Certificate in Accounting and Finance Stage Examination

13 February 2025
3 hours – 100 marks
Additional reading time – 15 minutes

CAF 8 – AUDIT & ASSURANCE [Mock]

Instructions for Candidates
1. Answer ALL FOURTEEN questions, in BLACK pen only.
2. After attempting, convert your answer script to PDF using CamScanner and upload on your LMS.
3. Take CLEAR pictures, in sequence i.e. first Q. 1 then Q. 2. First part a then part b.
4. To maintain proper record of your test performance, please name your PDF file as follows:
“CRN + Subject + Test No.” e.g. “15472 CAF 08 Mock”

Q. 1 (a) During the audit of Bright Star Textiles Limited (BSTL), your team has identified a significant
misstatement in the valuation of inventory. The engagement partner instructs the team to document the
issue but does not take further action. However, a senior team member disagrees with this approach and
believes that the matter should be discussed with management and Those Charged With Governance
(TCWG). The partner insists on finalizing the report without raising concerns.

Required:
In light of audit quality requirements, what steps should be taken when a difference of opinion arises within
the audit team? (04)

(b) You are a senior auditor at a mid-sized audit firm engaged in a review of the financial statements of Star
Solutions Limited, a software development company. During your review, you note that the company has a
significant amount of revenue recorded from long-term contracts. The finance manager requests you to
confirm balances with key customers to verify revenue recognition.

Required:
Suggest an appropriate course of action in this situation. (04)

Q. 2 (a) Your firm is engaged in a review of the financial statements of Techverse Ltd., a technology startup with
a large customer base. Instead of performing traditional analytical procedures, your firm decides to
incorporate data analytics to identify unusual patterns in revenue and expenses. The finance director,
however, is skeptical about the effectiveness of using data analytics in a review engagement.

Required:
Discuss how data analytics can enhance the effectiveness of a review engagement, particularly in analyzing
revenue and expenses. (03)

(b) You are conducting the audit of Orion Industries Limited (OIL) for the year ended 31 December 2023.
The audit report is scheduled to be signed on 10 March 2024. However, the CFO of OIL has resigned on 28
February 2024, and the new CFO will assume office on 15 March 2024. Since the financial statements have
already been prepared by the previous CFO, the board of directors has suggested that the new CFO will sign
the written representation letter after assuming office.

Required:
Discuss the auditor’s course of action in the above scenario. (04)
 Audit & Assurance Page 2 of 4

Q. 3 (a) You are the external auditor of Falcon Enterprises, a medium-sized manufacturing company. The
internal audit function is well-established and consists of experienced auditors. During the planning stage,
the CFO suggests that internal auditors assist in performing inventory counts at multiple warehouse
locations.

Required:
Based on the auditing standard, discuss whether the external auditor can obtain direct assistance from
internal auditors in this scenario. Justify your answer. (03)

(b) Your audit team is assessing whether to obtain direct assistance from internal auditors at SilverTech
Limited, a company involved in software development. The internal audit team is competent and
independent. However, a significant portion of the company's revenue is derived from long-term software
development contracts that require substantial judgment for revenue recognition.

Required:
In light of the auditing standard, analyze whether internal auditors can provide direct assistance in auditing
the revenue recognition process. Explain your reasoning. (03)

(c) You are the audit manager of Bright Solutions Limited. Your firm has decided to use direct assistance
from the internal audit team to test routine transactions in accounts payable and payroll. However, before
proceeding, you need to communicate this decision with those charged with governance (TCWG).

Required:
Outline the key points that should be communicated to TCWG regarding the planned use of internal
auditors for direct assistance. (02)

Q. 4 You are an audit senior in charge of auditing Moonlight Textiles Limited. During the planning meeting, the
engagement team identifies potential risks related to undisclosed related party transactions.

Required:
Explain four key discussion points that the engagement team should address to ensure completeness and
accuracy in identifying related parties. (04)

Q. 5 During the audit of Zenith Manufacturing Ltd., the audit team received the following responses from
accounts receivable confirmations:
(a) A major customer confirmed a balance but noted that payment had already been made on
December 29, which is not reflected in the company’s books.
(b) Another customer replied that they had returned goods worth $20,000 in November, but the
company still shows the amount as receivable.
(c) A confirmation request sent to a small customer was returned undelivered.

Required:
Discuss the audit procedures required for each of the above situations. (08)

Q. 6 (a) Swift Payments Ltd. is an online payment processing company handling millions of transactions daily. A
recent security audit revealed the following issues:

(i) Employees continue to have system access even after leaving the company.
(ii) There are no multi-factor authentication (MFA) requirements.
(iii) No formal supervision exists to monitor unauthorized access attempts.

Required:
Discuss the risks associated with the above security lapses. (03)
 Audit & Assurance Page 3 of 4

(b) Your firm has been appointed to audit the payroll system of Grand Motors Ltd. The system generates
employee salaries based on recorded attendance and pre-set salary scales. The audit team has identified
multiple discrepancies, including:

(i) Employees being paid above their authorized salary range.

(ii) Duplicate payments issued to some employees.
(iii) New employees not appearing in the payroll system.

