Caf-8 All Test (Sp-24)

CAF:08
Audit And Assurance

By
Sir Muhammad Asif, FCA
Test Number Syllabus
Test # 1 Syllabus: Ch. # 1
Test # 2 Syllabus: Ch. # 2 & 3
Test # 3 Syllabus: Ch. # 4 [LO 1 to LO 5]
Test # 4 Syllabus: Ch. # 4 [Complete]
Assessment # 1 Syllabus: Ch. # 4, 5 & 8
Test # 6 Syllabus: Ch. # 11 [LO 1 to LO 4] Ch. # 10 [LO 1]
Test # 7 Syllabus: Ch. # 11 [Complete]
Term Test # 1 Syllabus: 4, 5, 8, 9 & 11
Test # 8 Syllabus: Ch. #14, 15
Test # 9 Syllabus: Ch. # 16, 17
Test # 11 Syllabus: Ch.# 19
Term Test # 2 Syllabus: Ch. # 4, 11, 14, 16, 17, 18, 20
Test # 13 Syllabus: Ch. # 12 [5 Internal Control System]

Certificate in Accounting and Finance Stage Examination
11 October 2023
50 minutes – 28 marks
Additional reading time – None
CAF 8 – AUDIT AND ASSURANCE

Test – 1
Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.
(iii) Attempt each part of the question on fresh page.
Q. 1 (a) What is meant by reasonable assurance? (02)

(b) Why an auditor cannot provide an absolute assurance as a result of audit? Explain. (03)
Q. 2 Quartz’s finance director has asked your firm to undertake a non-audit assurance engagement. The audit
junior has not been involved in such an assignment before and has asked you to explain what an assurance
engagement involves.
Required:
Explain the five elements of an assurance engagement. (05)
Q. 3 Briefly explain following:

(a) Assurance Engagement (02)
(b) Role of directors as Agent (02)
(c) Statutory audit (02)
(d) Benefits of audit to management (02)
Q. 4 The managing director of Birdie Ltd, an external audit client of your firm, has discovered that an employee
has diverted Rs. 30,000 of company funds into his own bank account by creating and paying purchase
invoices on fictitious supplier accounts over the last twelve months. The managing director has contacted
your firm to express his concern that the audit team did not discover this fraud during the external audit
and has requested a meeting with the engagement partner to discuss the issue. The financial statements for
the current year show revenue of Rs. 25 million and profit before tax of Rs. 1.5 million.
Explain why the managing director’s expectation that the audit team should have discovered the fraud is
unrealistic. (03)
Q. 5 (a) Give any two examples about the uncertainty relating to the financial statements being audited by you.
(02)
(b) What is the difference between an “assurance engagement” and an “audit engagement”? (05)
(THE END)
CAF 8: Audit & Assurance
Suggested Solution – Test # 1
Answer # 1
 Reasonable assurance:
Reasonable assurance is a high but not absolute level of assurance (0.5 marks) which is expressed in
positive form of conclusion (0.5 marks) e.g. “in our opinion, financial statements give true and fair
view”. (1.0 marks)
 Reasons why absolute assurance cannot be provided:

1. There is often uncertainty / judgment / estimates/ forecasting involved in preparation of
financial statements and some areas cannot be accurately calculated/verified.
2. Entity’s internal control system over financial statements always has some
weaknesses/limitations e.g. because of humans errors.
3. Many of the auditor’s procedures are based on his judgment. Therefore, most of the audit
evidence is persuasive rather than conclusive.
4. Because of time and cost limitation, auditor checks only a sample of transactions.
5. Audit is not a fraud-examination i.e. audit procedures may not detect a sophisticated and
carefully organized fraud.
6. Management may not provide complete information to auditor, and
7. Auditor does not have specific legal powers e.g. power to search.
8. Most of the audit evidence is persuasive, rather than conclusive.
Marking plan:
0.5 mark for each limitation, subject to maximum of 03 marks
Answer # 2
Element Explanation
1. Intended users (the parties who require subject matter and assurance report
e.g. shareholders, bankers)
A three party 2. A responsible party (the party which is responsible for preparation of
relationship subject matter i.e. management) and
3. A practitioner (the professional who verifies subject matter and provides
assurance on it i.e. auditor)
Subject matter is the information which responsible party prepares and is to

A subject matter
be verified e.g. Financial Statements.
Criteria means Framework (i.e. standard rules and regulations) which is used
A Suitable Criteria to prepare and evaluate financial statements e.g. IFRS or Tax Laws.
Suitable means it should be selected appropriately.
Evidence means information on which practitioner’s conclusion is based.

Evidence
Evidence should be sufficient and appropriate.
Page 1 of 3
It is a page written in standard format which includes conclusion of

Written Assurance
practitioner. It is provided by practitioner to intended users e.g. Report on
Report
audit of financial statements, or Report on review of financial statements.
Marking plan:
0.5 mark for identification of each element, 0.5 mark for brief explanation
Answer # 3
(a) “Assurance engagement” means an engagement in which a practitioner obtains evidence about
evaluation of a subject matter against suitable criteria(01 mark), and expresses his conclusion to
enhance the confidence of the intended users (other than the responsible party) (01 mark).
(b) An agent is an individual employed by principal to provide a particular service (01 mark).
Management and Directors have role of agent i.e. they are appointed to act in accordance with
instructions of shareholders (the principal) (01 mark).
(01 mark)
(c) Statutory audit is an audit which is required by law e.g. audit of large companies in
Pakistan (01 mark).
(d)
1. Audit identifies deficiencies in entity’s internal control system and assurance providers
suggest recommendations for improvement through Management Letter. (01 mark)
2. Audit confirms that that management is performing its statutory and non-statutory duties. (01
mark)
Answer # 4
1. Auditor is responsible to obtain reasonable assurance only whether financial statements are free
from material misstatement.
2. £30,000 is an immaterial amount (being less than 75,000 = 1,500,000 * 5%), and auditor is not
responsible to detect immaterial misstatement.
3. Further, there are inherent limitations (e.g. use of sampling, collusion among employees) because
of which auditor may not be able to detect all misstatements.
4. Last but not least, primary responsibility to prevent and detect fraud rests with management.
Marking plan:
01 mark for each valid point, subject to maximum of 03 marks
Page 2 of 3
Answer # 5
(a)  Provision for bad debts

 Depreciation
 Provision for Legal Cases
 Provision for Warranty
Marking plan:
(01 mark for each example, subject to maximum of 02 marks)
(b) Assurance Engagement:

“Assurance engagement” means an engagement in which a practitioner (0.5 mark) obtains
evidence(0.5 mark) about evaluation of a subject matter(0.5 mark) against suitable criteria(0.5 mark), and
expresses his conclusion(0.5 mark) to enhance the confidence of the intended users(0.5 mark) (other
than the responsible party).
Audit Engagement:
Audit Engagement is a type of assurance engagement (01 mark) in which reasonable assurance (01 mark)
is provided.
(THE END)
Page 3 of 3
18 October 2023

Test – 2
(i) Answer all SEVEN questions.
Q. 1 International Federation of Accountants (IFAC) provides leadership to the worldwide accountancy

