office has recently been damaged by fire causing a system downtime for
five - days.
Required: Advise any three general controls to RL which may ensure continuity
operations in future. (03) .
26 List any six examples of system logs. (03) Q9e
(A-21)

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Chapter 6 | Test of Controls

1 You are audit incharge at Quick Enterprises Limited (QEL), a distributor of fast moving Q8
consumer goods. QEL supplies goods to retailers all over the country. The purchase (A-13)
procedure of the company includes the following:
i) Minimum stock levels are fixed on the basis of the changing demand for different
brands which is monitored by the marketing department.
ii) At the minimum stock level, requisitions for stock purchases are generated by the
marketing department and signed by the Marketing Manager.
iii) Pre-numbered purchase orders are generated in triplicate.
iv) Purchase Manager signs the purchase order after matching these with the
requisitions signed by the Marketing Manager.
v) Purchase orders are faxed to the suppliers and copies thereof are forwarded to the
stores and finance departments.
vi) On receipt of goods, pre-numbered Goods Receiving Notes (GRNs) are prepared
and signed by the Store Incharge. Each GRN is compared with the relevant purchase
order by the Store Incharge.
vii) GRN is forwarded to the finance department for recording in the stores ledger.
Required: Identify the key internal controls that appear to be in place in the above
system and test of controls required to evaluate each control. (08)
2 You have been assigned to plan the test of controls in respect of receiving of goods and Q8
invoices from suppliers of Bhurban Limited. In this regard, you are required to identify (S-15)
the following:
a) The related risks (03)
b) Controls that you expect to see to address the above risks (04)
c) Audit procedures that you need to perform to test the controls (03)
3 You have been assigned to plan the test of controls in respect of salaries and wages. In Q10
this regard you are required to identify the following: (A-15)
a) Possible control weaknesses in overtime payments (03)
b) Principal controls over payment of overtime (04)
4 You are the CFO of a newly incorporated company which has recently established five Q2
super markets in the city. One of your responsibilities is to implement internal (S-16)
controls. List six key controls:
(a) over cash sales and cash handling; (06)
(b) to reduce possibility of misappropriation of inventory. (06)
5 You are audit senior at Advanced Limited (AL) which is engaged in the business of Q9
assembling and marketing of consumer electronics. The process followed by AL for (S-18)
procurement is as follows:
a) Store Department generates a numerically sequenced purchase requisition (PR),
when the quantity falls below re-order level. PR shows the name of goods and quantity
required and is signed by the store officer. The approved PR is forwarded to the
Purchase Department for procurement.
b) Purchase Department has a list of suppliers which was prepared in 2015 by
including all the suppliers who had supplied goods to AL during the previous five years.
Later, some suppliers were added to the list on the recommendation of the store
manager.

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c) When a PR is received, the five most experienced suppliers are contacted and
purchase order (PO) is issued to the most experienced supplier provided he agrees to
supply the goods on the same price which was paid by AL on the latest purchase. The
PO is issued in the form of an email by the purchase manager. A copy of the email is
also sent to the store manager and the finance manager. In case of large or unusual
purchases, PR and PO are also authorised by the store manager prior to sending the
email.
d) On receiving the goods, the store officer agrees the goods dispatch note (GDN) of
the supplier with the PO to ensure that description of goods is the same as were
ordered by AL. An acknowledged copy of GDN is given to the supplier and another
copy is sent to the accounts department.
e) Store Department prepares sequentially numbered Goods Received Note (GRN),
which is signed by the store officer after counting the goods received. Entry in the
stores ledger is made on the basis of GRN. f) On receiving the invoice, purchase is
recorded by the accounts department after comparing the quantity received as per the
GDN with PO and the invoice.
Required: Identify the weaknesses in the internal control system of AL and their
possible effects and give your recommendations to AL. (15)
6 Mention any six tests of controls which an auditor may perform in respect of dispatch Q8d
of goods and invoicing in an organisation where all related documents are prepared (A-18)
manually.(06)
7 You are the job-in-charge on the audit of Sambar (Private) Limited (SPL), engaged in Q6
production and marketing of textile products. (A-19)
Your team has performed a walkthrough of the sales and receivable process which is
summarized as follows:
i) SPL has employed a Sales Representative (SR), who is responsible for finding new
customers and taking orders from all customers.
ii) Orders are recorded on a pre-numbered order form duly signed by the customers.
After taking the customer order, SR mentions the maximum credit limit and credit time
after verbally confirming them with the Director Operations, on the order form. SR
then forwards one copy of the order form to the warehouse and another copy to the
Factory Accountant (FA).
iii) Warehouse supervisor dispatches the completed order from the warehouse,
accompanied by a manually prepared pre-numbered delivery note. He keeps a copy of
delivery note and sends another to FA.
iv) FA manually prepares a pre-numbered invoice using the details mentioned on the
order form. FA also ensures that the customer should not exceed the maximum credit
limit after the new order. FA normally sends one copy of invoice to the customer along
with the delivery note and keeps the second copy along with the order form in the
record of accounts department. However, due to delay in receiving the order
information, invoice is sometime sent after the delivery.
v) Each Friday, FA inputs the week9s invoices into the computerized accounting
software. At each month end, FA prepares age analysis and follows-up with customers
who have not paid within their credit time.
Required: Identify the control weaknesses in sales and receivable process of SPL along
with their possible effects and give your recommendations to SPL. (15)
8 Cardano Limited (CL) is engaged in the business of assembling motor bikes. CL has a Q4
fully integrated Computerised Accounting System (CAS). You have been given (S-21)

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responsibility for reviewing the internal controls relating to procurement. In this

respect, you have gathered the following information:
Ordering of inventory:
 Approved supplier9s list is maintained in CAS. The list was last reviewed for
changes two years ago. However, during the intervening period, any supplier
whose performance is not satisfactory is timely removed from the list. As a control
measure, the list is accessible and editable only by the employees of Procurement
Department (PD).
 The Inventory Control Department (ICD) of CL generates a numerically sequenced
Purchase Requisition (PR), when the quantity of a particular inventory item
reaches re-order level. PR is electronically forwarded within the CAS to the PD.
 For all regular and routine orders, PD reviews the PR and selects a supplier from
the approved supplier9s list. A Purchase Order (PO) having a unique sequential
order number is then generated for the selected supplier.
 For large or out of the ordinary purchases, a tendering process is carried out by the
PD. Procurement Manager invites tenders through an advertisement in newspaper
and the supplier offering the lowest price is selected by the Procurement Manager
in consultation with Head of Procurement.
Receiving of inventory:
 When inventory items are received, the officer in ICD confirms that the inventory
agrees to the PO. The CAS is then updated to confirm receipt of inventory and an
electronic numerically sequenced Good Received Note (GRN) is generated. The
physical inventory items are then transferred to store.
Required: Identify any six weaknesses in the internal control system of CL and their
possible effects. Also give your recommendations to overcome these weakness to
CL.(12)

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Chapter 7 | Intro to Substantive Procedures

1 The analytical procedures which are carried out near the end of the audit usually assist Q3
the auditor in forming an overall conclusion on the financial statements. (A-10)
Required:
a) State the objectives which an auditor expects to achieve while applying analytical
procedures at the end of an audit. (04)
b) Discuss the course of action an auditor should adopt when results of analytical
procedures identify inconsistent relationships or differ from expected values by
significant amounts. (04)
2 In the planning phase of the audit of Dynamic Limited for the year ending 30 June Q2
2012, you have calculated the following ratios from the management accounts of the (S-12)
company for the eight months ended 29 February 2012:

Identify the prospective audit risks which the auditor should consider while planning
the audit. (09)
3 Identify the matters that need to be considered by the auditor at the time of designing Q1e
and performing substantive analytical procedures. (04) (S-15)
4 Briefly describe the following concepts: Q10b
Embedded audit facilities and its significance (04) (S-16)
5 State the factors which determine the extent to which an auditor may use Analytical Q6d
procedures as a form of substantive audit evidence. (S-17)
6 You are the audit manager in a firm of chartered accountants. Your audit client Zakir Q3
Textile Mills Limited (ZTML) has emailed you its draft financial statements for the year (S-19)
ended 31 December 2018 along with certain explanations. The information provided
by ZTML is summarized below:
i)

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ii)

iii)At the start of the year, ZTML had increased the sale price of its products by 13%.
iv)The entire long term loan was obtained in 2017. The principal is payable in three
annual instalments along with the amount of interest
v) Increase in property, plant and equipment represents additions made during the
year, net of depreciation. There were no disposals during the year.
vi)ZTML has a policy of giving interest free loan to its employees. The loan entitlement
was reduced during the year from 8 times the gross salary to 5 times of gross salary.
Required: Using analytical procedures, identify unexplained fluctuations and
inconsistencies in the above scenario. State the key audit procedures which you would
perform to address the issues identified by you. (Maximum of three key audit
procedures are required for each issue) (11
7 You are manager responsible for the audit of Pine Limited (PL) for the year ended 31 Q2a
August 2020. PL has large contracts with many government entities. During the year, (A-20)
the government has significantly reduced its spending which has also affected its
contract volumes with PL. Devaluation of the local currency has also resulted in
increased costs of the materials purchased from overseas suppliers.
During the planning work review, your team has provided you the following ratios:

Required:
i) Explain the fluctuations and inconsistencies in the given ratios.
ii) State any four key audit procedures which you would perform to address each issue
identified in (i) above. (09)
8 You are the audit manager in a frim of Chartered Accountants. Your audit client Q7
Dairy(private) Limited (DPL) has emailed you its draft financial statements for the year (A-21)
ended 30 June 2021 along with related notes. The information provided by DPL is
summarized below:

Notes
i) During the year, sales price of DPL products was increased by 20% to offset
the corresponding increase in cost of production.

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ii) On 30 June DPL had obtained a loan of Rs. 20 million, which is payable in
10 equal quarterly instalments at the end of every quarter. The loan
carries fixed mark-up rate of 9%.
iii) Decrease in property, plant and equipment represents disposals made
during the year, net of depreciation.
iv) Prepayment represents advance rental payment of warehouse, obtained
for 6 months on 16 June 2021 at a monthly rent of Rs. 250,000.
Required: Using analytical procedures, identify any four unexplained fluctuations
and inconsistencies in the above situation. State the key audit procedures which
you would perform to address the issues identified by you. (10)

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Chapter 8 | Non-Current Assets (S.P)

1 Briefly state test of details for verifying the valuation assertion of tangible non-current Q6
assets where the company follows revaluation policy for valuation of such assets. (08) (A-16)
2 You are the audit senior on the audit of Ormara (Pvt.) Limited (OPL). During the Q4
planning phase of the audit, you have identified that OPL has adopted the revaluation (A-18)
model for buildings for the first time. The valuation was carried out by an independent
well established external valuer. Required: Identify and assess the risks of material
misstatement at assertion level and briefly state the key audit procedures to mitigate
these risks. (05) (Procedures for assessing the competence and objectivity of the expert
are not required)
3 You are the audit manager in a firm of chartered accountants. While reviewing the audit Q5
working papers of a client you came across the following audit program on property, (S-19)
plant and equipment:

Required: Critically review the audit program and suggest changes or additional audit
procedures as may be necessary. Assume that the assets are carried at cost, no disposal
was made during the year and no impairment testing is required. (11)

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Chapter 9 |Current Assets (S.P)

1 You are the senior member of the audit engagement team, auditing the financial Q6
statements of a manufacturing company, Hard Stone Limited. List down the primary (A-09)
substantive procedures, which you would carry out in the verification of:
(a) trade debts (excluding receipts from customers). (06)
b) stores and spares. (06 )
2 Direct confirmations of balances due from customers are obtained to satisfy the Q2
objective of ensuring that the customer exists and owes the specified amount to the (S-10)
company at a certain date.
Required:
a) State the circumstances in which an auditor may decide not to circulate the requests
for direct confirmation. (05)
b) What are the factors that an auditor considers while designing the requests for
direct confirmation? (05)
c) Describe the alternative audit procedures which may be conducted if the customer
does not reply to a request for confirmation. (06)
3 Your firm is the auditor of Shahzad Limited (SL), a listed company, which is a wholesaler Q7b
of consumable products. SL records its sale on delivery of goods and maintains up to (S-10)
date computerised inventory records. A full inventory count was conducted at the year
end.
The senior who attended the physical stocktaking at the central warehouse has
observed the following matters:
i) The inventory count took place on January 1, 2010 under the supervision of the
Inventory Controller. No movement of inventory took place on that day.
ii) Four counting teams were formed. Each team comprised of two persons. The floor
area was allocated by the teams among themselves.
iii) Each team was instructed by the Inventory Controller to remember which inventory
had been counted.
iv) Pre-numbered count sheets were provided to the staff involved in the inventory
count. The count sheets showed the inventory ledger balances, to facilitate
reconciliation.
v) Old, slow-moving or already sold inventories were highlighted on the count sheets at
the time of counting.
vi) Items not located on the pre-numbered inventory sheets were recorded on separate
sheets which were numbered by the staff.
vii) At the end of the count, all inventories against which advances from customers had
been received were removed from the physical inventory on the instruction of the
Inventory Controller.
Required: Identify the weaknesses in the system of inventory count. Give appropriate
explanations to support your point of view. (09 )
4 You are the Audit Senior on the audit of Al-Haq Limited. The company is a trading Q7b
concern and 70% of its business relates to imported goods. The chief accountant has (A-10)
provided you the bank reconciliation statements of all the bank accounts along with
the bank statements.
Required:
(i) State the substantive procedures that you would carry out for the verification of
bank balances. (06)

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ii) Identify any eight types of information which you would verify from the
confirmations received directly from the bank. (08)
5 You are the Manager on the audit of Ghazi Power Limited (GPL), a gas transmission and Q1
distribution company, for the year ending 31 October 2011. On the company9s request, (A-11)
your firm has agreed to complete the audit by 20 November 2011.
In order to meet the audit deadline, you are considering various measures which
include sending requests for negative confirmations related to balances due on 31
August 2011. On 31 August 2011, total debtors aggregated Rs. 45 Million. 50% of the
amount is due from 15 major debtors, whereas the total number of debtors is 2,450.
Moreover, GPL9s management is not allowing you to send a request for confirmation of
balance to SSO Ltd, which is among one of the 15 major debtors, because of certain
ongoing legal disputes. Your previous experience with the client and the results of
initial risk assessment procedures suggest that the risk of material misstatement is low.
Required:
a) Discuss whether it would be appropriate to use the negative confirmations
procedure in the above situation. (06)
b) What audit procedures should be performed at the year end, if requests for
confirmation of balances are sent on 31 August 2011? (07)
c) List the procedures that should be adopted due to management9s refusal to send a
request for confirmation of balance to SSO Ltd. (06)
6 You are a part of the team on the audit of Fresh Meat (Private) Limited which sells fresh Q6
meat products through 25 retail outlets. Each outlet holds cash at the year end. Sales (A-11)
are made on cash as well as against credit cards. All the accounting records are
maintained at the outlets and balances with the Head Office are reconciled on a
monthly basis. Required: List the audit assertions relevant to the audit of cash in hand
and state how you would obtain audit evidence to support those assertions. (06)
7 List the substantive procedures that may be performed by the auditor to verify the Q4
amount of inventories as appearing in the financial statements of a manufacturing (S-12)
concern. (15)
8 You are currently in the planning phase of the audit of Mineral Water Limited (MWL) Q3
for the year ended 30 June 2012. The following information is available to you: (A-12)

50% provision for doubtful debts has been made by MWL against balances outstanding
for more than 30 days whereas the balances outstanding for more than 90 days have
been fully provided.
Required:
a) Indicate what would be the basis for selecting debtors for circularizing positive and
negative requests for confirmations. (06)

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b) Briefly explain as to how would you deal with a situation where a debtor confirms a
balance which is different from the amount appearing in the confirmation request.(08)
9 Your audit team members have attended the physical inventory count of Sutlaj Limited. Q5
Their observations are as follows: (A-14)
(i) Stock count was supervised by the warehouse incharge who reports to the
production manager.
(ii) In view of the various ongoing projects, temporary staff had to be hired to
conduct the stock count.
(iii) Pre-numbered count sheets were used by the staff which contained
columns for inventory ledger balances, physical balances and
excess/shortages.
(iv) The staff was instructed to ensure that no item of inventory was counted
twice and for this purpose they were asked to remain in constant contact
with other staff.
(v) On completion, all the count sheets were signed by the store incharge and
the head of the administration department.
Required: Identify the weaknesses in the inventory count procedures and state the
implications on the physical count. (08)
10 State the conditions under which it may be appropriate to send negative confirmations. Q10f
(02) (A-14)
11 The audit of Sehat Pharmaceuticals Limited (SPL) is in progress. Based on the previous Q5
experience with the client and the initial tests of control, the auditor has assessed a low (S-15)
risk of material misstatement in the area of debtors.
The debtor circularization summary depicts the following information

Analysis of confirmations received is as follows:

 3 out of 7 confirmations received from distributors did not agree with the amount
outstanding in SPL9s ledger.
 One of the distributors, Saleem Distributors (Private) Limited (SDPL) has gone into
winding up. The balance receivable from SDPL is outstanding since last one year.
 Replies received from the hospitals did not agree with the balance outstanding in
SPL9s records. However, the differences were reconciled by the audit staff.
 All the 12 confirmations received from the retailers showed disagreement with the
records of SPL. However, only 2 could be reconciled.
Required: a) Evaluate the decision regarding sending of negative confirmations. (04)
b) Determine the course of action the auditor should consider in case of balances
agreed, balances not agreed and replies not received. (05)
c) State the procedures that need to be performed in case of amount due from
SDPL.(03)
12 State the conditions under which an auditor may send negative confirmations (04) Q1h
(A-15)

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13 You are the Audit Incharge of Rehan Limited for the year ended 31 December 2015. Q1
While reviewing the working papers and discussion with audit team, you have noted (S-16)
the following:
(i) The audit team did not send balance confirmation requests for amounts
below Rs. 100,000 because according to the client, lots of efforts were
required to follow up the customers and the balances were also not
material.
(ii) One of the conclusions drawn as per the working papers is <there are no
unrecorded liabilities, as confirmations have been received from all
selected parties and no differences were noted. Hence, no further test is
required.=
Required:
a) Discuss with reasons whether you agree with approach adopted/conclusion drawn
by audit team. (03)
b) Provide brief guidance to the audit team in respect of each of the above situations.
(05)
14 Discuss the auditor9s course of action if management refuses to allow auditor to send Q1b
confirmation request. (Impact on audit report is not required) (05) (A-16)
15 During the audit of Shahbaz Chemicals Limited (SCL) for the year ended 31 December Q2a
2016, the audit team had noticed that sales of SCL has declined due to various reasons (S-17)
and SCL is facing difficulties in selling the existing stock of inventory at current price
levels.
Required: Explain the steps which the auditor should perform to ensure that carrying
value of inventories is based on lower of cost and net realisable value. (04)
16 You are the audit senior on the audit engagement of Farhan Foods Limited and Q5
assigned to attend the inventory count. (S-17)
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)
17 You are currently in the planning phase of the audit of Fresh Dairies Limited (FDL) for Q7
the year ended 31 December 2016. The information available to you in respect of the (S-17)
company9s debtors includes the following:

FDL is a low risk client and therefore you are assessing whether to send negative
confirmation requests.
Required: In respect of each of the above categories of customers, discuss the
appropriateness of sending negative confirmation requests. (09)
18 You are the audit manager in a firm of chartered accountants. Following is the extract Q2
of the email received from the job-in-charge responsible for the audit of your client (S-18)
Concordia Limited (CL) for the year ending 31 March 2018:

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<I am considering to circulate negative confirmations on 1 April 2018 for debtor

balances outstanding as on 31 March 2018 as firstly, the reporting deadlines at CL are
very stringent, secondly, the population comprises of a large number of small balances
and thirdly, risk of material misstatement has been assessed as low.
I have also been offered by CL9s CFO that one of their staff would get all the
confirmations signed from the debtors and deliver them to our firm9s office. This could
help us in meeting the reporting deadline.=
Required: Comment on the suggestions of the job-in-charge. Assuming that the
suggestion by job in charge is not considered appropriate, suggest an alternative
approach keeping in view the time limitations. (06)
19 Briefly discuss the steps an auditor would need to take if management refuses to allow Q8c
him to send confirmation request to a debtor. (05) (A-18)
20 You are the audit manager in a firm of chartered accountants. During the audit of a Q1a
client for the year ended 31 December 2018, the audit team has prepared the following (S-19)
schedule to summarize the responses from the debtors:

Required: Describe the steps (if any) which the audit team may perform in respect of
each of the above debtors. (05)
21 You are the job-in-charge on the audit of Ostrich Limited (OL), a food processing Q4
company, for the year ended 30 June 2019. For sending debtor balance confirmations, (A-19)
OL has provided you the following schedule for the year ended 30 June 2019:

There are no overdue and nil balances as on 30 June 2019. The risk of material
misstatement has been assessed as low and controls have been tested.

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Required: Discuss the audit strategy that you would follow for selecting the debtors for
balance confirmation. (07)
22 You are the audit manager in a firm of chartered accountants. During the audit of a Q6
client for the year ended 31 December 2019, the audit team has prepared the following (S-20)
schedule to summarize the responses from three debtors:

Evaluate the evidence obtained and describe the steps (if any) which the audit team
may perform in respect of the above debtors. (10)
23 You are the audit manager responsible for the audit of NKL Limited for the year ended Q1
28 February 2021. The audit team has prepared the following summary of debtors9 (S-21)
balances for your review:

Required: Assess the appropriateness of the work performed by the audit team. Also
suggest the additional procedures (if any) which the audit team may perform. (10)

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24 Tetra Milk Limited Q7

Customer’s name and address: DB limited, 46- Safoora Palace, Mall Road, (A-21)
Quetta.
Date: 7 September 2021
Dear Mr. Salman Shahid
In accordance with the request of our auditor, Abid Ali & Co, Chartered
Accountants, we ask that you kindly confirm your indebtedness to us which,
according to our records, amounted to Rs 45.6 million as shown by the enclosed
statement.
If the above amount is in agreement with your records, please notify sign in the
space provided below.
If the above amount is in agreement with your records, please notify us of the
amount shown by your records.
Yours faithfully.

Signature-

Tetra Milk Limited

Confirmation No. A-172
The amount shown above is/ is not in agreement with our records.

Account No&&&&&&&&&&&&&&&&&.
Signature&&&&&&&&&&&&&&&&&&..
Date&&&&&&&&&&&&&&&&&&&&.
Title or position&&&&&&&&&&&&&&&&&&&&&&&.

Required:
Identify then shortcomings in the above draft of balance confirmation request and
suggest the necessary changes. (06)

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Chapter 10 |Other Assets (S.P)

1 List the substantive procedures that may be performed by an auditor to verify the Q5
following: (A-12)
a) Bank reconciliation statements (06)
b) Payroll (08)
c) Raw material purchases (06)
2 List the substantive procedures which may be performed by the auditor to verify the Q6
Long Term Bank Loan. (07) (S-14)
3 List any five substantive procedures for the verification of each of the following: Q4
(i) Accrued expenses (A-14)
(ii) Contingencies (10)
4 State four substantive procedures for verification of share premium account appearing Q1f
in the statement of financial position (02) (A-15)
5 State five key substantive audit procedures for verification of Provisions (05) Q6a
(S-16)
6 While reviewing the list of 8trade and other payables9 at BAC Limited, you have noticed Q4b
that one of the trade creditors is not in the list. State any two audit procedures to be (S-18)
performed in relation to the completeness assertions for trade payables. (02)

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Chapter 11 | Related Parties

1 Describe the procedures that the auditor may perform, in order to ensure the Q7
completeness of the information provided by the management, about related (A-09)
parties.(06)
2 Al-Shams Limited is an unquoted public company. A large part of its business is carried Q4
out with persons / organisations who are related to the management or the (A-10)
shareholders.
Required:
a) State any eight procedures which an auditor may perform for determining the
existence of related parties or related party transactions. (08)
b) Give four examples of situations that may be indicative of dominant influence
exerted by a related party. (04)
3 As the auditor of a listed company with a number of related parties, what steps would Q5
you consider as part of your audit planning to ensure that all related party relationships (A-11)
and transactions are identified and disclosed in the financial statements. (13)
4 Strong Vehicles Limited (SVL) manufactures heavy vehicles. As the job incharge on SVL9s Q5a
audit, you have come across the following situations: (S-13)
The management had provided you with a representation that they had disclosed all
the related party transactions and relationships of which they were aware. However,
before finalization of the audit, you found that subsequent to the year-end, a payment
of Rs. 100 million has been made to Strong Engines Plc (SEP), a company incorporated
in a foreign country. On your query, the management has advised you that SEP is a
foreign subsidiary of SVL and its name was not disclosed inadvertently because it had
been non-operational for the last many years. (05)
5 While reviewing the audit working papers of Apple Limited (AL), the following matters Q7
have come to your attention: (S-14)
(i) The audit team was able to ascertain that AL has entered into a number of
transactions near the year-end with a new distributor Fruits Limited (FL),
which is a related party. On being confronted, the management has
informed that since there were no transactions with FL in the past, its
inclusion in the schedule of related party transactions was inadvertently
omitted. (05)
(ii) The details of related party transactions provided by the management
includes a payment of Rs. 300 million to Mango Limited. The job incharge is
of the view that this transaction is not in normal course of business of the
company. (04)
Required: Analyse each of the above situations and briefly describe your course of
action.
6 Give any three audit procedures to ensure completeness of list of related parties Q10i
provided by the management. (02) (A-14)
7 You are the audit manager on the audit of a listed company, Kamil Limited (KL). Prior to Q6
completion of audit, you came across a prospectus issued by Neelum Limited (NL) (S-15)
according to which a director of KL is the chief executive of NL. However, the name of
NL was not included in the list of related parties provided by KL. On being confronted
the management has advised that the name was omitted inadvertently as the
appointment took place just two months prior to the year end.
Required: Discuss your course of action in the above situation. (07)

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8 A schedule of related party transactions provided by the client includes two significant Q1c
transactions which are outside the normal course of business. State the substantive (A-15)
procedures that an auditor should undertake, in respect of these transactions. (04)
9 (a) Specify the procedures that an auditor should perform to ensure completeness of Q4
the list of related parties provided by the directors. (06) (A-16)
(b) As part of audit procedure you have requested the management of Energy Limited
to provide specific representation relating to completeness of related parties and
related party transactions. The management is of the view that since the auditor has
carried out a detailed review in which no undisclosed transactions were identified, a
written representation is not necessary.
Required: Evaluate the above situation, comment on the management9s stance and
suggest the appropriate course of action available to the auditor. (06)
10 On the audit of Babar Limited (BL) you have noted a transaction whereby a loan Q8
payable to the holding company which was overdue for six months was settled by (A-17)
transfer of securities owned by BL.
Required: Evaluate the above scenario and specify the audit procedures which need to
be performed. (06)
11 Briefly describe any three risks of material misstatement in case of significant related Q6b
party transactions. (03) (S-18)
12 Imran is the audit senior responsible for the audit of Pasni Garments Limited (PGL). Q6
During the audit he noticed that PGL made significant transactions with related parties. (A-18)
Required:
(a) State the audit procedures which should be performed to check whether all related
parties have been disclosed. (05)
(b) What steps should Imran perform if he identifies any related party transactions
which were not identified and disclosed by the management?
(Impact on the audit report is not required) (06)
13 You are the manager responsible for the audit of Zebra Limited (ZL). ZL normally has Q5
significant sale and purchase transactions with its related parties. (A-19)
Guide your audit team regarding the audit procedures and related activities that should
be performed for obtaining information relevant to identifying the risks of material
misstatements associated with related party relationships and transactions. (08)
14 During the audit of Cedar Limited (CL), your audit team observed that CL has sold one Q3
of its freehold lands to Maple (Private) Limited (MPL) at a loss of Rs. 10 million. Your (A-20)
team9s further investigation of the matter and reading of the minutes of the board of
directors9 meeting revealed that:
(i) a director of CL holds 20% shareholdings in MPL which makes this entity as CL9s
related party; and
(ii) MPL would pay 30% of the consideration in cash and the remaining amount over a
period of five years.
Required: Evaluate the above related party transaction and suggest any eight key audit
procedures that your team should perform in this respect. (10)
15 During the audit of Tether Limited (TL), the audit senior noticed that in one of the floors Q3
of the office building, a business other than that of TL was being run. On inquiry with (S-21)
TL9s management, it was identified that the floor was given to the daughter of a
director for six months for running her online business. No rent is being charged as it
has been a vacant floor and carries no marginal cost to TL.

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Required: Evaluate the above arrangement and discuss the procedures which should
be performed by the audit senior. (09)

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Chapter 12 | Reliance on Others

1 During the audit of PQR Limited you have been assigned the task of evaluating the work Q4
performed by the internal audit department of the company on certain specific areas. (A-09)
Required:
a) Describe how would you evaluate the work performed, in order to determine the
extent of reliance that may be placed thereon. (06)
b) List the important differences between internal and external audit with respect to
the following:
 Independence
 Objectives
 Reporting (08)
2 When expertise in a field other than accounting or auditing is necessary to obtain Q8
sufficient appropriate audit evidence, the auditor has to determine whether to use the (A-10)
work of an auditor9s expert.
Required: List down the sources from where the auditor may get the information
regarding the expert9s competence, capabilities and objectivity. (06)
3 You are the manager responsible for the audit of Park Hotels Limited (PHL), which Q2
operates three hotels in Pakistan. PHL has adopted the revaluation model for the (S-13)
valuation of buildings. In the current year, revaluation has been carried out by a new
firm, Farhan Associates (FA). PHL has incorporated the effects of revaluation in the
financial statements accordingly.
Required:
a) Briefly describe the matters that you would consider before using the report
prepared by FA. (04)
b) Identify and explain the principal audit procedures to be performed on the valuation
of the hotel9s buildings. (06)
4 Your firm is the auditor of Cell Phones (Private) Limited (CPPL), which operates a chain Q3b
of mobile phone retail outlets. About 25% of shareholding in CPPL is owned by Anwar (A-14)
and his wife. Anwar is the Chief Executive of CPPL and also looks after the finance and
operations of the company. There are five other directors and each of them holds 15%
shares in CPPL.
The Internal Audit Function comprises of three senior officers who are graduates. Their
duties include checking of accounting records, physical stock taking, preparation of
bank reconciliations, reviewing payments and verification of fixed and current assets.
During the planning phase, Anwar stressed the need for early completion of audit, in
order to be able to submit the audited financial statements for seeking a long term
finance. He was of the view that internal audit working papers would be of enormous
help in performing and early completion of the audit.
Required: State whether it would be advisable to use the internal audit working papers
in the above situation and give three distinct reasons to support your decision. (06
5 Identify the factors that are considered in determining the independence of internal Q1e
auditors. (2) (A-15)
6 Mineral Limited (ML) has incorporated a liability for gratuity payable to its employees Q4
on the basis of actuarial valuation carried out by Professionals Limited (PL). As the audit (S-15)
partner of ML you are not satisfied with the valuation report prepared by PL, and have
decided to appoint Experts Limited (EL) to carry out the valuation exercise again.
Required:

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(a) State the matters that you would consider regarding:

i) The competence, capabilities and objectivity of EL. (03)
ii) Evaluation of the adequacy of EL9s work. (03)
(b) Briefly discuss the course of action in case you are not satisfied with the work
performed by EL. (03)
7 You are the audit manager in a firm of Chartered Accountants. Your firm is often Q9
required to engage an auditor9s expert for reporting on matters relating to the audits. (S-16)
(a) List four key terms of engagement which should be agreed with the expert. (02)
(b) Specify the factors which should be considered in evaluating the adequacy of the
work performed by the expert. (04)
8 Briefly explain how an external auditor would evaluate the adequacy of the work Q6c
performed by the internal audit function. (04) (S-16)
9 Identify four examples of situations which may require the engagement of an auditor9s Q7c
expert. (02) (A-17)
10 Faheem is the audit manager on audit of Blue Bell Limited (BBL) for the year ending 31 Q3
March 2018, which is in the planning stage. BBL has a well-established internal audit (S-18)
function which reports directly to the audit committee. The staff of the internal audit
department have adequate level of competence and are members of professional
accounting bodies. Considering the above, Faheem intends to engage internal auditors
to perform audit procedures for certain audit areas.
Required: On behalf of the engagement partner, provide appropriate guidance to
Faheem to assist him in selecting the areas where direct assistance of internal auditors
can be utilized. (06)
11 State the matters to be documented by the external auditor if he uses the internal Q7b
auditor for providing direct assistance on the audit. (04) (S-19)
12 a) Q5
An audit junior of your firm has inquired about the following matters relating to an (S-20)
audit:
(i) Is there any need to evaluate the adequacy of expert9s work, if the procedures
related to competency and independence of the auditor9s expert have been
performed?
(ii) Can an audit firm include a reference to the expert9s work in the audit report so that
the audit firm9s responsibility may be reduced in the areas in which the audit firm does
not have expertise?
Required:
Comment on the above queries raised by audit junior in the light of International
Standards on Auditing. (06)
b)
Malta Limited (ML) has been facing problems in running an effective internal audit
department. The directors of ML has shared with you a brief structure, functioning,
roles and responsibilities of the current internal audit department, which are as
follows: The internal audit department is headed by Hina Akram, a Chartered
Accountant. She works in close coordination with CFO and CEO. She prepares audit
plan for each quarter by herself. All the internal audit findings are first discussed at
length with both the CFO and the CEO and are then presented to the audit committee.
Hina9s internal audit team comprises of three members, Usman, Kashif and Amna.
Usman is responsible for the audit of treasury and payments, Kashif is responsible for
the audit of procurement, payables and production and Amna is responsible for the

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audit of revenues, receivables and assets, for the last three years. Hina believes that
the continued involvement of her team in the same areas has helped them to develop
expertise in their assigned areas. This also helps her and her team to design internal
controls for the above-mentioned areas in an effective manner. Required: Identify the
deficiencies relating to independence of internal audit department and recommend
measures which should be taken to protect the independence. (07)
13 You are manager responsible for the audit of Bamboo Limited. Your team has asked for Q5
your guidance whether to involve an auditor9s expert for: (A-20)
(i) valuation of provision for doubtful debts. The provision has significantly reduced by
Rs. 100 million as compared to previous year.
(ii) fixed asset revaluation. The management has recently revalued its fixed assets. The
revaluation surplus has increased by Rs. 80 million.
The draft financial statements show a profit before tax of Rs. 500 million.
Required: Guide your audit team about involvement of an auditor9s expert. (06)
14 a) How would an auditor assess the competency and capabilities of an auditor9s Q9
expert? (03) (A-21)
d) State any four factors which the external auditor may need to consider while
assessing the competence of the internal audit function. (04)

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Chapter 13 | Ethics

1 A chartered accountant is required to comply with five fundamental principles specified Q4

by ICAP9s Code of Ethics. However, compliance with the fundamental principles may (S-11)
potentially be threatened by a broad range of circumstances. Required: Briefly describe
the categories of threats that may potentially affect compliance with fundamental
principles. Give two examples for each category. (10)
2 Discuss the categories of threats that may be involved in each of the following Q7
independent situations and advise the partners of the concerned firm with regard to (A-12)
the possible course of action that may be followed, in each case.
a) Burewala Bank Limited (BBL) is a listed audit client of Umer and Company, Chartered
Accountants (UCC). BBL has granted a house loan of Rs. 5 million to a partner in UCC.
(04)
b) Kamal was the audit manager during the last year9s annual audit of Faisalabad Textile
Mills Limited (FTML). He has joined FTML as their Manager Finance, prior to the
commencement of the current year9s audit. (08)
3 Discuss the categories of threats that may be involved in each of the following Q9
independent situations and advise the concerned engagement partners with regard to (A-13)
the possible course of action that may be adopted in each case.
a) Awesome Hotels Limited (AHL) is a listed company and is audited by Mansoor
andCompany, Chartered Accountants. The partners of Mansoor and Company stay in
the hotels managed by AHL while they are travelling. (05)
b) An audit team member on Hunza Limited (HL) has inherited 100,000 shares in HL
after the death of his father. (05)
4 Discuss the categories of threats that may be involved in each of the following mutually Q5
exclusive situations and advise the partner of the concerned firms with regard to the (S-14)
possible course of action which may be adopted in each case:
a) The audit of JJ Limited (JJL) is at its completion stage. The meetings of the audit
committee and the board of directors are scheduled to be held within a week, to
consider and approve the annual financial statements. JJL is facing financial difficulties
and has not paid the audit fee of the previous year. The CFO of JJL has committed to
pay the previous as well as current year9s audit fee, after signing the audit report. (04)
b) During the course of audit of HP Limited (HPL), the engagement partner has
informed the firm that his brother has acquired 200,000 shares in HPL. (05)
5 a) Briefly describe the term 8Integrity9 in accordance with the Code of Ethics for Q10
Chartered Accountants. (02) (A-14)
b) Briefly describe 8advocacy threat9 and give an example thereof. (02)
c) Briefly state the difference between 8actual independence9 and 8perceived
independence9. (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)
6 Discuss the categories of threats that may be involved in each of the following Q7
independent situations and advise the partners of the concerned firm with regard to (S-15)
the possible course of action that may be followed in each situation:
a) Ahmed has recently joined a firm of Chartered Accountants. The firm intends to
depute him on the audit of Masoom (Private) Limited (MPL). Prior to joining the firm,

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Ahmed had been providing accounting and taxation services to MPL for many years, in
the capacity of a consultant. (04)
b) It has been discovered that father of one of the trainees posted on the audit of
Chalak Limited (CL), has a financial interest in CL. (04)
c) Hoshiyar Limited (HL), an audit client of your firm has recently advertised certain
vacancies in its accounts department. The said positions have been applied for by
number of individuals including two staff members who are posted on the audit of HL.
(04)
7 Discuss the categories of threats and related safeguards in each of the following Q9
situations: (A-15)
a) Your firm is the auditor of Prime Super Markets Limited, a chain of super markets.
During a promotional campaign, the management has distributed discount vouchers
which have also been given to the audit team members. (04)
b) You are manager on audit of Abid Textile Mills Limited. Client has requested you to
send two staff members on secondment for three months to assist chief financial
officer as its two senior accounting team members have resigned recently. (05)
c) Fine Petroleum Limited (FPL) is the audit client of your firm for five years. During the
year, the engagement partner has been changed due to mandatory rotation as per
Code of Corporate Governance. However, the firm has decided to retain Atif, the audit
manager, who has been involved in the audit of FPL for past five years. (04)
8 Identify the threats that may be involved and applicable safeguards, if any, in each of Q5
the following scenarios: (S-16)
a) Your firm is the auditor of Delicious Biscuits Limited (DBL) for the past three years.
On previous year9s audit, Affan was the audit manager. He has recently joined DBL as
GM finance. (05)
b) ABC leasing company has a lease portfolio of Rs. 500 million. Atif, the Audit Manager
on ABC, has obtained a lease finance amounting to Rs. 800,000 from ABC. (05)
9 Identify the threats which may be involved and suggest appropriate safeguards, if any, Q8
in each of the following scenarios: (A-16)
(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)
10 Discuss the categories of threats and related safeguards in each of the following Q4
situations: (S-17)
(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) TTL9s management has requested Saleem to include Rashid, a semi-senior,
in the audit team. Rashid is the son of TTL9s Marketing Director.

