The Professionals’ Academy Of Commerce

Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test June 17, 2020
Test no: 1 20 marks – 36 min.

Audit & Assurance

Q.1 Comment on each of the following situations with reference to the appointment of external auditors in
accordance with the requirements of the Companies Act
(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.
(3.5)
(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. (4.5)

Q.2 The Commission may appoint a person to fill the vacancy in the cases if the company fails to appoint
auditor. List down such circumstances. (06)

Q.3 List down the circumstances where chartered accountants are or may be required to disclose confidential
information or when such disclosure may be appropriate. (06)
 Audit & Assurance Referral Test #1 Solution

Answer (a) Salman and Company is eligible to be appointed as the auditor of ABC Limited because, Naveen is in
#1 the employment of DEF which is an associated company and such employment has not relevance in
the context of appointment of an auditor

Kashif Associates can be appointed as the auditor of NPL as there is no qualification criteria mentioned for
private companies having paid up capital of less than Rs. 3 million. Holding of 30% shares of NPL by a public
company is of no relevance.

Answer The Commission may appoint a person to fill the vacancy in the cases if the company fails to
#2 appoint:
➢ the first auditors within a period of 90 days of the date of incorporation of the company; or
➢ the auditors at an annual general meeting; or
➢ an auditor in the office to fill up a casual vacancy within thirty days after the occurrence of
the vacancy; and
appointed auditors are unwilling to act as auditors of the company

Answer The following are circumstances where chartered accountants are or may be required to disclose
#3 confidential information or when such disclosure may be appropriate:

(a) Disclosure is permitted by law and is authorized by the client or the employer;

(b) Disclosure is required by law, for example:

(i) Production of documents or other provision of evidence in the course of legal
proceedings; or
(ii) Disclosure to the appropriate public authorities of infringements of the law that come to light;
and

(c) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the Quality Control Review (QCR) program of the Institute;
(ii) To respond to an inquiry or investigation by a member body or regulatory body;
(iii) To protect the professional interests of a chartered accountant in legal proceedings or
(iv) To comply with technical standards and ethics requirements.
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test June 24, 2020
Test no: 2 33 marks – 1 hour

Audit & Assurance

Question # 1:

You are the audit senior of Bridge Ltd. (Bridge) which has a year end of 31 December 2018. Bridge writes and develops
computer software for sale to international computer manufacturers. Profit before tax for the year amounted to
Rs.490,000 on a net asset base of Rs.3.45 million.

The following issues have been identified as part of the year-end audit work

Audit Issue 1
A substantial claim has been lodged against Bridge arising from software sold to a customer in January 2018. The
customer is claiming that the software supplied was flawed and resulted in a recall of certain computer models. No
provision has been made for the compensation payable by Bridge as it is not possible to estimate with reasonable
accuracy the amounts, if any, which may become payable. The audit partner has agreed with this assessment and is
satisfied that the compensation that may become payable cannot be assessed with reasonable accuracy at this point. The
directors of Bridge have included a note explaining this matter in the financial statements.

Audit Issue 2
A restructuring provision had been recognized in the financial statements of Bridge for the year ended 31 December
2017, in respect of a re-organization to which Bridge had committed itself at 31 December 2017. The provision was
recorded at a total cost of Rs.200,000 (reflecting total costs to be incurred over the two years to December 2019).
Restructuring costs incurred in the current year amounted to Rs.56,000 which was in line with the initial estimated
provision.

This amount was recorded as follows:

• Dr Operating costs Rs.56,000
• Cr Bank Rs.56,000

(a) Assess the audit considerations arising from the claim made against Bridge (Audit Issue 1 above), including any
potential implications on the audit report. (06)

(b) In respect of Audit Issue 2 only:

(i) Discuss the impact on the audit report; and
(ii) Outline the points to be included in a qualified audit report. (08)

Question # 2

Described below are situations which have arisen at two unrelated external audit clients of your firm. The year end in
each case is 30 September 2018.

(a) Pembroke Ltd (Pembroke)

The management of Pembroke has refused to provide written representations that:
it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable
financial reporting framework;
it has provided the auditor with all relevant information and access as agreed in the terms of engagement; and
 all transactions have been recorded and are reflected in the financial statements. (04)

(b) Snowdonia Ltd (Snowdonia)

On 12 October 2018, Snowdonia received an invoice for equipment costing Rs.2.4 million which has an estimated
useful life of five years. The equipment was installed and brought into use on 1 September 2018. The invoice was dated
8 October 2018 and had been posted to the ledger accounts as an October 2018 transaction. It has not been included in
the financial statements for the year ended 30 September 2018. The directors of Snowdonia have refused to amend the
financial statements in respect of this matter.

The draft financial statements for the year ended 30 September 2018 show profit before tax of Rs.750,000 and total
assets of Rs.16.5 million. (04)

Question # 3

Described below are four situations that have arisen concerning unrelated external audit clients of Beta & Omega Co, an
audit and assurance firm. The year end in each case is 28 February 2018.

Muntz Ltd (Muntz)

Muntz is a theme park design company. On 18 March 2018 a liquidator was appointed to Balloon Ltd Balloon), a
customer of Muntz. The balance on Muntz’s receivables ledger at 28 February 2018 in respect of Balloon was Rs.
229,000. In addition, staff at Muntz had commenced work on a number of bespoke design projects exclusively for
Balloon before the year end, but this work had not been invoiced at 28 February 2018. Muntz has recognised work in
progress at the year end of Rs. 465,000 in respect of this work. The directors do not believe any adjustments are
necessary to the year-end financial statements in respect of this matter as the liquidator was appointed after the year end.

The total assets of Muntz at 28 February 2018 are Rs. 28,250,000 and the profit before tax for the year ended 28
February 2018 is Rs. 6,340,000. (04)

Docter Ltd (Docter)

Docter replaced its computerized accounting system on 31 March 2017. During the current year audit multiple errors
were discovered affecting a number of material transactions and account balances. The new accounting system was not
run in parallel with the previous system and no records from the previous system have been maintained. No alternative
audit procedures were available to establish the level of error that may have arisen in the financial statements as a
consequence of the replacement system. (04)

Ellie Ltd (Ellie)

The directors of Ellie intend to include a note to the financial statements explaining that there are doubts as to whether
the business can continue in existence for the foreseeable future. The directors have prepared the financial statements on
a going concern basis. The audit partner is aware of the doubts over the going concern status of Ellie and has concluded
that the treatment in the financial statements is appropriate. (03)
Answer # 1

(a) Claim made against Comptex – Audit Considerations

- Comptex has been issued with a claim for faulty goods by a customer that is claiming damages. Due to
the nature of the claim it is not possible to estimate with reasonable accuracy the amounts, if any,
which may become payable and consequently no provision, has been made in the financial statements.

- As the outcome of the action will depend on future developments this constitutes an uncertainty
which is defined under ISA 700 (revised) as a matter whose outcome depends on future actions or
events not under the direct control of the entity but that may affect the financial statements.

- In determining whether the above mentioned uncertainty constitutes a significant uncertainty the
following issues need to be addressed:
- the risk that the estimate included in financial statements may be subject to change;
- the range of possible outcomes; and
- the consequences of those outcomes on the view shown in the financial statements.

- From the information provided it would seem to indicate that there is a wide range of possible
outcomes and the potential consequence on the view shown by the financial statements, given the
significance of the breach of contract, would appear to be significant. On this basis the legal action
would constitute a significant uncertainty. The accounting treatment adopted for the uncertainty is in
line with IAS 37 which requires a contingent liability to be disclosed in cases where no reliable
estimate of a potential provision can be made. Therefore we would not disagree with the treatment
adopted by Comptex Limited.