profession in serving the public interest. What activities are undertaken by IFAC to achieve this aim? (04)
Q. 2 Saeed has been appointed as the auditor for Jaguar Motors Ltd and he has to make his audit plan. He
delegates it to the engagement team to assess the internal control system to decide the nature, timing and
extent of audit procedures to be applied. From the assessment of the internal control system, he finds that
the internal controls are quite adequate and very effective. The audit team members therefore propose that
certain areas need not be checked at all. However, Saeed instructs them to carry out less extensive audit
procedures for each area.
Required:
Explain whether Saeed’s decision to implement audit procedures is right or wrong. (03)
Q. 3 The following issues were highlighted in a meeting of the audit committee of XYZ Limited with regard to
financial statements of one of its subsidiaries on which auditors had issued an unmodified audit report:
(i) The audit procedures were unable to detect a material error in inventory valuation, because it
occurred under exceptional circumstances and the internal controls established by the management
could not prevent and detect the same.
(ii) The provision for bad debt was insufficient and the impact was material. It was also evident from
the subsequent events, which came into the knowledge of the auditors before they issued their
report.
You are one of the independent members of the audit committee and are considered an expert on financial
reporting issues. The chairman of the audit committee has asked your comments with regard to the
responsibilities of management and auditors of the above mentioned subsidiary.
Give your comments on each of the above matters. (06)
(P.T.O)
Audit & Assurance Page 2 of 2
Q. 4 Identify whether the following are tests of control or Analytical procedure or Test of detail.
(a) Comparison of this year's expenses with last year's expenses.
(b) Observation by auditor that cash is deposited daily by a specific clerk.
(c) Inquiry by auditor about who deposits cash and how often.
(d) Examination of invoices to support additions (specific transactions) to fixed assets account during
year.
(e) Examination of sales invoices to see if initials of credit manager are present to indicate a credit
approval.
(f) Vouching from sales invoices to credit files to see if customer has a credit file and has been approved
for credit.
(g) Confirmation of year-end balances in accounts receivable.
(h) Observation of the existence of a building. (08)
Q. 5 Sara, an assistant auditor, decided to inspect documentary evidence that all shipments made by Kid Sport
Co. have been invoiced. Accordingly, she selected a sample from sales invoices and matched each invoice
with shipping documents.
Comment on her decision. (03)
Q. 6 ISA 500 - Audit Evidence lists down various procedures for obtaining audit evidence. Provide ONE
example of how an auditor would perform EACH of the following procedure to obtain evidence in Payroll
Expenses for the year.
(a) Inquiry
(a) Inspection
(d) Recalculation
(d) Analytical review (04)
Q. 7 You are also responsible for the audit of Coot Co, and you are currently reviewing the working papers of the
audit for the year ended 28 February 2012. In the working papers dealing with payroll, the audit junior has
commented as follows:
‘Several new employees have been added to the company’s payroll during the year, with combined
payments of $125,000 being made to them. There does not appear to be any authorisation for these
additions. When I questioned the payroll supervisor who made the amendments, she said that no
authorisation was needed because the new employees are only working for the company on a temporary
basis. However, when discussing staffing levels with management, it was stated that no new employees have
been taken on this year. Other than the tests of controls planned, no other audit work has been performed.’
Required:
Explain the meaning of the term ‘professional skepticism’, and recommend any further actions that should
be taken by the auditor. (06)
(THE END)
Answer # 1
1. IFAC develops of high-quality standards and guidance. [01 mark]

2. IFAC facilitates adoption and implementation of standards and guidance. [01 mark]
3. IFAC promotes the value of professional accountants worldwide. [01 mark]
4. IFAC speaks out on public interest issues where professional voice is important. [01 mark]
Marking Plan
Marks
• 1 mark for each activity 4.0
.
Answer # 2
Saeed’s decision to implement audit procedure is right (01 mark). Every internal control, no matter how
much strong, has its limitations (01 mark). Therefore, team should perform substantive procedures (01 mark).
As controls are assessed effective, extent of substantive procedures may be reduced (01 mark).
Marking Plan
Marks
• Maximum Marks to be awarded 3.0
.
Answer # 3
(i) In this case, auditor is not responsible (1 marks), because error occurred under exceptional
circumstances(1 marks). Auditor may have obtained reasonable assurance (1 marks).
(ii) In this case, auditor can be held responsible (1 marks) for this because matter had come into his
knowledge before issuance of auditor’s report (1 marks). He should have proposed adjustment for
the misstatement and if uncorrected, he should have issued modified report (1 marks).
Answer # 4
(a) Analytical Procedures

(b) Test of Control
(c) Test of Control
(d) Substantive Procedure
(e) Test of Control
(f) Test of Control
(g) Substantive Procedure
(h) Substantive Procedure
Page 1 of 3
Marking Plan
Marks
• 1 mark for each correct classification 8.0
.
Answer # 5
This decision is wrong. There is no relevance between assertion to be tested and procedure performed (01
mark)
.
If Sara wishes to ensure that all shipments have been invoiced (i.e. Completeness of Revenue), she
should select sample from shipping documents(01 mark) and each shipping document should be matched
with sales invoice to ensure they have been recorded. (01 mark)
Answer # 6
(a)
 Inquiring client about how many employees joined or left during the year.
 Inquiring client about Overtime Policy or Bonus Policy to employees
(b)
 Inspection of Payroll Sheet of a month.
 Inspection of Appointment Letter of new employees.
 Inspection of approval document for Overtime or Bonus.
(c)
 Recalculate salary expense of sample of employees to check it is accurately calculated.
 Recalculate tax payable on salary.
(d)
 Compare this year’s salary expense with last year, and investigate unusual difference.
 Make a plausible relationship of Salaries Expense with Number of Employees, to ensure salaries
expense is in line with number of employees.
Marking Plan
Marks
• 1.0 mark for each example, subject to maximum of 01 mark for each
4.0
type
.
Page 2 of 3
Answer # 7
Professional Skepticism:
Professional skepticism is an attitude [0.5 mark] that includes:
i. a questioning mind, [0.5 mark]
ii. being alert to conditions which indicate possible misstatement (due to error or fraud)
[0.5 mark]
, and
iii. critical assessment of audit evidence [0.5 mark].
Recommended Actions:
This is a case of inconsistency of evidence [0.5 mark]. Auditor should perform further procedures to
resolve matter [0.5 mark] e.g.
1. Lack of authorization of new employees is a weakness in internal control. Auditor should
communicate this to management. [01 mark]
2. Auditor should physically check existence of new employees. [01 mark]
3. Auditor should check that payments are made to different employees/bank accounts. [01
mark]
[Note: Other procedures described by students will also be marked correct, if relevant]
Page 3 of 3
25 October 2023

Test – 3
(i) Answer all SIX questions.
Q. 1 Identify the situations in which an auditor may modify his report without affecting his opinion. Also explain
how such a modification should be presented in the audit report. (07)
Q. 2 The outcome of an uncertainty depends on future actions or events not under the direct control of the entity
but it may have a material effect on the financial statements. Discuss the impact of an uncertainty on the
auditor’s report. (03)
Q. 3 Briefly discuss the circumstances which may result in following types of opinions:
(a) Qualified opinion (02)
(b) Disclaimer of opinion (02)
(c) Adverse opinion (02)
(d) Emphasis of matter paragraph (02)
Q. 4 State the effect on your audit report of the following situation:

JonArc & Co were appointed auditors after the end of the financial year of Galartha Co. Consequently, the
auditors could not attend the year end inventory count. Inventory is material to the financial statements.
(02)
Q. 5 You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of three
audit clients.
Palm Industries Co (Palm)

Palm's year end was 31 March 2015 and the draft financial statements show revenue of $28.2 million,
receivables of $5.6 million and profit before tax of $4.8 million. The fieldwork stage for this audit has been
completed.
A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted
that no amounts had been paid to Palm from this customer as they were disputing the quality of certain
goods received from Palm. The finance director is confident the issue will be resolved and no allowance for
receivables was made with regards to this balance.
Ash Trading Co (Ash)

Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only appointed
auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The
fieldwork stage for this audit is currently ongoing.
The inventory count at Ash's warehouse was undertaken on 31 January 2015 and was overseen by the
company's internal audit department. Neither Chestnut & Co nor the previous auditors attended the count.
Detailed inventory records were maintained but it was not possible to undertake another full inventory
count subsequent to the year end.
The draft financial statements show a profit before tax of $2.4 million, revenue of $10.1 million and
inventory of $510,000.
Bullfinch.com (Bullfinch)
Bullfmch.com is a website design company whose year-end was 31 October 2015. The audit is almost
complete and the financial statements are due to be signed shortly. Revenue for the year is $11.2 million and
profit before tax is $3.8 million. A key customer, with a receivables balance at the year end of $283,000, has
just notified Bullfinch.com that they are experiencing cash flow difficulties and so are unable to make any
payments for the foreseeable future. The finance director has notified the auditor that he will write this
balance off as an irrecoverable debt in the 2016 financial statements.
Required:
For each of the issues:
(i) Discuss the issue, including an assessment of whether it is material; (06)
(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and (03)
(iii) Describe the impact on the audit report if the issue remains UNRESOLVED. (04)
Q. 6 During the year ended 31 August 20X2 Worboys Ltd, an outdoor leisure retailing chain, switched purchases
of tents and waterproof clothing from Leakproof Products Ltd to another supplier. Two months later.
Leakproof Products Ltd went into liquidation.
The liquidators of the company have issued a claim against Worboys Ltd for breach of implied contract and
consequential losses. No amount has yet been put on the claim, but lawyers advise that it could be
substantial and, although they are confident of a successful defence, also advise that the case could go
against Worboys Ltd. This would have a serious effect on the company.
Describe the effects this situation will have on the audit report of Worboys Ltd if the matter is
(i) fully disclosed in the financial statements
(ii) Not disclosed in the financial statements. (03)
(THE END)
Answer # 1 [Question Adapted from Spring 2010 Attempt of ICAP]
Situations causing modification in Report:

