CAF-08

QUESTIONS BANK

Q1:
Aslam has been assigned the role of audit manager for the audit engagement of Exploration Limited (EL). While
reviewing the draft financial, Aslam has identified significant increase in the value of specialized assets used in
the drilling of wells due to a recent revaluation conducted by EL. The revalued amount of these assets is Rs.4,000
million.

Owing to the significance of the matter, Aslam engaged an independent valuation company "the Valuers" for the
valuation of specialized assets. After completing their work, the Valuers submitted their valuation report,
according to which the value of these assets should be Rs.3,500 million.

The draft financial statements show a profit before tax of Rs.2,500 million.
Required:
i. State any five key audit procedures which may be performed by the audit team to address the difference
in the fair value of the assets. (05)
ii. Discuss the possible impact on the audit report if the difference is not adjusted. (03)
(ICAP, CAF 08 Level - Autumn 2023, Q.# 5b)
Q2:
Your firm is the auditor of Chemicals Limited (CL). Following matters have been observed while planning the
inventory count for the year ending 30 September 2022:
One of the chemicals having radioactive properties has been procured for a government agency. Considering its
hazardous nature, it is stored in a special container which can only be opened in the presence of agency's officials.
The container was last opened in the presence of agency's official on 30 June 2022.
CL's plant has been running on maximum capacity. Therefore, in order to timely deliver an export order to
Colombia, CL has decided to procure the chemicals from Malaysia and directly ship the chemicals from Malaysia
to Colombia. The chemicals are currently lying at a warehouse in Malaysia and will be shipped to Colombia in
the first week of October 2022.
The production process cannot be stopped during the inventory count. Your team may not observe the inventory
count which will be in process on 30 September 2022.
Required:
State the audit procedures to verify the inventory quantities in each of the above situations. (08)
(ICAP, CAF 08 Level - Autumn 2022, Q.# 6)
Q.3
You have received a copy of the year-end bank reconciliation statement, from your audit client Harison Limited
(HL), Details of which are reproduced below:

Rupees
Balance as per bank statement as at 31 December 2021 10,500,000
Add:
i. Incorrect interest charged by the bank (Note-I) 240,000
ii. Charges reversed by bank on 10 January 2022 (Note-II) 100,000
Less:
iii. Cash directly deposited in bank by the customer to avail 5% discount (220,000)
iv. Cheques issued to suppliers not yet presented (800,000)
v. Cheques signed but not yet handed over to suppliers (250,000)
Balance as per ledger 9,570,000
Notes to bank reconciliation statement:
I. Interest on bank overdraft amounting to Rs. 750,000 was recorded in the bank statement. However, review
of the Accounts Officer indicated an error and HL recorded the correct amount of Rs. 510,000 in the bank
ledger.
II. This represents Letter of Credit charges which were charged twice by the bank for import of raw material
in December 2021.
Required:
a) State the audit procedures that should be performed on the above bank reconciliation statement. (06)
b) Briefly discuss whether the client's year-end bank reconciliation provides evidence about receipts and
payments cut-off. (02)
(ICAP, CAF 08 Level - Spring 2022, Q.#5)
Q.4.
You are the audit manager in a firm of chartered accountants. While reviewing the audit working papers of a client
you came across the following audit program on property, plant and equipment:

S. No. Audit Procedures Related Assertion

(i) Verify reconciliation of ledger balances with the fixed asset register. Completeness
(ii) Obtain schedule of fixed assets showing opening balances, additions, Accuracy
disposals, depreciation and closing balances.
(iii) Verify the cost of additions to fixed assets and capital work in progress Accuracy
with the related invoices.
(iv) Physically inspect the additions made during the year. Existence & Ownership
(v) On sample basis select assets and check the depreciation calculation. Accuracy

Required:
Critically review the audit program and suggest changes or additional audit procedures as may be necessary.
Assume that the assets are carried at cost, no disposal was made during the year and no impairment testing is
required. (11)
(ICAP, CAF 08 Level - Spring 2019, Q. # 5)

Q.5.
You are the audit manager on Beluga Limited (BL) for the year ended 31 August 2019 The following issues have
been brought to your notice by your audit team:

i. BL has pending tax litigation in which tax department has raised demand of Rs.75 million. The matter
has been challenged by BL and the decision in this respect is currently pending with the Appellate
Tribunal. BL’s tax advisor is confident of positive outcome of this litigation. No provision has been made
in this regard. However, it has been disclosed as a contingency in the financial statements.
ii. On 20 September 2019 one of the warehouses of BL caught fire destroying entire inventory, furniture,
fixtures and equipment. The book values of the destroyed assets at the time or fire were Rs.100 million.
Bu has lodged a claim with the insurance company.

The draft financial statements for the year ended 31 August 2019 show a profit before taxation of Rs.500 million
and net assets of Rs.1,400 million.
Required:
a) State the audit procedures which may be performed in respect of each of the above audit issues Identified
by your team. Also briefly discuss the implications of these issues on the audit report. (10)
b) Draft an opinion paragraph to be included in the audit report of BL in accordance with the requirement of
International Standards on Auditing, assuming that the matter in (i) above is not dealt with in accordance with
the requirements of IFRS.
(Basis of opinion paragraph is not required) (05)
(ICAP, CAF 08 Level - Autumn 2019, Q. # 7)
Q.6
ABC & Co, Chartered Accountants, has been appointed as the auditor of FoodPro Limited (FPL). While obtaining
an understanding of accounting and financial reporting process, the audit semi senior has documented the
following for the review of audit senior:

FPL utilizes an off-the-shelf accounting system for recording and processing its transactions. The general
i.
ledger and trial balance are extracted from the system, while draft financial statements are manually
prepared on spreadsheets by the accountant.
ii. Transactions are initially recorded on manual vouchers. Manual vouchers are reviewed, checked, and
approved by the chief accountant. Once the voucher is approved, it is sent for data entry.
iii. Data entry is carried out by junior accountants from various terminals, based on information received
from data owners such as sales, purchases, and payments. Data entered by junior accountants is
automatically processed by the system without any further manual intervention.
iv. Inventory valuation sheets are provided by the warehouse manager at month-end to be posted in the
system as balancing entries to calculate monthly consumption of materials and cost of sales.
Required:
Identify any five control weaknesses and suggest a related control to strengthen the system. (10)
(ICAP, CAF 08 Level - Autumn 2023, Q.# 4)
Q.7
Your firm is the statutory auditor of Naltar Dairy Limited (NDL) for the year ended 31 December 2022. NDL
manufactures and sells various dairy products including ice-cream.
The audit team is currently planning to perform the test of controls in respect of the ice-cream division's inventory.
Following information has been provided by the management:

i. Upon receipt of inventory at the warehouse, a process is performed to ensure its accurate verification by
counting matching it with purchase orders, performing quality inspection, entering it into the inventory
system and proper storing it in a designated area of the warehouse.

ii. On a weekly basis, the warehouse manager, Fahad Baqer, randomly selects a warehouse area for inventory
counting. By rotating the designated areas, each area is counted at least once every quarter. This count is
carried out in a manner that prevent the warehouse staff from knowing the expected quantity of items in
each area. Furthermore, the inventory is also inspected for damages and expiry dates to ensure product
quality.

iii. Fahad conducts a comparative analysis between the inventory count and quantity of items in the inventory
system. If any differences arise, he delegates the same counting task to a separate team for rechecking. Once
it is established that the count is correct, adjustments are recorded after the approval of Fahad himself and
the finance manager.
Required:
Identify the controls relating to the existence of inventory and suggest the test of controls to be performed to
verify that the controls are operating effectively. (08)
(ICAP, CAF 08 Level - Spring 2023, Q.#8a)

Q.8
Your firm is the auditor of Shahzad Limited (SL), a wholesaler of consumable products, for the year ended 30
June 2021. SL maintains up to date computerized inventory records.

The following matters have been observed during the inventory count:
i. The inventory count took place on 1 July 2021 under the supervision of the warehouse manager and his
staff, who are responsible for maintaining the inventory. No movement of inventory took place on that day.
ii. Four counting teams were formed. Each team comprised of two persons. The floor area was allocated by
the teams among themselves.
iii. Each team was instructed by the warehouse manager to remember which inventory had been counted.
iv. Pre-numbered count sheets were provided to the staff involved in the inventory count. To facilitate
inventory count, inventory belonging to third parties and the inventory ledger balances were mentioned on
the pre-numbered count sheets.
v. All the cut-off documents were provided to the audit team on the very next day after the inventory count

Required:
Identity any four weaknesses in the inventory count procedures and state their implications on the physical count.
(06)
(ICAP, CAF 08 Level - Autumn 2021, Q.# 4)
Q.9
Cardano Limited (CL) is engaged in the business of assembling motor bikes. CL has a fully integrated
Computerized Accounting System (CAS). You have been given responsibility for reviewing the internal controls
relating to procurement In this respect, you have gathered the following information:

Ordering of inventory:
 Approved supplier's list is maintained in CAS. The list was last reviewed for changes two years ago. However,
during the intervening period, any supplier whose performance is not satisfactory is timely removed from the
list. As a control measure, the list is accessible and editable only by the employees of Procurement Department
(PD).
 The Inventory Control Department (ICD) of CL generates a numerically sequenced Purchase Requisition
(PR), when the quantity of a particular inventory Item reaches re-order level. PR is electronically forwarded
within the CAS to the PD.
 For all regular and routine orders, PD reviews the PR and selects a supplier from the approved supplier's list.
A Purchase Order (PO) having a unique sequential order number is then generated for the selected supplier.
 For large or out of the ordinary purchases, a tendering process is carried out by the PD. Procurement Manager
invites tenders through an advertisement in newspaper and the supplier offering the lowest price is selected
by the Procurement Manager in consultation with Head of Procurement.

Receiving of inventory:
 When inventory items are received, the officer in ICD confirms that the inventory agrees to the PO. The CAS
is then updated to confirm receipt of inventory and an electronic numerically sequenced Good Received Note
(GRN) is generated. The physical inventory items are then transferred to store.

Required:
Identify any six weaknesses in the internal control system and their possible effects. Also give your
recommendations to overcome these weakness to CL. (12)
(ICAP, CAF 08 Level - Spring 2021, Q.# 4)
Q.10
Yasin is an audit junior in a firm of chartered accountants. He has recently been assigned to audit client where
he was allocated the area of bank borrowings. Yasin performed the following audit procedures at the assertion
level:

Assertion verified Audit procedures performed

Completeness  Obtained a list of the schedule of bank borrowings from the client.
 Traced the amounts specified in the schedule of borrowings with the
figures included in the trail balance.
 Conducted an inspection of assets provided as security.
Accuracy and valuation  Checked the accuracy of calculations in the schedule provided by the
client.
 Reviewed loan agreements concerning new facilities received.
Rights and obligations  Obtained schedule of bank charges from the client.
 Checked the recorded amounts (both received and repaid) in the ledgers,
cross-referencing them with bank statements.
Existence  Obtained bank borrowing ledgers and traced the recorded amounts
received and repaid with bank statements.
 Obtained management representation.
Presentation and  Inquired from the management about relevant disclosures.
disclosure.  Reviewed loan agreements, identifying terms and conditions such as
interest rates, repayment terms, and securities / mortgages/liens.

Required:
Identify the procedures that lack relevance to the above-mentioned assertions. Also, recommend any two
additional procedures to be performed for each assertion. (12)
(ICAP, CAF 08 Level - Autumn 2023, Q.# 7)
Q.11
You are the manager responsible for the audit of Crown Limited (CL) for the year ended 31 December 2019.
Your audit team has informed you that CL is developing a new product 'Solar giant which would have three
times more power generation capacity than the regular solar panels available in the market. CL had capitalized
development costs of Rs. 40 million in 2018 and Rs. 38 million in 2019. Based on technical feasibility carried
out by the production department, testing of solar giant is in the right direction and the product would be
launched as per plan in June 2020.

However, review of board minutes revealed that CL is facing technical problems that may delay the launch of
solar giant till March 2021. The minutes further revealed that CL may require to incur further Rs. 50 million for
the development of this project. This would result in increase in selling price that was originally envisaged by
CL.

CL's management is of the view that they would overcome these technical problems without incurring any
additional cost and would launch the solar giant as per original plan, in June 2020.