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(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)
11 Discuss the threat(s) that may be involved and the related safeguards in each of the Q3
following situations: (A-17)
a) Anwar, an ex-trainee has recently rejoined your firm. He is interested in acting as
the engagement manager on Curtains Limited, where he had been employed during the
past two years. (04)
b) House Limited (HL) owns the building in which the Karachi office of your firm is
located. HL owns multiple projects across the city and provides its premises to various
concerns on rental basis. HL has requested your firm to become its auditor for the year
ending 30 June 2018. (05)
c) Window Limited (WL), an audit client of your firm has approached the taxation
department of your firm to review the income tax return to be filed by WL. (03)
12 (a) Discuss the threats and the related safeguards in each of the following Q5
situations: (S-18)
i) Saleem is the audit senior at Mango Industries Limited (MIL). MIL9s 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 MIL9s
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 8Revenue from Contracts with Customers9 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)
13 (a) You have recently been promoted as a partner in the assurance department of a Q5
firm of chartered accountants. Your portfolio of clients includes Shah Motors (Pvt.) (A-18)
Limited (SML), a leading car dealer. Qaiser, a senior manager assurance in your firm,
has been auditing SML for the past 7 years. While updating you about SML, Qaiser
informed about the following:
(i) On the request of an audit team member, CFO of SML has helped the team
member9s brother in securing early delivery of a vehicle ordered by him on preferential
basis.
(ii) SML has hired a new Head of Marketing. His son Amjad is expected to be included as
a junior team member in SML9s audit team.
Required: Discuss the possible threats which may arise, their significance and the
safeguards required to mitigate those threats. (10)

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(b) State the circumstances where a chartered accountant may be required to disclose
the information obtained during the audit. (03)
14 You are the audit manager at a client Exim (Private) Limited (EPL). During the Q10a
finalisation meeting with the client, the CFO of EPL admired the performance of the (S-19)
audit team. He informed that a junior member of the audit team gave valuable
suggestions regarding a trading business which EPL is considering to launch in the near
future, as he had worked as an intern in a large business house involved in similar
business. The CFO also informed that the audit junior has offered to arrange a
warehouse on reasonable rent as he works part time in his brother9s estate agency.
Required: Identify the threats in the above scenario and suggest appropriate
safeguards. (05)
15 (a) Shayan has recently been hired as the audit manager in a firm of chartered Q8
accountants which is the auditor of Python Limited (PL). Shayan previously (A-19)
served as manager finance in PL for three years. The firm is considering to
depute Shayan as the engagement manager for the audit of PL for the year
ended 31 August 2019
Required: Identify the possible threats which may arise and discuss their significance.
Also, discuss the safeguards required to mitigate the threats under each of the
following assumptions:
(i) Shayan resigned from PL with effect from 30 June 2019
(ii) Shayan resigned from PL with effect from 30 June 2018 (07)
(c) You are the manager on the audit of Dolphin (Private) Limited for the year
ending 31 December 2019. The client has requested you to send an audit
trainee on secondment for October and November 2019 to assist the chief
financial officer, as one of the key staff members of the accounting team has
resigned.
Required: Identify the threat(s) in the above scenario and suggest appropriate
safeguards. (04)
16 (a) You are a partner in a firm of chartered accountants. You have received a letter Q9
from a special investigation committee formed by the government to investigate the (S-20)
affairs of Naqshbandi Limited (NL).
Your client Rahim Limited (RL) is the subsidiary of NL. The investigation committee
requires you to submit the details of all the transactions carried out by RL with NL and
its related parties. The committee also requires your firm to report the transaction
value and the arm9s length value of all the transactions.
Required: In the light of Code of Ethics for Chartered Accountants, discuss any three
factors that your firm should consider while disclosing client information to the
investigation committee. (03)
(b) Your firm has just been appointed as the auditor of Get Fit Gym Limited (GFG)
which operates a chain of high end gyms and fitness centers across the country.
The managing director of GFG is a close friend of the audit manager and the
audit was awarded to your firm through this connection.
In a recent meeting, the managing director of GFG has offered to grant
membership to all the staff members of your firm at 50% discount.
Required: Evaluate the threat(s) which may arise in the above situation. Also discuss
the safeguards required to mitigate such threat(s). (08)
17 Haris Awan has recently been appointed as a partner in HBC Chartered Accountants. Q8
Haris has been assigned the audit of Hemlock Limited (HL). HL has been the firm9s client (A-20)

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for the past 15 years. Haris has asked Babar Raza, manager responsible for the audit of
HL for the last seven years, to assist him in the planning phase. Babar has informed him
that:
(i) attitude of HL9s Chief Financial Officer (CFO) has been very aggressive towards audit
team members, particularly at times when questioned on any of his judgements in
relation to accounting matters.
(ii) CFO normally gives us a short deadline for completion of the audit.
(iii) one of the previous audit team members has recently joined HL as Manager
Finance and has ensured us his full cooperation towards the timely completion of the
audit.
Required: Discuss the possible threat(s) which may arise in the above situation, their
significance and the safeguards required to mitigate those threats. (12)
18 In the light of ICAP9s Code of Ethics, state the circumstances where a Chartered Q9a
Accountant is required to disclose confidential information. (03) (A-20)
19 You are the Ethics and Quality Control Manager in an audit firm namely HMB Chartered Q9
Accountants. The audit manager responsible for the audit of Fantom Limited (FL), has (S-21)
started the audit planning for FL and come across the following matters for which he
needs your guidance:
(i) Fizza was planned to be the engagement supervisor for the audit of FL. She has
received an employment offer from FL. However, she is considering not to
accept FL9s employment offer.
(ii) FL is the main sponsor of the ongoing cricketing event. Being the main sponsor,
FL has received some entry passes of VIP enclosure of the final match. It has
offered three such passes to the audit team members.
(iii) Your firm is under renovation process and about to procure two central air
conditioning systems through tendering process. Your firm has received
quotations from various vendors including FL. The total expenditures for
purchase and installation of two central air conditioning units are expected to
be Rs. 50 million.
(iv) FL has offered your firm that the fee for taxation services of this year may be
based on a percentage of tax saved.
Required: Identify the threat(s) which may arise and evaluate their significance. Also
recommend the course of action or the mitigating actions which may be taken by your
firm. (12)
20 b) Khursheed Jamal is a Chartered Accountant and has recently established his Q2
audit firm in the name of Khursheed & Company, Chartered Accountants. He is (A-21)
trying to expand his clientele and in this process his friend, who is his audit
client and the owner of an advertising agency, has offered to provide significant
discount for publicity of his new firm.
Required: In the light of Code of Ethics for Chartered Accountants, discuss
whether Khursheed should accept the offer of his friend. (07)
c) Hussain Tarar is the audit partner responsible for the audit of Petra Travels
(Private) Limited (PTL). The chief executive officer (CEO) of the company has
informed Hussain that due to liquidity issues amid COVID-19, several
employees including some staff members of finance department left the
company. CEO has therefore requested Hussain to provide two staff of the
audit firm for some time to run the finance department.

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Required: In the light of Code of Ethics for Chartered Accountants, discuss the
threats in the above scenario and suggest appropriate safeguards. (07)

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Chapter 14 | Audit Finalisation and Reporting

1 The auditor9s report as specified in form 35A in the Companies (General Provisions and Q8
Forms) Rules, 1985 includes the auditor9s opinion on certain matters which have not (A-09)
been specified in the format of auditor9s report given in the International Standards on
Auditing. Required: List the additional reporting responsibilities of the auditor, as
discussed in the preceding paragraph. (08)
2 The management of Zafar Textile Limited (ZTL) has become aware of an error in its Q3
audited financial statements after its issuance to the shareholders. ZTL intends to (S-10)
rectify the error and have approached the auditor for issuance of a new audit report on
the revised financial statements.
Required: Describe the procedures which the auditor should adopt in the above
circumstances. (08 )
3 The auditor is required to issue an audit report at the end of the audit, which sets out Q6a
his opinion on the financial statements. An important element of the audit report is the (S-10)
statement of auditor9s responsibility. Required: Narrate the matters that should be
contained in the statement of auditor9s responsibility as included in an audit report
issued under ISA-700 8The Independent Auditor9s Report on a Complete Set of General
Purpose Financial Statements9. (08)
4 One of the objectives of obtaining a written representation from management is to Q2
ensure that the management knows and acknowledges its responsibility for the (S-11)
preparation of the financial statements and for the completeness of the information
provided to the auditor.
Required: Specify the situations which may create doubts as to the reliability of written
representations. What course of action would the auditor take in such a situation? (07)
5 a) Briefly explain the term 8pervasive effects on the financial statements9. (04) Q8
b) As the engagement partner, you have reviewed the audit working papers of Apricot (S-11)
Engineering Limited (AEL). The audit team has highlighted the following matters in the
working papers.
(i) The company has issued a bank guarantee to one of its related parties after
the balance sheet date. No disclosure in this regard has been made in the draft
financial statements
(ii) AEL has paid a dividend after many years. Zakat has been appropriately
deducted and deposited in the Central Zakat Fund.
(iii) Subsequent to the year end, a major debtor has declared bankruptcy. The
company expects to recover only 20% of the outstanding amount. The
management has refused to make a provision but is ready to disclose the fact
by way of a note. (iv) With effect from January 1, 2010, AEL has:
 Changed the method of charging depreciation on its fixed assets from the
8straight line9 to the 8diminishing balance9; and
 revised its estimate of useful lives of vehicles from 6 years to 4 years.
Required:
Discuss impact of each of the above matters on your audit report. (10)
6 a) Differentiate between the following: Q2
(i) An 8emphasis of matter9 paragraph and an 8other matter9 paragraph. (04) (A-11)
b) Give three examples each of circumstances which may necessitate the inclusion of
the following in the auditor9s report:
(i) An 8emphasis of matter9 paragraph; and

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(ii) an 8other matter9 paragraph. (06)

7 Fieldwork for the annual audit of Peach Textile Mills Limited (PTML) has been Q3
completed and the financial statements and the audit report are due to be signed next (A-11)
week. During the concluding meeting with the client, the auditor was informed that a
fire has destroyed all the raw cloth placed in the warehouse at the mill. About 60% of
the destroyed cloth was purchased after the reporting date. However, due to certain
defect in the insurance policy, the insurance company settled the claim by paying 80%
of the amount of loss.
Required: Explain the auditor9s responsibility and the audit procedures and actions
that should be carried out by the auditor in the above situation. (05)
8 You are the audit manager of MM Electronics (Private) Limited. The company markets Q8
its products through retail outlets in nine major cities. The draft financial statements (A-11)
for the year ended 30 June 2011 show a profit after tax of Rs. 20 million and net assets
of Rs. 150 million. The audit team has noted the following matters for your
consideration:
a) During the year the company has changed its policy of valuation of property, plant
and equipment from historical cost to revalued amount. For this purpose, the services
of Professional Valuers (Private) Limited were hired. They have issued valuation reports
of three outlets indicating a revaluation surplus of Rs. 10 million, which has been
recognised in the financial statements. The management has informed you that the
valuation reports of the remaining properties are expected to be issued in December
2011.
b) The company was sued for breach of contract by a customer claiming damages of
Rs. 10 million. The legal advisor has confirmed the management9s assertion that no
liability existed at the balance sheet date. However, while reviewing the customers9
files, you found an email from the Manager (Legal Department) addressed to the Chief
Executive in which he has opined that the company will have to pay atleast 50% of the
damages claimed.
c) With effect from 01 July 2010, the company has introduced a policy of providing
one-year warranty on its television sets. No warranty is provided on the other products.
Sales of television sets aggregated Rs. 20 million, whereas the total sales for the year
amounted to Rs. 80 million. The company has a customer support department which
provides after sales services on all products. For defects not covered under the
warranty, the company bills the customers at 25% above cost. The management has
included a note in the draft financial statements stating that no provision has been
made in respect of the warranty, as the amount cannot be measured reliably.
d) The directors have decided not to disclose earnings per share as the same had
reduced significantly on account of issuance of 100% bonus shares. The disclosure was
however made in all previous financial statements.
Required: Express your views on each of the above situations and discuss the impact
thereof on the audit report. (14)
9 Platinum Limited (PL) is a key supplier of raw materials to Zinc Limited (ZL). PL has filed Q1
a suit against ZL for breach of terms of an agreement. The amount claimed by PL is Rs. (S-12)
10 million. ZL has disclosed it as a contingent liability in the draft financial statements
for the year ended 31 December 2011. However, ZL is striving for an out of court
settlement and recent correspondence indicates that PL is likely to agree and settle the
dispute for 50% of the amount claimed by them. Required: Describe the audit

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procedures that ZL9s auditor should perform in the above situation. Also discuss the
impact, if any, of the above procedures on the audit report. (07)
10 Differentiate between the following: Q5c
(i) Fair presentation framework and compliance framework (04) (S-12)
11 As part of the audit process, the management provides written representations to Q7
confirm certain matters in connection with the audit. (S-12)
Required:
a) State the matters that you will consider as an auditor while assessing the reliability
of representations made by the management. (05)
b) Describe the course of action available to an auditor if the management refuses to
provide representation on a particular issue. (05)
12 The following situations have arisen on different clients being audited by your firm. (b) Q8
Malakand Industries Limited (MIL) is engaged in the supply of customised machinery to (S-12)
textile manufacturers. On 18 February 2012 one of its customers, who owed Rs. 9.6
million, went into voluntary liquidation. In addition to the above amount, a job was in
progress on behalf of that customer and on which MIL had already spent Rs. 13.9
million. The directors have refused to make a provision against the debt on the grounds
that the liquidator was appointed after the balance sheet date. They have also refused
to make any provision in respect of the work in process as they are planning to sell the
machinery being manufactured to another customer for Rs. 15.7 million. The profit
after tax of MIL is Rs. 85 million. The materiality level is 10% of profit after tax. (05)
(c) Swat Limited has invested Rs. 150 million in a business which is not mentioned in
the object clause of its Memorandum of Association. However, the object clause was
amended a week before the signing of the audit report. (03)
Required: In the light of the relevant requirements, discuss how should the auditor
deal with the above situations and describe the impact thereof on the audit report.
13 As the engagement partner, you have reviewed the audit working papers of Samarkand Q2
Limited (SL). The audit team has highlighted the following matters in the working (A-12)
papers.
a) Twenty percent of the company9s recorded turnover (revenue) comprises of cash
sales. Proper records of cash sales have not been maintained. Consequently, the audit
team was unable to design audit procedures to verify the cash sales.
b) During the current year, the company changed the method of charging depreciation
on its fixed assets from the straight line to the diminishing balance method. However,
all the required disclosures have been included in the notes to the financial statements.
c) The previous year9s financial statements were audited by another firm of chartered
accountants which has issued an un-modified opinion on those financial statements.
Required: Discuss the impact of each of the above matters on your audit report. (10)
14 Briefly discuss how the auditor would deal with a situation where he is in doubt Q4b
regarding the reliability of the written representations provided by the management of (A-12)
the company. (05)
15 List the audit procedures that may be performed by the auditor in order to ensure that Q6
all events occurring between the date of the financial statements and the date of the (A-12)
auditor9s report that require adjustment of, or disclosure in, the financial statements
are identified and appropriately reflected in the financial statements. (10)
16 Strong Vehicles Limited (SVL) manufactures heavy vehicles. As the job incharge on SVL9s Q5b
audit, you have come across the following situations: (S-13)

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The management has provided you with written representation that lives of fixed
assets are realistically estimated. Similar representation was also provided in the prior
years. However, SVL has incurred losses on disposal of fixed assets during the year,
because of which you are now of the view that the useful lives of fixed assets were not
realistically estimated. (04)
17 Sher Khan Limited (SKL) had announced a major restructuring in the year 2011 and a Q6
provision of Rs. 120 million was made against the cost of restructuring and (S-13)
redundancies. During 2012 all known claims and liabilities relating to the restructuring
were settled for Rs. 90 million. However, as a matter of prudence, the company has not
written back the excess amount of provision in view of a suit filed by certain staff
members against termination of their employment.
SKL9s legal counsel is of the view that the possibility of an adverse decision against the
company in this matter is remote. The audit senior does not agree with the
management9s contention and has drafted the following modification in the audit
report:
<An amount of Rs. 30 million has been provided in respect of the expected
amount which the company may be required to pay to the employees whose
employment was terminated during the year. The management is of the view that in
case the company is required to pay the amount to those employees, the said provision
would be utilized. In our opinion, the company9s decision to make the above provision
is not in accordance with International Accounting Standards.
Had the liabilities been recognized correctly the profit for the year would have
increased by Rs. 30 million. Because of the effects of the matters discussed above, the
financial statements do not give a true and fair view of the financial position of the
company as at 30 September 2012.=
Profit before taxation and net assets of SKL are Rs. 145 million and Rs. 350 million
respectively.
Required: Comment on the decision of the audit senior and identify the shortcomings,
if any, in the modification drafted by him. (08)
18 You were the engagement partner on the audit of Bhurban Limited (BL) for the year Q9
ended 30 September 2012. A few days after the issuance of the audited financial (S-13)
statements, the job senior informed you that a long outstanding suit for recovery of Rs.
140 million has been decided in favour of BL and the amount has been recovered. The
profit before taxation, as reported in the financial statements for the year ended 30
September 2012 was Rs. 178 million and the above debt had been fully provided for in
those financial statements.
Required: Describe what actions you would need to take in this regard. (12)
19 The following situations have arisen on different clients of your firm. The year end in Q10
each instance is 31 December 2012. (S-13)
a) In November 2012, Wazir Limited (WL) entered into a five year contract with Safeer
Limited (SL), for supply of specific parts. The supply was to commence on 1 April 2013.
In December 2012 WL purchased plant and machinery specifically for the contract with
SL at a price of Rs. 150 million with useful life of five years. However, in January 2013 SL
incurred heavy losses in a natural disaster and went into liquidation. During 2012 sale
to SL amounted to Rs. 5 million and the amount receivable from SL at the year end was
Rs. 450,000. For the year ended 31 December 2012, WL had earned profit before
taxation of Rs. 125million. The turnover for the year was Rs. 900 million and the net
assets as of that date were Rs. 1.2 billion. (07)

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b) As the auditor of Mianwali Tracking Company Limited (MTCL), you have noticed that
proper cash book has not been maintained by the company due to shortage of staff.
However, MTCL has provided you with summaries showing party-wise receipts and
payments and you have been able to trace them to company9s bank statements. (05)
c) During the year, Jhelum Limited (JL) paid 10% dividend to the shareholders. On
account of an error, Zakat could not be deducted from some of the shareholders. The
amount involved was Rs. 22,000 which was deposited by JL in the Central Zakat Fund
and charged as other expenses. (03)
Required: Discuss the impact of each of the above matters on your audit report
20 Hashim Industries Limited (HIL) is a manufacturer of household appliances. Its products Q2a
are popular in the market mainly because the company provides are placement (A-13)
warranty for three years. HIL9s auditor has verified that the basis of arriving at the
warranty provision is same as in the previous year. However, the auditor has requested
a written representation from the management that there is no significant change in
circumstances necessitating a change in the basis of arriving at the amount of warranty
provision. The management has yet to confirm acceptance of this representation.
Required: Discuss the importance of written representation in the above situation and
list the steps that the auditor should take and the possible impact on the audit report,
if the management is not willing to provide the required written representation.(11)
21 a. Briefly describe the extent of auditor9s responsibility relating to subsequent events Q4
occurring between the date of the financial statements and the auditor9s report. (03) (A-13)
b. Identify any five procedures that the auditor may undertake to fulfill the
responsibilityas discussed in (a) above. (05)
22 You are the audit manager in a firm of chartered accountants and are currently faced Q3
with the following situations at two different clients. (S-14)
i) A bank confirmation has not been received despite extensive follow up by the
client. As the deadline is close, the client has provided you the original bank
statement of 31 December 2013 duly stamped and signed by the Bank
Manager. Consequently, the client is of the opinion that confirmation is no
more necessary. (06)
ii) At the planning stage of audit of Orange Limited, the management has refused
to send confirmations to three major debtors who constitute 45% of the total
debtors. On inquiry, you have been informed that these debtors are
partnership concerns and take lot of time in replying to confirmation requests.
However, as an alternative the management has offered to send negative
confirmation requests. (07
Required: Discuss how you would deal with the above situations. Also state the
possible implications on the audit report.
23 The following situations have arisen on different clients being audited by your firm. The Q8
year-end in each instance is 31 December 2013. (S-14)
(i) During the year Iron Limited has changed its policy for valuation of intangible assets
from Cost Model to Revaluation Model. (03)
(ii) Due to fire in the record room of Titanium Limited, all the records and backup
related to the fixed assets, trade debtors and stocks were destroyed and you are
unable to perform audit procedures for verification of the balances. (03)
(iii) During the planning stage of Coal Limited it was noted that the system of internal
controls of the company is weak. This aspect was taken into consideration in
determining the nature, timing and extent of the audit procedures. (02)

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(iv) One of the plants of Uranium Limited was destroyed subsequent to year-end.
Appropriate disclosure thereof has been made in the financial statements. (02)
Required: Discuss the impact of each of the above matters on the audit report.
24 The management of Pioneer Textile Limited (PTL) has provided you with management Q7
representation that they have disclosed to you all known instances of non-compliances (A-14)
with laws and regulations that are relevant to the preparation of the financial
statements. However, during the field work your team identified a payment of penalty
of Rs. 2 million to an environmental agency. PTL9s management claims that the
disclosure of the related non-compliance was inadvertently omitted.
Required: Discuss the appropriateness of management representation and how would
you deal with the above situation. (05)
25 State the auditor9s responsibility with respect to events between the end of the Q10h
reporting period and the date of the auditor9s report. (02) (A-14)
26 State the matters that auditor needs to consider where the written representation Q1f
provided by the management is inconsistent with other audit evidence. (03) (S-15)
27 a) Explain the term 8expectation gap9 in the context of an audit and give three examples Q1
of expectation gap. (04) (A-15)
28 Your firm is the auditor of Customized Machinery Limited (CML), a listed company, for Q4
the year ended 30 June 2015. CML has an asset base of Rs. 3.5 billion and profit before (A-15)
tax of Rs. 350 million. On 10 August 2015, after the issuance of audit report but prior to
the issuance of financial statements, you have been informed as under:
(i) CML had been awarded a contract of Rs. 500 million in April 2015 for supply of
specialized machinery parts in August 2015 to a foreign customer. CML was expecting a
profit of 20% on the contract. However, the government of the foreign country has
placed certain restrictions on import because of which the customer has cancelled the
purchase order under force majeure clause.
(ii) The inventory against the above order is lying in the warehouse and requires an
expense of Rs. 105 million in order to become usable for other customers.
(iii) According to the management, the cancellation of this order will not affect the
operations of the company in any significant manner.
Required: Discuss how you would deal with the above situation. (07)
29 As the engagement partner, you have reviewed the working papers of Nadeem Limited Q6
(NL) in which the audit team has highlighted the following matters: (A-15)
a) NL provides six months warranty to its customers and has hired an expert to
compute the warranty provision. The management is not willing to provide written
representation for the warranty provision because the provision is in accordance with
the expert9s advice. (04)
b) Certain contingent assets have been disclosed in the draft financial statements in
which inflow of economic benefits is possible but not probable. The management is of
the view that International Financial Reporting Standards does not prohibit making
additional disclosures which enhance the users understanding of the financial
statements. (03)
c) According to the accounting policy for revenue recognition, revenue from sale of
goods is recognized on dispatch of goods to customers. However, during the year, NL
has entered into various agreements in which the goods are required to be delivered at
the premises of the customers. (03)
Required: Discuss the possible impact on the audit report

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30 You are the audit partner of XYZ & Company, Chartered Accountants. The following Q8
matters are under your consideration: (S-16)
a) Asif Limited has made certain investments and has classified them as long term
investments. The management has also provided written representation in this regard.
However, before the finalization of financial statements the company disposed of some
of the said investments. (04)
b) Mansoor Limited has entered into significant related party transactions during the
year which are approved by the Board of Directors and appropriately disclosed. The
management has also agreed to provide a written representation but you have not
received it yet. (03)
Required: Analyse the above situations and explain how you would proceed in the
above matters
31 In relation to the audit report on financial statements and the contents thereof (under Q5
revised/new ISAs), discuss the appropriateness or otherwise of the following (A-16)
statements:
(d) The description of the auditor9s responsibilities for the audit of the financial
statements should be included within the body of the auditor9s report. (03)
(e) The audit report can only be signed in the personal name of the auditor. (02)
(f) Key audit matters are determined from the matters communicated with the
management of the entity that required significant auditor9s attention in performing
the audit. In making that determination, the auditor shall take into account the effects
on the audit of significant events or transactions that occurred during the current year
and prior period presented. (03)
32 Express Limited is a medium size entity engaged in trading of electronic appliances. Q2b
After the issuance of financial statements and audit report for the year ended 30 June (S-17)
2016, a major debtor was declared bankrupt by the Court. No recovery has been made
from the debtor after year-end.
Required: Evaluate the above situation and state the procedures which auditor would
need to perform. (08)
33 You are the audit partner in a firm of chartered accountants. Some of the audits are in Q3
the finalization stage and presently the following matters are under your consideration: (S-17)
(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.
Required: Discuss the possible impact on the audit report and specify the procedures
(if any) which you would undertake in the above situations.
34 You are the audit partner in a firm of chartered accountants. Some of the audits are in Q3
the finalization stage and presently the following matters are under your consideration: (S-17)
(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.

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35 a) Briefly state the course of action which should be adopted by a firm if the Q8
requested written representations are not provided by the client (S-17)
b) You are the audit manager at Afzal Textile Mills Limited (ATML). While
reviewing the draft financial statements and the working paper file, the
following matters have come to your attention:
(i) There is a significant decline in the number of related parties and
related party transactions.
(ii) During the year, ATML has acquired 15% shareholding in Bashir Textiles
Limited, a listed company.
(iii) ATML owns six buildings out of which four have been revalued during
the current year while the remaining buildings would be revalued next
year.
Required: Discuss whether it would be necessary to obtain management
representation in respect of the above matters.(6)
36 You are audit partner of the firm and your manager has highlighted the following Q9
matters: (A-17)
The profit before tax of Tariq Limited (TL) for the year ended 30 June 2017 is Rs. 790
million. TL provides three year warranty to its customers and has made provision of Rs.
80 million in this regard. The management carries out the computation internally. The
process is complex and based on various assumptions. Therefore, your firm has
appointed an expert after following all the necessary procedures for assessing the
competence, capability and objectivity of the expert. (08)
Your firm has been appointed as the auditor of Yaqoob Limited for the audit of the year
ended 30 June 2017. The audit team was not able to perform the inventory count at
year end because the appointment was made on 15 July 2017. (07)
Required: Describe the steps that will be performed in each of the above situation and
discuss the possible implications of the above on the audit report. (Drafting of opinion
not required)
37 You are the audit partner of GMP & Company, Chartered Accountants. The following Q10
matters are under your consideration: (A-17)
(a) The CEO of a client is travelling out of the country on 20 September 2017 and
would not be available on the date of signing of report which is 29 September
2017. However, he has offered to sign all the representations before leaving. (04)
(b) A client has modified the representation letter with regard to the responsibility of
management to provide the auditor with all information relevant for the purpose
of audit. It has been stated, that <except for the information destroyed in fire, we
have provided all the necessary information for the purpose of audit=. (03)
(c) The managing director of a client which is a family owned business has sent the
following email to the audit manager: <I believe the financial statements we have
provided to you are final. Although adjustments are required to correct some of
the balances, but being immaterial, they would not affect the decision making of
the owner. We therefore believe that the audit report may now be signed and the
required corrections may be included in the representation letter=. (04)
Required: Discuss how you would deal with the above situations.
38 You are the audit partner at BLC & Company, Chartered Accountants. The following Q4a
matters are under your consideration: (S-18)

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(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. ATL9s 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 RL9s 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. RL9s 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)
39 c) What course of action should the auditor take, if he doubts the reliability of the Q6
management representation due to its inconsistency with other audit evidence? (04) (S-18)
d) Discuss the circumstances in which an auditor may include other matter paragraph
in the audit report. (04)
f) Auditor should actively look for subsequent events up to the date of auditor9s report.
State the procedures which an auditor should perform specifically for identification of
subsequent events. (04)
40 You are the audit manager responsible for the audit of Hub Mills Limited (HML). At the Q3
planning stage, materiality level was determined at Rs. 8 million. Audit team has (A-18)
completed the audit field work for the year ended 30 June 2018 and has presented the
following issues identified during the audit for your review:
(i) Goods worth Rs. 3 million were returned by a customer on 5 July 2018 due to poor
quality. Since the goods were returned subsequent to year end, no adjustment has
been recorded by the management.
(ii) HML is facing liquidity issues which has resulted in adverse key financial ratios. To
address the issue, HML has sold one of its offices to a company managed by a director
of HML. The office was sold for Rs. 40 million. Since the management had correctly
recorded the disposal, no specific disclosures related to this sale have been made in the
financial statements. Directors are confident that these sale proceeds would solve the
cash flow problems of HML.
(iii) A customer who owed Rs. 11 million at year-end, was declared bankrupt on 15
August 2018. The management had already provided 50% of the balance in the
financial statements. Revenue for the current year is Rs. 800 million (2017: Rs. 950
million) and loss before tax is Rs. 22 million (2017: Rs. 7.6 million).
Required:
(a) In respect of each of the audit issues identified by your team, mention the impact (if
any) which these might have on the audit report along with proper justification. (10)

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41 You are the audit manager responsible for the audit of Hub Mills Limited (HML). At the Q6b
planning stage, materiality level was determined at Rs. 8 million. Audit team has (A-18)
completed the audit field work for the year ended 30 June 2018 and has presented the
following issues identified during the audit for your review:
(i) Goods worth Rs. 3 million were returned by a customer on 5 July 2018 due
to poor quality. Since the goods were returned subsequent to year end, no
adjustment has been recorded by the management.
(ii) HML is facing liquidity issues which has resulted in adverse key financial
ratios. To address the issue, HML has sold one of its offices to a company
managed by a director of HML. The office was sold for Rs. 40 million. Since
the management had correctly recorded the disposal, no specific
disclosures related to this sale have been made in the financial statements.
Directors are confident that these sale proceeds would solve the cash flow
problems of HML.
(iii) A customer who owed Rs. 11 million at year-end, was declared bankrupt
on 15 August 2018. The management had already provided 50% of the
balance in the financial statements. Revenue for the current year is Rs. 800
million (2017: Rs. 950 million) and loss before tax is Rs. 22 million (2017: Rs.
7.6 million).
Required:
(b) What matters would you want to include in the management representation letter,
with regard to the above issues. (05)
42 Tariq Limited (TL) is in dispute with one of its suppliers Hamid (Private) Limited (HPL) Q1b
over a claim of Rs. 10 million; due to quality issues with the product. The management (S-19)
has informed you that negotiations with HPL have concluded and HPL has agreed to
pay Rs. 7 million whereas the rest of the amount would be written off. TL9s
management has provided a written representation to the auditor with respect to the
said receivable. However, they want to preclude the auditor from sending a
confirmation to HPL.
Required: Evaluate the appropriateness of written representation as audit evidence
and determine the course of action available to the auditor in the above situation. (07)
43 Respond to the following independent situations in the light of International Standards Q2
on Auditing: (S-19)
(a) Risk of overstatement in revenue was considered as significant risk and was also
communicated to those charged with governance. Discuss whether it should be
included in the key audit matters section. (04
(b) No such matter arose during the audit which needs to be reported as key audit
matter. Discuss whether the auditor still needs to include key audit matters section in
audit report. (02)
(c) A qualified opinion has been expressed. The details of the qualification are also
mentioned in the key audit matters section. Is it appropriate to do so? (03)
44 Expert Limited (EL) is an unlisted public company engaged in production of various Q8
products. In January 2018, an equipment malfunctioned which caused severe injuries (S-19)
to some of the workers. EL had paid compensation to the workers but a case for
violation of safety regulations had also been filed by the regulator. On the basis of legal
advice, EL had recorded a provision of Rs. 5 million in its financial statements for the
year ended 31 December 2018.

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The board of directors approved the financial statements on 01 March 2019 and on the
same date your firm expressed an unmodified opinion. EL plans to issue the financial
statements on 5 March 2019. On 3 March 2019 the court imposed a penalty of Rs. 15
million on EL. Management of EL informed the auditor accordingly.
Required: Evaluate the need for amendment in financial statements and state the
procedures which the auditor would need to perform in the above situation. (09)
45 You are the manager of Saba and Company, Chartered Accountants, responsible for the Q1
audit of Tiger Limited (TL). While reviewing the draft financial statements and the (A-19)
working paper file, following matters have come to your attention:
(i) No subsequent events were identified.
(ii) During the stock count, certain items were physically present but were not
appearing in stock sheets provided by TL. The management informed you that these
items were sold but were not dispatched upon customer request.
(iii) TL has a policy for making full provision against receivables when they become
overdue for 360 days or more. However, three customers were not fully provided for in
accordance with the TL9s policy. The management contented that they are rigorously
following up with these parties and are confident to recover the outstanding balances
very soon.
(iv) There was only one litigation pending against the company which has appropriately
been disclosed in the financial statements.
Required: Discuss whether it would be necessary to obtain management
representation in respect of above matters
46 State any five audit procedures that could be performed to obtain sufficient Q2d
appropriate audit evidence for determining whether or not a material uncertainty (A-19)
exists when events are identified that may cast doubt on the entity9s ability to continue
as a going concern. (05)
47 You are the audit manager on Beluga Limited (BL) for the year ended 31 August 2019. Q7
The following issues have been brought to your notice by your audit team: (A-19)
(i) BL has pending tax litigation in which tax department has raised demand of Rs. 75
million. The matter has been challenged by BL and the decision in this respect is
currently pending with the Appellate Tribunal. BL9s tax advisor is confident of positive
outcome of this litigation. No provision has been made in this regard; however, it has
been disclosed as a contingency in the financial statements.
(ii) On 20 September 2019 one of the warehouses of BL caught fire destroying entire
inventory, furniture, fixtures and equipment. The book values of the destroyed assets
at the time of fire were Rs. 100 million. BL has lodged a claim with the insurance
company. The draft financial statements for the year ended 31 August 2019 show a
profit before taxation of Rs. 500 million and net assets of Rs. 1,400 million.
Required:
(a) State the audit procedures which may be performed in respect of each of the above
audit issues identified by your team. Also briefly discuss the implications of these issues
on the audit report. (10)
(b) Draft an opinion paragraph to be included in the audit report of BL in accordance
with the requirement of International Standards on Auditing, assuming that the matter
in (i) above is not dealt with in accordance with the requirements of IFRS. (Basis of
opinion paragraph is not required) (05)
48 You are the manager responsible for the audit of Crown Limited (CL) for the year ended Q3b
31 December 2019. Your audit team has informed you that CL is developing a new (S-20)

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product 8Solar giant9 which would have three times more power generation capacity
than the regular solar panels available in the market. CL had capitalised development
costs of Rs. 40 million in 2018 and Rs. 38 million in 2019. Based on technical feasibility
carried out by the production department, testing of solar giant is in the right direction
and the product would be launched as per plan in June 2020.
However, review of board minutes revealed that CL is facing technical problems that
may delay the launch of solar giant till March 2021. The minutes further revealed that
CL may require to incur further Rs. 50 million for the development of this project. This
would result in increase in selling price that was originally envisaged by CL. CL9s
management is of the view that they would overcome these technical problems
without incurring any additional cost and would launch the solar giant as per original
plan, in June 2020.
The draft financial statements show a profit before tax of Rs. 150 million.
Required: State the audit procedures which may be performed in respect of above
audit issue. Also discuss the implication of this issue, if any, on the audit report. (08)
49 You are manager responsible for the audit of Oak (Private) Limited (OPL) for the year Q1
ending 30 September 2020. The following issues have been brought to your notice by (A-20)
your audit team:
(i) During planning the year-end inventory count, audit team decided to visit third party
premises for inventory valued at Rs. 10 million. Third party has informed that because
of restrictions imposed by the government in the wake of COVID-19, it has limited
number of staff and consequently may not allow the audit team to visit its premises for
inventory count at year-end. However, the audit team may visit its premises on or after
31 October 2020 for inventory count.
(ii) A competitor has alleged that OPL has infringed its patent rights and has taken legal
action for damages of Rs. 500 million. OPL9s independent legal advisor is of the view
that no estimate can be made about the outcome of the case at this point of time. No
provision has been made for the possible loss, however OPL intends to fully disclose it
in the notes to the financial statements. The projected profit before tax is Rs. 75
million.
Required: For each of the above issues:
(a) state the audit procedures which may be performed by your audit team. (10)
(b) discuss with reasons, the implication(s) on the audit report. (08)
50 Consider each of the following independent situations: Q4
(i) Spruce Limited issued its financial statements on 15 September 2020 for the (A-20)
year ended 30 June 2020. On 22 September 2020, your audit team came to
know that a major debtor has filed bankruptcy due to destruction of its
production facility in a terrorist attack on 20 August 2020.
(ii) During the audit of Larch Limited (LL) for the year ended 30 June 2020, the
audit team noticed that the management of LL had worked out the net
realizable value (NRV) on the basis of the sales price at year-end. Since NRV
was greater than cost, LL recorded the inventory in the draft financial
statements at cost. However, after reporting period, LL is facing difficulties in
selling the inventory at current price level and therefore considering to revise
its prices.
Required: In each of the above situations, evaluate the need for amendment in the
financial statements and suggest the audit procedures, if any, which the auditor would
need to perform. (09)

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51 You are a partner in a firm of chartered accountants. Following independent matters Q6

are under your consideration: (S-21)
(i) The draft financial statements of Elrond Pakistan Limited (EPL) for the year
ended 31 January 2021 include inventory of Rs. 26 million that was purchased
on 1 January 2021 for fulfilling a large specialized order of a foreign customer.
Due to sudden imposition of import restriction in the foreign country, the
customer cancelled the order on 28 January 2021. The draft financial
statements show that EPL9s profit before tax is Rs. 130 million.
(ii) During the audit of Stellar Limited (SL), the management informed the audit
team that its largest customer, Ether Limited (EL) has recently notified that it
will not renew its contract with SL, which is due to expire on 30 June 2021.
Sales from EL constitutes 70% of the total revenue. The management has
further informed that they are in negotiation with EL and are hopeful to retain
the customer.
Required: For each of the above independent matters:
(a) state the audit procedures which may be performed by your audit team. (08)
(b) discuss with reasons, the implication(s) on the audit report. (10)
52 Your firm is the auditor of Iota Limited (IL) and audit report is expected to be signed on Q7
10 March 2021. IL9s management has just informed you that due to certain personal (S-21)
reasons, CEO will not be available from 5 March 2021 to 15 March 2021. They have
provided you with the following alternate options:
(i) CEO will sign all the representations either on 4 March 2021 or 16 March 2021.
(ii) CEO will call on 10 March 2021 to the engagement partner and will verbally confirm
all the representations required by the auditor.
Required: Comment on the acceptability of each option with reason(s) and suggest the
best course of action for obtaining the representations in the above scenario. (06)
53 You are the audit manager in a firm of chartered accountants. Following independent Q6
situations are under your consideration: (A-21)
(i) Mega Motors Limited (MML) offers 3-year warranty for its products. MML assessed
its warranty obligation to be Rs. 20 million for the year ended 30 June 2021. The board
of directors has approved the financial statements on 6 September 2021. Just before
signing the audit report, your audit team came to know about a latent defect in MML9s
products. This defect was neither earlier discovered nor known to MML.
(ii) Dawn Hotel Limited was severely damaged by flash flood on 31 August 2021. Initial
assessment of the incident shows that significant repairs are required and the hotel
would not be operational for at least a month. Audit report for the year ended 30 June
has not yet been issued.
Required:
For each of the above situations, evaluate the need for amendment in the financial
statements and suggest the auditor9s course of action. (10)
54 You are the audit manager in a firm of chartered accountants. Following independent Q3
matters are under your consideration: (A-21)
(i) In the draft financial statements of Elrond (Private) Limited (EPL) for the
year ended 30 June 2021, capital work in progress of Rs. 100 million related
to construction of a new production facility is included in property, plant
and equipment. Your team has ' observed that the last cost incurred on the
said facility was on 30 April 2021. However, it was put to use from 1 August
2021 and therefore no depreciation has been charged at the year-end. The

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useful life of the said facility is assessed to be 10 years. The draft financial
statements show that EPL9s profit before tax is Rs. 150 million.
(ii) Cafe Elixiar (Private) Limited (CEL) operates a chain of cafes in Pakistan.
Before the year-end, a large number of customers complained about food
poisoning, possibly as a result of eating at the cafe. Some of the customers
have taken legal action against CEL. An out of court settlement with these
customers is under process. No information has been provided in this
regard in the draft financial statements.
Required: For each of the above independent matters:
(a) state the audit procedures which may be performed by your audit team. (10)
(b) discuss the implication(s) on the audit report. (08)

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Chapter 15 | ISRE
1 State any three procedures which are generally adopted by the auditor to obtain Q10g
evidence in review engagement. (02) (A-14)
2 State the key features of review engagement which distinguish it from a statutory audit Q1d
and identify two types of review engagements. (03) (A-15)
3 State any eight key procedures which are performed during a review engagement of Q9
historical financial statements. (08) (A-16)
4 Differentiate between review engagement of financial statements and the annual audit. Q7b
(04) (A-17)

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Suggested Solutions
(Source: ICAP Website)
Disclaimer
The suggested answers to examination questions have been developed by the Board of Studies
of ICAP based on rules, regulations, theories and practice as applicable on the date of
examination, except as stated otherwise. These answers are not meant to provide the
assessment criteria against the particular examination questions as the purpose of these
suggested answers is only to guide the students in their future studies for ICAP’s examinations,
without in any way seeking to suggest a solution for the present incumbents.
The Institute shall not be in any way responsible for an answer capable of being solved in some
other way or otherwise of the suggested answer nor would it carry out any correspondence in
this regard.
Although reasonable care has been taken to ensure correctness in the preparation of these
answers, the Board of Studies does not take responsibility for any deviation of views, opinion
or answers suggested by any other person or persons. Similarly, the Council of the Institute of
Chartered Accountants of Pakistan assumes no responsibility for the errors or omissions in the
suggested answers. Nevertheless, if any error or omission is noticed, it should be brought to
the notice of the Chairman Board of Studies for information.