- ISA 700 (revised) indicates that the audit report should be modified by adding a paragraph if there is
a significant uncertainty (other than a going concern problem), the resolution of which is dependent
upon future events and which may affect the financial statements as is the case in Comptex Limited

An emphasis of matter paragraph highlighting the matter affecting the financial statements should be
included in the audit report. The addition of such an emphasis of matter paragraph does not affect the
auditor's opinion

- The emphasis of matter paragraph describes the matter giving rise to the significant uncertainty and
its possible effects on the financial statements, including (where practicable) quantification. Where it
is not possible to quantify the potential effects of the resolution of the uncertainty, as is the case in
Comptex Limited, a statement to that effect should be included in the audit report. Reference may be
made to notes in the financial statements but such a reference is not a substitute for sufficient
description of the significant uncertainty so that a reader can appreciate the principal points at issue
and their implications

- If upon additional review it is found that the estimate of the outcome of this significant uncertainty is
materially misstated or that the disclosure relating to it is inadequate, a qualified opinion should be
issued.

(b) Implications for Audit Report

The restructuring provision has been accounted for incorrectly in the current year. The amount of the
provision incurred during the year of Rs. 56,000 should have been set against the provision that was
set up in the prior year and not recharged to the profit and loss account in line with IAS 37.

The correction to the accounts that is required is:

− Dr Provision Rs. 56,000
− Cr Profit and loss (Operating Costs) Rs. 56,000

As such, profit is understated by this amount which equates to 11% of profit before tax. This amount is
material but not so material as to make the Financial Statements seriously misleading. As such, the
audit report should be modified on the basis of a disagreement in accounting treatment i.e. except for
qualification.

Basis for Qualified Opinion

Provision has been made in the financial statements for a restructuring provision to be utilised during
2018 and 2019. Amounts incurred in respect of this provision in the current year have been charged to
the income statement which, in our opinion, is not in accordance with International Accounting
Standards. In line with IAS 37 amounts incurred relating to a restructuring provision should be set
against the initial provision and consequently profit before tax is understated by Rs. 56,000 and
provision overstated by the same amount.

Answer # 2

Pembroke
The opinion should be modified due to the limitation on scope imposed by the directors, as the auditor
is unable to obtain sufficient appropriate evidence. International Standard on Auditing 580 Written
Representations (ISA 580) requires the auditor to disclaim an opinion on the financial statements
when the directors refuse to provide representations regarding the fulfilment of their responsibilities
in relation to the preparation of the financial statements.

Consequently, as the matter is material and pervasive, the auditor should specify in the opinion section
of the report that “we do not express an opinion” or “we are unable to express an opinion i.e.
Disclaimer of Opinion

There should be an explanation of the reasons for the disclaimer of opinion. In the matters on which
auditors are required to report in basis for disclaimer of opinion paragraph of the report, the auditors
should refer to the fact that they:
- have not received all information and explanations considered necessary for the audit; and
- were unable to determine whether adequate accounting records had been kept

Snowdonia
The opinion should be modified, due to disagreement over accounting treatment. The transaction
should be accounted for in the year ended 30 September 2018 because it was received and in use prior
to the year end. As a result, non-current assets, liabilities and depreciation are understated.

As the equipment represents 14.5% of total assets and the depreciation of Rs. 40,000 represents 5.3%
of profit before tax, the matter is material and the opinion should be qualified (except for). The matter
is not pervasive as it is confined to specific items in the financial statements and does not represent a
substantial proportion of the financial statements.

Answer # 3

Muntz
The appointment of the liquidator post year end is an adjusting subsequent event and the balance on
the receivables ledger in respect of Balloon should be written-off. The balance represents 0.8% of total
assets and 3.6% of profit before tax and is therefore not material in isolation. It appears unlikely that
the work in progress balance is recoverable given its bespoke nature and therefore this should also be
written-off. The balance represents 1.6% of total assets and 7.3% of profit before tax and is therefore
on the borderline of materiality thresholds.

However, the misstatements must be considered in aggregate. The total misstatement amounts to Rs.
694,000 and represents 2.5% of total assets and 10.9% of profit before tax; it is therefore material but
not pervasive, as the misstatement can be isolated to receivables and work in progress.

Therefore there is a disagreement over accounting treatment and the audit report and audit opinion
should be modified. The opinion will be qualified (except for) and this will be expressed in the
Qualified Opinion paragraph.

Docter
The firm was unable to undertake the planned audit procedures due to the new system and the level of
error in the financial statements cannot be accurately determined. This is a limitation on scope which
means the auditor is unable to obtain sufficient appropriate evidence and therefore cannot reach an
opinion on the financial statements as a whole. The matter is therefore pervasive.

The audit report should be modified with a disclaimer of opinion stating that the firm is “unable to
form an opinion” (alternative: “do not express an opinion”) with an explanation of the limitation on
scope.

Ellie
Doubts over going concern represent a significant uncertainty and are fundamental to users’
understanding of the financial statements. If the audit partner is satisfied that the disclosure in the
financial statements is adequate then the firm will issue a modified audit report with an emphasis of
matter paragraph but the opinion will not be modified.

The emphasis of matter paragraph will follow the basis for opinion paragraph, be headed “Emphasis of
matter – Significant Uncertainty”, give a brief description explaining the uncertainty over going
concern and draw users’ attention to the note in the financial statements. There will be a specific
statement that the opinion is not modified.

If disclosure is not considered to be adequate the firm should express a modified opinion, qualified or
adverse as appropriate, stating that there is a material uncertainty that may cast doubt on the entity’s
ability to continue as a going concern.
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 01, 2020
Test no: 3 50 marks – 1.5 hours

Audit & Assurance

Question # 1

You have just commenced employment as a trainee auditor for a firm of Chartered Accountants and have been
sent on your first audit engagement which is the audit of Big Agenda Ltd (Big Agenda). The senior on the job has
asked you to take responsibility for the Treasury area of the audit. You are delighted with this as it is an exciting
new challenge for you and you have studied this area in your auditing module during the year.

You have been asked in particular to take a look at the bank reconciliation which has been prepared by Big
Agendaʼs financial accountant Noman for the financial year ending 31 December 2018. You have been informed
that Normanʼs work is usually reviewed by the financial controller Bilal. The bank reconciliation is set out below:

Bank Reconciliation Statement for Big Agenda Ltd as at 31 December 2018

Balance as per Bank Statement 65,000
Add: Outstanding Lodgements
30/12/2018 6,850
31/12/2018 14,200 21,050
86,050
Less: Outstanding Cheques
02/12/18 Cheq no 1297 (2,100)
01/12/18 Cheq no 1396 (4,500)
28/12/18 Cheq no 1480 (2,000)
28/12/18 Cheq no 1481 (450)
28/12/18 Cheq no 1482 (780)
28/12/18 Cheq no 1483 (6,100) (15,930)
70,120
Add: December Bank Charges 72
Balance as per Client Bank Account 70,192
Prepared by: Noman 2/1/19
Reviewed by: Bilal 3/1/19

REQUIREMENT:
(a) Identify all of the procedures you should use to audit Big Agendaʼs Bank reconciliation statement at 31
December 2018. (06)
(b) Assess the purpose of each procedure above in terms of audit objectives. (06)

Question # 2

The training partner in your firm has just given you a list of the following typical questions about stock takes which
recur regularly among the firm’s trainee auditors

REQUIREMENT:
Prepare brief notes on each of the following
 a. The client did not provide any stocktaking guidelines. Is that a problem? (02)
b. What kind of details would you expect to find on properly completed stock take sheets and what should be
done if these details are missing? (03)
c. What does the term ‘cut-off details’ mean and what are the implications for the auditor and the client?
(02)
d. What is the auditor’s responsibility concerning obsolete stock? (03)

Question # 3

You are the external auditor of Corner Stores Ltd (CS) for the year ended 31 March 2018. CS operates 12
convenience stores in the greater Lahore area:

➢ Each store sells food, contains a deli section and an off-license.

➢ Each store is responsible for its own inventory procurement and produces monthly management accounts
which are sent to the centralized accounting department at CS head office.

