ISAs – Application Guide Code of Ethics

CODE OF ETHICS
CONCEPT APPLICATION QUESTIONS

Q.1 Your firm, Hatim Manzoor and Company, Chartered Accountants is the auditor of Paints Limited (PL) for the year ending
31 December 2019. On 1 December 2019, PL has acquired controlling interest in Brush Limited (BL). Your firm also has a
contract with BL for providing accounting and bookkeeping services until 31 December 2020. BL has requested your firm
to keep providing the services until an alternate solution is worked out.
Required:
Evaluate the threat(s) in the above scenario and discuss whether the firm can continue providing the services to both the
clients till conclusion of the audit. (10)
(ICAP, CFAP 06 Level – Winter 2019)

Q.2 Alpha Textile Limited (ATL) is a long standing listed audit client of your firm. Hans has been the audit engagement
partner of ATL for the last five years. The firm is considering to appoint Munir as ATL’s engagement partner and Haris
either as ATL’s quality control review partner or client relationship partner.
Required:
In the light of Listed Companies (Code of Corporate Governance) Regulation, 2017 and ICAP’s Code of Ethics, discuss the
validity of Haris’s appointment either as ‘quality control review partner’ or ‘client relationship partner’. (08)
(ICAP, CFAP 06 Level – Summer 2019)

Q.3 (a) You are the quality control partner in a firm of chartered accountants. Your firm has been approached by Beta
(Private) Limited (BPL) for appointment as the auditors for the year ending 30 June 2019.
Your firm was also hired by BPL for valuation of its investment in an unlisted company on August 2018. The valuation
engagement had concluded in September 2018 and the amount of investment is material to BPL’s financial statements.
Required:
Being the quality control partner, advise whether the audit of BPL could be accepted by the firm. Also discuss the relevant
threats, if any. (06)

(b) You are the statutory auditor of two listed companies, Alpha Limited and Gama Limited. Both the companies are in
conflict with each other and involved in two major litigations.
Required:
Identify the threats involved in the above situation and also suggest related safeguards, if any. (06)
(ICAP, CFAP 06 Level – Winter 2018)

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Q.4 Nisar Khalid & Co. Chartered Accountants (NKC) has been approached by Hector Limited (HL) a listed company, for
appointment as HL’s auditors for the year ending 30 April 2019.

The core departments of NKC along with the names of the partners are as follows:
Assurance Quality Control Tax & Corporate
Department Department Advisory Department
Nisar Ali Khalid
Hashmat Usman Ovais
Moin Hasan
Rashid
Arif

NKC intends to appoint Rashid as the engagement partner. As part of the client acceptance procedures, an email was
circulated to all the staff of the firm to disclose any investment in HL and its related parties by any partner/employee or
their family member(s).

A summary of response of Rashid and his staff is as follows:

 Rashid has confirmed that he does not hold any shares in HL although his wife has invested Rs. 2 million in a
mutual fund. The mutual fund has invested 14% of its total investment in shares of HL.
 Zahid has been working as an audit manager with Rashid. Zahid has disclosed that he has invested Rs. 50,000 in
the shares of Troy Limited (TL). HL owns 20% shareholding in TL.

Response by other partners of the firm are as follows:

 Ali has invested Rs. 45,000 in the shares of Achilles Limited, which is the holding company of HL.
 Ovais has confirmed that his son has invested Rs. 500,000 in the debentures issued by HL.

Response by other staff of the firm:

 Some of the junior audit staff who are not working with Rashid and the staff of the firm’s accounts department
have confirmed holding in shares of HL of nominal amounts ranging from Rs. 5,000 to Rs. 60,000.
Required:
In the light of Code of Ethics for Chartered Accountants, evaluate the above situation and discuss the threats (if any) in
each case along with the available safeguards if NKC decides to accept the assignment. (15)
(ICAP, CFAP 06 Level – Summer 2018)

Q.5 You are the quality control partner of Lotus & Co. Chartered Accountants. You have been assigned additional
responsibilities for assessment of risks associated with the firm’s clients.
At present, the following matters are under your consideration:

(a) Clean Limited (CL) has failed to pay the fee for review of its half yearly accounts for the six month ended 30 June 2017.
The issue was discussed with the management in the planning meeting for the audit of the year ending 31 December
2017. The management has assured that the amount would be paid in about 30 days. During the discussion, the audit
manager was also informed that CL has been facing liquidity issues and it has closed two of its plants. The management
has also requested for a reduction in the audit fee for the year ending 31 December 2018 because of the decline in the
volume of business. Further, the management has requested the firm to consider some relief as regards audit fee for the
current year. (10)

(b) During the review of working papers of Daffodil Limited (DL), the engagement manager came to know that a large
consignment of import of raw material is stuck with the custom authorities. On his query he was informed that the DL’s
clearing agent was unable to resolve the matter. However, now DL has approached another custom clearing agent for
clearing the said consignment and the matter with the custom authorities would be resolved shortly. DL has agreed to pay
1.4% of the value of consignment to the clearing agent. A junior member of the team has informed the engagement
manager that clearing agent appointed by DL is the brother of the audit senior. (05)

Required:
Discuss the categories of threats involved in each of the above situations and advise the possible course of action that may
be followed.
(ICAP, CFAP 06 Level – Winter 2017)

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Q.6 (a) An audit client of Akbar Ali & Co. has approached your firm for appointment as internal auditor. Your firm and Akbar
Ali & Co. Chartered Accountants have a common quality control department and share common quality control policies
and procedures.
Required:
Discuss the above scenario in the light of Code of Ethics assuming the said client is a public interest entity. (07)

(b) Sameer works as manager assurance in your firm. He has close personal relationship with Saqib, who is the CFO at one
of your audit client. However, you haven’t assigned that client to Sameer.
Required:
Evaluate the above situation and identify threat(s), if any, and related safeguards. (03)
(ICAP, CFAP 06 Level – Summer 2017)

Q.7 You are the partner in a firm of Chartered Accountants and presently following matters are under your consideration:
(a) Annual audit of Kamran Limited (KL) for the year ending 31 December 2016 is due to commence in a few weeks. Jamal
has been an audit team member for eleven years; two years as the job incharge, three years as manager and six years as
partner.
KL was listed on the Pakistan Stock Exchange in July 2016.
Required:
(i) Identify the threats in the above situation and discuss the significance thereof. (06)
(ii) Discuss the need for rotation of engagement partner in each of the following situations:
 The firm has adequate resources and personnel who can replace Jamal as engagement partner but Jamal does
not want to leave this assignment.
 The firm is unable to find a suitable replacement. (03)

(b) Your firm has received request from a listed audit client to assess the quality of the internal audit function and give
recommendations as regards improving the structure of the internal audit department and the quality of its staff.
Required:
Evaluate the above situation and identify threats, if any and related safeguards. (03)
(ICAP, CFAP 06 Level – Winter 2016)

Q.8 You are the partner in a firm of Chartered Accountants having three partners. Presently, following matters are under your
consideration:

(a) Your firm is conducting the audit of Tahir Limited (TL). A partner in your firm is a close friend of Kashif, who is the
financial controller in TL. (05)

(b) Your firm has been approached by Javed Limited for advice regarding investment in Kamran Limited (KL). The spouse
of a partner of the firm holds 500,000 shares in KL. (05)

Required:
Evaluate threats involved in the above situations and suggest related safeguard(s), if any.
(ICAP, CFAP 06 Level – Summer 2016)

Q.9 You are the manager in Quality and Risk Management department in a firm of Chartered Accountants. A partner of the
firm has informed you about the following:

(a) Audit of Nadir Limited (NL), a non-listed company, is in the finalization stage as almost 85% of the field work has been
completed. NL has acquired 51% holding in Hamid Limited (HL), a listed company, few days ago. A partner of the firm
holds 500,000 shares valuing Rs. 20 million in HL. The partner has agreed to sell the shares; however it would take some
time as the shares of HL are not actively traded. (08)

(b) An audit manager of the firm has effectively negotiated a non-assurance assignment with an audit client. Such deals
are usually considered in the annual appraisal of the managers. (06)

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(c) Zaheer Limited has approached your firm for transaction advisory services related to acquisition of Javed Limited,
which is your audit client. (07)

Required:
Give your views on each of the above situations with regard to Code of Ethics.
(ICAP, CFAP 06 Level – Winter 2015)

Q.10 You are the partner incharge of quality control department of Mian and Company, Chartered Accountants. The following
independent matters are under your consideration:
(a) Engagement partner’s brother-in-law has joined as CFO on an audit client. (04)
(b) Your firm has been asked to verify the results of an award competition being organized by an audit client. (04)
(c) On an unlisted audit client, the audit engagement team prepares financial statements from the trial balance and
proposes adjusting entries. (04)
Required:
Identify and evaluate the threats involved (if any), in each of the above situations and explain the actions which should be
taken as regards the above matters.
(ICAP, CFAP 06 Level – Summer 2015)

Q.11 Deleted.

Q.12 (a) An audit client has approached your firm for advice on various issues concerning a financing arrangement. The client
has provided you information regarding terms of financing offered by three different financial institutions including draft
agreements which the client may be required to sign.
Required:
Identify threats involved in the above case and also suggest related safeguards, if any. (06)

(b) Assuming that two of the above financial institutions are audit clients of your firm, explain whether such situation
would result in a conflict of interest, under the Code of Ethics for Chartered Accountants. (04)
(ICAP, CFAP 06 Level – Winter 2014)

Q.13 Your firm has been appointed as an advisor to Jupiter Limited (JL) an unlisted public company, which is an assurance
client of your firm. JL wants to dispose of its shares in Pluto Limited, to a foreign buyer. As part of the assignment, your
firm is required to act as an intermediary between the foreign buyer and JL, negotiate the payment terms, receive
payments on behalf of JL and ultimately make disbursement to JL after the transfer of shares.

Required:
Identify the nature of threat(s) involved and explain how you would meet your professional obligations and
responsibilities while carrying out the above assignment. (10)
(ICAP, CFAP 06 Level – Winter 2014)

Q.14 You are the quality control partner in a firm of chartered accountants. The following independent situations are under
your consideration.
(a) Kamal, a manager in the firm is assigned on deputation for training of the newly hired staff in the accounts department
of a brokerage house. The brokerage house is also an audit client of your firm. (04)
(b) Your firm has received a proposal from an audit client for implementation of a new IT system which the company has
acquired. (08)
(c) The client has written a letter of appreciation showing their gratitude for the involvement and guidance provided by
an audit manager on various issues regarding application of accounting standards. (05)
Required:
Identify and evaluate the threats involved and explain what actions should be taken in the above circumstances including
the steps required, if any, to reduce the risks to an acceptable level.
(ICAP, CFAP 06 Level – Summer 2014)

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Q.15 ABC and Company, Chartered Accountants, have been requested to give their consent for appointment as the auditor of
Sindh Limited (SL), in place of XYZ and Company, Chartered Accountants. The matter of appointment of ABC and
Company is to be placed in the annual general meeting of SL.
Required:
(i) Explain the responsibility of ABC and Company and the steps that it needs to take before acceptance of the audit. (05)
(ii) What would be the retiring auditor’s responsibilities with respect to the above and the responsibility of ABC and
Company, in case the retiring auditor does not fulfil its responsibility? (05)
(ICAP, CFAP 06 Level – Winter 2013)

Q.16 (a) Dynamic (Private) Limited (DPL) is a client of your firm. At the finalization stage of annual audit, it was discovered
that a senior member of the assurance team is the co-owner of a property, for the possession of which DPL has filed a
legal case. On investigation, the member informed that the said case is pending for the last three years and he did not
consider necessary to disclose it at the time of commencement of audit.
Required:
Discuss the matters that should be considered and the course of action which may be followed in the above situation. (07)

(b) Murree Limited (ML) and Bhurban Limited (BL) are listed assurance clients of your firm. BL has filed a claim of Rs. 50
million in the court in respect of low quality of goods delivered by ML. Upto last year ML had not acknowledged the claim
of BL. However, in the planning phase, you were informed by ML’s management that in order to avoid bad reputation in
the market and to continue its business relationship with BL, ML intends to settle the dispute by making a payment of Rs.
20 million to BL. The debt of Rs. 50 million is fully provided in the books of BL.
Required:
Being the auditor of both the companies, identify and evaluate the threats for the firm and explain how these can be
reduced to an acceptable level. (06)
(ICAP, CFAP 06 Level – Winter 2013)

Q.17 You are the quality control partner of Nasir and Company, Chartered Accountants (NCC) and presently following matters
are under your consideration:

(a) Your firm has issued an unmodified opinion on the financial statements of Salim Limited (SL) for the year ended 31
December 2012. The tax authorities have recently launched an investigation against SL, alleging that SL has under
declared its income for the year ended 31 December 2012. NCC is also acting as the tax advisor of SL. (09)

(b) While appreciating the services rendered by your firm, the managing director of a client has informed the engagement
partner that an audit trainee has helped him in the purchase of a plot of land. On investigation, the engagement partner
was able to establish that the trainee works part-time in an estate agency and receives 0.5% commission on all deals. (05)

(c) Josh Limited (JL), an unlisted audit client of your firm has approached your firm to recruit a chartered accountant for
the position of finance director in JL. In response to an advertisement published in the newspaper, NCC received various
applications which include individuals working at some of your clients and some of your ex-employees. (05)

Required:
Identify and evaluate the threats involved and explain what actions you would take in the above circumstances including
the steps required, if any, to reduce the risks to an acceptable level.
(ICAP, CFAP 06 Level – Summer 2013)

Q.18 Identify and evaluate the threats involved and explain how these threats can be reduced to an acceptable level, in each of
the following situations:

(a) During the year, Jamil Limited (JL) had acquired Sarfraz Limited (SL) and the companies were subsequently merged.
The due diligence exercise for the acquisition was performed by the same firm which carries out the annual audit of JL. At
the time of planning, the auditor found that a significant provision has been made against SL’s inventories and accounts
receivables. The management informed the auditor that the fact that the value of these assets was impaired came to its
knowledge after taking control of SL. JL and SL are unlisted public companies. (10)

(b) A limited assurance engagement has been accepted at a fee which is lower than the fee charged by the predecessor
auditor. (03)
(ICAP, CFAP 06 Level – Winter 2012)

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Q.19 You are the quality control partner in Wiew and Company, Chartered Accountants. You have been assigned additional
responsibilities for assessment of risks associated with the firm’s existing and proposed clients. At present, the following
matters are under your consideration:

(a) The government has invited ‘expression of interest’ for selling its strategic shares in Iqbal Limited (IL). One of your
clients’ Zain Limited is interested in the deal and has requested your firm to carry out a due diligence exercise. Mian
Limited has also approached your firm for carrying out a business valuation of IL.