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Chapter 1 | Concept and need for assurance

1 (a) The management9s responsibilities in relation to the F/S include the following:
 The overall responsibility for the preparation and presentation of the F/S
 Identifying the FRF to be used in the preparation and presentation of the F/S.
 Designing, implementing and maintaining internal controls relevant to the preparation
and presentation of F/S that are free from material misstatement whether due to fraud or
error.
 Selecting and applying appropriate accounting policies.
 Making accounting estimates that are reasonable in the circumstances.
2 (a) The appointment of Farrukh& Co. will be in order because the firm would not be considered
indebted to the company as the period for which the utility dues are unpaid does not exceed 90
days.
(b) Mr. Shahid cannot be appointed as statutory auditor of Rehman Limited because of the
following:
(i) Mr. Shahid is not eligible for appointment as statutory auditor since only 100 days have passed
since the company9s incorporation and therefore obviously less than three years have elapsed
since he left the employment of the company.
(ii) Directors have lost their authority to appoint external auditors after the expiry of 90 days from
date of incorporation.
(c) Syed & Co. shall not be appointed as auditor of the company because his spouse holds shares
in its associated company. However, the firm can be appointed as auditor of Fazal Limited if the
spouse of the partner disinvests the shares within 90 days of appointment.
(d) Mr. Dawood9s appointment shall be void because only a chartered accountant can be
appointed as auditor of a private limited company having share capital of Rs. 3 million or more.
(e) Hussain Associates (Pvt.) Ltd. being a body corporate cannot be appointed as external auditor
of any company
3 (a)
i) The appointment of Guava and Company, Chartered Accountants, will be in order.
ii) The firm would not be deemed indebted to the company as the amount of debt is not exceeding
Rs. 1,000,000.
(b)
i) The Appointment of Apricot and Company, Chartered Accountants will be in order.
ii) Banana Limited and Water Melon Limited are not associated companies as the common director
is a Government nominee.
(c)
i) Mr. Zaheer cannot be appointed as the Auditor of Lychee (Private) Limited
ii) There specific qualification requirement for auditors of companies having paid-up capital of less
than Rs. 3 million; The auditor shall be a CA or CMA having certificate of practice from respective
institute or Firm of CAs/CMAs having such criteria as may be prescribed
iii) The fact that 40% of the shareholding is owned by Blue Black Limited does not disqualify Mr.
Zaheer as the auditor of LPL but the fact that he is not a CA or a CMA disqualifies him.
(d)
Before accepting the offer Wallnut and Company, Chartered Accountants, apart from obtaining
professional clearance from the existing auditor is also required to inform the ICAP (Institute) and
obtain prior clearance from the Institute
(e)
(i) Since the three-year period has not been lapsed,

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(ii) Our firm cannot be appointed as the auditor of Strawberry Limited,

(iii) The fact that Mr. Sadiq was serving on the board as a Government nominee does not make
any difference, in this case.
4 Audit evidence is persuasive rather than conclusive because of the following reasons:
i) The auditor gathers evidence on a test basis (the sample may or may not be representative).
(ii) People make mistakes (both client and auditor).
(iii) Documents could be forged (increasingly easy with digital technology)
(iv) The client9s personnel may not always tell the truth.
5 (a)
 As per the Companies Act, 2017 a person shall not be appointed as auditor of a company, if he
is disqualified for appointment of any other company, which is that company9s subsidiary or a
holding company or a subsidiary of that holding company.
 Therefore, the firm cannot be appointed as an auditor of of KL as Mr. Zaman holds 5,000 shares
in ML which together with KL is a subsidiary of DKL.
 For appointment as the auditor of the company, Mr. Zaman is required to dispose off the
shares in ML.
(b)
 Bilal and Company, Chartered Accountants are eligible to act as the auditor of IJK Limited.
 IJK Limited is not an associated company of LMN Limited as LMN Limited holds 15.4% shares
of IJK Limited. Therefore, the wife of the partner is not required to dispose of the shares in
LMN Limited.
 Holding of non-voting shares is not relevant in determining the status of the company.
6 (a) Sohail and Company can continue to be the auditor of Wasim Limited. Waqar was a partner of
Aqib, two years back, whereas the Companies Act, 2017 restricts only a present partner or the
director of a company, from becoming the auditor of that company.
(b) According to the Companies Act, 2017, Kamal should disclose the fact that he holds shares in
GL at the time of appointment. His decision to disinvest shares of GL within thirty days is in
accordance with the requirements of the Companies Act, 2017. Disposal of shares to his son who
is the manager in AAC, does not attract any contravention of the Companies Act, 2017 because
there is a bar on the holding of shares by the auditor, his spouse and minor children, however
there is no bar on holding of shares by his son Kamran who has attained the age of majority.
Moreover, the Companies Act, 2017 and the Code of Ethics does not restrict the Manager of the
Audit firm from holding shares in the Company. Hence the appointment of AAC as an auditor of
GL is in order.
(c) The appointment of Sajid, Hameed and Company (SHC), Chartered Accountants is in order as
Kashif is not the employee of any director of the company. He is employed by the trust in which
the directors are the trustees.
(d) Orange and Company is not qualified for appointment as the auditor of ABC Financial Services
as the credit card balance of a partner exceeds the threshold limit of Rs. 1,000,000, set by the
Companies Act, 2017. However, there is no restriction on the appointment of Saleem, in his sole
capacity, as an auditor of ABC Financial Services Limited as Orange and Company and his Sole
Proprietorship firm are separate entities.
7 1.
Professional Judgment:
It means making informed decisions by a professional accountant about the courses of actions that
are appropriate in the circumstances during an audit engagement, in the context of auditing,
accounting and ethical standards and by applying the relevant training, knowledge and experience.

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Why Professional Judgment is necessary;

Professional judgment is essential to the proper conduct of an audit. This is because interpretation
of relevant ethical requirements and the ISAs and the informed decisions required throughout the
audit cannot be made without the application of relevant knowledge and experience to the facts
and circumstances. Professional judgment is necessary in particular when taking decisions about:
 Materiality and audit risk
 The nature, timing and extent of audit procedures used to meet the requirements of the ISAs
and gather audit evidence.
 Evaluating whether sufficient appropriate audit evidence has been obtained to achieve the
objectives of the auditor.
 The evaluation of management9s judgments in applying the entity9s AFRF and accounting
policies.
 The drawing of conclusions based on the audit evidence obtained, for example, assessing the
reasonableness of the estimates made by the management in preparing the F/S.
2.
(a) The credit card balance of Rs. 100,000 is within the limit allowed by the Companies Act, 2017
i.e. Rs. 1,000,000 outstanding towards a credit card issuer. Moreover, obtaining personal finance
from GBL is in the context of being indebted, but due to the loan being obtained from a bank
having ordinary course of business, therefore Khan and Company is eligible to be appointed as
auditors of GBL
(b)
 Saima has rightfully disposed of the shares held by her on appointment of Abid9s firm as
auditors of SL.
 Holding of shares by Father of Abid and association of Saima as General Manager
Marketing in SL is not in contravention of any of the requirements of the Companies Act,
2017 and hence appointment of Abid9s firm as an auditor is valid.
8 (a)
 Holding of interest by brother of Mr. Ahsan or his brother being a director of ML, does not
make Mr. Ahsan ineligible for becoming the auditor of JPL
 However as per the Companies Act 2017, the auditor of a private company where paid up
capital is less than Rs. 3 million (provided it is not a subsidiary of a public company) shall
be a CA or CMA having certificate of practice from respective institute or Firm of CAs/CMAs
having such criteria as may be prescribed
 Therefore, appointment of Mr Ahsan is invalid as per the Companies Act 2017.
(b)
A notice for appointment of auditor is required to be served by a member of the company having
at least 10% shareholding, but Mr. Iqbal is not a member of the company as he only holds non-
voting shares.
Hence, the notice served by him is not in order.
(c) Appointment of Mr. Khan9s firm is in order as Mr. Khan and KL are separate persons and
indebtedness of KL cannot be termed as indebtedness of Mr. Khan.
9 (a) Since Mateen presently is not a partner in the firm, his firm can be the auditor of the company.
However, the firm at the time of admitting him as a partner, would need to ensure that:
- the period of three years has lapsed from the date when Mateen resigned from the
directorship of SL.
- The shareholding of Mateen in SL is disposed off.

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(b) Appointment of Khawar9s firm is valid because he is not an employee of Financial Press Limited,
and writes as a freelancer in the newspaper published by the company.
(c) There is no restriction in the Companies Act, 2017 on holding the Term Finance Certificates
issued by the audit client. Therefore, the appointment of Hamid9s firm as an auditor of SFL is valid.
10 Retirement of existing and Appointment of new auditor in an AGM
 Member(s) having at least 10% shareholding shall also be entitled to propose any auditor
whose consent has been obtained.
 A notice shall be given to company at least 7 days before the date of the AGM.
 On receipt of such notice, company shall: - Sent a copy of notice to the retiring auditor,
forthwith. - Post it on its website.
 Retiring auditor can make representation to company at least 2 days before AGM. It shall be
read in AGM and it shall be mandatory for auditor/representative to attend the meeting.
 Company shall intimate the registrar within 14 days of appointment / removal / casual vacancy
together with the consent of appointed auditor.
11 Exceptions: The Directors are allowed to:
 appoint the first auditors of a newly formed company within 90 days of incorporation.
 fill a casual vacancy; for example, where the current auditors are no longer able to act.
The Commission may appoint a person as an auditor to fill the casual vacancy, if neither the
shareholders nor the directors have appointed the auditors.
12 (a) Salman and Company is eligible to be appointed as the auditor of ABC Limited because, Naveen
is in the employment of DEF which is an associated company and such employment has not
relevance in the context of appointment of an auditor.
(b) Kashif Associates can be appointed as the auditor of NPL as qualification criteria mentioned for
private companies having paid up capital of less than Rs. 3 million under Companies Act 2017 is
either a CA or CMA having certificate of practice from respective institute or Firm of CAs/CMAs
having such criteria as may be prescribed. Holding of 30% shares of NPL by a public company is of
no relevance.
13 Reasonable Assurance: A high (but not absolute) level of assurance provided by the practitioner9s
conclusion expressed in a positive form. The reasonable assurance is usually expressed in case of
statutory audits.
Limited Assurance: A moderate level of assurance provided by the practitioner9s conclusion
expressed in a negative form. The negative form of assurance is usually expressed in case of review
engagements.
14 a) The appointment of KCC is valid, as 90 days have not lapsed in case of outstanding bill. However,
the concerned partner should be requested to settle the amount of bill before the expiry of 90
days as it will result in disqualification of KCC as auditors of NEL.
b)
 Appointment of Zubair and Company is valid.
 Under the Companies Act, 2017, there is no restriction on the appointment of spouse of chief
executive of an associated company as the auditor.
 The holding of 100,000 shares by Saima is required to be disclosed at the time of appointment.
Further, these shares should be disposed off within 90 days of the appointment.
15 (a) JL holds 51% shareholding in RL:
As Daud & Co. (DC) is not qualified for appointment as the auditor of RL due to directorship and
shareholding of partner9s wife in RL, DC cannot be appointed as the auditor of any of its holding
company i.e. JL.
(b) JL is an associated company of RL:

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DL is ineligible to act as the auditor of JL, as the spouse of the partner holds shares in the associated
company. However, since Daud9s wife holds shares prior to the appointment, DC can be appointed
as auditor of JL subject to comply with the following requirements:
 Disclose this fact to JL at the time of appointment as auditor.
 Divest her investment in RL within 90 days of appointment.
The directorship of Daud9s 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.
16 (b) The statement is appropriate to the extent that reasonable assurance is a high level of
assurance. However, second statement is not appropriate as reasonable assurance is not a
guarantee that an audit conducted in accordance with ISAs will always detect a material
misstatement, due to inherent limitations of audit.
(c) The statement is appropriate to the extent that auditor has to obtain an understanding of
internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances. However, the second statement is not appropriate because the auditor is not
required to express an opinion on the effectiveness of internal controls in conjunction with the
audit of the F/S.
17 (a) According to Companies Act 2017, there is no bar on Bilal and Company to be appointed as the
auditor of DL as holding of TFC9s in the audit client is not prohibited under the provisions of the
Companies Act, 2017.
(b) Zain and Company is ineligible for appointment as the auditor of HL as Imran is a partner in
Pure Investment Associates, which holds share in HL which is prohibited under the Companies Act,
2017. In order to be eligible for appointment, the fact of holding of shares is required to be
disclosed at the time of appointment. Further, the shares are to be disposed-off within 90 days of
such appointment
18 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 F/S
and presenting them to the shareholders for discussion and approval.
Fair presentation (True and fair view): Although the phrase 8true and fair view9 has no legal
definition, the term 8true9 implies free from error, and 8fair9 implies that there is no undue bias in
the F/S or the way in which they have been presented. In preparing the F/S, a large amount of
judgement is exercised by the directors. Similarly, judgement is exercised by the auditor in
reaching his opinion. The phrases 8true and fair view9 and 8present fairly9 indicate that a judgement
is being given that the F/S can be relied upon and have been properly prepared in accordance with
an appropriate FRF.
19 To CEO, APL.
An auditor cannot obtain absolute assurance because there are inherent limitations in an audit
that affect the auditor9s ability to detect material misstatements. These limitations arise because
of the following:
(i) The use of testing/sampling techniques;
(ii) The limitations that exist in any accounting and internal controls system (for example, the
possibility of collusion);
(iii) The fact that most audit evidence is persuasive rather than conclusive; and

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(iv) The work undertaken by the auditor to form an opinion is permeated by judgment.
Further, other limitations may affect the persuasiveness of evidence available to draw
conclusions on particular financial statement assertions (for example, transactions between
related parties).
20 A person shall not be qualified for appointment as auditor if he/she is indebted to the company or
any of its holding or subsidiary company other than in the ordinary course of business of such
entities. Further, a person who owes a sum of money not exceeding one million rupees to a credit
card issuer shall not be deemed to be indebted to the company.
Hatim9s plan that he would pay off all his dues before the commencement of audit is not valid, as
the auditor appointed in the general meeting holds the office from the conclusion of that meeting
until the conclusion of the next annual general meeting. If the firm intends to be appointed as the
auditor of TL, Hatim would have to reduce the amount due on his credit card to less than Rs. 1
million prior to the firm9s appointment as the auditor of TL.
21 The Commission may appoint a person to fill the vacancy in the cases if:
 The company fails to appoint the first auditors within a period of 90 days of the date of
incorporation of the company;
 The company fails to appoint the auditors at an annual general meeting;
 The company fails to appoint an auditor to fill up a casual vacancy within thirty days after the
occurrence of the vacancy;
 The appointed auditors are unwilling to act as auditors of the company.
22 To: ABC
Dated: 4 September 2018
Subject: Explanation of Misstatement Related to Audit
I received your comments on the audit report of Ascender Limited and want to clarify that:
The auditor, because of inherent limitation of audit, cannot reduce audit risk to zero. Therefore,
auditor provides a reasonable assurance but not absolute assurance that financial statements are
free from material misstatement.
In order to provide reasonable assurance, auditor plans and performs audit procedures based on
the concept of materiality and assessment of audit risk. Auditor does not aim to examine all or the
majority of transactions. Based on professional judgment about the effectiveness of the selection,
auditor applies audit procedures using 100% selection, specific selection or audit sampling. Thus,
selective examination of specific items does not provide audit evidence about the whole
population and conclusion drawn from a sample may be different if the entire population were
subject to the same procedure.
The management is responsible for the internal controls for the preparation of financial
statements and auditor is responsible to obtain understanding of the same in order to design audit
procedures. Auditor is not required to express opinion on effectiveness of internal controls.
Furthermore, the auditor is responsible to provide reasonable assurance not the absolute
assurance that financial statements as a whole are free from material misstatement, whether
caused by fraud or error. As stated above, the principle of materiality will also be applied here in
case of misstatement due to fraud.
The objective of a statutory audit (an external audit) is to express an opinion on the truth and
fairness of the view presented by the financial statements. Its objective is not the prevention or
detection of fraud.
Moreover, there is a possibility that despite all due care, the auditor is unable to detect a fraud
especially those involving management override of controls.
I hope above explanations would enhance your understanding regarding auditor9s roles and
responsibilities in the audit of financial statements.

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Yours faithfully,
XYZ
23 The past experience regarding honesty and integrity of the entity9s management and those
charged with governance is critical for the auditor. However, a belief that management and those
charged with governance are honest and have integrity, does not relieve the auditor of the need
to maintain professional skepticism. In fact, maintaining of professional scepticism throughout the
audit helps the auditor to reduce the risks related to:
 overlooking unusual circumstances.
 over generalizing when drawing conclusions from audit observations.
 using inappropriate assumptions in determining the nature, timing and extent of the audit
procedures and evaluating the results thereof.
 critical assessment of audit evidence.
 identification of material misstatement.
24 Our response to the viewpoints of Amjad would be as follows:
(i) It is not correct that the statutory audit does not add value to business.
In fact:
 it increases the credibility of the financial statements. This is important to potential lenders,
who may insist on the company having an audit as a pre-condition for lending money.
 it confirms to management that they have performed their statutory duties correctly.
 it provides assurance to management that they have complied with nonstatutory
requirements.
 it helps on establishing accountability of the management, especially when the business
owners (shareholders) have hired others to manage their business, as is typically in modern
corporations.
 the need for assurance also arises because there is a complexity of transactions, information
and processing systems which renders difficult in determining the proper presentation without
a review by an independent expert.
 it provides feedback on effectiveness of internal controls. Where internal controls are weak or
inadequate, the auditor will give recommendations for improvement. This will assist
management in improving the internal controls and reducing the risk(s).
(ii) The objective of a statutory audit (an external audit) is to express an opinion on the truth and
fairness of the view presented by the financial statements. Its objective is not primarily the
prevention or detection of all or major fraud. In fact, it is primarily the responsibility of
management to establish systems and controls to prevent or detect fraud. Further, the auditor is
concerned with fraud that might impact the financial statements and is therefore concerned with
the risk of material fraud.
25 (a) Following procedures shall be followed for appointment of the existing auditor for the next
year:
 The board shall first obtain the consent of the proposed auditor.
 A notice shall be given to the members with the notice of general meeting.
 On the appointment of the auditor the board shall ensure that, within fourteen days from
the date of appointment of the auditor, an intimation is sent to the registrar thereof,
together with the consent in writing of the appointed auditor
(b) Procedure for shareholder(s): Javed should follow the following process if he alone or together
with other willing shareholders, holds 10% shareholdings in Alpha Limited:
 The shareholder(s) should first obtain the consent of the proposed auditor.

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 A notice should be given to the company in this regard, not less than seven days before
the date of the annual general meeting.
Responsibilities of the board: The company shall forthwith send a copy of notice received from
Javed to the retiring auditor and shall also post it on the company9s website. Since an auditor,
other than the retiring auditor is proposed to be appointed, the board shall ensure that:
 The retiring auditor is given an opportunity to make a representation in writing to the company
at least two days before the date of general meeting.
 Representation received from the retiring auditor is read out at the meeting before taking up
the agenda for appointment of the auditor.
26 An assurance engagement performed by a practitioner consist of the following elements:
(i) Three party relationships: An assurance engagement is a three party relationship
consist of practitioner, responsible party and intended users.
(ii) Subject matter: This is the data such as the financial statements that have been
prepared by the responsible party for the practitioner to evaluate.
(iii) Evidence: Information used by the practitioner in arriving at the conclusion on which
their opinion is based. This must be sufficient and appropriate. (iv) Assurance Report:
The report containing the practitioner9s opinion. This is issued to the intended user(s)
following the collection of evidence
27 When planning and performing an audit, we should adopt an attitude of professional skepticism.
We should have an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
We should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding our past experience of the honesty and integrity of the entity9s management and
those charged with governance.
Although the level of risk of management override of controls will vary from entity to entity, the
risk is nevertheless present in all entities. Due to the unpredictable way in which such override
could occurs, it is a risk of material misstatement due to fraud and thus a significant risk.
Irrespective of our assessment of the risks of management override of controls, we shall design
and perform the audit procedures for management override of controls.
Assessing the risk of fraud as non-significant is also not correct based on the presumption that BTL
has been the firm9s client for the last 10 years and no material misstatement had been reported in
the previous years. The audit team should identify and assess the risk of material misstatement
due to fraud at the financial statement level and at the assertion level. Furthermore, the audit
team shall consider that there is a risk of fraud in revenue recognition which may result in a
material misstatement unless justifiably rebutted.
28  Where any company is required under the Act to include in its books of accounts the
particulars of cost accounts.
 The Commission may direct that an audit of cost accounts of the company should be
conducted in the order subject to recommendation of the regulatory authority supervising the
business of relevant sector.
 The audit of cost accounts will be conducted by Chartered Accountant or Cost and
Management Accountant and will have same powers, duties and liabilities as an auditor of the
company
29 Rao Arif & Co. Under the provision of Companies Act, 2017, a person who is, or at any time during
the preceding three years was a director, other officer or employee of the company is not eligible
for appointment as auditor. Furthermore, a person will not be qualified for appointment as auditor
of a company if he is disqualified for appointment as auditor of any other company which is that

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company9s subsidiary or holding company. Therefore, being the former CFO of WBL9s subsidiary
will make Rao Arif & Co. ineligible for appointment as external auditor.
Hatim Tughlaq & Co. Under the provision of Companies Act, 2017, a person who is indebted to
the company other than in the ordinary course of business of such entities cannot be appointed
as the auditor. Since it is in the ordinary course of WBL to grant loan therefore HatimTughlaq &
Co. can be appointed as external auditor WBL.
Rashid Kareem & Co. A person or a firm who, whether directly or indirectly, cannot be appointed
as auditor if it has business relationship with the company other than in the ordinary course of
business of such entities. If properties are rented out in the ordinary course of business than Rashid
Kareem & Co. can be appointed as the external auditor of WBL.
30 Salman should follow the following process if he alone or together with other willing shareholders,
holds 10% shareholdings in PL:
 The shareholder(s) should first obtain the consent of the proposed auditor.
 A notice should be given to PL in this regard not less than seven days before the date of
the annual general meeting.
PL shall forthwith send a copy of notice received from shareholder(s) to the retiring auditor and
shall also post it on its website. Since an auditor, other than the retiring auditor is proposed to be
appointed, PL shall ensure that:
 the retiring auditor is given an opportunity to make a representation in writing to PL at least two
days before the date of general meeting.
 representation received from the retiring auditor is read out at the meeting before taking up
the agenda for appointment of the auditor.
31 Death of Mr. Haris has caused casual vacancy in the office of auditor. The board shall fill his vacancy
in the office of auditor within 30 days. If the board fails to fill up the casual vacancy within 30 days,
the commission may of its own motion or on as application made to it by the company or any of
its member direct to make good the default within the specified time. In case company fails to
report compliance within the specified period the commission shall appoint auditors. Any auditor
appointed to fill the vacancy shall hold the office until the conclusion of the next annual general
meeting.

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Chapter 2 | Obtaining an Engagement

1 (a) Before accepting the audit, our firm should consider the following:
(i) Whether the firm is technically competent to act as auditors?
(ii) Does it possess the resources necessary to carry out the engagement?
(iii) Could there be any self-interest threat involved?
(iv) Are there any professional reasons for not accepting the engagement?
(c)
(i) The change in the terms of engagement may result from:
I. change in circumstances affecting the need for the service.
II. misunderstanding as to the nature of the audit or of the related service originally requested.
III. restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
(ii) In response to the request for change in the terms of the engagement the firm should consider
the following:
 Appropriateness of such a request for change by considering carefully the reason given by
Mujahid Limited.
 in case the change results in restriction on the scope of the engagement, the firm should
assess whether or not it would be able to able to meet its statutory responsibility after the
impositions of such restriction.
 A change in circumstances or a misunderstanding concerning the nature of service
originally requested would ordinarily be considered a reasonable basis for requesting a
change. A change would not be considered reasonable if it appears that change relates to
information that is incorrect, incomplete or unsatisfactory.
 Before agreeing to change the terms of engagement the auditor should consider any legal
or contractual implications of change to assess whether it would still be possible to carry
out the audit in accordance with ISAs.
2 The following factors may make it appropriate to revise the terms of the audit engagement or to
remind the entity of existing terms:
(a) Any indication that the entity misunderstands the objective and scope of the audit.
(b) Any revised or special terms of the audit engagement.
(c) A significant change in the ownership.
(d) A significant change in nature and size of the entity9s business.
(e) A change in legal or regulatory requirements.
(f) A change in the FRF adopted in the preparation of the F/S.
(g) A change in other reporting requirements.
3 (a) Preconditions for an audit are as follows:
(i) An acceptable FRF has been used by the management in the preparation of the F/S; and
(ii) the management and, where appropriate, TCWG agreed on the premise on which the audit is
to be conducted.
b) In order to establish whether the preconditions for an audit are present, we will:
(i) determine whether the FRF to be applied in the preparation of F/S is acceptable;
(ii) obtain the agreement of management that it acknowledges and understands its
responsibility:
for the preparation of the F/S in accordance with the AFRF.
for such internal control as management determines is necessary to enable the
preparation of F/S that are free from material misstatement, whether due to fraud or
error.

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to provide us with
- access to all information of which management is aware, that may be relevant
to the preparation of the F/S;
- additional information that the auditor may request from management for the
purpose of the audit; and
- unrestricted access to persons within the entity from whom the auditor
determine it necessary to obtain audit evidence.
(c) If a precondition for an audit is not present, the matter would be discussed with the
management. Unless required by law or regulation to do so, we will not accept the proposed audit
engagement, if the pre-conditions are not met
4 Key Components of Audit engagement letter:
 The objective and scope of the audit of F/S;
 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the AFRF for the preparation of the F/S;
 Reference to the expected form and content of any reports to be issued by the auditor and;
 A statement that there may be circumstances in which a report may differ from its expected
form and content.
5 (a) Circumstances in which the management can request the auditor to change the terms of audit
engagement:
(i) Change in circumstances affecting the need for the service.
(ii) A misunderstanding as to the nature of an audit as originally requested.
(iii) A restriction on the scope of an audit engagement, whether caused by management
or caused by other circumstances
(b) Factors that are to be considered by auditor before accepting the change in terms of
engagement:
(i) Justification provided for changing the terms of engagement.
(ii) The information in respect of which the change is requested by the management.
(iii) Legal or contractual implications of the change.
(c) Steps that the auditor can take, if he is unable to agree to a change in terms of engagement: If
the auditor is unable to agree to a change in the terms of the audit engagement and is not
permitted by management to continue the original engagement, the auditor shall:
(i) Withdraw from the audit engagement where possible under applicable law or
regulation; and
(ii) Determine whether there is any obligation, either contractual or otherwise, to report
the circumstances to other parties, such as TCWG, owners or regulators.
6 In order to establish whether the preconditions for an audit are present, the auditor shall:
 Determine whether the FRF to be applied in the preparation of the F/S is acceptable; and
 Obtain the agreement of management that it acknowledges and understands its
responsibility:
- For the preparation of the F/S in accordance with the AFRF, including where relevant
their fair presentation;
- For such internal controls as management and, where appropriate, TCWG determine is
necessary to enable the preparation of F/S that are free from material misstatement,
whether due to fraud or error; and
- To provide the auditor with:

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o Access to all information of which management is aware that is relevant to the

preparation of the F/S such as records, documentation and other matters;
o Additional information that auditor may request from management for the
purpose of the audit; and
o Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
7 In order to establish whether the preconditions for an audit are present, I will:
(i) determine whether the FRF to be applied in the preparation of F/S is acceptable;
(ii) obtain the agreement of management that it acknowledges and understands its responsibility:
 for the preparation of the F/S in accordance with the AFRF.
 for such internal control as management determines is necessary to enable preparation
of F/S that are free from material misstatement, whether due to fraud or error.
 to provide us with all relevant and requested information and unrestricted access to all
personnel
8 Responsibilities of our firm and of the existing auditors: Our firm will communicate with the
existing auditors to establish if there are any matters that it should be aware of when deciding
whether or not to accept the appointment. The following points should be noted in connection
such communication:
 HGM permission is required for any such communication. If HGM refuses to give its
permission, the appointment as auditor should not be accepted.
 If HGM does not give the existing auditor the permission to reply to any relevant questions
of our firm, the appointment as auditor should not be accepted.
 If existing auditor provides the required information, our firm should assess all the
available information and take a decision about whether or not to accept the audit
engagement.
 If the existing auditor does not provide any information relevant to the appointment, we
may accept or reject the engagement based on other available knowledge.
 Even if the existing auditor provides professional reasons to suggest that we should not
accept the audit, the final decision in this regard shall be based on our professional
judgment.
9 (a) In determining the need to send an engagement letter, the firm should assess whether:
 circumstances require a revision in the terms of engagement.
 management need to be reminded of the existing terms of the engagement. The following
factors may indicate that the above is appropriate:
 Any indication that the entity misunderstands the objective and scope of the audit.
 Any revised or special terms of the audit engagement.
 A recent change of senior management.
 A significant change in ownership.
 A significant change in nature or size of the entity9s business.
 A change in legal or regulatory requirements.
 A change in other reporting requirements.
(b) We would consider whether the request is <reasonable=.
 If the request is reasonable then revised terms should be agreed and recorded in
engagement letter.
 If the request is unreasonable, we should discuss the matter with the management and if
the management agrees with our view point, then there is no need for amendment in the
existing terms of engagement.

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 If we are unable to agree to the changes and management also do not agree with our
viewpoint then we would consider withdrawing from the engagement and consider
whether there is any obligation to report the circumstances to TCWG, owners or
regulators.
10 Additional matters that can be included in the engagement letter:
 Additional details on the scope of the audit, such as reference to applicable legislation,
regulations, ISAs, and ethical pronouncements.
 The fact that because of the inherent limitations of an audit, and the inherent limitations of
the internal control, there is an unavoidable risk that some material misstatements may not
be detected even though the audit was properly planned and performed in accordance with
ISAs.
 Arrangements regarding planning & performance of audit including composition of audit team
 The expectation that management will provide written representations.
11 The statement is not appropriate, as management is also responsible for assessing the entity9s
ability to continue as a going concern and whether the use of the going concern basis of accounting
is appropriate as well as disclosing, if applicable, matters relating to going concern.
12 a) Situations that may require revision in the terms of engagement letter are as follows:
 Any indication that the entity misunderstands the objectives and scope of the audit;
 Any revised or special terms of the audit;
 A recent change in the senior management/ ownership;
 A significant change in nature or size of the entity9s business;
b) Pre-conditions of an audit are not present: If the pre-conditions of audit are not present, the
auditor shall:
 discuss the matter with the management and explain to them what the preconditions are
and why they are required.
 unless required by law or regulation, the auditor shall not accept the proposed audit
engagement. If the management is unable to address the auditor9s concern.
13 To establish if the preconditions for an audit are present, the auditor shall:
 establish if the financial reporting framework to be used in the preparation of the financial
statements is acceptable; and
 obtain the agreement of management that it acknowledges and understands its responsibility
(the 8premise9):
- for the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation;
- for internal controls to ensure that the financial statements are not materially misstated; and
- to provide the auditor with all relevant and requested information and unrestricted access
to all personnel.
14 (a) Matters to be included in engagement letter
 Being the first year of audit for our firm, arrangements concerning the involvement of
predecessor auditor would be necessary.
 Use of auditor9s expert may be required as RRL has changed its accounting policy from
historical cost convention to revaluation model.
 Due to strict deadlines:
– It should be included in the engagement letter that management would make available the
draft financial statements along with all relevant information in time to allow for the
completion of audit in accordance with the proposed time table.

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– We need to communicate the planning and performance of the audit, including the
composition of the audit team.
– We may also consider using RRL9s internal audit department and this fact may have to be
communicated through the engagement letter.
15 The auditor should consider the justification for the request and whether it is <reasonable=. If the
auditor considers that it is a reasonable request and the terms of engagement are changed, the
auditor and management shall agree on and record the new terms of engagement in an
engagement letter.
If the auditor is unable to agree to a change of terms he should withdraw from the engagement
and consider whether there is any obligation to report the circumstances to those charged with
governance, owners or regulators.

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Chapter 3 | PLANNING AND RISK ASSESMENT

1 (b) Audit Skepticism

Audit skepticism is an attitude of professional skepticism which means that the auditor should
recognize the fact that circumstances may exist that may cause the F/S to be materially misstated.
Consequently, he should make a critical assessment with a questioning mind of the validity of audit
evidence obtained. He should remain alert to audit evidence that contradicts or brings into
question the reliability of documents and responses to inquiries and the reliability of other
information obtained from management and TCWG.

Elaboration on the response of the audit manager that auditor should always maintain an attitude
of professional skepticism throughout the audit:
Although the auditor cannot be expected to disregard past experience of the honesty and integrity
of the entity9s management and TCWG, the auditor9s attitude of professional skepticism is
particularly important in considering the risks of material misstatement on account of changes in
circumstances.
2 Some of the situations which are indicative of fraud or an attempt to conceal fraud or fraudulent
financial reporting are as follows:
 Significant transaction, that are outside the normal course of business or that otherwise
appear to be unusual.
 Where a transaction appears overly complex.
 Management has not discussed the nature of and accounting for such transactions with TCWG
of the entity and there is inadequate documentation.
 Management is placing more emphasis on the need for a particular accounting treatment than
on the underlying economics of the transaction.
 Transactions that involve non-consolidated related parties, including special purpose entities
and have not been properly reviewed or approved by TCWG of the entity.
 The transactions involve previously unidentified related parties or parties that do not have the
substance or the financial strength to support the transaction without assistance from the
entity under audit.
3 (a)
(i) In the absence of any valid explanations from the management, it would be considered as
misappropriation of assets i.e. fraud as it seems to involve the theft of an entity's assets.
(ii) It is a case of fraudulent financial reporting as it seems that management has tried to inflate
the sales in order to deceive financial statement users. An apparent intention behind this action is
the management bonuses which are linked to the operating performance of the company.
(iii) It is an error on the part of accountant. The underlying records such as the invoice etc have not
been altered and even the voucher has been prepared with the correct amount which shows that
it is an unintentional misstatement.
(b) (i) & (ii)
If we have identified a fraud or has obtained information that indicate that a fraud may exist, we
should communicate these matters on a timely basis to the appropriate level of management. This
is so even if the matter might be considered immaterial. We should consider whether there are
matters related to fraud to be discussed with TCWG of the entity.
Matters may include:
 Concerns about the nature, extent and frequency of management's assessments of the
controls in place to prevent and detect fraud and of the risk that the F/S may be misstated.

