Audit and Assurance

Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

Ans.1 (i) There is a risk of embezzlement of cash collected from donation boxes as no receipt
is generated for cash collected in donation box.
(ii) Cash collected at kiosks may be embezzled by personnel collection cash donations;
therefore, cash is highly susceptible to theft.
(iii) There is an inherent risk that the donation income may be overstated by
overvaluing the donation in kind.
(iv) There is a risk that the management may miss-classify administration spending by
classifying items of expense incorrectly.
(v) Since there is no qualified accountant, there is a risk that:
 proper withholding of taxes may not be done leading to ineligibility of tax
credit.
 transactions are not recorded on a timely basis.
 withholding taxes are not timely deposited with the taxation authorities.
(vi) Since only two employees are responsible for recording all transactions including
inventory management, there is a lack of segregation of duties and hence risk of:
 fraud and error may arise.
 theft of medicines may arise;
(vii) The medicines may be issued to the employees or other beneficiary without
fulfilling the requirements.

Ans.2 (a) Death of Mr. Haris has caused casual vacancy in the office of auditor. The board
shall fill this vacancy in the office of auditor within 30 days. If the board fails to fill
up the casual vacancy within 30 days, the commission may of its own motion or on
as application made to it by the company or any of its member direct to make good
the default within the specified time. In case company fails to report compliance
within the specified period the commission shall appoint auditors. Any auditor
appointed to fill the vacancy shall hold the office until the conclusion of the next
annual general meeting.

(b) As per the “Code of Ethics” for Chartered Accountants, the practicing chartered
accountants are not allowed to publicize their services in a manner done by other
normal businesses.
However, appropriate newspapers or magazines may be used to inform the public
of the establishment of a new practice, of changes in the composition of a
partnership, or of any alteration in the address and telephone number of a practice.
The following should be considered before placing the announcement:
 Such announcements should be limited to a bare statement of facts in an
objective manner.
 Consideration should be given to the appropriateness of the area of
distribution of the newspaper or magazine and number of insertions.
 The basic principles of legality, decency, clarity, honesty and truthfulness
should be followed; and
 Do not project an image, which is inconsistent with that of a professional
person bound to high ethical and technical standards.

The purchase of services from an audit client by a firm does not usually create a
threat to independence if the transaction is in the normal course of business and at
arm’s length. However, the magnitude of the transaction needs to be evaluated to
substantiate that whether a self-interest threat may be created. The firm should
evaluate that the whether the amount of discount is material to the firm and would
it impair the audit team’s objectivity. It also needs to be evaluated that whether
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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

such discounts are also offered to other clients.

The firm may accept the discounted offer only if other clients are also given similar
sort of offers and the advertisement is in the compliance with the above mentioned
principles.

(c) A self-review threat may be created as the firm would be auditing the same
financial information which the team had worked on.
An advocacy threat would also be created as the firm’s employees might promote
the in-correct position adopted by them to the point that their objectivity is
impaired.
A familiarity threat would also be created as the seconded employees will become
too familiar with the management of the audit client.

The following safeguards may be adopted to address the above threats:

 Conducting an additional review of the work performed by the loaned
personnel.
 Not including the loaned personnel as an audit team member.
 Not giving the loaned personnel audit responsibility for any function or activity
that the personnel had performed.
 Providing such assistance only for a short period of time.
 Not assuming management responsibilities and the audit client is responsible
for directing and supervising the activities of the personnel.

Ans.3 EPL-Audit Procedures:

(i) Inquire from management when the asset was available for use.
(ii) Obtain the engineer’s certificate / documentation to assess when the asset was
completely built.
(iii) Read the management meeting minutes to find out whether any discussion has
been made related to the project completion.
(iv) Obtain management representation regarding when the asset was available for use.
(v) Inspect the purchase invoice of the additions made to this CWIP.
(vi) Review that only capital expenditure has been capitalized and revenue expenses
has been recorded in profit and loss.
(vii) Review the useful life for reasonableness by comparing it with other similar assets.

EPL-Reporting Implications:
EPL should start depreciating the asset when it is available for use and not when it is put
to use. If it is established that the asset has been completed before year end, the
management of EPL should be asked to record depreciation. However, the maximum
possible adjustment i.e. Rs. 1.67 million is below the materiality level i.e. Rs. 7.5 million.
Therefore there would not be any impact on the audit report and we will express an
unqualified opinion. The potential adjustment amount would need to be added to the list
of uncorrected misstatements and assess that whether they are material in aggregate. We
will also obtain a written representation in this regard that the effects of uncorrected
misstatements are immaterial, both individually and in the aggregate, to the financial
statements as a whole.