(b) JKL Limited, a listed audit client of your firm, has been in dispute with a supplier. JKL is of the view that it has suffered
losses on account of breach of contract by that supplier. JKL intends to file a suit in a civil court and has asked you to
estimate the amount of damages that may be claimed and provide a detailed calculation thereof.

Required:
Discuss the categories of threats involved in each of the above situations and advise the partners as regards the possible
course of action that may be followed. (16)
(ICAP, CFAP 06 Level – Summer 2012)

Q.20 Mr. Mahmood is the engagement partner for the audit of Khyber Limited (KL), a listed company. In a meeting of the
partners of the firm he had declared that Better Life Trust (BLT), in which he is a trustee, intends to purchase fifty
thousand shares of KL from the open market.
Required:
(a) State how should the firm deal with the above situation. (07)
(b) What would the firm’s response be if Mr. Mahmood inadvertently fails to disclose the above fact before the purchase
of shares and it comes to the knowledge of the firm after the shares have been purchased? (05)
(ICAP, CFAP 06 Level – Summer 2012)

Q.21 You are the quality control partner in Pirzada and Company, Chartered Accountants. The following matters are under
your consideration:

(i) Your firm has been approached for appointment as external auditors of Watto Limited (WL), a listed company. Your
firm has been providing valuation services to WL.

(ii) To evaluate the network security system of Babar Limited (BL), your firm had acquired the services of a Systems
Auditor. The Finance Director of BL has accused the Systems Auditor for compromising information relating to the
company’s customers and providing their contact details to a competitor.

(iii) Your finance department has issued an invoice to Qamar Software Services (QSS) against referral fees for
recommending services of QSS to an assurance and a non-assurance client. Your permission has been sought before
sending the bill to QSS.

Required:
Identify and evaluate the threats involved and explain what action would you take in the above circumstances including
the steps required, if any, to reduce the risk to an acceptable level. (16)
(ICAP, CFAP 06 Level – Winter 2011)

Q.22 You are the audit manager in Farhad and Company, Chartered Accountants. You have specific responsibility for assessing
the risks associated with the firm’s existing and proposed listed clients.

Presently the following matters are under your consideration:

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

(ii) Sherbano Limited (SL) has requested your firm to provide a consent letter for acting as its auditors. The wife of a
partner in your firm is the Director Marketing in SL.

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(iii) One of your assurance clients has requested your firm to provide consultancy services in relation to a proposed
transaction with a company based in Singapore. As your firm does not have the expertise to undertake that assignment, it
is considering to refer the assignment to Marvi & Company, Chartered Accountants. It is expected that your firm would
receive a commission of 15% of the assignment fee from Marvi & Company.

Required:
Discuss the categories of threats involved in each of the above situations and advise the partners as regards the possible
course of action that may be followed.
(15)
(ICAP, CFAP 06 Level – Summer 2011)

Q.23 Eagle Limited (EL) is an unlisted company and operates a chain of 30 restaurants. The management has established
effective internal controls especially over cash receipts and payments to employees and suppliers. The internal audit
department of EL has been playing an important role in continuous evaluation and monitoring of these internal controls.
However, the chief internal auditor (CIA) has recently resigned alongwith his two assistants.

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

Required:
Comment on each of the above alternatives as follows:
(a) Discuss the threat involved and explain the safeguards, if any, available to the firm which may eliminate or reduce the
threat to an acceptable level.
(b) In the light of the Code of Corporate Governance, explain whether you would have accepted the proposals, had EL
been a listed company. (20)
(ICAP, CFAP 06 Level – Winter 2010)

Q.24 You are the quality control partner in a medium size audit firm and have been asked to give your views on the following
situations:

(a) Pentagon Limited, an unlisted assurance client, has requested your firm to assist them in the recruitment of the Chief
Financial Officer (CFO) of the company. While short listing the candidates, it was found that the applicants include CFOs of
two of your existing assurance clients.

(b) One of your firm’s large clients, a listed company, has requested that the current year’s audit should be carried out by
the same team which audited the last year’s financial statements. The request has been justified on the grounds that the
accounts department is extremely busy on a special assignment and a new team would take a lot of their time. You have
also been informed that Mr. Shams has been the manager in charge of that audit during the last three years.

Required:
Discuss the category of threat involved in each of the above situations. Also explain the safeguards available with the firm
which may eliminate or reduce the threat to an acceptable level. (14)
(ICAP, CFAP 06 Level – Summer 2010)

Q.25 You are a chartered accountant in practice. The following situations have arisen in connection with two of your clients:
(a) A multinational company (MNC) which is planning to establish a place of business in Pakistan by forming a public
limited company under the Companies Ordinance, 1984, has requested your firm to provide the following services:
(i) Receive the funds remitted by the MNC.
(ii) Make disbursements in accordance with the instructions of the MNC.
Required:
Explain how you would meet your professional obligations and responsibilities while carrying out the above assignment.
(07)

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(b) Your firm is the external auditor of a listed company. Recently the management of the company has requested your
firm to provide the following services:
(i) Reconciling the creditors’ ledger with the statements submitted by the suppliers.
(ii) Estimating the compensation payable to the employees who were seriously injured while carrying out the trial run of
the plant.
Required:
Explain the threats involved in accepting the above assignments and identify the steps the firm should take to fulfill its
professional responsibilities and obligations. (10)
(ICAP, CFAP 06 Level – Summer 2010)

Q.26 Mr. Omar is incharge of the quality control department of an audit firm. While reviewing the working papers relating to
some audit engagements of the firm he came across the following situations:
(i) The spouse of a partner in the firm is a legal consultant and is assisting an audit client of that firm in filing its tax
return.
(ii) The audit manager engaged on the audit of a company has been offered a job by that company. He has been asked to
join on March 1, 2010 when the current CFO would retire. The audit is expected to be completed on December 15, 2009.
(iii) A meeting of the CEO of ABC & Company Limited and the audit engagement partner was held to discuss the draft
financial statements of the company for the year ended September 30, 2009. Serious difference emerged between the two
sides on the accounting treatment and the disclosures of certain items and consequently the CEO informed the
engagement partner that unless the auditors agree to the company’s point of view, they would not be reappointed for the
next year.
(iv) The engagement partner on the audit of XYZ Limited has been its engagement partner for the past six years.
Required:
Identify the category of threat involved in each of the situations described above and explain how would it affect the
objectivity and independence of the auditor. Also explain the responsibility (if any) of the firm and the concerned member
of the audit team. (11)
(ICAP, CFAP 06 Level – Winter 2009)

Q.27 You are the partner in charge of your Firm’s risk management department and in the said capacity your responsibilities
interalia include advising the firm’s engagement partners / managers on different aspects of the assurance and non
assurance services, in accordance with the applicable regulatory and independence framework. You have been requested
for guidance on the following issues:

(i) Olive Limited has approached your firm to act as their advisors to the first public issue of the company which shall be
used to finance a new project. Your responsibilities would include drafting the prospectus, assistance in completing listing
formalities and negotiations with and appointment of Bankers to the issue. Previously you have also carried out a due
diligence exercise in respect of the said project. Olive limited has suggested different fee levels corresponding to the
amount of eventual subscription received.

(ii) Crimson Limited, an unlisted audit client has engaged a software company to automate its accounting and finance
functions. The company wants to engage your firm to help in the implementation of the system.

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

Required:
(a) Advise the concerned partners/managers as regards the acceptance of the above assignments.
(b) Suggest possible modification in the scope or terms of engagement or possible safeguards, if any, to avail the
opportunities within permissible limits. (12)
(ICAP, CFAP 06 Level – Summer 2009)

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Q.28 You have worked as a job in charge on the audit of financial statements of a multinational listed company, engaged in
pharmaceutical business. During the course of your audit, you became aware of various facts and details about the
company. It was a long engagement for which you had to move out of the city of your residence. Consequently, a number
of people around you, including family, friends and colleagues, are aware of the fact that you were job in charge on the
said audit.

Some of them are interested in having certain information as discussed below:

(a) One of your close relative has got an offer for appointment as director marketing of the said client. He wants to be
aware of the levels of remuneration at comparable positions in order to negotiate his remuneration properly.
(b)A manager in your firm (other than the engagement manager for the said client) has inquired about the internal
controls in place, in respect of a specific process. Assuming that the same would be effective, he intends to recommend the
same as best practice to a local pharmaceutical client.
(c) Your sister has asked you about the ingredients of a specialized nutritional product for children, being marketed by
the company, which she is using for her child. You are aware of all the details about the said product, as you got the
opportunity to perform tests on the costing of that product.
(d) One of your friends is working in the Ministry of Health, Government of Pakistan. He has asked you as to whether the
company has complied with certain statutory requirements. You are aware of the fact that the company is not complying
with the same and you have already included the matter in the management letter. With reference to specific provisions
of law, he has convinced you that it is his duty to enquire about the same, and you are responsible to disclose the relevant
information to the Ministry. He has also informed you that in case of no response, you may be served with a legal notice.
(e) Your younger brother intends to commence distribution business. He has asked you about the rate of commission and
volume rebates being allowed by the said client to its distributors, as he wants to work out the feasibility of business.
(f) Your father invests his surplus funds in the capital market. Being aware of the fact that companies like that always
have a five to ten year’s plan in place. He has asked you about the trend of earnings per share of the said company for the
last five years, and the expected growth in the net profits for the next five years.
Required:
Discuss each situation to conclude as to whether or not you can provide the requisite information and the extent to which
the same can be disclosed without compromising the professional ethics. Support your conclusions, with appropriate
arguments. (10)
(ICAP, CFAP 06 Level – Summer 2009)

Q.29 You are the audit engagement partner for Mubarak Limited (ML), a listed company which is the subsidiary of a company
registered in USA. You have received an email from your firm’s tax partner based in Lahore. He has informed you that in a
recent meeting with the Chairman of ML in Lahore, he discussed an opportunity to pursue major assignments for the
Company. He strongly urged you to have an urgent meeting with the CEO of ML as the company is in discussion with other
firms also and is due to take a final decision soon.
The services include Internal Audit Outsourcing and Corporate Finance Services (CFS). CFS mainly involve negotiating the
terms of restructuring / re profiling of long-term borrowings obtained by ML from one of its lenders. However, as the
audit engagement Partner of Mubarak Limited you are of the opinion that it would not be possible for you to provide the
above services.
Required:
Write a comprehensive letter to the client explaining your point of view, giving appropriate reasons and references to the
relevant standards and regulations. (10)
(ICAP, CFAP 06 Level – Winter 2008)

Q.30 Your firm is a member of an internationally recognized network of accountancy firms and provides wide range of
professional services. A large multinational company South Union wishes to have a business presence in Pakistan. Having
completed the necessary regulatory formalities, the management of the company has approached your firm for
appointment as auditors. The management has also requested you to provide the following services in the current year:
(i) Carry out market search to identify the parties engaged in distribution business. The fee will be dependent on the
eventual appointment of the distributor by the management;
(ii) Recruit professionals in the position of Head of finance and Internal Audit;
(iii) Provide a general ledger package that has been developed by your firm.
Your firm has decided to accept the appointment as auditor but has refused to carry out the other services.
Required:
Write a letter to the management, briefly explaining the reasons for refusal to accept the other assignments. (07)
(ICAP, CFAP 06 Level – Winter 2007)

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Q.31 The Credit Manager of one of your audit clients has left without giving any notice. His responsibilities included
maintenance and distribution of management information reports and participation as a member of credit committee.
The said client has requested your firm to allocate one of your staff members, for a period of two months, to take up the
responsibilities of Credit Manager. Your firm deals in such kind of assignments for non-audit clients.
Mr. RMP, the Risk Management Partner, has been requested to advise the firm on the above stated engagement.
Required:
Draft a memo on behalf of Mr. RMP clearly indicating whether and under what conditions the firm can accept the above
assignment under each of the following situations:
(a) the client is an unlisted company;
(b) the client is a listed company. (10)
(ICAP, CFAP 06 Level – Summer 2007)

Q.32 The Management of Fine (Pvt) Limited sent a letter to the statutory auditor of the company along with following
statement and notes:
Statement of Receipts and Payments
For the year ended 31 December 2006
Rs. in million
Bank balance as 1 January 2006 50
Add: receipts from customers and shareholders 150
200
Less: - Payment against purchases 90
- Salaries paid 50
- Other expenses paid 20
160
Bank balance as 31 December 2006 40
Notes to the Statement of Receipts and Payments:
1. During the year company issued further shares of Rs. 100 million.
2. Payments against purchases and other expenses are made through cheques and nothing was outstanding at the end of
the year.
3. All goods purchased have been sold and all debts have been collected before the year end.