CS is financed by a Rs.250,000 bank loan which is repayable at a rate of Rs.50,000 per annum over each of the
next 5 years starting on 31 October 2018.

a. Describes FOUR analytical procedures that should be performed to confirm CS’s revenue and profit.
(04)
b. Outlines substantive procedures that should be adopted to verify the assertion of valuation of inventory.
(05)
c. Analytical Procedures can/must be used at different stages of audit. List down such stages. (02)

Question # 4
Explain FOUR factors which influence the reliability of audit evidence. (04)

Question # 5
The auditor is required to assemble the final audit file(s) on a timely basis after the date of the auditor’s report. After
the assembly of the final audit file has been completed, the auditor must not delete or discard audit documentation
before the end of its retention period. Describe circumstances in which auditor can/will change Audit Documentation and
the process for that change. (06)

Question # 6
a) When designing a sample, auditor has to make a number of key decisions. List down key items that the auditor
must consider when designing the sample. (03)
b) What is the course of action available for auditor if he/she comes across an Anomaly? (02)
c) How can auditor project misstatements and control deviations when evaluating the results of sample? (02)
Answer 1 (a) and (b)

Procedure (a) Purpose – Audit Objective (b)

Test the mathematical accuracy of the bank reconciliation To agree the accuracy and correctness of the
(Checking the tots, agreeing correctness of the amount) – reconciliation.
Accuracy)
Trace the line item “Balance per the Bank Statement” to To agree the correctness of the amount.
the related Bank confirmation and cutoff bank statement.
(Agree balance per the Bank Statement to an original
copy of the bank statement as at 31/12/18)
Further confirmation of the bank balance can be obtained To agree the correctness of the amount and to confirm
by agreeing to the Bank Confirmation Letter or send a the existence of the bank account balance
bank confirmation letter to the bank asking them to
confirm the bank balance
Agree balance to the general ledger. (i.e. the Rs.70,192 To agree the accuracy of the amount
per the Client bank account to the clientʼs trial balance
and financial statements as at 31/12/18)
Trace the outstanding items on each bank reconciliation
to the corresponding cut off bank statement:

1. Trace the outstanding lodgements to the January Bank

Statement. ( Check the dates on the deposit slips to
ensure amounts were lodged in December and ensure
that the lodgements are in the bank statement close
enough to the start of the new year to ensure the correct
cut-off has been applied)
To verify the existence and correctness of the amounts
listed as outstanding. Also a check on the correctness of
cutoff
.

2. Trace a sample of the outstanding cheques to the post

year end bank statements.

3. Agree the bank charges of Rs.72 to the bank statement

and ensure that these bank charges have been accrued
for

Document all your work in such a way that reperformance To ensure that cash at bank per Big Agenda is reduced
of these tests will produce the same results by the amount of the charges and hence to validate the
accuracy of the cash per the books figure.

Reperformance and good documentation of work

1 mark for each correct procedure up to a maximum of 6 and

1 mark for each correct objective identified up to a maximum of 6.

Answer # 2

a. In the absence of guidance on counting, movements, obsolescence problems can arise resulting in
increased risk of an incorrect stocktake.
b. Stocktake sheet details should be:
• Pre-numbered and controlled
• contain details of the stock taker, and
• a listing of the stock items that might be counted.
 In the absence of the above there is an increased risk of errors on a stocktake with incorrect details being
recorded or where stock-sheets go missing. Where stock-sheets are pre-numbered there is reduced risk
of them going missing.

c. Cut-off – concerns ensuring the correct transactions are recorded in the correct accounting period. At the
cut-off the client should stop, or pause stock movements, and record details of the last goods received or
despatch note that are relevant to the period being audited. The auditor must check that these details are
correct

d. The auditor should ensure that the client, in the stock- take guidelines, provides guidance on how to
identify and record obsolete stock and the auditor should check that these procedures occur.

Answer # 3

a) Four analytical procedures

 Review monthly sales per outlet broken down per food products, deli and off licence
 Compare profit margins for sales across shops
 Review sales mark up on cost and compare to revenue
 Review average level of shop inventory wastage per outlet
 Compare actual levels of sale per shop to budget

b) Valuation of inventory
 Verify sample to supplier invoices to ascertain cost
 Discuss method of cost approximation with management and compare to current prices across
the three areas of food products, deli and off licence
 Examine sales prices after year end to confirm NRV > cost for shop inventory
 Vouch a sample items held in shop inventory to purchase invoices to verify cost
 Consider the level of perishable inventory held at the inventory count and review the year end
valuation

c)
i. at the audit planning stage
ii. at the end of the audit, in the overall review of the audit
iii. as a substantive procedure during the audit
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 08, 2020
Test no: 4 33 marks – 1 hour

Audit & Assurance

Question # 1:

Your audit practice has recently been appointed as auditor to Wogan Limited (Wogan), a manufacturing
company. As the audit senior, you have just received the draft accounts from Wogan’s accountant which show the
following Property Plant and Equipment (PPE) for the year ended 31 March 2016:

Freehold Land and

Plant and Machinery Motor Vehicles Total
Buildings
Rs'000' Rs'000' Rs'000' Rs'000'
Cost
At 1 April 2015 1,200 650 380 2,230
Additions 120 244 147 511
Disposals - (130) (157) (287)
At 31 March 2016 1,320 764 370 2,454
Depreciation
At 1 April 2015 650 353 271 1,274
Charge for the year 49 82 85 216
Disposal - (95) (142) (237)
At 31 March 2016 699 340 214 1,253

Required:

Prepare, t the request of you engagement manager, a memorandum for the assistant assigned to the audit, setting
out the work programme for the audit of PPE in Wogan. (11 Marks)

Question # 2

Your firm has recently been appointed as auditor to Coffeextra. Coffeextra is a company that runs a chain of
coffee shops. The company has a centralised operating function and managers of individual coffee shops have
very limited decision-making powers on day-to-day operational matters.

The company’s centralised administration is responsible for the buying of food and beverages, the payment of
staff, the maintenance and cleaning of shops by staff employed by a nationwide agency, and all other matters
relating to the running of the business.
The company has good internal controls over purchasing. Stock counts are conducted at each coffee shop at the
year-end.

REQUIREMENT:
(a) Provide the account headings which should be found in Coffeexta’s schedule of Trade Payables and Accrued
Expenditure. (3 marks)

(b) Recommend, and give reasons for, the audit tests that should be carried out to obtain audit evidence for
Coffeextra’s Trade Payables and Accrued Expenditure. (10 marks)

Question # 3

Jackdaw Motor Cars Co (Jackdaw) manufactures a range of motor cars and its year end is 31 January 2015. You
are
the audit supervisor of Puffin & Co and are currently preparing the audit programmes for the year-end audit of
Jackdaw. You have had a meeting with your audit manager and he has notified you of a number of issues
identified during the audit risk assessment process.

Land and buildings

Jackdaw have a policy of revaluing land and buildings, this is undertaken on a rolling basis over a five-year
period. During the year Jackdaw requested an external valuer to revalue a number of properties, including a
warehouse purchased in May 2014. Depreciation is charged on a pro rata basis.

Work in progress
Jackdaw undertakes continuous production of cars, 24 hours a day, seven days a week. An inventory count is to
be undertaken at the year end and Puffin & Co will attend. You are responsible for the audit of work in progress
(WIP) and will be part of the team attending the count as well as the final audit. WIP constitutes the partly
assembled cars at the year end and this balance is likely to be material. Jackdaw values WIP according to
percentage of completion, and standard costs are then applied to these percentages.

Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit
evidence in relation to:

(i) The revaluation of land and buildings and the recently purchased warehouse; and (5 marks)
(ii) The valuation of work in progress. (4 marks)
Answer # 1

To: Audit Assistant

From: Audit Senior
Date: 1 May 2016
Re: Wogan Limited
Audit of Tangible fixed assets
Year ended 31 March 2016

The following is the audit programme to be followed when auditing Wogan’s tangible fixed assets:
i. Prepare or obtain a fixed asset register showing the date of purchase of assets and the make up of
the opening balance.
ii. Agree the client’s fixed asset schedule to the closing nominal ledger. Check the totals on the
schedule.
iii. Agree opening balances to prior-year signed financial statements.
iv. Physically verify assets. Ensure assets brought forward have been inspected.
v. Vouch additions to supporting documentation.
vi. Vouch disposals to supporting documentation.
vii. Examine title documents (if not held as security by a lender). Ensure title is in the name of the
company.
viii. Examine vehicle registration documents. Note details of model and user.
ix. Review hire purchase and lease agreements and ensure the assets and related obligations have been
properly accounted for in accordance with IAS.