CEL-Audit Procedures:
(i) Review the legal expense account for any further claims or proceedings against the
company.
(ii) Send confirmation to the legal advisor to confirm the current status of the litigation
and the expected outcome.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

(iii) Review communication with the customers for out of court settlement.
(iv) Review the minutes of the board of directors meeting to assess the possible
outcome of the case.
(v) Consider the possibility of any legal proceedings and any proceedings that may be
instigated by the public health authorities as such authorities might impose
significant fines.
(vi) Seek written representation from the management about likely outcome of the
case.
(vii) Ensure that proper disclosure in this regard in the financial statements should be
made.

CEL-Reporting Implications:
Not giving disclosure of the event is qualitatively material to the financial statements. The
financial statements should include the disclosure required by the applicable financial
reporting framework. If CEL does not disclose this matter, it would be considered as a
material misstatement that relates to the non-disclosure of information required to be
disclosed. The auditor shall:
 discuss the non-disclosure with those charged with governance;
 Express a qualified opinion
 describe in the basis for opinion section the nature of the omitted information; and
 unless prohibited by law or regulation, include the omitted disclosures, provided it
is practicable to do so and the auditor has obtained sufficient appropriate audit
evidence about the omitted information.
For the customers with whom out of court settlement has been agreed a provision needs
to be recorded. If the management does not record the provision and if it is material, then
the auditor shall express a qualified opinion. The auditor needs to include a basis for
qualified opinion, explaining the reasons for qualifying the opinion.

Ans.4 Weakness Implication

The warehouse manager is supervising Since there is a lack of segregation of duties,
the inventory count procedure. the Warehouse Manager may influence the
inventory count process.

No system of marking on counted items. This may lead to double counting or

omission completely and possibility that
some items may not be counted at all.

Perpetual inventory records and third The person responsible for counting may try
party inventory records are available on to match the numbers provided instead of
count sheets. carrying out an independent count.
The third party inventory may be made part
of the inventory. Confirm that inventory
belonging to third parties, but on the client’s
premises at the date of the count, is not
included in the inventory.

Cut-off documents not obtained during There is a possibility of recording back

the inventory count. dated entries, therefore the cut-off
documents should have been obtained on
the date of the inventory count date.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

Ans.5 Long-term loan

It seems that DPL has failed to make the quarterly installment of its long-term loan or has
made delayed payment. This may represent default on part of DPL. Furthermore, no accrual
of finance cost for the last quarter has been made.

Audit procedures
 Obtain the loan agreement and look for any penal provision.
 Obtain correspondence with the bank to assess the possibility of any penalty or action
taken against DD.
 Critically analyze the confirmation received from the bank.
 Ask the management to record any penalty amount or loan re-classification.

Trade payables
Creditor days have decreased from 43 days to 34 days. This may represent that creditor
balances might be understated. Consequently, the following procedures may be performed:

Audit procedures
 Circulate balance confirmation requests to trade creditors.
 Compare the current list of trade payables with prior year’s working papers to identify
any omissions.
 Ensure that all regular suppliers are included in the list of trade creditors.
 Scrutinize subsequent payments and ensure that appropriate accruals were made
against those payments.

Prepayments
Since the warehouse was obtained on 16-June-21, an expense amounting to Rs. 125,000
should be transferred to profit and loss and prepayment should be reduced to Rs. 1,375,000
in the statement of financial position.

Audit procedures
 Obtain the rent agreement of the warehouse to verify the monthly rent.
 Verify and trace the payment made for the rent.
 Ask the management to record the expense amounting to Rs. 125,000.

Inventory
The inventory turnover days have increased from 47 to 57 days. Due to this increase there
might be some obsolete inventory which requires provisioning.

Audit procedures
 Verify from the stock count sheet whether any obsolete or old inventory was identified
 Obtain the inventory aging analysis.
 Obtain the management working of net realizable value and assess its accuracy.

Ans.6 Evaluation:
Even though MML came to know about the defect after the year end, the existence of
defect in MML products provide evidence of conditions that already existed at the end of
the reporting period. Therefore, it is as an adjusting event. The warranty provision
should be reassessed on the basis of the identified defect and the financial statements
should be adjusted accordingly.

Course of action:
(i) Inquire with the management about the quantity of effected products which have
been sold until the year end.
(ii) Inquire from the management whether they have assessed the revised warranty
provision on the basis of this new information.
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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

(iii) Consider involving auditor’s expert to re-assess the warranty provision.

(iv) Evaluate the management assumptions for the revised warranty provision.
(v) Assess whether there is any material effect to the warranty provision because of
the identified defect.
(vi) Ask the management to revise the financial statements and get it approved by the
board of directors.
(vii) Obtain management representation that the warranty provision reflects the
management best estimate.
(viii) Ask the management to prepare a working for the net realizable value of the
inventory and assess its adequacy.