The draft financial statements show a profit before tax of Rs. 150 million.
Required:
State the audit procedures which may be performed in respect of above audit issue. Also discuss the implication
of this issue, if any, on the audit report. (08)
(ICAP, CAF 08 Level - Spring 2020, Q. # 3b)
Q.12
You are the audit manager in a firm of chartered accountants. Following independent situations of three listed
audit clients are under your consideration:
a) The client's management has refused to provide written representation about management
responsibilities. (05)

b) Power Generation Limited has used the fuel price as at 30 June 2022 to value its closing fuel
inventories. Consequently, the value of fuel inventories has been increased from Rs. 500 million to Rs.
750 million. Profit before tax for the year ended 30 June 2022 is Rs. 2,000 million. (05)

c) Based on detailed assessment, the management of Wallmart Limited (WL) believes that WL will not be
a going concern. Consequently, they have prepared WL's financial statements on liquidation basis. (05)

Required:
Briefly evaluate each of the above independent situations and discuss the impact of each matter on the audit
report including impact on the key audit matter section, if any.
(ICAP, CAF 08 Level - Autumn 2022, Q.#3)
Q.13
Sher Khan Limited (SKL) had announced a major restructuring in the year 2011 and a provision of Rs. 120
million was made against the cost of restructuring and redundancies. During 2012 all known claims and
liabilities relating to the restructuring were settled for Rs. 90 million.

However, as a matter of prudence, the company has not written back the excess amount of provision in view of
a suit filed by certain staff members against termination of their employment. SKL's legal counsel is of the view
that the possibility of an adverse decision against the company in this matter is remote.

The audit senior does not agree with the management's contention and has drafted the following modification in
the audit report:
"An amount of Rs. 30 million has been provided in respect of the expected amount which the company may be
required to pay to the employees whose employment was terminated during the year. The management is of the
view that in case the company is required to pay the amount to those employees, the said provision would be
utilized. In our opinion, the company's decision to make the above provision is not in accordance with
International Accounting Standards. Had the liabilities been recognized correctly the profit for the year would
have increased by Rs. 30 million. Because of the effects of the matters discussed above, the financial statements
do not give a true and fair view of the financial position of the company as at 30 September 2012."

Profit before taxation and net assets of SKL are Rs. 145 million and Rs. 350 million respectively.
Required:
Comment on the decision of the audit senior and identify the shortcomings, if any, in the modification drafted
by him. (08)
(ICAP, CAF 08 Level - Spring 2013, Q.#6)
Q.14
Al-Badr & Company, Chartered Accountants, have conducted the statutory audit of the financial statements of
Al-Qasim Limited, a listed company, for the year ended June 30, 20X3 under the requirements of the
Companies Act, 2017. The job in charge has drafted the following audit report;

Auditors' Report to the Directors

Opinion
We have audited the annexed financial statements of Al-Qasim Limited, which comprise the statement of
financial position as at June 30, 20x3, and the statement of profit or loss and other comprehensive income or the
income and expenditure statement, the statement of changes in equity, for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies and other explanatory information,
and we state that we have obtained all the information and explanations which, to the best of our knowledge and
belief, were necessary for the purposes of the audit.

In our opinion and to the best of our information and according to the explanations given to us, the statement of
financial position, statement of profit or loss and other comprehensive income or the income or expenditure
statement, the statement of changes in equity and the statement of cash flows together with the notes forming
part thereof conform with the accounting and reporting standards as applicable in Pakistan and give the
information required by the Companies Act, 2017 (XIX of 2017), in the manner so required and respectively
give a true and fair view of the state of the Company s affairs as at June 30, 20x3 and of the profit or loss and
other comprehensive income or loss, or the surplus or deficit, the changes in equity and its cash flows for the
year then ended.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities
under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the International
Ethics Standards Board for Accountants* Code of Ethics for Professional Accountants as adopted by the
Institute of Chartered Accountants of Pakistan (the Code) and we have fulfilled our other ethical responsibilities
in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.

Responsibilities of Management and Board of Directors for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance
with the accounting and reporting standards as applicable in Pakistan and the requirements of Companies Act,
2017(XIX of 2017) and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease operations,
or has no realistic alternative but to do so.

Board of directors are responsible for overseeing the Company's financial reporting process.

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with ISAs as applicable in Pakistan will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the

As part of an audit in accordance with ISAs as applicable in Pakistan, we exercise professional judgment and
maintain professional skepticism throughout the audit.

We also:
  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.\

 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control.

 Conclude on the appropriateness of management's use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report.
However, future events or conditions may cause the Company to cease to continue as a going concern.

 Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.

We communicate with the board of directors regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant deficiencies in internal control that we identify
during our audit.

We also provide the board of directors with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the board of directors, we determine those matters that were of most
significance in the audit of the financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the
matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

Based on our audit, we further report that in our opinion:
a) the statement of financial position, the statement of profit or loss and other comprehensive income or
the income and expenditure account, the statement of changes in equity and the statement of cash flows
together with the notes thereon have been drawn up in conformity with the Companies Act, 2017 (XIX
of 2017) and are in agreement with the books of account and returns;
b) investments made, expenditure incurred and guarantees extended during the year were for the purpose
of the Company's business; and
c) no Zakat was deductible at source under the Zakat and Ushr Ordinance.

[Signature]
[Place/ location]
[Date]

Required:
Identify and explain (where necessary) the errors in the above audit report.
(Note: You are not required to redraft the report.) (12)
(ICAP, CAF 08 Level - Autumn 2010, Amended, Q.#10)
(ICAP's Question Bank for CAF 08 - Q. # 153)
Q.15
You are the audit manager of MM Electronics (Private) Limited. The company markets its products through
retail outlets in nine major cities. The draft financial statements for the year ended 30 June 2011 show a profit
after tax of Rs. 20 million and net assets of Rs. 150 million. The audit team has noted the following matters for
your consideration:

a) During the year the company has changed its policy of valuation of property, plant and equipment from
historical cost to revalued amount. For this purpose, the services of Professional Valuers (Private)
Limited were hired. They have issued valuation reports of three outlets indicating a revaluation surplus
of Rs. 10 million, which has been recognized in the financial statements. The management has informed
you that the valuation reports of the remaining properties are expected to be issued in December 2011.

b) The company was sued for breach of contract by a customer claiming damages of Rs. 10 million. The
legal advisor has confirmed the management's assertion that no liability existed at the balance sheet
date. However, while reviewing the customers' files, you found an email from the Manager (Legal
Department) addressed to the Chief Executive in which he has opined that the company will have to
pay at least 50% of the damages claimed.

c) With effect from 01 July 2010, the company has introduced a policy of providing one year warranty on
its television sets. No warranty is provided on the other products. Sales of television sets aggregated Rs.
20 million, whereas the total sales for the year amounted to Rs. 80 million.
The company has a customer support department which provides after sales services on all products.
For defects not covered under the warranty, the company bills the customers at 25% above cost. The
management has included a note in the draft financial statements stating that no provision has been
made in respect of the warranty, as the amount cannot be measured reliably.

d) The directors have decided not to disclose earnings per share as the same had reduced significantly on
account of issuance of 100% bonus shares. The disclosure was however made in all previous financial
statements.

Required:
Express your views on each of the above situations and discuss the impact thereof on the audit report. (14)
(ICAP, CAF 08 Level - Autumn 2011, Q.#8)
(ICAP's Question Bank for CAF 08 - Q. # 157)
Q.16
The following situations have arisen at different audit clients of your firm:

a) Zafar Technology Limited (ZTL), a listed company, is engaged in the manufacture of compressors used in
electrical appliances. During the conduct of the audit for the year ended 31 March 2012, a team member has
discovered a letter dated 18 March 2012 from Sartaj Electronics Limited (SEL) which states that SEL will
 not pay the current outstanding invoices as according to it the compressors supplied by ZTL are of an incorrect
specification.
TL's Technical Director believes that the problem arose due to changes in the design of appliances produced
by SEL and not because of faulty production by ZTL. However, both the companies have agreed to refer the
matter to arbitration.
Sales to SEL account for approximately 25% of the revenue of TL and the balance due from SEL as at 31
March 2012 amounted to Rs. 3.12 million. The profit after taxation of ZTL is Rs. 25 million with an asset
base of Rs. 150 million. (07)

b) The directors' report of XCP Limited states without any further explanation that the 20% increase in profit as
compared to the previous year is due to increase in sales and austerity measures introduced by the
management. The income statement for the year shows an increase in profits and sales amounting to Rs. 20
million and Rs. 8 million respectively whereas the costs have reduced by Rs. 12 million. A review of your
working papers however indicates that costs have reduced mainly on account of reduction in import duty on
certain raw materials. (04)

c) IPL is a manufacturer of diversified products and has factories in seven major cities of the country. The
demand for some of its products has been falling and the company wants to concentrate on its core products
only. Consequently, it has decided to close three of its factories and has made a provision of Rs. 30 million in
respect of redundancies and restructuring. The directors' report for the year ended 31 May 2012
comprehensively discusses the restructuring plan and states that the factories in Lahore and Multan would be
closed in the months of July and September 2012 respectively. The third factory will be closed before
December 2012 however, the location of that factory will be decided in November 2012.
The profit after taxation of IPL according to its draft financial statements for the year ended 31 May 2012 is
Rs. 80 million. (06)

Required:
Discuss the matters which the auditor should consider for each of the above situations and the possible impact
thereof on the respective audit reports.
(ICAP, CFAP 06 Level - Summer 2012)
(ICAP's Question Bank for CAF 08 - Q. # 155)
Q.17
Suggest any five controls to prevent misappropriation of petty cash. (05)
(ICAP, CAF 08 Level – Autumn 2022, Q.# 2b)
Q.18
Wages system - shift workers
Shift-workers arrive for work at about 7.00 am and ‘clock in’ using an electronic identification card. The card is
scanned by the time recording system and each production shift-worker's identification number is read from
their card by the scanner. The worker is then logged in as being at work. Shift-workers are paid from the time of
logging in. The logging in process is not monitored as it is assumed that shift-workers would not work without
first logging in on the time recording system.

Shift-workers are split into groups of about 25 employees, with each group under the supervision of a shift
foreman. Each day, each group of shift-workers is allocated a specific vehicle to manufacture. At least 400
vehicles have to be manufactured each day by each work group. If necessary, overtime is worked to complete
the day's quota of vehicles. The shift foreman is not required to monitor the extent of any overtime working
although the foreman does ensure workers are not taking unnecessary or prolonged breaks which would
automatically increase the amount of overtime worked. Shift-workers log off at the end of each shift by re-
scanning their identification card.
Payment of wages
Details of hours worked each week are sent electronically to the payroll department, where hours worked are
allocated by the computerized wages system to each employee's wages records. Staff in the payroll department
compare hours worked from the time recording system to the computerized wages system, and enter a code
word to confirm the accuracy of transfer. The code word also acts as authorization to calculate net wages. The
code word is the name of a domestic cat belonging to the department head and is therefore generally known
around the department.

Each week the computerized wages system calculates:

i. gross wages, using the standard rate and overtime rates per hour for each employee,
ii. statutory deductions from wages, and
iii. net pay.

The list of net pay for each employee is sent over Blake's internal network to the accounts department. In the
accounts department, an accounts clerk ensures that employee bank details are on file. The clerk then authorizes
and makes payment to those employees using Blake's online banking systems. Every few weeks the financial
accountant reviews the total amount of wages made to ensure that the management accounts are accurate.

Termination of employees
Occasionally, employees leave Blake. When this happens, the personnel department sends an e-mail to the
payroll department detailing the employee's termination date and any unclaimed holiday pay. The receipt of the
e-mail by the payroll department is not monitored by the personnel department.

Required:
(a) As the external auditors of Blake Co, write a management letter to the directors in respect of the shift-
workers wages recording and payment systems which:
i. Identifies and explains FOUR weaknesses in that system;
ii. Explains the possible effect of each weakness;
iii. Provides a recommendation to alleviate each weakness.
Note up to two marks will be awarded within this requirement for presentation. (14)

(b) List THREE substantive analytical procedures you should perform on the shift managers' salary system. For
each procedure, state your expectation of the result of that procedure. (06)
(ACCA, Fundamentals Level F8 - December 2008)
(ICAP's Question Bank for CAF 08 - Q. # 134b&C)
Q.19
Client background - sales system
Seeley Co is a wholesaler of electrical goods such as kettles, televisions, MP3 players, etc. The company
maintains one large warehouse in a major city. The customers of Seeley are always owners of small retail shops,
where electrical goods are sold to members of the public. Seeley only sells to authorised customers; following
appropriate credit checks, each customer is given a Seeley identification card to confirm their status. The card
must be used to obtain goods from the warehouse.