Answer # 2

Answer 2(a): For trade payables and accrued expenditure the following seven headings seem likely but
will accept other legitimate answers:

i. food and beverages;

ii. payroll;
iii. cleaning;
iv. maintenance of properties;
v. waste disposal;
vi. light, heat, water and other utilities;
vii. business and other local taxes

Answer 2(b): Audit tests and reasons: trade payables and accrued expenditure

(i) The firm would first obtain an understanding of the business, including reviewing management and financial
accounts, in order to enable the firm to make some predictions as to the likely relationships between items of
financial and nonfinancial data. There are likely to be direct relationships that do not vary such as gross
margins, and income and expenditure. These relationships may be applied to each restaurant and to the
company as a whole. Understanding the business is important because it is the firm’s first year as auditor and
because it enables the auditor to properly plan tests, and evaluate the results thereof.

(ii) Tests of controls would be performed on expenditure under each heading to enable the firm to determine
the level of substantive procedures required at the year-end.
(iii) Analytical procedures would be applied to each heading, both for the company as a whole, for regions and
for individual restaurants if necessary. This would establish the level of expenditure, and the level of trade
payables and accruals in the prior year and for each period within the current year for which figures were
available. Any unusual items would be investigated and explanations sought and substantiated. Analytical
procedures are useful in the planning of audit tests to establish areas to which greater audit resources need to
be devoted.
Food, beverages, payroll, cleaning, maintenance of properties

(iv) In all cases, substantive procedures would involve tracing source documentation created by the company
(such as purchase orders for food and beverages, contracts with the cleaning and maintenance agencies and
clock cards or timesheets) through the system (via goods received notes, signed documentation indicating that
services had been performed, etc.) to daybooks, ledgers and control accounts and finally to schedules
supporting the financial statements. This type of test helps provide audit comfort that trade payables and
accruals are complete, correctly calculated, properly authorised and recorded in the correct accounting period.

(v) Substantive procedures tracing entries in the financial statements back to supporting schedules, entries in
the ledgers, control accounts and daybooks through to source documentation help provide audit comfort that
trade payables and accruals exist, are properly authorised and recorded in the correct accounting period.

(vi) Substantive procedures may also involve direct confirmation of trade payables, although if suppliers send
regular statements this may not be necessary. Such confirmations and statements provide the auditor with
valuable third party, written evidence that is generated outside the company, showing the existence, accuracy
and proper recording of trade payables.

(vii) After-date payment of both trade payables and accruals also provides evidence of the existence and ccuracy
of trade payables and accrued expenditure.

(viii) Cut-off tests (checking samples of invoices for food and beverages received just before and just after the
year-end to goods received notes, purchase invoices and records of stock counts, for example) help ensure that
expenditure and the related trade payables and accruals are recorded in the correct accounting period.

(ix) For many such items, there may be accrued expenditure. Tests for accrued expenditure will be similar to
those noted under the following heading.

(x) Waste disposal, light, heat, water and other utilities and business and other local taxes. These items are less
likely to have source documentation created by the company than those noted above. They are also more likely
to be billed or invoiced less frequently than those noted above and there are likely to be more accruals for such
items.

(xi) Accrued expenditure is an accounting estimate based on previous experience. Analytical procedures such as
those noted above form a large part of the checking of accrued expenditure.

(xii) The firm should establish the basis on which accrued expenditure is calculated to ensure that it appears
reasonable and consistent with prior periods, and check the actual calculation of the expenditure (possibly on a
sample basis).

(xiii) Checking accrued expenditure to invoices or bills received after the year-end and to payments after the
year-end provides evidence as to the correct calculation of accruals.

(Any 10 Points)
Answer # 3

(a) Substantive procedures for land and buildings

– Obtain a schedule of land and buildings revalued this year and cast to confirm completeness and accuracy of
the revaluation adjustment.
– On a sample basis agree the revalued amounts to the valuation statement provided by the valuer.
– Agree the revalued amounts for these assets are included correctly in the non-current assets register.
– Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation surplus.
– Agree the initial cost for the warehouse addition to supporting documentation such as invoices to confirm ost.
– Confirm through a review of the title deeds that the warehouse is owned by Jackdaw.
– Recalculate the depreciation charge for the year to ensure that for assets revalued during the year, the
depreciation was based on the correct valuation and for the warehouse addition that the charge was for nine
months only.
– Review the financial statements disclosures of the revaluation to ensure they comply with IAS 16 Property,
Plant and Equipment.

(b) Substantive procedures for work in progress (WIP)

– Prior to attending the inventory count, discuss with management how the percentage completions are
attributed to the WIP, for example, is this based on motor cars passing certain points in the production process.
– During the count, observe the procedures carried out by Jackdaw staff in assessing the level of WIP and
consider the reasonableness of the assumptions used.
– Agree for a sample that the percentage completions assessed during the count are in accordance with
Jackdaw’s policies communicated prior to the count.
– Discuss with management the basis of the standard costs applied to the percentage completion of WIP, and
how often these are reviewed and updated.
– Review the level of variances between standard and actual costs and discuss with management how these are
treated.
– Obtain a breakdown of the standard costs and agree a sample of these costs to actual invoices or payroll
records to assess their reasonableness.
– Cast the schedule of total WIP and agree to the trial balance and financial statements.
– Agree sample of WIP assessed during the count to the WIP schedule, agree percentage completion is correct
and recalculate the inventory valuation.
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 15, 2020
Test no: 5 26 marks – 30 Min

Audit & Assurance

Question # 1

Audit-related services do not provide the same high level of assurance, and in some cases do not provide any
assurance. Explain following type of engagements
a. Reviews of data
b. Agreed-upon procedures
c. Compilations (06)

Question # 2

(b) Listed below are some control activities

i. Limits to authority
ii. No “rubber stamps”
iii. No blank signed forms
iv. Verifying charges in the general ledger to file copies of approved invoices
v. Budget to actual comparison
vi. Performance indicators
vii. Quality teams that address ongoing problems
viii. Machines that automatically trigger cooling systems to correct temperature imbalances
ix. Insurance Programs to recover losses
x. Computer incident response teams
xi. Intrusion detection systems
xii. Dual-signature requirements on all checks
Required:
From the list above, identify which controls are Preventive, Corrective and Detective. (06)

Question # 3

a) List down any four categories of general controls that an auditor would expect to find in a computer-based
information system. (06)
b) Internal control systems are never fool proof. All systems, no matter how effective they may appear to be,
have several limitations. List down Four reasons that the internal controls systems are not fool proof. (06)
c) Difference between Range Checks and Existence Checks (02)

THE END
 Answer # 1

 Reviews of data. Reviews of data are checks carried out on information prepared by another
person. They provide a moderate level of assurance that the information under review is free of
material misstatement.

 Agreed-upon procedures. This is an engagement where the party hiring the practitioner
specifies the procedures that the practitioner should follow when performing the assignment.

 Compilations. The practitioner is engaged to prepare information, rather than to audit

information prepared by someone else.

Answer # 2

Limits to authority Preventive

No “rubber stamps” Preventive
No blank signed forms Preventive
Verifying charges in the general ledger to file copies of approved invoices Detective
Budget to actual comparison Detective
Performance indicators Detective
Quality teams that address ongoing problems Corrective

Machines that automatically trigger cooling systems to correct temperature

Corrective
imbalances

Insurance Programs to recover losses Corrective

Computer incident response teams Corrective
Intrusion detection systems Detective
Dual-signature requirements on all checks Preventive

Answer # 3

Answer 3 (a) i. controls over the development of new computer information systems and applications
ii. controls over the documentation and testing of changes to programs
iii. the prevention or detection of unauthorised changes to programs (for example, by an
employee committing fraud or by a ‘hacker’ accessing the system)
iv. controls to prevent the use of incorrect data files or programs
v. controls to prevent unauthorised amendments to data files
vi. controls to ensure that there will be continuity in computer operations (and that the system
will not ‘break down’ and cease to be operational).