The audit firm has appointed you as job in-charge to audit the financial statements of the company. Following information
has also been made available to you:
(i) There are only five shareholders in the company having close family relationship with each other and they are
supervising the entire business activity themselves.
(ii) The company is engaged in sales and after sale services of a large number of products.
(iii) Payments against purchases and other expenses are made through cheques except the payments of some
insignificant amounts.
(iv) The system of accounting and management information is reasonably sophisticated. However, the management does
not apply some of the important internal controls due to its direct involvement in business operations.

The chief executive of the company has requested that since management lacks accounting knowledge, the receipt and
payment statement may be treated as the financial statements or alternatively, a summary balance sheet and profit and
loss account may be prepared by the auditor. He has justified his request on the ground that user group is extremely
limited and is itself involved in the management of the company.
Required:
Discuss the following with appropriate explanations:
(a) What should be the response to the Chief Executive’s request;
(b) Essential matters to be dealt at engagement stage; and
(c) Internal controls of the company. (12)
(ICAP, CFAP 06 Level – Summer 2007)

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 ISAs – Application Guide Code of Ethics

Q.33 Mr. Kay, the audit partner of JKL & Co. Chartered Accountants, came across the following matters relating to the trainee
students of the firm;
- They freely discuss information of one client with other clients unless client specifically requests for confidentiality.
- One trainee disclosed some key information of an ex-client to his friends outside the firm, which probably were used by
them for their personal benefit. However, the trainee himself had not used such information in any way.
- Another trainee supplied certain information to one of the lawyers of the client. However, he had obtained prior written
permission from the said client.
To address the issues relating to confidentiality Mr. Kay decided to hold a training session for trainee students. As the
audit manager, you are required to make a presentation covering the following points;
(a) Principles of confidentiality. (04)
(b) Any breach of such principles with relation to given instances. (03)
(c) Examples of circumstances when disclosure of information of a client is considered to be in order. (03)
(ICAP, CFAP 06 Level – Winter 2006)

Q.34 A private limited company with paid up capital of Rs. 25 million has outsourced its internal audit department for a period
of 3 years to a professional firm of chartered accountants, Shams Qamer & Co., during the year ended 31 December 2005.
According to the ‘Outsourcing Agreement’, if the management changes the internal auditor before expiry of 3 years, the
management would pay a compensation of Rs. 1.00 million to Shams Qamer & Co.
Before holding an annual general meeting for the year, the company received a notice from a member of the company for
change of external auditors and also proposed the name of Shams Qamer & Co. for the same.
The management is confused whether internal auditor can also be appointed as external auditor of the company.
Therefore, management contacted you for seeking your opinion in this respect.
Advise the management with reference to ISA on the subject and the Code of Ethics issued by Institute of Chartered
Accountants of Pakistan as to whether Shams Qamer & Co. engaged as internal auditors can also be appointed as external
auditors of the company simultaneously. (07)
(ICAP, CFAP 06 Level – Summer 2006)

Q.35 State Street Limited (SSL) is a public limited company. Their external auditors are Mohammad Din & Co., Chartered
Accountants. They are also providing taxation services to SSL. You are working as Manager Audit on the above
engagement. You came to know that your firm’s tax services department has agreed with the management of SSL to
represent the Company before the taxation authorities in respect of an appeal filed by them involving substantial amount
of tax demand. In consideration thereof, the tax department will charge ten percent of the amount of tax relief that may be
allowed.
As an audit engagement manager you are not comfortable with the above arrangement as it may impair independence of
the Firm. You are required to put forward a note before the audit engagement partner highlighting the guidance provided
in the Code of Ethics as issued by the Institute of Chartered Accountants of Pakistan in respect of contingent fees charged
to clients for assurance and nonassurance services. (06)
(ICAP, CFAP 06 Level – Summer 2006)

Q.36 Your firm has been approached by the management of Fox Limited, a listed company for the year ending 31 December
2005 in the month of November 2005 to fill the casual vacancy of the auditors. The audit fee fixed for outgoing auditors
was Rs. 1,000,000. You are willing to accept the engagement on the same remuneration. In view of the lower expected
profit of Rs. 5 million only for the year ended 31 December 2005, the management is of the view that the audit fee is too
high because it represents 20 percent of the expected profit. The management offers you 10 percent of the actual profit
for the year ended 31 December 2005.
Would you accept the audit on the terms of remuneration offered by the management? Please give reasons for your
response. (05)
(ICAP, CFAP 06 Level – Winter 2005)

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Q.37 You are the partner of Shahab & Co., Chartered Accountants. One of your audit clients, Independence Limited, a listed
company has approached you with the intention of engaging your firm for some other assignments which are as follows:
(a) Rendering of accountancy services
(b) Taxation services
(c) Conducting agreed upon procedures
(d) Financial due diligence for acquisition of a company
(e) Actuarial valuation of employment benefits
(f) Human resource consulting
(g) Legal opinion on labour laws
(h) Training of the Board of Directors
(i) Outsourcing of internal audit function to your firm
(j) Assistance in preparation of disaster recovery plan

Which of the assignments can be accepted by your firm in the light of restrictions placed under the Code of Ethics for
Chartered Accountants. (05)
(ICAP, CFAP 06 Level – Summer 2005)

Q.38 Zaid a fresh qualified chartered accountant has recently established his practice in the name of Zaid & Co., chartered
accountants. He is continuously trying to expand his practice and in the process he came across the following situations:

(a) One of the Zaid’s close friends, Ahmed, who is in retail business advises him that he should take support of media for
the purpose of publicity of his new practice to attract clients. He gave him the example how he managed to increase his
sales through media advertisement. (02)

(b) Clever Ltd., an owner managed company asks Zaid that they are willing to appoint him in the forthcoming annual
general meeting (AGM) of the company in place of the existing auditors, if he can quote fee which is 50% of the existing
audit fee. Zaid believes that keeping in view the estimated time required for audit and the fact that he needs business, it
will still be a profitable job. (02)

(c) Zaid receives an offer of appointment as auditors from Famous Limited, a listed company who wants to remove the
existing auditors before completion of their term of office. (02)

Keeping in view the sensitivities of the above matters, Zaid seeks your advice. Being a good friend of Zaid, belonging to the
same profession, advise him in each of the above keeping professional ethics in view.
(ICAP, CFAP 06 Level – Winter 2001)

Q.39 A friend of yours, Iqbal, is a qualified Chartered Accountant, practicing as a partner in a firm of Chartered Accountants.
Because of your relationship with him, you are aware that he has invested a substantial amount of his savings in a
company owned by one of his clients. A common friend, who happens to be a broker by profession, recently took you into
confidence and informed you that Iqbal had passed on to him some confidential information about this company where
Iqbal had invested his savings. As a result of this information, your broker friend was able to influence the price of the
share of this company in the local stock exchange due to which the price escalated, resulting in a considerable
appreciation in the value of shares owned by Iqbal.

Iqbal has indulged in such activities more than often and appears to have a reputation of not being straight forward in his
dealings with clients and have been careless in rendering services thereto to the point that at times he shows up to work
at the last minute to initial his report , generally finalized by his staff.

Recently, he has been accused of being completely out of touch with the latest developments in the profession and is least
bothered about it. In fact, he has been found to have openly carried out activities which you regard as highly
objectionable.

Required:
Identify and discuss the Fundamental Principles which Iqbal has failed to observe in order to achieve the objectives of the
accountancy profession. (10)
(ICAP, CFAP 06 Level – Summer 2001)

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SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1
MCQ # Correct Option
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
(xvi)
(xvii)
(xviii)

CONCEPT REVIEW QUESTIONS

CONCEPT APPLICATION QUESTIONS

Q.1 Since such a current interest or relationship cannot reasonably be terminated by the effective date of the acquisition, the
firm shall evaluate the self-review threat.

The financial statements of BL and PL would be consolidated and the firm would have to review its own work.
Furthermore, PL and BL would now be related entities and the restriction imposed by the code of ethics on PL would also
be applicable on BL.

The firm shall discuss with those charged with governance the reasons why the interest cannot reasonably be terminated
by the effective date of the acquisition and the evaluation of the significance of the threat.

If those charged with governance request the firm to continue as an auditor, the firm shall do so only if:
 the interest or relationship will be terminated as soon as reasonably possible and in all cases within six months
of the effective date of the acquisition.
 any individual who performed that non-assurance service should not be made part of the audit team.
 a chartered accountant review the audit work as appropriate
 a chartered accountant, who is not a member of the firm expressing the opinion on the financial statements,
perform a review that is equivalent to an engagement quality control review
 another firm is engaged to evaluate the results of the non-assurance service or another firm is engaged to
reproduce the non-assurance service to the extent necessary to enable it to take responsibility of the service.

Q.2 Code of ethics requires that an individual shall not be a key audit partner for more than seven years unless the law
prescribes a shorter period. Since Pakistan law i.e. code of corporate governance requires rotation of engagement partner
after 5 years, the requirements of Pakistan law will apply.

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Code of ethics also requires that after such time, the individual shall not be a member of the engagement team or be a key
audit partner for the client for two years. The code defines key audit partner as the engagement partner, individual
responsible for engagement quality control review partner and other partners who make key decision or judgements on
significant matters with respect to the audit of the financial statements.

Considering the above, Haris cannot be appointed as engagement partner or quality control partner.

Appointment as Client Relationship Partner

If Haris would be in a high level contact with the management or the audit committee, there is a possibility that he would
be able to directly influence the outcome of the engagement. In such a case he could not be appointed as client
relationship partner.

However, code of ethics allows an additional year to a key audit partner only in rare circumstances outside the firms
control whose continuity is especially important as long as the threat to independence can be eliminated or reduced to an
acceptable level by applying safeguards.

Examiners’ Comments: Passing Percentage = 18%

Instead of linking the requirements of Code of Corporate Governance (CCG) and Code of Ethics (CE) while arriving at the
conclusion regarding the appointment, examinees arrived at two separate conclusion i.e. one under CCG and other under CE.

Q.3 (a) Under the code of ethics, the firm could not have accepted the valuation service, had the valuation service been
requested after the appointment as auditors, However, since the valuation service was provided prior to appointment as
auditors, the audit engagement could be accepted.

A self-review threat would be created because the amount is material to the financial statements, is highly subjective and
is included in the financial statements of the period which the firm will subsequently audit.
In order to reduce the threat to an acceptable level the following safeguards should be applied:
 Not including personnel who provided the non-assurance service in the audit team.
 Having a chartered accountant to review the audit and the valuation as appropriate
 Engaging another firm to evaluate the results of the valuation engagement or having another firm to re-perform
the non-assurance service to the extent necessary to enable it to take responsibility for the service.

(b) A threat to objectivity or confidentiality may be created when a chartered accountant in practice performs services for
clients that are in dispute with each other.

Following safeguards should be considered and applied as necessary to eliminate or reduce the threats to an acceptable
level:
 The use of separate engagement teams.
 Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential and
secure data filing).
 The use of confidentiality agreements signed by employees and partners of the firm.
 Regular review of the application of safeguards by a senior individual not involved with relevant client
engagement.
 Having a chartered accountant who is not involved in providing the service review the work performed to assess
whether the key judgements and conclusions are appropriate.
 Consulting with third parties, such as professional body, legal counsel, etc.
 Disclose the nature of conflict of interest and the related safeguards to the clients in litigation.
 Where a conflict of interest poses a threat to one or more of the fundamental principles, including objectivity,
confidentiality or professional behavior, that cannot be eliminated or reduced to an acceptable level through the
application of safeguards, the chartered accountant may withdraw from the engagement.