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 A failure by management to appropriately address identified significant deficiencies in

internal control, or to appropriately respond to an identified fraud.
 Our evaluation of ASPL9s control environment, including questions regarding the
competence and integrity of management.
 Actions by management that may be indicative of fraudulent financial reporting, such as
management's effort to manage earnings in order to deceive financial statement users by
influencing their perceptions as to the entity's performance and profitability.
 Concerns about the adequacy and completeness of the authorization of transactions that
appear to be outside the normal course of business.
Based on the discussion and our overall understanding of the matter, we should:
 ask the management to reverse the sales made;
 revise its risk assessment of the entity9s control environment and modify the further
planned audit procedures accordingly.
 Consider the impact on audit report.
(iii) Since this seems to be an error, the appropriate level of management should be informed
about it and the relevant adjustments in fixed assets and depreciation account should be made.
4 (a) Areas of Inherent Risk
(i) Donations
 Donations may fall, especially where donors9 own income is limited or declining, or there
is a change in the circumstances.
 No control over the completeness of donations (especially over the cash donations).
(ii) Expenses
 Donations are spent outside the aims and objectives of AMF.
 Donations are not spent in accordance with donors9 instructions.
(b)
Effect on the audit approach
(i) It is difficult to estimate that income in the future will be sufficient to meet the expenditure of
the AMF. Audit of the going concern concept (as in ensuring that the AMF can still operate) will
therefore be quite difficult.
(ii) Audit tests are unlikely to be effective to meet the assertion of completeness. The audit report
may need to be modified and qualified to explain the lack of evidence stating that completeness
of income cannot be confirmed.
(iii) Careful review of expenditure will be necessary to ensure that expenditure is not 8ultra vires9
the objectives of the AMF. The auditor will need to review the trust deed and other documents of
the AMF carefully in this respect.
(iv) The use of donations received for specific purposes would have to be checked to ensure that
instruction of donors has been followed.
5 (a)
(i) Sajjad may have decided to change the level of materiality because of any of following causes:
 a change in circumstances; or
 a change in the auditor9s knowledge as a result of performing audit procedures.
(ii) There is an inverse relationship between materiality and the level of audit risk. This relationship
is considered by an auditor in determining the nature, timing and extent of audit procedures. Mr.
Sajjad reduced the materiality level which resulted in increase in audit risk. Therefore, in order to
compensate the effect of increased audit risk, he should either:
 reduce the assessed risk of material misstatement, where this is possible by carrying out
extended or additional tests of control; or

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 reduce the detection risk by modifying the nature, timing and extent of planned
substantive procedures.
(b)
Examples of qualitative misstatements would include the following:
(i) Inadequate or improper description of an accounting policy when it is likely that a user
of the F/S would be misled by the description.
(ii) Failure to disclose the breach of regulatory requirements when it is likely that the
consequent imposition of regulatory restrictions will significantly impair operating
capability
(iii) Non-disclosure of directors personal expenses, charged to company even if they are
insignificant.
(iv) Non-disclosure of failure to meet debt covenant requirements.
(v) Illegal payments which may not be material but if revealed may have severe
repercussions.
6 (a) The audit strategy sets the scope, timing and direction of the audit. It also provides
guidance for the development of audit plan. The audit plan is more detailed than the audit
strategy and it includes the nature, timing and extent of audit procedures to be performed
by the engagement team members. The planning for these audit procedures takes place
over the course of audit as the audit plan for the engagement develops.
(b)
The auditor should perform the following activities prior to starting an initial audit engagement:
(i) Performing procedures regarding the acceptance of the client relationship and the
specific audit engagement.
(ii) Unless prohibited by law, arrangements to be made with the predecessor auditor, for
example, to review the predecessor auditor9s working papers.
(iii) Any major issues discussed with management in connection with the initial selection
as auditor, the communication of these matters to TCWG, and how these matters
affect the audit strategy and audit plan.
(iv) The audit procedures necessary to obtain sufficient appropriate audit evidence
regarding opening balances.
(v) Other procedures required by the firm9s system of quality control for initial audit
engagements.
7 (a)
Preliminary Engagement Activities: These are the activities undertaken by the auditor at the
beginning of audit engagement, and include:
- Performing procedures regarding continuance of the client relationship and the specific
audit engagement;
- Evaluating compliance with the relevant ethical requirements, including independence;
and
- Establishing an understanding of the terms of the engagement.
Planning Activities:
Planning activities includes establishing an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan.
(b)
(i) Information that Alamgir & Co. Chartered Accountants needs to obtain in deciding whether or
not to accept the audit of GL:
Following matters may be considered in deciding about the acceptance of audit:
 The integrity of the principal owners, key management and TCWG of the entity;

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 Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
 Whether the firm and the engagement team can comply with relevant ethical
requirements;
(ii) Matters that may be considered in establishing the overall audit strategy: In establishing the
overall audit strategy, the auditor shall:
 Identify the characteristics of the engagement that define its scope;
 Ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required;
Consider factors that, in auditor9s professional judgment, are significant in directing engagement
team9s efforts;
 Consider the results of the preliminary engagement activities and, where applicable, whether
knowledge gained on other engagement performed by the engagement partner for the entity
is relevant; and
 Ascertain the nature, timing and extent of resources necessary to perform the engagement.
 Being initial audit engagement following matters should also be considered in establishing
overall audit strategy:
 Arrangements to be made with the predecessor auditor.
 Communicate major issues identified during discussion with the management, to TCWG and
consider that how these matters will affect the overall audit strategy and audit plan.
 The audit procedures necessary to obtain sufficient appropriate audit evidence regarding
opening balances.
 Other procedures required by the firm9s system of quality control for initial audit engagements
(for example, the firm9s system of quality control may require the involvement of another
partner or senior individual to review the overall audit strategy prior to commencing
significant audit procedures or to review reports prior to their issuance).
8 (a)
Factors to be considered by auditor in exercising judgment relating to the significance of audit
risks: In exercising judgment as to which risks are significant risks, the auditor shall consider at
least the following:
 Whether the risk is a risk of fraud;
 Whether the risk is related to recent significant economic, accounting or other
developments and, therefore, requires specific attention;
 The complexity of transactions;
 Whether the risk involves significant transactions with related parties;
 The degree of subjectivity in the measurement of financial information related to the risk;
and
 Whether the risk involves significant transactions that are outside the normal course of
business for the entity, or that otherwise appear to be unusual.
(b)
Documentation Required for Risk Identification and Risk Assessment procedures: The auditor shall
include in the audit documentation:
 The discussion among the engagement team about the susceptibility of the entity9s F/S to
material misstatement and decisions reached.
 Key elements of the understanding obtained regarding each aspect of the entity and its
environment and each internal control component; the sources of information from which
the understanding was obtained; and the risk assessment procedures performed;
 The identified and assessed risks of material misstatement; and

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 The risks identified, and related controls about which the auditor has obtained an
understanding.
9 Course of action:
Irrespective of the auditor9s assessment of the risks of management override of controls, the
auditor shall design and perform audit procedures to:
(i) Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in preparation of F/S. In designing and performing audit procedures for such
tests, auditor shall:
 Make inquiries of individuals in the accounts department about inappropriate or unusual
activity they have noticed during processing of journal entries and other adjustments;
 Select journal entries and other adjustments made near the yearend; and
 Consider the need to test journal entries and other adjustments throughout the period.
(ii) Review accounting estimates for biases and evaluate whether the circumstances producing the
bias, if any, represent a risk of material misstatement due to fraud. In performing this review, the
auditor shall:
 Evaluate whether the judgments and decisions made by management in making the
accounting estimates, even if they are individually reasonable, indicate a possible bias on
the part of the management that may represent a risk of material misstatement due to
fraud. If so, the auditor shall reevaluate the accounting estimates taken as a whole; and
 Evaluate the results of the accounting estimates and judgments made in the prior years.
(iii) For significant transactions that are outside the normal course of business for the entity, or
that otherwise appear to be unusual, the auditor shall evaluate whether the business rationale (or
the lack thereof) of the transactions suggests that they may have been entered into to engage in
fraudulent financial reporting or to conceal misappropriation of assets.
10 (a) Fraud Risk Factors:
Rapid Changes in Technology:
Products like mobile phones are likely to become obsolete very quickly, as more advanced
products come on to the market. The company faces a threat due to rapid changes in technology;
therefore the management may be inclined to manipulate the accounting records.
Lack of Segregation of Duties/ Dominance of management by a single person:
As Anwar is the Chief Executive and is also responsible for finance and operations of the company,
this gives him a personal motivation to misstate figures to show improved performance.
Long Term Loan:
As the company has applied for long term loan, it may be inclined to manipulate the figure to show
better financial position to the bank.
Demand for early completion of audit:
The demand by Anwar for early completion of audit creates undue suspicion because such
pressures are sometime applied to distract the auditor from his responsibilities.
11 Materiality:
Information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of F/S. The auditor keeping in view the concept of materiality gives his
opinion i.e. whether the F/S present fairly in all material respects the financial position and
performance of the entity.
Performance Materiality:
Performance materiality means the amount or amounts set by the auditor at less than materiality
for the F/S as a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the F/S as a whole. If
applicable, performance materiality also refers to the amount or amounts set by the auditor at

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less than the materiality level or levels for particular classes of transactions, account balances or
disclosures. Performance materiality recognizes the fact that errors/omissions detected in a
particular area may not breach the overall materiality level but when all the errors/omissions in
all the areas is combined or added together, the overall materiality could be breached
12 Financial Statement Level:
Risks at financial statement level are those which are pervasive to the F/S as a whole and which
potentially affect many assertions.
Example: If management has a tendency to override internal controls it would affect all areas of
the accounting system.
Assertion Level:
Risk at assertion level are those which relate to specific objectives of the F/S. Example: All liabilities
have not been recorded and all recorded assets exist.
13 (a)
(i) Inability to increase the prices of its products since last 5 years
The Company9s profitability is under threat due to increased competition therefore the
management may be inclined to manipulate the accounting records.
(ii) Research costs wrongly capitalized
It is an error and is not indicative of fraud, as research costs is only 2% of the total amount
capitalized and the underlying records were duly supported by invoices from the suppliers.
(iii) Bonuses linked with profitability
It is a fraud risk factor as it is evident that management is receiving profit related bonuses,
therefore the management may be inclined to manipulate the accounting records.
(iv) Goods sold but not dispatched
It is a fraud risk factor as it seems that management has tried to inflate the sales in order to deceive
financial statement users, an apparent intention behind this action can be to overstate the profits
of the company
(b) Course of action:
In response to assessed risk of material misstatement due to fraud, the auditor shall:
 Emphasize to the Audit team the need to maintain an attitude of professional skepticism.
 Assign more experienced staff or increased supervisor of staff.
 To the extent not already done, the auditor shall obtain an understanding of the entity9s
related controls, relevant to such risks.
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may be
indicative of fraudulent financial reporting resulting from management9s effort to manage
earnings; and
 Incorporate an element of unpredictability in the selection of the nature, timing and extent
of audit procedures.
 Design and perform further audit procedures whose nature, timing and extent of audit
procedures are responsive to the assessed risk of material misstatements.

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14

15 (a)
(i) Forging or altering accounting records or supporting documentation which form the basis of the
F/S.
(ii) Misrepresenting or intentionally omitting events or transactions from the F/S.
(iii) Intentionally misapplying accounting principles.
(iv) Concealing or not disclosing, facts that could affect the amounts recorded in the F/S.
(v) Engaging in the complex transactions that are structured to misrepresent the financial position
or financial performance of the entity.
(vi) Embezzling receipts (for example, diverting them to personal bank accounts)
(b) The auditor is required to perform the following procedures to identify the risks of material
misstatement due to fraud:
 Make inquiries of management in respect of:
- their assessment of the risk of material fraud;
- their process in place for identifying and responding to the risks of fraud;
- any specific risks of fraud identified or likely to exist;
- any communications within the entity in respect of fraud (including to employees
regarding management9s -views on business practices and ethical behavior).
 Make inquiries of management and others within the entity as to whether they have any
knowledge of any actual, suspected or alleged frauds and to obtain views about the risks of
fraud.
 Evaluate any unusual or unexpected relationships identified in performing analytical
procedures which might indicate a risk of material fraud.
 Evaluate information obtained from other risk assessment procedures to see if any fraud risk
factors exist.
16 Audit risk
There is a risk that revenue from fees income and sale of goods is misstated due to following
reasons:

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 Fees income may be recognized immediately on receipt of fees rather than recognized on
monthly basis as the services are rendered.
 Discounts given to students may not be accounted for properly, resulting in overstatement
of revenue.
 There is a risk that revenue related to sale of course material is in appropriately classified
as part of the university fees, as a result of which it may have been recognized
proportionately on the basis of time (services provided).
 Entire revenue from sale of course material may not be recognized
17 Professional Skepticism:
It refers to an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
However, it does not mean that the auditors should disbelieve everything they are told, but they
should view what they are told with a skeptical attitude, and consider whether it appears
reasonable and whether it conflicts with any other evidence.
18 a)
(i) Planning stage – The concept of materiality is used in determining the nature, timing and extent
of further audit procedures;
(ii) Reporting stage – The materiality concept is used in evaluating the effect of uncorrected
misstatements, if any, on the F/S and in forming the opinion in the auditor's report.
(b) The auditor shall document the following aspects of materiality:
(i) Materiality for the F/S as a whole;
(ii) Performance materiality;
(iii) Basis of computing materiality; and
(iv) Any revision of (i) to (ii) as the audit progresses
19 (a) The objective of a statutory audit (an external audit) is to express an opinion on the truth and
fairness of the views presented by the F/S. The auditor is not primarily responsible for the
prevention or detection of fraud.
The auditor will be concerned with fraud only to the extent that it might impact on the view shown
by the F/S. He will therefore be concerned with the risk of material fraud. The auditor should
maintain an attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit vidence. Further,
he must respond appropriately to fraud or suspected fraud identified during the audit.
b) Management9s attitude towards the auditor which may indicate the possibility of a material
misstatement includes:
 Denial of access to records, facilities, certain employees, customers, vendors, or others
from whom audit evidence might be sought.
 Undue time pressures imposed by management to resolve complex or contentious issues.
 Unusual delays by the entity in providing requested information.
 An unwillingness to add or revise disclosures in the F/S to make them more complete and
understandable.
(c)
Rapid growth or unusual profitability.
 Significant portions of key management personnel9s compensation i.e. bonus being
contingent upon achieving aggressive targets for operating results.
 Pressure on management to show good profitability considering the proposed acquisition
20 (a) Fraud risk factors in the scenario are:
 high degree of competition or market saturation, accompanied by declining margins and
profitability.

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 High vulnerability to rapid changes, such as changes in technology, product obsolescence,

or interest rates.
 Excessive pressure exists for management to meet the requirements or expectations of
third parties due to the need to obtain additional debt financing to stay competitive.
 Recurring negative cash flows from operations or an inability to generate cash flows from
operations while reporting profitable operation.
b) Audit risks
(i) Risk of fraudulent financial reporting by Management override of controls: In view of the
declining earnings trend and declining margin and increase in financing the management may be
inclined to fraudulent financial reporting by overstating the revenues or understating the
expenses.
(ii) Risk of impairment in value of property, plant and equipment: Due to introduction of new
technology there is a possibility that value of existing plant and machinery is impaired.
(iii) Risk of overstatement of existing inventory:
Due to change in technology, the demand for SL9s products has been affected and there is a
possibility that net realizable value of inventory may have declined and a provision for
obsolescence may be required.
(iv) Risk of overstatement in value of debtors: In view of the negative operating cash flows, it seems
that SL has not been able to generate operating cash flows despite increase in sale, which might
indicate that debtors are either doubtful or not recoverable.
21 Since it will be the first time we will be auditing Door Limited, I will have to discuss the following
additional matters with the engagement partner:
 Arrangements to be made with the predecessor auditor, for example, to review the
predecessor auditor9s working papers;
 Any major issues (including the application of accounting principles or of auditing and
reporting standards) discussed with management in connection with the initial selection as
auditor, the communication of these matters to those charged with governance and how these
matters affect the overall audit strategy and audit plan;
 The audit procedures necessary to obtain sufficient appropriate audit evidence regarding
opening balances; and
 Other procedures required by the firm9s system of quality control for initial audit
engagements.
22 (a)
Email to job-in-charge
To: Audit Senior
Date: 07 September 2017
Subject: Risk of material misstatement due to fraud and management override of control
I have reviewed the draft planning document prepared by you and I want to bring your attention
to the risk of material misstatement due to fraud and management override of control.
When planning and performing an audit, we should adopt an attitude of professional skepticism.
We should have an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
We should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding our past experience of the honesty and integrity of the entity9s management and
those charged with governance.
Although the level of risk of management override of controls will vary from entity to entity, the
risk is nevertheless present in all entities. Due to the unpredictable way in which such override
could occur, it is a risk of material misstatement due to fraud and thus a significant risk. Irrespective

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of our assessment of the risks of management override of controls, we shall design and perform
the audit procedures for management over ride of controls.
If you require any further information on the above, please do not hesitate to contact me.
Yours faithfully,
XYZ
b)
Following are the procedures for risk of material misstatement due to fraud:
(i) Make enquiries of management in respect of:
 their assessment of the risk of material fraud;
 processes in place for identifying and responding to the risks of fraud; and
 any specific risks of fraud identified or likely to exist.
(ii) Make inquiries of management and others within the entity as to whether they have any
knowledge of any actual, suspected or alleged frauds and to obtain views about the risks of fraud.
(iii) Make inquiries of internal audit.
(iv) Evaluate any unusual or unexpected relationships identified while performing analytical
procedures which might indicate a risk of material fraud.
(v) Evaluate information obtained from other risk assessment procedures to see if any fraud risk
factors are present.
23 The following can be the benchmark for determining materiality:
 Gross profit
 Total expenses / Total Revenue
 Total equity
 Total assets / Total Liabilities
24 Key benefits that may arise from splitting the work between interim and final audit are as follows:
 More flexible resource planning within the firm (the timing of interim audit is typically more
flexible than the timing of final audit. This helps to reduce demand for audit staff during 8busy
season9)
 Earlier identification of significant matters
 Shareholders and other users receive audited accounts earlier/Earlier completion of the audit
 Increased audit efficiency
25 (a)
Fraud risk factors:
Significant decline in customer demand:
Due to significant decline in demand of foreign customers, the management may be inclined to
show improved results by manipulating the accounting records.
Significant related party transactions:
Significant related party transactions between GL and BL would provide an opportunity for
engaging in fraudulent financial reporting.
Sale of shares by director:
The directors' intention to sell their shareholding in GL provides them an incentive to manipulate
the annual profits so that they can achieve the maximum possible gain from the sale of shares.
Non-implementation of last year’s external auditor’s recommendations:
Management failure to place controls against weaknesses identified by the external auditor on
timely basis shows the management9s attitude towards the improvement of internal controls and
consequently it increases the risk of fraud.
b)

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Course of action: In response to assessed risk of material misstatement due to fraud, the auditor
shall:
 emphasize to the Audit team the need to maintain an attitude of professional skepticism.
 assign more experienced staff or increased supervision of staff.
 to the extent not already done, the auditor shall obtain an understanding of the entity9s
related controls, relevant to such risks
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may be
indicative of fraudulent financial reporting resulting from management9s effort to manage
earnings.
 incorporate an element of unpredictability in determining the nature, timing and extent of
audit procedures
 design and perform further audit procedures whose nature, timing and extent are responsive
to the assessed risk of material misstatements.
26  The audit team should not accept other invoices as a sample in replacement of the three
misplaced invoices. It should try to perform alternate audit procedures to verify those sales. If
that is not possible, the team should request the management to find those invoices.
Otherwise it should be considered as a misstatement.
 The audit team should investigate whether the missing invoices represent a control weakness
or indicative of fraud and evaluate its impact on the overall audit accordingly.
 As for the sale recorded with incorrect rates, the management should be asked to reduce the
sales by Rs. 1,575,000.
 The audit team should also investigate whether the invoices recorded at incorrect rate
represent control weakness, due to which the management was unable to detect the error in
the invoices previously.
 The audit team must obtain a high degree of certainty that such misstatement is not
representative of the population for which it may need to perform additional audit
procedures.
 If it is established that the misstatement is representative of the population, the audit team
should project the misstatements found in the sample to the entire population of the stratum
and consider increase in the extent of substantive testing and the nature of testing.
27 (a) Fraud can be committed by management overriding controls using techniques such as the
following:
 Recording fictitious journal entries.
 Inappropriately adjusting / changing assumptions and judgments used previously to
estimate account balances.
 Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
 Concealing or not disclosing facts that could affect the amounts recorded in the financial
statements.
 Engaging in complex transactions / unusual transactions to misrepresent the financial
position or financial performance of the entity.
 Altering records and terms related to significant and unusual transactions.
28 (b)
 There is a risk of embezzlement in cash collection and inventory.
 Donation for food are recorded in donation for education account and vice versa.
 Contributions are spent on other than intended purpose.

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 There is a risk that the money spent on administration is not recorded as administration cost
and is misclassified.
 Since only one person is responsible for managing the accounts, there is a lack of segregation
of duties and hence risk of fraud and error may arise.
 Since there is no full time person to look after the accounts, there is a risk that transactions
are not recorded on a timely basis.
29 Performance materiality means the amount or amounts set by the auditor at less than materiality
for the financial statements as a whole or at less than the materiality level for particular classes of
transactions, account balance or disclosures.
Performance materiality is set to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements in the financial statements or in classes
of transactions, account balance or disclosures exceeds the materiality as a whole.
30 The auditor may make the following inquiries to identify the risk of material misstatement due to
fraud:
 Management9s assessment of the risk that the financial statements may be materially
misstated due to fraud, including the nature, extent and frequency of such assessments.
 Management9s process for identifying and responding to the risks of fraud in the entity,
including any specific risks of fraud that management has identified or that have been
brought to its attention, or classes of transactions, account balances, or disclosures for
which a risk of fraud is likely to exist;
 Management9s communication, if any, to those charged with governance regarding its
processes for identifying and responding to the risks of fraud in the entity; and
 Management9s communication, if any, to employees regarding its views on business
practices and ethical behavior.
 Enquire whether they have knowledge of any actual, suspected or alleged fraud affecting
the entity
31 Discussion on conclusion: Since the auditor has extrapolated the error over the entire population,
he should obtain sufficient evidence that the misstatement or deviation also affects the rest of the
population.
Steps to be performed:
 Investigate the nature and cause of the error i.e. whether the errors identified are an
indication of system errors.
 Investigate whether the problem lies within one transaction only, or it affected multiple
transactions or affected any specified period.
Discussion on conclusion:
The conclusion drawn by the audit junior is not correct, as there may be other errors which when
aggregated, may result in a material misstatement.
It may also be an indication of similar errors in the accounting software.
The accounting treatment suggested by the management is also not correct, because payable to
FBR and receivable from employees have been understated at year-end.
Steps to be performed:
 Involve the IT specialist for obtaining assurance on the proper functioning of the accounting
software.
 Consider whether there is any fines or penalties which need to be accounted for in the financial
statements
 Discuss with the management to record the short deduction as receivable from employees
and payable to FBR.

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32

33 Aggressive targets for departmental heads

CEO aggressively follows up with the departmental heads for achieving the targets set by those
charged with governance. It seems that there is an excessive pressure on management to meet
financial targets established by the directors therefore they may be under undue pressure to
misstate the financial statements.
Performance measurement of senior management
Since the performance of the senior management is measured in terms of year-on-year profit
growth they would have an incentive to fraudulently misstate the financial statements to obtain
bonuses or increments.
Internal audit department reports to CEO
Reporting of internal audit department to the CEO will impair their independence. Therefore this
deficiency in internal control structure would give an opportunity for fraudulent financial
reporting. Significant subjective judgements Determination of the provision required for onerous
contract may require significant subjective judgements on part of the management. There is an
opportunity for the management to misstate the recognition of expenses and liabilities.
Furthermore, since the performance is measured in terms of year-on-year profit growth,
management would have an opportunity to achieve those targets by not recording the required
provision.
Not recording provision
Justification of the CFO does not seem correct as information regarding rise in the cost of raw
material can easily be obtained from the market. The fraud risk factor further increases with the
fact that the audit team also suspects that the provision has not been recorded to maintain the
profitability.
Maintaining the profitability
Excessive interest by management in maintaining the profitability and earning trend represents
the management9s attitude which would increase the fraud risk.
34 Information is considered material if its omission could influence the economic decision of the
users taken on the basis of the financial statements. Only considering the board of director as the

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only users of financial statements for determining materiality is not correct. Furthermore, since TL
is a newly established entity, use of 8profit before tax9 will not be a good benchmark as current
year profit is low because of first year of operation. Further, considering a benchmark on the basis
of future profitability is also not correct. If materiality is still to be determined based on 8profit
before tax9, it will result in a low materiality level, which will require performing detailed testing.
By setting a lower materiality the audit team would also increase their sensitivity to a potential
misstatement.
Alternatively, assets or revenue may be considered to be an appropriate benchmark, in the
determination of materiality. The audit team however, based on their audit strategy and approach,
may consider other appropriate benchmarks (e.g. total expenses, net assets etc.)
35 In response to assessed risk of material misstatement due to fraud, the auditor shall:
 emphasize to the audit team the need to maintain an attitude of professional skepticism.
 assign more experienced staff or increased supervision of staff.
 to the extent not already done, the auditor shall obtain an understanding of the entity9s
related controls, relevant to such risks.
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective
 measurements and complex transactions, may be indicative of fraudulent financial
reporting resulting from management9s effort to manage earnings.
36 b) Planning activities to be performed by Afaq & Co.
 Arrangements to be made with the predecessor auditor, for example, to review the
predecessor auditor9s working papers.
 Any major issues (including the application of accounting principles or of auditing and
reporting standards) discussed with management in connection with the initial selection as
auditor, the communication of these matters to those charged with governance and how these
matters affect the overall audit strategy and audit plan.
 Audit procedures to be performed to obtain sufficient appropriate audit evidence regarding
opening balances.
 Other procedures required by the firm9s system of quality control for initial audit engagement.
c)
If, the auditor performs new or additional audit procedures or draws new conclusions after the
date of the auditor9s report, the auditor shall document:
 the circumstances encountered;
 the new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor9s report; and
 when and by whom the resulting changes to audit documentation were made and
reviewed.
37 (a) (i) Pressure on the sales managers to meet sales target:
Since the performance of the sales manager is measured in terms of sales, they would have an
incentive to fraudulently record the fake sales at year end to meet their targets in order to obtain
bonuses or increments.
(ii) Aggressive sales targets:
Sales managers are given aggressive sales target, which might not be attainable. Therefore, sales
managers would be under pressure to achieve those targets by recording fake sales at year end to
meet their targets.
(iii) Decline in customers9 demand:
Decrease in customers9 demand due to cheap alternatives, the management would have under
pressure to overstate the revenue or book fictitious revenue transactions.

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(iv) Domination of the management by a single person:

All the management decisions including those related to HR and accounting estimate are
dominated by the CEO. Due to his dominant position, there is an opportunity for the CEO to
override control and involve in any fraudulent activity.
(v) Excessive involvement of CEO in application of accounting estimates:
The authority of adoption of accounting estimates should be with the CFO and not with the CEO.
CEO9s excessive involvement in the adoption of accounting estimates indicates his attitude which
may lead to fraudulent financial reporting
(b)
In response to assessed risk of material misstatement due to fraud, the auditor shall:
 emphasize to the audit team the need to maintain an attitude of professional skepticism.
 assign more experienced staff or increased supervision of staff.
 obtain to the extent not already done, an understanding of the entity9s related controls,
relevant to such risks.
 evaluate whether the selection and application of accounting policies by the entity,
particularly those related to subjective measurements and complex transactions, may be
indicative of fraudulent financial reporting resulting from management9s effort to manage
earnings.
 incorporate an element of unpredictability in determining the nature, timing and extent
of audit procedures.
 design and perform further audit procedures whose nature, timing and extent are
responsive to the assessed risk of material misstatements.
 consider revising the materiality level.
38 Responsibilities of auditors for fraud in an audit of financial statements:
The auditor is concerned with fraud only to the extent that it might impact on the view shown by
the financial statements. He will therefore be concerned with the risk of material fraud. This is to
identify and assess-the risks of material misstatement and to obtain sufficient appropriate
evidence about those risks through appropriate audit procedures. He must also respond
appropriately to fraud or suspected fraud identified during the audit. It is particularly important in
relation to fraud that the auditor maintains an attitude of professional skepticism.
Auditor should communicate to those charged with governance concerning the detection or
possibility of fraud.
39 i. There is a risk of embezzlement of cash collected from donation boxes as no receipt is
generated for cash collected in donation box.
ii. Cash collected at kiosks may be embezzled by personnel collection cash donations;
therefore, cash is highly susceptible to theft.
iii. There is an inherent risk that the donation income may be overstated by overvaluing the
donation in kind.
iv. There is a risk that the management may miss-classify administration spending by
classifying items of expense incorrectly.
v. Since there is no qualified accountant, there is a risk that:
 proper withholding of taxes may not be done leading to ineligibility of tax credit.
 transactions are not recorded on a timely basis.
 withholding taxes are not timely deposited with the taxation authorities.
vi. Since only two employees are responsible for recording all transactions including
inventory management, there is a lack of segregation of duties and hence risk of:
 fraud and error may arise.
 theft of medicines may arise;

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vii. The medicines may be issued to the employees or other beneficiary without fulfilling the
requirements.

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Chapter 4 | Audit Evidence ISA 500

1 The auditor may decide to examine the entire population in the following circumstances:
 when the population constitutes a small number of large value items.
 when there is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
 When the repetitive nature of a calculation or other process performed automatically by
an information system makes a 100% examination cost effective.
(a) (i) Audit efficiency may be improved as the auditor has stratified a population by dividing it
into discrete sub-populations which have an identifying characteristic. The stratification reduces
the variability of items within each stratum and therefore allow sample size to be reduced without
a proportional increase in sampling risk.
(ii) Other ways by which sales population may be stratified are as under:
 By product
 By customers or category of customers
 Geographically
 Terms of sales such as credit, cash, advance etc.
Precaution: sub-categorization/sub-populations need to be carefully defined such that any
sampling unit can only belong to one stratum.
(iii) Views expressed by Sohail His view that if verification of total transaction of category A is
carried out than there is no need to perform further procedures is not correct due to the following
reasons:
 The results of audit procedures applied to all the items within category A can only provide
evidence about the items that make up that category(stratum).
 The auditor should obtain sufficient appropriate audit evidence regarding items in
Categories B & C as these are also material.
Views expressed by other audit team members Their view that proper sampling should be carried
out from the total population of 640 million and categorization should be ignored altogether is not
correct because stratification helps in improving the efficiency of the audit
2 Audit documentation should provide:
(i) Evidence of auditor9s basis for a conclusion about the achievement of the overall objective
of the auditor; and
(ii) Evidence that audit was planned and performed in accordance with ISAs and applicable
legal and regulatory requirements.
Audit documentation serves a number of additional purposes, which include:
 Assisting the engagement team to plan and perform the audit.
 Assisting members of the engagement team responsible for supervision, to direct and
supervise the audit work and to discharge their review responsibilities.
 Enabling the engagement team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of quality control reviews and inspections.
 Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.
3 Audit documentation may be recorded on paper, or on electronic or other media.
The precise contents of the audit file vary, depending on the nature and size of the client and the
complexity of the audit processes required to reach a conclusion but will include:
 audit programs

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 analyses
 summaries of significant matters
 letters of confirmation and representation
 checklists, and
 correspondence.
All audit working papers should clearly show the following (where relevant):
 The name of the client
 The accounting date
 A file reference
 The name of the person preparing the working paper
 The date the paper was prepared
 The name of any person reviewing the work and the extent of such review
 The date of the review
 A key to 8audit ticks9 or other symbols used in the papers
 A listing of any errors or omissions identified
 A conclusion on the area.
4 (i) The sufficiency and appropriateness of audit evidence are interrelated.
(ii) Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor9s assessment of the risks of misstatement (the higher the
assessed risks, the more audit evidence is likely to be required) and also by the quality of such
audit evidence (the higher the quality, the less may be required).
(iv) Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor9s opinion is based.
5 (a)
(i) Statistical and non-statistical sampling
An approach to sampling that has the following characteristics is called statistical sampling:
Random selection of the sample items; and
 Use of probability theory to evaluate sample results, including measurement of sampling
risk.
 A sampling approach that does not have above characteristics is considered non-statistical
sampling.
(ii) Sampling and non-sampling risk Sampling risk is the risk that the auditor9s conclusion based on
a sample may be different from the conclusion if the entire population were subjected to the same
audit procedure. Non sampling risk is the risk that the auditor may reach an erroneous conclusion
for any reason not related to sampling risk.
(b)
(i) The following shortcomings have been observed in the approach adopted by the Audit Team:
1) By ignoring less than Rs. 5,000 debtors, the government debtors and some of the related parties,
for the purpose of sampling, the following important principles have not been complied with.
 That the auditor should consider the risk of material misstatement on the entire
population.
 That the auditor should attempt to ensure that all items in the population have a chance
of selection
2) In stratification, the audit efforts are directed towards larger value items. However, the audit
planning documentation should explain why the only 10 debtors out of 50 largest debtors were
selected.
(ii) Alternative means of sampling material balances are as follows: Stratification This would
involve dividing the sample into discrete sub-populations (stratum) which have an identifying

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characteristic. In our case, the population may be stratified by monetary value. For example,
following strata may be created:
 Above Rs. 1,000,000
 Between Rs. 500,000 and Rs. 1,000,000
 Below Rs. 500,000 The sample may be made from each strata allowing effort to be directed
to the larger value items
6 (a) After the assembly of the final audit file has been completed, the auditor shall not delete or
discard audit documentation of any nature before the end of the retention period. The firm should
establish its own policies and procedures for the retention of engagement documentation. The
retention period for audit engagement ordinarily is no shorter than five years from the date of
auditor9s report.
(b) Changes in the audit documentation during the final file assembly process may only be made
if they are administrative in nature. Examples of such changes include:
(i) Deleting or discarding superseded documentation;
(ii) Sorting, collating and cross referencing working papers;
(iii) Signing off on completion checklist relating to file assembly process;
(iv) Documenting audit evidence that the auditor has obtained, discussed and agreed with the
relevant members of the engagement team before the date of the auditor9s report.
(c) Under exceptional circumstances, the auditor performs new or additional procedures or draws
new conclusions after the date of the Auditor9s report. In this relation the auditor should
document:
(i) The circumstances encountered.
(ii) The new or additional audit procedures performed, audit evidence obtained, and conclusion
reached, and their effect on the auditor9s report.
(iii) When and by whom the resulting changes to audit documentation were made and reviewed
7 A Tolerable misstatement is a monetary amount set by the auditor in respect of which the auditor
seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is
not exceeded by the actual misstatement in the population.
Performance materiality means the amount or amounts set by the auditor at less than materiality
for the F/S as a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the F/S as a whole.
Performance materiality also refers to the amount or amounts set by the auditor at less than the
materiality level or levels for particular classes of transactions, account balances or disclosures.
8 (b) Methods of Collecting Audit Evidence:
Physical Examination: Physical examination means physical verification of an asset, such as stocks,
investment certificates and fixed assets, as an evidence of its existence and its condition.
Third party confirmation: Confirmation of an amount or other information shown in the client9s
records by an independent third party provides a reliable evidence of the existence of the amount
and correctness of the information, as the case may be. For example, receivables, payables,
contingent liabilities, stock with third parties etc.
Examination of original records: Original records like ownership documents, bills, notices etc.
provide a reliable and conclusive evidence of the legal claims, transactions, balances etc.
Recomputation: Recomputation technique is applied to prove arithmetical accuracy of a
transaction and to verify that the computation is in accordance with the rules, procedures and
acceptable practices. The areas where recomputation techniques are generally applied include
depreciation computations, bonus calculations, provisions etc.

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Enquiry: Enquiry consists of seeking information from knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity. The enquiry may not provide conclusive audit
evidence but it may give some form of clue which may lead to further verification.
Analytical Procedures
Analytical procedures consist of evaluations of financial information through analysis of plausible
relationships among financial as well as non-financial data. Analytical procedures also encompass
investigation of identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount.
9 (a) (i) Selecting all items
Selecting all items of a population for examination may be appropriate in the following situations:
- The population constitutes a small number of large value items;
- There is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
- The repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.
10 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).
j)
Auditor should consider source of audit evidence, effectiveness of related controls, form of audit
evidence etc
11  When designing an audit sample, the auditor shall consider the purpose of the audit procedure
and the characteristics of the population from which the sample will be drawn.
 The sample size should be sufficient to reduce sampling risk to an acceptably low level.
 The auditor shall select items for the sample in such a way that each sampling unit in the
population has an equal chance of selection.
12 (i) After the assembly of the final audit file has been completed, the auditor must not delete or
discard audit documentation before the end of its retention period.
(ii) However the changes to document can be made if:
 the changes are deemed necessary.
 there are exceptional circumstances in which the auditor has to perform new or additional
procedures or reaches new conclusions.
(iii) If it appears that it was necessary to modify existing or add new documentation after this stage,
the auditor is required to document:
 when and by whom the modifications were made.
 the reasons for making them.
(iv) If exceptional circumstances arise after date of audit report; auditor is required to document:
 the circumstances
 the new or additional procedures performed, audit evidence obtained, conclusions
reached and their effect on the auditor9s report, and
 when and by whom the resulting changes to audit documentation were made and who
reviewed the
13 (a) Ways in which debtor9s population may be stratified are as under:
 By product
 By customers or category of customers
 Geographically
Terms of sales such as credit terms/Aging

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By values
(b) Views expressed by the team member:
(i) The view that if verification of balances of category A and B is carried out than there is no need
to perform further procedures is not correct as the results of audit procedures applied to items in
category A and B will only provide evidence about the items that make up that category (stratum).
(ii) The auditor should obtain sufficient appropriate audit evidence regarding items in categories C
& D as these can also be material.
(iii) The view that sampling should be carried out on haphazard basis to ensure equal chance of
selection is not correct as such assurance is only ensured by using random sampling, i.e. use of
random numbers to select items.
(iv) The view related to systematic sampling is not correct, as selection of 10% items is not
systematic sampling. Systematic sampling involves, selection of first item on random basis and
then items are selected with a standard gap between them (for example, every 10th item).
Suggestion: Both haphazard and systematic sampling may be used in the normal manner, either
with or without stratification. However, these methods cannot be used in the manner as suggested
by the team members because it may result in extensive testing on immaterial items, thereby
increasing the cost which may not be efficient. It may also be appropriate to use random sampling
to ensure all items in a population have an equal chance of selection.
14 (a) The auditor is required to assemble the final audit file(s) on a timely basis after the date of the
auditor9s report. This usually excludes drafts of working papers or F/S, or notes that reflect
incomplete or preliminary thinking. After the assembly of the final audit file has been completed,
the auditor must not delete or discard audit documentation before the end of its retention period.
(b) In such case the auditor is required to document:
 the circumstances;
 the new or additional procedures performed, audit evidence obtained, conclusions reached
and their effect on the auditor9s report; and
 when and by whom resulting changes to audit documentation were made and who reviewed
them.
15 Factors to be considered by auditor in deciding sufficiency of audit evidence:
The decision relating to sufficiency of audit evidence depends upon the judgment of the auditor.
Apart from professional judgment, following factors are also relevant in determining the
sufficiency of audit evidence.
i) the seriousness of the risk that the F/S might not give a true and fair view; when this risk is high,
more audit evidence will be required
ii) the materiality of the item
iii) the strength of the internal controls in the client9s accounting systems

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Chapter 5 | Internal Controls

1 The components of internal controls are as follows:

(i) Control environment:
The control environment includes the attitudes, awareness and actions of management and TCWG
concerning the entity9s internal control and their importance in the entity
(ii) Entity9s risk assessment process:
It is the entity9s process for identifying business risks relevant to financial reporting objectives and
deciding about actions to address those risks, and the results thereof.
(iii) Information system, including related business processes, relevant to financial reporting, and
communication.
(iv) Control activities: These are the policies and procedures that help ensure that management9s
directives are carried out.
(v) Monitoring of controls: It is a process of assessing the design and operation of controls on a
timely basis and taking necessary corrective actions on account of change in conditions.
2 (a) Control Environment and its elements The 8control environment9 is often referred to as the
general 8attitude9 to internal control of management and employees in the organization. The
elements of control environment include the following:
 Communication and enforcement of integrity and ethical values
 Commitment to competence
 Participation of TCWG.
 Management9s philosophy and operating style
 Organizational structure
 Assignment of authority and responsibility
 Human resource policies and practices
(b) Walk through tests: Auditor is required to gain an understanding of the various elements of the
internal control system operating within an entity.
Once this understanding has been gained, the auditor should confirm that his understanding is
correct by performing 8walk-through9 tests on each major transaction type (for example, revenue,
purchases and payroll). Walk-through testing involves the auditor selecting a small sample of
transactions and following them through the various stages in their processing in order to establish
whether his understanding of the process is correct.
3 (i) Training on applicable policies, department policy/ procedures:
It is a preventive control, 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 authorizing
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:

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It is a corrective control as it will involve any retrieval measures in case of any damage to the
original data.
4

5 In evaluating the control environment, the auditor should consider such factors as:
 management participation in the control process, including participation by the board of
directors
 management9s commitment to a control culture
 the existence of an appropriate organization structure with clear divisions of authority and
responsibility;
 an organization culture that expects ethically-acceptable behavior from its managers and
employees; and
 appropriate human resources policies, covering recruitment, training, development and
motivation, which reflect a commitment to quality and competence in the organization.

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7 (a) Symmetric key ciphers:

These use related (often identical) keys to both encrypt and decrypt information. This is sometimes
called 8shared secret9 between two or more parties.
Asymmetric key ciphers:
These use different keys to encrypt and decrypt information (one to lock, the other to unlock). This
is sometimes called 8public/private9 key.
(b) Information that can be extracted from system logs include:
(i) Which user logged-in, when and where from
(ii) Failed log-in attempts
(iii) Who accessed and amended data in a file
(iv) Changes made to a program – what, when and by who
8 Controls over data transmission include:
 firewalls to prevent intrusion into the programs that send and receive data.
 restricting access to source data that is transmitted.
 only using secured Wi-Fi with password protection.
 using check sums and check digits to ensure that data received is intact.
 data encryption.
9 Physical access controls over an IT System might include:
(i) Doors and door-locks
(ii) Alarms
(iii) Surveillance camera or video
(iv) Cables that allow a user to lock a laptop to a desk
(v) Fingerprints readers to log-in to a system
(vi) Lockable briefcase
10 Audit Trail in a computerized environment:
An audit trail refers to the ability of the auditor to trace a transaction through all its processing
stages. An audit trail can be provided by a record (8log9) of how the computer has processed any
transaction.
An audit trail may not exist in 8paper form9 in an online system, but the computer program should
be written so as to generate the audit trail on request for any transaction.