(any four)
Answer 3 (b) i. Human error may result in incomplete or inaccurate processing which may not be detected
 by control systems.
ii. It may not be cost-effective to establish certain types of controls within an organisation.
iii. Controls may be in place, but they may be ignored or overridden by employees or
management.
iv. Collusion may mean that segregation of duties is ineffective. Collusion means that two or
v. more people work together to avoid a control, possibly for the purpose of committing
fraud

(any four)
Answer 3 (c)  A Range check. The value of an item of data might have to be within a particular range

 An existence check is similar, but the program checks the actual existence of a particular
code.
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test July 22, 2020
Test no: 6 47 marks – 90 Min

Audit & Assurance

Q # 4.
Faster Jets Co is an airline company and is a new audit client of Brown & Co. You are responsible for the audit of the
financial statements for the year ended 30 November 2018. The draft financial statements recognize revenue of
Rs.150 million and total assets of Rs.250 million. During the year, Faster Jets Co purchased several large plots of land
located near major airports at a cost of Rs.12·5 million. The land is currently rented out and is classified as investment
property, which is recognized in the draft financial statements at a fair value of Rs.14·5 million. The audit partner has
suggested the use of an auditor’s expert to obtain evidence in respect of the fair value of the land. Explain the matters
to be considered in assessing the reliance which can be placed on the work of an auditor’s expert. (05)

Q # 5.
You are in charge of the internal audit department of IC ltd (IC), a rapidly expanding company. Turnover at IC has
increased by about 20% per annum for the last five years, to the current level of Rs.10 million. Net profits are also
high, with an acceptable return being provided for the four shareholders. The internal audit department was
established last year to assist the board of directors in their control of the company and to prepare for a possible listing
on the stock exchange. The external auditors may seek to rely on work carried out by the internal audit department of
their clients in the interest of audit efficiency. The Managing Director is keen to follow the principles of good corporate
governance with respect to internal audit. Discuss the matters which the external auditor should consider at the
planning stage to assess the effectiveness of a company’s internal audit department. (08)

Q # 6.
Various measures can be taken to try to protect the independence of the internal auditors. List down five such
measures with brief explanation. (05)

Q # 7.
a) What procedures should Auditor follow if the auditor discovers previously unidentified or undisclosed related
parties or (significant) related party transactions? (05)
b) In making inquiries of management in respect of the identity of related parties, the auditor will obtain a list of
related parties from the directors, and consider if this list is complete. What Tests should the auditor carry out
to for completeness of related party list? (05)
c) While considering the use of internal auditors to provide direct assistance, there are two circumstances where
internal auditors may not provide direct assistance. What are those circumstances? (02)

THE END
 Solution # 6:

Answer 1 i. Audit evidence is more reliable when it is obtained from independent sources outside the
entity under audit
ii. Internally generated audit evidence is more reliable when the related controls are Effective
iii. Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly or by inference
iv. Audit evidence is more reliable when it exists in documentary form
v. Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies
(any four)
Answer 2 Modifications in the documentation

If it does become necessary to modify existing or add new documentation after this stage,
the auditor is required to document:
• when and by whom the modifications were made
• the reasons for making them.

If exceptional circumstances arise after the date of the audit report, such that the auditor:
• has to perform new or additional procedures, or
• reaches new conclusions

the auditor is required to document:

• the circumstances
• the new or additional procedures performed, audit evidence obtained, conclusions reached
and their effect on the auditor’s report, and
• when and by whom the resulting changes to audit documentation were made and who
reviewed them.

Answer 3(a) The auditor will have to make a number of key decisions:
i. the sampling approach to be used (statistical or non-statistical)
ii. the characteristics of the population from which the sample is to be drawn
iii. the sample selection method
iv. what constitutes a misstatement or deviation
v. the ‘tolerable’ misstatement or rate of deviation
vi. the ‘expected’ misstatement or rate of deviation.
All of the above decisions will influence the sample size required.
Answer 3(b) if the auditor considers the misstatement or deviation to be an anomaly he must obtain a high
degree of certainty about this and perform additional audit procedures to obtain sufficient evidence
that the misstatement or deviation does not affect the rest of the population.
Answer 3(c) • For tests of details this will include projecting the misstatements found in the sample to
the entire population

• For tests of controls, the sample deviation rate will be the projected deviation rate for the
whole population.
Answer # 4

ISA 620 requires the auditor to apply the procedures set out below when using the work of an expert.
The auditor should:

i. assess the competence, capabilities and objectivity of the expert

ii. obtain an understanding of the expert’s field of expertise, sufficient to allow the auditor to
determine the nature, scope and objectives of the expert’s work and evaluate the adequacy
of that work.
iii. agree terms of engagement with the expert
iv. evaluate the adequacy of the expert’s work
v. If the auditor decides that the work of the expert is not adequate he is required to:
❑ agree additional work with the expert, or
❑ perform other appropriate additional audit procedures.

Answer # 5
The criteria against which the internal audit function will be assessed is as follows:

Criterion Comment
Objectivity
➢ What is the status of the internal audit function within the entity?
➢ To whom does it report? Does it have access to those charged with governance?
➢ Is it free of any conflicting responsibilities (e.g. any operational responsibilities)?
➢ Do those charged with governance oversee employment decisions of the internal audit function?
➢ Are there any restrictions placed on the internal audit function?
➢ Do management act on the recommendations of the internal audit function?

Competence
➢ Are the internal auditors members of relevant professional bodies?
➢ Do they have adequate technical training and proficiency?
➢ Are there established policies for hiring and training internal auditors?
➢ Do the internal auditors possess the required knowledge of financial reporting?

Systematic and disciplined approach

➢ Is internal audit work properly planned, supervised, reviewed and documented?
➢ Does the function have appropriate quality control procedures, audit manuals, work programmes
and other relevant documents?

If any of the above factors regarding objectivity, competence and systematic and disciplined approach are
lacking, ISA 610 (Revised) states that the external auditor shall not use the work of the internal audit
function

Answer # 6

i. Reporting lines. The chief internal auditor may report to the audit committee and not to the
finance director or chief accountant

ii. Deciding the scope of internal audit work. The scope of work carried out by the internal
auditors should not be decided by the finance director or line management responsible for the
operations that might be subjected to audit

iii. Rotation of internal audit staff Internal auditors should not be allowed to become too familiar
with the operations that they audit or the management responsible for them. To reduce the
familiarity threat, internal auditors should be rotated regularly
 iv. Appointment of the chief internal auditor. The chief internal auditor should not be appointed by
a senior executive who may have some self-interest in wishing to appoint a ‘yes man’ who will not
‘cause trouble

v. Designing internal controls. The internal auditors should not be responsible for the design of
internal controls within the entity

Answer 7(a)

➢ Determine whether the underlying circumstances confirm the existence of those relationships or
transactions.
➢ Communicate the relevant information to the audit team.
➢ Request management to identify all transactions with the newly identified related parties.
➢ Inquire as to why the entity’s system failed to identify or disclose these related party relationships
or transactions.
➢ Perform appropriate substantive procedures on the newly identified related parties or significant
related party transactions.
➢ Reconsider the risk of there being unidentified or undisclosed related parties or (significant)
related party transactions and perform additional procedures as necessary.
➢ If the non-disclosure appears intentional, evaluate the implications for the audit.

Answer 7(b)

Tests for completeness could include the following:

➢ Review working papers for previous years, to look for names of known related parties.
➢ Review the company’s procedures for identifying related parties.
➢ Inquire about the relationships between directors and other entities (for example, does any
director own another company, and have there been any transactions between that company and
the client company?)
➢ Review shareholder records for the names of major shareholders.
➢ Review minutes of shareholder meetings (general meetings of the company).
➢ Ask any other audit firms involved in the audit about related parties (if the audit is the audit of a
group of companies and more than one firm of auditors is involved). Or
➢ Ask previous auditors of the company about their knowledge of related parties.

