INSTITUTE OF BUSINESS MANAGEMENT

Second Mid Term Examinations – Fall 2020

Course Title: Auditing Course Code: ACC505
Faculty: Mubashir Jawaid Section: N/A
Day / Date: 06/12/2020 Timings: 9:30 – 11:30
Student’s Name MUHAMMAD MOMIN Total Marks:
30
Student ID: 21397
Note:

Instructions

Please note that you are required to answer only 5 questions in Section A.

Please note that you are required to answer all questions in Section B.

Please finish the Mid Term in the allotted 2 hours.

This Mid Term consists of 2 pages including the title page.

Papers found with plagiarism will be marked 0.

Section A

Detailed Questions – (25 marks)

Please answer any 5 of the 6 questions (5 marks each)

1- Explain in detail how a legal external confirmation will be obtained. Also comment on why it will be
useful.

Legal confirmation letter is obtained as a response from the auditor to the confirmation party. It is
either is paper or electronic form. The procedure of legal external confirmation can be divided into
different steps. Firstly, the information is determined to be confirmed or requested, then relevant
confirming party is selected, then confirmation request is designed. Some of the key factors are
considered while designing it such as identified risk misstatement is stated, the assertion is being
addressed and layout or presentation is also important. Lastly the confirming parties are asked to
answer the auditors by either agreement or by providing information.

2- What is a Management Representation Letter and what details can it entail? What is the prescribed
action if management refuses to send a management representation letter?

A management representation letter is written by the external auditors for attesting that the
financial statements of the company are accurate. It is signed by the management of the company
including CEO and CFO of the company. In this letter the management attest few claims, such as
financial statements are according to the accounting framework, all information is provided to the
auditors, there are no missing transaction, all contingent claims or related party transactions are
enclosed and etc. the auditors use this letter as the audit evidence. If the management refuses to
sign the MRL then it is considered as a scope limitation as the management refuses to stand on its
representation

3- Why do we need Internal Controls? What are their limitations?

The internal controls are the back bone of the company that protects and safeguard its assets and
company data. They are designed to avoid the occurrence of fraud in the company. There are
certain limitation of internal control such as the people who are responsible to watch internal
control instead overcome the system, furthermore human errors, management override, and
missing segregation are also limitation.

4- What are cut-off procedures? Design cut-off procedures to ensure that sales invoices are recorded
appropriately for year ending 31st October 2020.

Cut off procedure to is to verify whether certain transaction is being recorded in the correct
accounting date or not. For sales invoices that are being recorded in 31 oct 2020, cut-off
 procedures to attest sales can include by comparing sales data before and after year to sale
invoices or shipping document. Revenue recognizing principle is being checked either the revenue
is realized when it is earned.

5- Design Verification Procedures for A) Trade Debtors B) Accruals

Trade debtors: matching the opening balance with last year closing balances, verify the amount
through the general ledgers, reviewing the company policy on trade debtors and lastly check the
figures from the clients.

Accruals: it can be verified by applying the analytical procedures to determine th causes of

misstatements, the verification of invoices can also be done, general ledgers can also be reviewed
to check the accuracy of accruals and lastly company policy is also needed to be checked.

Section B

Short Questions - (5 marks)

Please answer all questions. (1 mark each)

1- Why is Recalculation the best audit technique and give one example for it?

Recalculation process can be used for the test of controls or substantive testing. It is highly reliable
audit evidence. For example, recalculating the account receivables by general ledgers.

2- Audit Risk = IR x CR x DR. Explain what IR means.

In audit material misstatement can occur due to some other reason except failure in internal
control, this is inherent risk which means inheriting risk from something other.

3- What do we mean by ‘Subsequent Events’?

Subsequent events are events that occur between the date of financial statemtns and auditor
report

4- What do we mean by Management Override of Controls and why is it always a significant risk?
 It is a risk when the management manipulate the financial statements by going against the internal
control. It is a significant risk as it is unpredictable risk.

5- Describe the unusual account combination test conducted when testing Journals.

The evaluation of the risks of material errors due to fraud.