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11 (a) Controls over data transmission may include the following:

 Firewalls to prevent intrusion into the programs that send and receive data
 Only using secured Wi-Fi with password protection
 Data encryption
(c) Performance reviews – In the context of control activities, performance review includes:
 analyses of actual performance against budget and forecasts;
 analyses of actual performance against prior period performance
 control reporting and variance analysis
(e) The main categories of general controls that an auditor would expect to find in a computer
based information system are:
(i) controls over the development of new computer information systems and applications
(ii) controls over the documentation and testing of changes to programs
(iii) the prevention or detection of unauthorised changes to programs (for example, by an
employee committing fraud or by a 8hacker9 accessing the system) (iv) controls to prevent the use
of incorrect data files or programs
12 General IT controls Application controls
General IT controls aim to Application controls are the specific controls over
establish a framework of overall the relevant applications maintained by the
control over the computer computer. The purpose of application controls is to
information system9s activities to establish specific control procedures over a
provide a reasonable level of particular application to provide reasonable
assurance that the overall assurance that all transactions are authorized and
objectives of internal controls are are processed completely, accurately on a timely
achieved. basis.

Examples of General IT controls:

 Segregation of duties
 Password protection
 Virus checks
 Backup copies
Examples of Application controls:
 Authorisation controls e.g. data is input only by authorized personnel
 Control totals
 Batch controls
 Authorisation controls e.g restriction on printing of document.
b)
Weaknesses in general IT controls may result in IT application controls becoming ineffective.
However it is possible that manual procedures exercised by users may provide effective controls
at the application level.
13 (a) The introduction of IMS may create the following risks:
 There is an increased level of dependency on the computer system of the organisation and
also of the supplier. Any computer failure may therefore have an increased impact on the
organisation.
 There is an increased risk of possible loss or corruption of data due to the process of
transmission.
 There are also security risks in the transmission of data and unauthorised individuals may be
able to gain access to the data.

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(b)
 Controls that could mitigate the above risks are as follows:
 Controls over transmission of data (encryption, acknowledgement systems, authentication
codes, etc.);
 Monitoring and checking of output;
 Virus protection systems; and
 Contingency plans and back up arrangements.
14 Many of the control activities that are typically found in a large company such as segregation of
duties, internal audit etc. may be inappropriate for a small entity because they are too costly or
impractical for such smaller organizations. Often, control systems in small entities are based on a
high level of involvement by the directors or owners.
Following audit risks may arise when control systems rely excessively on the involvement of senior
management:
(i) There may be a lack of evidence as to how systems are operating.
(ii) There may be lack of evidence of controls.
(iii) Management may override controls that are in place.
(iv) Management may lack the expertise necessary to control the entity effectively.
15  Data encryption during data transmission
 Availability of firewalls to prevent intrusion into the programs that send and receive data
 Program controls that ensure data is transmitted in the correct format
 Restricting access to source data that is transmitted
 Only using secured Wi-Fi with password protection
 Using check sums and check digits to ensure that data received is intact
16

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17 (a) A system log is a file that records events taking place in the execution of a system. This
generates an audit trail that can be used to understand the sequence of activities of the system
and to diagnose problems.
 Types of information that may be generated by a system log are:
 Which user logged-in, when and where from
 Failed log-in attempts
 Who accessed and amended data in a file
 Changes made to a program – what, when and by whom
 When employees entered and left the building
 Black box flight recorders
 CPU speed
 Broadband speed
 Which web pages a user accessed
 Attempted cyber intrusions
b)
General IT controls Application controls
General IT controls aim to Application controls are the specific controls over
establish a framework of overall the relevant applications maintained by the
control over the computer computer. The purpose of application controls is to
information system9s activities to establish specific control procedures over a
provide a reasonable level of particular application to provide reasonable
assurance that the overall assurance that all transactions are authorized and
objectives of internal controls are are processed completely, accurately on a timely
achieved. basis.
c)
(i) Control Totals
Control total means the total value for all the transactions input. This total is given by the computer
prior to processing. The total given by the computer is checked with the total taken manually.
(ii) Check Digits
AL can use check digits with the customer code to prevent the posting of amounts in in-correct
customer account. Check digits forms part of the account code which allows the computer
program to check the validity of the code.
(iii) On-Screen Prompts
On-screen prompts are displayed on the computer screen when a compulsory field in the data
entry form is not filled.
(iv) Existence Check
Existence check could be written into the system to ensure that the program will look at the value
for a particular item of data in the input transaction, and if it is invalid, it will produce an error
report and will not process the transaction.
18 Following general control may be considered while developing a new computer systems or
applications:
 Appropriate IT Standards should be used when designing, developing, programming and
documenting a new computer system.
 There should be controls to ensure that tests are carried out on new systems before they
are introduced.
 A new computer system design should be formally approved by the system 8user9.
 There should be a segregation of duties between the designers and testers of systems.
19 Input Errors

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i) Existence check:
Existence check can be written into a computer program to test the validity of input data. The
program looks at the value for a particular item of data in the input transaction, and if it is invalid,
it produces an error report and will not process the transaction. A program check can be carried
out on the product code for all order forms, and if the code is not within the defined list, an error
report will be produced.
ii) Check digit:
PL can use check digits with the inventory codes to prevent the posting of in-ward movement in
in-correct inventory account. Check digits are controls within a computer program on the validity
of key numerical codes, such as customer codes, supplier codes and employee identification
numbers. When check digits are used, every code is given an extra digit, the check digit. This is a
unique digit obtained from the other digits in the code.
Processing Errors
(i) Control total:
PL may use control total, batch total or hash total to prevent duplicate processing of salary. Control
totals may be used when several transactions are input for processing at the same time. Control
total means the total value for all the transactions input. This total is given by the computer prior
to processing. The total given by the computer is checked with the total taken manually.
20 (a)
Logical access controls are tools and protocols used for identification, authentication,
authorization and accountability in computer information systems. It enables the organization to
identify users, restrict access to specific resources and produce audit trail of systems and user
activity.
 The login account must uniquely identify the person, but it must be part of a standard
similar to all other logins.
 The password has to be sophisticated and must be of a certain prescribed length.
 The access to the system must be limited in accordance with roles and responsibilities of
the users.
 User must be logged out after a certain period of in-activity.
(b)
 Maintaining secure second copies of all programs and data files (8back-up copies9).
 Take measures for the protection of equipment against fire, power failure and other
hazards.
 Make disaster recovery plans, such as an agreement with another entity to make use of
its computer center in the event of a disaster.
 Suitable maintenance and service agreements with software companies to provide
8technical support9 in the event of operating difficulties with the system
21 (i)
 Firewalls to prevent intrusion into the programs that send and receive data.
 Restricting access to source data that is transmitted.
 Using check sums and check digits to ensure that data received is intact.
(ii)
 SL should also store its backup data at some other location.
 SL should develop disaster recovery plans, such as an agreement with another entity to
make use of its computer center in the event of a disaster such as a fire or flood.
 The company should make suitable maintenance and service agreements with software
companies, to provide 8technical support9 in the event of operating difficulties with the
system.

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22 (b) Logical access controls are tools and protocols used for identification, authentication,
authorization and accountability in computer information systems. It enables the organization to
identify users, restrict access to specific resources and produce audit trail of systems and user
activity.
 The login account must uniquely identify the person, but it must be part of a standard
similar to all other logins.
 The password has to be sophisticated and must be of a certain prescribed length.
 The access to the system must be limited in accordance with roles and responsibilities of
the users.
 User must be logged out after a certain period of in-activity.
(c) Many of the control activities that are typically found in a large company such as segregation
of duties, internal audit etc. may be inappropriate for a small entity because they are too costly or
impractical for such smaller organizations. Often, control systems in small entities are based on a
high level of involvement by the directors or owners.
Following audit risks may arise when control systems rely excessively on the involvement of senior
management:
 There may be a lack of evidence as to how systems are operating.
 There may be lack of evidence of controls.
 Management may override controls that are in place.
 Management may lack the expertise necessary to control the entity effectively.
23 a)
General IT controls Application controls
General IT controls aim to Application controls are the specific controls over
establish a framework of overall the relevant applications maintained by the
control over the computer computer. The purpose of application controls is to
information system9s activities to establish specific control procedures over a
provide a reasonable level of particular application to provide reasonable
assurance that the overall assurance that all transactions are authorized and
objectives of internal controls are are processed completely, accurately on a timely
achieved. basis.

b)
Examples of general IT controls:
 Physical access to computer terminals may be restricted to authorized employees.
 Access to programs and data files may be restricted using passwords. There should be
rigorous checks by management to ensure that a password system is being used effectively
by employees (so that passwords are not easy to 8guess9)
 Firewalls (software and hardware) can be used to prevent unauthorized external access
via the internet.
Examples of application controls:
 Management review of master files and standing data
 Regular updates of master files
 Review log files for changes made in master files
24 (a) Limitations of flow chart:
 These are only suitable for describing standard systems rather than recording systems with
numerous unusual transactions.
 Flowcharts are also not appropriate for recording systems with further classifications of
subsystems or subroutines.

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 Constructing a flow chart is a time consuming process because an auditor must learn about
the operating personnel involved in the system and gather samples of relevant
documents. Thus involves a lot of effort and observation.
 There is a possibility of recording and checking areas that are of no audit significance.
(b)
 There should be a segregation between the tasks of programmers (who write new
programs) and computer operators (who use the programs).
 There should be full documentation of all program changes.
 There should be restricted access to programs (program files), and only authorised
programmers should have access to them.
 Program logs should be maintained, to record which programs and which versions are
used.
(c)
Since the General IT controls provides assurance regarding the effectiveness of the overall control
objectives, therefore in case, IT General controls are not effective, there may be a risk that
misstatements occur and go undetected in the application system or the application controls
becoming ineffective. However, it is possible that manual procedures exercised by users may
provide effective controls at the application level. Consequently, the auditor may consider
extensive testing of application control to obtain reliance on their operating effectiveness.
25 a)
i. Data input should be kept at minimum. For example, data of repeat customer should be
auto retrieved on entering their phone number.
ii. Data should not exceed a predetermined amount. For example, if the sale amount exceeds
the allowed credit limit the data would be rejected for further verification.
iii. A field should always contain data and not zeros or blanks. For example, the record should
not be saved unless data is entered in all the fields like phone number, email address etc.
iv. Programmed checking of the data validity in accordance with predetermined
criteria/format for example, the system will not process record if nonnumeric character is
entered in amount field or the system will Pop up an alert if less than 13 numbers are
entered in the CNIC field, etc.,
b)
i. There should be measures for the protection of equipment against fire, power failure and
other hazards.
ii. There should be controls over maintaining secure second copies of all programs and data
files (8back-up copies9). The back-up copies can be used if the original copies are damaged
of corrupted.
iii. The company should have disaster recovery plans, such as an agreement with another
entity to make use of its computer center in the event of a disaster such as a fire or flood.
26 Examples of system logs include:
i. Which user logged-in, when and where from
ii. Failed log-in attempts
iii. Who accessed and amended data in a file
iv. Changes made to a program - what, when and by whom
v. When employees entered and left the building
vi. Black box flight recorders

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Chapter 6 | Test of Controls

2 (a) Risks: Risks related to receiving of goods and invoice from suppliers are as follows:
 Goods may be accepted from a supplier without having been ordered.
 The company may fail to claim discounts from suppliers despite being due.
 Supplier may raise invoices for goods that have not actually been received/purchased.
 Goods received from suppliers are of inferior quality.
(b) Related controls Suitable controls may be as follows:
 A copy of all delivery notes should be retained, with a signature of the member of staff
who took receipt and checked the goods.
 Goods received notes should be produced for each delivery, from the delivery note or after
a physical count of the items received.
 A member of the accounts staff or purchasing staff must be responsible for checking
discounts allowed by suppliers.
 There should be a segregation of duties between the individuals who take delivery of
goods, those who place the orders and those who record the purchase invoices in the
accounting system.
 All purchase invoices should be checked against a purchase order and a goods received
note.
(c) Tests of control
 Ensure that goods received notes, purchase orders and purchase invoices are matched
with each other.
 Confirm from documentary evidence that discounts are claimed from suppliers when
available.
 Check that the segregation of duties does exist.
3 (a)

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Following are the possible weaknesses that may exist in overtime payments:
 There may be weaknesses in the system for recording time spent at work. When
employees are paid on the basis of time, there will be a system of 8time-in9 and 8timeout9,
typically using employee identity cards and a time recording device. The risk is that
employees will 8clock on9 on behalf of a colleague, using the identity card that the
colleague has given him.
 Overtime payments may not be properly authorized which includes situation where a
person works overtime without proper authorization.
 Incorrect rates of overtime may be used.
(b) Principal controls over payment of overtime:
 List of overtime payment (time or the amount) should be signed by person duly authorized
in this regard by the organization.
 A overtime rates should be checked by a person authorized in this regard by the
organization.
 The process of recording time should be monitored either by an authorized supervisor or
by the use of bio-metric machine.
 It should be ensured that the amount of overtime is correctly incorporated in the salary
sheets and deductions therefore if any have been appropriately made.
4 a) Key controls on cash sales and cash handling:
(i) Responsibility to receive cash should be clearly identified.
(ii) Proper locks should be provided to each person responsible for handling cash.
(iii) Cash should be kept in a locked and secure area until it is deposited.
(iv) Cash registers and credit card machines should be balanced at least once a day.
(v) Proper policies should be made to deal with cash shortages/excesses.
(vi) Timely deposit of cash should be ensured.
(vii) Cash register should be used to record cash sales.
(viii) Transfers of cash from one person to another should be kept at a minimum.
(b)
(i) Adequate segregation of duties or independent checks.
(ii) Adequate system of authorization and approval of transactions (for example, in purchasing,
movement between locations etc.)
(iii) Use of door locks and surveillance cameras.
(iv) Surprise physical count and timely reconciliation of inventory items.
(v) Mandatory vacations for employees performing key control functions.
(vi) Periodic rotation of employees.
(vii) Restricted storage area.
(viii) Different entry and exit doors.
(ix) Access controls over automated records, including controls over and review of computer
systems event logs.
(x) Job applicant screening of employees with access to assets.

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6 (d)
 Check whether appropriate segregation of duties exist.
 Check whether all invoices and GDNs are pre-numbered.
 Check that invoices show a customer order number and a dispatch note number.
 Check the signature of customers on delivery notes to confirm the acceptance of the
customers.

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 Check that credit notes are cross-referred to a sales invoice number.

 Observe the dispatch process in operation.
 Obtain documentary evidence that a member of the accounts staff has carried out
arithmetical checks on the accuracy of invoices.
 Check the credit notes to ensure that they contain the authorization signature of the
appropriate manager
7

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Chapter 7 | Intro to Substantive Procedures

1 (a)
The auditor should apply analytical procedures at or near the end of the audit in order to
(i) Form an overall conclusion as to whether the F/S as a whole are consistent with the auditor9s
understanding of the entity.
(ii) Corroborate the conclusions formed through other procedures performed during the audit of
individual components or elements of the F/S.
(iii) Identify previously unrecognized risk of material misstatement. In such circumstances, the
auditor may:
 revise the auditor9s assessment of the risk of material misstatement;
 modify the further planned audit procedures accordingly. and
(b) When analytical procedures identify significant fluctuations or relationships, the auditor shall
investigate such differences. Fluctuations can be investigated in the following manner:
(i) Inquiring of management and obtaining appropriate audit evidence relevant to management
responses. These audit evidence may be obtained by taking into account:
 the auditor9s understanding of the entity and its environment; and
 with other audit evidence obtained during the course of the audit.
(ii) Performing other audit procedures when:
 management is unable to provide an explanation, or
 the explanation together with the audit evidence obtained is not considered adequate.
2 The prospective audit risks are as follows:
Overstatement of Debtors:
Average period for outstanding debtors has reached to four months which is indicative of a risk of
inadequate provision against doubtful debts.
Overstatement/ Understatement of Inventories:
The inventories turnover rate has decreased to 3 times per year from 5 times in 2010. It is
indicative of the following types of risks:
(a) Obsolescence of inventories.
(b) Improper valuation of inventories.
Overstating of income as well as understating of expenses:
The income position has weakened and the company has suffered losses as the interest coverage
has moved below 1.0. In such a situation there is a risk that the management may like to overstate
its revenue, and understate its expenses.
Liquidity Problems:
The company is experiencing liquidity problems as are evidenced from the decline in current ratio
and quick asset ratio.
Decline in Gross Profit %:
The decline in GP % needs to be justified. The absence of an appropriate explanation may be
indicative of:
(a) Improper pricing and discounting policies
(b) Improper purchasing policies
(c) Other irregularities like unauthorized spending, intentional manipulation of profitability etc.
Going Concern:
Losses/significant decline in profitability and fast deteriorating liquidity position are financial
indicators of going concern issues, which should not be overlooked
3 When designing and performing substantive analytical procedures the auditor should:

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 determine the suitability of particular substantive analytical procedures for given

assertions – i.e. how effective they will be in detecting a particular type of material
misstatement.
 develop an expectation of recorded amounts or ratios and evaluate whether that
expectation is sufficiently precise to identify a misstatement.
 evaluate the reliability of the data from which the expectation has been developed.
 determine what level of difference from expected amounts is acceptable without further
investigation.
4 Embedded Audit Facilities:
It is an audit software that is built into the client9s IT system, either temporarily or permanently.
The purpose of embedded audit facilities is to allow the audit to carry out tests at the time the
particular transactions are being processed, in 8real time9. This can be very useful for the audit of
online systems where:
 data is continually processed and master files are being continually updated, and/or
 it is difficult, if not impossible, for the system to provide a satisfactory audit trail for the
transactions, through the system.
 an embedded audit facility may also print details of the transactions it has monitored, or copy
them to a computer file, so that the auditor can study the transactions
5 The factors which determine the extent to which analytical procedures may be used as a form of
substantive procedures are as follows:
 suitability of particular substantive analytical procedures for given assertions;
 reliability of data from which the auditor's expectation of recorded amounts or ratios is
developed;
 whether the expectation as regards the recorded amounts is sufficiently precise to identify
a misstatement that, individually or when aggregated with other misstatements, may
cause the F/S to be materially misstated.
6 (i) Provision against litigation
Even though the change in provision against litigation is not significant but due to the high inherent
risk, further steps needs to be taken as follows:
 Circulate confirmation to legal advisors of the company.
 Scrutinize payments of legal expenses to ensure that all legal cases have been identified
by the client.
 Review the minutes of the board meetings.
 Obtain expert advice, if considered necessary.
 Verify the basis for recording of provision.
(ii)Trade payables
Despite the increase in cost of sales, trade payables have decreased. Consequently the following
procedures may be performed:
 Circulate balance confirmation requests to trade creditors.
 Compare the current list of trade payables with prior year9s working papers to identify any
omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
 Scrutinize subsequent payments and ensure that appropriate accruals were made against
those payments.
(iii) Loans to employees
Despite the reduction of entitlement of loan, it has increased from previous year. Considering this
inconsistency, following procedures may be performed:
 Discuss the increase in loan amount with management.

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 Check payment of amount of loan given to employees during the year with payment
voucher having acknowledgment of employees.
 Obtain confirmation of loan balances from employees.
 Verify approval of new loan given to employees.
 Ensure that recoveries are being made as per policy and are recorded.
(iv) Trade debtors
Sales has increased by 15% but debtors have only increased by 6%. Considering this inconsistency
following procedures may be performed:
 Discuss the reason for change with the management.
 Circulate confirmation requests to debtors.
 Trace a sample of shipping documents to sales invoice and into the sales and receivable
ledgers.
(v) Cost of sales
Despite 15% increase in sales, cost of sales has increased by only 10%. Considering this fluctuation,
following steps may be performed:
 Perform cut-off test for purchases.
 Check that the correct quantity of material, labour and overheads has been used.
 Perform analytical calculations over the cost of inventory consumed and other major costs.
 Verify the major costs with bills, invoices and other related documents.
(vi) Expenses
Even though the finance cost would also have reduced due to reduction in loan, expenses have
increased by 17%. Considering this fluctuation, following steps may be performed:
 Ask the client for the detailed breakup of the expenses
 Enquire from management for any inconsistencies in the break-up of expenses obtained.
(vii) Taxation
Tax rate was exactly 35% of the profit before taxation in last year which have reduced to 32%.
Considering this fluctuation, following steps may be performed.
 Obtain and review the tax working prepared by the management
 Check the enacted tax rates
7 The increase in the gross profit margin is inconsistent with the increase in the cost of materials due
to devaluation of local currency and decrease in volume of sales with the government. Considering
this inconsistency, following steps may be performed:
 Review the explanations obtained by the audit team for the increase in the gross profit
margin even after decrease in government contracts and increase in import prices.
 Perform cut-off test for purchases and sales.
 Check that the costing of material, labour and overheads have been correctly applied.
 Perform analytical calculations over the cost of inventory consumed and other major costs.
The accounts payable to cost of sales ratio has decreased significantly (29%), despite weakening
of the local currency. Consequently, the following procedures may be performed:
 Ensure that foreign trade payables are translated at the closing foreign currency exchange
rates.
 Circulate balance confirmation requests to trade creditors.
 Compare the current list of trade payables with prior year9s working papers to identify any
omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
Trade day receivable has increased significantly (20%), which indicates that PL is facing problems
in collecting trade debts. There is a possibility that provision for doubtful debt may not be correctly
recorded. Considering this, following procedures may be performed:

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 Obtain aging of the receivable balances.

 Obtain confirmation from major customers.
 Review the subsequent collection of trade receivables.
 Assess the adequacy of provision against overdue balances.
8 Long-term loan
It seems that DPL has failed to make the quarterly installment of its long-term loan or has made
delayed payment. This may represent default on part of DPL. Furthermore, no accrual of finance
cost for the last quarter has been made.
Audit procedures
 Obtain the loan agreement and look for any penal provision.
 Obtain correspondence with the bank to assess the possibility of any penalty or action taken
against DD.
 Critically analyze the confirmation received from the bank.
 Ask the management to record any penalty amount or loan re-classification.
Trade payables
Creditor days have decreased from 43 days to 34 days. This may represent that creditor balances
might be understated. Consequently, the following procedures may be performed:
Audit procedures,
 Circulate balance confirmation requests to trade creditors.
 Compare the current list of trade payables with prior year9s working papers to identify any
omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
 Scrutinize subsequent payments and ensure that appropriate accruals were made against
those payments.

Prepayments
Since the warehouse was obtained on 16-June-21, an expense amounting to Rs. 125,000 should
be transferred to profit and loss and prepayment should be reduced to Rs. 1,375,000 in the
statement of financial position.
Audit procedures
 Obtain the rent agreement of the warehouse to verify the monthly rent.
 Verify and trace the payment made for the rent
 Ask the management to record the expense amounting to Rs. 125,000.

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Chapter 8 | Non-Current Assets (S.P)

1 Test of details for verification of valuation assertion of tangible non-current assets:
 Check the cost in the F/S against the purchase invoices/contracts for the assets.
 Check that the purchase expenditure is analysed reasonably between land, buildings and
equipment
 Review the allocation of total expenditure on non-current assets between capital and
revenue amounts.
 Verify amounts in the F/S with the valuer9s report.
 Obtain an understanding of the work of the expert through considering the
reasonableness of valuations/assumptions used in valuations.
 Evaluating the competence, capabilities and objectivity of the expert.
 Check that valuations are regularly updated.
 Check that all the assets of the similar class are revalued.
2 Adoption of revaluation model for building indicates the risk of in-correct valuation and
presentation of buildings and surplus on revaluation.
Audit procedures to mitigate the above risk are as follows:
 Verify amounts in the financial statements with the valuer9s report.
 Consider the reasonableness of the valuation and the assumptions used for valuation.
 Check that the rise in value on revaluation have been appropriately recorded in the
financial statements and depreciation has been calculated on the revalued amount(s).
 Consider involving auditor9s own expert.
 Check that revaluation have been appropriately disclosed in the financial statements.
 Ensure that all class of building has been revalued.
3 (i) No comments.
(ii) Obtaining the asset schedule showing opening balances, addition, disposal, depreciation and
closing balance addresses the assertion of completeness only but not accuracy.
(iii) Apart from verifying the cost of the asset through purchase invoices, the following steps would
also be required:
 Verify the date from which asset was available for use from purchase invoices or the
completion certificate of capital work in progress, to ensure that depreciation is recorded
from the correct date.
 Check the allocation of total expenditure between capital and revenue expenditure in case
of additions.
 Check that purchases are duly authorised.
(iv) Physical inspection of assets may not address the assertion of ownership.
Additional procedures
 For addressing the assertion of ownership, check the title documents of the assets
especially the assets purchased on sample basis.
 Check bank confirmation for any charge on assets, if any.
 Check register of charges maintained by the client, if any.
 Physically verify the existing assets from register to floor and vice versa.
(v) This step would not be enough. Following procedures would also be required.
 Perform analytical procedures on the overall depreciation.
 Review the depreciation rates for reasonableness in the light of the nature of assets, its
estimated useful life and residual value.
 Ensure that consistent depreciation methods are in use.
 Ensure that fully depreciated assets are not subject to depreciation.

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 Obtain approval for additions made during the year.

The audit program has no procedure related to presentation assertion. Auditor should review the
disclosure in the financial statements and ensure that they are correct and clear.
Ensure that non-current assets have been classified in appropriate account.

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Chapter 9 |Current Assets (S.P)

1 Substantive procedures for verification of stores and spares
(i) Obtain the listing of stores and spare balances at period-end and investigate large or unusual
quantities or amounts.
(ii) Review large or unusual entries in the ledger account.
(iii) Review period end reconciliation of subsidiary and general ledger and investigate large and
unusual items.
(iv) Attend inventory counts at period end and ensure that physical differences are appropriately
recorded and resolved and damaged items if any are identified.
(v) Check valuation of selected items using one or more of the recommended sampling techniques.
(vi) Identify slow moving items and discuss/determine the impact thereof.
a) Substantive procedures for verification of trade debts (excluding receipt from customers)
 Investigate any unexpected or unusual movement/differences between current and prior
period as regards the amounts of trade debts, debtor9s turnover, ageing of receivable and ratio
of debtors to credit sale etc.
 Review of period end reconciliation of subsidiary and general ledger and investigate large and
unusual items.
 Reviewing the period-end bank reconciliation statements with specific reference to the list of
cheques deposited but not credited in the bank.
 Review the following: - Large or unusual postings in the general ledger. - Large or unusual
balances in subsidiary records including, credit balances, past due balances and balances
exceeding credit limits etc.
 Circularization of confirmations and performance of appropriate follow-up of selected
customer balances at period end and obtaining and testing reconciliation of balances
confirmed with book balance.
 Review the ageing schedule and ensure reasonableness of provision based on:
- Discussion with the credit manager.
- Examination of the subsequent collections made.
- Past practice and consistency.
2 (a) The auditor may consider not to circulate the direct confirmation to the customers where:
(i) accounts receivables are immaterial to the F/S; or
(ii) the response rate is not expected to be adequate; or
(iii) the responses are not expected to be reliable; or
(iv) inherent and control risk in aggregate are assessed at low level.
(v) audit evidence expected to be gathered through other substantive procedures (e.g. analytical
procedures) is sufficient to reduce the audit risk to an acceptable level.
(vi) management requests not to send the confirmation and auditor after satisfying himself from
the reason and explanation given by the management.
(b) While designing the confirmation request, the auditor considers the following factors:
(i) Assertions being addressed through the direct confirmation.
(ii) Form of the external confirmation requests (i.e. positive or negative or combination of both)
(iii) Prior experience on the audit of similar engagements.
(iv) The nature of the information being confirmed.
(v) The intended respondent.
(vi) Type of information respondents will be able to confirm readily
c) The auditor may perform one or more of the following steps:
(i) Check receipt from customers after balance sheet date.

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(ii) When there is no receipt from customers after balance sheet date, the auditor should consider
the following audit procedures:
 Verify validity of purchase orders, if any.
 Verify goods dispatched note other documents duly acknowledged by the customers.
(iii) Obtain explanations for invoices remaining unpaid, if any, after subsequent one have been
paid
(iv) Examine sales near the period end to provide audit evidence about cutoff assertion.
3 Following weaknesses in inventory count are identified from audit senior9s observations:
(i) Lack of segregation of duties
Inventory Controller is responsible for physical control of the inventory and is also supervising the
stock count.
(ii) Non availability of detailed plan
Allocation of counting area by the teams themselves indicates non availability of detailed plan
which may lead to certain inventory items being counted more than once while some items may
not be counted at all.
(iii) No system of marking on counted items
This again may lead to double counting or omission completely.
(iv) Perpetual inventory
The person responsible for counting may try to match the numbers provided instead of carrying
out an independent count.
(v) Additional count sheets are not pre-numbered
If the separate sheets are numbered as they are used, there is no means of identifying that all
sheets issued have been returned and the last count sheet(s) may go unnoticed.
4 (i) Substantive procedures for bank balance verification (Following procedures apply individually
to all bank accounts)
 Obtain bank confirmation from the company9s bank and agree the balances per the bank
confirmation to the company9s bank reconciliations.
 Check arithmetic accuracy of bank reconciliation.
 Perform cut-off procedures.
 Agree the balance per the bank books to the bank reconciliation and to the F/S and the
ledger.
 Trace outstanding cheques per the bank reconciliation to the cash book and to after-date
bank statements.
 Agree any un-cleared banking have been paid in prior to the year-end date by examination
of paying-in slips.
 Scrutinize the cashbook and bank statements before and after the balance sheet date for
exceptional entries to transfers which have a material effect on the balance shown to be
on hand.
 Determine whether the bank account is subject to any restrictions.
(ii) Types of Information
 Full titles of all accounts together with the account numbers and balances thereon,
including NIL balances:
 Where the amount is subject to any restriction or exchange control considerations this
information should be stated.
 Full titles and dates of closure of all accounts closed during the period.
 The separate amounts accrued but not charged or credited as at the above date.
 Markup/interest and provisional charges (including commitment fees).

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 The amount of interest charged during the period if not specified separately in the
customer9s statement of account.
 Particulars of any written acknowledgment of set-off, either by specific letter of set-off, or
incorporated in some other document or security.
 Details of loans, overdraft cash credits and facilities, specifying agreed limits and in the
case of term loans, date of repayment or review.
 A list of other banks, or branches of your bank where you are aware that the relationship
has been established during the period.
Security
 Details of any security formally charged to the bank including the date and type of charge,
(e.g. pledge, hypothecation etc.)
 Particulars of any undertaking to assign to the bank any assets.
 If a security is limited to any borrowing, or if there is a prior, equal or subordinate charge.
 Investments, bills of exchange, documents of title or other assets held but not charged.
Contingent Liabilities
 Total of bills discounted for your customer, with recourse;
 Details of any guarantees, bonds or indemnities given to you by the customer in favour of
third parties.
 Details of any guarantees, bonds or indemnities given by you, on your customer9s behalf,
stating where there is recourse to your customer and / or to its holding, parent or any
other company within the group;
 Total of acceptances;
 Total of forward exchange contracts;
 Total of outstanding liabilities under documentary credits
5 (a) Certain conditions are required to be met before an auditor can decide to use negative
confirmation as a sole substantive procedure, these conditions include:
(i) Auditor has assessed risk of material misstatement as low and has obtained sufficient
appropriate audit evidence regarding operating effectiveness of controls relevant to assertions;
(ii) The population of items subject to negative confirmation procedure comprises a large number
of small, homogeneous account balances, transactions or conditions;
(iii) A very low exception rate is expected; and
(iv) The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.
In the given situation, condition # (i) and (ii), are met; the fact that risk of material misstatement
is low suggests that condition # (iii) is also being met. Therefore, it would be appropriate to use
negative confirmation provided that the fourth condition is met. For 15 major debtors, it would
be appropriate to use positive confirmation as their population consists of small number of large
balances.
(b) Audit Procedures:
(i) Prepare or obtain a client roll forward schedule from 31 August 2011, to 31 October 2011.
(ii) Agree Individual entries for 31 October 2011, with the sales ledger and debtors control
accounts.
(iii) Note and obtain explanation for any unusual journal adjustments.
(iv) Vouch material sales or receipts with supporting documents.
(v) Select a sample of receipts and sales and perform tests of controls to ensure that system of
internal controls continued to operate effectively.
(vi) Re-perform cutoff test at year end.

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(vii) Perform analytical procedures by comparing the balances of debtors on 31 August 2011, to
Debtors on 31 October 2011, and ascertain reasons for major variances, if any.
(viii) Check subsequent recovery of year end balances.
(c) If Management refuses to allow the auditor to send a confirmation request, the auditor shall:
(i) Inquire as to management9s reason for the refusal, and seek audit evidence as to their validity
and reasonableness;
(ii) Evaluate the implications of management9s refusal on the auditor9s assessment of the relevant
risks of material misstatement, including the risk of fraud
(iii) and on the nature, timing and extent of other audit procedures; and
(iv) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
(v) If the auditor concludes that
 Management9s refusal to allow the auditor to send a confirmation request is
unreasonable; or
 the auditor is unable to obtain relevant and reliable audit evidence from alternative audit
procedures the auditor shall communicate with TCWG and auditor shall also determine
implications of results of procedures carried out above on the audit and the auditor9s
opinion
6 (a) Audit Assertions The key audit objectives in the audit of cash are to verify the assertions of:
(i) Existence
(ii) Completeness
(iii) Rights and obligations
(iv) Presentation and disclosure
(b) Audit Procedures
(i) Existence
 Carry out cash count and reconcile it with the accounting records.
 Any unusual items such as IOU should be investigated thoroughly.
(ii) Completeness
 Perform cutoff procedures to ensure that there is no unrecorded cash or cash in transit is
not missed.
 Check the reconciliation between Cash as per Head Office records with the Cash at the
outlets.
(iii) Rights and obligations
Ensuring that Company owns the cash in hand and none of the cash is held on behalf of any third
party.
(iv) Presentation and Disclosure Ensure that cash and balances have been disclosed, classified and
described in accordance with AFRF
7 (a) Physical verification:
(i) Evaluate the client9s physical inventory taking instructions and procedures to their staff.
(ii) Attend physical inventory count to observe the inventory count procedures.
(iii) Ascertain whether the staff members are carrying out the physical inventory count as per
approved instructions issued to them.
(iv) Perform test counts to ensure the efficiency and effectiveness of the physical count
procedures.
(v) Observe the physical inventory count and identify the matters for appropriate follow-up during
the audit.
These matters may include the following:
 Excess/ Shortages found in test count performed by the auditors.
 Items of inventory identified as obsolete, slow moving, damaged or defective.

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 Details of instances where the approved inventory count procedures are not followed by
the staff members of the client.
 Instances where the stock records (bin cards, stock and stores ledger etc) do not contain
adequate details relating to balance of inventory in hand, minimum level, maximum level,
ordering level, specification of inventory and location of inventory etc.
 Cut-off procedures and adherence thereto.
(vi) Check that adjustments arising out of the physical count have been made in stock count sheets.
(vii) Check final stock sheets for quantity, pricing, extensions, casting, summarization, and
signatures of the stock taking staff.
b) Finished Goods:
(i) Obtain a list of items (schedule) shown as finished goods, with full particulars, quantity and
value
(ii) Compare the list with physical count sheet balances and with stock ledger balances
(iii) On test basis check the items and quantities in the stock ledger with the bin card.
(iv) With regard to cut-off procedures performed during the attendance at the physical inventory
count, check the 8goods outward book9 or 8delivery challans9 book for the last few days of the year,
and early few days of the succeeding financial year.
(v) If goods are sold on consignment, check the closing stock with the consignment account
(c) Work in Process:
(i) Obtain a list of items shown as work in progress, with full particulars, quantity and value.
(ii) Compare the list with physical count sheet balances and with stock ledger balances
(iii) Check the quantity and items included in the list with the production reports and job cards etc.
(iv) Check records showing the work in progress opening balances, raw material and other material
issued and labour and overheads charged to production and closing balance of work in process.
(v) Where it is not possible to quantify or value the work in process for technical reasons, the
auditor should consider to use an expert.
(d) Raw material:
(i) Obtain a list of items shown as Raw material, with full particulars, quantity and value.
(ii) Compare the list with physical count sheet balances and with stock ledger balances.
(iii) Verify cost of raw material appearing in F/S by matching with them with purchase invoices etc.
(e) Valuation of Inventories:
(i) Ensure that stock has been valued in accordance with the valuation policy.
(ii) Ensure that inventories have been valued at the lower of cost and net realizable value.
(iii) Ensure that the cost of inventories comprise of purchase price, cost of conversion and other
costs incurred in bringing the inventories to their present location and condition.
(iv) Check that the following costs have not been included in the cost of inventories:
 Abnormal wastes in labour, material or other production overheads.
 Storage costs unless considered necessary for the production process/ inventory.
 Administrative overheads
 Selling and distribution costs
 Financial charges
(v) Examine and perform test checks to verify the proper allocation of overheads is in accordance
with the requirements of IAS 2.
(vi) Where the inventories are valued at net realizable value, check that valuation is correct and is
based on the most reliable evidence.
(vii) Check that the cost of obsolete and damaged items is properly written down.
(viii) Test arithmetical accuracy of the calculation of the stock sheets.
(f) Disclosure:

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Ensure that inventories have been disclosed in accordance with the requirements of International
Financial Reporting Standards and the Companies Act, 2017.
(g) General:
(i) Trace opening balance from last year9s working papers.
(ii) Agree closing balance appearing in the F/S with books of accounts.
(iii) Ensure that inventories have been appropriately classified.
(iv) Obtain direct confirmation for stocks held by third parties.
(v) Check reconciliations of opening and closing balances with production/ sale records, wherever
possible.
8 (a) Selection of Accounts Receivable for circulation at year-end
(i) The debtors listing will be stratified in accordance with the different market segments (Super
markets, whole sellers, retailers and five star hotels)
(ii) For positive circulation the selection may be as follows:
 All twelve super markets, as well as the seven five star hotels will be purposely selected
(56% of the total debtors balance will be covered in this manner).
 Whole sellers and retailers will be stratified further according to value and days
outstanding. A sample will be made from the above-mentioned sub-populations, with
greater focus on the high value and long-outstanding populations.
 Debtors with nil and credit balances, as well as overdue debtors should also be selected.
(iii) A negative circulation of non-selected debtors may be considered on sample basis.
(b) Situation where a debtor confirms a balance which is different from the amount appearing in
the confirmation request: A response that indicates a difference between information requested
to be confirmed and information provided by the confirming party is termed as exception. The
exception may be on account of:
(i) Timing difference
(ii) Misstatement
 In case of timing differences, the auditor will need to reconcile the amount confirmed by
the confirming party and the amount sent for confirmation.
 If the amount cannot be reconciled, the auditor is required to evaluate whether it is
indicative of a fraud or deficiency or deficiencies in the entity9s internal control over
financial reporting.
 In either case, the auditor will consider whether he needs to revise his risk assessment and
audit procedures.

