ALLAMA IQBAL OPEN UNIVERSITY

Semester Terminal Exam Autumn 2020

Program /level: BA/B.Com/Associate Degree Program Maximum Marks 100

Title /Course
Auditing (481) Pass marks 40/50
Code

Instructions for Exams:

1. Attempt All Questions.

2. Write answers in your own words and avoid copying from an internet source or
any book.
3. Be precise, avoid unnecessary details, answer to each question must
be between 600-800 words.
4. Students can attempt paper on any white page. Mention Roll No. , Name
& Signature on everypage. Attach undertaking with each course code.
5. Students are advised to post their answer sheets to their tutor well in
time so the same mustreach on or before 20-06-2021.
6. Submissions after due date & time will not be entertained.

Q.
Question Mark
No.
s s
Suppose your firm has assigned a task to conduct Audit of M/S Z & Co. a
1 public limited company for the year 2018-2019. Draft a qualified report
based on assumptions.

INDEPENDENT AUDITOR'S REPORT

Audit of M/S Z & Co
Report on the Financial Report
We have audited the accompanying financial report of Audit of M/S Z & Co,
which comprises the statements of financial position as at 30 June 2019, the
statements of comprehensive income, the statements of changes in equity and the
statements of cash flows for the year then ended, notes comprising a summary of
significant accounting policies and other explanatory information and
management's assertion statement of the entity and the consolidated entity
comprising the entity and the entities it controlled at the year's end or from time to
time during the financial year.
Management's Responsibility for the Financial Report
Management is responsible for the preparation and fair presentation of the financial
report in accordance with Accounting Standards and for such internal control as
management determines is necessary to enable the preparation of the financial
report that is free from material misstatement, whether due to fraud or error.
Auditor's Responsibility Our responsibility is to express an opinion on the financial
report based on our audit. We conducted our audit in accordance with Australian
Auditing Standards. Those standards require that we comply with relevant ethical
requirements relating to audit engagements and plan and perform the audit to obtain
reasonable assurance about whether the financial report is free from material
misstatement. An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial report.
The procedures selected depend on the auditor's judgement, including the
assessment of the risks of material misstatement of the financial report, whether
due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of the
financial report 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 entity's internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the financial
report.
OPINION
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our qualified audit opinion.
Basis for Qualified Opinion
Audit of M/S Z & Co investment in Audit of M/S Z & Co, a foreign associate
acquired during the year and accounted for by the equity method, is carried at P15
million on the consolidated statement of financial position as at 30 June 2019, and
Audit of M/S Z & Co.’s share of XYZ's profit of P1 million is included in the
consolidated statement of comprehensive income for the year then ended. We were
unable to obtain sufficient appropriate audit evidence about the carrying amount of
ABC's investment in XYZ as at 30 June 2019 and Audit of M/S Z & Co’s share
of XYZ's profit for the year because we were denied access to the financial
information, management, and the auditors of XYZ. Consequently, we were unable
to determine whether any adjustments to these amounts were necessary.
Other Information
The other information comprises the information included in the annual report,
other than the financial statements and our auditor’s report thereon. The directors
are responsible for the other information. Our opinion on the financial statements
does not cover the other information and, except to the extent otherwise explicitly
stated in our report, we do not express any form of assurance conclusion thereon. In
connection with our audit of the financial statements, our responsibility is to read
the other information and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in
the audit or otherwise appears to be materially misstated. If we identify such
material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements or a
material misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact
Conclusion
 In our opinion, except for the possible effects of the matter described in the Basis
for Qualified Opinion paragraph, the financial report presents fairly, in all material
respects, (or "gives a true and fair view of") the financial position of Audit of M/S
Z & Co and its subsidiaries as at 30 June 2019, and (of) their financial
performance and cash flows for the year then ended in accordance with Generally
Accepted Accounting Principles.
Senior Auditor
15-June-2021

Suppose you are the auditor of any small and medium scale business
2 organization, as an auditor which type of audit is most suitable for small 33
and medium scale business. Is used this type of audit in Pakistan for SMEs.
Explain with example.