Evaluation:
The incident occurred after the year-end for which no condition existed before the year-
end. Therefore, it is a non-adjusting event for which the financial statements do not need
amendment. The incident has a significant impact and it seems material for the users of
the financial statements. Therefore, DHL shall disclose nature of the event and an
estimate of its financial effect.

Course of action:
(i) Inquire from the management about the time it would take to repair the hotel and
make it operational.
(ii) Inquire from the management to assess the amount of revenue lost due to non-
functionality of hotel.
(iii) Inquire from the management about the estimated cost of repair.
(iv) Inquire from the management about any amount to be received from the insurance
company.
(v) Ask the management to disclose the matter in accordance with the requirements of
IFRSs.

Ans.7 Shortcomings Required changes

(i) The client has been asked to confirm Instead of using the word ‘us’ we should use
the balance and notify any ‘our auditors directly’.
difference to the audit client’s
management. It should be specifically mentioned
somewhere in the confirmation that it
needs to be mailed directly to the auditor.
(ii) The year-end date at which the The year-end date needs to be inserted just
balance need to be confirmed is not before or after the places where the account
mentioned. balance has been mentioned and the place
where client confirms his balance.
(iii) An addressed and stamped This also needs to be mentioned in the
envelope is always attached with the balance confirmation request.
confirmation request.
(iv)Balance reconciliation in case of The debtor should be asked that in case he
difference has not been asked. does not agree with the mentioned balance,
he should provide the detail and full
particulars of the difference.

Ans.8 (a) (i) Data input should be kept at minimum. For example, data of repeat customer
should be auto retrieved on entering their phone number.

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 Audit and Assurance
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Certificate in Accounting and Finance – Autumn 2021

(ii) Data should not exceed a predetermined amount. For example, if the sale
amount exceeds the allowed credit limit the data would be rejected for
further verification.
(iii) A field should always contain data and not zeros or blanks. For example, the
record should not be saved unless data is entered in all the fields like phone
number, email address etc.
(iv) Programmed checking of the data validity in accordance with predetermined
criteria/format. For example, the system will not process record if non-
numeric character is entered in amount field or the system will pop up an
alert if less than 13 numbers are entered in the CNIC field, etc.

(b) (i) There should be measures for the protection of equipment against fire,
power failure and other hazards.
(ii) There should be controls over maintaining secure second copies of all
programs and data files (‘back-up copies’). The back-up copies can be used if
the original copies are damaged or corrupted.
(iii) The company should have disaster recovery plans, such as an agreement
with another entity to make use of its computer centre in the event of a
disaster such as a fire or flood.

Ans.9 (a) We will assess the competence, capabilities and objectivity of the expert in one or
more of the following ways:
(i) Personal experience with previous work of that expert.
(ii) Discussions with that expert.
(iii) Discussions with other auditors or others who are familiar with that expert’s
work.
(iv) Knowledge of that expert’s qualifications, membership of a professional body
or industry association, license to practice, or other forms of external
recognition.
(v) Published papers or books written by that expert.

(b) The auditor should consider the justification for the request and whether it is
“reasonable”. If the auditor considers that it is a reasonable request and the terms
of engagement are changed, the auditor and management shall agree on and record
the new terms of engagement in an engagement letter.

If the auditor is unable to agree to a change of terms he should withdraw from the
engagement and consider whether there is any obligation to report the
circumstances to those charged with governance, owners or regulators.

(c) Responsibilities of auditors for fraud in an audit of financial statements:

The auditor is concerned with fraud only to the extent that it might impact on the
view shown by the financial statements. He will therefore be concerned with the
risk of material fraud. This is to identify and assess the risks of material
misstatement and to obtain sufficient appropriate evidence about those risks
through appropriate audit procedures. He must also respond appropriately to
fraud or suspected fraud identified during the audit. It is particularly important in
relation to fraud that the auditor maintains an attitude of professional skepticism.

Auditor should communicate to those charged with governance concerning the

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Autumn 2021

detection or possibility of fraud.

(d) (i) Are the internal auditors members of relevant professional bodies?
(ii) Do they have adequate technical training and proficiency?
(iii) Are there established policies for hiring and training internal auditors?
(iv)Do the internal auditors possess the required knowledge of financial reporting?

(e) Examples of system logs include:

(i) Which user logged-in, when and where from
(ii) Failed log-in attempts
(iii) Who accessed and amended data in a file
(iv) Changes made to a program – what, when and by whom
(v) When employees entered and left the building
(vi) Black box flight recorders

(THE END)

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