COMSATS University Islamabad

Lahore Campus

Sessional I – SP2021
Course Title: Auditing Course Code: MGT-370 Credit Hours: 3(3,0)
Course Instructor/s: Rashid Waheed Qureshi Programme BS AF
Semester: 4th Batch: SP19-BAF Section: Name:
A Date: 2021
Time Allowed: 60 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.

Question # 1. (10)

Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great Barrier
Reef. Its operations include boating, surfing, diving and other leisure activities, a backpackers’ hostel,
a family hotel and a five-star resort. Justin and Sarah Morris own the majority of the shares in the
Morris Group which controls Dolphin. Justin is the chairman of the board of directors of both
Dolphin and the Morris Group, and Sarah is a director of both companies as well as the CFO of
Dolphin.
In February 2017, Justin Morris approached your audit firm, Clarke Partners, to carry out the Dolphin
audit for the year ended 30 June 2017. Dolphin has not been audited before but this year the audit has
been requested by the company’s bank and a new private equity investor group which has just
acquired a 20 per cent share of Dolphin. You know that one of the partners at Clarke Partners went to
school with Justin and has been friends with both Justin and Sarah for many years.

Required:
(a) Identify and explain the significant threats to independence for Clarke Partners in accepting the
audit of Dolphin.
(b) Explain any relevant and practical safeguards that Clarke Partners could implement to reduce the
threats.

ANSWER:
Part-1) In accepting the audit of Dolphin the main threats to independence for Clarke Partners will be
familiarity threat that may occur due to personal relationships among the two directors and partner of the
audit firm. The threat will occur even when partner is not part of the engagement team as he is a senior
member for the audit firm.
Examples of situations that may result to familiarity threats include, however not limited to:
-- Engagement Team member having an immediate or close family member to be an officer or director of the
client. -- Member receiving preferential treatment or accepting gifts from a client, unless the gift's value to be
inconsequential or trivial
-- Engagement Team member having an immediate or close family member to a client's employees who is in
a position to put immense influence over the subject concern of the engagement
-- An Officer or director of the client or an employee who is in a position to put immense influence over the
subject of the engagement having served recently to be Engagement Partner
Part-2) APES 110 states that an audit firm must document the policies connected to type of independence
threat, the threat evaluation and the safeguards on a reduction of the threats. They must have the
procedures and policies on the prevention that partner from influencing inappropriately the assurance
engagement's outcome. Moreover, on the Dolphin engagement should not use that partner and must deny
on the acceptance of an audit when the partner is required on the audit

Continued…..
Question # 2. (10)

Elecnet is an electricity distribution company based in a large capital city. Its business is to manage
the electricity assets, including poles, wires and other equipment, that are used to deliver electricity to
more than 500000 retail and business customers in the city. Pole, wire and substation maintenance
and improvements are a large part of the company’s operations and teams of highly trained
technicians are used for both planned work and emergency response activities. Emergency response
is required when storms or fires bring down power lines, the power must be turned off at the direction
of police, or the electricity supply fails for any reason.
Each team comprises several vehicles (vans and trucks) and uses additional heavy equipment, such as
cherry pickers, cranes and diggers, as required. Each vehicle carries a core set of specialised parts and
tools and additional items are obtained as required from the stores, located in a large warehouse in the
northern suburbs. The warehouse is staffed on a 24-hour basis to assist night maintenance (designed
to minimise disruption to business customers) and emergency response.
Required
(a) Make a list of the potential problems that could occur in Elecnet’s maintenance and improvements
program.
(b) Suggest ways that good internal control over parts, equipment and labour could help Elecnet
avoid these problems.
(a) Potential problems include:

 Problems with communication systems stop emergency reports reaching the response teams in a timely
manner.

 Police or other emergency services are unable to contact Elecnet during an emergency because they do not
have the required contact information or staff at Elecnet are not rostered on to respond to emergencies.

 Trained staff are not available to respond to emergencies through mismanagement of leave or failure to
recruit and train staff.
 Storms, fires or other emergencies are more extensive than anticipated and not enough staff and
equipment are available to respond.

 Equipment, such as vehicles, diggers and cherry pickers, are not operational due to lack of suitable
maintenance.

 Not sufficient supplies of specialised tools and parts are held in stores.

 The large warehouse is not accessible in an emergency because the key holder is away sick or on leave.

 Too many staff are rostered onto normal maintenance and not enough available for emergency response in
a particular geographic location.

 Changes are made to the electricity distribution system so that different parts are required for maintenance
and these new parts are not ordered in time.

(b) Suggested internal controls include:

 responsibility for maintaining communication systems with emergency services assigned to a senior staff
member at Elecnet who also has information about staff rosters.

 HR department is made aware of staffing requirements for emergency. response and reports to senior
management on achievement of staff targets

 HR department oversees policies and procedures for staff training to ensure that sufficient staff within the
organisation have the required skills and qualifications.

 Scientific modelling of emergency situations, taking into account population growth and climatic conditions.
 Schedule of maintenance for equipment coordinated with senior staff responsible for emergency response.
 Stores report on holdings of various parts, with integration with new equipment purchases.

 Stores maintain security systems and assign responsibility for staff member to coordinate with emergency
response teams.

 Staff schedules and rosters approved by senior management with consideration of balance between
maintenance and emergency response.