Marking Scheme: Mark(s)

(a)
 Discussion regarding acceptability of the engagement  1.5
 Identification of the relevant threat  0.5
 Evaluation of the significance of threat  1.0

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 ISAs – Application Guide Code of Ethics

 01 mark for each related safeguard  3.0

(b)
 Identification of threat  1.0
 Up to 01 mark for each related safeguard  5.0

Examiners’ Comments:
This question was based on code of ethics for Chartered Accountants. The question consisted of two parts. The overall
performance was satisfactory as 50% candidates secured passing marks. Part wise performance is discussed below:
Question 5(a)
According to the given scenario, a firm of chartered accountants was offered appointment as auditors by a company whereas
the firm had been previously involved in the valuation of the company’s investment in an unlisted company. The requirement
was to discuss whether the firm could accept the appointment and the threats involved.
The performance in this part was not satisfactory as majority of the students did not pay attention to the fact that valuation
service was provided prior to appointment as auditor so the appointment could have been accepted. Consequently, they also
did not mention the correct safeguards as they concluded that no safeguards can reduce the threat to an acceptable level.
Question 5(b)
According to the given scenario, two clients of an audit firm were involved in major litigations. The requirement was to
identify the threats in the given situation and the related safeguards.
This part was attempted well as most of the students mentioned the correct threats i.e. objectivity and confidentiality; and
the related safeguards.

Q.4 Holding a financial interest in an audit client may create a self-interest threat. However, the significance of the threat may
vary in different circumstances, each of which is discussed below:

Rashid
Even though Rashid does not have any financial interest in HL. However, his wife being an immediate family member
holds an indirect financial interest, since she beneficially owns shares in HL through a collective investment trust.

It needs to be assessed whether the amount invested in the mutual fund is material to her. If yes, a self-interest threat
would be created. Then the firm should not accept the assignment unless the units of mutual fund are disposed of or a
sufficient amount is disposed of so that the remaining amount is no longer material.

Zahid
Since HL owns 20% shares in TL, HL can exercise significant influence over TL. However, the materiality of the interest
both for HL in TL and Zahid in TL needs to be evaluated. In case the financial interest is material to any of the parties the
threat created would be so significant that it can only be reduced if Zahid disposes of his entire shareholding or reduces it
to such an extent that it no longer remains material.

Ali & Ovais:

Persons performing quality control for the engagement or providing consultation regarding technical issues for the
engagement are also included in the audit team.

A self-interest threat may be created due to Ali’s holding of shares in the holding company of HL if the investment in HL is
material to AL. If the investment are material to AL then firm should not appoint Ali as the engagement quality control
partner unless he disposes of his entire investment.

If Ovais’s son is not dependent on him, then NKC can accept the assignment. However, if Ovais is to be considered as the
tax advisory partner, then his son being a close family member, would have to dispose of all of his holding or a sufficient
amount is disposed of so that the remaining amount is no longer material, even if he is not dependent on Ovais. However,
if his son intends to retain the investment, then NKC should consider to have a chartered accountant review the work
performed by Ovais or remove Ovais from the team.

If Ovais’s son is dependent on him, then it would be a direct investment in an audit client by an immediate family member
and NKC could not accept the assignment, unless he disposes of all his investment.

Other employees:
Self-interest threat may be created, but it’s significance would depend on whether any of these individuals have any
relationship with the audit team and the firm’s organizational, operating and reporting structure.

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Depending upon the significance of the threat, NKC may:

 remove any audit team member who have any relationship with such an employee;
 exclude any such employee from any significant decision making; or
 have a chartered accountant review the work of such member of the audit team

Marking Scheme: Mark(s)

 Identification of threats  1.0
 Evaluation of the situation and significance of the threat in the case of:
- Rashid  2.5
- Zahid  2.5
- Ali & Ovais  2.5
- Other employees  1.5
 Discussion on available safeguards  5.0

Examiners’ Comments:
Code of Ethics is considered a favourite area of the students; however, in this attempt the performance was poor in this area
also. Only 17% of the candidates secured passing marks and about 20% of the candidates secured three or less marks in this
15 marks question.

Majority of the students were only able to obtain a few marks on the basis of their comments on shareholding of the
engagement partner’s wife’s. Most of the candidates tried to give generalised comments on the scenario as a whole instead of
analyzing each situation separately.

Many students did not consider the partners giving non-audit services as part of audit team and hence made incorrect
conclusions. Similarly, only a few students touched on the threats arising due to holdings of other employees as majority
concluded that no threats would arise due to holdings of other employees.

Q.5 (a)The discussion in the meeting with the management of Clover Limited (CL) highlights two aspects which would have
an impact on the ethical considerations:
(i)Outstanding fee
(ii)Reduction in fee
(i)Outstanding fee:
A self-interest threat may be created if fees due from an audit client remain unpaid for a longtime, especially if the review
fee is not paid before the issuance of the audit report for the year ended 31 December 2017.
Our firm should ensure that the outstanding fee is received as early as possible to avoid the above threat. In this regard
we should consider discussing this matter with the audit committee or those charged with governance.
If the fee remains unpaid, the existence and significance of any threat shall be evaluated and safeguards applied when
necessary to eliminate the threat or reduce it to an acceptable level. Such a safeguard is, having an additional chartered
accountant who did not take part in the audit engagement provide advice or review the work performed.
According to Code of Ethics, the overdue fee might even be regarded as being equivalent to a loan to the client and in case
the amount is considered significant, we may consider whether it is appropriate to continue the audit engagement.
(ii)Reduction in fee:
A self-interest threat to professional competence and due care is created if the fee quoted is so low' that it may be difficult
to perform the engagement with applicable technical and professional standards in that price.
Even though CL has closed one of its major product lines, it does not necessarily mean that quantum of work will
materially differ from the quantum of work carried out by us previously. Instead, because of the weak financial position of
the company, we may encounter more challenging audit areas that would require additional work and more extensive
areas of professional judgement and greater skepticism such as for determining impairment of assets and going concern,
etc.
In view of the above, we may agree to a reduction in fee only if we are satisfied that we would be able to perform all the
necessary procedures and there would be no undue pressure in this regard because of the reduction in fee.
Moreover, regardless of the audit fee, we should ensure that:
• adequate time is spent on the assignment; and
• audit personnel with sufficient expertise and experience are assigned to the job.
We should only accept management’s request of a reduction in fee, if we are able to ascertain that the quantum of work
will reduce accordingly.

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(b) Self-interest threat or intimidation threat may be created due to a close business relationship between a member of
the audit team’s immediate family and the audit client. The relationship of the audit senior and the clearing agent comes
under the definition of close family member instead of immediate family member. However, the code recognizes the fact
that it is impossible to define every situation, and there could be many variation in circumstances that create threats to
independence and can deter a Chartered Accountant from concluding that a situation is permitted if it is not specifically
prohibited.
Therefore, even though the clearing agent is not an immediate family member of the audit senior, our firm should
consider the possibility and significance of threats to the independence of the audit senior.
Depending upon the significance, we may also consider
• Removing the audit senior from the engagement team.
• Having a chartered accountant review the work of the audit senior.

Marking Scheme: Mark(s)

(a)
 Identification of threats  2.0
 Evaluation of the situation and significance of the threat  6.0
 Discussion on available safeguards  2.0
(b)
 Identification of threats  1.0
 Evaluation of the situation and significance of the threat  3.0
 Discussion on available safeguards  1.0

Examiners’ Comments:
This question contained two independent scenarios and the candidates were required to identify the threats involved and the
possible course of action to be adopted in each case. Though this should have been an easy question as this part of the
syllabus is regularly tested, yet the performance was even worse as only 18% of the candidates secured passing marks.
Comments on each scenario are given below:

(i) According to this scenario, a client which was in a weak financial position had failed to pay the audit fee for review of half
yearly accounts and the management had also requested the audit firm to give some relief as regards audit fee of current
year. The performance remained below average mainly because the students could not give appropriate comments on some
of the main issues as discussed below:
 With regard to non-payment of audit fee, the candidates generally could not specify an important step that the auditor
should bring the matter to the knowledge of the audit committee and/or those charged with governance. Moreover, it
was also important to assess the significance of the threat which was also missed by the majority. Furthermore, many
candidates mentioned about declining the engagement whereas according to the scenario it had already been accepted.
 With regard to reduction in fee, many students did not make any comment on the management’s contention that work
would reduce as a result of closure of plants. On the other hand, many students were completely in agreement with the
management’s view in this regard. They did not consider the other aspect of the situation i.e. closure of factories is also an
indication of weakening financial position because of which the auditor may have to face more challenges such as risk of
intentional misstatement and more issues involving professional judgment, such as impairment of assets and going
concern and therefore it was not necessary that closure of plants may result in reduction in work.
 A large number of students were of the incorrect view that audit fee cannot be reduced under any circumstances.

Q.6 (a) Our firm and Akbar Ali and Company are Network firms due to common quality control department and common
quality control policies and procedures.
The firm shall be independent of the audit client of the network firms, also.
Therefore, the provision of internal audit sendees will create a self-review threat to independence, in the same manner, as
if the assignment was taken by the firm itself.
Since our client is a public interest entity', we shall not provide the internal audit services relating to the following:
• A significant part of the internal controls over financial reporting.
• Financial accounting systems that generate information that is significant to the client’s accounting records or
financial statements on which the firm will express an opinion: or
• Amounts or disclosures that are material to the financial statements on which the firm will express an opinion.
The firm may accept the engagement except for the above mentioned internal audit service but it should ensure that it
does not get involved in management decision making.

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 ISAs – Application Guide Code of Ethics

If the firm gets involved in management decision making, the threat created would be so significant that no safeguards
would reduce the threat to an acceptable level.
(b) Due to close personal relationship between Sameer and Saqib, self-interest, familiarity and intimidation threats may
be created.
The threats are significant due to close personal relationship and managerial positions of Saqib and Sameer. The
significance will also depend on the interaction of Sameer with the assurance team;
Safeguards may include:
• structuring Sameer5 s responsibilities to reduce any potential influence over the assurance engagement; or
• having the relevant assurance work reviewed by a chartered accountant.

Marking Scheme: Mark(s)

(a)
 Up to 02 marks for discussing the requirements of independence in the network firms  2.0
 Identification of threat  1.0
 01 mark for stating each internal audit service not to be provided to a public interest entity  3.0
 Discussion on the need to avoid management responsibility  1.0
(b)
 Up to 01 mark for discussing each threat and its significance  2.0
 0.5 mark for stating each safeguard  1.0

Examiners’ Comments:
Part (a)
Common errors
1.The students did not understand that the two firms were network firms and therefore each firm would be subject to the
same independence requirement while accepting an assignment involving clients of the network firms, as would be applicable
in case of its own clients.
2. Those students who correctly identified that the two firms were network firm, declared that internal audit assignment
cannot be accepted which was not correct as internal audit assignments pertaining to some areas may still be accepted.
(Please refer suggested answer for further guidance).
Part (b)
Common errors:
1.There were two reasons for concern in the given situation i.e. Sameer’s close relationship with Saqib and their managerial
positions. Mostly, the students did not mention the second point.
2. Inappropriate safeguards were identified such as (i) ensure that Sameer does not have close relations with any of the audit
team members, (ii) ensure that other senior managers are also assigned to the job along with Sameer, etc.

Q.7 (a)
(i) As Jamal is associated with KL since last eleven years it will create a familiarity and self-interest threats.
The threats created are significant as:
 association of Jamal with KL is of 11 years;
 Jamal has a key/main role in the audit engagement of KL, being the engagement partner; and
 the engagement is a statutory audit.

Other factors on which the significance of threats will depend are:

 Structure of the firm;
 Whether the client’s management team has changed;
 Whether the nature or complexity of the client’s accounting and reporting issues has been changed.

(ii) As Jamal has served the audit client for six or more years when the KL becomes a listed company, however as per the
requirements of Code of Ethics Jamal can still continue to serve as an engagement partner for a maximum of two
additional years.

Further, Jamal can continue to serve as an engagement partner for more than the period specified, provided an
independent regulator has provided an exemption from partner rotation. If such an exemption is not provided then the
auditor should leave the audit engagement.

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(b)
Since the services comprise of reviews and recommendations (as quality assessment) for improvement of the client's
Internal Audit function and giving recommendations with respect to improving the structure of the internal audit
department and the quality of its staff, does not seem to involve any management decision or taking management
responsibility, therefore these are the allowed services under code of ethics and listing regulations.

However, if it appears that the recommendations are binding on management which may be the case if the management is
not competent to evaluate the recommendations or exercise its own judgment, then these services cannot be performed.

Marking Scheme: Mark(s)

(a)
(i)
 0.5 mark for identification of each threat  1.0
 01 mark for discussing each factor on which significance of threat would depend  5.0
(ii)
 Up to 02 marks for discussing the need of rotation, under each situation  3.0
(b)
 Evaluation of the situation  2.0
 Discussion on allowability of services under Code of ethics and listing regulations  1.0

Examiners’ Comments:
(a)The performance in this part of the question was satisfactory. The only point which caused confusion was that the
company had been listed during the current year only and hence the rotation of the partner was not necessary under the
given circumstances. Moreover, very few could comment on the second possibility i.e. where firm was unable to find suitable
replacement. The candidates are advised to seek further guidance in respect of this question from ICAP’s suggested answers.
(b)According to the scenario in this part of the question, a firm has received a request from one of its audit clients to evaluate
the internal audit function and give recommendations for improvement. The performance was below average as most of the
students were unable to realize that since the work did not involve any management decision or taking management
responsibility, therefore it comes under the purview of allowed services under the code of ethics and listing regulations.