Audit report can be modified even without modified opinion if any of following paragraph is included in
audit report:
1. “Material Uncertainty relating to going concern”.
2. “Emphasis of Matter Paragraph”,
3. “Other Matter Paragraph”, or
How such paragraphs are presented in audit report:

 These paragraphs are presented as separate section in audit report. [01 Mark]
 These are presented after Opinion/Basis of Opinion Section [01 Mark]. However, exact placement
depends on their relative importance [01 Mark] i.e. if material uncertainty relating to going concern
is more important, it will be presented first and other paragraph will appear after it [01 Mark].
Marking Plan
Marks
• 1 mark for each type of modification 3.0
• Presentation & Placement 4.0
.
Answer # 2 [Question Adapted from Spring 2007 Attempt of ICAP]
The impact of uncertainty depend on type of uncertainty:

1. If uncertainty relates to going concern, auditor discusses it in paragraph “material uncertainty
relating to going concern” [01 Mark].
2. If uncertainty relates to exceptional litigation or regulatory action, auditor discusses it in
paragraph “emphasis of matter” [01 Mark].
3. If uncertainty relate to common issues e.g. various litigations, or tax contingencies, auditor
discusses them in paragraph “Key Audit Matter” Section [01 Mark].
Marking Plan
Marks
• 01 mark for discussion of each type of uncertainty 3.0
.
Answer # 3
(a) If there is a misstatement or scope limitation [01 Mark], whose effect is material [01 Mark].
(b) If there is scope limitation [01 Mark] whose effect is pervasive [01 Mark].
(c) If there is a misstatement [01 Mark], whose effect is pervasive [01 Mark].
[01
(d) If auditor wants to draw users’ attention to matter which is disclosed in financial statements
Mark]
and is fundamental for users’ understanding of financial statements [01 Mark].
Page 1 of 3
Answer # 4 [Question Adapted from December 2007 Attempt of ACCA]
(1) This is a scope limitation if evidence is not obtained from alternative procedures too. [0.5 Mark]
(2) Auditor shall express qualified opinion on financial statements, and shall explain nature of scope
limitation in basis for qualified opinion section. [0.5 Mark]
(3) In Key Audit Matter Section, auditor shall refer to basis for qualified opinion section. [0.5 Mark]
(4) Auditor shall also include Other Matter Paragraph in his report to communicate that prior period
financial statements were audited by another auditor. [0.5 Mark]
Answer # 5
Palm Industries Co (Palm)

(i) If it is probable that customer will not pay the amount then provision for bad debts should be
recorded [01 Mark]. Effect is material as amount of 350,000 is greater than materiality level 240,000
[=4,800,000 * 5%][01 Mark]
(ii) Audit teach should check subsequent collection from debtor, or inspect the relevant documents
e.g. sales agreement, customer’s correspondence. [01 Mark]
(iii)
 Auditor shall express qualified opinion (as effect is material). Auditor shall also explain nature of
misstatement in basis for qualified opinion section. [0.5 Mark]
 In Key Audit Matter Section, auditor shall refer to basis for qualified opinion section. [0.5 Mark]
Ash Trading Co (Ash)

(i)
 This is a scope limitation if evidence is not obtained from alternative procedures too. [01 Mark]
 Effect is material as amount of 510,000 is greater than materiality level 120,000 [=2,400,000 *
5%][01 Mark]
(ii) Auditor should inspect documentary evidence on current date, and should roll-back transactions
to reach the inventory balance at year end. [01 Mark]
(iii)
1. Auditor shall express qualified opinion on financial statements, and shall explain nature of
scope limitation in basis for qualified opinion section. [0.5 Mark]
2. In Key Audit Matter Section, auditor shall refer to basis for qualified opinion section. [0.5 Mark]
3. Auditor shall also include Other Matter Paragraph in his report to communicate that prior
period financial statements were audited by another auditor. [1.0 Mark]
Page 2 of 3
Bullfinch.com (Bullfinch)
(i) Cash flow difficulties faced by debtor indicates that debt is not fully recoverable and a provision
for bad debts should be recorded [01 Mark]. Effect is material as amount of 283,000 is greater than
materiality level 190,000 [=3,800,000 * 5%] [01 Mark]
(ii) Auditor should confirm debtor’s financial position from debtors financial statements. He can
send letter to liquidator. Auditor can also check if any amount is received after year end. [01 Mark]
(iii)
 Auditor shall express qualified opinion (as effect is material). Auditor shall also explain nature
of misstatement in basis for qualified opinion section [0.5 Mark].
 In Key Audit Matter Section, auditor shall refer to basis for qualified opinion section [0.5 Mark].
Answer # 6
This is an exceptional litigation which is required to be disclosed in financial statements.
(i) Auditor shall express unmodified opinion, but shall include “emphasis of matter paragraph” in his
report to draw users’ attention towards this matter. [01 Mark]
(ii) Auditor shall express qualified opinion (if effect is material), or adverse opinion (if effect is pervasive)
[0.5 Mark]
. Auditor shall also explain nature of misstatement in basis for qualified/adverse opinion section
[0.5 Mark]
.
In Key Audit Matter Section, auditor shall refer to basis for qualified/adverse opinion section. [01 Mark]
ICAEW Book 8 Question Bank Section 4 Short form questions
Marking Plan
Marks
• 1.0 mark for describing effect if fully disclosed. 1.0
• 2.0 mark for describing effect if fully disclosed. 2.0
.
Page 3 of 3
04 November 2023

Test – 4
Q. 1 With reference to Auditor’s Report under Companies Act, 2017, state whether following statements are
Correct or Incorrect. If Incorrect, also suggest correction.
a. The report must begin with "Chartered Accountant's Report"