Answer 7(c)

Internal auditors may not provide direct assistance if:

➢ there are significant threats to the objectivity of the internal auditor; or
➢ the internal auditor lacks sufficient competence to perform the proposed work.
 The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test August 05, 2020
Test no: 7 33 marks – 1 hour

Audit & Assurance

Q.1 ISA 210 Agreeing the Terms of Audit Engagements requires auditors to agree the terms of an engagement
with those charged with governance and formalize these in an engagement letter.
Required:
(a) Identify and explain TWO factors which would indicate that an engagement letter for an existing
audit client should be revised. (02)
(b) List SIX matters which should be included within an audit engagement letter. (03)
(c) Your audit firm has just won a new audit client, Milky Way Technologies Co (Milky Way), and
you have been asked by the audit engagement partner to gain an understanding about the new client
as part of the planning process.
Required:
Identify FOUR sources of information relevant to gaining an understanding of Milky Way Technologies
Co and describe how this information will be used by the auditor. (04)

Q.2 You are an audit supervisor of Pluto & Co and are currently planning the audit of your client, Venus
Magnets Co (Venus) which manufactures decorative magnets. Its year end is 31 December 2017 and the
forecast profit before tax is Rs.9·6 million.
During the year, the directors reviewed the useful lives and depreciation rates of all classes of plant and
machinery. This resulted in an overall increase in the asset lives and a reduction in the depreciation charge
for the year.
Inventory is held in five warehouses and on 28 and 29 December a full inventory count will be held with
adjustments for movements to the year end. This is due to a lack of available staff on 31 December. In
October, there was a fire in one of the warehouses; inventory of Rs.0·9 million was damaged and this has
been written down to its scrap value of Rs.0·2 million. An insurance claim has been submitted for the
difference of Rs.0·7 million. Venus is still waiting to hear from the insurance company with regards to this
claim, but has included the insurance proceeds within the statement of profit or loss and the statement of
financial position.
The finance director has informed the audit manager that the October and November bank reconciliations
each contained unreconciled differences; however, he considers the overall differences involved to be
immaterial.
A directors’ bonus scheme was introduced during the year which is based on achieving a target profit
before tax. In order to finalise the bonus figures, the finance director of Venus would like the audit to
commence earlier so that the final results are available earlier this year.
Required:
Describe SEVEN audit risks, and explain the auditor’s response to each risk, in planning the audit of Venus
Magnets Co. (14)

Q.3 You are planning the audit of Derry Ltd (Derry) for the year ended 31 December 2017. The company
manufactures and sells products made from imported timber. In recent years, the company has expanded
into the manufacture of quality childrens’ garden swings and slides which are sold with a 10-year
guarantee. Most sales are to domestic customers, but the company also has a small export market which has
grown steadily over the last few years.
 Audit & Assurance |Page 2 of 2

At a planning meeting with the finance director, the following matters were discussed:

Operating Activities
During the year, the company’s revenue increased by 20% and the gross and operating margins increased
by 5% and 2% respectively. Inventory and trade receivable balances are significantly higher than the
previous year as a result of this increased activity. Online ordering on the company’s website commenced
in January 2016. Internet orders have grown steadily but only still represent a small percentage of the total
of company sales. However, the company continues to invest in the website to maintain its speed and ease
of use for customers.
Payroll
Following the successful implementation of a new computer system two years ago, payroll processing,
which had been outsourced for many years, was brought back in house from 1 March 2017. Management
was unhappy with the service provided by the external payroll company and cancelled the contract.
Additional staff have been recruited to process the payroll.
Managing Director (MD)
The MD has announced his intention to sell his 100% shareholding in Derry in order to concentrate on his
other business interests. Negotiations are underway with a potential buyer for his shares.
Using the information provided, discuss the key audit risks and recommend an appropriate auditor’s
response to each risk in planning the audit of Derry.
(10)
(The End)
 Solution # 7:

Answer The ISA suggests that the following factors may indicate that the above is appropriate:
# 1(a) _ Any indication that the entity misunderstands the objective and scope of the audit.
_ Any revised or special terms of the audit engagement.
_ A recent change of senior management.
_ A significant change in ownership.
_ A significant change in nature or size of the entity’s business.
_ A change in legal or regulatory requirements.
_ A change in the financial reporting framework adopted in the preparation of the financial
statements.
_ A change in other reporting requirements.

(any four from above)

Answer The content of the engagement letter
1 (b) The engagement letter should include details of the following:
_ The objective and scope of the audit.
_ The responsibilities of the auditor.
_ The responsibilities of management.
_ Identification of the underlying financial reporting framework.
_ Reference to the expected form and content of any reports to be issued.
_ more details on the scope of the audit, such as reference to applicable legislation,
regulations, ISAs, ethical and other pronouncements;
_ the form of any other communication of results of audit engagement.
_ the requirement for the auditor to communicate key audit matters in the auditor’s report in
accordance with ISA 701
_ the expectation that management will provide written representations;
_ the expectation that management will provide access to all information that is relevant to
the preparation of the financial statements and its disclosures

(any six above)

Answer Prior year financial statements: Provides information in relation to the size of Milky Way
1(c) Technologies Co (Milky Way) as well as the key accounting policies, disclosure notes and
whether the audit opinion was modified or not.

Discussions with the previous auditors/access to their files: Provides information on key
issues identified during the prior year audit as well as the audit approach adopted.

Prior year report to management: If this can be obtained from the previous auditors or from
management, it can provide information on the internal control deficiencies noted last year. If
these have not been rectified by management, then they could arise in the current year audit
as well and may impact the audit approach.

Milky Way’s accounting systems notes/procedural manuals: Provides information on how

each of the key accounting systems operates and this will be used to identify areas of potential
control risk and help determine the audit approach.

Discussions with management: Provides information in relation to the business, any important
issues which have arisen or changes to accounting policies from the prior year.
 Review of board minutes: Provides an overview of key issues which have arisen during the
year and how those charged with governance have addressed them.

Current year budgets and management accounts: Provides relevant financial information for
the year to date. It will help the auditor during the planning stage for preliminary analytical
review and risk identification.

Milky Way’s website: Recent press releases from the company may provide background on the
business during the year as this will help in identifying the key audit risks.

Financial statements of competitors: This will provide information about Milky Way’s
competitors, in relation to their financial results and their accounting policies. This will be
important in assessing Milky Way’s performance in the year and also when undertaking the
going concern review

(any four from above)

Answer Audit risk

#2 The directors have reviewed the asset lives
and depreciation rates of plant and
machinery, resulting in the depreciation
charge reducing. Under IAS 16 Property,
Plant and Equipment, asset lives should be
reviewed annually, and if the asset lives have
increased as a result of this review such that
the
depreciation decreases, then this change
may be reasonable
Discuss with the directors the rationale for
any extensions of asset lives and reduction
of depreciation rates.
The revised useful life of a sample of assets
should be compared to how often these
assets are replaced, as this provides
evidence of the useful life of assets.