Q.8 (a)Self-interest, familiarity or intimidation threats may be created due to a personal relationship between the partner and
the finance controller of TL.
The existence and significance of any threat will depend on factors such as:
 The nature of the relationship between the partner and the finance controller;
 The interaction of the partner with the assurance team;
The significance of any threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce
it to an acceptable level. Examples of such safeguards include:
 Structuring the partner's responsibilities to reduce any potential influence of the partner over the assurance
engagement; or engagement team.
 Having a chartered accountant review the relevant assurance work performed.
(b)The interest of relevant partner and Javed Limited, with respect to Kamran Limited are in conflict and it will create a
threat to objectivity.
The firm is required to evaluate:
 the significance of relevant interest or relationships.
 the significance of the threats created by performing the professional services.
The following safeguards shall be applied to reduce the threats to an acceptable level:
 Closely monitor the implementation of policies within the firm with regard to procedures to limit access to client files,
the use of confidentiality agreements and/or the physical and electronic separation of confidential information.
 Regular review of the application of safeguards by a senior individual not involved with the client engagement or
engagements.
 Having a chartered accountant who is not involved in providing the service or otherwise affected by the conflict, review
the work performed to assess whether the key judgments and conclusions are appropriate.
 Consulting with third parties, such as a professional body, legal counsel or another chartered accountant.

Marking Scheme: Mark(s)

(a)

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 0.5 mark for identification of each threat  1.5

 Up to 01 mark for mentioning each factor on which significance of threat would depend on  1.5
 01 mark for suggesting each safeguard  2.0
(b)
 Identification of threat and discussion thereon  1.0
 Discussion on evaluation of significance of relationships and threats  1.0
 Up to 01 mark for discussion on application of each safeguard  3.0

Examiners’ Comments:
This was a relatively well answered question. The answer for this question was directly from the code of ethics so the students
who have gone through the study material were able to score very good marks. However, in part (b), instead of appreciating
conflict of interest and threat to objectivity, a number of students mentioned self-interest threat and in some cases
intimidation threat. Moreover, a large number of students stated that the spouse of the partner must liquidate her
shareholding.

Q.9 (a) After the acquisition, HL has become related entity of NL and as per the Code of Ethics, reference to Audit Client
includes reference to its related entities. Therefore after the acquisition, the partner holds direct financial interest in a
related entity and it would create a self-interest threat.
As the amount of holding is material to the partner and NL can exercise significant influence over HL, the self-interest
threat created would be so significant that no safeguards could reduce the threat to an acceptable level.
However, as 85% of the audit work has been completed, the remaining work can be completed in a short period of time
and, in such case if those charged with governance request the firm to complete the audit without disposing off the
interest, the firm can continue the engagement provided that the firm:
 Discusses the evaluation of threat with those charged with governance.
 Ensures that relevant partner is not the member of the audit team nor the partner responsible for engagement quality
control review.
 Has deputed a Chartered Accountant to review the audit work.
 Has deputed another Chartered Accountant, other than the members of the audit team, to perform a review that is
equivalent to engagement quality control review.
(b) A self-interest threat is created when a member of the audit team is evaluated on or compensated for selling non-
assurance services to the audit client.
The significance of the threat will depend on:
 The proportion of the individual’s compensation or performance evaluation that is based on the sale of such services;
 The role of the individual on the audit team; and
 Whether promotion decisions are influenced by the sale of such services. The significance of the threat shall be
evaluated and, if the threat cannot be reduced to an acceptable level, the firm shall either revise the compensation plan or
evaluation process for that individual or apply safeguards to eliminate the threat or reduce it to an acceptable level.
Examples of such safeguards include:
 Removing such members from the audit team; or
 Having a Chartered Accountant review the work of the member of the audit team.
(c) Accepting of assignment from Zaheer Limited will result in conflict of interest, which will result in threat to objectivity.
Significance of threat need to be evaluated and relevant safeguards should be applied to reduce the threats to an
acceptable level. Such safeguards may include:
 Implementing mechanisms to prevent unauthorized disclosure of confidential information as the interests of the two
clients may be are in conflict. This could include:
° Using separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality.
° Creating separate areas of practice for separate functions within the firm, which may act as a barrier to passing of
confidential client information from one practice area to another within a firm.
° Establishing policies and procedures to limit access to client files, the use of confidentiality agreements signed by
employees and partners of the firm and/or the physical and electronic separation of confidential information.
 Obtaining consent from Javed Limited, relating to acceptance of assignment from ZL.
 Regular review of the application of safeguards by a senior individual not involved with the two engagements.
 Requiring a chartered accountant who is not involved in providing the services or otherwise affected by the conflict, to
review the work performed to assess whether the key judgments and conclusions are appropriate.
 Consulting with third parties, such as a professional body, legal counsel or another Chartered Accountant.

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Marking Scheme: Mark(s)

(a)
 Identification of threat and discussion thereon  2.0
 Discussion on materiality and significant influence  2.0
 Discussion on continuation of audit engagement with safeguards  4.0
(b)
 Identification of threat and discussion thereon  1.0
 Factors on which significance of threat would depend  3.0
 Evaluation of threat along with discussion on application of safeguards  2.0
(c)
 Identification of threat and discussion thereon  1.0
 Evaluation of threat along with discussion on application of safeguards  6.0

Examiners’ Comments:
This question required the candidates to give their views on three outlined situations in the light of the principle of
independence applicable to an auditor. Comments on each of the three parts are provided below:
(a)The performance in this part was average. Many students lost marks by mentioning only that partner should dispose of
shares immediately or firm should not accept the assignment. They ignored the fact that since 85% of the work had been
completed, if those charged with governance request the auditor to continue with the engagement then the auditor could
have continued with his appointment by applying certain safeguards. Further, most students who recommended immediate
disposal of shares, did not consider that in the question it was specifically stated that the shares can not readily be sold.
Further, many students kept referring to Companies Ordinance which was not relevant.
(b)This aspect of the code was tested for the first time and therefore either the students scored very high marks or no marks
at all. Most of the students seemed unaware of the given type of situation and produced wayward answers.
(c)This was a relatively straightforward question from the code of ethics and most of the students were able to secure good
marks.

Q.10 (a) Partner’s brother in law has joined as CFO:

 Partner’s brother in law does not come under the definition of close or immediate family member.
 However, this may be perceived as a close personal relationship in our society and it would threaten the perceived
independence (independence in appearance) of the engagement partner.
 The close relationship between engagement partner & CFO may give rise to self interest familiarity and intimidation
threats.
 The appropriate safeguard would be to rotate the partner and do not allow him to involve in any matter pertaining to
that client.
 In case no other partner is available then it would be better to withdraw from the engagement.
(b) Verify results of award competition
 If the award competition materially affects the information/results of financial statements, self review threat may be
created.
Significance of threat need to be evaluated that whether the award competition is material to the audit client and to what
extent affects the figures appearing in the financial statements.
 If the threat is significant then the assignment should be declined.
(c) The threat involved in this situation is self-review threat.
The following safeguards can be applied to reduce the threat to an acceptable level: it may
 Obtaining client approval for any proposed adjustments/ avoid managerial decision making.
 Requiring the underlying assumptions / source data for accounting to be originated and approved by the audit client.
 Having a qualified person, who is not a member of the audit team, take responsibility for performing the non-audit
services
 Establishing procedures and policies to guide persons performing such services

Examiners’ Comments:
This question required the candidates to give their views on three outlined situations in the light of the principle of
independence applicable to an auditor. Comments on each of the three parts are provided below:
(a) Majority of the students rightly identified the threats involved and actions that should be taken. However, a large number
of students could not explain that partner’s brother in law does not come under the definition of close or immediate family
member, although, this may be perceived as a close personal relationship in our society and accordingly it would threaten the
perceived independence of the engagement partner.

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(b) Majority of the students either did not attempt this part or mentioned that there is no threat in accepting this assignment.
Very few of them were able to discuss the possibility of impact on the financial statements.
(c) The response of this situation was good and most of the candidates were able to identify the self-review threat and the
relevant safeguards. However, some students wasted time in explaining the threats instead of stating the relevant safeguards.

Q.11 Deleted.

Q.12 (a) Threats:

The firm should ensure that while giving advice to the audit client, it does not commit the client to the terms of the
transaction or consummate transaction on behalf of a client.
If the advice to the client involves any of the above acts, then the firm should not accept such an engagement, because
accepting such an engagement would create a threat to independence that are so significant that no safeguard could
reduce the threat to an acceptable level.
After considering the above, if the assignment relating to the advice on the financing arrangement is accepted then it
would still create threats to advocacy and self review threat.
Safeguards that should be considered include:
 Policies and procedures to prohibit individuals assisting the assurance client from making managerial decision on behalf
of the client;
 Using professionals who are not members of the assurance team to provide the service; and
(b) If the audit client intends to enter into financing arrangement with the financial institutions which are also your audit
clients, this will not create any conflict of interest as obtaining loan from bank does not produce any apparent conflict of
interest between the client and the bank.
A conflict of interest might exist between two financial institutions, which are providing the finance, but as your firm is
not providing the said service to these institutions, hence no threat will be created and this assignment can be accepted.
However the confidentiality requirements and relevant safeguards should be considered while carrying out the said
assignment.

Examiners’ Comments:
(a)According to the given scenario, the auditor had been asked to provide advice to assist the client in selecting one of the
three financial institutions who had offered credit facilities to the client. Most of the candidates scored well in this question
and correctly identified the threats, namely self-review and advocacy threats as well as the course of action required.
(b)In this part the candidates were required to explain whether conflict of interest would arise if two of the three financial
institutions with whom the matter referred to in (a) above was being negotiated, were clients of the audit firm. Most of
students did not score any marks as they believed that a conflict of interest did exist. In fact, the conflict existed between the
financial institutions but these were of no relevance as the firm was not providing the said service to financial institutions.
Further, very few students mentioned about safeguards related to maintenance of confidentiality.

Q.13 Acting as an intermediary between the prospective buyers and the client, negotiating the payment terms, making
arrangements for securing payments and ultimately making disbursements to the group of shareholders to a non-audit
assurance client, will involve two aspects, i.e.
(i) Provision of advisory services
(ii) Having custody of JL Assets
(i) Provision of advisory services
Self review threat and threat to independence would arise if services performed by your firm affect the subject matter
information of assurance engagement performed by your firm. The significance of threats created should be evaluated
and if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce it
to an acceptable level, which may include:
 Policies and procedures to prohibit professional staff from making management decision or assuming management
responsibility for such decision.
 Discussing independence issues related to the provision of non assurance services and nature and extent of fees
charged, with those charged with governance, such as audit committee.
 Policies within the assurance client regarding the oversight responsibility for provision of non-assurance services by the
firm.
 Involving an additional chartered accountant to advice on the potential impact of the non-assurance engagement on the
independence of the member of the assurance team.
 Involving an additional chartered accountant outside of the firm to provide assurance on a discrete aspect of the
assurance engagement.
 Obtaining the assurance client’s acknowledgement of responsibility for the results of the work performed by the firm.
 Making arrangements so that personnel providing non-assurance services do not participate in the assurance
engagement.

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(ii) Having custody of JL Assets

While taking up the assignment, we should consider whether taking custody of client’s assets is permitted by law. Even if
the law allows, it will still create a self interest threat to professional behavior and may be a self interest threat to
objectivity.
To safeguard against the threats identified, we should,
 keep such money separately from firm assets;
 use such money only for the purpose for which they are intended;
 at all times, be ready to account for the money received, and any income, dividends or gains generated, to any persons
entitled to such accounting;
 comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.
We should be aware of threats to compliance with the fundamental principles through association of such assets. For
example, money derived from illegal activities. In order to safeguard against these threats, we should:
make appropriate inquiries about the source of such assets;
 consider their legal and regulatory obligations.
 seek legal advice.

Examiners’ Comments:
This question required the students to identify the threats involved when a chartered accountant in practice acts as an
intermediary between prospective buyers and the client, negotiating payment terms, securing payments, etc. The students
were expected to identify the two main aspects giving rise to the threats, namely, the provision of advisory services (that may
result in self-review threat and threat to independence), and having custody of assets (resulting in self-interest threats to
professional behavior and objectivity).
There was a mixed response from students with some identifying both aspects and the related threats and others identifying
only one. However, almost all those who identified the threats correctly were also able to state the professional
responsibilities and procedures required from the auditor.
Some students did not segregate their answers amongst the two issues and tried to provide a combined answer which
resulted in various errors and omissions.