b. The report is addressed to shareholders.
c. The report includes that management is responsible to prepare financial statements in conformity
with International Accounting Standards.
d. The report indicates that auditor's responsibility is to conduct the audit in accordance with
International Standards on Auditing.
e. The report indicates that auditor obtains material assurance about whether financial statements are
free of any misstatement.
f. The report indicates that an audit includes assessing the accounting policies and significant estimates
made by management.
g. The report includes opinion whether proper books of accounts have been kept as required by
International Accounting Standards.
h. Complete set of financial statements consists of the balance sheet, profit and loss account, and cash
flow statement together with the notes forming part thereof
If audit is conducted by a firm of chartered accountants, audit report contains either the name of firm or the
name of engagement partner. (09)
Q. 2 You are manager incharge for the audit of Sehwan Marbles Limited. During audit you noticed that the
company was sued for breach of contract by a customer claiming damages of Rs. 200 million. Based on the
lawyer’s opinion (received through management), the management asserted that there would be no
significant liability at the balance sheet date in respect of the said breach and accordingly, no provision was
made in the financial statements. However, while studying the case file you found a memorandum from the
head of the legal department addressed to the managing director in which he had opined that the company
will have to pay atleast 50% of the damages claimed. You concluded that this note was a strong evidence
indicating the existence of this liability, which should be provided for. Management considers that such note
was nullified by the opinion of the company’s legal advisor and as such there was no need to make any
provision in respect of this contingent liability that was considered to be remote. Therefore, the CFO advises
you that at the most there may be a disclosure of this contingent liability in the financial statements or
perhaps an emphasis of matter paragraph in the auditor’s report without qualification.
Required:
Write a memorandum containing your conclusion and recommendation for the decision of the partner as to
the type of opinion that should be issued and why. (05)
Q. 3 The following situations have arisen on different clients being audited by your firm. The year end in each
instance is 31 December 2011.
(a) The management of Dir Limited intends to present certain unaudited supplementary information
(i.e. information other than financial statements), with the audited financial statements, in order to
comply with the requirements of the parent company. Before signing the audit report, it has been
determined that some of the information is inconsistent with the information in the draft financial
statements. (02)
(b) Malakand Industries Limited (MIL) is engaged in the supply of customised machinery to textile
manufacturers. On 18 February 2012 one of its customers, who owed Rs. 9.6 million, went into
voluntary liquidation. In addition to the above amount, a job was in progress on behalf of that
customer and on which MIL had already spent Rs. 13.9 million.
The directors have refused to make a provision against the debt on the grounds that the liquidator
was appointed after the balance sheet date. They have also refused to make any provision in
respect of the work in process as they are planning to sell the machinery being manufactured to
another customer for Rs. 15.7 million.
The profit after tax of MIL is Rs. 85 million. The materiality level is 10% of profit after tax. (03)
Required:
In the light of the relevant requirements, discuss how should the auditor deal with the above situations and
describe the impact thereof on the audit report.
Q. 4 The following matters arising during the audit of Brakes Co have been noted on file for your attention:
(i) A customer of Brakes Co had to withdraw one of their family car models this year due to concerns
over the safety of the braking system. The customer has lodged a legal claim against Brakes Co for
Rs. 10m for the negligent supply of 'faulty' braking systems. The company's lawyers believe that
there is an 80% chance that Brakes Co will lose the case but the directors believe that their quality
control procedures have always been robust and that the braking systems will be proven to have
been safe. They have however decided to disclose the matter in the accounts to provide additional
information to shareholders. (04)
(ii) Brakes Co also produces and sells brake fluid. Another customer has recently returned a small batch
of brake fluid because the fluid appeared to be contaminated with oil. Brakes Co issued the customer
with a credit note for the full value (Rs. 137,500) and correctly accounted for this in the draft
financial statements. As the brake fluid was returned before the year end, Brakes Co has included it
in the year-end inventory listing at cost (Rs. 125,000). Brakes Co may be able to re-filter and resell
the brake fluid at the original price, but filtering will cost a further Rs. 62,500. (04)
(iii) Four months ago. Brakes Co began renting some additional warehouse space from a third party
storage provider. Wheels Co. At the year end, a number of items of raw material belonging to
Brakes were stored by Wheels Co. The directors of Brakes Co did not make you aware of the new
third party storage facility. Consequently, no audit procedures were included in the audit plan to
verify the quantity of raw material owned by Brakes Co but held by Wheels at the year end. Rs.
3.2m is included in inventory in Brakes Co draft financial statements, in respect of this raw material.
(04)
Required
Discuss each of these issues and describe the impact on the audit report if the above issues remain
unresolved. Draft profit before tax is $9 million, and total assets are $37 million.
Q. 5 As per ISAs, what are the matters need to be communicated to those charged with governance by auditor in
relation to audit of financial statements? Give six examples. (03)
(THE END)
Answer # 1
(a) Incorrect. [0.5 Mark]

The report must begin with “Independent Auditor’s Report”. [0.5 Mark]
(b) Incorrect. [0.5 Mark]

The report is addressed to members. [0.5 Mark]
(c) Incorrect. [0.5 Mark]

The report includes that management is responsible for the preparation and fair presentation of
the financial statements in accordance with the accounting and reporting standards as applicable
in Pakistan and the requirements of Companies Act, 2017 [0.5 Mark]
(d)Incorrect. [0.5 Mark]

The report includes that auditor’s responsibility is to obtain reasonable assurance about whether
the financial statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditor’s report. [0.5 Mark]
(e)Incorrect. [0.5 Mark]

The report indicates that auditor obtains reasonable assurance about whether financial
statements are free of material misstatement. [0.5 Mark]
(f)Correct. [01 Mark]
(g)Incorrect. [0.5 Mark]

The report includes opinion whether proper books of accounts have been kept as required by the
Companies Act, 2017. [0.5 Mark]
(h)Incorrect. [0.5 Mark]

[0.5 Mark]
Statement of changes in equity is also a part of complete set of financial statements.
(i) Incorrect. [0.5 Mark]

If audit is conducted by a firm of chartered accountants, audit report contains signature of firm,
and name of engagement partner. [0.5 Mark]
Marking Plan
Marks
• 1 mark for each statement 9.0
.
Page 1 of 4
Answer # 2: [Question Adapted from Spring 2006 Attempt of ICAP]
To: [Partner's Name]

Date: [Date]
Subject: Audit of Sehwan Marbles Limited - Contingent Liability for Breach of Contract
Evaluation of the Situation:

There is a pending litigation about which Lawyers’ opinion has been received which states no liability
exists, but it is received through management therefore it is less reliable (being indirect).
Recommendation:
Based on head of legal department’s memorandum, we have concluded that 50% liability exists.
Therefore:
 Management should record Rs. 100 million [50% * Rs. 200 million] as liability. [01 Mark]
 Management should disclose remaining about as contingent liability. [01 Mark]
However, CFO is not ready to record liability.
Conclusion about Type of Opinion:

 If management does not record provision, this will be a misstatement.
 If effect is material, auditor shall express Qualified opinion on financial statements. If effect is
pervasive, auditor shall express Adverse opinion on financial statements. [01 Mark]
 Auditor shall also explain nature of misstatement in basis for qualified/adverse opinion section.
[01 Mark]
 Qualified/Adverse opinion is by nature a key audit matter. Therefore, a reference to the Basis for
Qualified/Adverse Opinion should be included in the Key Audit Matters section. [01 Mark]
Marking Plan
Marks
• 02 marks for Recommendation 2.0
• 03 marks for Conclusion 3.0
.
Answer # 3: [Question Adapted from Spring 2012 Attempt of ACCA]
(a)
If there is inconsistency, auditor shall discuss with management and investigate which information is
correct. [01 Mark]
 If financial statements are incorrect and supplementary information is correct, this will be a
misstatement. Auditor shall express qualified or adverse opinion. [01 Mark]
 If financial statements are correct and supplementary information is incorrect, auditor shall
express unmodified opinion. [01 Mark] However, he shall include in the auditor’s report an
‘Information Other than the Financial Statements and Auditor’s Report Thereon’ describing the
inconsistency. [01 Mark]
Page 2 of 4
(b)
Bankruptcy of customer after B/S date is an adjusting event [0.5 Mark]. There is no need to record inventory
at NRV, as NRV of inventory (15.7 million) is more than its cost (13.9 million). [0.5 Mark]
If management does not record provision for bad debts:

 This will be a misstatement.
 Effect is material i.e. Rs. 9,600,000 > Rs. 8,500,000 (85,000,000 * 10%). [0.5 Mark]
 Auditor shall express Qualified Opinion on financial statements. [0.5 Mark]
 Auditor shall also explain nature of misstatement in basis for qualified/adverse opinion section.
[0.5 Mark]
 Qualified/Adverse opinion is by nature a key audit matter. Therefore, a reference to the Basis for
Qualified/Adverse Opinion should be included in the Key Audit Matters section.[0.5 Mark]
Marking Plan
Marks
• Maximum of 02 marks for Part (a) 2.0
• Marks for Part (b) 3.0
.
Answer # 4 [Question Adapted from ACCA]
(a) Faulty Brake System:

 Provision for $10 million should be recorded as outflow of resources is probable. [1.0 Mark]
 This is a case of misstatement of $10 million. [1.0 Mark]
 Amount of $10 million is material, as it is more than materiality level $450,000
[9,000,000 * 5%]. [1.0 Mark]
 Auditor shall express Qualified opinion on financial statements, and shall explain nature
of misstatement in basis for qualified opinion section. [1.0 Mark]
 Qualified opinion is by nature a key audit matter. Therefore, a reference to the Basis for
Qualified Opinion should be included in the Key Audit Matters section. [1.0 Mark]
(b) Contaminated Brake Fluid:

 Inventory should be valued at lower of cost and NRV. Cost of fluid is $125,000, and
NRV is $75,000 [137,500 – 62,500]. [1.0 Mark]
 Hence there is a misstatement of 50, 000. [1.0 Mark]
 Amount is not material as $50,000 is less than materiality level $450,000 [9,000,000 *
5%]. [1.0 Mark]
 Auditor shall express unmodified opinion on financial statements, if misstatement is
immaterial on aggregate as well as qualitative basis. [1.0 Mark]
Page 3 of 4
(c) Additional Warehouse Space:

 Auditor should perform alternative procedures to verify the balance of inventory e.g.
obtaining balance of inventory after year end, and perform reverse working to reach
balance at year end. [1.0 Mark]
 If evidence is not obtained, This is a case of scope limitation of $3.2 million. [1.0 Mark]
 Amount of $3.2 million is material, as it is more than materiality level $450,000
[9,000,000 * 5%]. [1.0 Mark]
 Auditor shall express Qualified opinion on financial statements, and shall explain nature
of scope limitation in basis for qualified opinion section. [1.0 Mark]
Qualified Opinion should be included in the Key Audit Matters section. [1.0 Mark]
Marking Plan
Marks
• Maximum of 04 marks for each Part 12.0
.
Answer # 5
1. A misstatement
2. A scope limitation
3. Emphasis of Matter
4. Other Matter
5. Material Uncertainty relating to Going Concern
6. Key Audit Matters (for listed companies)
7. Compliance with independence requirements (for listed companies)
8. Weaknesses in Internal Control
9. Decision of withdrawal and its reason
10. If anyone from management is involved in fraud.
Marking Plan
Marks
• 0.5 mark for each matter, subject to maximum of 03 marks 3.0
.
(THE END)
Page 4 of 4
08 November 2023

Assessment Test – 1
(i) Answer all SIX questions.
Q. 1 Mitchell and Holmes, Accountants and Registered Auditors, was auditing the financial statements for the
year ended 31 December 20X8 of Aurora Maze, a brewery company.
During the year the tax authorities filed an appeal in the country's Apex court against Aurora Maze for the
recovery of $800,000 in tax on certain peculiar real estate transactions. Aurora had not made any provision
for claim in its financial statements since its legal counsel reported that the outcome was most probably in
the company’s favour. However, in January 20X9, the Apex Court adjudicated a similar case in favour of
the tax authorities. Aurora's management is still of the opinion that since the Apex Court has not yet heard
its case, there is no need to make the provision. The management also feels that this event has not yet had
any impact on Aurora's financial position as on the reporting date.
Required:
As Mitchell and Holmes' audit manager on the Aurora Maze engagement, draft a memo to Aurora's
management detailing the implications of the situation and the action required to be taken by the company.
(04)
Q. 2 Discuss the course of action which may be adopted by the auditor if pre-conditions of audit are not present.
(06)
Q. 3 (a) Your firm has been invited by John Vector, the managing director and majority shareholder of Vector
Ltd (Vector), to accept appointment as external auditor. The client acceptance procedures have identified a
recent newspaper article which provides details of court proceedings relating to an alleged fraud committed
by John Vector.
Explain why this matter should be considered when deciding whether or not to accept the appointment as
external auditor of Vector. (03)
(b) Net profit of Reed Ltd. for year ended December 31st, 2017, after charging remuneration of CEO
Rs. 10.4 million amounted to Rs. 1800 million you have noted that the director has charged personal
travelling expenses amounting to Rs. 2 million to business expense.
What will be the impact on audit report? (02)
(c) What are the audit procedures an auditor normally employs for the purposes of expressing his opinion
on Zakat in the audit report? (02)
Q. 4 You are the audit partner of Gricon Furnitures (Pvt) Ltd (GFL) and this is the first year of audit of your
firm. You were appointed as auditor of GFL on 31st March 2016 and you have signed the engagement letter
dated 07th April 2016. The audit for the year ended 31st March 2016 is in progress. Assuming that today is
10th April 2016, the Board has requested you to change the terms of audit engagement. Being Audit Partner
what matters, you will consider with regard to this matter? (06)
Q. 5 CCC Inc. is owned by 3 brothers, 2 of whom are actively involved in the business and one who is an
investor living in another province. The company was previously audited by another firm, but one of the 2
active owners belongs to the same sports club as you and has indicated that he is dissatisfied with the
previous auditors and has invited your firm to be the company’s auditors. He has paid only half of the
previous auditor’s fee, because he felt that the audit staff was argumentative and not efficient, and he has
advised in advance that he expects your firm’s auditors to work efficiently. He did not appreciate the
previous auditor’s insistence in reclassifying as a current liability a bank loan that the client had shown as
long-term, since, after all, total liabilities was correct. One of your responsibilities in the firm is to obtain
new clients and your preliminary discussions suggest that this could be a profitable business arrangement.
As a first step, you obtained the financial statements and audit report from the previous year, and are now
writing a letter to the previous auditors.
Required
Assume that you were unable to contact the predecessor auditor. Indicate 3 reasons why you would not
accept the audit engagement. (03)
Q. 6 Your firm is currently completing the audit of Richards Ltd (Richards) for the year ended 30 June 2008.
(a) In the early hours of 1 July 2008, there was a fire at Richards’ factory which resulted in the
destruction of both a substantial quantity of inventory and the computer system which was used to
maintain the company’s perpetual inventory records. This has resulted in the loss of the company’s
inventory records. You were due to attend the inventory count at the factory later that day. The
company’s finance director has estimated a figure for the destroyed inventory of £230,000, and he
has included this figure in the financial statements at 30 June 2008.
(b) On 27 July 2008, Richards was notified that a liquidator had been appointed at Watts Ltd (Watts), a
major customer of Richards. Sales to Watts in the year ended 30 June 2008 amounted to 40% of the
company’s revenue and the balance due from Watts at 30 June 2008 was £175,000, of which
£50,000 had been received by Richards as at 27 July 2008. The liquidator has not yet given a firm
indication of the likely future prospects for Watts.
Richards’ unadjusted pre-tax profit for the year ended 30 June 2008 was £700,000 and its total assets at that
date were £1.8 million.
Requirements
Explain the possible effects of the situations described above on the financial statements of Richards for the
year ended 30 June 2008 and discuss whether this will give rise to a modification to its associated audit
report. (08)
(THE END)
Suggested Solution – Assessment Test # 1
Answer # 1
Action by Company:
1. The Apex Court's recent decision in a similar case increases the probability that Aurora may
have to pay tax.
2. Management should record provision and should also disclose details of provision in notes.
Implications of the Situation:

1. If management does not record provision, it will be a misstatement.
2. Auditor shall express Qualified Opinion (if effect is material) or Adverse Opinion (if effect is
pervasive).
3. Auditor shall also explain nature of misstatement in basis for qualified/adverse opinion section.
4. Qualified/Adverse opinion is by nature a key audit matter. Therefore, a reference to the Basis for
Qualified/Adverse Opinion should be included in the Key Audit Matters section.
Answer # 2:
If preconditions for audit are not present, auditor shall explain to management:
1. What preconditions are;
2. Preconditions are required to comply with ISAs; and
3. Preconditions are necessary to avoid misunderstanding about responsibilities of management
and auditor.
If Management Does Not Agree to Premise on Which Audit is Conducted:

Auditor shall not accept the proposed audit engagement.
If AFRF is Not Acceptable:

Auditor shall refuse the engagement, unless required by law or regulation to do so.
If AFRF is not acceptable but is required by law, auditor shall accept engagement only if following
conditions are met:
1. Management agrees to provide additional disclosures in financial statements, to avoid financial
statements being misleading.
2. Engagement Letter shall state that:
i. Auditor’s report will include Emphasis of Matter Paragraph, to draw users’ attention
towards additional disclosure; and
ii. Auditor’s report will not include phrases “give true and fair view” or “present fairly in all
material respects”.
If above conditions are NOT met and the auditor is required by law or regulation to undertake the audit
engagement, the auditor may still accept engagement but auditor shall:
 evaluate its effect on auditor’s report; and
 include appropriate reference of the effect in engagement letter.
Page 1 of 3
Answer # 3:
(a)
This factor should be considered because this information indicates doubt about integrity of higher
management and shareholders of client.
It increases:
 Risk of fraud and illegal activities (e.g. money laundering, non-compliance with laws and
regulations)
 Reputation Risk (association of firm with a client of bad reputation may also cause negative
impact in public)
(b)
This amount is quantitatively immaterial. Auditor shall express unmodified opinion on financial
statements.
However, auditor shall state in “Other reporting respoinsibilities required by Law” that expenditure
incurred of Rs. 2 million during the year was not for the purpose of the Company’s business.”.
(c)
Following two audit procedures are required:
1. Whether Zakat deductible at source, was deducted by the company correctly,
2. Whether such Zakat was deposited in the Central Zakat Fund on timely basis.
Answer # 4
If management requests auditor to change the terms of engagement during audit, auditor shall consider
whether there is a reasonable justification to do so.
If change is reasonable and auditor accepts the change:

1. Revised terms of engagement shall be agreed.
2. Procedures to be performed and Report to be issued shall be according to revised engagement.
3. Report shall NOT refer to:
 Original audit engagement or
 Any procedures performed in original audit engagement
If change is not reasonable and auditor does not accept the change:
 Auditor shall continue to perform the audit engagement as per original terms of engagement.
 If management does not permit auditor to continue original engagement, it will be scope
limitation by management whose effect is pervasive. Auditor shall withdraw from engagement
and shall consider whether there is any obligation to report to TCWG, owners or regulators.
 If withdrawal is not possible and practicable, auditor shall express disclaimer of opinion on
financial statements.
Page 2 of 3
Answer # 5
Reasons why our firm should not accept audit engagement:

1. Outstanding Fees with Previous Auditor (half of the fee is pending)
2. Concerns Over Independence and Objectivity (personal connection with one of the active owners)
3. Disagreement with Previous Auditor’s Judgment (it raises concerns about the client's understanding
and attitude towards proper accounting standards)
Answer # 6
(a)
Possible Effects on Financial Statements:
In financial statements, this inventory lost by fire should be disclosed as a non-adjusting event.
Modification in Audit Report:

This is a case of Subsequent Non-Adjusting Event, as well as Scope Limitation.
1. Subsequent Event:
Auditor should include Emphasis of Matter Paragraph in his report to refer to disclosure relating
to subsequent event of Fire (if properly disclosed).
2. Record Lost:
 This is a scope limitation. Auditor shall express qualified opinion as effect is material [230,000 >
5% of 700,000].
 Auditor shall also explain nature of misstatement in basis for qualified opinion section.
 Qualified opinion is by nature a key audit matter. Therefore, a reference to the Basis for Qualified
Opinion should be included in the Key Audit Matters section.
(b)
Possible impact on financial statements:
Bankruptcy of debtor after year end is an adjusting event. Provision should be recorded for likely amount
of bad debts 125,000 [175,000 – 50,000].
Further, as it was a largest customer, its loss may have impact on going concern, Therefore, a disclosure
should be added in financial statements to indicate this event casting doubt on going concern.
Modification in Audit Report:

This is a case of Misstatement, as well as Going Concern Issue.
1. Bankruptcy of Customer:
 If management does not record provision for bad debts, this will be a misstatement. Auditor shall
express qualified opinion as effect is material [125,000 > 5% of 700,000].
 Auditor shall also explain nature of misstatement in basis for qualified opinion section.
Qualified Opinion should be included in the Key Audit Matters section.
2. 40% revenue stream lost:

 Auditor shall include Material Uncertainty relating to Going Concern Paragraph in his report. In
the paragraph, auditor shall state the matter, include the reference and state that auditor’s
opinion is not modified in respect of the matter emphasized.
(THE END)
Page 3 of 3
15 November 2023
Additional reading time – 05 minutes
Audit and Assurance

Test # 5
(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 You are the manager responsible for the audit of a newly incorporated company, Trojan
Limited (TL). Following are the extracts from the first draft financial statements of TL for the
year ended 31 December 2019:
Rs. in million
Revenue 12,000
Profit before tax 72
Total assets 13,000
Total liabilities 7,000
Since this is the first year of operation, the profit before tax was quite low. However, as per the
management’s projection, the profit before tax would grow exponentially over the next three
years.
Your audit team has determined the materiality on the basis of profit before tax for the year
ended 31 December 2019. In view of the audit team profit before tax is the main performance
indicator for TL’s board of directors.
Required:
Discuss the appropriateness of the benchmark used by your team in determining the
materiality and suggest the alternative(s) available to your team. (06)
Q.2 Hi-tech Computers (Hi-tech) is a profit-oriented company and sells computers to stores. You
are the manager of audit engagement team at Hi-tech, and are in the process of determining an
appropriate materiality level for this audit client. One of your team members is of the view
that profit before tax should not be used as a base for determining materiality for Hi-tech.
Required:
(i) Can a base other than profit be used to determine materiality for profit oriented
entities? If so, under what conditions? (1.0)
(ii) State 3 examples of bases, other than profit, that the auditor could use in determining
materiality in this case. (1.5)
(iii) If draft financial statements for the year under audit have not been prepared yet, how
can auditor calculate materiality level? (1.5)
Audit and Assurance | Page 2 of 2
Q.3 State the following are true or false.

(i) Audit Plan is prepared in each year.
(ii) Audit planning helps the auditors in conducting the audit efficiently.
(iii) Audit plan helps the management to identify the important audit areas.
(iv) Audit plan is prepared during the conduct of audit.
(v) Audit plan can be revised at any time.
(vi) Audit Planning is not applicable on recurring audit client. (03)
Q.4 Five Stars Foods International Limited is a producer/manufacturer of wide range of food
products including daily use items such as jams, marmalades, jellies, cereals and few
specialized food products for diabetic and heart patients. The company has set up two
manufacturing facilities, one in Karachi and the other in Lahore. Mostly, items are sold
locally, however, the company also exports few high-quality products mainly to Middle East
and Afghanistan. Major raw material items are procured from local markets; however, few
specialized items are imported directly by the company. The company’s sales for the year
ended June 30, 2009 amounted to Rs. 500 million, while the expected turnover for the year
ending June 30, 2010 is Rs. 750 million. The company is maintaining a steady profit margin at
10% which is expected to continue during the current year. The company’s major financing
has been made through equity and very small debt financing is arranged mainly for meeting
working capital requirements. During the year, the company has launched a new low calories
products range “Eat Light” in collaboration with a US based company. An aggressive
advertisement and publicity campaign was undertaken for launching this new product range
on which an amount of approximately Rs. 10 million was incurred.
Your firm has been the auditor of Five Stars Foods International Limited for the last couple of
years and you have gathered above information in the process of planning for the year ending
June 30, 2010. During the year the Chief Executive Officer of the company was also changed
and also there has been a major change in the Board of Directors. The new management has
requested you to brief them on some key aspects of the audit.
Required:
In view of these developments, you have to prepare a brief report for the management which
should include the following:
(a) What is materiality? Why is it important for an audit under International Standards on
Auditing? (05)
(b) What is the relationship between materiality and audit risk? (02)
(c) Do you consider advertisement and publicity expense incurred on launching the new
product range as material? Explain with reasons. (02)
(d) The key audit risk areas for the year ending June 30, 2010 with brief reasons. (04)
(THE END)
Answer # 1
Appropriateness of Benchmark:
Materiality is determined considering users (mainly shareholders), and not just directors.
Profit is not an appropriate benchmark in this case as this is very low figure in current year. This
will result in a low materiality level, causing unusual increase in risks of material misstatement.
There will be over-auditing which will affect efficiency of the audit.
Suggestions:
Average of past years’ profit can also not be used as benchmark, as this is first year of operation.
Following alternative benchmarks can be used to calculate materiality:

 Revenue
 Total expenses
 Total Assets
 Equity
A suitable percentage could be 1% on the basis of these benchmarks.
Marking Plan:
 Discussion on selection and appropriateness of the benchmark used
by the audit team 2.0 marks
 Discussion on the implication of setting a lower materiality level 2.0 marks
 0.5 mark for mentioning each alternative benchmark for determining 2.0 marks
materiality
.
Answer # 2
(i) Yes. For a profit-oriented entity, basis other than profit may also be used if there is no profit in
current as well as previous years.
(ii) 1. Total revenue

2. Total expenses
3. Total assets
(iii) If financial statements are not prepared by client yet, auditor can calculate materiality level from:
1. Interim financial statements (projected for whole year)
2. Budgeted financial statements
3. Financial statements of prior periods
Marking Plan:
(i) 1.0 marks for correct answer along with correct reasoning.
(ii) 0.5 marks for each example.
(iii) 0.5 marks for each point.
Page 1 of 4
Answer # 3
Sr. # Statement True or False

(i) Audit plan is prepared in each year. True.
(ii) Audit planning helps the auditors in conducting True.
the audit efficiently.
(iii) Audit plan helps the management to identify the False. It helps auditor, not management.
important audit areas.
(iv) Audit plan is prepared during the conduct of False. It is prepared at start of the audit.
audit.
(v) Audit plan can be revised at any time. True.
(vi) Audit Planning is not applicable on recurring False. Audit planning is applicable on
audit client. initial as well as recurring audit clients.
Marking Plan:
0.5 marks for each correct answer.
Answer # 4
(a) Materiality
 Items are considered material if they, individually or in aggregate, could reasonably be
expected to influence the economic decisions of users taken on the basis of financial
statements.
 Materiality depends on size as well as nature of misstatement.
What is it important?
(i) At planning stage:
To determine nature, timing and extent of audit procedures to be performed.
(ii) At performance stage:

To ensure that misstatements identified during audit do not exceed materiality level.
(iii) At reporting stage:

To evaluate the effect of uncorrected misstatements on financial statements, and form an
opinion on financial statements (i.e. whether financial statements give true and fair view
in all material respects).
Page 2 of 4
Marking Plan:
Definition of materiality 2.0 marks
Importance of materiality at all three stages of audit 3.0 marks
Maximum marks for part (a) 5.0 marks
.
(b) There is an inverse relationship between materiality and the level of audit risk i.e. the higher the
materiality level, the lower the audit risk and vice-versa.
Auditor takes into account this relation when determining nature, timing and extent of audit
procedures.
For example:
If materiality level is reduced, audit risk will be increased. Auditor shall compensate it by
modifying nature, timing and extent of audit procedures i.e. auditor shall:
 Perform additional tests of controls (if necessary)
 Increase extent of substantive procedures
Marking Plan:
Defining the relationship between materiality and audit risk 1.0 marks
Brief explanation or example 1.0 marks
Maximum marks for part (b) 2.0 marks
.
(c) Calculation of materiality level:

Using rule of thumb, an appropriate level of materiality is:
= Profit before tax × 5%
= (Rs 750 million × 10%) × 5%
= Rs 75 million × 5%
= Rs 3.75 million
Conclusion:
As the amount involved in research and development Rs. 10 million is much higher than
materiality level Rs. 3.75 million, hence it is a material item.
Marking Plan:
Calculation of materiality level 1.0 marks
Conclusion 1.0 marks
Maximum marks for part (c) 2.0 marks
.
Page 3 of 4
(d) Following are the key audit risk areas for the year ending June 30, 2010:
Sr. # Audit Risk Area Reasons

(i) Advertisement and  Material amount is involved in this transaction.
publicity expense  This is a non-routine transaction and internal controls
may not be effective to deal with it.
 Management may intentionally try to capitalize it instead
of expensing it out.
(ii) Valuation of new  Cost and NRV of new product may not be calculated
product accurately.
(iii) Foreign currency  Foreign currency transactions may be complex and
transactions (import as subject to regulatory requirements.
well as export)  Foreign currency transactions will have to be measured
in local currency which increases risk of material
misstatement.
(iv) New top level  New top level management may not be aware of
management business. Hence, there is greater risk of misstatement in
this year because of inexperienced management.
Marking Plan:
Identification of each key audit risk area 0.5 marks
Correct reasoning for each identified key audit risk area 0.5 marks
Maximum marks for part (d) 4.0 marks
.
(THE END)
Page 4 of 4
22 November 2023

Test – 6
(i) Answer all FOURTEEN questions.
Q. 1 Following are different situations being faced by various audit clients of your firms. For each of the
following case, you are required to:
(a) Identify the audit risk(s) involved in the situation. Explanation of risk is not required; just write
heading.
(b) List ONE procedure for each risk involved.
Hint: There may be more than one risks in some situations.
Situations:
1. Karachi Electronics Co. has announced the unexpected closure of its Hyderabad factory, a key
production site, due to persistent financial challenges, significantly impacting the local workforce
and the company's overall output capacity.
2. Sapphire Textiles, a prominent manufacturer in Faisalabad, experienced a notable decrease in its

creditors' turnover ratio.
3. TechLink, a Lahore-based IT firm, faces a significant dispute with its debtors, primarily from the
Karachi region. The disagreement centers around unpaid invoices totaling PKR 10 million for
software services rendered, leading to strained relationships and potential legal actions to recover the
funds.
4. The renowned Pakistani company, Lahore Textiles Ltd., faces a surge in customer complaints
regarding the declining quality of their cotton fabrics, raising concerns about potential damage to
their long-standing reputation in the local market.
5. Creative Tech Solutions, a software company in Islamabad, faces legal action from multiple
competitors alleging infringement of proprietary coding techniques, threatening its market position
and sparking concerns about potential financial and reputational damages.
6. Zahid & Co., a manufacturing firm in Faisalabad, faces a lawsuit after a hazardous material spill at
their facility led to severe local river contamination.
7. Lahore Electronics recently observed its competitor, Innovative Tech, launch a groundbreaking
smart home device
8. Karachi Textiles, facing severe cash flow issues and declining market demand, has raised substantial
doubt among auditors about its ability to continue operations in the foreseeable future
9. At year-end, Islamabad Constructions discovers that a physical count of inventory wasn't conducted
at one of their sites.
10. Peshawar Pharmaceuticals encounters a major setback when an internal audit reveals a critical fault
in their drug production process, potentially affecting the quality of their medications
11. In response to newly introduced accounting regulations by the Pakistani government, Faisalabad
Financial Services scrambles to revise their reporting practices, facing challenges in compliance and
the need for urgent staff training to meet these legal requirements.
12. Multan Motors, a prominent automobile manufacturer in Pakistan, undergoes a significant

revaluation of its fixed assets, revealing a substantial increase in the value of their production
machinery, which could lead to a notable impact on their financial statements.
13. Upon achieving an ambitious profit target, Rawalpindi Retail Group announces a substantial bonus
for its CEO, Ayesha Khan, and CFO, Ali Ahmed, as a recognition of their efforts.
14. TechPro Instruments in Lahore faces a setback as their biggest contract for specialized medical
equipment is abruptly cancelled due to the bankruptcy of their main customer, HealthCare Inc.
(33 marks)
(THE END)
Marking Plan:
• 0.75mark for Identification of Correct Audit risk
• 01mark for every relevant procedure.
Situations # 1:
Audit Risk One Procedure

Provision for restructuring/ staff Inquire from terminated employees regarding agreed
termination remuneration.(01mark)
Valuation of Non-current assets Obtain valuation report of expert to confirm fair value of
held for sale assets(01mark).
Situations # 2:

Completeness of Review the list of creditors and compare with previous year to identify
creditors major suppliers which have been omitted, or have declined significantly.
Inquire reasons(01mark).
Situations # 3:

Completeness of Inquire about disputed receivables, Inspect customer communication and
creditors board minutes for evidence of disputes and expected recovery(01mark).
Situations # 4:

Provision for Review client’s working for warranty provision, and check appropriateness of
warranty assumptions in the current situations(01mark) .
Situations # 5:

Valuation of patents and Obtain confirmation from legal advisor regarding possible
development costs outcome of any litigation(01mark).
Page 1 of 3
Situations # 6:

Provision for Obtain confirmation from legal advisor regarding possible outcome of
Litigations any litigation(01mark).
Situations # 7:

Valuation of Obtain and inspect aging report of inventory, and review for evidence of
inventory slow-moving/obsolete inventory(01mark).
Impairment of Obtain working of client relating to impairment test, and review source
Machinery data and reasonableness of assumptions(01mark).
Situations # 8:

Risk of Going Evaluating management’s plans for future action, and whether it is
Concern feasible(01mark).
Situations # 9:

Existence of Estimate the closing stock at year-end by making reconciliation from interim
Inventory sales and interim purchases(01mark).
Situations # 10:

Valuation of Inquire client about calculation of NRV of inventory, and check
Inventory reasonableness of the basis of calculations(01mark).
Provision for Inquire entity’s legal counsel about status of cases filed by patients using
Litigation drug(01mark).
Going Concern Inquire about any regulatory action by Govt. authorities(01mark).
Issue
Page 2 of 3
Situations # 11:

Risk of Non-compliance and related ensure appropriateness of accounting treatment and
implications disclosures made(01mark).
Situations # 12:

Valuation of fixed assets Verify amounts in financial statements with the valuer’s report(01mark).
Situations # 13:

Risk at financial Increased level of professional skepticism specially during audit of
statements level judgmental areas(01mark).
Situations # 14:

Valuation of Examine cash recovery from debtors after the year end. Also examine write-
debtors offs of debts after the year(01mark).
Valuation of Inquire client about calculation of NRV of inventory, and check
inventory reasonableness of the basis of calculations(01mark).
(THE END)
Page 3 of 3
29 November, 2023
Audit and Assurance