However, there is a risk that this reduction

has occurred in order to achieve profit
targets, due to the introduction of the bonus
system. If this is the case, then plant and
machinery is overvalued and profit
overstated.
Due to staff availability, the company is During the final audit the year-end inventory
planning to undertake a full year-end adjustments schedule should be reviewed in
inventory count days before the year end detail and supporting documentation
and then adjust for movements to the year obtained for all adjusting items
end.
If the adjustments are not completed The audit team should increase the extent of
accurately, then the year-end inventory inventory cut-off testing at the year end.
could be under or overstated.
In October, a fire damaged inventory such Discuss with management the basis of the
that it has been written down from Rs.0·9m Rs.0·2m scrap value attributed.
to Rs.0·2m which is its scrap value. This
write down should have been charged to
profit or loss
If the goods remain unsold after the year Review whether any of the goods were sold
end, there is the risk that the scrap value is
overstated and inventory overvalued
An insurance claim for Rs.0·7m has been
submitted and the proceeds included within
profit or loss.
However, the company has not received a
reply from the insurance company and this
would therefore represent a possible
contingent asset. To comply with IAS 37
Provisions, Contingent Liabilities and
Contingent Assets, this should not be
recognised until the receipt is virtually
certain. With no response
to date, the inclusion of this sum overstates
profit and receivables.
The bank reconciliations for October and
November both contain unreconciled
amounts, and the finance director believes
the overall differences to be immaterial
Errors in bank reconciliations could actually
represent large errors which net off to a
small amount. If the differences are not fully
reconciled, it could result in bank balances
being under or overstated.
In addition, unreconciled amounts in the
bank could have arisen due to fraud
A directors’ bonus scheme was introduced
which is based on achieving a target profit
before tax. There is a risk the directors might
feel under pressure to manipulate the
results through the judgements taken or
through the use of provisions
The finance director has requested that the
audit commence earlier than normal as he
wishes to report results earlier. A reduction
in the audit timetable will increase detection
pre or post year end and at what value; this
should assess whether the attributed scrap
value is reasonable. If none have been sold,
discuss with management the possibility of
further write downs.
Discuss with management whether any
response has been received from the
insurance company and review the related
correspondence. If virtually certain, the
treatment adopted is correct.
If not, management should be requested to
remove it from profit and receivables. If the
receipt is probable, the auditor should
request management include a contingent
asset disclosure note.
Discuss this issue with the finance director
and request that the December
reconciliation is fully reconciled. The
reconciling items should be tested in detail
and agreed to supporting documentation.
Throughout the audit, the team should be
alert to the risk of fraud and maintain
professional scepticism
Throughout the audit, the team will need to
be alert to this risk and maintain
professional scepticism.
Detailed review and testing on judgemental
decisions, including treatment of provisions,
and compare treatment against prior years.
Any journal adjustments affecting profit
should be tested
in detail.
In addition, a written representation should
be obtained from management confirming
the basis of any significant judgements.
The timetable should be confirmed with the
finance director. If it is to be reduced, then
consideration should be given to performing
an interim audit in late December or early
 risk and place additional pressure on the
team in obtaining sufficient and appropriate
evidence
In addition, the finance team will have less
time to prepare the financial information
leading to an increased risk of errors arising
in the financial statements
Answer Purchase invoices from imports are likely to
#3 be in foreign currencies (unlikely but
possible for export sales).This increases the
risk of incorrect translation of foreign
amounts into the home currency. There is a
risk of misstatement of purchases and
payables
(and possibly of sales and receivables).
All play equipment is sold with a 10-year
warranty. Directors will need to estimate the
potential repair costs for faulty goods sold
within the last 10 years, which may be
difficult to do accurately. There is a risk of
misstatement of the provision for warranty
costs.
The increase in revenue coupled with gross
profit margin may not on its own give rise to
suspicion. However, the MD/100%
shareholder selling his shares provides a
significant reason to want to manipulate
annual profits so that he can achieve the
maximum possible gain from the share
sale.There is a risk of misstatement of
annual revenue/profit in 2017.
Derry continues to invest in the website to
January; this would then reduce the pressure
on the final audit
The team needs to maintain professional
scepticism and be alert to the increased risk
of errors occurring
For a sample of purchases agree the
exchange rate applied to an external source
(such as the Irish Times) to confirm the
accuracy of the retranslation. Confirm
software capable of dealing with exchange
rates by testing a sample of rates used in the
system to externally gathered exchange
rates. Enquire of directors how they (or the
accounting system) identify the correct daily
translation rate. For a sample of material
payables balances re-translate the amount
owed at 31 December 2017 with the
translation rate on that day to ensure all
outstanding amounts are translated to
current amounts.
Enquire of directors how they have
estimated the provision and re-perform the
calculation. Compare the provision to a
mixture of forecasts and post yearend
correspondence from claimants to assess
whether the current provision is adequate to
cover estimated returns. Compare previous
years’ provisions to the level of actual
returns received in
the following years to identify the accuracy
of
previous estimates.
Analytically review sales lines across the
whole garden furniture line. Obtain
appropriate explanations for significant rises
in sales by product. Re-perform cut-off
procedures for goods dispatched just prior
to and just after the year-end. Trace them to
the sales ledger to confirm they are
recorded in the correct period.
Review a sample of credit notes raised
shortly after the year-end to identify the
completeness of any provisions against
annual sales
Analytically review repairs and maintenance
improve its ease of use. Subsequent repair
costs should by expensed. Only those costs
that increase the benefit of the noncurrent
assets may be capitalised There is a risk of
misstatement of website maintenance
costs.
The new payroll system has only been
operational for 9 months and the staff who
administer it are also new. The system may
be prone to ‘teething’ problems due to a
developing control environment.
There is a risk of misstatement of payroll
costs and related liabilities
costs to identify any unusual changes in
expenses trends. Inspect breakdown of
additions to noncurrent assets to identify
any amounts which should be expensed as
repair costs. Inspect a sample of invoices
relating
to system costs to identify if they relate to
system improvements or
repair/maintenance costs
Document the payroll system,highlighting
the
controls that operate. Test the operation of
the system and controls using walkthrough
procedures. Test a sample of monthly
payroll totals by comparing amounts
entered into the system to original
documents, such as salary contracts and
timesheets. Confirm year-end wage/ salary
and tax liabilities by comparing to the
December 2017 payroll and cash book.
 The Professionals’ Academy of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations

Referral Test August 08, 2020
Test no: 8 33 marks – 1 hour

Audit & Assurance

Q.1 You are a trainee auditor with Tariq and Company and you have just returned from annual leave to discover that
you have been assigned to the audit of Sweet Bakery Ltd (Sweet), a small bakery based in Gujrat.

You have been assigned audit responsibility for a number of account balances including Non-Current Assets.
The audit partner informed you at your briefing meeting this morning that Sweet have extended the premises
this year and have invested heavily in new baking equipment. Thus, while non-current asset additions have been
tested substantively in the past, the audit partner has requested that the audit team understand and document the
processes and controls in this area in order to assess whether there are any control deficiencies that Sweet
should be made aware of in light of their significant investment.

Another member of the audit team already visited Sweet last week and documented the process over non-
current asset additions in the working paper below.

Working Paper: Controls over non-current asset additions

Prepared by: Auditor, Tariq and Company
Client: Sweet
Year Ended: 31 December 2018

Sweet maintains a Non-Current/ Fixed Asset Register which details the item code, number, cost and age of all
assets on hand. When a new asset is required (such as a new mixer or oven) the bakers discuss this with the
owner and together an asset requisition form is completed with a description of the item required. An order is
raised by the accounts staff in the office on foot of the asset requisition form. These orders are all pre-
numbered.

When an item requires replacing, such as bread baskets or trays, the bakers also raise an asset requisition form.
The person raising the requisition is required to provide the item code for the item to be replaced (derived from
the non-current asset register), description and number of new items required, and the reason why the item is
required (replacement, broken, etc). As the bakers work between 12 midnight and 6 am, it is not always possible
to get all this detail from the office so they usually leave this part of the form blank.

An order is raised by the accounts staff in the office on foot of the asset requisition form. All orders are pre
numbered. The order is subsequently approved by the bakery owner/manager by reviewing the section of the
order which details the reason(s) for the replacement. There is no physical inspection performed at this point on
the assets that are being replaced.

Once approved, a copy of the order is then passed to the accounts clerk who orders the item from the relevant
supplier. (Note: the accounts clerk cannot raise an order without an approved asset requisition form). The
original order details are entered on the outstanding order listing. The outstanding order listing is reviewed on a
request basis if bakery staff enquires as to why certain items have not been received.

Upon receipt of the goods, a goods received note (GRN) is raised by the goods inwards department and
matched to the original order. Goods are not accepted if there is no record of the original order form. The goods
receipt note is not pre-numbered. Once the goods have been received, both the order and the GRN are passed to
 the accounts clerk. The matched GRN and order are maintained by the accounts clerk for further matching with
the relevant invoice once received.

