Certificate in Accounting and Finance Stage Examination

04 January, 2023
45 minutes – 22 marks
Additional reading time – None

Audit and Assurance

Test # 9
Instructions to examinees:
(i) Answer all FOUR questions.
(ii) Answer in BLACK ballpoint pen only.
(iii) Attempt each part of the question on a new page.

Q.1 Standard Commercial Bank (SCB) is an audit client of your firm. Given below are some factors which you
came to know during risk assessment procedures. For each of the factor mentioned below Indicate whether it
increases, decreases or has no effect on risk of material misstatement, and whether it affects risk of fraud.
(explanation is NOT required)

1. SCB is a continuing audit client.

2. SCB operates in a growing, prosperous area and has remained profitable over the years.
3. SCB's board of directors is controlled by Saqib, the majority stockholder, who also acts as the chief executive
officer.
4. Management at the bank's branch offices has authority for directing and controlling SCB's operations and is
compensated based on branch profitability.
5. The internal auditor reports directly to Haris, a minority shareholder, who also acts as chairman of the
board's audit committee.
6. During 20X1, SCB increased the efficiency of its accounting operations by installing a new, sophisticated
computer system.
7. SCB’s formula has consistently underestimated the allowance for loan losses in current years.
8. Management has been receptive to Green’s suggestions relating to accounting adjustments. (08)

Q.2 Larger Engineering Designs (LED) is a private eight-partner firm that provides engineering services to the
commercial building industry. You are planning the audit for LED for the year ended 30 June 2015 and are
assessing the risk of fraud occurring. You note the following characteristics of the business:
 LED was established over 20 years ago and has maintained a good reputation in the marketplace.
 As well as its partners, all of LED’s senior engineers also have shares in the business. They are paid a
lower-than-market salary, but in return receive a profit share via dividends.
 Many of LED’s projects are complex and long term (for example, infrastructure development).
 The company is in a sound financial position and has solid bank balance.
 Management is reasonably vigilant in overseeing the accounting staff, although it is having trouble
understanding the reports produced by the new accounting system.
 The credit controller, about whom there have been many complaints in relation to poor job
performance, is the brother-in-law of one of the directors.
 The chair of the board and the finance director have worked together for around 15 years and both
have domineering personalities.
 In the past, management has refused to sign a management representation letter on the grounds that
you would not need one if the auditor was doing their job properly.

Required
Referring to the information above, explain whether there is a significant risk of fraud at LED. (04)
 Audit and Assurance | Page 2 of 2

Q.3 What are the implications of following situations on audit:

1. The individual collecting cash also reconciles the bank account.

2. Company’s share price is declining and CFO has intense pressure to meet the expectations of shareholders.
CFO’s remuneration is also dependent on share price.
3. Internal audit function primarily interacts with CFO throughout the year and Internal Audit Department’s
bonuses are decided and approved by CFO.
4. In an attempt to reduce operating expenses, the company capitalizes expenses to an asset account.
5. An accountant was uncomfortable with some of the journal entries passed in financial statements. He
showed his concerns to the CFO, who assures him that “everything is ok”. The accountant was not satisfied,
however, he did not inform to anyone other.
6. Accounting records were either missing or were disorderly placed. (06)

Q.4 Green Limited (GL) is a listed company engaged in the manufacturing of garments and apparels. During the
audit planning meeting for the year ending 31 March 2018, the Chief Financial Officer of GL has provided the
following information:

(i) GL was previously exporting all its production under the brand name of ‘Wearables’. However, it has been
facing the issue of decline in export orders and therefore has decided to start focusing on the local market.
Accordingly, it has made an agreement with BL, according to which GL’s products would be sold to BL who
would market them through BL’s retail outlets spread throughout Pakistan. A director of GL holds major
shareholding in BL.

(ii) Two of the directors of GL holding 16% and 13% shares in GL have informed the Board that they intend to
sell their entire shareholding in GL in order to concentrate on some of their other businesses.

(iii) While discussing some of the internal control deficiencies in the payroll processing department, which
were raised in the previous year’s management letter, the CFO has informed that the matter has been referred
to the internal audit department but is pending because of the illness of the Chief Internal Auditor.

Required:
Identify fraud risk factors in the above scenario. (04)

(THE END)