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10 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.
11 (a) (i) Hospitals and clinics:
The decision to send negative confirmation was appropriate as all the conditions for sending
negative confirmation i.e. Large number of small account balances, low risk of material
misstatement, low exception rate as only four customers have disagreed with the balances due
and that have been also reconciled and there was no knowledge of circumstances that would
cause recipient to disregard the confirmation request.
(ii) Retailers: Results of confirmations depict high risk of material misstatement and high exception
rate. However, since the decision to send negative confirmation was taken on the basis of initial
assessment, the decision under the circumstances seems correct
(b) Balance agreed:
No further audit work is required.
Balance not agreed:
 The client should be asked to review the replies and reconcile the balances in its records
with the balances confirmed by the customer.
 The reconciliation prepared by the client should be checked.
- The reconciling items depicting errors in the client9s records should be investigated and
corrected.
- The client should be asked to resolve the difference in case the reconciling items
depicting errors on part of the customers.
No reply received:

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In these cases, alternative procedures should be performed (e.g. subsequent payments and
checking of invoices/ dispatch notes in order to obtain evidence to confirm the customer9s
balances.
(c)From the winding up event it appears that the amount receivable from SDPL is irrecoverable.
Therefore, the auditor needs to ensure that the amount of irrecoverable receivables are written
off or is duly provided for.
The following substantive procedures should also be performed:
 Review any correspondence of the SPL with the liquidator/management of SDPL (if any),
relating to recovery of the amount due.
 Review the calculation of amount of provision/write off and basis thereof.
12 A negative confirmation can be used, where any of the following condition is met:
 The risk of material misstatement has been assessed as low and controls have been tested.
 The population is comprised of large number of small account balances.
 A very low exception rate is expected.
 The auditor is not aware of the circumstances which would cause the respondent to ignore
the request for confirmation.
13 (a)
(i) The approach of not sending confirmation requests to balances below Rs. 100,000 is not correct
unless the total of such balances is clearly immaterial.
(ii) The conclusion documented by the team is not correct as the confirmation received from
creditors only confirms the recorded amount and is not relevant for the purpose of testing of
unrecorded liabilities.
(b)
(i) The audit team is required to discuss the matter with client9s management and ask them to
send confirmation as per the normal sampling procedure of the audit firm. In case the
management does not agree, the audit team should evaluate the implications of management's
refusal on the auditor's assessment of the relevant risks of material misstatement, including the
risk of fraud, and on the nature, timing and extent of other audit procedures;
(ii) Following information should be tested by the audit team to draw conclusion related to
unrecorded liabilities:
 subsequent disbursements
 unmatched receiving reports (Inventory Cutoff)
14 If management refuse to allow the auditor to send a confirmation request the auditor should:
 inquire as to management9s reasons for the refusal, and seek audit evidence as to the
validity and reasonableness of those reasons;
 evaluate the implications of management9s refusal on the auditor9s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
 perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
The auditor shall communicate with TCWG if:
 the auditor concludes that management9s refusal to allow the auditor to send a
confirmation request is unreasonable; or
 The auditor is unable to obtain relevant and reliable audit evidence from alternative audit
procedures,
15 Shahbaz Chemicals Limited The following steps shall be performed by the audit team:
 Review and test the procedures in place for comparing NRV with cost for each item of
inventory.

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 Review the information gathered during the physical inventory count (e.g. deterioration
of inventory) which may suggest that NRV may be lower than cost.
 Review the records relating to goods returned by customers or allowances granted to
customers.
 Review inventory records and order books for evidence of slow-moving items and
compare their expected NRV with cost.
 Select major items of inventory from the list of stock and compare NRV with cost.
 Review prices at which goods have been sold after the reporting period, for evidence that
NRV is higher than cost.
16 (a) During the count, the auditor should consider:
 whether or not the count is being conducted in accordance with the written instructions
of the client9s management
 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)
 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 entity9s premises)
 whether or not, during the count, production of new inventory and the movement of
inventory are controlled and properly documented, in accordance with management9s
instructions for the count
 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 yearend
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
17 For sending negative confirmation, all of the following conditions are required to be met:
(i) The risk of material misstatement has been assessed as low and controls have been tested.
(ii) The population is comprised of large number of small account balances or transaction.
(iii) A very low exception rate is expected.
(iv) The auditor is not aware of circumstances which would cause the respondent to ignore his
request for confirmation. Based on the above, my comment on appropriateness of sending
confirmation requests for each category of customers are as follows:

18 We cannot choose to circulate negative confirmation merely on the fact that risk of material
misstatement has been assessed as low and majority of the balances comprise of large number of
small balances. Before using the negative confirmation as the substantive procedures, we also
need to ascertain that:
 exception rate is expected to be low; and
 there is no apparent reason to suspect that the customers would disregard the
confirmation request.

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Furthermore, we cannot consider the offer of CFO because we should maintain control over
external confirmation requests which include sending the requests ourselves with an instruction
for responses to be sent directly to us.
Ideally, confirmation of balances should take place after the reporting period, and should be based
on customers9 account balances as at the reporting period. However, to reduce the time pressure
at the final audit stage, the confirmation process can also be based on balances at an interim date
before the end of the financial year (normally no more than three months before the end of the
reporting period). However, while doing so, we should consider the fact that we will need to check
the changes in the debtor balances between the confirmation date and the end of the reporting
period
19 (c) If management refuse to allow the auditor to send a confirmation request the auditor should:
 inquire about the reasons for refusal and seek audit evidence as to the validity and
reasonableness;
 evaluate the implications of management9s refusal on the auditor9s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
 perform alternative audit procedures such as, subsequent receipts and inspection of
documents, designed to obtain relevant and reliable audit evidence.
If the auditor concludes that management9s refusal to allow the auditor to send a confirmation
request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence
from alternative audit procedures, the auditor shall communicate with those charged with
governance.
Failure to obtain sufficient appropriate audit evidence indicates scope limitation and the auditor
shall assess the implications of such limitation on the auditor9s opinion.
20 (a)
(i) No further audit work is required.
(ii) This is a timing difference. We need to obtain goods delivery note and customer
acknowledgement to ascertain the date of delivery and date of acceptance of goods.
(iii) This is an adjusting event.
We should perform the following steps:
 Check the return of goods with the relevant goods receipt document.
 Ask the client to reduce the sales and receivables and incorporate corresponding effects
in cost of sales and inventory.
(iv) Follow-up procedures should be initiated. For example, second request and third request
letters could be sent, or the client could be asked to contact the customer for a reply. Subsequent
receipt of the amount should be checked. If no payment (or only part-payment) has been received,
the outstanding sales invoices should be checked with:
 Purchase order issued by the customer.
 Delivery note duly acknowledged by the customer.
21 We will have to check the completeness and accuracy of the list prepared by the client. Stratified
sampling could be used for selecting customer balances for circularizing the confirmation. If the
chain stores are selected, 51% (or 49% in absolute terms) of the population can be covered without
excessive time and cost being involved. Therefore, all the three chain stores could be selected for
confirmation.
Debtors from superstores and restaurants should be chosen on the basis of any appropriate
sample selection method adopted by the team. Since balances of chain stores and super stores
consist of large balances, positive confirmation should be circulated.

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Since the population of restaurant comprises of large number of small account balances, the risk
of material misstatement has been assessed as low and control have been tested, negative
confirmation can be used if the following two conditions are also met:
 A very low exception rate is expected; and
 The auditor is not aware of circumstances which would cause the respondent to ignore
the request for confirmation.
 Credit account balances should also be separately selected for circulating the
confirmation.
22 Debtor A
Evaluation
Even though the balance confirmed is the same, it raises doubt for the reliability of the response
because the confirmation was not received directly from the confirming party.
Steps to perform
 Auditor should modify or add procedures to resolve doubts over the reliability of information
to be used as audit evidence.
 Auditor should contact the confirming party and request them to respond directly to the
auditor.
Debtor B
Evaluation
It appears that the confirmation did not come from the originally intended confirming party. It
carries risk of interception, alteration or fraud.
Steps to perform
 Auditor should resend the confirmation again to the debtor.
 Auditor should revise the risk of material misstatement at the assertion level and modify
planned audit procedures accordingly.
 If it is ascertained that fraud exist, it is important that the matter is brought to the
appropriate level of management and those charged with governance.
 If the auditor has doubts about the integrity of the management or those charged with
governance, then the auditor should consider to obtain legal advice for appropriate course
of action.
Debtor C
Evaluation
Sales return subsequent to the year-end can be an adjusting event which needs to be adjusted in
the financial statements.
Steps to perform
 Check the return of goods with the relevant goods receipt document.
 Inquire from the management the reasons for the return of good and assess whether it is
an adjusting event.
 If it is established that it is an adjusting event than ask the client to reduce the sales and
receivables and incorporate corresponding effects in cost of sales and inventory.
 Consider the fraud risk that whether the sales were made for overstating the sales for the
year end.
Additional steps (overall)
Since there are doubts over the reliability of the confirmation response, the auditor should
also perform the following alternate audit procedures to gather audit evidence:
 Subsequent receipt of the amount should be checked.

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 If no payment has been received, the outstanding sales invoices should be checked with
purchase order issued by the customer and delivery note duly acknowledged by the
customer.
23 Interim balances:
Since the interim balances were used for sending confirmation, the auditor will need to check the
changes in the receivable balances between the confirmation date and the end of reporting
period. This check will consist mainly of checking entries in the receivable control account with the
transactions entered in the book of prime entry during the same period.
Assertions addressed:
Cut-off, rights and obligation assertion has been correctly identified the audit team. However, the
receivable balances are generally tested for overstatement, the completeness assertion is
therefore less relevant. Assertion related to existence is more relevant as this exercise confirms
that the receivables do in fact exist, and there is no overstatement of receivables in the financial
statements. Accuracy and valuation assertion is also verified during the confirmation exercise
which has not been addressed by the audit team.
Debtors’ wise assessment of work:
(i) Alpha: No further procedure required.
(ii) Beta: The auditor should maintain control over the external confirmation requests, including
the process of sending the requests himself. The confirmation being sent directly was returned by
the courier on the grounds of invalid address and that resending by the client may indicate doubts
on the reliability of the response. The auditor should also consider performing alternate audit
procedures to verify the receivable balance such as subsequent clearance, review the supporting
documentation such as signed PO, delivery documentation and sales invoice.
(iii)Gamma: From the winding up event it appears that the amount receivable is irrecoverable.
Therefore, the auditor needs to ensure that the amount of irrecoverable receivables is written off
or is duly provided for.
 Review any correspondence with the liquidator/debtor, relating to recovery of the
amount due.
 Review the calculation of amount of provision/write off and basis thereof.
(v) Small Distributors:
Audit team9s decision to ignore small balance is not correct. The team may consider sending
negative balance confirmation. If the team ensure that there is low risk of material misstatement,
low exception rate is expected and there is no reason to disregard the confirmation request.
24 Shortcomings Required changes
i) The client has been asked to confirm the Instead of using the word 8us9 we should use
balance and notify any difference to the audit 8our auditors directly9. It should be specifically
client's management. mentioned somewhere in the confirmation
that it needs to be mailed directly to the
auditor.
ii) The year-end date at which the balance ' The year-end date needs to be inserted just
need to be confirmed is not mentioned before or after the places where the account
balance has been mentioned and the place
where Client confirms his balance.
iii) An addressed and stamped envelope is This also needs to be mentioned in the balance
always attached with the confirmation confirmation request.
request.

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iv) Balance reconciliation in case of difference The debtor should be asked that in case he
has not been asked. does not agree with the mentioned balance,
he should provide the detail and full
particulars of the difference.

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Chapter 10 |Other Assets (S.P)

1 (a) Substantive Procedures for verification of Bank reconciliation statements:
 Trace and agree balances per books of accounts (ledger or bank book) as appearing in the bank
reconciliation statement with the general ledger/ bank book.
 Trace and agree balances per bank statement as appearing in the bank reconciliation
statement with the bank statements
 Trace reconciling items appearing in the previous months bank reconciliation into current
month9s ledger/ bank statement/ bank reconciliation statement.
 Check subsequent clearance of current months reconciling items.
 Review and discuss long outstanding items appearing in the bank reconciliation statement.
 Ensure that all outstanding items requiring adjustments are properly accounted for in the
books of accounts.
 Check arithmetical accuracy of reconciliation statements. (b) Substantive Procedures for
Payroll:
 From the payroll record:
- Select a sample of newly appointed staff and check their salaries with the appointment
letter.
- Select a sample of other staff (appointed in previous years) and check their salaries with
the increment letter.
- In both the above cases check that allowances and deductions are in accordance with the
company9s policies or the relevant legal requirements.
 Select a sample of payroll summaries and:
- Check that payroll summary has been approved by an appropriate authority.
- Trace totals of payroll summaries to appropriate general ledger accounts.
- Check allocation of payroll to cost of sales and operating expenses.
- Compare net payroll after deductions with transfer letter issued to the bank.
o Carryout analytical review by comparing the monthly and annual payroll and inquire
reasons for significant fluctuations.
o Ensure that payroll costs have been properly disclosed in the F/S.
(c) Substantive Procedures for Raw material purchases:
 Select a sample of transactions and carryout the following tests.
- Check weather appropriate measures have been taken as per the
company9s policy to ensure that purchases are made from most
competitive sources.
- Check the relevant invoices.
- Match invoices with goods receiving notes to ensure that goods have been
received for all billings made by supplier.
Match supplier9s invoices with purchase orders to ensure that:
- Purchases were duly authorized.
- Rates and quantities mentioned on the invoice are same as those
mentioned on the purchase order.
 Check posting of supplier9s invoices to creditor9s accounts/ general ledger.
 Perform cut-off procedures on purchases.
 Perform analytical procedures on purchases made during the year by comparing
current year purchases with the last year and investigate significant differences, if any
2 Substantive Procedures for verification of Long Term Bank Loan:

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 Check approval of board of directors.

 Study loan agreement and make relevant extracts.
 Check calculation of interest paid/ accrued.
 Obtain bank confirmation and confirm the particulars of security deposited with the bank
as security for the loans or charge created on an asset or assets of the client.
 Ensure that the particulars mentioned in the bank confirmation are same as mentioned in
the loan agreement.
 If the loan is secured against mortgage or charge, check the mortgage deed or any other
related document.
 If there is any default in the payment of installments, check the related implications of the
default and ensure they are properly reflected in the F/S.
 Prepare a movement schedule during the year and match the opening and closing
balances, and also confirm that loan balance is appropriately reduced by the amount paid
during the year.
 Ensure proper disclosure is made in the F/S.
3 The audit approach to gathering evidence on contingencies and commitments is as follows:
Accrued expenses:
 Obtain or prepare a listing of accrued expenses as at the end of the reporting period. Check
the calculations and additions for arithmetical accuracy.
 Check the amounts in the listing against the balances in the relevant main ledger expense
accounts and ensure that the amounts are the same.
 Verify the invoices received or payments made after the year end and ensure that the
amount accrued appears reasonable in relation to this evidence.
 Compare the list of accrued expenses with the list that was prepared at the same date in
the previous financial year, and enquire about items not listed in the current year that
were in the list in the previous year.
 Review the list of accruals for completeness, based on the auditor9s knowledge of the
business.
 Relate items on the list of accruals to other audit areas, such as the bank confirmation
letter (which might provide details of unpaid/accrued bank charges).
 Perform analytical procedures on accrued expenses. For example, the auditor might
measure the ratio of accrued payroll expenses to total payroll costs for the year, and
compare this with the similar ratio in previous years. Significant differences should be
investigated.
Contingencies:
 Ascertain the approach taken by the client9s management for identifying contingencies.
 Review the minutes of board meetings (where such matters are likely to be discussed).
 Review relevant material related to the industry as a whole such as F/S of major companies
in the industry to identify possible industrywide contingencies
 Review the client9s correspondence with lawyers.
 Review the invoices for legal services to identify undisclosed contingencies and additional
information about contingencies
 Consider direct confirmation from the company9s lawyers and legal advisors.
 Consider whether expert advice may be required from outside sources other than lawyers.
 Ensure that provisions has been made in case relevant condition as specified in IFRS are
met.
4 Audit procedures for verification of share premium account:
 Obtain an analysis of movements in share premium account during the period.

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 Check the accuracy of these movements by checking supporting documentation

 Ensure that any specific legal requirements relating to share premium have been complied
with. (For example, check that the entity has not breached legal restrictions on use of the
share premium account.)
 Check authorization in respect of all movements during the year.
5 Key substantive procedures for verification of provisions include the following:
(i) Ensure that all provisions have been recognized in accordance with the IAS 37.
(ii) Review the measurement of the closing balance for each provision and discuss these with
management if appropriate. Consider whether it might be appropriate to take expert advice on
the existence or measurement of a provision.
(iii) Review the board approval related to provisions booked in the F/S.
(iv) Review the list of provisions for possible omissions, based on the auditor9s knowledge of the
business and the industry in which it operates.
(v) Relate the testing of provisions to other areas of the audit work, such as correspondence with
lawyers/minutes of Board of director9s meeting (which might reveal more information about
matters to which the provisions relate).
(vi) Compare provisions for the current financial year with provisions in previous years, and
investigate any major differences or omissions.
(vii) Review the subsequent events to ensure completeness of provisions
6  Review the list to identify major suppliers i.e. regular suppliers of frequently purchased items
who are not in the listing of trade payables.
 Compare the list of trade payables with the listing of the previous year9s audit. Look for
explanations as to why any major supplier is not appearing on the current year9s listing.
 Apply other analytical procedures and obtain explanations for any significant differences
identified while carrying out the above tests

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Chapter 11 | Related Parties

1 (i) Review prior year working papers for names of known related parties;
(ii) Review the entity9s procedures for identification of related parties;
(iii) Inquire as to the affiliation of TCWG and officers with other entities;
(iv) Review shareholder records to determine the names of principal shareholders or, if
appropriate, obtain a listing of principal share-holders from the share register;
(v) Review minutes of the meetings of shareholders and TCWG and other relevant statutory
records such as the register of directors9 interests;
(vi) Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their
knowledge of additional related parties; and
(vii) Review the entity9s income tax returns and other information supplied to regulatory agencies
2 (a) (i) Evaluate the company9s procedures for identifying and for properly accounting for
relatedparty transactions.
(ii) Inquire of management regarding:
 the identity of the entity9s related parties, including changes from prior period;
 the nature of relationship between the entity and these related parties; and
 whether entity entered into any transaction with these related parties during the period and, if
so, the type and purpose of the transactions.
(iii) Inspect information supplied by the entity to regulatory authorities (e.g. SECP, FBR, SBP, etc.)
(iv) Identify all employee benefit plans and the names of the officers and trustees thereof.
(v) Review shareholder registers to identity the entity9s principal shareholders.
(vi) Review material investment transactions during the audit period to determine whether the
nature and extent of investments during the period create related parties.
(vii) Review contracts and agreements with key management or TCWG.
(viii) Review significant contracts re-negotiated by the entity during the period.
(ix) Review significant contracts and agreements not in the entity9s ordinary course of business.
(x) Review of internal auditor9s report
(xi) Review of third party confirmations obtained by the auditor
(xii) Minutes of meetings of shareholders and of TCWG.
(b) Indicators of dominant influence exerted by a related party include the following:
(i) Significant transactions are referred to the related party for final approval.
(ii) There is little or no debate among management and TCWG regarding business proposals
initiated by the related party.
(iii) Transactions involving the related party (or a close family member of the related party) are
rarely independently reviewed and approved.
(iv) The related party has vetoed significant business decisions taken by management or TCWG
3 The steps that I as an auditor would consider as part of the audit planning to ensure that all related
party relationships and transactions are identified and disclosed in the F/S are as follows:
(a) Obtaining an understanding of the controls, if any, that management has established to
identify, account for, and disclose related party relationships and transactions in accordance with
the AFRF.
(b) Inquiring of the management regarding:
(i) The identity of the entity9s related parties, including changes from the prior period;
(ii) The nature of relationships between the entity and these related parties; and
(iii) Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.

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(c) Inspecting the following documents for indications of the existence of related party
relationships or transactions that management has not previously identified or disclosed:
(i) Bank and legal confirmations
(ii) Minutes of meetings of shareholders and of TCWG; and
(iii) Any other records or documents as the auditor considers necessary (e.g. Form A, Form
29, Register of members etc.).
(d) Reviewing the extent and nature of business transacted with major customers, suppliers,
borrowers and lenders for indications of previously undisclosed relationships.
(e) Reviewing the significant transactions outside the normal course of business, paying particular
attention to the transaction recognized at or near end of the reporting period and inquire of
management:
 The nature of these transactions
 Whether related parties are involved in these transactions
(f) Once related parties have been identified, the client should provide the details of transactions
with such parties. I as auditor would ensure that these transactions are disclosed appropriately in
the F/S as per AFRF.
4  Non-disclosure of the name of a subsidiary raises concerns relating to competence, integrity,
ethics and diligence of management.
 We shall determine the possible effects of such concerns on the reliability ofother
representations provided to us and audit evidence in general. We shall perform the following
procedures:
1. Promptly communicate the other members of the engagement team that Strong Engine Plc of
Strong Vehicles Ltd., which was not identified by the management.
2. As IFRS requires certain disclosures and treatment of related party and transactions, we would:
(i) Request management to identify all transactions with the SEP for our further evaluation; and
(ii) Inquire as to why the entity9s controls over related party relationships and transactions failed
to enable the identification or disclosure of SEP and transactions;
3. Perform appropriate substantive audit procedures relating to SEP and significant related party
transactions;
4. Reconsider the risk that other related parties or significant related party transactions may exist
that management has not previously identified or disclosed to the auditor, and perform additional
audit procedures as necessary; and
5. If the non-disclosure by management appears intentional (and therefore indicative of a risk of
material misstatement due to fraud), evaluate the implications for the audit
5 (i) Since related party relationship/ transactions have been identified which were not previously
identified or disclosed to the auditor, the auditor shall:
 Promptly communicate the relevant information to the other members of the
engagement team;
 Where the AFRF establishes related party requirements:
- Request management to identify all transactions with FL for the auditor9s further
evaluation; and
- Perform appropriate substantive audit procedures relating to significant related party
transactions with FL;
- Reconsider the risk that other related parties or significant related party transactions
may exist that management has not previously identified or disclosed to the auditor,
and perform additional audit procedures as necessary; and

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- If the non-disclosure by management appears intentional (and therefore indicative of

a risk of material misstatement due to fraud), evaluate the implications for the audit.
(ii) For identified significant related party transactions outside the entity9s normal course of
business, the auditor shall:
 Inspect the underlying contracts or agreements, if any, and evaluate whether:
- The business rationale (or lack thereof) of the transactions suggests that they may have
been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets;
- The terms of the transactions are consistent with management9s explanations; and
- The transactions have been appropriately accounted for and disclosed in accordance with
the AFRF; and
 Obtain audit evidence that the transactions have been appropriately authorized and approved
6 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 company9s procedures for identification of related parties
 review shareholder9s records
7 In the scenario, a previously undisclosed related party has been identified. I shall:
 communicate the relevant information to the audit team.
 assess as to why the entity9s system failed to identify or disclose the related party
relationship.
 request management to identify all transactions with NL and disclose them accordingly.
 perform appropriate substantive procedures on the newly identified related parties or
significant related party transactions.
 assess the reasonableness of the management9s explanation and;
 evaluate the implications on the audit, if the non-disclosure appears intentional.
8 If the auditor discovers significant related party transactions outside the entity9s normal course of
business, he must:
 Inspect the underlying contracts or agreements to evaluate whether:
- the contracts etc. were entered into in order to engage in fraudulent financial reporting
or to hide the misappropriation of assets (a lack of business rationale might indicate this)
- the terms of the contracts etc. are consistent with management9s explanations, and
- the transactions have been properly accounted for and disclosed.
 obtain evidence that the transactions were properly authorized
9 (a) In order to ensure the completeness of list of related parties provided by the client, your audit
procedures could include the following:
 Review working papers for previous years, to look for names of known related parties.
 Review the company9s procedures for identifying related parties.
 Inquire about the relationships between directors and other entities i.e. whether any
director is a director, CEO, major shareholder etc. in another company.
 Review shareholder records for the names of major shareholders.
 Review minutes of BOD meetings and general meetings of the company.
 Get confirmation from any other audit firms involved in the audit about related parties.
(e.g. in case of audit of a group of companies, more than one firm of auditors are involved)
(b) According to the International Standard on Auditing (ISAs) the auditor is required to obtain
written representations from management and, where appropriate, TCWG that:

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 they have disclosed to the auditor the identity of the entity's related parties and all the related
party relationships and transactions of which they are aware; and
 they have appropriately accounted for and disclosed such relationships and transactions in
accordance with the requirements of the framework
In view of the above, the auditor should not accept the argument given by the management. If
management does not provide one or more of requested written representations, the auditor
shall:
 discuss the matter with management/ TCWG;
 re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
 take appropriate actions, including determining the possible effect on the opinion in the
auditor's report
10 Repayment of loan to the holding company in the form of transfer of securities indicates a
significant and unusual related party transaction, which is outside the entity9s normal course of
business. In this regard following audit procedures may be performed:
 Inspect the underlying contracts or agreements to evaluate whether:
- the terms of the contracts etc. are consistent with management9s explanations.
- the transactions have been properly accounted for and disclosed.
- the contracts and agreements were entered to engage in fraudulent financial reporting or
to hide the misappropriation of assets (a lack of business rationale might indicate this).
 Obtain evidence that the transactions were properly authorised.
 If management has made a statement in the notes to the financial statements that a related
party transaction was made on the same terms as an arm9s length transaction, the auditor
must obtain evidence to support this statement
11  Accounting systems may not be effective at identifying and summarizing related party
transactions and balances.
 Related party transactions may not be conducted on normal market terms.
 Related parties may operate through complex structures and therefore may be used to
commit fraud
12 (a)
Imran should perform the following audit procedures to ensure the completeness of identification
of related parties.
 Review working papers for previous years, to look for names of known related parties.
 Assess the adequacy of the company9s procedures for identifying related parties.
 Review minutes of shareholder meetings and board of directors meeting.
 Review shareholder records for the names of major shareholders.
 Review the regulatory returns and the information supplied by the entity to the regulatory
authorities.
 Inspect non-routine and unusual transactions.
 Inspect significant contracts and agreements not in the ordinary course of business.
 Review significant contracts renegotiated by the entity during the period.
 Identify all employee benefit plans and the names of officers and trustees.
 Review internal audit reports.
(b) If he discovers previously unidentified or undisclosed related parties or (significant) related
party transactions he must:
(i) promptly communicate the relevant information of the related party transaction to other
members of the audit team.

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(ii) perform appropriate substantive procedures on the newly identified related parties or
significant related party transactions.
(iii) request management to identify all transactions with the newly identified related parties.
(iv) inquire as to why the entity9s internal control system failed to identify or disclose these related
party relationships or transactions.
(v) Reassess the risk of there being unidentified or undisclosed related parties or (significant)
related party transactions and respond to the reassessed risk.
(vi) If the non-disclosure by management appears intentional (and therefore indicative of risk of
material misstatement due to fraud), evaluate the implications for the audit
13 I would suggest the following activities/procedures to my team, in respect of identification of risks
of material misstatement related parties:
 The audit team9s discussion on risk shall include specific consideration of susceptibility of
financial statements to material misstatement due to fraud or error through related parties
and their transactions.
 The audit team should inquire of management regarding:
 the identity of related parties including changes from prior period;
 the nature of the relationships between the entity and its related parties; and
 whether any transactions occurred between these related parties during the period and,
if so, the type and purpose of the transactions.
 what controls the entity has to identify, account for and disclose relating to related party
relationships and transactions.
The audit team should obtain an understanding of the controls, if any, that management has
established to: - identify, account for, and disclose related party relationships and transactions;
- authorize and approve significant transactions and arrangements with related parties;
- authorize and approve significant transactions and arrangements outside the normal
course of business.
 The audit team should maintain alertness for evidence of related party information when
obtaining other audit evidence, in particular, when scrutinizing bank and legal confirmations
and minutes of meetings.
 If significant transactions outside the normal course of business are discovered, the audit team
should inquire management the nature of the transactions and whether related parties could
be involved.
 The audit team should share relevant information obtained about the entity9s related parties
with other members of the engagement team.
14 Since the related party transaction was not disclosed to the audit team by the client, it creates a
risk of not disclosing all related party(ies) and related party transaction(s). Further, the way the
transaction is structured (i.e. sold on loss and 70% payment over a period of five years), it seems
that it is not in the ordinary course of business. Key audit procedures to be performed:
(i) Inquire with management the reasons for disposal of freehold land.
(ii) Promptly communicate the relevant information of the related party transaction to other
members of the audit team.
(iii) Request management to identify all transactions with MPL for further evaluation.
(iv) Reconsider the risk that other related parties or significant related party transactions may exist
that management has not previously identified or disclosed to the auditor, and perform additional
audit procedures.
(v) Inquire as to why the CL9s system failed to identify or disclose this related party relationship
and transaction.

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(vi) Obtain representation from the management that all related parties have been identified and
disclosed to the auditor.
(vii) Inquire about the influence of director with respect to the said transactions.
(viii)If the non-disclosure by management appears intentional (and therefore indicative of risk of
material misstatement due to fraud), evaluate the implications for the audit.
15 Evaluation:
Transaction with the daughter of a director is a related party transaction not conducted at arm9s
length. Even though the management decides not to charge any amount from the daughter of the
Director, being a related party transaction, this arrangement needs to be disclosed in the financial
statements. Not disclosing the related party transaction would be a non-compliance of IAS-24 and
the Fourth Schedule of Companies Act 2017 and will be a material misstatement. Furthermore, it
was a transaction which was not disclosed to the audit team.
Procedures to be performed by the audit senior:
(i) Communicate the relevant information to the audit team.
(ii) Discuss with management the terms of the arrangement, and whether is there any contract or
agreement in place.
(iii) Request management to identify all transaction related to the new arrangement.
(iv) Request management to identify the fair value of the new arrangement.
(v) Reconsider the risk of other unidentified or undisclosed related parties or related party
transactions.
(vi) Inquire from the management that whether this arrangement has been authorized.
(vii) Inquire as to why the client9s system failed to identify or disclose this related party relationship
and transaction.
(viii)If the management does not disclose the arrangement in the financial statements, then
discuss the non-disclosure with those charged with governance.
(ix) Consider the risk of fraud and management integrity if the non-disclosure appears intentional
and evaluate the implications for the audit.
(x) Obtain management representation that all related parties and the transactions with them
have been disclosed to the audit team

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Chapter 12 | Reliance on Others

1 (a)
For the purpose of determining the extent of reliance that may be placed on the work of internal
auditor in specified areas, it may be evaluated by:
(i) Inspecting the adequacy of the scope of the work and related programs.
(ii) Determining by means of inspection whether the preliminary assessment of Internal audit
function remains appropriate.
(iii) Obtain evidence that:
 The work is performed by staff having adequate technical training and proficiency as
internal auditors and the work of assistants are properly supervised, reviewed and
documented.
 Sufficient appropriate audit evidence was obtained to serve as a reasonable basis for
conclusions reached.
 Conclusions reached are appropriate in the circumstances and any reports prepared are
consistent with the results of work performed.
 Any exceptions/unusual matters disclosed by internal audit are properly resolved
Important differences between Internal Audit and the External Audit
Independence
Since internal audit is a part of the entity, no matter how autonomous and objective it is., it
cannot reach the level of independence enjoyed by the external auditors.
Objectives
The objectives of internal audit function vary according to management9s requirements.
Whereas, the primary objective of external auditor is to ascertain whether or not the F/S are free
of material misstatements.
Reporting
 Report of external auditor is addressed to the members (shareholders) / owners / those
charged with the governance of the entity. Internal audit reports are addressed to the
management and those charged with the governance.
 The reporting requirement of the external auditor is determined by the framework
under which
the audit is being carried out and by applicable legal and regulatory requirements.
Reporting requirement of internal audit is based on the objectives/scope of work determined by
the management and TCWG
2 Information regarding the competence, capabilities and objectivity of an auditor9s expert may
come
from a variety of sources, such as:
a) Personal experience with previous work of that expert.
b) Discussions with that expert.
c) Discussions with other auditors or others who are familiar with that expert9s work.
d) Knowledge of the expert9s qualifications, membership of a professional body or industry
association, license to practice or other forms of external recognition.
e) Published papers or books written by that expert.
f) The auditor9s firm9s quality control policies and procedures.
3 (a) When planning to use the report of FA (the valuer) the auditor should:
 Evaluate the competence, capabilities and objectivity of FA.
 Obtain an understanding of the work carried out by FA; and

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 Evaluate the appropriateness of FA9s work as audit evidence for the relevant assertion.
(b)
Inspect written instructions given to FA by PHL, which should include the objectives and scope of
the work, the intended use of the work to be performed by FA and the extent of the valuer9s
access to records and files.
 Consider the assumptions and methods used by the valuer to ensure they are reasonable
based on other audit evidence and the auditor9s previous knowledge of PHL.
 Evaluate the method used to measure fair value to ensure consistency.
 Examine the valuation report to ensure each property has been valued consistently and
that the date of valuation is reasonably close to year-end.
 Inspect the buildings physically to ensure their condition is the same as described in
valuation report.
 Obtain written representations from management regarding reasonableness of any
assumptions used in determining the fair value
4 It is not advisable to use the work of internal audit for external audit purposes due to following
reasons:
Status of the internal audit function within the entity
Administratively all the internal audit staff are under the influence of Anwar and hence their
independence is impaired.
Conflicting responsibilities:
The internal audit staff9s responsibilities for preparing bank reconciliation statement is in conflict
with its responsibility as a member of the internal audit function
Qualifications of internal audit staff:
All the internal audit personnel are graduates and do not have required competence about
various aspects of the internal audit function
5 Following factors are considered in determining the independence of internal auditors:
 To whom does the internal auditor reports to.
 Who decides the scope of internal audit work.
 Frequency of rotation of internal audit staff.
 Appointing authority of chief internal auditor.
 Conflict of interest i.e. they should not be responsible for designing internal controls.
6 (a)
(i) Matters that should be considered by the auditor in determining the competence,
capabilities and objectivity of EL
The competence, capabilities and objectivity of an expert may be assessed in one or more of the
following ways:
 Personal experience with previous work of that expert.
 Discussions with that expert.
 Discussions with other auditors or others who are familiar with that expert9s work.
 Knowledge of that expert9s qualifications, membership of a professional body or industry
association, license to practice, or other forms of external recognition.
 Published papers or books written by that expert.
(ii) While evaluating the adequacy of the EL9s work, the following would be considered:
 Reasonableness of the EL9s conclusions.
 Consistency of such conclusions with other audit evidence.
 Reasonableness of significant assumptions and methods used.
 Relevance, completeness and accuracy of source data.

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(b) If the auditor decides that the work of the expert is not adequate he is required to:
 agree additional work with the expert, or
 perform other appropriate additional audit procedures.
 hire another expert
7 a)
(i) the nature, scope and objectives of the expert9s work
(ii)the respective responsibilities of the expert and the auditor
(iii) the form of the expert9s report
(iv) confidentiality requirements
(b) The factors that should be considered in evaluating the adequacy of the expert9s work,
include:
 reasonableness of the expert9s conclusions
 consistency of those conclusions with other audit evidence
 reasonableness of significant assumptions and methods used
 Relevance, completeness and accuracy of source data
8 In order to evaluate the adequacy of internal audit function, the external auditor should assess
whether:
(i) The work was properly planned, performed, supervised, reviewed and documented;
(ii) Sufficient, appropriate evidence was obtained to enable internal auditors to draw reasonable
conclusions;
(iii) Appropriate conclusions were reached, consistent with any reports prepared;
(iv) Any exceptions or unusual matters were properly resolved.
9 Following are the situations which may require the engagement of an auditor9s expert:
 legal opinions
 specialist valuation areas, such as property or pension liabilities
 analysis of complex or unusual taxation issues
 specialized inventory counts
10 Before selecting the areas where direct assistance of internal auditors can be used. Faheem
should consider the following matters:
The internal auditor should not be involved in making significant amount of judgement in:
- planning and performing audit procedures; and
- evaluating the audit evidence gathered.
 The audit areas assigned to internal auditors should not relate to areas where risk of material
misstatement is assessed as high.
 Evaluate the existence of threats to objectivity and level of competence of the internal audit
staff who will be providing direct assistance
 The areas assigned should not relate to work in which the internal auditors have been
involved and which has already been, or will be, reported to management or those charged
with the governance by internal audit function.
 The areas assigned should not relate to the decisions you make in accordance with ISA
regarding the internal audit function and the use of its work or direct assistance.
 It should be ensured that despite using internal auditors to provide direct assistance to the
 extent planned, together with the planned use of the work of the internal audit function, the
external auditor would still be sufficiently involved in the audit, given the external auditor9s
sole responsibility for the audit opinion expressed.
11 If the external auditor uses internal auditors to provide direct assistance on the audit, the
external auditor shall include the following in the audit documentation:

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 The evaluation of the existence and significance of threats to the objectivity of the internal
auditors, and the level of competence of the internal auditors used to provide direct
assistance;
 The basis for the decision regarding the nature and extent of the work performed by the
internal auditors;
 Who reviewed the work performed and the date and extent of that review in accordance
with ISA 230;
 The written agreements obtained from an authorized representative of the entity and the
internal auditors; and
 The working papers prepared by the internal auditors who provided direct assistance on
 the audit engagement.
12 Reporting lines: Hina works in close coordination with CFO and CEO and also discusses all of the
findings with them. Therefore, it seems that the internal audit department is also reporting to
CFO and CEO which would impair its independence. Hina should be directly reporting to the
audit committee rather than going through CEO and CFO.
Deciding the scope of internal audit work: The scope of work carried out by the internal auditors
is solely decided by Hina without the consultation of the audit committee. The scope of internal
audit work should be decided by the audit committee or the chief internal auditor herself with
the approval of the audit committee.
Rotation of internal audit staff: Internal auditor staff has been auditing the same processes for
the last three years. They would have become too familiar with the operations that they audit or
the management responsible for them. To reduce the familiarity threat, internal auditors should
be rotated regularly.
Designing internal controls: The internal audit department is also involved in designing the
internal controls. However, they should not be responsible for the design of internal controls
within the entity. If they did, they would be required to audit their own work, which creates self-
review threat. Senior management in accounting and finance or line management should have
responsibility for the design and implementation of internal controls, taking advice where
appropriate from the external auditors when control weaknesses are identified during the
external audit.
b)
Auditor remains fully responsible for the report produced, even if evidence on which it is based
was produced by others. The auditor has sole responsibility for the audit opinion issued and this
is not reduced in any way by his use of an expert.
Therefore, he should not refer in his report to the use of an expert, unless that is required by law
or regulation. Even then, or if the auditor refers to the expert9s work in his report because it is
relevant to an understanding of a modified opinion, then he must make it clear that such a
reference does not reduce his responsibility for that opinion in any way.
The auditor therefore cannot simply accept work performed by experts. That work must be
evaluated in the same way as any other audit evidence is evaluated.
 reasonableness of the expert9s conclusions.
 consistency of those conclusions with other audit evidence.
 reasonableness of significant assumptions and methods used.
 relevance, completeness and accuracy of source data.
13 i) Valuation of provision for doubtful debts
The auditor may use the work of an expert to provide knowledge relevant to the audit, which the
audit firm does not possess. Provision of doubtful debt is an area of accounting and auditing for

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which an auditor is expected to have expertise and can be verified by various evidences
available, such as aging, subsequent receipts, etc. Therefore, the audit team does not require an
expert for valuation of provision for doubtful debts.
(ii) Fixed asset revaluation
The balance of fixed asset revaluation is material to the financial statements. Furthermore, due
to complexity involved it has an inherent risk of material misstatement. Since the only source of
evidence available is valuation report, the auditor should involve an expert due to lack of
expertise and availability of audit evidence for verification of revaluation surplus.
14 a)
We will assess the competence, capabilities and 8objectivity of the expert in one or more of the
following ways:
i. Personal experience with previous work of that expert.
ii. Discussions with that expert
iii. Discussions with other auditors or others who are familiar with that expert's work.
iv. Knowledge of that expert's qualifications, membership of a professional body or
industry association, license to practice, or other forms of external recognition.
v. Published papers or books written by that expert.
d)
(i) Are the internal auditor9s members of relevant professional bodies?
(ii) Do they have adequate technical training and proficiency?
(iii) Are there established policies for hiring and training internal auditors?
(iv) Do the internal auditors possess the required knowledge of financial reporting?