Dispatch and sales system

The dispatch and sales system operates as follows:
1. Customers visit Seeley's warehouse and load the goods they require into their vans after showing their
Seeley identification card to the dispatch staff.
 2. A pre-numbered goods dispatch note (GDN) is produced and signed by the customer and a member of
Seeley's dispatch staff confirming goods taken.
3. One copy of the GDN is sent to the accounts department, the second copy is retained in the dispatch
department.
4. Accounts staff enter goods dispatch information onto the computerized sales system. The GDN is
signed.
5. The computer system produces the sales invoice, with reference to the inventory master file for product
details and prices, maintains the sales day book and also the receivables ledger. The receivables control
account is balanced by the computer.
6. Invoices are printed out and sent to each customer in the post with paper copies maintained in the
accounts department. Invoices are compared to GDNs by accounts staff and signed.
7. Paper copies of the receivables ledger control account and list of aged receivables are also available.
8. Error reports are produced showing breaks in the GDN sequence.

Required:
Using information from the scenario, list SIX tests of control that an auditor would normally carry out on the
dispatch and sales system at Seeley Co and explain the reason for each test. (12)
(ACCA, Fundamentals Level F8 - June 2008)
(ICAP's Question Bank for CAF 08 - Q. # 133b)
Q.20
DinZee Co assembles fridges, microwaves, washing machines and other similar domestic appliances from parts
procured from a large number of suppliers. As part of the interim audit work two weeks prior to the company
year-end, you are testing the procurement and purchases systems and attending the inventory count.

Procurement and purchases system

Parts inventory is monitored by the stores manager. When the quantity of a particular part falls below re-order
level, an e-mail is sent to the procurement department detailing the part required and the quantity to order. A
copy of the e-mail is filed on the store manager's computer.

Staff in the procurement department check the e-mail, allocate the order to an authorized supplier and send the
order to that supplier using Electronic Data Interchange (EDI). A copy of the EDI order is filed in the order
database by the computer system. The order is identified by a unique order number.

When goods are received at Dinee, the stores clerk confirms that the inventory agrees to the delivery note and
checks the order database to ensure that the inventory were in fact ordered by DinZee. (Delivery is refused
where goods do not have a delivery note.)

The order in the order database is updated to confirm receipt of goods, and the perpetual inventory system
updated to show the receipt of inventory. The physical goods are added to the parts store and the paper delivery
note is stamped with the order number and is filed in the goods inwards department.

The supplier sends a purchase invoice to DinZee using EDI; invoices are automatically routed to the accounts
department. On receipt of the invoice, the accounts clerk checks the order database, matches the invoice details
with the database and updates the database to confirm receipt of invoice. The invoice is added to the purchases
database, where the purchase day book (PDB) and suppliers individual account in the payables ledger are
automatically updated.

Required:
List SIX audit procedures that an auditor would normally carry out on the purchases system at DinZee Co,
explaining the reason for each procedure. (12)
(ACCA, Fundamentals Level F8 - December 2007)
(ICAP's Question Bank for CAF 08 - Q. # 132a)
Q.21
Mention any six tests of controls which an auditor may perform in respect of dispatch of goods and invoicing in
an organization where all related documents are prepared manually. (06)
(ICAP, CAF 08 Level - Autumn 2018, Q. # 8d)
Q.22
You have been assigned to plan the test of controls in respect of receiving of goods and invoices from suppliers
of Bhurban Limited.
In this regard, you are required to identify the following:
(a) The related risks
(b) Controls that you expect to see to address the above risks
(c) Audit procedures that you need to perform to test the controls. (10)
(ICAP, CAF 08 Level - Spring 2015, Q. # 8)
(ICAP's Question Bank for CAF 08 - Q. # 67)
Q.23
You are the training manager in a firm of chartered accountants. Prepare brief presentation for newly inducted
trainees, on the following:
(a) Control Environment and its elements. (04)
(b) Walk through tests and why these are performed. (03)
(ICAP, CAF 08 Level - Autumn 2014, 0. # 6a&b)
(ICAP's Question Bank for CAF 08 - Q. # 63a&b)
Q.24
Identify and explain the shortcomings in the following paragraph of the draft audit report of Javed Limited:
Emphasis of Matter:
We draw attention to the fact that the company has accumulated losses of Rs. 115,436,540 (2011: Rs. 85,365,479)
and certain payments against long term loans were overdue as at the reporting date. As at 30 September 2012, its
total liabilities exceeded its total assets by Rs. 15,450,300 (2011: Rs. 11,542,200). These conditions indicate the
existence of a material uncertainty that may cast significant doubt on the Company's ability to continue as a going
concern. (03)
(ICAP, CFAP 06 Level - Winter 2012)
Q.25
The draft accounts of Kingfisher Pharmaceutical Limited (KPL) for the year ended September 30, 2010 show a
profit before taxation of Rs. 115 million and total assets of Rs. 450 million.
Being the audit manager, you are currently reviewing the following matters:

i. The basis of preparation of financial statements states that these have been prepared in accordance with the
International Financial Reporting Standards. However, the accounting policy note for borrowing costs states
that all borrowing costs are expensed as incurred. Results of audit tests show that borrowing costs expensed
during the year include Rs. 15 million which relate to qualifying assets.

ii. On October 17, 2010 the Income Tax Department issued amended assessment orders for the tax years 2006
to 2009 in which an aggregate tax of Rs. 40 million has been demanded. KPL has filed appeals against the
orders before the Income Tax Appellate Tribunal. KPLs tax consultant has advised that it is not possible at
this stage to give a reasonably accurate estimate of the amount of tax that the company may ultimately be
required to pay but it would range between Rs. 10-35 million. There is no reference of this matter in the
draft financial statements.
iii. The directors' report contains a statement that "current year's increase in profit before taxation by over 10%
is primarily due to the improved operating performance of the company". However, the income statement
shows that KPL'S profit before taxation includes a gain on sale of a factory amounting to Rs. 30 million. In
the absence of this gain, the company would have reported a reduction in operating profit by 19%.

Required:
In respect of each of the above matters:
(a) State with reasons what action you would take; and
(b) discuss the implications on the audit report, if any. (13)
(ICAP, CFAP 06 Level - Winter 2010)
Q.26
You are the manager in charge on the audit of Hexa Garments Limited (HGL). The company is listed on the
Karachi Stock Exchange and has nine directors. It is engaged in the manufacture and sale of fancy garments
through its own retail outlets. You are considering the following matters in respect of the audit for the year
ended December 31, 2009:
(a) According to the draft financial statements the total assets of the company are valued at Rs. 375 million.
These include value of ten retail outlets amounting to Rs. 175 million. The valuation is based on historical
cost less accumulated depreciation. During the year ended December 31, 2009, the management had
decided to revalue all the retail outlets. The valuer appointed by the management has not been able to
complete the assignment to date. However, he has submitted two interim reports as described below:

Interim Report
First Second
Date of report 31/12/09 20/02/10
Number of shops revalued 3 4
Book value as on 31/12/2009 (Rs. in million) 40 60
Revalued amount (Rs. in million) 70 100

(b) During the year HGL has developed two new brands "Deebal" and "Kalachi" and has launched an
aggressive marketing campaign for their promotion. The company has recognized the cost incurred on the
campaign amounting to Rs. 10 million as an intangible asset. It is being written off over the estimated useful
life of the brands i.e. four years.

Required:
Discuss the matters that may be of significance to you as an auditor, in respect of the above issues. Also explain
their implications on the audit report.
(ICAP, CFAP 06 Level - Summer 2010)
Q.27
(a) Differentiate between general IT controls and application controls. (04)

(b) The internal auditor of Cyprus (Private Limited has identified some discrepancies in the sales revenue. After
investigation, it was identified that some unknown changes were made to the master price-list which resulted in
such discrepancies.
Required:
Suggest any three general IT controls to prevent occurrence of such error. (03)
(ICAP, CAF 08 Level - Autumn 2020, Q. # 6)

Q.28
(a) Describe any four limitations of flow chart as a tool of system documentation. (04)
(b) Companies having large in-house developed software, have a risk that new programs might be introduced
without proper authorization. Briefly discuss any four general IT controls to mitigate this risk. (04)
(c) Discuss the effects on application controls where general IT controls are ineffective. (02)
(ICAP, CAF 08 Level - Spring 2021, Q.#8)
Q.29
Your firm is the auditor of Bell Limited (BL) which is engaged in manufacturing and assembling of vehicles.
BL has been encountering frequent stock-outs. To address this issue, it has developed an Inventory Management
System (IMS) and connected it with the systems of all the suppliers. IMS generates and sends purchase orders
to the suppliers automatically when the inventory reaches the reorder threshold.

Required:
(a) Discuss the risks to be considered due to the introduction of the above mentioned solution. (04)
(b) What controls would you expect in IMS to mitigate the above risks? (05)
(ICAP, CAF 08 Level - Autumn 2017, Q.#4)
Q.30
Following a competitive tender, your audit firm Cal & Co has just gained a new audit client Tirrol Co. You are
the manager in charge of planning the audit work. Tirrol Co's year end is 30 June 2009 with a scheduled date to
complete the audit of 15 August 2009. The date now is 3 June 2009.

Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and
purchasing systems are computerized, with each location maintaining its own computer system. The software in
each location is the same because the programs were written specifically for Tirrol Co by a reputable software
house. Data from each location is amalgamated on a monthly basis at Tirrol Co's head office to produce
management and financial accounts.

You are currently planning your audit approach for Tirrol Co. One option being considered is to re-write Cal &
Co's audit software to interrogate the computerized inventory systems in each location of Tirrol Co (except for
head office) as part of inventory valuation testing. However, you have also been informed that any computer
testing will have to be on a live basis and you are aware that July is a major holiday period for your audit firm.

Required:
i. Explain the benefits of using audit software in the audit of Tirrol Co; (03)
ii. Explain the problems that may be encountered in the audit of Tirrol Co and for each problem, explain
how that problem could be overcome. (10)
(ACCA, Fundamentals Level F8 - June 2009)
(ICAP's Question Bank for CAF 08 - Q. # 122a)

Q.31
You are the audit manager responsible for the audit of NKL. Limited for the year ended 28 February 2021. The
audit team has prepared the following summary of debtors' balances for your review:

Summary of debtors balances and their confirmed amounts as at 31 January 2021

Assertions verified: Completeness, Cut-off and Rights and Obligations

Sr No. Debtor(s) Balances (Rs.) Comments

as per books Confirmed
by debtor(s)
(i) Alpha 800,000 800,000 -
 (ii) Beta 900,000 900,000 Confirmation was returned by the courier on the
grounds of invalid address. Confirmation was
resent by the client through its rider. The reply
was received directly by the auditor.
(iii) Gamma 700,000 No reply Gamma has gone into liquidation.
received
(iv) Small 600,000 Not These represent various small distributors whose
distributors applicable balances were below Rs. 30,000. Due to
immaterial balances, they weren't selected for
sending confirmation.

Required:
Assess the appropriateness of the work performed by the audit team. Also suggest the additional procedures (If
any) which the audit team may perform. (10)
(ICAP, CAF 08 Level - Spring 2021, Q.# 1)
Q.32
You are the audit manager in a firm of chartered accountants. Following is the extract of the email received
from the job-in-charge responsible for the audit of your client Concordia Limited (CL) for the year ending 31
March 2018:

"I am considering to circulate negative confirmations on 1 April 2018 for debtor balances outstanding as on 31
March 2018 as firstly, the reporting deadlines at CL are very stringent, secondly, the population comprises of a
large number of small balances and thirdly, risk of material misstatement has been assessed as low.

I have also been offered by CL's CFO that one of their staff would get all the confirmations signed from the
debtors and deliver them to our firm's office. This could help us in meeting the reporting deadline."

Required:
Comment on the suggestions of the job-in-charge. Assuming that the suggestion by job in charge is not
considered appropriate, suggest an alternative approach keeping in view the time limitations. (06)
(ICAP, CAF 08 Level - Spring 2018, Q.# 2)
(ICAP's Question Bank for CAF 08 - Q. # 126)
Q.33
You are currently in the planning phase of the audit of Mineral Water Limited (MWL) for the year ended 30
June 2012. The following information is available to you:

Customer Segment No. of Balance 10 days 10-20 21-30 31-90 > 90

Customers outstanding days days days days
---------- Rs. In Thousands -----------
Super markets 12 20,014 8,125 5,053 6,396 311 129
Wholesalers 65 14,910 5,078 6,019 3,150 454 209
Retailers 553 4,743 1,756 1,798 724 278 187
Five star hotels 7 7,694 2,805 2,793 1,784 201 111
47,361 17,764 15,663 12,054 1,244 636
50% provision for doubtful debts has been made by MWL against balances outstanding for more than 30 days
whereas the balances outstanding for more than 90 days have been fully provided.

