COMSATS University Islamabad

Lahore Campus

Sessional II – SP 2021
Course Title: Auditing Course Code: MGT-370 Credit Hours: 3(3,0)
Course Instructor/s: Rashid Waheed Qureshi Programme BS AF
Semester: 4th Batch: FA19-BAF Section: Name:
A Date: 2021
Time Allowed: 90 minutes Maximum Marks: As per CUI Policy
Student’s Name: Reg. No.

Important Instructions / Guidelines:

 Read all the questions carefully before solving the paper.

 Solve Paper on A4 size sheet. (Hand written)
 Solution is acceptable in pdf file only
 email i.e. rwqureshi@cuilahore.edu.pk
 Upload file CU-online in given time (10 minutes allowed to upload the file)
 (late submission may not be acceptable)
 Use Black Ink/ Ball pen
 Send solved file in sequence (preferable with page numbers)
 Attempt all the Questions.
 If any solution found copied or same with other students, the solution will carry zero mark.

Question # 1. (5+5)

Cleanway Ltd is a public company that competes in the highly competitive market for manufactured
household products. The company is dominated by Rob Bigbucks, the chairman and chief executive
officer, who has guided the company since it was a private company and has extensive influence on
all aspects of company operations. Rob is known to have a short temper and, in the past, has
threatened individuals in the accounting department with no pay rise if they failed to help him
achieve company goals. Furthermore, the company has extended its influence over customers and has
dictated terms of sale to ensure that customers are able to obtain desired quantities of their most
popular products. Bonuses based on sales are a significant component of the compensation package
for individual product sales managers. Sales managers who do not meet sales targets three quarters in
a row are often replaced. The company has performed well up until a recent recession, but now the
company is having difficulty moving inventory in most product lines as retailers have difficulty
selling in a down economy.

Required:
a. Identify the fraud risk factors that are present in this case.
b. Identify the accounts and assertions that are most likely to be misstated based on the fraud
risk factors noted in the case.

Question # 2. (10)

Moss Green Ltd is a wine grower and producer of medium- to high-quality wines located in Western
Australia's Margaret River region. The company has recently listed on the Australian Securities
Exchange. After listing, it changed auditors from Tickit Associates to your firm, Watson and
Partners. You are an audit supervisor in Watson and Partners, and you are planning the audit for 31
December 2015. The managing director of Moss Green Ltd is Tom Green. He is the founder of the
winery and has a very ‘hands on’ management style. He is a trained winemaker and has always
focused more on the wine making and marketing side of the business than the financial side, which
he leaves for Wendy Chong, the financial director, in whom he has great faith. He pays her a good
base salary and provides an attractive bonus scheme based on growth in net profitability.
The company has been very successful in selling its medium-quality wine to the United Kingdom.
This is mainly due to a very large contract with one of the leading supermarket chains there,
Safeburys. Part of the success has been due to the low value of the Australian dollar compared with
the British pound. However, the company manages its foreign exchange risk through hedging, which
is controlled by Wendy. Tom has also been very happy with Wendy's performance in this area as she
has made some healthy profits on her hedging contracts. The wine production manager is Alfred
Horndale. From discussions with Alfred, you become aware that the company has significant stock
from the 2013 vintage in the Margaret River warehouse and in London (because it was rejected by
Safeburys — payment for this stock is currently in dispute).
As is the standard practice, you contacted Tickit Associates before you accepted the engagement at
the beginning of the year to see whether there were any matters you should have been aware of
before accepting the engagement. They told you that they had only two main concerns. First, they had
problems getting Tom Green to have any interest in the financial side of the business, and it was their
view that he was not financially literate. Second, there had been a number of disputes over
accounting policy with Wendy Chong, particularly over getting her to implement audit standard on
Agriculture and standard on Provisions, Contingent Liabilities and Contingent Assets.
Required:
Discuss potential problem areas and their impact on the audit plan.
Question # 3. (10)

You are about to complete the planning stage of the audit of Stack Print Ltd and you are considering
your approach to several events that have occurred during the year. Stack Print Ltd's revenue for the
year is $25 million and profits are $3 million. A customer has made a claim against Stack Print Ltd
for breach of contract. They claim that products were not delivered in accordance with the contract
and this led to them having to engage other contractors to carry out the work at great expense. The
customer is suing the company for damages of $1 million. A major customer has not paid Stack Print
Ltd for three months and the receivable balance at the year-end for this customer is $120 000. The
customer is rumoured to be having significant cash flow difficulties; however, Stack Print Ltd's
directors believe they will be paid as the customer is one of long standing and has always paid in the
past. Stack Print Ltd recently purchased new equipment for the factory. This replaced old machinery,
which is no longer being used, included in the balance sheet at a net written down value of $2250000.
The old equipment has not reached the end of its originally expected useful life and remains on the
balance sheet and is being depreciated in line with previous years.
Required:
Describe substantive procedures that would provide sufficient appropriate evidence in relation to the
issues outlined above.