The accounts clerk records the purchase of the goods on the system by debiting Non-Current Assets and
crediting Accounts Payable when the invoice has been received and matched to the GRN and order. This is
usually performed on a weekly basis by invoice batch. The Non-Current Asset Register is also updated to take
account of the addition. If there is a discrepancy between a GRN and the associated invoice, the invoice is
posted and subsequently adjusted when the discrepancy has been resolved. Each month, the Non-Current Asset
Register is reconciled to the general ledger for assets purchased in that month, and the reconciliation is
approved by the finance director. There are seldom any differences noted in the reconciliation.
(a) From the documentation of the control processes over additions to non-current assets set out above,
outlines significant control weaknesses. (05)

(b) In your letter include an assessment of the implications of each weakness and a recommendation for
their improvement. (10)

Q.2 You are an audit senior in Hassan & Co. and are currently reviewing documentation for Shangrila Ltd’s
(Shangrila) sales system in preparation for the interim audit.

Shangrila is a small company that produces and sells high-quality knitwear. Its customers are principally
fashion boutiques. Shangrila has two directors, one of whom manages the day-to-day administration of the
business. The other is a non-executive director. A senior employee, Azeem, is responsible for processing
revenue and receivables.

The company has one sales representative, who visits customers’ boutiques and is responsible for finding new
customers and for generating and taking orders from all customers. Orders are recorded on an order form which
is referenced with the date and time the order was placed and the customer’s initials. The sales representative
passes the completed forms to the warehouse. The completed order is dispatched from the warehouse by
courier, accompanied by a copy of a dispatch note.

A second copy of the dispatch note is sent to Azeem, who prepares an invoice using its details and the
company’s authorized price list. He sends one copy of the invoice to the customer and retains a second copy.

Each Friday, Azeem inputs the week’s invoices into the computerized sales and nominal ledger. He then files
them alphabetically by customer name. Dispatch notes are not retained because filing space is limited. Azeem
opens the post daily and lists remittances received from customers. Each Friday, he inputs the information listed
to the receivables ledger. He passes the cheques to the managing director who is responsible for their lodgment.

Azeem reviews the computerized accounts receivables ledger balances every month and writes to customers
who have not paid within 90 days of receiving goods. The receivables ledger is printed out annually for year-
end purposes. Otherwise, no hard copy is printed and Azeem reviews the receivables ledger on the computer
screen.

The company’s computer software includes the facility to produce a day book and an accounts receivables
ledger control account. These are not used because Azeem considers that the low volume of transactions (10 to
15 invoices per week) renders them unnecessary.

(a) Discuss the significant deficiencies in the sales and receivables system. (06)
(b) Justify a recommendation to address each deficiency (06)
Q.3 You are the auditor of Mystery Ltd and in the course of the statutory year-end audit you identified the following
significant points in regards to the purchases control system:
(i) Amendments to the payables master file can only be made by the Managing Director (MD). Access to
the master file is restricted to the MD by password protection.
(ii) A print out of the master file is periodically extracted by the MD and compared to the underlying
system data to ensure that it has not been amended without authorization.
(iii) The payables ledger balances are reconciled to the supplier statements by Mr Straight who is
responsible for processing purchasing and payables. All reconciliations are retained on file to assist
with the preparation of year-end accruals and in cases of disputed payments.
(iv) At month end Mr Straight prints off an aged payables ledger and writes cheques to all suppliers with
amounts in the ‘70 days and older’ column. He then presents the cheques to the MD along with a copy
of the aged payables ledger. The MD scrutinizes the cheques and relates the payables back to the
authorised list of suppliers on the master file. The MD then signs the cheques, and Mr Straight mails
them to suppliers.
(v) All expense claims are supported by receipts, as required by company policy. All claims are authorized
by the MD, who checks that the receipts are sufficient evidence and that claims are relevant to the
business
Required:
Outline tests of controls that you as auditor of Mystery Ltd should perform to assess if the controls are operating
effectively. (06)

(The End)
SOLUTION # 8:
Answer 1(a) and 1(b)
Control Weakness
Although management review the reason for the
replacement, this reason is not validated.
Asset requisition forms for replacement items may be
incomplete.
Physical inspection of assets purchased is not performed
to ensure that items recorded on the listing actually exist
and are in working condition.
Goods receipt notes are not prenumbered
Details of the non current asset purchase is only entered
on the system when the invoice is received.
If there is a discrepancy between the GRN and invoice
the invoice is posted and subsequently adjusted
when the discrepancy has been resolved.
Adequate procedures for recording write offʼs and assets
no longer in use are not in place within the current
system.
Impact of Weakness
This could lead to inappropriate ordering of replacement
assets by bakery staff given that the reason for the
replacement are not investigated by management or an
appointed official. Staff could raise a requisition for goods
that are not required and simply misappropriate the goods
when received (this would go undetected as the original
asset would still be in working order)
This could lead to unnecessary or incompete purchases
being made.
There is no follow up, only on an exceptions basis, of
goods ordered not received. This could result in lost
production time as equipment might not be available.
Due to the lack of segregation of duties over those who
order the goods and those who have access to the goods,
misappropriation is a risk. Liabilities for goods received
may not be identified if there is no sequential numbering.
Cut off errors may arise for goods that are ordered and
received close to year end, for which no invoice has
been received. Goods may have been physically received
but no related accrual or asset set up for the purchase.
Purchase/liability may be recorded incorrectly if there is
no automatic control to prevent the posting of invoices
when exceptions to GRNʼs are noted. Reliance in manual
follow up. Incorrect payments may also be raised.
Neither the asset inventory listing nor the general ledger
are updated to take account of the asset that is being
replaced and no longer is use with the result that assets
may be overstated and not recoverable.
Answer 2(a) and 2(b)
Deficiency
Order forms are not sequentially pre-numbered.
Orders are processed without authorisation or without
performing a credit check on customers.
Nobody matches the GDN to the original order prior to despatch
and no-one signs the GDN to confirm that the correct quantity of
goods has been despatched.
Nobody checks that all orders have been despatched
There are no procedures to ensure the completeness and
accuracy of sale invoices.
GDNs are not retained on file
A sales day book is not maintained
Recommendation
All order forms should be sequentially prenumbered. Azeem
should file one copy of the order form in numerical sequence
and pass the other to the warehouse
All new customers should undergo a credit reference check
before being accepted as new customers. Credit limits should be
set for all customers and Mr Jones, the executive director and
the sales rep should meet to identify those customers close to or
exceeding their limits every month to avoid selling goods on
credit to risky customers. All orders over a certain limit should be
authorized by the executive director and confirmed with clients
prior to processing.
Before orders are despatched by courier, the factory supervisor
should check the quantity and quality of goods to the despatch
note and compare this to the original order. The supervisor
should then sign the despatch note to confirm this check has
taken place.
Azeem should keep a copy of all orders and match them to
GDNs. At the end of each week he should check unmatched
orders and enquire why a GDN has not been raised
All GDNs should be matched to the invoice and filed together. At
the end of each week Azeem should perform a review of
uninvoiced GDNs to ensure all despatches have been invoiced.
The customer order file should be reviewed periodically by
Melissa, who should confirm that the order, GDN and invoice
details all match.
A copy of the GDN should be retained in the warehouse (where
there is more filing space) in numerical order. Azeem should
record the despatch note number on each invoice so that, in the
event of query, the warehouse copy can be found.
Azeem should use the SDB facility and post the daily total sales
to the sales ledger and sales ledger control account. Melissa
should review a sample of daily postings in comparison to
original invoices and a sample of daily totals in comparison
to the ledgers to ensure that accurate entries are being made
into the system
Answer # 3

i. The auditor should use test data and enter a ‘dummy’ password into the payables master file to ensure
access is not granted.

ii. For a sample of months, inspect the masterfile printout and for a sample of amendments ask the MD to
explain the reason for the amendment.

iii. Observe the process of performing supplier reconciliations ensuring that it is performed by Mr Straight.
Alternatively, inspect a sample of supplier reconciliations for evidence of Mr Straight signature confirming
that it was performed by him.

iv. Ask to inspect the file of reconciliations to ensure they are being retained.

v. Observe the process of raising cheques ensuring that Mr Straight attaches the payables ledger to the
cheques and the MD reviews this. For a sample of payments made to suppliers during the year, compare
to the authorised list of suppliers to ensure that only valid suppliers are being paid.

vi. For a sample of expense payments recorded on the payroll system, inspect the related receipts and
supporting documents signed by the MD to authorise the payment as a valid business expense.