Required:
(a) Indicate what would be the basis for selecting debtors for circularizing positive and negative requests for
confirmations. (06)
(b) Briefly explain as to how would you deal with a situation where a debtor confirms a balance which is
different from the amount appearing in the confirmation request. (05)
(ICAP, CAF 08 Level - Autumn 2012, Q.# 3)
(ICAP's Question Bank for CAF 08 - Q. # 106)

Q.34
An auditor has to rely on various kinds of data while performing analytical procedures. The reliability of data is
influenced by a number of factors. List out the main factors with examples. (04)
(ICAP, CAF 08 Level - Spring 2007, Q. # 8b)
Q.35
Your firm is the external auditor of Brave Ltd (Brave) which maintains public parks, under a contract with the
owner of each park. The audit plan in respect of the external audit of Brave, for the year ended 30 June 2013,
requires the use of substantive analytical procedures to estimate revenue. You have been asked to perform these
procedures using the following information:
 Prices on all contracts in place on 1 July 2012 increased by 5% on that date and amounts are invoiced at
the end of each month.
 The same contracts remained in place for the year ended 30 June 2013 compared with the prior year
except for one new contract which commenced on 1 January 2013, providing services of €150,000 per
month, and an existing contract, worth €90,000 per month when it expired on 31 March 2013.
 Prior year audited revenue was £7,560,000 and revenue recorded by Brave for the year ended 30 June
2013 is £8,668,000.

Requirements
i. Calculate the expected revenue, for the year ended 30 June 2013, as required by the audit plan for
Brave. Your answer should clearly show each step in your calculation.
ii. State the audit evidence you would obtain to test the reliability of the data used at each step of your
calculation.
iii. Explain the actions you would take based on the result of your analytical procedures. (10)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2013 September)

Q.36
You are responsible for planning the audit of payroll as part of the external audit of Geese Ltd (Geese) for the
year ended 31 December 2012. You have been provided with the following information:

Year ended 31 December

2012 2011
(draft) (audited)
Employees' total gross pay (£'000) 2,189 2,175
Average number of employees in year 85 91
Company-wide pay rise (effective 1 January) 2% 3.50%
Profit before tax (£'000) 1,088 1,081

Using analytical procedures, identify factors which may indicate a risk of misstatement in the payroll of Geese
for the year ended 31 December 2012. (04)
(Institute of Chartered Accountants in England and Wales, Professional Level - 2013 March)

Q.37
You are the audit senior on the audit of Nano Footwear Limited (NFL) for the year ending 31 March 2021. NFL
is in the business of making a wide variety of footwear products. Your review of the last year working papers
and initial meeting with the NFL management have revealed the following:

i. Due to a high Influx of low priced Chinese products in the local market, NFL has been experiencing a
decline in customers' demand and high degree of competition. The sales managers have been given
aggressive sales targets during the year which are their key performance indicators and are considered
in their annual appraisals.

ii. All the management and policy decisions such as human resources, accounting estimates and
procurement are taken by the CEO himself.

Required:
Briefly discuss the possible 'fraud risk factors' from the above scenario. (06)
(ICAP, CAF 08 Level - Spring 2021, Q.# 5a)

Q.38
Your firm is the external auditor of Avian Limited (AL), a listed company, for the year ending 31 March 2020.
AL is engaged in the business of construction and selling of construction material.

During the planning stage, the audit team has noted the following points for your consideration:
i. AL's CEO aggressively follows up with the departmental heads for meeting the financial targets
established by the directors. Performance of senior management at AL is measured in terms of year-on-
year profit growth. There is an internal audit division of AL and it reports directly to the CEO.

ii. AL is facing difficulties in fulfilling its contracts for supply of building blocks due to a sudden rise in
the cost of raw material, however no provision has been made in the financial statements. AL's CFO
explained that provision has not been made as amount cannot be determined with certainty now and
therefore provision will be made next year, if required. Audit team was of the view that the provision
has not been made because it would significantly affect the profitability of the company.

Required:
Briefly discuss the possible 'fraud risk factors' from the above scenario. (09)
(ICAP, CAF 08 Level - Spring 2020, Q.# 2)

Q.39
Green Limited (GL) is a listed company engaged in the manufacturing of garments and apparels. During the
audit planning meeting for the year ending 31 March 2018, the Chief Financial Officer of GL has provided the
following Information:
i. GL was previously exporting all its production under the brand name of 'Wearables'. However, It has
been facing the Issue of decline in export orders and therefore has decided to start focusing on the local
market. Accordingly, it has made an agreement with BL, according to which GL's products would be
sold to BL who would market them through BL's retail outlets spread throughout Pakistan. A director of
GL holds major shareholding in BL.

ii. Two of the directors of GL holding 16% and 13% shares in GL have informed the Board that they
intend to sell their entire shareholding in GL in order to concentrate on some of their other businesses.
 iii. While discussing some of the internal control deficiencies in the payroll processing department, which
were raised in the previous year's management letter, the CFO has informed that the matter has been
referred to the Internal audit department but is pending because of the illness of the Chief Internal
Auditor.

Required:
Identify fraud risk factors in the above scenario. (04)
(ICAP, CAF 08 Level - Spring 2018, Q.# 8a)
(ICAP's Question Bank for CAF 08 - Q. # 60a)
Q.40
Your firm is the auditor of Cell Phones (Private) Limited (CPPL), which operates a chain of mobile phone retail
outlets. About 25% of shareholding in CPPL is owned by Anwar and his wife. Anwar is the Chief Executive of
CPPL and also looks after the finance and operations of the company. There are five other directors and each of
them holds 15% shares in CPPL.

The Internal Audit Function comprises of three senior officers who are graduates. Their duties include checking
of accounting records, physical stock taking preparation of bank reconciliations, reviewing payments and
verification of fixed and current assets. During the planning phase, Anwar stressed the need for early
completion of audit, in order to be able to submit the audited financial statements for seeking a long term
finance. He was of the view that internal audit working papers would be of enormous help in performing and
early completion of the audit.

Required:
(a) Identify and briefly describe the fraud risk factors in the above scenario. (06)
(b) State whether it would be advisable to use the internal audit working papers in the above situation and
give three distinct reasons to support your decision. (06)
(ICAP, CAF 08 Level - Autumn 2014, Q.# 3)
(ICAP's Question Bank for CAF 08 - Q. # 147)
Q.41
Sukoon Limited is engaged in manufacturing and sale of office equipments. It has appointed you in place of
XYZ & Company for the audit of financial statements for the year ended June 30, 2007.

During the audit you noted the following:

o An employee of the company, responsible for after-sales-services, misappropriated cash which he
recovered from the customers without raising proper invoices. The amounts were small and much
below the materiality level.
o During the last year (ended on June 30, 2006), the middle management in connivance with lower staff
booked a sale of material amount which actually pertained to the current year. The higher management
has issued warning letters to the concerned employees but is reluctant to take any further action as the
company has not suffered any losses. XYZ & Company has given an unmodified report on the previous
year's financial statements.

Required:
Describe how each of the above situations will impact the following:
i. Assessment of risk and audit procedures; (03)
ii. Communication with management and with those charged with governance. (04)
(ICAP, CFAP 06 Level - Winter 2007)
Q.42
Malta Limited (ML) has been facing problems in running an effective internal audit department. The directors
of ML have shared with you a brief structure, functioning, roles and responsibilities of the current internal audit
department, which are as follows:

The internal audit department is headed by Hina Akram, a Chartered Accountant. She works in close
coordination with CFO and CEO. She prepares audit plan for each quarter by herself All the internal audit
findings are first discussed at length with both the CFO and the CEO and are then presented to the audit
committee.

Hina's internal audit team comprises of three members, Usman, Kashif and Amna. Usman is responsible for the
audit of treasury and payments, Kashif is responsible for the audit of procurement, payables and production and
Amna is responsible for the audit of revenues, receivables and assets, for the last three years. Hina believes that
the continued involvement of her team in the same areas has helped them to develop expertise in their assigned
areas. This also helps her and her team to design internal controls for the above mentioned areas in an effective
manner.

Required:
Identify the deficiencies relating to independence of internal audit department and recommend measures which
should be taken to protect the independence. (07)
(ICAP, CAF 08 Level - Spring 2020, Q. # 5b)
Q.43
M & B Limited is an unquoted public company engaged in the manufacture and marketing of textile products.
Its production facility and head office is located in Karachi. Sales are made through a network of merchants
across the! country. The audit of the company is in planning stage and you, in your capacity as audit senior,
have been assigned the task of evaluating the internal audit function of the Company.

The Company has an adequately manned internal audit department (IAD). Scone and objectives of the LAD are
determined by the Audit Committee, which reports directly to the Board of Directors of the Company.

Major functions of IAD include:

i. Systems review and compliance testing;
ii. Review of monthly management accounts including variance, trends and ratio analysis; and
iii. Substantive testing as per the overall internal audit plan.
iv. The internal audit planning is performed by the head of internal audit department and approved by the
Audit Committee.
v. The work and reports of the IAD are reviewed by the Audit Committee on a quarterly basis.

Required:
(a) Explain why an auditor should consider internal audit activities while planning the audit. (02)
(b) Based on the above, perform preliminary assessment of internal audit. Also state further information, if
any, regarding the internal audit function that you may require. (05)
(c) Assuming you have planned to rely on the work of the internal auditor, describe what would you
consider in evaluating specific work of the internal auditor. (03)
(ICAP, CFAP 06 Level - Summer 2004)
Q.44
Mineral Limited (ML) has incorporated a liability for gratuity payable to its employees on the basis of actuarial
valuation carried out by Professionals Limited (PL). As the audit partner of ML you are not satisfied with the
valuation report prepared by PL, and have decided to appoint Experts Limited (EL) to carry out the valuation
exercise again.
Required:
(a) State the matters that you would consider regarding:
i. The competence, capabilities and objectivity of EL. (03)
ii. Evaluation of the adequacy of EL's work. (03)
(b) Briefly discuss the course of action in case you are not satisfied with the work performed by EL. (03)
(ICAP, CAF 08 Level - Spring 2015, Q. # 4)
(ICAP's Question Bank for CAF 08 - Q. # 35)
Q.45
For each of the following, identify whether sampling would be appropriate or some other approach needs to be
applied:
i. Substantive testing for long term loans from commercial banks (Population size: 5 loans / Rs. 250
million). (02)
ii. Compliance testing for revenue cycle - goods dispatch function (Population size: 100,000 dispatches /
Rs. 550 million); (02)
iii. Substantive testing for payroll expenses (Population size: 102 employees / Rs. 85 million); and (02)
iv. Substantive testing for additions to fixed assets (Population size: 100 items / Rs. 70 million); (02)
(ICAP, CFAP 06 Level - Summer 2005)
Q.46
Your firm is the statutory auditor of Teak Pakistan Limited (TPL) for the year ended 30 June 2020.

During the final review of audit work, your audit team informed you that TPL uses a third party software for its
payroll. While checking the tax calculation, they identified an error in the calculation of monthly tax deduction
from salary. The audit junior who performed the test, extrapolated the error over the entire population. This
resulted in an overall short deduction of Rs.920,985. She concluded that the error was not material because this
amount was less than the audit materiality set at the financial statement level i.e. Rs.1,000,000.

Further, she discussed this matter with the TPL's management who has agreed to deduct the differential amount
from the salary of the next month and will deposit it into government exchequer. Therefore, she concluded that
no accounting adjustment is required for the year ended 30 June 2020.

Required:
i. Briefly discuss the conclusion made by the audit junior regarding materiality of the transaction and
recording of the error.
ii. State the additional steps that you would suggest to your audit team. (Implications on audit report are
not required). (07)
(ICAP, CAF 08 Level - Autumn 2020, Q. # 2b)
Q.47
(a) List any four ways in which the debtor balances may be stratified. (02)

(b) You are the audit in charge on the audit of Opportunity Limited (OL). OL deals in fast moving consumer
goods. For sending of confirmations, an audit team member has stratified the debtors as follows:

Category A Balances exceeding Rs. 50 million 12 customers

Category B Balances below Rs. 50 million 100 customers
Category C Balances below Rs. 10 million 280 customers
Category D Balances below Rs. 1 million 600 customers

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

Required:
Discuss the appropriateness of options discussed in the meeting and give your suggestion in this regard. (05)
(ICAP, CAF 08 Level - Autumn 2015, Q. # 7)
(ICAP's Question Bank for CAF 08 - Q. # 82)
Q.48
You are the audit manager in a firm of Chartered Accountants. The audit seniors on various jobs have sought
your advice in respect of the following independent situations:

i. The expected rate of deviation based on the auditor's understanding of controls has increased to an
extent which is unacceptably high.
ii. Number of debtors has increased from 4,500 to 5,000 and the number of debtors as a percentage of total
assets has also increased.
iii. The expected amount of misstatement has decreased from Rs. 300,000 to Rs. 200,000 and tolerable
misstatement has increased by Rs. 50,000.