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Chapter 13 | Ethics

1 (i) Self-interest threats - This may occur as a result of the financial or other interests of
chartered accountant or of an immediate or close family member.
 A financial interest in a client or jointly holding a financial interest with a client.
 Undue dependence on total fees from a client.
 Having a close business relationship with a client.
 Concern about the possibility of losing a client.
 Potential employment with a client.
 Contingent fees relating to an assurance engagement.
 A loan to or from an assurance client or any of its directors or officers.
(ii) Self-review threat - This may occur when a previous judgment needs to be re-evaluated by
the chartered accountant responsible for that judgment.
The discovery of a significant error during a re-evaluation of the work of the chartered
accountant in practice.
 Reporting on the operation of financial systems after being involved in their design or
implementation.
 Having prepared the original data used to generate records that are the subject matter
of the engagement.
 A member of the assurance team being, or having recently been, a director or officer of
that
 client.
 A member of the assurance team being, or having recently been, employed by the client
in a position to exert direct and significant influence over the subject matter of the
engagement
 Performing a service for a client that directly affects the subject matter of the assurance
engagement.
(iii) Advocacy threats - This may occur when a chartered accountant promotes a position or
opinion to the point that subsequent objectivity may be compromised.
 Promoting shares in a listed entity when that entity is a financial statement audit client.
 Acting as an advocate on behalf of an assurance client in litigation or disputes with third
parties.
(iv) Familiarity threats - This may occur when, because of a close relationship, a chartered
accountant becomes too sympathetic to the interests of others.
 A member of the engagement team having a close or immediate family relationship with a
director or officer of the client
 A member of the engagement team having a close or immediate family relationship with an
employee of the client who is in a position to exert direct and significant influence over the
subject matter of the engagement.
 A former partner of the firm being a director or officer of the client or an employee in a
position to exert direct and significant influence over the subject matter of the engagement.
 Accepting gifts or preferential treatment from a client, unless the value is clearly
insignificant.
 Long association of senior personnel with the assurance client.
(v) Intimidation threats - This may occur when a chartered accountant may be deterred from
action objectively by threats, actual or perceived.
 Being threatened with dismissal or replacement in relation to a client engagement.

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 Being threatened with litigation.

 Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
2 (a) Burewala Bank Limited:
Threats
(i) A threat to independence may be created if the loan is made under abnormal lending
procedures, terms and requirements and the loan is material to both the firm and the BBL.
(ii) A self-interest threat may be created if the loan amount is material to the firm/ partner.
Safeguards:
As the Companies Act, 2017, restricts a person who is indebted to the company from being
auditor of the said company, therefore the course of action available to the partners of UCC is
to withdraw from the engagement or repayment of the loan by the partner concerned.
(b) Faisalabad Textile Mills Limited:
Threats:
It has created self-interest, familiarity and intimidation threats.
The assurance team9s independence is threatened, on account of the fact that Kamal is in a
position to exert direct and significant influence over the assurance engagement as Kamal was a
member of the assurance team during the previous year audit.
Safeguards:
The safeguards might include:
(i) Consider the appropriateness or necessity of modifying the assurance plan for the assurance
engagement;
(ii) Assigning an assurance team that is of sufficient experience in relation to the individual who
has joined the assurance client;
(iii) Involve an additional chartered accountant who was not a member of the assurance team
to review the work or advise as necessary; or
(iv) Quality control review of the assurance engagement.
(v) Ensuring that the individual concerned is not entitled to any benefits or payments from the
firm unless these are made in accordance with fixed pre-determined arrangements. In addition,
any amount owed to the individual should not be of such significance to threaten the firm9s
independence.
(vi) Ensuring that the individual does not continue to participate or appear to participate in the
firm9s business or professional activities.
3 (a) The purchase of goods and services from an assurance client by the firm would not generally
create a threat to independence unless the transaction is not in the normal course of business
and not on an arm9s length basis.
The creation of self-interest threat or otherwise shall depend upon the nature of the transaction
and its magnitude.
If the threat created is other than clearly insignificant, safeguards should be considered and
applied as necessary to reduce the threat to an acceptable level.
Such safeguards might include:
 Discontinue the practice of staying in hotels managed by AHL or reducing its frequency so as
to reduce the magnitude of the billing.
 ensure that the charge out rates are in accordance with those applicable to normal
customers.
 Ensure that the dealing is at arm9s length and no undue advantage is secured by the firm.
 Discussing (informing) the issue with TCWG.

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(b)
 As a result of inheritance of shares, a self-interest threat has been created. The
following safeguards should be applied to eliminate the threat or reduce it to an
acceptance level:
- The financial interest may be disposed of at the earliest practical date; or
- The concerned staff may be removed from the assurance engagement.
 During the period prior to disposal of the financial interest or the removal of the
individual from the assurance team, consideration should be given to whether
additional safeguards are necessary to reduce the threat to an acceptable level. Such
safeguards might include:
- Discussing the matter with TCWG, such as the audit committee; or
- Involving an additional chartered accountant to review the work done, or
otherwise advise as necessary
4 (a) Threats:
Self-interest threat is created as the auditor would like to recover the previous year9s audit fee.
Safeguards:
Generally, the payment of previous year audit fees should be received before the report is
issued.
However, if the fee is not paid additional safeguards may be applied, which may include:
 Discussing the outstanding fees with the audit committee and TCWG.
 Involving an additional chartered accountant who did not take part in the assurance
engagement, to provide advice or review the work performed.
(b) Threats:
Self-interest threat is created as the shares are held by a close relative of the engagement
partner.
As the engagement partner has promptly notified the firm about the interest of his brother,
hence it is likely that it would not impair the independence of the engagement partner.
Safeguards:
Significance of threat should be evaluated and if the threat is other than clearly insignificant,
safeguards should be considered and applied as necessary to reduce the threat to an acceptable
level.
Such safeguards might include:
 If possible the engagement partner may convince his brother to dispose of the shares;
 If disposal does not occur at the earliest practical date, the engagement partner may be
changed.
 An additional chartered accountant who did not take part in the assurance engagement
may review the work done or otherwise advise as necessary.
5 (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:

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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.
(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:
6 (a) The previous provision of accounting and taxation services to MPL and long association of
Ahmed with MPL will create self-review and familiarity threat.
Significance of threats needs to be evaluated and if threats are other then clearly insignificant,
safeguards need to be applied to reduce the threats to an acceptable level.
In case Ahmed is included in the Audit engagement the related safeguards may include:
 involving an additional chartered accountant to review the work done by Ahmed or
otherwise advise as necessary.
 independent internal quality reviews.
If the threats are significant, Ahmed should not be part of the assurance engagement team.
(b) In the given situation involvement of such trainees in the audit of CL may result in a self-
interest threat.
The materiality and significance of the financial interest, needs to be evaluated. If the financial
interest is immaterial then the audit trainee may be allowed to work on that client, otherwise
only safeguard available is to withdraw the trainee from this assignment.
(c) A self-interest threat is created when a member of the assurance team participates in the
assurance engagement while knowing, or having reason to believe, that he may join the
assurance client in future.
The threat created can be reduced to an acceptable level by the application of the following
safeguards:
 Ask the individual to notify the firm when entering serious employment negotiations
with the assurance client;
 Remove of the individual from the assurance engagement;
 Perform an independent review of any significant judgments made by that individual
while on engagement.
7 (a) Accepting of discount vouchers may create self-interest and intimidation threats.
However, if the value of discount vouchers is not clearly insignificant, the threat to
independence cannot be reduced to an acceptable level by the application of any safeguard.
If the value is other than clearly insignificant, the members of the audit team should be
instructed not to accept the discount vouchers.
(b) The lending of staff by a firm to an audit client will create a self-review threat. However, the
threat may be reduced to an acceptable level if the firm's personnel:
 are not involved in exercising discretionary authority; or
 do not assume management responsibilities.
 are not given audit responsibility for any function or activity that they performed or
supervised.
 The audit client should acknowledge its responsibility for directing and supervising the
activities of assigned personnel.

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(c) Familiarity and self-interest threats are created by using the same senior personnel on an
audit
engagement over a long period of time. This applies to the audit manager also.
The significance of the threats shall be evaluated and following safeguards should be applied if
necessary to eliminate the threats or reduce them to an acceptable level:
 Rotating the audit manager as well;
 Having a professional accountant who was not a member of the audit team review the
work of the audit manager;
 Regular independent internal or external quality reviews of the engagement
8 a) Familiarity or intimidation threats may be created if a member of audit team joins the audit
client.
Following are the safeguards:
(i) Modifying the audit plan;
(ii) Assigning individuals to the audit team who have sufficient experience as compared to the
individual who has joined the client;
(b) A loan from an audit client to an audit team member will not create a threat to
independence, if the loan is made under normal lending procedures, terms and conditions.
If the loan is not made under normal lending procedures, terms and conditions, a self- interest
threat would be created that would be so significant that no safeguard could reduce the threat
to an acceptable level. However, as the loan has already been disbursed, the only safeguard
available is to remove the manager from the audit team or ask him to settle the lease
obligation.
9 (a) Self-interest, self-review and familiarity threats will be created, as Kamran has served as an
employee in ABC.
Safeguards:
 Conducting a review of the work performed by Kamran as a member of the audit team,
 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:
 Disposing as soon as practicable, of all the shares by Nasir9s father (a close family
member)
 Having a professional accountant review the work of Nasir;
 Replacement of Nasir from the Audit team.
10 Assisting financial statement audit client in matters such as preparing accounting records or F/S
may create a self-review threat when the F/S are subsequently audited by the firm.
The related safeguards are as follows:
 Arrange for such services to be performed by an individual who is not a member of
audit team.
 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.
(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 F/S, however,
he could be tempted by management for not identifying errors due to influence of his father. In

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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.
11 The association of Anwar with Curtains Limited will create self-review and familiarity threat. If
the threats are significant, Anwar should not be part of the assurance engagement team.
In case Anwar is included in the Audit engagement the related safeguards may include:
 Involving an additional chartered accountant to review the work done by Anwar or
otherwise advise as necessary.
 Independent internal quality reviews.
(b) In the given situation, the acceptance of audit engagement will result in a business
relationship with an audit client which may pose a familiarity threat to objectivity.
However, the significance of the threat in such situation depends upon the following:
 Whether it is in the ordinary course of business;
 Whether the tenancy agreement is on an arm9s length basis; and
 The materiality of the contract for either of the party.
From the situation given, it can be determined that this business relationship is in the ordinary
course of business on an arm9s length basis and not material to either of the parties, hence, the
engagement can be accepted.
(c) Income tax return contains information which is directly related to a significant figure in the
financial statements. Therefore, the acceptance of review of income tax return would create a
self-review threat.
 In case the engagement is accepted the related safeguards may include the following:
 The review may be performed by professionals who are not members of the audit
team;
 If the service is performed by a member of the audit team, a partner or senior staff
member with appropriate expertise and is not a member of the audit team, review the
tax calculations; or
 The firm does not get involved in management decision making and clarifies this fact in
the communication with the client.
12 (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:
 Removing the individual from the audit team; or
 A review of any significant judgments made by that individual while on the team.
(b)
(i) Following are the threats in the mentioned situation:
 Suggesting the client about accounting treatment would create a selfreview threat, because
that accounting treatment will also be the subject matter of the assurance engagement.

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 Even though Amjad9s friend has attended the workshop on IFRS-15, it 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.
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:
 Regularly conduct professional development of its staff for any recent changes or updates in
professional pronouncement.
 Circulate documented internal policies and procedures requiring compliance with the
fundamental principles.
 Implement an effective disciplinary mechanism to promote compliance with policies and
procedure.
13 (i) Familiarity and self-interest threat may arise because of long association of Qaiser on the
audit of SML.
The threat is significant but it also needs to be further evaluated by considering whether SML9s
management team has changed or whether the nature or complexity of SML9s accounting and
reporting issues has changed.
Following safeguards may be applied:
 Replace Qaiser with any other senior manager having appropriate experience.
 Asking a professional accountant who was not a member of the audit team to review
the work.
 Regular independent internal or external quality reviews of the engagement.
(ii) Requesting CFO for expediting the delivery may create self-interest, familiarity, intimidation
threat to the independence of the audit team member.
The threats seem to be significant because the preferential treatment was not in the normal
course of the business.
The audit team member who has obtained preferential treatment should not be made part of
the audit team and in case he is made part of the team, his work should be reviewed by an
independent chartered accountant.
It should also be ensured that no such breach of ethics occurs in future and the firm should
communicate and strictly implement its policies in this regard. Firm may also consider taking
disciplinary action against the individual who had obtained the preferential treatment from
SML.
(iii) Family and personal relationship between a member of the audit team and the Head of
Marketing of SML may create self-interest, familiarity and / or intimidation threats.
The threat would be significant because of the close relationship. The significance would also
depend on Amjad9s responsibilities on the audit team.
Following safeguards may be applied:
 Removing Amjad from the audit team
 Structuring the responsibilities of the audit team so that Amjad does not deal with
matters that are within the responsibility of his father.
 Review of work carried out by Amjad,
(b) A chartered accountant should refrain from disclosing confidential information acquired as a
result of professional and business relationships. However, under the following circumstances, a
chartered accountant may be required to disclose confidential information:
 Disclosure is required by law.
 There is a professional duty or right to disclose, when not prohibited by law.

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

14 Offering business advice to the audit client in such an informal manner is a breach of
professional behavior by the audit junior. He also appears to be in breach of the fundamental
principal of professional competence and due care, unless he has the required competency to
offer such an advice.
Moreover, business relationship between the member of the audit team and the audit client
will create self-interest threat and intimidation threat.
Due to above, the following safeguards may be implemented:
 Any work performed by the audit junior to date should be critically reviewed.
 We need to take steps to ensure that the client does not act on any advice that the
junior provided.
 We should also assess any gaps in our internal training process; the junior should have
received training prior to his audit assignments so that he understood his role as an
auditor
15 (a) Self-interest threat, self–review threat or familiarity threat may be created. Shayan
previously being the manager finance was in a position to exert significant influence over the
preparation of the PL9s accounting records which would now be subject to his own review in the
capacity of audit manager. Furthermore, since Shayan has worked for three years in PL, he may
be influenced by his ex-subordinates. Considering these facts, the threat appears to be
significant.
If Shayan had previously worked in PL until 30 June 2019
Since he resigned during the period covering by the audit, the threat created would be so
significant that no safeguard could reduce the threat to an acceptable level. Consequently,
Shayan shall not be part of the audit team.
If Shayan had previously worked in PL until 30 June 2018
 Threats would only be created for decisions made or work performed by Shayan in the
prior period, while employed at PL and should be evaluated in the current period as
part of the current audit engagement.
 If Shayan is appointed as the engagement manager, then the work performed by him as
a member of the audit team should be independently reviewed.
(c) The lending of staff by a firm to an audit client will create a self-review threat, However, the
threat may be reduced to an acceptable level if:
 they are not involved in exercising discretionary authority; or
 they do not assume management responsibilities and the audit client should
acknowledge its responsibility for directing and supervising the activities of assigned
personnel.
 an additional review of the work performed by the seconded staff may be carried out.
 they are not given audit responsibility in future for any function or activity that they
performed or supervised.
 are not included in the audit team.
16 (a)
 Whether the interests of all parties, including third/related parties whose interests may
be affected, could be harmed if the client consents to the disclosure of information.
 Whether all the relevant information related to the related parties is known and
substantiated, to the extent it is practicable.
 Since the requirement of the committee involves reporting on the arm9s length price of
the transaction which generally involves unsubstantiated facts or unsubstantiated

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conclusions, professional judgment shall be used in determining the type of disclosure

to be made, if any.
(b)
Threat
Close friendship of the audit manager with the managing director would cause a familiarity
threat, because the audit manager would be biased towards the managing director and would
sympathetic to his interest or too accepting of his work.
Safeguard
 Structure the audit manager9s responsibilities to reduce any potential influence over the
assurance engagement; or
 Review the assurance work from a chartered accountant; or
 Remove the audit manager from the engagement.
Threat s
 Offering of membership at reduced rate could cause a self-interest threat to the audit,
because the recipients may not want to lose their benefit, and therefore be biased in
their audit work or not seek adjustments where there are material issues in the financial
statements.
 An intimidation threat may also arise because the audit client may threaten to make
such offers public to degrade the firm9s reputation.
Safeguards
Auditors are not allowed to accept such benefits unless their value is trivial and inconsequential.
In this case, the value of a reduced membership of a high end gym is unlikely to be trivial and
inconsequential to audit staff members and therefore the firm should reject this discounted
offer of MD.
17 Familiarity and self-interest threat may arise because of using Baber on the audit of HL over a
long period of time.
The threat is significant but it also needs to be further evaluated by considering whether HL9s
management team has changed or whether the nature or complexity of HL9s accounting and
reporting issues has changed. Furthermore, due to the long association of Babar with HL, he
may be too sympathetic to their interest or too accepting of their work.
Following safeguards may be applied:
Replace Baber with any other manager having appropriate experience.
 Ask a professional accountant who is not a member of the audit team, to review the
work.
 Regular independent internal or external quality reviews of the engagement.
CFO aggressive attitude towards the audit team and setting short deadlines for completion of
audit indicates presence of intimidation threat.
The threat is significant as audit firm may be pressurized into accepting CFO9s judgements even
when these may not be appropriate and due to very strict deadlines firm may not be able to
obtain sufficient appropriate audit evidence. This may result in the issuance of an inappropriate
audit opinion.
Following safeguards may be applied:
 Independent review of areas requiring judgements.
 Assign highly skilled and competent audit team members.
 Discussing with those charged with governance the attitude of CFO towards the audit
team.

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Familiarity or intimidation threats are created as the manager finance has been a member of
the previous audit team.
Being in the position of manager finance, the individual is responsible for the preparation of
financial statements and will be in continuous communication with the audit team. Due to these
factors the threat seems significant.
Following safeguards may be applied:
 Assign individuals to the audit team who have sufficient experience in relation to the
individual who has joined the client; or
 Have a professional accountant review the work of the former member of the audit
team.
 Modify the audit plan
18  Disclosure is permitted by law and is authorized by the client or the employer
 Disclosure is required by law
 There is a professional duty or right to disclose
19 (i) A self-interest threat will be created when a member of the audit team may join the audit-
client in near future, as her decision making and objectivity may be impaired due to the
potential employment with the client. It needs to be ensured that refusal have been formally
communicated to the audit manager before planning her in the audit team. When it has been
assured that she won9t be accepting the offer then no threat would be created and she could be
made part of the audit team.
If it can9t be ensured that Fizza will not accept the employment offer, then she should not be
made part of the audit team.
(ii) Accepting gifts or hospitality from an audit client may create self-interest, and familiarity
threats.
The audit team9s objectivity may be compromised and they would be too accepting the audit
clients work if they are treated with gifts of considerable value. Intimidation threat would also
arise as the client may threaten the firm of making such offers public.
Even though the tickets would not have any direct cost to the audit client but they are still of
significant value to the audit team. Therefore, the audit team should not accept the tickets for
the VIP enclosure of the final match.
(iii) The purchase of goods and services from an audit client by the firm does not generally
create a threat to independence if the transaction is in the normal course of business and at
arm9s length.
Since the expected transaction is of significant value, a self-interest threat may be created.
Firm should ensure that no undue favors are accepted and that contract is awarded after a
proper tendering process.
(iv) Agreeing to accept taxation work on the percentage of the tax saved is essentially accepting
a contingent fee. This would create a self-interest threatas there will be pressure to gain the
highest tax savings for the client and this could tempt the audit firm to suggest inappropriate
tax advice.
The threat created would be so significant that no safeguard could reduce the threat to an
acceptable level, therefore the fee must be based on time and experience for the job, not the
contingent fee.
A self-review might also be created and therefore the firm should have separate teams for the
taxation service and the audit services.
20 (b) As per the <Code of Ethics= for Chartered Accountants, the practicing chartered accountants
are not allowed to publicize their services in a manner done by other normal businesses.

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However, appropriate newspapers or magazines may be used to inform the public of the
establishment of a new practice, of changes in the composition of a partnership, or of any
alteration in the address and telephone number of a practice. The following should be
considered before placing the announcement:
 Such announcements should be limited to a bare statement of facts in an objective
manner.
 Consideration should be given to the appropriateness of the area of distribution of the
newspaper or magazine and number of insertions.
 The basic principles of legality, decency, clarity, honesty and truthfulness should be
followed; and
 Do not project an image, which is inconsistent with that of a professional person bound
to high ethical and technical standards.
The purchase of services from an audit client by a firm does not usually create a threat to
independence if the transaction is in the normal course of business and at arm9s length.
However, the magnitude of the transaction needs to be evaluated to substantiate that whether
a self-interest threat may be created. The firm should evaluate that the whether the amount of
discount is material to the firm and would it impair the audit team9s objectivity. It also needs to
be evaluated that whether such discounts are also offered to other clients.
The firm may accept the discounted offer only if other clients are also given similar sort of offers
and the advertisement is in the compliance with the above mentioned principles.

(c) A self-review threat may be created as the firm would be auditing the same financial
information which the team had worked on
An advocacy threat would also be created as the firm's employees might promote the in-correct
opted by them to the point that their objectivity is impaired.
A familiarity threat would also be created as the seconded employees will become too familiar
with the management of the audit client.
The following safeguards may be adopted to address the above threats:
 Conducting an additional review of the work performed by the loaned personnel.
 Not including the loaned personnel as an audit team member.
 Not giving the loaned personnel audit responsibility for any function or activity that the
personnel had performed.
 Providing such assistance only for a short period of time.
 Not assuming management responsibilities and the audit client is responsible for
directing and supervising the activities of the personnel.

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Chapter 14 | Audit Finalization and Reporting

1 The report specified in form 35A in the in the Companies (General Provisions and Forms) Rules,
1985 covers the following additional reporting responsibilities.
(i) that proper books of accounts are being maintained by the company as required by the
Companies Ordinance, 1984.
(ii) that the balance sheet and the profit and loss account together with notes thereon are in
conformity with the Companies Ordinance, 1984 and in agreement with the books of accounts
and are further in accordance with the accounting policies consistently applied.
(iii) Opinion as regards the following:
 whether expenditure incurred during the year was for the purposes of the company9s
business and
 whether the business conducted, investments made and expenditure incurred during the
year were in accordance with the objects of the company.
(iv) Opinion as regards the following:
 whether Zakat deductible at source under the Zakat and Usher Ordinance, 1980; was
deducted and
 whether the zakat deducted (if any) was deposited in the Central Zakat Fund.
2 When management revises the F/S, the auditor should undertake the following audit
procedures.
a) Carry out the audit procedures necessary in the circumstances
b) Audit procedures should be designed to obtain sufficient appropriate audit evidence that all
events up to date of auditor9s report that may require adjustment of, or disclosure in, F/S have
been identified.
c) Review the steps taken by management to ensure that anyone in receipt of the previously
issued F/S together with the auditors9 report thereon is informed of the situation
d) Issue a new report on the revised F/S. The new auditors9 report should include an emphasis of
a matter paragraph referring to a note to the F/S that more extensively discusses the reason for
the revision of the previously issued F/S and to the earlier report issued by the auditor.
e) The new audit report should be dated not earlier than the date of approval of the revised F/S.
f) If the auditor is unable to obtain sufficient, appropriate audit evidence or if he is not satisfied
with the steps taken by the management, he shall seek a legal opinion.
3 The statement of responsibility should state the following:
 It is the responsibility of the auditor to express an opinion on the F/S.
 The audit was conducted in accordance with International Standards on Auditing.
 Those standards require that:
o the auditor complies with ethical requirements.
o the auditor plans and performs the audit to obtain reasonable assurance whether
the F/S are free from material misstatement.
 That an audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the F/S.
 As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional skepticism throughout the audit.
 That while selecting the procedures to be performed the auditor exercises judgment,
including the assessment of risks of material misstatements and whether due to fraud or
error.
 In making the risk assessment the auditor considers internal controls relevant to fair
presentation of F/S in order to design audit procedures that are appropriate in the

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circumstances but not for the purpose of expressing an opinion on the effectiveness of the
entity9s internal control.
 That an audit includes evaluation of the appropriateness of the accounting policies used, the
reasonableness of estimatesand the overall presentation of information in the F/S.
 That auditor has concluded on the appropriateness of management9s use of the going
concern basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on the
Company9s ability to continue as a going concern.
 That an audit involves evaluating the overall presentation, structure and content of the F/S,
including the disclosures
 That auditor communicates with TCWG regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in
internal control that auditor identify during the audit.
 That auditor also provide TCWG with a statement that auditor have complied with relevant
ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on auditor9s
independence, and where applicable, related safeguards.
4 Under the following situations, the auditor would have doubt as to the reliability of written
representation:
(a) When the auditor has concerns about the competence, integrity, ethical values or diligence of
management, or about its commitment to or enforcement of these.
(b) When written representations are inconsistent with other audit evidence obtained. Course of
action in situation (a)
(i) The auditor shall determine the effect that such concerns may have on the reliability of
representations and audit evidence in general.
(ii) If the auditor concludes that the risks related to management representations on the F/S is
such that an audit cannot be conducted, the auditor may consider withdrawing from the
engagement.
Course of action in situation (b)
(i) The auditor may consider whether the risk assessment remains appropriate and, if not, revise
the risk assessment and determine the nature, timing and extent of further audit procedures to
respond to the assessed risks.
(ii) If the matter remains unresolved, the auditor shall reconsider the assessment of the
competence, integrity, ethical values or diligence of management, or of its commitment to or
enforcement of these, and shall determine the effect that this may have on the reliability of
other representations and audit evidence in general.
(iii) If the auditor concludes that the written representations are not reliable, the auditor shall
take appropriate actions, including determining the possible effect on the opinion in the
auditor9s report.
5 (a) Pervasive is a term used to describe the effects of misstatement on the F/S or the possible
effects thereon if any misstatement remains undetected due to the auditor9s inability to obtain
sufficient appropriate audit evidence. Pervasive effects on the F/S are those that, in the auditor9s
judgments: i. are not confined to specific elements, account or items of the F/S, ii. if so confined,
represent or could represent a substantial proportion of the F/S or iii. in relation to disclosures,
are fundamental to user9s understanding of the F/S
(b)
(i) Issuance of bank guarantee after the year end does not require any adjustment or disclosure.
Therefore, there will be no effect on the audit report on this issue.

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(ii) The audit report shall state that <Zakat deductible at source under the Zakat &Ushr
Ordinance, 1980, was deducted and deposited in the Central Zakat Fund established under
section 7 of that Ordinance=.
(iii) The auditor should consider the materiality of the amount. If the amount is material, the
auditor should express a qualified or adverse opinion.
(iv)
 The audit report shall mention the exception to the consistent application of accounting
policies and whether the auditor concurs with it or not.
 The F/S shall be adjusted accordingly and the effect of change in estimate shall be
disclosed in the notes to the F/S unless the differences are material and auditor has
reasons to differ with the reviewed estimate. There would be no impact on the audit
report on this issue
6 a)
Emphasis of matter paragraph is a paragraph that is included in the auditor9s report that refers to
a matter appropriately presented or disclosed in the F/S that, in the auditor9s judgment, is of
such importance that it is fundamental to users9 understanding of the F/S. Other Matter
paragraph is a paragraph that is included in the auditor9s report that refers to a matter other
than those presented or disclosed in the F/S that, in the auditor9s judgment, is relevant to the
users9 understanding of the audit, the auditor9s responsibilities or the auditor9s report.
b)
(i) Examples of circumstances which necessitate the inclusion of emphasis of matter paragraph:
Early application (where permitted) of a new accounting standard (for example, a new
International Financial Reporting Standard) that has a pervasive effect on the F/S in advance of
its effective date.
 A major catastrophe that has had, or continues to have, a significant effect on the
entity9s financial position.
 The existence of material uncertainty relating to the event or condition that may cast
significant doubt on the entity9s ability to continue as a going concern but has been
appropriately disclosed.
(ii) Examples of circumstances which necessitate the inclusion of Other matter paragraph:
 Any matter which in the auditor9s opinion is relevant to user9s understanding of the Audit
 Any matter which in the auditor9s opinion is relevant to User9s Understanding of the
Auditor9s responsibilities or the Auditor9s Report
 When the auditor is required to report on more than one set of F/S.
 When there is restriction on distribution or use of the auditor9s report
7
8 (a) Revaluation of Properties:
(i) In accordance with IAS 16, Property, Plant and Equipment, if a policy of revaluation is to be
applied, it should be applied to all the non-current assets in a particular class of assets.
(ii) Since compliance with (i) above is not possible, the auditor should advise the client to not to
change the accounting policy and state the values of the property at cost.
(iii) In case of disagreement the auditor may consider issuing a qualified report
(b) Suit for damages:
The reliability of audit evidence provided by the legal advisor is high because it has been
obtained from an independent source outside the entity. As management is also of the view that
no liability exists at the balance sheet date, therefore in the presence of legal advisor9s
confirmation a conclusion should not be drawn on the basis of manager9s legal email.

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(i) However, since there is inconsistency in audit evidence obtained and the auditor is unaware
of the context in which the manager (legal) sent the email, he shall investigate the reasons
thereof and may need modification or addition to the audit procedures.
(ii) The auditor should analyze the situation, in the light of IAS 37, Provisions, Contingent
Liabilities and Contingent Assets, and assess whether a disclosure of the event as a contingent
liability is required or not.
(iii) If disclosure of contingent liability is required, and the client disagrees the audit report may
be qualified.
(c) Warranty Provision:
(i) Management9s claim that amount cannot be measured reliably is not correct because they
were charging customers at 25% above cost prior to July 01, 2010 i.e. when there was no
warranty on the sale of television sets and hence they must be in a position to make a reliable
estimate based on their past experience and records available with them.
(ii) If a provision is not made for the warranty then if the amount of provision is material to the
F/S then the audit report should be qualified
(d) Non-Disclosure of Earnings per share in the F/S:
International Accounting Standards 33, Earnings per share does not apply to non-listed entities;
therefore there is no requirement of disclosing earnings per share in the F/S.
9 The following audit procedures should be applied to assess whether an adjustment is required:
(i) Obtain direct confirmation from the company9s lawyers seeking their opinion as to whether
the settlement is probable and whether Rs. 5 million is the likely amount.
(ii) Review the correspondence with PL to confirm that the amount they are willing to accept is
in fact Rs. 5 million.
(iii) Discuss with management as to whether they intend to accept PL9s offer and obtain a written
representation. If on the basis of the above procedures the auditor concludes that a settlement
at 50% of the amount claimed is likely, he shall ask the management to make a provision. In case
the management refuses to provide for the amount then a qualified opinion may be given, if the
amount of Rs. 5 million is considered material.
10 c)
The term fair presentation framework is used to refer to a FRF that requires compliance with the
requirements of the framework and:
 Acknowledges explicitly or implicitly that, to achieve fair presentation of the F/S, it may
be necessary for management to provide disclosures beyond those specifically required
by the framework; or
 Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the F/S. Such departures
are expected to be necessary only in rare circumstances. T
erm 8compliance framework9 is used to refer to a FRF that requires compliance with the
requirements, but does not contain acknowledgements of fair presentation framework
The auditor is responsible to consider the impact on the F/S, of all events that take place before
the signing of the audit report. The loss due to fire is a non-adjusting event as it is indicative of
conditions that arose after the reporting period. Therefore, in the above situation auditor will
need to carry out following procedures:
a) Assess the financial impact of the damage as may have been determined by the management
by reviewing the accounting documents, board minutes, surveyor9s report etc.
b) If the event needs to be disclosed in the F/S, because of its materiality, advise the
management to make appropriate disclosure.

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c) If appropriate disclosure is not made or disclosure is inappropriate, consider modification of

the audit report.
11 (a) Matters that will be considered as an Auditor while assessing the reliability of representation
made by the management: When the representations relate to matters material to the F/S:
(i) Whether the representations appear reasonable and consistent with other audit evidence
obtained.
(ii) Whether the individuals making them can be expected to be well informed on such matters.
(iii) Integrity of those making the representations.
(iv) Accuracy of representations made in the past.
(v) Corroborate audit evidence from sources inside or outside the entity.
(b) Auditor9s course of action if management refuse to provide a management representation on
a particular issue: If management does not provide one or more of the requested written
representations, the auditor shall:
(i) Evaluate whether sufficient, appropriate audit evidence can be obtained from other sources;
(ii) If sufficient appropriate audit evidence cannot be obtained from other sources than this will
constitute a scope limitation and the auditor should express a qualified opinion or disclaimer of
opinion.
(iii) Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
(iv) Consider possible implications that the refusal may have on the auditor9s report.
(v) Re-assess the continuation of engagement with the audit client
12 (b)
(i) The amount of Rs. 9.6 million which is due from MIL is material to the F/S.
(ii) With respect to job in progress, if the auditor can satisfy himself that management would be
able to recover the cost of work in process from another customer, he may conclude that a
provision is not required in this respect.
(iii) In making the above decision the auditor should also consider the expenses that are required
to be incurred on the job, subsequent to year end.
iv) The auditor should ask the management to provide for the loss of Rs. 9.6 million or any part
thereof depending upon the estimated amount of default, plus any further provision that may be
necessary in respect of the work in process. In case of management9s refusal, the auditor shall
qualify his report.
(c) The auditor shall qualify the audit report by mentioning that investment of Rs. 150 million was
not in accordance with the objects of the company with a clarification that the object clause was
amended a week before the issuance of audit report, to include the said objective
13 (a)
 The audit report will be modified on ground of limitation of scope.
 Either a qualified or disclaimer of opinion will be given depending upon the materiality
and pervasiveness of the matter.
 We may have to mention that <proper books of accounts as required by the Companies
Act 2017 have not been kept by the Company=.
(b) There will be no impact on the audit report as the change of depreciation method is a change
in accounting estimate.
(c) The auditor will include another matter paragraph in the auditor9s report, referring to the
fact that the F/S of Samarkand Limited for the Previous year, were audited by another auditor,
who expressed an un-modified opinion on those F/S.

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14 How the auditor would deal with a situation where he is in doubt as regards the reliability of the
written representation provided by the management of the company: The doubt as regards
management9s representation can be on account of several different reasons.
Auditor9s response in each situation is described below:
 If there is inconsistency between one or more written representations and audit
evidence is obtained from another source, the auditor may consider whether the risk
assessment remains appropriate and, if not, revise the risk assessment and the nature,
timing and extent of further audit procedures to respond to the assessed risk.
 If the matters relate to the competence, integrity, ethical values, diligence and
commitment of management, the auditor may conclude that the audit cannot be
conducted. In such a situation, the auditor may consider withdrawing from the
engagement and if withdrawal is not possible, he may disclaim an opinion.
15 The following procedures will help the auditor in identifying 8subsequent events9 that require
either adjustment or disclosure in the F/S:
(i) Review existing procedures (if any) laid down by the management to identify these events.
(ii) Study minutes of the meetings of the Members, Board of directors and other important
executive committees (if any) held after the balance sheet date and enquire about the matters
which may be relevant in this regard.
(iii) Discuss with key officials on matters such as company9s policy on marketing of new products,
price structure, major sales order booked or cancellation of sales orders and loss of major
customers, if any, new borrowings, capital commitments, fresh guarantees, outcome of pending
law suits and any change in accounting policies etc.
(iv) Ascertain the status of litigations, claims etc. against the company from its legal advisors.
(v) Inquire, or extend previous oral or written inquiries, of entity9s legal counsel concerning
litigation and claims
(vi) Read the entity9s latest available budgets, cash flow forecasts and other related management
reports for periods after the date of the F/S.
(vii) Obtain written representation from the management that all relevant events have been
appropriately accounted for/dealt with.
(viii) Obtain an assurance from management about the:
 Current status of items that were accounted for on basis of estimates or inconclusive
data.
 Any events occurred or likely to occur which will require change in the existing
accounting policies.
 Any events which may cast doubts about the validity of entities 8going concern9
assumption. For this purpose, the auditor should remain alert for the circumstances
which may cast significant doubt on the company9s ability to continue as a going
concern.
16  Representation provided by management that useful lives of fixed assets are realistically
estimated seems inconsistent with audit evidence related to the losses on disposal of
fixed assets.
 However, since the matter pertains to future estimates, the error does not seem to
render other management representations unreliable.
 The auditor shall discuss the matter with the management to attempt to resolve the
matter.
 If after discussion with the management, the matter remains unresolved, the auditor
may:

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 Consider whether the risk assessment remains appropriate and, if not, revise the risk
assessment and determine the nature, timing and extent of further audit procedures.
 Ask the management to reassess the estimated useful lives of fixed assets.
17 The 2012 statement of financial position shows provisions of Rs. 30 million. Since all known
liabilities and claims have been settled, and according to the legal advisor as well as the
company9s management, the chances of payment are remote, hence inclusion of a provision for
liabilities is inappropriate.
Materiality
The amount of Rs. 30 million is material, as it is 8.57% of net assets and 20.69 % of profit before
taxation. However, the auditor9s report for 2012 gives an adverse opinion which is inappropriate
because the impact of the misstatement is material but not pervasive. Hence, a qualified opinion
would be appropriate.
Short Comings in Modification paragraphs
 The paragraph does not mention the note reference, where the details relating to the
Provision can be found in the F/S.
 There is no need to mention the management9s point of view in the report. Managements
view point should be disclosed in the relevant notes to the F/S.
 The draft audit opinion is not in accordance with the form recommended by ISA, as the basis
of modification paragraph has been merged with the opinion paragraph. The two paragraphs
should be separated and contain appropriate headings also. Moreover, the phrase <In our
opinion= should be used at the beginning of the opinion paragraph and a qualified opinion
should be given as has been discussed above.
18 Decision given by court confirms the existence of debtor which is material, therefore audit report
issued on the basis of provision against debtor does not hold good and therefore auditor needs
to amend the report. In view of the above, the auditor needs to take the following steps:
 Discuss the matter with management and, where appropriate, TCWG.
 Inquire how management intends to address the matter in the F/S.
 If management amends the F/S, the auditor shall:
- Carryout audit procedures (as may be necessary under circumstances) on the
amendment.
- Review the steps taken by management to ensure that anyone in receipt of the
previously issued F/S together with the auditor9s report thereon is informed of the
situation.
- Extend the audit procedures on subsequent events to the date of the new auditor9s
report and date the new auditor9s report no earlier than the date of approval of the
amended F/S; and.
- Provide a new auditor9s report on the amended F/S.
 Provide a new or amended auditor9s report that includes a statement in an emphasis of
matter paragraph or other matter paragraph that conveys that the auditor9s procedures
on subsequent events are restricted solely to the amendment of the F/S as described in
the relevant note to the F/S; and
- The emphasis of matter paragraph or other matter paragraph included in new or
amended auditor9s report shall refer to a note to the F/S that more extensively discusses
the reason for the amendment of the previously issued F/S and to the earlier report
provided.
 If the management does not take the necessary steps to ensure that anyone in receipt of
the previously issued F/S is informed of the situation, the auditor shall notify

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management and where appropriate, TCWG, that the auditor will seek to prevent
reliance on the auditor9s report. If despite such notification, management or TCWG do
not take necessary steps, the auditor shall take appropriate action to seek to prevent
reliance on the auditor9s report.
19 a) The liquidation of SL is a non-adjusting event. However, the amount due from SL is only 0.36%
of profit before tax and is not material to the F/S therefore the disclosure relating to
uncollectability of amount due from SL is not required. The cost of plant is 120% of the profit
before taxation and 12.5% of the net assets of the company and it is material to the F/S. Since
plant was purchased exclusively for the production of items to be supplied to SL, an impairment
review under IAS 36 must be carried out. If material impairment is eminent then a disclosure
would be required as it is a non-adjusting event. In case of non-disclosure, a qualified opinion
would be given as the matter is material to the F/S.
(b) Under the requirements of the Companies Act, 2017 every company is required to keep a
record of sums of money received and expended by the company and the matters in respect of
which the receipts and expenditure takes place. By tracing the receipts and payments mentioned
in the party wise summaries with the bank statement, the matter in respect of which these
receipts and payment took place cannot be verified. Unless the information relating to the
matters in respect of which receipt and expenditure takes place is available elsewhere, the audit
opinion regarding proper books of accounts as required under the Companies Act 2017 shall be
qualified.
(c) It will be mentioned in the auditor9s report that <In our opinion, Zakat of Rs. 22,000 was
deductible at source under the Zakat and Ushr Ordinance, 1980, but was not deducted by the
Company. However, an equivalent amount was deposited by the Company in the Central Zakat
Fund and is included in other expenses=.
20 (a) The Auditor is generally not in a position to obtain evidence from an external source in
relation to warranty provisions. Hence the written representation, whilst being an entity
generated source of evidence, would still be useful as there are few other alternatives.
Steps to take if written representation on warranty provision is not provided
 If management does not provide the requested written representation on the warranty
provision the auditor should discuss the matter with management to understand why
they are refusing.
 In addition, the auditor should re-evaluate the integrity of management and consider the
effect that this may have on the reliability of other representations (oral or written) and
audit evidence in general.
 Auditor should then take appropriate actions, including determining the possible effect
on the audit opinion.
Impact on audit report
Unless auditor is able to obtain sufficient appropriate evidence* to conclude that warranty
provision is free from material misstatement, a modified audit opinion will be required, as
discussed below:
 If the warranty provision is material but not pervasive then a qualified opinion would be
appropriate, a disclaimer of opinion would be appropriate if the effect of misstatement is
both material and pervasive.
21 (a) The auditor shall perform the audit procedures designed to obtain sufficient appropriate
audit evidence that all events occurring between the date of the F/S and the date of the auditor9s
report that require adjustment or disclosure in the F/S have been identified*. However, the
auditor is not expected to perform additional audit procedures on matters to which previously
applied audit procedures have provided satisfactory conclusions.