Internal audits are a hidden gem that many organizations have used to:
 Streamline operations
 Reduce potential for fraud
 Remedy problems that could show up in future external audits
 Save time and money
Many companies use internal audits to pinpoint potential ways to work smarter and
optimize resources. Can your organization do the same?
Internal audit or external audit which is better?
An internal audit is an independent, objective activity designed to identify
opportunities for improvement across your organization’s operational, financial,
and technology controls. It evaluates and gives guidance on improving the
effectiveness of your organization’s controls and operations, risk management and
governance processes.
Internal audits aren’t limited to financial reporting controls. Rather, they can help
you evaluate risk across any area of your organization.
While external audit can sometimes be seen as a “check-the-box” activity required
by regulators, bankers or shareholders, internal audit provides a more proactive and
consultative approach to evaluating an organization and providing a fresh
perspective on operations and controls.
Internal Audit in Small and Medium scale business-My Opinion
An internal audit team’s objective is to examine the how as well as the what of your
processes and controls.
Whereas an external audit asks whether the balance sheet is accurate, an internal
audit looks at the efficiencies and effectiveness of your internal controls, including
financial reporting and other operating areas that could ultimately affect the
numbers on the balance sheet. To take this deeper dive, the internal audit team:
Assesses the location and source of potential risks
Evaluates the adequacy, effectiveness and necessity of existing controls
Determines whether and where additional controls might be necessary
The resulting recommendations enable management to make informed decisions
about everything from technology and human resources to industry-specific
workflows.
Importance of Internal Audit for SME
One key benefit of internal auditing is that it’s extremely customizable. An internal
audit can be as broad or as granular as you need.
For example, Wipfli’s internal audit specialists start by sitting down with
management for a high-level discussion. We identify options that match the
organization’s concerns, goals and resources. Many clients start with a risk
assessment to determine where to spend the most time and energy, and what
departments, business processes or functions to focus on first.
Is used this type of audit in Pakistan for SMEs
In general, the internal audit begins with a walk-through of the processes to be
evaluated. For example, an internal audit of your accounts payable process would
start with the internal audit team working with the AP team to determine whether
money is going out the door as it should. Small and medium scale business are
vital and Example of such organizations Sme Business Solutions (Pvt)
Limited,Industrial Consultans & Machinery Linkers (Icml), Pdn (Pvt.) Ltd (Product
Distribution Network), Synergy Business Consulting. Financial Services Bag &
 Luggage Making Materials Business Services Luggage, Bags & Cases. Jics Tech,
Absolute Solutions (Pvt.) Ltd. And Ak enterprises.co. In recent years, stakeholders’
demands for business behaviors that are consistent with sustainability are
increasing. As business organizations play an important role, both positive and
negative, in sustainable development the issue of sustainability is gaining
prominence in the agenda of governmental and non-governmental organizations.
Business organizations, especially in developing countries, are very often blamed
for numerous harmful societal and environmental impacts. Therefore, stakeholders
compel an organization to engage in sustainable practices and to report on those.
Thus Most of small and medium scaled business in Pakistan undergoes External
and internal audit but external audit is mostly used in Pakistan.

i. What do you understand by liabilities? Describe the verification of

long termliabilities and short term liabilities.
3 34
ii. Explain various steps involved in the verification of revenue and
describe main objectives of verification of revenues.

Answer:-

1)
Liabilities

A liability is a debt owed by a company that requires the entity to give up an

economic benefit (cash, assets, etc.) to settle past transactions or events
A liability is typically an amount owed by a company to a supplier, bank, lender, or
other provider of goods, services, or loans. Liabilities can be listed under accounts
payable, and are credited in the double entry bookkeeping method of managing
accounts.
To settle a liability, a business must sell or hand over an economic benefit. An
economic benefit can include cash, other company assets, or the fulfillment of a
service.
Verification of long termliabilities and short term liabilities

To verify the existence of liabilities shown in the balance sheet and that these are
genuine obligations of the company. the higher of fair value less costs of disposal
and value in use). Long-term disability insurance (LTD) is an insurance policy that
protects an employee from loss of income in the event that he or she is unable to
work due to illness, injury, or accident for a long period of time. Long Term
Liabilities; To see how various liability accounts are placed within these
classifications, click here to view the sample balance sheet in Part 4. Assets can be
divided into e.g. The reserve and funds are to be shown on the liability side of the
Balance Sheet with footnotes. The primary audit concern with the verification of
long-term liabilities is that all liabilities are recorded and that the interest expense
is properly paid or accrued. Liabilities are also known as current or non-current
depending on the context. It is treated as a liability and should be shown in the
liability side of the Balance Sheet. Employees sometimes need these letters for
future employment, a mortgage or credit application, or a rental application. If the
bond repayment period is greater than 1 year, it is considered as a long term
liability; however if the maturity date is within 1 year, the bond is considered a
short-term liability. He should examine the Goods Inward Book to ensure that the
goods purchased have been actually received. The terms of a loan can be studied
from the loan agreement. The auditor should see whether the provision made
therefor is sufficient to meet the estimated liability.

2.

Various steps involved in the verification of revenue

Revenues are the lifeblood of any organization. Without cash inflows, the entity
may cease to exist. So, it’s important that each business generate sales or some type
of revenue. For you, the auditor, it’s important to verify the revenue.
Along with revenues, auditors need to prove receivables. Why? Some companies
manipulate their earnings by inflating their period-end receivables. When trade
receivables increase, revenues increase. So, a company can increase its net income
by recording nonexistent receivables.
Here are the important assertions of revenues:
Completeness: This assertion concern the completeness of recording in the
financial statements. The incomplete record of revenues might be happening
because many different reasons including the entity’s process and procedure could
not capture all the revenues, errors, and sometimes fraud.
Cut off: cut off assertion concerning that revenues are recording in the different
periods that they are belonging to. This could cause the understated and overstate of
revenues being shown in the income statement.
Occurrence: The auditor should consider assessing whether the revenues recorded
in the period have really occurred. There are risks that revenues recorded might not
occur.
Right and Obligation: Right and obligation are very important and it is concerning
entity rights and obligation over the goods that sold to customers. This is a link to
the risks and rewards then auditors performing cut-off testing.

Main objectives of verification of revenues

 To show correct valuation of assets and liabilities.
 To know whether the balance sheet exhibits a true and fair view of the state
of affairs of the business
 To find out the ownership and title of the assets
 To find out whether assets were in existence
 To detect frauds and errors, if any
 To find out whether there is an adequate internal control regarding
acquisition, utilization and disposal of assets.
 To verify the arithmetic accuracy of the accounts
 To ensure that the assets have been recorded properly

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