Required:
State with reasons, the effect of each of the above issues on the sample size of:
(a) Tests of controls; and
(b) Substantive procedures. (07)
(ICAP, CAF 08 Level - Spring 2012, Q. # 5a)
Q.49
Your audit client has provided you a draft representation letter. The extract from the representation letter is as
follows:

No management employee is involved in any fraudulent activity.

All the related party transactions and the identities of those related parties have been disclosed to you. These
have also been appropriately accounted for and disclosed in accordance with the requirements of
International Financial Reporting Standards.

All the uncorrected misstatements identified are immaterial individually and therefore do not need any
adjustments.

Required:
Critically analyze the above representations given by the audit client. (08)
(ICAP, CAF 08 Level - Spring 2022, Q.#6)
Q.50
You are the manager of Saba and Company, Chartered Accountants, responsible for the audit of Tiger Limited
(TL). While reviewing the draft financial statements and the working paper file, following matters have come to
your attention:
i. No subsequent events were identified.
 ii. During the stock count, certain items were physically present but were not appearing in stock sheets
provided by TL. The management informed you that these items were sold but were not dispatched
upon customer request.
iii. TL has a policy for making full provision against receivables when they become overdue for 360 days
or more. However, three customers were not fully provided for in accordance with the TL's policy. The
management contented that they are rigorously following up with these parties and are confident to
recover the outstanding balances very soon.
iv. There was only one litigation pending against the company which has appropriately been disclosed in
the financial statements.

Required:
Discuss whether it would be necessary to obtain management representation in respect of above matters. (08)
(ICAP, CAF 08 Level - Autumn 2019, Q. # 1)
Q.51
The following points have arisen during the audit for the year ended 30 June 20X6 of Compo, a nationwide
dealer in used cars.
(a) During the year, five of Compo's properties were revalued by an independent surveyor.
(b) One property was sold during the year to the marketing director.
(c) The directors have refused to make provision against a bad debt.
Required:
Explain whether or not each of the above would be referred to in the letter of representation for the year ended
30 June 20X6.
(ICAP's Study Text for CAF 08)
Q.52
Greenfields Co specializes in manufacturing equipment which can help to reduce toxic emissions in the
production of chemicals. The company has grown rapidly over the past eight years and this is partly due to the
warranties that the company gives to Its customers. It guarantees Its products for five years and if problems
arise in this period it undertakes to fix them, or provide a replacement product.

You are the manager responsible for the audit of Greenfields and you are performing the final review stage of
the audit and have come across the following two issues.

Receivable balance owing from Yellowmix Co

Greenfields has a material receivable balance owing from Its customer, Yellowmix Co. During the year-end
audit, your team reviewed the ageing of this balance and found that no payments had been received from
Yellowmix for over six months, and Greenfields would not allow this balance to be circularized. Instead,
management has assured your team that. they will provide a written representation confirming that the balance
is recoverable.

Warranty provision
The warranty provision Included within the statement of financial position is material. The audit team has
performed testing over the calculations and assumptions which are consistent with prior years. The team has
requested a written representation from management confirming the basis and amount of the provision are
reasonable. Management has yet to confirm acceptance of this representation.

Required:
(a) For each of the two issues above:
i. Discuss the appropriateness of written representations as a form of audit evidence; and (04)
 ii. Describe additional procedures the auditor should now perform in order to reach a conclusion
on the balance to be included in the financial statements. (06)

(b) The directors of Greenfields have decided not to provide the audit firm with the written representation for
the warranty provision as they feel that it is unnecessary.
Required:
Explain the steps the auditor of Greenfields Co should now take and the Impact on the audit report in relation to
the refusal to provide the written representation. (05)
(ACCA, Fundamentals Level F8 - December 2010)

Q.53
Your firm is the statutory auditor of Bashu Clothing Limited (BL) for the year ended 31 December 2022. BCL
Is a manufacturer of active wear. The draft financial statements show profit before taxation of Rs. 300 million.

During the audit, it was observed that there was an outstanding receivable of Rs. 0.3 million from Shigar (Pvt.)
Limited (SPL) since June 2022. On Inquiry, the management informed your team that this represents a
receivable from SPL for management services related to supply chain management and human resource
management. Further Inquiry revealed that SPL was referred to BCL by one of BCL's director who also holds
the same position in SPL. This was because SPL Is a newly incorporated business and required assistance in
setting up these departments.

Required:
(a) Evaluate the above transaction and discuss the course of action that the audit team should take
(Reporting implications are not required) (12)
(b) State the representation(s) which your firm should obtain from BCL. (04)
(ICAP, CAF 08 Level - Spring 2023, Q.#4)
Q.54
During the audit of Cedar Limited (CL), your audit team observed that CL has sold one of Its freehold lands to
Maple (Private) Limited (MPL) at a loss of Rs. 10 million. Your team's further Investigation of the matter and
reading of the minutes of the board of directors' meeting revealed that:
i. A director of CL holds 20% shareholdings in MPL which makes this entity as CL's related party; and
ii. MPL would pay 30% of the consideration in cash and the remaining amount over a period of five years.

Required:
Evaluate the above related party transaction and suggest any eight key audit procedures that your team should
perform (10)
(ICAP, CAF 08 Level - Autumn 2020, Q. # 3)
Q.55
Al-Shams Limited Is an unquoted public company. A large part of its business is carried out with persons /
organizations who are related to the management or the shareholders.

Required:
(a) State any eight procedures which an auditor may perform for determining the existence of related
parties or related party transactions. (08)
(b) Give four examples of situations that may be Indicative of dominant Influence exerted by a related
party. (04)
(ICAP, CAF 08 Level - Autumn 2010, Q. # 4)
(ICAP's Question Bank for CAF 08 - Q. # 97)
Q.56
Your firm is the auditor of MAB Limited (MAB), a company listed on Pakistan Stock Exchange, for the year
ended 30 June 2023. MAB had issued its financial statements on 1 September 2023 in which a profit before tax
of Rs.1,700 million was disclosed.

On 10 September 2023 an ongoing litigation at the appellate forum was decided against MAB, resulting in a
liability of Rs.500 million to the taxation authorities. This was previously disclosed as a contingent liability in
MAB's financial statement. MAB's legal team is of the view that the liability would amount to Rs.150 million,
and they have decided to file an appeal to a higher judicial forum. Considering the legal team's advice, MAB's
management has decided to amend its previously issued financial statements by recognizing a provision of
Rs.150 million and disclosing the remaining Rs.350 million as a contingent liability in its amended financial
statements for the year ended 30 June 2023.

Required:
Discuss the implications on the audit report. (07)
(ICAP, CAF 08 Level - Autumn 2023, Q.# 5a)
Q.57
You are the audit manager in a firm of chartered accountants. Following independent situations are under your
consideration for the year ended 30 June 2022:

i. The board of directors of Hacksaw Limited (HL), producer of confectionery products, approved the
financial statements on 7 September 2022. Before signing the audit report, it was revealed that retailers
are returning one of HL's products to the distributors. On enquiry, it was found out that certain batches
of that product were not processed correctly and have caused a very bad taste. HL's closing inventory
also contains finished goods from those batches.

ii. Your audit client, Cola Limited was in negotiation for the acquisition of Orange Limited (OL) since
April 2022. On 15 June 2022, it was principally agreed to acquire OL at a price of Rs. 4 billion.
However, the agreement was formally signed on 10 July 2022.

Required:
For each of the above situations, evaluate the need for amendment in the financial statements and suggest the
auditor's course of action. (12)
(ICAP, CAF 08 Level - Autumn 2022, Q.# 7)
Q.58
Consider each of the following independent situations:

i. Spruce Limited issued its financial statements on 15 September 2020 for the year ended 30 June 2020.
On 22 September 2020, your audit team came to know that a major debtor has filed bankruptcy due to
destruction of its production facility in a terrorist attack on 20 August 2020.

ii. During the audit of Larch Limited (LL) for the year ended 30 June 2020, the audit team noticed that the
management of LL had worked out the net realisable value (NRV) on the basis of the sales price at year-
end. Since NRV was greater than cost, LL recorded the inventory in the draft financial statements at
cost. However, after reporting period, LL is facing difficulties in selling the inventory at current price
level and therefore considering to revise its prices.

Required:
In each of the above situations, evaluate the need for amendment in the financial statements and suggest the
audit procedures, if any, which the auditor would need to perform. (10)
 (ICAP, CAF 08 Level - Autumn 2020, Q. # 4)
Q.59
You are the audit manager responsible for the audit of Hub Mills Limited (HML), At the planning stage,
materiality level was determined at Rs. 8 million.

Audit team has completed the audit field work for the year ended 30 June 2018 and has presented the following
issues identified during the audit for your review:

i. Goods worth Rs. 3 million were returned by a customer on 5 July 2018 due to poor quality. Since the
goods were returned subsequent to year end, no adjustment has been recorded by the management.

ii. HML Is facing liquidity Issues which has resulted in adverse key financial ratios. To address the Issue,
HML has sold one of its offices to a company managed by a director of ML. The office was sold for Rs.
40 million. Since the management had correctly recorded the disposal, no specific disclosures related to
this sale have been made in the financial statements. Directors are confident that these sale proceeds
would solve the cash flow problems of HML.

iii. A customer who owed Rs. 11 million at year-end, was declared bankrupt on 15 August 2018. The
management had already provided 50% of the balance in the financial statements.

Revenue for the current year is Rs. 800 million (2017: Rs. 950 million) and loss before tax is Rs. 22 million
(2017: Rs. 7.6 million).

Required:
(a) In respect of each of the audit issues identified by your team, mention the impact (if any) which these
might have on the audit report along with proper justification. (10)
(b) What matters would you want to include in the management representation letter, with regard to the
above issues. (05)
(ICAP, CAF 08 Level - Autumn 2018, Q. # 3)
Q.60
Your firm is the auditor of Customized Machinery Limited (CML), a listed company, for the year ended 30 June
2015. CML. has an asset base of Rs. 3.5 billion and profit before tax of Rs. 350 million. On 10 August 2015,
after the issuance of audit report but prior to the issuance of financial statements, you have been informed as
under:

i. CML had been awarded a contract of Rs. 500 million in April 2015 for supply of specialized machinery
parts in August 2015 to a foreign customer. CML was expecting a profit of 20% on the contract.
However, the government of the foreign country has placed certain restrictions on import because of
which the customer has cancelled the purchase order under force majeure clause.
ii. The inventory against the above order is lying in the warehouse and requires an expense of Rs. 105
million in order to become usable for other customers.
iii. According to the management, the cancellation of this order will not affect the operations of the
company in any significant manner.
Required:
Discuss how you would deal with the above situation. (07)
(ICAP, CAF 08 Level - Autumn 2015, Q. # 4)
(ICAP's Question Bank for CAF 08 - Q. # 141)
Q.61
Humphries Co operates a chain of food wholesalers across the country and its year end was 30 September 2011.
The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed
on 13 December. Revenue for the year is $78 million and profit before taxation is $7-5 million. The following
events have occurred subsequent to the year end.

Receivable
A customer of Humphries Co has been experiencing cash flow problems and its year-end balance is $0-3
million. The company has just become aware that its customer is experiencing significant going concern
difficulties. Humphries believe that as the company has been trading for many years, they will receive some, if
not full, payment from the customer; hence they have not adjusted the receivable balance.

Lawsuit
A key supplier of Humphries Co is suing them for breach of contract. The lawsuit was filed prior to the year
end, and the sum claimed by them is $1 million. This has been disclosed as a contingent liability in the notes to
the financial statements; however, correspondence has just arrived from the supplier indicating that they are
willing to settle the case for a payment by Humphries Co of S0•6 million. It is likely that the company will
agree to this.

Warehouse
Humphries Co has three warehouses; following extensive rain on 20 November significant rain and river water
flooded the warehouse located in Bass. All of the inventory was damaged and has been disposed of. The
insurance company has already been contacted. No amendments or disclosures have been made in the financial
statements.