Q.14 (a) Supervising employees of assurance client in the performance of their normal recurring activities may create self
review or self interest threats.
The significance of threats should be evaluated and if the threat is other than clearly insignificant, safeguards should be
considered and applied as necessary to eliminate the threat or reduce to an acceptable level. Such safeguards might
include:
 Making arrangement so that personnel providing such services do not participate in the assurance engagement;
 Involving an additional chartered accountant to advise on the potential impact of the activities on the independence of
the firm and the assurance team;
(b) The listing regulations clearly stipulate that prohibited services by the auditors include financial information
technology system design and implementation, significant to overall financial statements.
However, if the auditor concludes that it is not significant to overall financial statements and is therefore permissible
under the listing regulations, the situation would need to be assessed from the point of view of Code of Ethics, which
states that:
The provision of services involving design and implementation of information systems that are used to generate
information forming part of financial statements may create a self review threat.
The self-review threat is likely to be too significant to allow the provision of such services to a financial statement audit
client unless appropriate safeguards are put in place ensuring that;
 The audit client acknowledges its responsibility for establishing and monitoring the system of internal controls;
 The audit client designates a competent employee preferably in the senior management cadre, with the responsibility
to make all management decisions with respect to the design and implementation of the hardware or software system;
 The audit client evaluates the adequacy and result of the design and implementation of the system; and
 The audit client is responsible for the operation of the system (hardware or software) and the data used or generated
by the system.
Consideration should also be given to whether such non-assurance services should be provided only by personnel not
involved in the financial statement audit engagement and with different reporting lines within the firm.
(c) Involvement of audit personnel and guidance to client on accounting principles are an appropriate means to promote
the fair presentation of financial statements and the audit process routinely requires dialogue between the firm and
management of the audit client and such types of activities are considered to be a normal part of the audit process and do
not, generally, create threats to independence Self-review threat will be involved in above situation, if the auditor
assumes management responsibility while providing guidance to the client’s management.
Safeguards should be applied to prevent the auditor from assuming management responsibility when providing advice.
Safeguards could include:

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 Obtaining acknowledgement of responsibility from the client for any actions or decisions made.
 Evaluating the ultimate decision of the client and ensuring that the reasons for their decisions are self-determined
 The risk is further reduced when the firm gives the client the opportunity to make judgments and decisions based on an
objective and transparent analysis and presentation of the issues.

Examiners’ Comments:
This question consisted of three parts and required the candidates to evaluate the threats and specify measures to reduce the
risk to acceptable level in three outlined situations. A review of the students response in each part is presented below:
(a)In this case, the manager of an audit firm was assigned to train the staff of an assurance client. In most of the cases only
self review threat was identified whereas very few could identify the self-interest threat. A number of candidates were of the
opinion that no threat was involved in this situation.
(b)In this part many students missed the fact that listed companies regulations clearly stipulate that prohibited services
include financial information technology system design and implementation and such services can only be undertaken if the
auditor concludes that it is not significant to overall financial statements.
(c)According to the scenario in this part, an audit manager had helped the client, though voluntarily, in the application of
accounting standards. Majority of the students were able to identify self-review threat in case the audit manager becomes
involved in management decision making, however, they were unable to mention the relevant safeguards as per the
requirements of Code of Ethics.

Q.15 (a)
(i) New Auditor’s (ABC and Company) responsibility before acceptance of audit:
 ABC and Company should consider whether the acceptance of new client would create any threats to compliance with
fundamental principles.
 Evaluate significance of threats before accepting the audit engagement. If the threats are other than clearly insignificant,
safeguards should be considered and applied as necessary, to eliminate them or reduce them to an acceptable level.
 Communicate with the retiring auditor to establish the facts and circumstances behind the proposed change, however,
before communicating it shall seek permission of the client for such communication.
 Comply with relevant legal and other regulations in communicating with retiring auditor.
(ii) Retiring Auditor’s responsibility:
Retiring auditor is responsible to respond to any communication by the incoming auditor. However, before giving any
information about the client, he should seek client’s permission.
While communicating with the auditor, the retiring auditor need to meet the legal and ethical requirements related to
such communication and disclosure.
The retiring auditor should promptly transfer to the new auditor all books and papers related to SL, which may be held
after the appointment has been effected and should also advise SL accordingly.
Incoming Auditor’s Course of action if SL and retiring auditor donot fulfill their responsibility:
In case ABC and Company is unable to communicate with the retiring auditor due to any reason, it should try to obtain
information about any possible threats by other means such as inquiries from third parties or background investigation of
senior management or those charged with governance.
If unable to reduce threats through alternative procedures, it may decline the engagement.

Examiners’ Comments:
(a)In this part, the candidates were required to specify:
• the steps that an auditor would take before signifying acceptance to act as the auditor of a company.
• the retiring auditors responsibility in such a situation; and
• the incoming auditor’s responsibility if the retiring auditor fails to fulfill its responsibilities.
Most of the candidates seemed to possess sound knowledge of these areas and performed well. However, a number of
candidates went into too much detail about client acceptance procedures and what information would be required before
acceptance. While explaining the retiring auditor’s responsibilities many candidates did not mention that the retiring auditor
shall take prior permission of the client before communicating with the incoming auditor and that he needs to comply with
any legal or other regulation during such communication.

Q.16 (a) When litigation takes place, or appears likely, between the firm or a member of the assurance team and the assurance
client, a self-interest or intimidation threat may be created. The significance of the threat created will depend upon
materiality of the litigation. In this regard, the following steps may be undertaken:
 Disclosing to the audit committee or others charged with governance, the extent and nature of litigation.

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 Involving an additional chartered accountant in the firm who was not a member of the assurance team to review the
work done or otherwise advise as necessary.
If the assurance team member knew about the suit filed and he does not disclose the fact to the firm then, it raises
questions related to independence and integrity of the assurance team member, and possible course of action, in
additions to the steps taken above may include:
 If the employee avoided declaring his interest by making an incorrect declaration, appropriate action should be taken
against him as per the firm’s policies.
 If no such declaration is required under the firms policies then the QCR policies of the firm need to be reviewed and
revised appropriately.
 Assurance member’s argument that he did not consider it necessary to disclose the matter is indicative of deficiency in
the training program of the firm and needs improvement.

(b) A threat to objectivity or confidentiality may be created when a chartered accountant in practice performs services for
clients that are in dispute with each other.
Significance of threats should be evaluated, if threats are other than clearly insignificant, following safeguards should be
considered and applied as necessary to eliminate them or reduce them to an acceptable level:
 Notifying the client of the firm’s business interest or activities that may represent a conflict of interest and obtaining
their consent to act in such circumstances; or
 Notifying all known relevant parties that the chartered accountant in practice is acting for two parties in respect of a
matter where their respective interests are in conflict, and obtaining their consent to do so; or
 Notifying the client that the chartered accountant in practice does not act exclusively for any one client in the provision
of proposed services and obtaining their consent to so act.
 The use of separate engagement teams; and
 Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential and secure data
filing); and
 Clear guidelines for members of the engagement team on issues of security and confidentiality.
 The use of confidentiality agreements signed by employees and partners of the firm; and
 Regular review of the application of safeguards by a senior individual not involved with relevant client engagement.
 Where a conflict of interest poses a threat to one or more of the fundamental principles, including objectivity,
confidentiality or professional behavior, that cannot be eliminated or reduced to an acceptable level through the
application of safeguards, the chartered accountant may resign from the engagement.

Examiners’ Comments:
(a)According to the situation given in this part, litigation between the client and a senior assurance team member was
discovered during finalization stage of the audit. On inquiry, the concerned member had informed that he knew of the
litigation but did not consider it necessary to disclose it. The candidates were required to discuss the matter and specify the
course of action that the firm may adopt.
Most of the students were able to identify the related threats, discuss the significance of the threat and the measures to
mitigate such threat. However, very few of them could look beyond that. They did not realize that the possible reason for
failure of the assurance team member to disclose the fact was important. His statement that he didn’t felt the need to disclose
this information was indicative of the fact that the firm had no policy in this regard or this policy was not clearly stated or
communicated to the staff. This aspect was not covered by majority of the students.
(b)According to the situation given in this part of the question, a firm was the auditor of two listed companies. One of the
companies had filed a claim of Rs. 50 million against the other company for supply of low quality products.
The performance in this part was good as majority of the candidates were able to fulfill the requirement of identifying the
related threats and the measures to mitigate such threats. Many candidates secured full marks also.

Q.17 (a) Investigation by tax authorities

 The tax authorities have launched an investigation against SL on suspicion of under-declaring income. This implies one
of the following:
 The financial statements are materially misstated.
 The tax return is misstated.
 The tax official’s suspicions are unjustified.
 The quality control partner may engage another chartered accountant to review the financial statements as well as the
tax return to investigate the allegations leveled against the client.
 If Financial Statements are Misstated:

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 Quality control partner may ask the engagement partner to review the situation and establish whether the financial
statements need to be revised.
 Quality Control Partner may like to know whether the mistake could have been avoided if the Quality control policies of
the firm had been followed.
 If there is a lapse on the part of the firm’s employees, appropriate action would be taken and the capacity of the
reviewer would also be questioned.
 If the mistake was such that it could not have been detected using the standard audit procedures of the firm, the firms
policies and procedures may be reviewed to ensure that weaknesses if any are properly addressed.
 If Tax Return are Misstated:
 If it is established that tax returns filed by NCC on behalf of the client are materially misstated then NCC should ensure
that proper remedial actions (such as revision of tax returns etc) are followed subsequent to the discovery of
misstatement.
 If the above actions are not taken by the client, the auditor should consider the firm’s legal responsibilities.
 In the case of error in the financial statement or the tax return, quality control partner would need to assess whether the
error was made intentionally by the management.
 If it is established that the misstatement was made intentionally the auditor would need to review whether it would be
appropriate to discontinue its relationship with the client.
(b) A close business relationship between a member of assurance team and the management of the client will involve a
common financial interest and may create self interest threat.
The materiality and significance of the financial interest, needs to be evaluated. If the financial interest is immaterial or
relationship is clearly insignificant then the audit trainee may be allowed to work on that client, otherwise only safeguard
available is to not to allocate that audit trainee on the client.
If the conduct of the trainee is not in accordance with the firm’s policies, appropriate action may be taken.
(c) The recruitment of finance director for JL may result in self interest, familiarity and intimidation threat.
The service to be provided shall not involve making management decision and the decision as to whom to hire should be
left to JL.
A threat to Objectivity will be created, because the recruitment team may become biased while dealing with the
applications of their former colleagues or if the recruitment team members know the employees of the clients who have
applied for the job.
Significance of threat should be evaluated and if the threat is other than clearly insignificant, safeguards should be
considered, which may include:
Use of separate engagement teams for the audit and recruitment procedure.
Procedures to prevent access to information (e.g. strict physical separation of audit and recruitment teams, confidential
and secure data filing); and
Clear guidelines for members of the engagement team and recruitment teams on issues of objectivity, confidentiality.
The use of confidentiality agreements to be signed by employees and partners of the firm.

Examiners’ Comments:
(a)According to the given situation, the tax authorities had launched investigation against an assurance client, who was also
being provided with tax services, by the same firm. The tax authorities had alleged that the client has under-declared its
income.
A very poor performance was witnessed in this question as most of the students discussed the issue of permissible and non-
permissible services under the Code of Ethics. Most of the students did not consider as to what else can go wrong in the given
situation, such as possibility of mis-statements in the financial statements or mis-statement in tax returns. Obviously, mis-
statement in either or both of the above documents would have warranted various actions by the auditors, which were mostly
missed.
(b)In the given scenario, a trainee who worked part time at a estate agency had helped the CEO of the assurance client in
purchasing a plot of land. In this part, most of the students identified the self interest threat correctly. However, they failed to
identify or discuss other important issues such as the materiality and significance of the financial interest involved and
whether the trainee’s conduct was in accordance with the firm’s policies.
(c)In this case, a Chartered Accountants firm was assigned to recruit a finance director and the applications received
included those from former employees of the firm as well as employees of existing clients. The performance was better as the
candidates were generally able to identify the threats involved and also mentioned some steps for reducing those threats to
an acceptable level. However, most students missed the following points:
• Use of separate teams for audit and recruitment procedures.
• Confidentiality of the assignment and procedures to prevent access to confidential information.

Q.18 (a)Threats Faced:

(i)Self Review Threat:
Since judgments and conclusions reached during the due diligence exercise needs to be reviewed again for the purpose of
the audit, there exists a self review threat.

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The situation is all the more complex on account of the fact that impairment in the value of these assets could not be
identified during the due diligence exercise.
(ii)Advocacy Threat:
The auditor has an interest in concluding that no impairment has taken place and the previous valuation (as per the due
diligence exercise) was correct. Hence there is an advocacy threat.
Safeguards:
On account of above threats, the staff who had participated in the due diligence work should not be made part of the audit
team.
Even if the audit is carried out by staff other than the staff who carried out the due diligence exercise, the firm may take
the following safeguards:
Involve an additional chartered accountant to review the work done or otherwise advise as necessary.
Consult an independent third party such as a professional regulatory body.
Involve another firm to perform or re-perform part of the engagement.
If the firm still wants to include the same team members, than besides the above safeguards the following additional
safeguards would be advisable:
Not assigning work to team members (who had participated in the earlier assignment) in the audit areas, which were
connected with the due diligence work.
Reviewing their work carefully.
Keeping the audit committee or those charged with governance of KL informed about the inclusion of the members in
the audit team that were involved in due diligence.
Assigning more senior staff to audit team than would be required if no such impairment in the value of assets had
occurred.
(b)By agreeing to perform the engagement at a lower fee than that charged by the predecessor firm, or quoted by other
firms, a self interest threat has been created.
Safeguards:
The self interest threat created may be reduced to an acceptable level if the firm is able to demonstrate that:
Appropriate time and qualified staff are assigned to the task.
All applicable assurance standards, guidelines and quality control procedure are being compiled with.