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(b) The following procedures will help the auditor in identifying 8subsequent events9 that require
either adjustment or disclosure in the F/S:
(i) Review existing procedures (if any) laid down by the management to identify these events.
(ii) Study minutes of the meetings of Members, Board of the directors and other important
executive committees (if any) held after the balance sheet date and enquire about the matters
which may be relevant in this regard.
(iii) Discuss with key officials on matters such as company9s policy on marketing of new products,
price structure, major sales orders booked or cancellation of sales orders and loss of major
customers, if any, new borrowings, capital commitments, fresh guarantees, outcome of pending
law suits and any change in accounting policies etc.
(iv) Ascertain the status of litigations, claims etc. against the company from its legal advisors.
(v) Read the entity9s latest available budgets, cash flow forecasts and other related management
reports for periods after the date of the F/S
22 (i)
 Bank confirmation contains details such as facilities, securities, additional banking
relationships, trade finance, derivative and commodity trading and custodian arrangements.
 This information is not available in bank statement. Moreover, the bank confirmation is
supposed to be received directly from the bank whereas the bank statement has been
received through the client.
 We need to determine whether a response to a positive confirmation is necessary to obtain
sufficient appropriate audit evidence related to bank balance as at December 31, 2013.
 If it is concluded that the response to bank confirmation is not necessary, then we would
perform alternate audit procedures to obtain sufficient appropriate audit evidence relating
to details not provided by the bank.
 If we are unable to obtain sufficient appropriate audit evidence from alternative audit
procedures or if we conclude that the response to the bank confirmation is necessary and we
are unable to obtain bank confirmation , then it will constitute a scope limitation.
Accordingly, we would qualify the audit report or issue a disclaimer of opinion depending on
the materiality and pervasiveness of the matter.
(ii)
 The request by management for sending negative confirmation requests is not appropriate
as these are usually sent when population comprises of large number of small account
balances.
 The reason provided by the management for not sending confirmation request to three
debtors is not appropriate.
 In view of the above, we would ask the client to send positive confirmation request.
 If the client refuses to send positive confirmation, we would evaluate the implications of the
refusal on the risk of material misstatement, including the risk of fraud and on the nature
timing and extent of other audit procedures.
 Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
 If we are unable to obtain sufficient appropriate audit evidence form alternative audit
procedures or if we conclude that the confirmation is necessary and we are unable to obtain
confirmation from the debtors, then it will constitute scope limitation. Based on materiality
and pervasiveness of the matter, we would issue a qualified or disclaimer of opinion as
appropriate.

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23 i) Exception to the consistent application of accounting policies will be mentioned in the audit
report along with the note reference where disclosure is made about change in accounting policy
and statement whether the auditor concurs with it or not.
 The auditor will issue a disclaimer of opinion on account of limitation of scope and as the
matter is material and pervasive in nature.
 It is also to be mentioned that proper books of accounts as required by the Companies Act,
2017 have not been kept by the company.
(ii) The responsibility of management regarding establishing and maintenance of system of
internal controls is mentioned in the Audit Report, however, no opinion is required regarding
operating effectiveness of internal controls. There would be no impact on audit report.
(iii) If in the auditor judgement, the matter of destruction of plant is fundamental to users
understanding of the financial statement then an emphasis of matter paragraph is required to be
given in the audit report referring to a note in the F/S where the relevant disclosure is made in
the financial statement.
24 The management representation regarding disclosure of non-compliance with law does not
remain appropriate, as it contradicts with the audit evidence obtained. To address the
contradiction, we should:
 consider whether his risk assessment of that area is still appropriate.
 consider whether additional audit procedures are needed.
 consider the integrity of management, document those concerns and consider the
possible course of action.
25 Auditor9s responsibility with respect to events between end of reporting period and date of the
auditor9s report: The auditor is required to obtain sufficient appropriate evidence that all
subsequent events that require adjustment or disclosure in the F/S:
 have been identified, and
 are suitably reported in the F/S.
26 If a representation by management is contradicted by other audit evidence, the auditor should:
 consider whether his risk assessment of that area is still appropriate.
 consider whether additional audit procedures are needed.
If the auditor has concerns about the integrity of management, document those concerns and
consider withdrawing from the audit.
27 The term 8expectation gap9 refers to the fact that the public perception of the role and
responsibilities of the external auditor is different from his statutory role and responsibilities.
The expectations of the public are often set at a level higher than that at which the external
auditor actually operates. Some examples of the misunderstandings inherent in the public9s
expectations are as follows:
 The public believes that the audit opinion in the audit report amounts to a 8certificate9
that the F/S are correct and can be relied upon for all decision-making purposes.
 The public also believes that the auditor has a duty to prevent and detect fraud and that
this is one reason for an audit.
 The public assumes that, in carrying out his audit work, the auditor tests 100% of the
transactions undertaken during the accounting period.
28 The imposition of restriction by foreign country is an adjusting event as the inventory prepared
for the order cannot be supplied to any other customer, without considerable expense of Rs. 105
million. The revised net realizable value of the inventory would therefore be approximately Rs.
395 million (500-105), as against the cost of Rs. 416.67 million (500÷1.2), resulting in an
adjustment of Rs. 21.67 million which is approximately 6.19% of the profit before tax. As an
auditor we have no obligation to perform any audit procedures after the date of the audit report.

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However, in view of the fact that the above situation has come to our knowledge, we are
required to discuss the matter with management and inquire how it intends to address the
matter in the F/S. If the F/S are amended, the auditor is required to:
 carry out the necessary audit procedures on the amendment.
 extend his review of subsequent events up to the date of the new audit report.
If management do not amend the F/S for the event identified, then the auditor should take
appropriate action to prevent reliance on the audit report after taking legal advice.
29 (a) The argument that the written representation is not necessary because the provision is
incorporated on the basis of expert9s advice is not correct. The recognition of provision on basis
of expert9s advice will not preclude management from assuming responsibility for the warranty
provision. If the management do not provide the written representation, the auditor will require
to reevaluate the effect which may have on reliability of representations and audit evidence in
general. The auditor may qualify or disclaim the opinion on the F/S depending on the materiality
and pervasiveness of the matter.
(b) The argument of management relating to additional disclosures is not valid, as this disclosure
will make F/S misleading, as IAS allows disclosure of only those contingent assets which are
probable. If the amount is material and the management refuses to remove the disclosures from
the F/S, then the auditor may qualify the audit report.
(c) It is not a change in Accounting policy. However, if the revenue for the customers to whom
the goods are to be delivered to their premises, is material to the F/S, auditor will ask the
management to revise the accounting policy for revenue recognition to cover all types of sales
contracts. If the management refuses to revise the policy accordingly and record the sales based
on such policy then the audit report will be qualified.
30 (a) In this case, the representation provided by the management contradicts with the audit
evidence obtained later and therefore we should:
 consider whether his risk assessment of that area is still appropriate
 consider whether additional audit procedures are needed
 assess the impact on auditors assessment of management9s integrity, document those
concerns and consider withdrawing from the audit.
(b)The written representation from the management must cover:
 the completeness of the information that has been provided about the identity of
related parties and related party relationships and transactions, and
 the adequacy of accounting for and disclosure of such related party relationships and
transactions in the F/S.
The audit report should not be signed unless the written representation has been received. If
management does not provide the written representation, it will result in limitation of scope and
we would take appropriate actions, including determining the possible effect on the opinion in
the auditor9s report
31 (d) The statement is not appropriate the responsibilities in addition to the main body of the audit
report can be included;
 Within an appendix to the auditor9s report, in which case the auditor9s report shall
include a reference to the location of the appendix; or
 By a specific reference within the auditor9s report to the location of such description on a
website of an appropriate authority.
(e) The statement is not appropriate as the audit report can either be signed in the name of the
audit firm or the personal name of the auditor or both

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f) The statement is not appropriate as the Key Audit Matters are selected from the matters
communicated with TCWG and in making those assessments matters pertaining current period
only are considered as opposed to matters pertaining to prior period
32 Express Limited
The auditor has no obligation to perform any audit procedures regarding the F/S after the date
of the auditor9s 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:
 discuss the matter with management and, where appropriate, those charged with
governance.
 determine whether the F/S need amendment and, if so inquire how management intends to
address the matter in the financial statements.
 carry out the necessary audit procedures on the amendment.
 review the steps taken by management to inform about the situation to anyone who
received the original F/S and audit report.
 extend the review of subsequent events up to the date of the new audit report
 if management does not agree to change the F/S, the auditor should consider the available
alternative to him.
33 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 TCWG. In the key audit matter section, the auditor
shall:
 include a reference to the related disclosure(s), if any, in the F/S
 state why the matter was considered to be one of most significance in the audit;
 specify how the matter was addressed in the audit.
34 (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 F/S
(c) If in the opinion of the auditor the non-disclosure of information results in material
misstatement in the F/S, he shall:
 discuss the non-disclosure with TCWG;
 describe in the 8Basis for opinion section9 the nature of the omitted information; and
 issue a qualified opinion on the basis of inability to obtain sufficient appropriate audit
evidence.
35 a)
 Discuss the matter with the management.
 Re-evaluate the integrity of the management.
 Take appropriate action including determining the possible effects on the auditor9s
report.
b)
i) This must be included in a representation letter. The written representation must cover the
completeness of the information that has been provided about the related parties and related
party transactions.
(ii) This may not be included in a representation letter. The auditor should obtain sufficient
appropriate audit evidence on this matter such as checking the shareholding in the share
register, etc.

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(iii) This should not be included in a representation letter. This is a matter of incorrect accounting
treatment which the auditor should discuss and resolve with the management.
36 (a) Provision of warranty is 10% of the PBT and therefore it is material to the financial statements
Since the expert has been appointed and matters related to his appointment have already been
considered, we may need to perform the following procedures:
 Evaluate the reasonableness of significant assumptions and methods used
 Evaluate the relevance, completeness and accuracy of source data
 Evaluate the reasonableness of the expert9s conclusions
 Carry out analytical procedures to assess the reasonableness of the provision as
compared to other relevant items
 Confirm that the accounting provisions of IAS 37 have been complied with, in making the
provision
 In case there is a difference between the valuation of the auditor9s expert and the
valuation of the management, discuss the difference with the management.
Reporting implication
In case the difference between the valuation of the auditor9s expert and the valuation of the
management is material and cannot be resolved, we will have to give a qualified opinion.
However, if we have obtained sufficient appropriate evidence regarding the valuation and
presentation of the warranty provision, then we will have to include relevant details under the
heading of key audit matters in our audit report, because it is an area of higher assessed risk of
material misstatement due to involvement of high degree of uncertainty and significant auditor
judgment.
(b) Our firm was not appointed as auditors of the YL until 30 June 2017 and thus did not observe
the counting of physical inventories as the end of year 30 June 2017. In this situation, we may
perform the following procedures:
 Conduct physical inventory count after the date of the financial statements.
 Check whether the changes in inventory between the count date and the date of the
financial statements are properly recorded.
 Investigate the reason for significant differences between the information obtained during
the physical count and the inventory records.
 Assess the reliability of inventory records.
Reporting implication
If the auditor concludes that it would be impracticable or not possible to work back the inventory
then this would be a scope limitation and depending upon the material and pervasiveness of the
amount of inventory, the auditor should qualify or disclaim his opinion.
Furthermore, the auditor should include other matter paragraph and mention that the prior
period financial statements were audited by another auditor.
37 (a) Offer of CEO cannot be accepted as the letter of representation is to be dated as near as
practicable (but not after) the date of audit report, because:
 written representation is also obtained in respect of subsequent events
 further matters might also arise during the course of audit for which we may require
management representation.
However, the written representations are requested from those responsible for the preparation
of financial statements. Therefore, in the absence of the Chief Executive Officer, management
representation may be obtained from the Chief Financial Officer and those charged with
governance.

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(b) If the management modifies our requested wording, we may still be able to conclude that it is
a reliable representation. However, before arriving at any conclusion, we must consider the
effects of the information destroyed in the fire on the financial statements and on our ability to
obtain the necessary audit evidence and the possible impact on our audit report.
(c) If adjustments are immaterial, representation letter may include the effect of any uncorrected
immaterial misstatements. However, the decision regarding materiality of the uncorrected
misstatements is to be made by the auditor and not by the client.
Further, materiality depends on the fact that omission or misstatement would influence the
economic decision of the user, and the financial statements are relevant not only for the owners
but also for other users which may include bankers, government institutions, etc., therefore, the
comment of the managing director regarding the effect on decision making is not correct. If
financial statements remain uncorrected and the required correction is material also, its impact
on audit report would need to be assessed
38 (i)
 The intangible asset measured at Rs. 100 million is material as it represents 37% of profit
before tax.
 IAS 38 requires that the entity should be able to demonstrate the availability of adequate
technical, financial and other resources to complete the development and to use or sell the
intangible asset. As ATL appears to be short of finance, it is questionable whether sufficient
funds would be available to complete the development work and take the product to
market. Therefore, it appears that the criteria for capitalization of development costs
contained in IAS 38 Intangible Assets is not met.
 Discuss this matter with the management and those charged with governance to assess their
plans for arranging the necessary finance. In case the auditor believes that there is a doubt
as regards the company9s ability to complete the development work, the intangible asset
should be derecognized and the auditor should request the management to amend the
financial statements.
 If the management fails to resolve the issue appropriately, the auditor may have to qualify
the report as the misstatement is material, but not pervasive
ii)
 Since the fire has destroyed a significant portion of RL9s plant, the auditor should consider
RL9s ability to continue as a going concern.
 Evaluate financial condition of RL as the cost of new plant is expected to be much higher and
insurance claim of Rs. 400 million may not be sufficient to purchase a new plant.
 Discuss with the management and those charged with governance that how they intend to
finance the new plant and the operational expenses during the closure of the plant.
 Inspect the insurance policy and the correspondence with insurance company for the
verification of the insurance claim.
 Read the minutes of those charged with governance for further details.
 Analyze the latest available interim financial statements, to assess the impact of the accident
on RL9s financial performance.
 In case the going concern basis is inappropriate but the financial statements have not been
adjusted accordingly we will express an adverse opinion.
 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.

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 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.
39 c)
 Perform other audit procedures to attempt to resolve the matter or finalize your view point.
 Consider the effect of the above on reliability of other representations and the audit
evidence.
 Consider whether the risk assessment remains appropriate and if not, revise the risk
assessment and determine the nature, timing and extent of further audit procedure. The
auditor may also reconsider assessment of the competence, integrity, ethical values or
diligence of the management.
 If the auditor has concerns about the integrity of management, he should document those
concerns and consider withdrawing from the audit and the impact on the report
d)
Following are circumstances in which an auditor may include other matter paragraph in audit
report:
 Relevant to Users9 Understanding of the Audit: In the rare circumstance where the
auditor is unable to withdraw from an engagement, the auditor may consider it
necessary to include an Other Matter paragraph in the auditor9s report to explain why it
is not possible for the auditor to withdraw from the engagement.
 Relevant to Users9 Understanding of the Auditor9s Responsibilities or the Auditor9s
Report: Law, regulation or generally accepted practice in a jurisdiction may require or
permit the auditor to elaborate on matters that provide further explanation of the
auditor9s responsibilities in the audit of the financial statements or of the auditor9s
report thereon.
 Reporting on more than one set of financial statements: An entity may prepare set of
financial statements in accordance with more than one framework and engage the
auditor to report on both sets of financial statements. If both the frameworks are
acceptable, the auditor may include an Other Matter paragraph in the auditor9s report
Restriction on distribution or use of the auditor9s report: When the financial statements are
prepared for a specific purpose, the auditor may consider it necessary to include an Other Matter
paragraph, stating that the auditor9s report is intended solely for the intended users, and should
not be distributed to or used by other parties.
f)
 Obtain an understanding of management9s procedures for identifying subsequent events.
 Inquire of management as to whether any subsequent events have occurred which might
affect the financial statements.
 Read the entity9s latest subsequent financial statements.
 Read minutes of shareholders9 meetings, meeting of the board of directors held after the
date of the financial statements and inquire about matters discussed at any such meetings
where minutes are not available.
 Obtain written representations in respect of subsequent events.
40 (a) (i) The return of goods due to quality issues is an adjusting event for which condition existed
at the year end. Revenue reported in the financial statements should be reduced by Rs.
3,000,000 by recording sales return. The cost of sales should also be reduced accordingly. The
auditor should also consider that there may be quality issues with other inventory items as well
requiring them to be written down to NRV

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In term of the impact on the audit report, the level of misstatement is not material as the
materiality has been set at Rs. 8 million, consequently this issue will have no impact on the audit
report; unless there are other misstatements and the aggregate of such misstatements is
material to the financial statements.
(ii)
HML9s liquidity issues, adverse key financial ratios and recurring net loss cast a doubt on HML9s
ability to continue as a going concern.
We need to satisfy that there is no doubt over the going concern assumption. If the going
concern basis is appropriate but a material uncertainty exists, which is adequately disclosed in
the financial statements, then a paragraph related to material uncertainty would have to be
included in the audit report. In case adequate disclosures are not given, audit report may express
qualified or an adverse opinion. If the going concern basis is not appropriate an adverse opinion
would be given, unless HML agrees to present the financial statements on other than going
concern basis.
Sale of office to a company managed by the director of HML is a related party transaction and
needs to be disclosed specifically as a related party transaction. The disclosure and the
magnitude of transaction are both material to the financial statements. If it is not disclosed in the
financial statements appropriately, it will be considered as a misstatement on account of
application of accounting policy. The opinion will be modified accordingly.
(iii) Declaration of a customer as bankrupt is an adjusting subsequent event and the remaining
50% of the balance also needs to be written off. The above issue individually is not material to
the financial statement, therefore has no impact on audit report. However, if this misstatement
is not corrected and aggregate of all uncorrected misstatements is material to the financial
statements, the report will be modified according
41 (b) If he discovers previously unidentified or undisclosed related parties or (significant) related
party transactions he must:
(i) promptly communicate the relevant information of the related party transaction to other
members of the audit team.
(ii) perform appropriate substantive procedures on the newly identified related parties or
significant related party transactions.
(iii) request management to identify all transactions with the newly identified related parties.
(iv) inquire as to why the entity9s internal control system failed to identify or disclose these
related party relationships or transactions.
(v) Reassess the risk of there being unidentified or undisclosed related parties or (significant)
related party transactions and respond to the reassessed risk.
(vi) If the non-disclosure by management appears intentional (and therefore indicative of risk of
material misstatement due to fraud), evaluate the implications for the audit
42 (b) Written representations are necessary information that the auditor requires in connection
with the entity9s financial statements. Although written representations provide audit evidence,
they do not provide sufficient appropriate audit evidence on their own about any of the matters
with which they deal.
The fact that the management has provided reliable written representations do not affect the
nature or extent of other audit evidence that the auditor should obtain. Hence, considering the
scenario, the auditor should take the following steps to obtain the required evidence:
 Inquire management about reasons for refusal to send confirmation.
 Seek audit evidence as to their validity and reasonableness.
 In case a valid reason is not provided by the management, evaluate the implications of
management9s refusal on the auditor9s assessment of the relevant risks of material

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misstatement, including the risk of fraud and on the nature, timing and extent of other
audit procedures;
 Perform alternative audit procedures to obtain relevant and reliable audit evidence, such
as:
– Obtain the correspondence with the supplier.
– Check subsequent receipt from the supplier.
 Communicate with those charged with governance, if:
– The auditor concludes that management9s refusal to allow the auditor to send a
confirmation request is unreasonable.
– The auditor is unable to obtain relevant and reliable audit evidence from alternative
audit procedures.
 The auditor shall determine the implications for the audit and the auditor9s opinion in
accordance with ISA 705 given such a limitation on scope.
43 (a) The audit report should include only those matters in the KAM section which required
significant auditor attention. Areas which require significant auditor attention are those which:
 Involve significant audit risks
 Significant judgement on the part of management / auditor.
 Significant transactions and events affecting the audit.
Even though KAMs are extracted from the matters communicated with those charged with
governance, however, not all significant risks or matters communicated to those charged with
governance are considered as KAMs. The auditor needs to determine whether the risk of
overstatement of revenue fulfills the above mentioned criteria and is of most significance to the
current year audit, only then it can be included as a key audit matter.
(b) Even if the auditor determines, depending on the facts and circumstances of the entity and
the audit, that there are no key audit matters to communicate, the audit report shall include the
key audit matter section. The fact that there are no key audit matters to communicate in the
report, should be mentioned under the heading Key Audit Matters.
(c) A matter giving rise to a qualification by their nature is a key audit matter. However, these
matters shall not be described in the Key Audit Matters section of the audit report, rather the
matter is to be reported in accordance with the requirements of related ISA. However, reference
to the basis for qualified opinion is to be included in the Key Audit Matter section
44 Evaluation of the situation:
The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor9s report. However, the matter has come to the
knowledge of the auditor before publication of financial statements and imposition of penalty is
indicative of condition that existed at balance-sheet date.
Course of action:
Had the actual amount of penalty imposed by the court been known to the auditor at the date of
the auditor's report, it may have caused the auditor to ask the management for adjustment in
the financial statements. Therefore, the auditor need to perform the following procedures:
 Discuss the matter with management and, where appropriate those charged with
governance
 Inquire how management intend to address the matter in the financial statements.
 Instruct management not to issue the financial statements before the necessary
amendments have been made
 If the financial statements are amended, the auditor is required to:
– Carry out the necessary audit procedures on the amendment.
– Extend his review of subsequent events up to the date of the new audit report

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 If the financial statements are not amended, the auditor is required to

– Take appropriate action to prevent reliance on the audit report, after taking legal
advice.
– In the longer term, the auditor should also consider resigning from the audit, but
this would not be appropriate as an immediate response to the problem.
45 (i) This must be included in the representation letter. The written representation must cover that
there were no events subsequent to the date of the financial statements and for which IFRSs
require adjustment or disclosure.
(ii) This may not be included in the representation letter. The auditor should obtain sufficient
appropriate evidence on this matter such as checking the customer correspondence or directly
confirming from the customer. However, after obtaining sufficient appropriate audit evidence,
the auditor may still ask for management representation that the stock has been held on the
instruction of the customer.
(iii) This should not be included in the representation letter. This is a matter of incorrect
application of accounting policy, which the auditor should discuss and resolve with the
management.
(iv) The auditor must include this matter in the representation letter. The representation would
cover that all known actual or possible litigation and claims, whose effects should be considered
when preparing the financial statements, have been disclosed to the auditor and accounted for
and disclosed in the financial statements.
46 (i) Analyzing and discussing the cash flow, profit and other relevant forecasts with the
management.
(ii) Analyzing and discussing latest available interim financial statements.
(iii) Reading the terms of loan agreements.
(iv) Confirming existence, terms and adequacy of the borrowing facilities.
(v) Reading minutes of meetings of shareholders, those charged with governance and relevant
committees for reference to financing difficulties
47 (a) (i)
 Review minutes of the board meeting in which such matter were discussed.
 Review the client9s correspondence with the tax advisers and invoices for tax services.
 Obtain direct confirmation from tax adviser.
 Obtain and review the correspondence with the tax authorities.
 Consider whether expert advice may be required from outside sources other than tax
advisor.
 Consider any legal precedent or case law by assessing relevant historical and recent
judgments passed by the courts and other authorities in similar situation.
 Obtain written representation from the management.
 Evaluate the adequacy of the disclosure in the financial statement.
From the information provided it seem to indicate that the accounting treatment adopted is in
line with IAS 37 which requires a contingent liability to be disclosed. Therefore there would be no
impact on the audit report of BL.
We may have to include an emphasis of matter paragraph in the audit report highlighting the
matter with a reference to the note to the financial statements
(ii) Since the event occurred after the date of financial statements and the amount of loss is
material, the auditor should obtain evidence that whether the incident has been appropriately
disclosed in the financial statements as a non-adjusting event. We will need to verify the financial
impact to be disclosed in the financial statements by verifying the write down of stocks, loss of
property and equipment, etc. We will also need to assess the adequacy of the insurance claim

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and whether it covers all the losses by reviewing the insurance policy and the correspondence
with the insurers. We will have to include an emphasis of matter paragraph in the audit report
highlighting the matter with a reference to the note to the financial statements. In case the
management disagrees to disclose the incident then we may consider expressing a qualified
opinion.
(b) Qualified Opinion We have audited the financial statements of Beluga Limited (the Company),
which comprise the statement of financial position as at 31 August 2019, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the year
then ended, and notes to the financial statements, including a summary of significant accounting
policies. In our opinion, except for the effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of the Company as at 31
August 2019, and (of) its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (IFRSs).
48 The total development cost incurred to date is Rs. 78 million which is 52% of profit before tax
and is therefore material.
Your team should first discuss with the management and those charged with governance to
evaluate the contradicting views obtained from the board minutes and the management9s
explanation.
If the view of the board of directors is valid then perform the following audit procedures:
 Consider whether CL would be able to arrange the additional funding requirements for
completion of the project.
 Ask management to provide the revised marketing plans to assess that whether a market
at such an increased price actually exists.
 Review revised projections, feasibility and forecasts for using resources and generating
future economic benefits.
 Obtain written representation from management as to their commitment to complete
the project.
 Assess whether CL would be able to produce the solar roof at an increased cost.
If the view of the board of directors is not valid then perform the following audit procedures:
 Obtain and read the documentation of research team9s notes and conclusions related to
completion of the project and the funding requirements.
Reporting implications:
If the matter is resolved the auditor may consider including it in the key audit matter section of
the audit report. However, if it is established that conditions required for recognition of
development cost are not met then auditor should request the management and those charge
with governance to expense out the development cost. If they disagree, as the matter is not
pervasive as it only affects specific items in the financial statements and therefore a qualified
opinion should be issued. The audit report should include an explanation of the issue in the basis
for qualified opinion paragraph.
49 (a) Inventory count:
Audit team should consider whether the physical count can be conducted on 31 October 2020. If
the inventory count can be carried out, then the following procedures should be performed:
 Conduct physical inventory count after the date of the financial statements.
 Check whether the changes in inventory between the count date and the date of the
financial statements are properly recorded.
 Investigate the reason for significant differences identified during the physical count and
the inventory records.

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 Assess the reliability of inventory records.

Audit team should also consider and discuss with the management and the third party that
whether the physical count can be conducted through video link. If it is impracticable to conduct
an inventory count at a later date, then the following procedures should be performed:
 Inquire from the management whether third party will carry out any inventory count on
30 September 2020, and if yes, obtain the inventory count sheets.
 Inquire from the management whether third party regularly provides the inventory
levels held at their warehouse, and whether any discrepancies has previously been
identified.
 Obtain details of the inventory transferred to the third party warehouse and inspect
documents of subsequent sale/transfer out to ascertain the condition and existence of
the inventory.
 Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity.
Litigation:
Discuss with the OPL9s legal advisor(s) in respect of the outcome of the case.
 Obtain the minutes of meeting with regards to discussion on this litigation.
 Review the subsequent correspondence with the competitor, if any.
 Involve auditor9s legal expert to assess the outcome of the case.
 Evaluate the adequacy of the disclosure in the financial statements, in particular the
disclosure of the uncertainty in estimation and its quantification.
 Obtain written representation from the management regarding the fact that no estimate
can be made about the outcome of the case.
(b) Inventory count
 If the auditor is able to attend the inventory count or obtains sufficient appropriate audit
evidence without attending the inventory count, an unmodified opinion will be
expressed.
 If the auditor is not able to attend the inventory count at the third party warehouse and
also could not obtain sufficient appropriate audit evidence through alternate audit
procedures, it will be a limitation of scope.
If the auditor attends the inventory count on 31 October 2020 but still could not obtain
sufficient appropriate evidence, it will also be a limitation of scope. The value of the inventory
recorded by management is 13.3% of profit before tax and therefore material but not pervasive
as it is isolated to one account head of the financial statements.
Therefore, the audit opinion should be modified with a qualified opinion. The auditor needs to
include a basis for qualified opinion, explaining the reasons for inability to obtain sufficient
appropriate audit evidence.
Litigation
 If the auditor agrees with management9s treatment, an unmodified opinion should be
issued.
 The claim is 667% of profit before tax and represents a significant uncertainty which
would turn OPL9s profit into a loss.
Therefore, the audit report should be modified using an Emphasis of Matter paragraph and a
brief description should draw the users9 attention to the relevant disclosure note.
 If the auditor does not agree with management9s treatment based on the opinion of the
auditors expert, auditor should modify his opinion accordingly.
50 (i) Evaluation:

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The incident occurred after the year-end for which no condition existed before the year-end.
Therefore, it is a non-adjusting event for which the financial statements does not need an
amendment.
Furthermore, after the financial statements have been issued, the auditor has no obligation to
perform any audit procedures regarding such financial statements.
Therefore, no action from the auditor with regards to financial statements for the year ended 30
June 2020 is required. However, auditor shall inquire how the management intends to address
the matter in the financial statements. If the management amends the financial statements to
disclose the non-adjusting event then the auditor shall extend the audit procedures to the date
of new audit report.
(ii) Evaluation:
The difficulty in selling the inventory after the year-end at current prices and consideration of
revising the price give the evidence about their net realizable value (NRV) at the year-end, which
is an adjusting event. Therefore, NRV of the inventory should be calculated on the basis of
revised selling price after the yearend and the financial statements should be adjusted
accordingly.
Suggested audit procedure:
 Review prices at which goods have been sold after the reporting period, for evidence
that NRV is higher than cost.
 Review and test the procedures in place for comparing NRV with cost for each item of
inventory.
 Select major items of inventory from the list of stock and compare NRV with cost.
 Review inventory records and order books to identify of slow-moving items and compare
their expected NRV with cost.
 Review the information gathered during the physical inventory count (e.g. deterioration
of inventory) which may suggest that NRV may be lower than cost.
 Review the records related.
51 (i) (a) Audit procedures:
 Inquire from the management that whether any contract was made with the foreign
customer.
 Review the contract to identify as to whether any recovery can be made from the
customer for exiting/breaching the contract.
 Inquire from the management that since the inventory was for specific use, could it be
put to some other use.
 Inquire from the management that whether they have carried out any exercise to
determine the NRV of this inventory.
 Assess the managements working of NRV for accuracy.
(b) Reporting implication: The value of the inventory recorded by management is 20% of profit
before tax and therefore material but not pervasive as its effect restricted to one account head
of the financial statements.
If the management records the NRV adjustment, then a clean opinion would be issued. However,
the auditor may consider including it as a key audit matter.
If the auditor considers that no major adjustment is required in the inventory value and the
management has not recorded that adjustment, then the auditor will combine it with other
misstatements to assess whether the combined effect is material.
If the auditor considers that major adjustment is required in the inventory value and the
management has not recorded that adjustment, then the auditor expressed a qualified opinion.

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The auditor needs to include a basis for qualified opinion, explaining the reasons for qualifying
the opinion.
ii) (a) Audit procedures:
 Discuss with the management that whether they have carried out a going concern
assessment.
 Discuss with management that whether there are any contingency plan(s) in place for
the loss of this contract.
 Review the negotiations with EL regarding the contract renewal being carried out.
 Inquire the management that whether any new customer has been identified
subsequently.
 Review the minutes of board of directors meeting to identify the course of action to be
adopted by the management.
 Review the projected cash flow and profit and loss forecast prepared by the
management in light of this event.
 Review subsequent financial statements of EL to obtain evidence regarding the going
concern assumption.
 Obtain management representation regarding the fact that EL have sufficient
resources/support from sponsors to continue as a going concern.
(b) Reporting implication:
If there is uncertainty about the going concern status of the company and management is willing
to fully disclose the circumstances, a paragraph headed Material Uncertainty Related to Going
Concern should be included, highlighting the issue and drawing users9 attention to the note in
the financial statements. There should be a specific statement that the opinion is not modified. If
management refuses to disclose the uncertainty, the opinion should be modified due to
misstatement/disagreement. The modification should be a qualified opinion if the issue is
considered material but not pervasive or an adverse opinion if considered material and
pervasive. If the entity9s going concern is not valid and the financial statements are prepared on
an inappropriate basis and consequently many items in the financial statements will be
materially misstated. This would be pervasive requiring an adverse opinion stating that the
financial statements do not give true and fair view. If the management is unwilling to make or
extend its assessment a disclaimer of opinion would be given.
52 Representation letter dated 05 March 2021:
Offer of CEO cannot be accepted as the letter of representation is to be dated as near as
practicable to the date of audit report because further matters might also arise during the
intervening period for which the auditor may require management representation.
Representation letter dated 16 March 2021:
The audit report should not be signed unless the written representation has been received as it
supports other audit evidence obtained during the course of audit. If management does not
provide the written representation, it will result in limitation of scope, which would impact the
audit opinion.
Verbal Representation:
Verbal evidence is not strong audit evidence. Therefore, in order to improve the quality of this
evidence, the auditor will need to ask for any significant discussions to be confirmed in writing.
Suggestion:
If it is practicable to do so sign the audit report on 16 March 2021 or management
representation may be obtained from the Chief Financial Officer or those charged with
governance on the date of signing.
53 Evaluation:

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Even though MML came to know about the defect after the year end, the existence of defect in
MML products provide evidence of conditions that already existed at the end of the reporting
period. Therefore, it is as an adjusting event. The warranty provision should be reassessed on the
basis of the identified defect and the financial statements should be adjusted accordingly.
Course of action:
i. Inquire with the management about the quantity of effected products which have been
sold until the year end.
ii. Inquire from the management whether they have assessed the revised warranty
provision on the basis of this new information.
iii. Consider involving auditor's expert to re-assess the warranty provision.
iv. Evaluate the management assumptions for the revised warranty provision.
v. Assess whether there is any material effect to the warranty provision because of the
identified defect.
vi. Ask the management to revise the financial statements and get it approved by the board
of directors.
vii. Obtain management representation that the warranty provision reflects the
management best estimate.
viii. Ask the management to prepare a working for the net realizable value of the inventory
and assess its adequacy.
Evaluation:
The incident occurred after the year-end for which no condition existed before the yearend.
Therefore, it is a non-adjusting event for which the financial statements do not need amendment
The incident has a significant impact and it seems material for the users of the financial
statements, Therefore, DHL shall disclose nature of the event and an estimate of its financial
effect.
Course of action:
(i) Inquire from the management about the time it would take to repair the hotel and
make it operational.
(ii) Inquire from the management to assess the amount of revenue lost due to non-
functionality of hotel
(iii) Inquire from the management about the estimated cost of repair.
(iv) Inquire from the management about any amount to be received from the insurance
company.
(v) Ask the management to disclose the matter in accordance with the requirements of
IFRSs.
54 EPL-Reporting Implications:
EPL should start depreciating the asset when it is available for use and not when it is put to use.
If it is established that the asset has been completed before year end, the management of EPL
should be asked to record depreciation. However, the maximum possible adjustment i.e. Rs. 1.67
million is below the materiality level i.e. Rs. 7.5 million. Therefore, there would not be any impact
on the audit report and we will express an unqualified opinion. The potential adjustment amount
would need to be added to the list of uncorrected misstatements and assess that whether they
are material in aggregate. We will also obtain a written representation in this regard that the
effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to
the financial statements as a whole.
CEL-Audit Procedures:
(i) Review the legal expense account for any further claims or proceedings against the
company.

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(ii) Send confirmation to the legal advisor to confirm the current status of the litigation
and the expected outcome.
(iii) Review communication with the customers for out of court settlement.
(iv) Review the minutes of the board of directors meeting to assess the possible
outcome of the case.
(v) Consider the possibility of any legal proceedings and any proceedings that may be
instigated by the public health authorities as such authorities might impose
significant fines.
(vi) Seek written representation from the management about likely outcome of the case.
(vii) Ensure that proper disclosure in this regard in the financial statements should be
made.
CEL-Reporting Implications:
Not giving disclosure of the event is qualitatively material to the financial statements. The
financial statements should include the disclosure required by the applicable financial reporting
framework. If CEL does not disclose this matter, it would be considered as a material
misstatement that relates to the non-disclosure of information required to be disclosed.
The auditor shall:
 discuss the non-disclosure with those charged with governance;
 Express a qualified opinion
 describe in the basis for opinion section the nature of the omitted information; and
 unless prohibited by law or regulation, include the omitted disclosures, provided it is
practicable to do so and the auditor has obtained sufficient appropriate audit evidence
about the omitted information.
For the customers with whom out of court settlement has been agreed a provision needs to be
recorded. If the management does not record the provision and if it is material, then the auditor
shall express a qualified opinion. The auditor needs to include a basis for qualified opinion,
explaining the reasons for qualifying the opinion.

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Chapter 15 | ISRE
1 Procedures of review engagement:
The procedures for the review of F/S will usually include:
 Inquiry
 analytical procedures
 Agree and reconcile Interim Financial Information with the accounting records.
2 a review of the statements as a whole.
The key features of review engagement that distinguish it from statutory audit are as
follows:
 Review engagement requires less evidence than an audit
 Opinion in the review engagement is expressed in negative terms
Two types of review engagements:
 Attestation engagement
 Direct reporting engagement
3 Procedures for the review of historical F/S will usually include the following:
Obtain an understanding of the entity9s business and the industry in which it operates.
o Make inquiries into:
o the entity9s accounting policies, practices and procedures, including the preparation of
F/S
o material assertions in the F/S that are subject to the review
o decisions taken at board meetings and other meetings of the entity that may affect the
F/S
o the completeness of the accounting records that were used to prepare the F/S.
 Applying analytical procedures designed to identify unusual relationships between items in
the F/S, and individual items that appear unusual. Analytical procedures would include:
o comparing the F/S under review with F/S for prior periods
o comparing the F/S with the anticipated results and financial position of the entity
o a study of the relationships between elements in the F/S that should be expected to
conform to a predictable pattern (based on the entity9s past experience or normal
ratios/relationships for the industry as a whole).
Other procedures that will usually be carried out in a review of F/S include:
o discussions with the company9s auditors (if the audit firm is not the firm of
accountants that is performing the review engagement)
o obtaining representations from management
o considering the appropriateness of the accounting policies employed by the entity
o making inquiries into subsequent events (after the date of the statement of financial
position)
o making a review of the statements as a whole.
4 Review Engagement Annual Audit
The procedures performed are substantially less than those performed in an audit and are
mostly limited to analytical procedures and inquiries.
The procedures performed in an audit includes test of controls, substantive procedures,
analytical procedures and inquiries.
A review does not provide a high level of assurance and in some cases do not provide any
assurance.
An audit is designed to provide a high level of assurance to the users of the financial
statements.

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The End

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