Required:
For each of the three events above:
i. Discuss whether the financial statements require amendment;
ii. Describe audit procedures that should be performed in order to form a conclusion on the amendment;
and
iii. Explain the impact on the audit report should the issue remain unresolved. (15)
(Note: The total marks will be split equally between each event.)
(ACCA, Fundamentals Level F8 – December 2011)
Q.62
Asim & Co. an audit firm has a number of clients. Certain matters related to different clients were brought into
the notice of a partner of the firm for review and advise as to which type of audit report are to be issued in each
of the following cases:
i. Milestone Technology Limited (MTL) is a renowned company for manufacturing specialized
machineries on order. One of the customers sued the company for the worst quality of material used in
machinery specially customized for him. The amount that is being sued was not substantial but material
in nature and the case could go either way. The company did not mention this amount in the financial
statements.

ii. Rashid & Sons, one of the customers of Shalimar Corporation went bankrupt just after the year end but
the company did not provide for bad debts. The details are as follows:
Rupees
Amount of bad debts of Rashid & Sons 300,000
Total trade receivables 1,300,000
Profit for the year 3,000,000
 iii. Amir Brothers Limited is undergoing a major court case that would bankrupt the company if lost. The
directors assessed and disclosed the case as a contingent liability in the financial statements. The
auditors agreed with the treatment and the disclosure.

iv. The auditor attended the inventory count of Kashan Limited but the company made a very poor attempt
to conduct their inventory count. However, there was insufficient evidence that the inventory valuation
at Rs. 3.5 million is correct. Sales revenue and profit for the year were as follows:
Rs. in million
Sales revenue 40.0
Profit 17.5

v. Mehreen Enterprises is a retailer, deals in Fast Moving Consumer Goods (FMCGs). The company
supplies its product on cash basis but there is no system to confirm the accuracy of cash sales.

Required:
State what type of audit report should be issued in each of the above cases and also explain the reason for
selection of such type of report. (10)
(ICMA Pakistan - Summer 2017 Extra Attempt)

Q.63
An auditor is required to identify and assess the risks of material misstatement at both the financial statement
and assertion levels. Briefly discuss the risk at financial statement level and provide TWO examples of such
risk. (03)
(ICAP, CAF 08 Level - Spring 2023, Q.#3b)
Q.64
ISA 315 Understanding the Entity and Assessing the Risks of Material Misstatement states 'the auditor should
perform risk assessment procedures to obtain an understanding of the entity and Its environment, including its
internal control.
Required:
i. Explain the purpose of risk assessment procedures. (03)
ii. Outline the sources of audit evidence the auditor can use as part of risk assessment procedures. (03)
(ACCA, Fundamentals Level F8 - December 2006)
(ICAP's Question Bank for CAF 08 - Q. # 44)
Q.65
Jamshed & Company, CAs, is auditing the Star Bank Limited. M. Jamshed is evaluating the collectability of a
Rs. 40 million loan receivable which is given to a firm of partnership and is secured by a mortgage on property
of land and building.

The appraisals performed by the Appraisal Company, showed value of property in excess of the loan amount.
Upon enquiry, Mr. Bilal, the bank's vice president stated: "I know the loan is good because I myself own 40
percent of the partnership that owns the property and is obligated on the loan."

Jamshed then wrote in the working papers:

"The loan appears collectible; Mr. Bilal personally attested to knowledge of the collectability as a major owner
in the partnership obligated on the loan, and the appraised value exceeds the loan amount"

Required:
Do you perceive any problems with M. Jamshed's reasoning or the appropriateness of evidence? Also suggest
appropriate course of action.
Q.66
Year end of Sky Company ends on 30 June 2012 and audit report was signed on 3 September 2012.
Following are some events which occurred in relation to the audit work papers.

(a) On 15 October 2012, you received a bank confirmation letter in the mail. You replaced the faxed copy in the
audit file with this letter.
(b) As for point (a) above, except that you received the confirmation on 15 November 2012.
(c) On arriving at work on 2 September 2012, you write up your notes of the final audit meeting, which was
held with the client on 13 August 2012, and place them in the audit file.

Required:
State whether each of the above events meet or breaches the documentation requirements of ISA 230 Audit
Documentation. Also write additional documentation required by ISA 230, if any, in each case.

Q.67
In a recent audit engagement, the audit manager completed the final assembly of audit file. Subsequently, the
audit partner expressed the intention to remove certain review remarks.
Required:
Discuss whether the audit partner can remove his review remarks. (04)
(ICAP, CAF 08 Level – Spring 2023, Q.# 3c)
Q.68
Your firm is the auditor of Monero Limited (ML).
ML's financial statements were issued on 28 February 2021. However, after receiving a High Court judgement
on 2 March 2021, ML's management assesses its impact and has decided to revise its financial statements.

Required:
Discuss the documentation that is necessary to be included in the audit working file regarding the above matter.
Note: Audit procedures are not required. (03)
(ICAP, CAF 08 Level - Spring 2021, Q.# 2c)
Q.69
Who is the owner of working papers? Can working papers be a substitute to the accounting records of a
company? (02)
(ICAP, CAF 08 Level - Spring 2001)

Q.70
You are the audit manager of ABC Company which is the listed Company and the draft financial statement
shows profit before tax of Rs 10 billion and revenue of Rs. 100 billion.

The engagement team includes a part time supervisor and 2 trainees.

Considering the time availability of the supervisor, it was decided that the planned audit approach to trade
payables was to place reliance on internal controls on purchasing. Hence the audit team decided to do test of
controls and reduce substantive tests, where possible.

As per delegation of authority manual, the purchase orders were required to be authorized by Deputy Manager -
Procurement. During test of controls, it was identified by the audit team that atleast seven purchase orders had
not been authorized by the Deputy Manager - Procurement. When the audit team made enquiries from the staff,
it was observed that the purchases were made for business purposes. The team concluded that no additional
procedures were required.

Required:
Discuss the quality issue in the above scenario.
(ICAP's Question Bank for CAF 08 - Q. # 56)
Q.71
You have been assigned as audit manager on Serene Limited. a listed company. The audit manager who was
previously assigned is on privilege leave due to personal reasons.

The draft financial statements for the year show profit before taxation for the year of Rs.200.2 million and total
assets of Rs. 650.5 million.

The audit supervisor, who is a part qualified chartered accountant, has shared with you that company has
changed its valuation policy from cost to fair value. This was not identified at planning as a high risk area. The
valuation was performed by an external firm of valuers. The audit manager and the team has not heard of their
name before. The audit supervisor said that on their website, it has been mentioned that they have some very
well-known companies as their clients. This information has not been substantiated from any other source.

Required:
Comment on the quality of the planning and performance of the audit of the company, discussing the quality
control and other professional issues raised.
(ICAP's Question Bank for CAF 08 - Q. # 59)

Q.72
Wealthy Bank Limited (WBL) is considering to appoint external auditor for the year ending June 2020. WBL
has shortlisted the following three audit firms for appointment as external auditor and has presented certain
matters relating to each of them for your consideration:

Rao Arif & Company, Chartered Accountants

The firm has recently admitted a new partner who worked as CFO till June 2017, of Noor Engineering Limited,
a subsidiary of WBL.

Hatim Tughlaq & Company, Chartered Accountants

One of the partners in the firm has obtained a loan from WBL of Rs. 5 million. The firm has informed that the
partner would not be able to repay the loan till 2021.

Rashid Kareem & Company, Chartered Accountants

Rashid, one of the partners in the firm, has several commercial properties in Lahore. He has rented out five
properties to WBL for its branch operations.

Required:
In the light of the Companies Act, 2017 discuss whether any of the above firms can be appointed as external
auditor of WBL. (06)
(ICAP, CAF 08 Level - Spring 2020, Q.#8)

Q.73
Haris & Company, Chartered Accountants was appointed as the auditor of Cactus (Private) Limited (CPL) for
the year ending 31 December 2021. Haris, the only audit partner of Haris & Company, passed away on 5
September 2021. No other auditor has yet been appointed by CPL.
Required:
State the requirements of the Companies Act, 2017 for the appointment of auditor in the above situation. (03)
(ICAP, CAF 08 Level - Autumn 2021, Q.#2a)

Q.74
On 5 March 2018, HSB & Company, Chartered Accountants (HSB) has been offered appointment as external
auditor of Tahir Limited (TL) for the year ending 31 December 2018. TL Is the subsidiary of Crypto Bank
Limited (CBL), which is audited by another firm of chartered accountants.

Hatim, a partner of HSB is using credit card of CBL and the balance outstanding against it on 28 February 2018
was Rs. 1.1 million. Hatim plans to clear the dues by 30 July 2018, which is well before the commencement of
audit. It is expected that the audit planning activities will commence from 1 November 2018.

Required:
Comment on the above situation in the light of Companies Act, 2017. (04)
(ICAP, CAF 08 Level - Spring 2018, Q.#1a)
(ICAP's Question Bank for CAF 08 - Q. # 55a)

Q.75
Comment on each of the following situations with reference to the anointment of external auditors in
accordance with the requirements of the Companies Act, 2017.

(a) ABC Limited and DEF Limited are associated companies on account of common directorship. Salman
and Company, Chartered Accountants (SCC) have received an offer for appointment as the auditor in
ABC. Salman, a partner in SCC is the spouse of Naveen, who is an employee in DEF. (02)
(b) All the partners of Kashif Associates are Cost and Management Accountants. The firm has received an
offer for appointment as the auditor of Nihal (Private) Limited (NPL). NPL has a paid-up capital of Rs.
500,000 and 30% of its shares are held by Siyal Limited which is a public company. (03)
(ICAP, CAF 08 Level - Spring 2015, Q.#2)
(ICAP's Question Bank for CAF 08 - Q. # 14)

Q.76
Comment on the following independent situations, with reference to the requirements of the Companies Act,
2017. Hamid is a partner in a Chartered Accountant firm and holds 100,000 Term Finance Certificates in Sona
Fertilizers Limited (SFL). Hamid's firm is considering to accept the audit of SFL. (02)
(ICAP, CAF 08 Level - Spring 2014, Q.#2c)

Q.77
Comment on each of the following independent situations in respect of appointment of auditors, with reference
to the applicable rules and regulations:
(a) Guava and Company, Chartered Accountants, have received a request for appointment as auditor of
Orange Bank Limited (OBL). Most of the partners of Guava and Company maintain their accounts with
OBL and are enjoying credit card facilities from them. The maximum outstanding balance on the credit
card facility, due from any partner is Rs. 899,000.
(b) Apricot and Company, Chartered Accountants, have received an offer for appointment as auditor of
Banana Limited. Mr. Pumpkin who is a nominee director of the Government on the Board of Directors of
 Banana Limited holds 25% shares in Water Melon Limited. The spouse of a partner also holds shares in
Water Melon Limited.
(c) Mr. Zaheer, a legal practitioner, has received an offer for appointment as external auditor of Lychee
(Private) Limited (LPL). The paid up capital of LPL is Rs. 1,500,000 of which 40% is owned by Blue
Black Limited, a listed company.
(d) Walnut and Company, Chartered Accountants, have received an offer for appointment as external auditors
of Wasim (Private) Limited (WL), in place of the previous auditors, who were removed before the
completion of their term. You may assume that WL has completed all the legal formalities before removing
the previous auditors.
(e) Mr. Sadiq has recently joined your firm as a partner. He has served on the Board of Directors of
Strawberry Limited (SL) until 30 June 2009, as a Government nominee. In the Annual General Meeting of
SL held on 31 August 2011, a shareholder has proposed the name of your firm for appointment as the
external auditors for the year ending 30 June 2012. (11)
(ICAP, CAF 08 Level - Autumn 2011, Q.#4)
(ICAP's Question Bank for CAF 08 - Q. # 39)
Q.78
Alia recently completed her Chartered Accountancy qualification and training from Rumi Iqbal and Company,
Chartered Accountants. During her training, Alia was mainly engaged in audits of fast moving consumer goods
(FMCG) companies.

She is currently working with an audit client who approached her for reporting manager position. One of the
main reasons for her selection was her audit experience in the FMCG sector. The audit client, who wants to
employ her, expects that she will help prepare a comparative analysis of certain financial aspects of the
company using the data from the sector that she may have obtained during the course of her audits.