Examiners’ Comments:
This question required identification and evaluation of threats in two different situations and the mitigating factors to reduce
these threats to an acceptable level.
(a)This was an interesting situation whereby the annual audit was being performed by a firm which had also carried out a
due diligence exercise for the company in respect of acquisition of a subsidiary and that during the due diligence exercise, the
fact that the assets of the subsidiary were impaired, had not been identified.
Most of the students were able to identify the self review threat which was quite apparent and also suggested rightly that the
staff who had participated in the due diligence exercise should not form part of the audit team, but beyond that they were not
very sure.
The advocacy threat was rarely identified. Some of the students confused the scenario with a situation where services are
being provided to two entities both of which are clients.
(b)This part pertained to the acceptance of an assurance engagement at a fee which is lower than the fee charged by the
predecessor auditor. This was quite easy and was generally responded well and a significant number of students were able to
score full marks also.

Q.19 (a)Iqbal Limited:

(i)A threat to objectivity or confidentiality may be created when a Chartered Accountant in practice performs services for
clients whose interests are in conflict.
(ii)The above threat may be reduced to an acceptable level by taking the following steps:
Notifying both the parties that we are acting for both of them, and obtaining their consent to so act; and
The use of separate engagement teams; and
Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential and secure data
filing); and
Clear guidelines for members of the engagement team on issues of security and confidentiality; and
The use of confidentiality agreements signed by employees and partners of the firm; and
 Regular review of the application of safeguard by a senior individual not involved with relevant client engagements.
(b)JKL Limited:

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(i)A self-review threat may be created when the litigation support services provided to a financial statement audit client
include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the
financial statements.
The significance of any threat created will depend on:
The materiality of the amounts involved:
The degree of subjectivity inherent in the matter concerned;
(ii)Wiew and Company, should evaluate the significance of any threat created and, if the threat is other than clearly
insignificant, it should:
Inform JKL that the decision with regard to the filing of suit and all allied matters is at the sole discretion of its
management.
 The employees on the assignment should be clearly advised, not to participate in any managerial decision making.
The professional on this assignment should not be involved in the assurance engagement.
The involvement of others, such as independent experts should be considered, if necessary.

Examiners’ Comments:
In this question the students were supposed to identify the categories of threats involved in two different situations and
advise the possible cause of action for the practicing firm. Response to each situation is discussed below:
(a)Many students could not understand that in the given situation, the firm was serving two different clients with conflicting
interest. Being an open book examination, those students who were able to assess the situation correctly, mostly secured full
marks.
(b)In this part, most of the students were able to identify correctly that a self review threat has arisen in the situation.
Consequently, they were able to list all the key mitigating measures. However, many students were confused as between
litigation support services and legal services. They erroneously presumed that the services being provided by the firm were
legal services which are prohibited under CCG/listing regulations and therefore advised that the firm should refuse to
perform these services.

Q.20 (a)Circumstances in which the shares of KL can be purchased by BLT:

If BLT makes investment in shares of KL Mr. Mahmood may continue to act as the audit engagement partner of KL as well
as a Trustee in BLT, if:
Mr. Mahmood or any of his immediate family members is not a beneficiary of the trust; and
The value of shares purchased is not material to BLT (Trust); and
 Even after purchase of shares, BLT will not be able to exercise significant influence over the assurance client; and
Mr. Mahmood and the firm does not have significant influence over any investment decision involving a financial interest
in KL.
In case the answer to any of the above is in negative, the firm shall require that the shares held by the Trust are disposed
off or shall have to change the engagement partner.
(b)Circumstances And Actions:
If Mr. Mahmood has inadvertently not disclosed the fact about purchasing shares of KL and the shares are subsequently
purchased, the firm should take the following steps in order to ensure that the independence of the firm is not impaired:
In case where Mr. Mahmood discloses the fact regarding purchase of shares to the firm immediately after the purchase of
shares, the firm should require him to either ensure that the shares are sold by the Trust immediately. If that is not
possible, he should be removed from the engagement team.
In case where Mr. Mahmood does not discloses the fact regarding purchase of shares to the firm immediately after the
purchase of shares, the firm should consider involving an additional chartered accountant who did not take part in the
assurance engagement to review the work done by Mr. Mahmood.

Examiners’ Comments:
According to the situation given in the question, a trust intended to purchase shares in a listed company. The engagement
partner on the audit of that company was also a trustee in the said Trust and had informed the firm about his conflict of
interest in the given situation.
(a)In this part very few students could give a complete answer as to how the firm should deal with the above situation. Most
of them were unable to point out that the concerned partner may or may not continue to act simultaneously in both positions,
depending upon the existence or otherwise, of certain conditions. Most others could not correctly quote all the relevant
conditions.
(b)In this part, candidates were required to specify the procedures which the audit firm could follow if the concerned partner
fails to declare the fact inadvertently and the matter comes to the knowledge of the firm after the shares had been purchased.
It was hardly attempted by a few examinees and even very few among them could secure more than one or two marks.

Q.21 (i)Watto Limited

(a)A self review threat may be created if the results of the valuation carried out by the firm are required to be
incorporated in the client’s financial statements.

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(b)If the firm has carried out valuation of items material to the financial statements or the valuation involves a significant
degree of subjectivity, the firm would not be in a position to reduce the self review threat to an acceptable level by the
application of any safeguard, and should not accept the audit engagement.
(c)If the valuation services are not material either separately or in aggregate, or if they do not involve a significant degree
of subjectivity, the following actions may be taken to reduce the self review threat to an acceptable level:
Involve another chartered accountant who will not be a member of the assurance team, to review the work done or
provide necessary advice.
Obtain confirmation from the audit client about their understanding of the underlying assumptions of the valuation and
the methodology being used for valuation
Obtain approval of the client regarding use of the methodology and assumptions in the valuation.
Obtain the client’s acknowledgement of responsibility for the results of valuation services performed by the firm.
Ensure that personnel who had been providing such services do not participate in the audit engagement.
(ii)Babar Limited
If the allegation by the client that the Systems Auditor has compromised the information relating to the company’s
customers is correct, retaining the employee would pose similar threat at other clients also.
Therefore, we should immediately take the following actions:
(a) Remove the Systems Auditor from all jobs till the matter is investigated and the allegation is confirmed or refuted.
(b)If the System Auditor is found guilty, he shall be dismissed immediately.
(c)The above situation casts doubt about the firm’s recruitment and training policies. These would need to be reviewed
and re-evaluated.
(iii)Qamar Software Services:
(a)Receiving of a referral fees for referring the services of QSS to clients may create a self interest threat to objectivity,
professional competence and due care.
(b)It should be ensured that the arrangement between Pirzada and Company, Chartered Accountants and QSS, regarding
referral fees, is fully disclosed to the clients.

Examiners’ Comments:
The question required the students to give their comments on three different situations, each of which is discussed below:
(a)A firm which had been providing valuation services had been approached for appointment as auditor. The students were
expected to know that the response of the firm would be different depending upon whether the items being valued were
material to the financial statements or involved subjectivity or not. Most of the students could not elaborate in the desired
manner.
(b)In the given situation, a client had accused an audit team member of compromising company’s information to a
competitor.
Most of the students failed to notice that the allegation may or may not be true. Consequently, a structured response was
rarely witnessed as most of the students simply assumed that the staff member was guilty.
(c)Many students could correctly point out that referral fee can be accepted provided the matter is disclosed to the client. The
risks that may be associated with charging of referral fee in the given situation were also identified correctly.

Q.22 (i)Romeo Supermarket Limited:

Providing due diligence services to the client (RSL) whose interests are in conflict with your other assurance client (Juliet
Limited) in relation to the transaction in question may create a self review threat or threat to objectivity or confidentiality
or professional behavior.
However, the firm can provide such services provided it notifies JL of the firm’s business interest or activities that may
represent a conflict of interest, and obtains its consent for accepting the assignment. In such case the following safeguards
should also be considered:
The use of separate engagement teams;
Additional procedures to restrict access to confidential information to concerned personnel only.
Clear guidelines to members of the engagement team on issues of security and confidentiality;
The use of confidentiality agreements signed by employees and partners of the firm; and;
 Regular review of the application of safeguards by a senior individual not involved in relevant client engagements.
(ii)Sher Bano Limited:
Family and personal relationships between a member of the assurance team and SBL Director Marketing may create:
°threat to independence;
°self interest threat;
°familiarity threat; or
°intimidation threat
The significance of the above threat should be evaluated and the following safeguards should be considered to reduce
the threat to an acceptable level:
°Removing the individual from the assurance team;

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°Where possible, structuring the responsibilities of the assurance team so that the professional does not deal with
matters that are within the responsibility of the immediate family member;
°Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and
objectivity that concerns them
(iii)
The payment of such referral fee create a:
°self interest threat to objectivity; and
°self interest threat to professional competence and due care.
Before referring the assignment, your firm should disclose to the client about the arrangement to receive a referral fee
from Marvi & Company.

Examiners’ Comments:
This was an easy question and a large number of students were able to correctly demonstrate their knowledge relating to
Code of Ethics for Chartered Accountants and Code of Corporate Governance. However, several students did not appreciate
that in case of Sherbano Limited, the wife of the partner was Director Marketing by designation and not a director sitting on
the Board of Directors and hence, the appointment as auditor could have been accepted after placing appropriate internal
checks.

Q.23 (a)Alternative 1: Outsourcing of Internal Audit Department

A self-review threat may be created when a firm provides internal audit services to a financial statement audit client.
When the firm undertakes the outsourcing of internal audit activities, any self-review threat created may be reduced to an
acceptable level by ensuring that there is a clear separation between the management and control of the internal audit by
client management and the internal audit activities themselves.
The firm may accept this alternative if appropriate safeguards are put in place to reduce the threat to an acceptable level.
The safeguard may include the following:
(i)The audit client is responsible for internal audit activities and acknowledges its responsibility for establishing,
maintaining and monitoring the system of internal controls;
(ii)The audit client designates a competent employee, preferably within senior management, to be responsible for
internal audit activities;
(iii)The audit client, the audit committee or supervisory body approves the scope, risk and frequency of internal audit
work;
(iv)The audit client is responsible for evaluating and determining which recommendations of the firm should be
implemented;
(v)The audit client evaluates the adequacy of the internal audit procedures performed and the findings resulting from the
performance of those procedures by, among other things, obtaining and acting on reports from the firm; and
(vi)The findings and recommendations resulting from the internal audit activities are reported appropriately to the audit
committee or supervisory body.
(vii)Internal audit services should be provided only by personnel not involved in the financial statement audit
engagement and with different reporting lines within the firm.
Alternative 2: Recruitment of CIA on EL’s behalf
The recruitment of senior management for an assurance client, such as those in a position to affect the subject matter
information of the assurance engagement, may create current or future self interest, familiarity, and intimidation threats.
In any case, the firm should not make management decisions and the decision as to whom to hire should be left to the
client.
However, the firm could provide such services as:
(i)reviewing the professional qualifications of a number of applicants and providing advice on their suitability for the
post.
(ii)producing a short-list of candidates for interview, provided it has been drawn up using criteria specified by the
assurance client.
However, a contingent fee charged by a firm creates self-interest and advocacy threats that cannot be reduced to an
acceptable level by the application of any safeguard. Accordingly, the firm should not enter into any such fee arrangement.
Alternative 3: Providing audit staff on secondment to assist CIA
A self-review threat may be created when a firm provides internal audit services to a financial statement audit client. The
firm can provide its staff on secondment to the client subject to the application of safeguards given in alternative 1.
(b)Alternative 1: Outsourcing of Internal Audit Department
The firm of external auditors cannot provide internal audit services related to internal accounting controls, financial
systems or financial statements to its external listed audit clients.
Alternative 2: Recruitment of CIA on EL’s behalf
The firm of external auditors cannot provide human resource related to executive recruitment to its external listed audit
clients.

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Alternative 3: Providing audit staff on secondment to assist CIA

The firm of external auditors of a listed company cannot provide any service other than audit including services on
secondments basis except in accordance with the regulation and under the IFAC guidelines. The firm may accept the
engagement after ensuring that the terms of the engagement specify that firm’s deputed staff will not be involved in
management functions and decisions.
However, Mr. Kiwi cannot be appointed as Chief Internal Auditor of the company because no listed company can appoint a
person as the Internal Auditor who was a partner of the firm of its external auditors or an employee involved in the audit
of the listed company at any time during the two years preceding such appointment.

Examiners’ Comments:
This was an easy question and a large number of students were able to correctly demonstrate their knowledge relating to
Code of Ethics for Chartered Accountants and Code of Corporate Governance.

Q.24 (a)
(i)Recruitment of senior management may create current or future self interest, familiarity and intimidation threats.
(ii)Applications from CFOs of existing assurance clients has also created a threat to objectivity, as we performs services
for these clients whose interests will be in conflict with Pentagon in respect of appointment of CFO.
(iii)The significance of the threat created 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.
(iv)The safeguards available to the engagement partner are the following:
The firm should not make management decisions and engagement should be restricted to advising suitable qualification
and making a list of suitable candidates. The decision as to whom to hire should be left to the client.
The use of separate engagement team
Procedures to prevent access to information (e.g., strict physical separation of such teams, confidential and secure data
filing);
Clear guidelines for members of the engagement team on issues of security and confidentiality.
(b)Client’s request for certain staffs
The audit firm should assess whether the reason given by the client is valid under the circumstances because if there is
any other reason, it may affect the independence of the audit. Moreover, as a matter of principle, the audit firm should not
encourage such requests from the client.
Long association of Mr. Shams
(i)Using the same senior personnel on an assurance engagement over a long period of time may create a familiarity
threat.
(ii)The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards
should be considered and applied to reduce the threat to an acceptable level.
Such safeguards might include:
Rotating the senior personnel (other than the audit team)
Involving an additional chartered accountant who was not a member of the assurance team to review the work done by
the senior personnel or otherwise advise as necessary;
Independent internal quality reviews.