Required:
Recommend five IT application controls that should be implemented to prevent such issues. (05)

Q. 7 ABC Electronics is a manufacturer of home appliances. During the audit of its financial statements for the
year ending December 31, 2023, the audit team noted that the company had received a substantial insurance
claim related to damages caused by a fire at its warehouse. The management has recorded the insurance
receivable in the financial statements. However, the insurance company has not yet confirmed the
acceptance of the claim.

Required:
(a) Identify the key audit procedures that should be performed concerning the insurance receivable. (03)
(b) Discuss whether the recognition of the insurance receivable complies with the relevant financial
reporting framework. (02)

Q. 8 ABC Limited, a car manufacturing company, offers a three-year warranty on its vehicles. The audit team
notices that the company has not recorded any warranty provision, arguing that historical warranty claims
have been minimal. However, recent customer complaints suggest a manufacturing defect in a particular car
model, which may lead to a higher number of warranty claims in the coming months.

Required:
(a) Identify and explain the audit procedures that should be performed regarding the warranty provision.
(05)
(b) Discuss the potential impact on the audit report if the company refuses to recognize a warranty provision
despite clear indications of future claims. (04)

Q. 9 Elite Textile Mills Ltd., a large-scale textile manufacturing company, is facing financial distress due to rising
production costs and declining sales. The company recently breached a debt covenant with its primary
lender, resulting in a demand for immediate repayment. Management is negotiating with the bank for
restructuring, but there is no formal agreement in place. Despite this, the financial statements have been
prepared on a going concern basis, with no disclosures about the breach or potential liquidity issues.
Required:
(a) Discuss the business risks and audit risks involved in this scenario. (06)
(b) Evaluate the auditor’s responsibilities in assessing going concern assumptions. (02)
(c) Suggest audit procedures to determine whether Elite Textile Mills Ltd. can continue as a going concern.
(03)

Q. 10 Your firm is auditing the financial statements of Velocity Tech Ltd., a fast-growing software company. The
company reported a net profit of $2.1 million for the year. However, your audit team identifies an
unrecorded expense of $220,000, which, if recognized, would reduce the net profit to $1.88 million—below
the $2 million threshold that qualifies the company’s executives for performance-based bonuses.

Materiality level for this audit engagement is Rs. 220,000.

Required:
Evaluate the above situation, and auditor’s course of action. (03)
 Audit & Assurance Page 4 of 4

Q. 11 (a) Alpha Auditors have been appointed as external auditors for Star Technologies Ltd. for the first time.
Upon reviewing the engagement, the audit team realizes that the company has not yet paid the previous
year’s audit fee to the predecessor auditor. The CFO of Star Technologies has committed to clearing both
the previous and current year’s fees just after receiving a clean audit report.

Required:
Discuss the threats to auditor independence and suggest the possible course of action Alpha Auditors should
take. (04)

(b) Haris is an audit senior working on the audit of Gourmet Constructions Ltd. During the audit, the
company’s CEO invites Haris and his audit team to a fully sponsored international business conference at a
luxury resort. The CEO insists that this is a goodwill gesture to appreciate their efforts.

Required:
(i) Identify the ethical threats involved in accepting the invitation.
(ii) Discuss the actions Haris should take in light of the Code of Ethics for Chartered Accountants.
(05)

Q. 12 You are the audit manager at Rahim & Co., Chartered Accountants, responsible for the audit of Silverline
Industries Ltd. (SIL) for the year ending 31 December 2023. The audit team has gathered the following
information during the finalization phase of the audit:
• On 15 February 2024, a massive fire broke out at SIL’s primary warehouse, destroying inventory
worth Rs. 120 million.
• The company had adequate insurance coverage, but the settlement process is still in progress.
• The financial statements were approved for issuance on 25 February 2024.
• The company’s management has disclosed this event in the notes to the financial statements.

Required:
(a) Discuss the impact on audit report. Justify your response. (03)
(b) Draft an appropriate paragraph that should be included in the audit report, in the above case. (04)

Q. 13 You are the audit manager of Rizwan & Co., Chartered Accountants. During the audit of Falcon Industries
Ltd. (FIL) for the year ending 30 June 2023, you noted the following issue:
• The company’s inventory balance as of 30 June 2023 was Rs. 500 million.
• The audit team was unable to observe the physical inventory count at year-end because the
engagement was accepted after the reporting date.
• No alternative audit procedures could provide sufficient appropriate evidence regarding the
inventory balance.

Required:
(a) Explain the appropriate type of audit opinion that should be issued for this situation. (02)
(b) Draft the Basis for Qualified Opinion paragraph for the auditor’s report. (04)

Q. 14 You are the audit senior for the audit of Swift Telecom Ltd. (STL), a listed telecom company. The audit
team has identified revenue recognition as a key audit matter due to the complexity of STL’s billing
systems and the variety of revenue streams, including prepaid, postpaid, and international roaming services.

Required:
(a) Discuss why revenue recognition should be included as a Key Audit Matter (KAM). (02)
(b) Draft an appropriate KAM paragraph for the audit report. (05)

(THE END)