Required:
In light of the Code of Ethics for Chartered Accountants, identify and explain the threats to the fundamental
principles. (08)
(ICAP, CAF 08 Level - Autumn 2023, Q.#1a)

Q.79
You are the quality control partner in an audit Arm. Following Independent matters are presently under your
consideration:

(a) Freshco (Private) Limited (FPL) has asked your firm to help them in implementation of an ERP software.
Your firm has refused to accept the engagement as the firm believes that it does not have the required
competencies. However, the fin has referred FPL to an IT firm which has relevant competencies. As part of
arrangement, the IT firm will pay 15% of fee charged to FPL to your firm.
Required:
Identify and explain the threats to the fundamental principles of ICAP code of ethics. (03)

(b) Ahmed has recently joined your firm as an audit manager. The firm intends to depute him on the audit of
Monsoon (Private) Limited (MPL). Prior to joining the firm, Ahmed had been providing accounting and
taxation consultancy services to MPL for last many years. Ahmed was also assisting MPL in preparation of
annual budgets, management accounts and calculation of tax provision based on audited financial statements.
Required:
Identify and explain the threats to the fundamental principles of ICAP code of ethics. Also evaluate the
significance of the identified threats. (07)
(ICAP, CAF 08 Level - Autumn 2022, Q.# 1b&e)
Q.80
Hussain Tarar is the audit partner responsible for the audit of Petra Travels (Private) Limited (PTL). The chief
executive officer (CEO) of the company has informed Hussain that due to liquidity issues amid COVID-19,
several employees including some staff members of finance department left the company. CEO has therefore
requested Hussain to provide two staff of the audit firm for some time to run the finance department.
Required:
In the light of Code of Ethics for Chartered Accountants, discuss the threats in the above scenario and suggest
appropriate safeguards. (07)
(ICAP, CAF 08 Level - Autumn 2021, Q.# 2c)

Q.81
Daud and Company, Chartered Accountants (DC), has received an offer for appointment as auditor of Jamal
Limited (IL). Wife of Daud is a Shareholder and Director in Royal Limited (RL).

Required:
In accordance with the requirements of the Companies Act, 2017, state whether and under what circumstances
DC could accept the audit, under each of the following situations:
(a) JL holds 51% shareholding in RL. (03)
(b) L is an associated company of RL. (05)
(c) One of the directors in JL also holds 10% shareholding in RL. (02)
(ICAP, CAF 08 Level - Autumn 2016, Q.#7)
(ICAP's Question Bank for CAF 08 - Q. # 31)

Q.82
Comment on each of the following independent situations with reference to the applicable rules and regulations.

(a) Zaman is a partner in a firm of Chartered Accountants and holds 5,000 shares in Mardan Limited (ML). His
firm has received an offer for appointment as auditors of Khanewal Limited (KL). ML and KL are subsidiaries
of Dera Khan Limited (DKL).

(b) The total paid up capital of IJK Limited is Rs. 990 million whereas its ordinary share capital is Rs. 130
million. LMN Limited holds 50 million non-voting preference shares and 2 million ordinary shares in IJK
Limited. The par value of both types of shares is Rs. 10 each.
Bilal and Company has received an offer for appointment as auditors of IJK Limited.
Faryal, the wife of a partner in Bilal and Company, is a director in LMN Limited. Faryal also holds 10,000
shares in LMN Limited. (04)
(ICAP, CAF 08 Level - Autumn 2012, Q.#8)
(ICAP's Question Bank for CAF 08 - Q. # 7)
Q.83
You are the Ethics and Quality Control Manager in an audit firm namely HMB Chartered Accountants. The
audit manager responsible for the audit of Fantom Limited (FL), has started the audit planning for FL and come
across the following matters for which he needs your guidance:

i. Fizza was planned to be the engagement supervisor for the audit of FL. She has received an
employment offer from FL. However, she is considering not to accept FL's employment offer.
ii. FL is the main sponsor of the ongoing cricketing event. Being the main sponsor, FL has received some
entry passes of VIP enclosure of the final match. It has offered three such passes to the audit team
members.
 iii. Your firm is under renovation process and about to procure two central air conditioning systems
through tendering process. Your firm has received quotations from various vendors including FL. The
total expenditures for purchase and installation of two central air conditioning units are expected to be
Rs. 50 million.
iv. FL has offered your firm that the fee for taxation services of this year may be based on a percentage of
tax saved.

Required:
Identify the threat(s) which may arise and evaluate their significance. Also recommend the course of action or
the mitigating actions which may be taken by your firm. (12)
(ICAP, CAF 08 Level - Spring 2021, Q.# 9)

Q.84
Haris Awan has recently been appointed as a partner in HBC Chartered Accountants. Haris has been assigned
the audit of Hemlock Limited (HL). HL has been the firm's client for the past 15 years. Haris has asked Babar
Raza, manager responsible for the audit of HL for the last seven years, to assist him in the planning phase.
Babar has informed him that:
i. Attitude of HL's Chief Financial Officer (CFO) has been very aggressive towards audit team members,
particularly at times when questioned on any of his judgements in relation to accounting matters.
ii. CFO normally gives us a short deadline for completion of the audit.
iii. One of the previous audit team members has recently joined HL as Manager Finance and has ensured us
his full cooperation towards the timely completion of the audit.
Required:
Discuss the possible threats) which may arise in the above situation, their significance and the safeguards
required to mitigate those threats. (12)
(ICAP, CAF 08 Level - Autumn 2020, Q.#8)

Q.85
(a) Discuss the threats and the related safeguards in each of the following situations:
i. Saleem is the audit senior at Mango Industries Limited (MIL). MIL's finance manager has
requested him to provide the residential addresses of the engagement manager and the engagement
partner. The finance manager wants to send them one of MIL's latest product.
ii. Akram is the audit senior engaged on the audit of Dragon Limited (DL). He has informed the audit
manager that he has been offered a job by DL and that he would be joining DL from 1 April 2018.
The audit is expected to be completed on 15 March 2018.

(b) Amjad is the audit senior at Orange Limited (OL), a software house. OL has adopted IFRS 15 'Revenue
from Contracts with Customers' for preparation of its financial statements for the year ending 31 March
2018. However, the manager finance of OL. is indecisive as regards revenue recognition on certain
contracts.
He has asked Amjad to suggest accounting treatment of such contracts in accordance with IFRS 15. Amjad
does not have in-depth knowledge of this IFRS and therefore, he has consulted his friend who has recently
attended a workshop on IFRS 15.

Required:
i. Discuss the threats in the above situation. (03)
ii. What actions the firm should take to ensure that such situation is avoided in future? (03)
(ICAP, CAF 08 Level - Spring 2018, Q.#5)
(ICAP's Question Bank for CAF 08 - Q. # 5b&c)
Q.86
Discuss the categories of threats and related safeguards in each of the following situations:
(a) An unlisted audit client which has recently been incorporated has requested your firm to assist the
finance department in the preparation of financial statements. (03)

(b) Saleem has recently been promoted as a partner and the audit of TTL has been assigned to him. TTL
owns and operates a chain of restaurants. The following matters are under his consideration:
i. Asif has been involved in the audit of TTL as audit senior for the last three years. He has
recently qualified as chartered accountant and Saleem wants to appoint him as audit manager.
ii. TTL's management has requested Saleem to include Rashid, a semi-senior, in the audit team.
Rashid is the son of TTL's Marketing Director.
iii. Saleem has noticed that the firm often uses the restaurants run by TTL for conducting its
internal functions. (07)
(ICAP, CAF 08 Level - Spring 2017, Q. # 4)
(ICAP's Question Bank for CAF 08 - Q. # 18)

Q.87
Discuss the categories of threats that may be involved in each of the following independent situations and
advise the partners of the concerned firm with regard to the possible course of action that may be followed in
each situation:
(a) Ahmed has recently joined a firm of Chartered Accountants. The firm intends to depute him on the
audit of Masoom (Private) Limited (MPL). Prior to joining the firm, Ahmed had been providing
accounting and taxation services to MPL for many years, in the capacity of a consultant. (04)
(b) It has been discovered that father of one of the trainees posted on the audit of Chalak Limited (CL), has
a financial interest in CL. (04)
(c) Hoshiyar Limited (HL), an audit client of your firm has recently advertised certain vacancies in its
accounts department. The said positions have been applied for by number of individuals including two
staff members who are posted on the audit of HL. (04)
(ICAP, CAF 08 Level - Spring 2015, Q. # 7)
(ICAP's Question Bank for CAF 08 - Q. # 15)
Q.88
Karim & Company, Chartered Accountants are engaged in the review of interim financial information of Babar
Textiles Mills Limited for the half year ended June 30, 2008. The increase in oil and energy prices and current
inflationary trend prevailing in the country has resulted in substantial losses and the Company's outlook is
negative. Moreover, in view of recessionary pressures being faced by the US and many of the EU economies,
some of the large customers in those countries have not renewed their orders and many others are expected to
follow. Consequently, the company has decided to lay off 40 percent of its workforce gradually, over the next
few months.

The company's management acknowledges the severity of the situation but is reluctant to provide specific
details in the interim financial information. However, it has given a note containing general indications about
the future prospects of the company.

Required:
Describe how the practitioner should address the above issue and the implications it may have on the review
report of interim financial information. (05)
(ICAP, CAF 08 Level - Autumn 2008, Q. # 4)
Q.89
You are the audit engagement partner of a listed company, Steel Limited (SL). The firm is currently in the
process of completing limited scope review of SL's interim financial statements for the half year ended
December 31, 2007. The audit team has recently concluded their work with following findings for your
decision:
i. Inventory is a significant item of the balance sheet but the practitioner was not asked to attend the stock
count at the end of the period. Consequently, the audit team relied on the count communicated by the
management.
ii. A set up of the company in Lahore having carrying value of Rs. 235 million has been sold to an
associated undertaking for Rs. 240 million. The minutes of the Board of Directors show that the
transaction was carried out at an arm's length price. No explanatory note has been given in the financial
statements in this regard.
iii. As a percentage of total debts, the provision for bad debts are in accordance with the previous history of
the company. However, due to time constraints the practice of using age-analysis of debtors has not
been used this time.
Required:
Discuss the above issues and their implications on your report.
(ICAP, CFAP 06 Level - Summer 2008)
Q.90
You are the audit manager in a firm of chartered accountants. Your firm has been appointed as the auditor of a
listed company, Rustam Raees Limited (RRL) for the year ending 31 December 2019. RRL has been publishing
their annual financial statements within one month of the year end and have set strict deadlines for the
completion of audit. Further, this year, RRL has changed its accounting policy relating to property, plant and
equipment, from historical cost to revaluation model.

Required:
List the matters (related to the given scenario only) which you would like to include in the engagement letter,
along with their justification. (04)
(ICAP, CAF 08 Level - Spring 2019, Q # 6a)

Q.91
Your firm has been re-appointed as the auditor of Elegant Limited (EL) for the year ended 30 June 2015. The
firm has been the auditor of EL for the last five years.
Required:
How would you assess whether it is necessary to send an audit engagement letter to EL for the year ended 30
June 2015? (05)
State how you would proceed if EL requests your firm to change certain terms of the engagement. (04)
(ICAP, CAF 08 Level - Autumn 2015, Q. # 2)
(ICAP's Question Bank for CAF 08 - Q. # 51)

Q.92
Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which has seen its revenue
decline steadily over the past few years. The firm is looking to increase its revenue and client base and so has
developed a new advertising strategy where it has guaranteed that its audits will minimize disruption to
companies as they will not last longer than two weeks. In addition, Salt & Pepper has offered all new audit
clients a free accounts preparation service for the first year of the engagement, as it is believed that time spent
on the audit will be reduced if the firm has produced the financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to update the engagement letters of
existing clients, on the basis that these letters do not tend to change much on a yearly basis. One of Salt &
Pepper's existing clients has proposed that this year's audit fee should be based on a percentage of their final
pre-tax profit. The partners are excited about this option as they believe it will increase the overall audit fee.

Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers Co (Cinnamon), whose year end is
31 December. Cinnamon requires their audit to be completed by the end of February; however, this is a very
busy time for Salt & Pepper and so it is intended to use more junior staff as they are available. Additionally, in
order to save time and cost, Salt & Pepper have not contacted Cinnamon's previous auditors.

Required:
(a) Describe the steps that Salt & Pepper should take in relation to Cinnamon:
i. Prior to accepting the audit; and (05)
ii. To confirm whether the preconditions for the audit are in place. (03)
(b) State FOUR matters that should be included within an audit engagement letter. (02)
(c)
i. Identify and explain FIVE ethical risks which arise from the above actions of Salt & Pepper & Co; and
ii. For each ethical risk explain the steps which Salt & Pepper & Co should adopt to reduce the risks
arising. (10)
(ACCA, Fundamentals Level F8 - December 2013)

Q.93
The audit team has started planning for the audit of Rustam Limited (RL), a sports product manufacturer, for the
year ended 30 June 2023.

RL holds contracts with two well-known international sports brands, Sportify and Xcelerate, for manufacturing
their sports equipment. The majority of RL's sales comprise export to these two brands. The audit team has
observed and documented the following matters for the review of the audit manager:

(I) Sportify's Sponsorship and Production Impact

Sportify served as the main sponsor of a top-ranked football team associated with a German football club, a
partnership that came to an end on 31 December 2022. Consequently, one of RL's production units remained
non-operational for six| months during the year and at the year-end. This unit was established in 2020 with the
specific intention of meeting Sportify's product demand. RL intends to sell the inventory produced for Sportify
within the local market. However, there Is a prevalence of cheaper counterfeits of RL products available in the
market.