Q.25 (a)
(i)While taking up the assignment, we should keep in mind the following:
 A chartered accountant in practice should not assume custody of client’s monies unless permitted to do so by law.
It creates a self interest threat to professional behavior and may be a self interest threat to objectivity.
To safeguard against such threats, we would:
keep such monies separately from firm’s assets.
use such money only for the purpose for which they are intended;
at all times, be ready to account for these assets, and any income, dividends or gains generated, to any persons entitled to
such accounting.
comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.
We should be aware of threats to compliance with the fundamental principles through association of such assets. For
example, money derived from illegal activities. In order to safeguard against these threats, we should:
make appropriate inquires about the source of such assets;
consider their legal and regulatory obligations.
seek legal advice.
(ii)There is no bar to accepting this business as MNC is not our financial statements audit client.

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(b)
(i)
Preparation of such reconciliations may be used by the client as base document of accounting entries. Therefore, it may
create a self-review threat when the financial statements are subsequently audited by the firm.
 While providing such assistance, the auditor should not involve in making management decision which include:
Determining or changing journal entries, or the classifications for accounts or transaction or other accounting records.
Authorizing or approving transactions; and
Preparing source documents or originating data or making changes to such documents or data.
 The significance of any threat created 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:
 Making arrangements so such services are not performed by a member of the assurance team;
 Implementing policies and procedures to prohibit the individual providing such services from assisting in preparation of
accounting records and making any managerial decisions on behalf of the audit client;
(ii)
 The estimation of compensation may be used by the client as a basis for making provisions in the accounts. Therefore, it
may create a self-review threat. The significance of threat will depend upon the following factors:
 The materiality of the amounts involved;
 The degree of subjectivity inherent in the matter concerned; and
 The nature of the engagement i.e. the purpose and objective of estimation.
 The firm should evaluate the significance of threat and if it is significant then apply the necessary procedures to
eliminate the threat or reduce it to an acceptable level. Such safeguards may include:
 Policies and procedures to prohibit individuals assisting the audit client from making managerial decisions on behalf of
the client.
 Using professional who are not members of the assurance team to perform the service;
 The involvement of others such as independent experts.

Q.26 (i)This situation does not contain any threat.

(ii)Self-Interest Threat
Subsequent employment with the assurance client is of personal interest to the audit manager which will impair the
independences and objectivity of the audit manager in the professional matter.
Moreover, if the company is listed, then as per Code of Corporate Governance (CCG) it shall not appoint any member of
the audit engagement team or his close relative as its CEO/CFO/Internal auditor/director at any time during the next 2
years of his/her involvement in the audit. In case its not a listed company, manager shall immediately inform the
engagement partner about his intentions and the firm should arrange proper replacements.
(iii)Intimidation Threat
The CEO of the client has actually threatened of replacement in case there is a disagreement by the auditor over the
issues.
Partner should discuss the issue with the other partners in the firm. Disclose to the audit committee or other charged with
governance and may decide to withdraw from the current year engagement.
(iv)Familiarity Threat
The prolonged period of time during which partner has been the engagement partner could lead to a close relationship
with the company. This could affect his objectivity as he may decide not to discuss contentious matters with the
management, to maintain good relationship.
If the company is listed the firm is required by CCG to rotate the partner incharge after 5 years. If it is a non-listed
company this approach may be followed as best practice to avoid familiarity threat.

Q.27 (i)
(a)
 Since Olive Limited is not an audit client, therefore the requested services may be provided.
 In term of the Chartered Accountants Ordinance, 1961 and the code of ethics a member should not enter into any
contingent or conditional fee arrangement and the member is guilty of professional misconduct if he/she enters into such
arrangement. Hence, fee based on amount of subscription received should not be agreed upon.
(b) An appropriate caveat should be built in the engagement letter wherein we should describe the management’s
responsibility and disassociate the firm from the responsibility of taking management decisions on behalf of the client.
The fee arrangement should be reconsidered and brought in line with permissible mode like fixed fee or hours charged
basis.
(ii)
(a) Since the company is unlisted, therefore accepting such an assignment is not altogether restricted by ICAP’s code of
ethics. However, provision of such services may create self review threat.
(b) In order to address the issue of self review threat the auditor should apply appropriate safeguards i.e. ensure that:

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 The client acknowledges its responsibility for establishing and monitoring the system of internal controls.
 The client makes all management decisions with respect to the design and implementation process.
 The client evaluates the adequacy and results of the design and implementation of the system.
 The client is responsible for the operation of the system (hardware or software) and the data used or generated by the
system.
 The team engaged on the assignment should be different from the team employed on the audit engagement.
(iii)
(a) In terms of the provisions of the Companies Ordinance, 1984 a person who is indebted to the company is disqualified
to be appointed as the auditor of that company. Therefore appointment will not be lawful. However IFAC code of ethics
allows entering business relationship with audit clients provided the terms should not be softer than those offered to
other customers.
(b) If the firm is interested in appointment as auditors then it would have to discharge all amounts owed to Rose Bank
Limited, to become eligible for appointment.

Q.28 (a) Information requested can be disclosed, to the extent of the remuneration of the chief executive, because in case of a
public listed entity, it is public information.
The information related to executive directors is disclosed in the financial statements on aggregate basis, hence it is not
public and it would not be appropriate to disclose the same.
(b) You cannot provide him the information directly about his question, as according to the code of ethics, the
confidentiality is applicable even in case of colleagues within the firm.
However, code of ethics does not restrict the professional accountant to use his/her prior knowledge and experience,
even on a new job. Accordingly, you can use your knowledge as benchmarks, if you form your independent view that
these are appropriate for consideration as benchmarks.
(c) Information can be disclosed to the extent to which the details are made public by the company, which is a common
practice and requirement of law in the nutrition sector.
(d) According to the Code of Ethics, a professional accountant may be required to disclose confidential information when:
 disclosure is permitted by law and is authorized by the client or the employer.
 disclosure is required by law. (For example in the course of legal proceedings or disclosure to appropriate public
authorities if infringement of law is discovered.)
In case a written notice is received from the Ministry of Health, the relevant information may be provided after ensuring
that it is actually required by law. However, even in such case, the client should at least be informed before sending the
information.
(e) You cannot provide any information.
(f) Past information of earnings per share may be disclosed, as the same is public information but future projections
should not be disclosed as it is a confidential information of the entity.

Q.29 Response to the client conveying the inability to carry out certain assignments.
Under the listing regulations of the stock exchange of Pakistan, the external auditors of listed companies are prohibited to
provide internal audit services to the listed companies, which are being audited by them.
Further, the Code of Corporate Governance has also placed certain restrictions on the external auditors and restricts the
listed companies from appointing their auditors to provide services in addition to audit except in accordance with the
listing regulations and requires the auditor to observe applicable IFAC guidelines in this regard and to ensure that the
auditors do not perform management functions or make management decisions, responsibility for which remains with
the Board of Directors and management of the listed company.
Also according to the Code of Ethics (para 9.198), provision of CFS to an audit client may create advocacy and self-review
threats. In case of the proposed CFS, the independence could be impaired and there are no safeguards that could reduce
the threat to an acceptable level. A self review threat may be created when a firm provides internal audit services to an
audit client.
The negotiation with the Company’s banker is purely a management function and cannot be undertaken by us as it will be
a violation of the listing regulations and the CCG as disclosed above.
Further, as ML is a subsidiary of a company based in US which is subject to US SEC Rules, we will also need to refer to the
SEC to see as to what other types of services are the external auditors allowed to provide.
Q.30

Examiners’ Comments:
This question was designed to test the knowledge of students about the non audit services which an auditor can provide to its
audit clients and the related potential independence issues. Although it was an easy question but the response was not that
good. The following errors were commonly seen:

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• Surprisingly very few students could highlight the issue of contingent fee in the context of Chartered Accountants
Ordinance which declares such practice as professional misconduct.
• Some of the students declared that under ICAP’s Code of Ethics an auditor cannot render any non audit service to its
audit clients.
• A large number of students did not provide any reason for not accepting the non-audit services. Threats such as self
interest, self review, impairment of independence and objectivity etc. were discussed by some of the good students
only.
• Quiet often the reason for refusing a particular assignment were incorrect.

Q.31

Examiners’ Comments:
The question was based on the requirements of code of ethics. A situation was given and the examinees were required to
advise whether the auditor could accept the assignment if the client was an unlisted company and if it was a listed company.
The part related to listed company was simple and most examinees were able to answer correctly in the light of ICAP’s
Council’s directive 4.16 which was applicable to listed companies only.
However, for the benefit of the students we would like to inform that the directive 4.16 was withdrawn by ICAP on June 07,
2007 and for future examinations they should refer to a negative list of services which now from part of the listing
regulations of stock exchanges in Pakistan.
The response to the point related to unlisted company was average. The students were expected to cover the question under
three heads:
• Permissibility (It is permissible under the Code of Ethics).
• Identification of the threats to independence mainly the self review threats.
• The safeguards that should be applied in such situations as described in para 9.186 of the Code of Ethics.
Some of the students thought it enough to say that the same is permissible without stating the conditions under which the
assignment may be accepted. Some of the students were also of the view that directive 4.16 will also be applicable on unlisted
companies which obviously led to a totally incorrect answer.

Q.32

Examiners’ Comments:
The question related to a small, family owned company with annual receipts of only Rs. 150 million. The question consisted of
three parts as discussed below:
(a) In this part almost all the students were able to declare correctly that since the company is a private limited company, it
has to prepare its accounts in accordance with the Fifth Schedule and the alternatives suggested by the CEO were not
acceptable.
However, very few were able to mention the other two important points i.e. while preparing the accounts as requested by the
CEO, the auditor should evaluate the existence of self review threat and take appropriate safeguards and should also avoid
taking management decisions.
(b) Most of the students restricted themselves to describing the matters that are generally contained in an engagement letter
without reference to the environment in which the company was operating.
It was evident from the given scenario and was also mentioned in the question that the management has compromised on
some of the important controls. It was therefore expected that students at this level will highlight this issue and then mention
the important matters to be considered at the engagement stage and not just the matters that are generally contained in the
engagement letter. However, very few students could approach the question as described above.
(c) The examinees were required to comment on the internal controls of the company. Most of them, restricted their answers
to matters such as lack of segregation of duties and supervisory controls by the owners. Very few were able to mention an
important point that the totally dominant role of the owner management increases the risk of management override of
controls.

Q.33

Examiners’ Comments:
(a)Most of the students were able to quote the principles of confidentiality correctly and secured good marks.
(b)The students were able to identify the breaches committed by the trainees. However, most candidates were not aware of
the stipulation that under the Chartered Accountants Ordinance, 1961 trainees are not allowed to reveal confidential
information without the permission of the principal, even if the client has authorized them to do so.
(c)The replies to the question relating to circumstances under which disclosure of client’s information is allowable were
generally correct. These include the situations:
• Where the disclosure is required by law

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• Where the disclosure is necessary to comply with technical standards or quality control review program of the
Institute
• When authorized by the client

Q.34

Examiners’ Comments:
The examinees were required to assess whether an internal auditor can be appointed as the external auditor with reference
to International Standards on Auditing and Code of Ethics. Students were found unable to express with clarity their
understanding on the issue. Many examinees, unnecessarily described the common areas between internal and external audit
procedures gaining no marks. There were good answers also which contained reference to ethical requirements that include
refraining from prohibited relationship, threats of self review, impairment of independence and safeguards suggested by the
Code of Ethics.

Q.35

Examiners’ Comments:
Most of the students mentioned correctly that according to Code of Ethics issued by the Institute of Chartered Accountants of
Pakistan, such an arrangement is prohibited. However, very few could mention about the exception contained therein.
Q.36

Examiners’ Comments:
The question related to acceptance of audit dependent on the actual profit (contingent fee), which should be primarily
discussed in the light of relevant paragraph of Code of Ethics dealing with contingency fee. Many students claimed the fee as
lower of the existing fee and submitted their response on the basis of paragraphs dealing with undercutting.

Q.37

Examiners’ Comments:
The question was related to the Code of Corporate Governance. It was required to identify which services are permissible
under the provisions of Code of Corporate Governance in case of auditors of listed company. It was a very simple question and
candidates attempted properly and gained good marks.

Q.38
Q.39
Examiners’ Comments:
It was a pretty straightforward question and almost all the candidates made the most of it by scoring very high marks. The
question was designed to test the candidates’ knowledge regarding professional ethics required to be observed by Chartered
Accountants.
The question required listing of the professional ethics not observed by Mr. Iqbal with a brief explanation of each. All the
candidates, apart from a few, very well attempted the question and scored high on this question.

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