(II) Xcelerate's Production Outsourcing and Industry Developments

Xcelerate specializes in selling sports kit and protective gear for high-impact sports. Xcelerate has outsourced
its production to various manufacturers, one of which is RL. Recent injuries have prompted increased
awareness and regulations concerning the reliability of such protective gear. Xcelerate has recently issued a
press release those five severe injury incidents occurred which involved its products and they are investigating
it. Further, Xcelerate is expected to undergo an acquisition by another company operating within the same
segment, with the transaction likely to finalize by November 2023.

Required:
Discuss the business risks and the related audit risks from the above scenario. (09)
(ICAP, CAF 08 Level - Autumn 2023, Q.# 6)
Q.94
Your firm is the statutory auditor of Astore Limited (AL), a listed company, for the year ended 31 December
2022. AL deals in fast moving consumer goods (MCG) In recent times, the FMCG sector has experienced
significant growth with numerous new players entering the market and established companies expanding their
operations, resulting in a fiercely contested industry. AL has consistently endeavored to meet ever-evolving
needs and preferences of consumers by adapting to changes in the market.

Effective this year, AL has commenced importing raw materials for its new category of consumer products.
Some of these raw materials have a short shelf-life and could become harmful if used cater their expiration date.
However, AL has successfully captured the attention of consumers with its exceptional finished products in this
category, resulting in significant increase in sales.

During the year, AL has commenced the expansion of its production facilities and the implementation of an ERP
system to integrate its operations with financial reporting process. These Initiatives are being financed through
additional borrowing facilities.

Required:
Identify and discuss the business risks and the related audit risks from the above scenario. (12)
(ICAP, CAF 08 Level - Spring 2023, Q.# 1)

Q.95
Your firm is the auditor of Ninja Foods Limited (NFL) for the year ended 30 June 2022. NFL Is a food chain
having restaurants located in all major cities of Pakistan. NFL specializes in Pan-Asian cuisine and has
Japanese, Thai and Chinese food on its menu.

Following information has been gathered by the audit team:

i. Some of the ingredients used in the food products offered to customers are imported. On 31 August
2022, the government has banned import of luxury food items which includes most of the imported
items used in the NFL's most selling items. NFL currently has stock of these imported items which
fulfil its requirement of next one month only.
ii. 70% of the customers pay in cash while the remaining 30% pay through credit/debit cards.
Furthermore, 55% of the customers' visits are on weekend. All cash collection on weekend is deposited
in the bank on the very next working day.
iii. NFL follows a policy in which all the expired stock is to be placed in separate store room, which can
then be adequately destroyed. In the internal audit report, it has been highlighted that two of the
restaurants were not following this policy.
iv. During the year ended 30 June 2022, NFL's profits have been reduced by 30% mainly due to rising
electricity prices, increase in interest rates on long term loan, decrease in demand of the product due to
recession in the economy and increase in raw material prices due to rupee devaluation.

Required:
Identify the key audit risks in the above scenario. (Ignore the risk related to going concern) (10)
(ICAP, CAF 08 Level - Autumn 2022, Q.# 4a)

Q.96
Your firm is the auditor of Adventure Travel (Private) Limited (APL) which offers a wide range of adventure
sports services such as paragliding, parasailing and scuba diving. APL follows high safety standards to avoid
any unfortunate events. However, during the year, one of its paragliding trips was affected due to bad weather
which caused severe injuries to its clients. Immediately after this unfortunate incident, APL has invested heavily
in further upgrading its equipment to prevent happening of such incident in future. The entire investment has
been financed through a bank loan.

You have been informed that due to overwhelming response towards adventure trips, number of tour operators
have launched the same services at significantly low prices as compared to APL; however, all these new tour
operators are not following as high safety standards as are being followed by APL

Considering the increased competition, APL has recently widened its scope of business and introduced:
 Booking of air tickets and hotel rooms on behalf its clients at a discounted rate. APL is entitled to a
commission, if bookings are made through APL. The commission on booking is recorded when the
payment has been received.
 "Book now and Pay later" instalment scheme for all of its services.

Required:
(a) Identify the matters that you will consider while obtaining an understanding of APL and its
environment. (05)
(b) Identify and discuss the business risks and the related audit risks from the above scenario. (09)
(ICAP, CAF 08 Level - Spring 2022, Q.#2)

Q.97
Khyber Foundation (KF) is a non-profit organization engaged in providing medicines and medical equipment
free of cost or at substantially discounted rates to the underprivileged people of the society. KF has obtained the
approval from the relevant regulatory authorities to operate as a non-profit organization- Therefore. KF is
entitled to tax exemption subject to conditions that administrative expenses do not exceed 15% of total
donations and all withholding taxes are duly deposited with the taxation authorities.

During the financial year 2020-21. KF has received cash donations from the following three sources:
 Corporate entities through banking channel;
 Donation boxes placed in various retail shops; and
 Collection kiosks placed in the major shopping malls as part of donation campaign in Ramadan.

KF has also received medical equipment from donors which are recorded at fair value. Medicines and medical
equipment are given only on a valid doctor's prescription. This facility is also available to KF's employees.

KF has employed two accountants who are pursuing their bachelor's degree. Both of them are responsible for
recording receipts, making payments, managing inventory and reporting to the trustees.

Required:
Identify the risks which KF's auditor would need to consider. (07)
(ICAP, CAF 08 Level - Autumn 2021, Q.# 1)
Q.98
You are the manager responsible for the audit of a newly incorporated company, Trojan Limited (TL).
Following are the extracts from the first draft financial statements of TL for the year ended 31 December 2019:

Rs. in million
Revenue 12,000
Profit before tax 72
Total assets 13,000
 Total liabilities 7,000

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

Your audit team has determined the materiality on the basis of profit before tax for the year ended 31 December
2019. In view of the audit team profit before tax is the main performance indicator for TL's board of directors.

Required:
Discuss the appropriateness of the benchmark used by your team in determining the materiality and suggest the
Alternative(s) available to your team. (06)
(ICAP, CAF 08 Level - Spring 2020, Q. # 3a)

Q.99
You are the audit manager in charge of the audit of Tempest, a limited liability company. The company's year
end is 31 December, and Tempest has been a client for seven years. The company purchases and resells fittings
for ships including anchors, compasses, rudders, sails etc. Clients vary in size from small businesses making
yachts to large companies maintaining large luxury cruise ships. No manufacturing takes place in Tempest.

Information on the company's financial performance is available as follows:

2005 Forecast 2004 Actual

$000 $000
Revenue 45,928 40,825
Cost of sales (37,998) (31,874)
Gross profit 7,930 8,951
Administration costs (4,994) (4,758
Distribution costs (2,500) (2,500)
Net profit 436 1,693

2005 Forecast 2004 Actual

$000 $000
Non-current assets (at net book value) 3,600 4,500
Current assets
Inventory 200 1,278
Receivables 6,000 4,052
Cash and bank 500 1,590
Total assets 10,300 11,420

Share capital 1,000 1,000

Accumulated profits 5,300 5,764
Total shareholders' funds 6,300 6,764

Non-current liabilities 1,000 2,058

Current liabilities 3,000 2,598
Total liabilities 10,300 11,420

Other information
The industry that Tempest trades in has seen moderate growth of 7% over the last year.
 Non-current assets mainly relate to company premises for storing inventory. Ten delivery vehicles are
owned with a net book value of $300,000.
 One of the directors purchased a yacht during the year.
 Inventory is stored in ten different locations across the country, with your firm again having offices
close to seven of those locations.
 A computerized inventory control system was introduced in August 2005. Inventory balances are now
obtainable directly from the computer system. The client does not intend to count inventory at the year
end but rely instead on the computerized inventory control system.

Required:
Using the information provided above, prepare the audit strategy for Tempest for the year ending 31 December
2005. (15)
(ACCA, Fundamentals Level F8 - December 2005)
(ICAP's Question Bank for CAF 08 - Q. # 46b)

Q.100
You are the audit manager in a firm of chartered accountants. Your audit client Dairy (Private) Limited (DPL)
has emailed you its draft financial statements for the year ended 30 June 2021 along with related notes. The
information provided by DPL is summarized below:

Draft statement of financial position as at 30 June 2021

2021 2020
------- Rs. in 000 --------
Equity and reserves 35,922 26,000
Long-term loan 6,000 12,000
Trade and other payables 7,800 6,500
Equity and Liabilities 49,722 44,500

Property, plant and equipment 22,630 26,818

Prepayments 1,500 -
Trade debtors 12,000 8,000
Inventory 13,000 7,000
Cash and bank balances 592 2,682
Assets 49,722 44,500

Draft income statement for the year ended 30 June 2021

2021 2020
------- Rs. in 000 --------
Sales 110,000 73,000
Cost of sales (83,050) (54,750)
Gross profit 26,950 18,250
Admin and marketing expenses (12,100) (10,950)
Finance cost (675) (1,530)
Net profit before taxation 14,175 5,770
Taxation @ 30% (4,253) (1,731)
Net profit 9,922 4,039
Notes:
i. During the year, sales price of DPL products were increased by 20%, to offset the corresponding
increase in cost of production.
ii. On 30 June 2019, DPL had obtained a loan of Rs. 20 million, which is payable in 10 equal quarterly
instalments at the end of every quarter. The loan carries fixed mark-up rate of 9%.
iii. Decrease in property, plant and equipment represents disposals made during the year, net of
depreciation.
iv. Prepayment represents advance rental payment of warehouse, obtained for 6 months on 16 June 2021 at
a monthly rent of Rs. 250,000.

Required:
Using analytical procedures, Identify any four unexplained fluctuations and inconsistencies in the above
situation. State the key audit procedures which you would perform to address the issues identified by you. (10)
(ICAP, CAF 08 Level - Autumn 2021, Q.# 5)

Q.101
You are manager responsible for the audit of Pine Limited (PL) for the year ended 31 August 2020, PL, has
large contracts with many government entities. During the year, the government has significantly reduced its
spending which has also affected its contract volumes with PL. Devaluation of the local currency has also
resulted in increased costs of the materials purchased from overseas suppliers.

During the planning work review, your team has provided you the following ratios:
2020 2019
Gross profit margin 32% 28%
Accounts payable to cost of sales ratio 0.20 0.28
Trade days receivable 90 75

Required:
i. Explain the fluctuations and inconsistencies in the given ratios.
ii. State any four key audit procedures which you would perform to address each issue identified in (i)
above. (09)
(ICAP, CAF 08 Level - Autumn 2020, Q. # 22)

Q.102
Ameer Welfare Trust (AWT) Is engaged in providing education and three dally meals to the underprivileged
citizens of the society. Donation collection kiosks have been established at various public spots which collect
donations predominantly in cash.

The constitution of AWT states that administration costs should not exceed 10% of Its income. Due to this
restriction, AWT has employed only one accountant who works on part time basis.

The constitution further requires AWT to maintain separate bank accounts for donations collected for education
and meals. Donors are requested to mention the purpose of donation. Donation received for a specific purpose
cannot be spent for any other purpose.

Required:
Identify the risks which AWT's auditor would need to consider. (05)
(ICAP, CAF 08 Level - Spring 2019, Q. # 6b)
Q.103
You are the auditor of Reliable Generators Limited (RGL) for the year ended 30 September 2014. RGL is
primarily engaged in the business of manufacturing and sale of generators. The generators are supplied all over
the country through a network of distributors.

On receipt of order from a distributor, the order is recorded electronically and transmitted to the factory. 100%
payment IS received in advance. Following are the extracts from draft financial statements provided by the
client:
Income statement for the year ended 30 September
2014 (Draft) 2013 (Audited)
------- Rs. in 000 --------
Revenue 60,222 59,638
Purchases 42,676 40,848
Gross profit 21,249 19,681

Statement of financial position as at 30 September

2014 (Draft) 2013 (Audited)
------- Rs. in 000 --------
Trade payables 1,653 1,895
Provision for warranty claims 1,265 1,193

Other related Information is as follows:

i. Effective 01 October 2013, in order to match Its competitors, RGL has increased the warranty period
from 3 to 5 years.
ii. A discount of 20% was offered to address the Issue of reduced demand witnessed in the 3rd quarter. As
a result of the discount, the situation Improved significantly, during the 4th quarter.
iii. In August 2014, serious defects were discovered in one of the major components. Consequently,
significant quantity of such components was returned to the suppler.
iv. Scanning of the suppliers' ledger accounts revealed various payments for which no satisfactory reply
was given by the management. However, said amounts were recovered before the year end.

Required:
Identify and evaluate the audit risks in the above situation and how would you respond to these risks. (15)
(Note: Routine verification steps may not be mentioned)
(ICAP, CFAP 06 Level - Winter 2014)