Test # 7
(ii) Answer in BLACK ballpoint pen only.
Q.1 An auditor made the following list of observations during the tour of the plant and distribution
center. For each observation, indicate the potential audit risk associated with the observation.
(1) The auditor notes that a large number of production machines are sitting idle outside.
(2) The distribution center seems busy and messy. Although there are appropriate policies
and procedures in place but supervisor emphasizes delivery of goods on time and often
paper work is completed hours after delivery.
(3) One area of the distribution center contains some products that seem to have been there
for a long time. They are dusty and the packaging looks old.
(4) The receiving area is fairly automated. Many products come packaged in cartons or
boxes. The receiving department uses computer scanners to read the contents on a bar
code, and when bar codes are used, the boxes or containers are moved immediately to
the production area where they are to be used.
(5) The company uses minimum security procedures at the warehouse. There is a fence
around the facilities, but employees and others seem to be able to come and go with
ease. (05)
Q.2 (a) Define and explain the term ‘business risk’. (02)
(b) How can auditor perform analytical procedures for risk assessment if financial statements
have not been prepared yet. (02)
Q.3 Your firm is the external auditor of Graphite plc (Graphite) for the year ended 30 November 2013.
The principal activity of the company is the manufacture and installation of mining equipment.
Graphite operates from two freehold sites in Cardiff and Newcastle. Trading conditions are difficult
and revenue in previous years has increased by less than 2% per annum.
You are the audit manager and the engagement partner has asked you to consider the following key
areas of audit risk:
(1) Revenue
(2) Work in progress
(3) Trade receivables
(4) Freehold premises
All work performed by the company is carried out under short term fixed-price contracts for mining
companies located throughout Europe and all customers are invoiced in Sterling. Graphite’s employees
design the equipment to customers’ specifications and buy in components from suppliers in mainland
Europe and install the machinery. Overseas suppliers invoice Graphite in Euro.
The contract price is negotiated and agreed with the customer before commencement of any work by
Graphite. The terms of payment require an initial payment of 40% of the contract value prior to the
commencement of any work and the balance following the successful installation of the equipment. It
is company policy to recognise revenue once the customer confirms successful installation of the
equipment. Graphite’s terms of trade require payment within 30 days of invoice date for both initial
payments and final instalments. One customer, Durcoal Ltd, is withholding its final instalment of
£1,835,000 as it claims that the equipment is not operating efficiently.
All direct costs relating to each contract are recorded in the company’s job costing system which is
integrated with the purchases and payroll systems. The finance director uses the cost records to
calculate the value of work in progress for the monthly management accounts and the year-end
financial statements. For the valuation of work in progress a percentage is added to direct costs to cover
production overheads. The percentage is determined by taking attributable overheads in the
management accounts as a percentage of direct costs in the management accounts. Provision is made
for contract losses where appropriate. The prior year audit identified a number of weaknesses in the job
costing system.
The company’s freehold premises in Cardiff were valued by an external valuer in October 2013. The
premises are currently included in the accounting records at cost less accumulated depreciation which
is lower than the valuation figure. The directors wish to recognise the new valuation in the financial
statements for the year ended 30 November 2013.
The engagement partner has provided you with the following extracts from the financial statements:
Income statement for the year ended 30 November

2013 2012
(draft) (audited)
£’000 £’000
Revenue 51,260 47,560
Cost of sales 30,760 30,440
Gross profit 20,500 17,120
Statement of financial position as at 30 November

2013 2012
(draft) (audited)
£’000 £’000
Current assets
Work in progress 7,500 6,305
Trade receivables 6,620 3,450
Requirement
Justify why the items listed (1) to (4) in the scenario have been identified as key areas of audit risk and,
for each item, describe the procedures that should be included in the audit plan in order to address
those risks.
Note: You should present your answer in a two-column format using the headings:
(i) Justification; and
(ii) Procedures to address the risk. (14)
Q.4 You work as an audit manager in a reputed firm of Chartered Accountants and have recently been allocated
Alfa Foods as a major audit client in your portfolio. The company is engaged in manufacture and sale of
canned, ready-to-eat foods. Financial information for June 2014 and results for June 2013 are as shown below:
June 2014 June 2013

(Rs. 000) (Rs. 000)
Revenue 165,750 100,120
Gross Profit 35,800 35,005
Administrative Costs 5,243 3,800
Selling and marketing costs 7,897 5,420
Net Profit 22,660 25,785
Property, plant & equipment 18,770 20,460

Inventory 8,884 1,752
Receivables 24,184 14,323
Cash and Bank Balances 45 6,430
Long-term loans 5,000 1,000

Trade creditors 7,632 5,629
Accrued expenses 1,567 750
Shot-term finance (over draft facility) 4,592 Nil
 The long term loan from a commercial bank is secured by a mortgage over the company’s land and
building which have a book value of Rs. 7.5 million.
 No provision for expired canned food has been made in the 2014 Financial Statements.
 A debtor who owes Rs. 10 million to Alfa Foods has recently announced for bankruptcy owing to
financial difficulties. No provision has been recorded by Alfa Food as yet since management believes
they enjoyed a good working relationship with the debtor and the amount would therefore be
recovered.
From the information above, identify and explain FIVE risks that should be considered by the audit team
when planning the audit engagement for Alfa Foods. (10)
(THE END)
Q.1
Sr. # Audit Risk

Impairment loss needs to be recorded on idle machines.
(1)
Further, idle machines may need to be recorded as “assets held for sale”.
Internal controls over sales might be weak. Auditor should be concerned about preparation
(2)
of correct billing of sales with respect to quantity and price.
(3) This indicates obsolete inventory which might have to be recorded on NRV.
There is no quality and quantity inspection on receiving goods. Using bar codes only to
(4)
accept receiving might result in paying for ‘garbage’.
(5) This may result in theft of inventory and other assets of company.
(01 mark for identification of each risk)
Q.2
(a)
Business risk is the risk that an event or condition may adversely affect the ability of the entity to achieve
its objectives (02 marks).
(b)
Auditor can use Interim financial statements (0.5 mark), Management accounts (0.5 mark), Budgets (0.5 mark),
Forecasts (0.5 mark).
Q. 3
REVENUE
Justification Procedures to address risk
1. There is an unusual increase of 7.8% (51,260 / 47,560) in  Discuss reasons for the increase in revenue with management.
revenue as compared to less than 2% in previous years.  Vouch entries in the revenue account to invoices and confirmation
Therefore, there is a risk of Occurrence assertions of of successful installation.
sales.  Perform cut-off tests
2. 40% of revenue is received in advance prior to  Evaluate and test the system for recording deferred income and its
commencement of work. There is a risk that revenue may transfer to revenue.
be recognized pre-mature. Therefore, there is a risk of  For a sample of contracts in progress at year-end trace initial
Occurrence assertions of sales. payment invoice to entry in deferred income account
WORK IN PROGRESS
1. Work in process involves estimation of stage of completion  Enquire if there were any systems issues during the year and
(which is subjective); and absorption of overhead (which is if previous years issues have been remedied.
complex). Therefore, Valuation and Allocation assertion of  For a sample of material costs, reperform exchange rate
Inventory is at risk. translation and check the rate to a reliable source.
2. Inventory turnover ratio has increased to 87.8 days (7,500 /  Obtain workings for overhead allocation and ensure only
30,760 * 360) this year from 74.5 days (6,305 / 30,440 * 360) attributable overheads are included
in last year, which indicate overstatement of work in process.  Assess consistency of valuation of work in process with
3. Number of weaknesses in job costing system were identified in previous years.
previous year which may result in erroneous valuation in  Compare actual costs to budget to identify cost overruns
current year too. which may indicate potential losses
4. Suppliers invoice in euro and there may be errors in  Compare contract price to estimated total costs for contracts
translation. in progress at the year end to ascertain whether provision for
5. There may be loss on some contracts in progress due to cost- losses is required.
overrun.  Inspect ageing of WIP to identify any unbilled/irrecoverable
WIP.
TRADE RECEIVABLES
 Obtain aged receivable analysis and review for evidence of
overdue balances
1. Debtors turnover ratio has increased to 46.5 days (6,620 /  Inspect customer correspondence and board minutes for
51,260 * 360) this year from 26.1 days (3,450 / 47,560 * 360) evidence of disputes
in last year, which indicates that debtors may be overstated  Examine bank statement to see if receivables are paid after
e.g. fake debtors may exist or poor debtors may exist from year end
whom full recovery is not expected. Therefore, Existence and  Review credit notes issued after year end
Valuation and Allocation assertions of Debtors are at risk.  Direct confirmation of balances with customers
 Inspect contract with Durcoal
2. A material amount of receivable (1,835,000) is in doubt  Consider basis and adequacy for provisions for Durcoal and
because of dispute. This amount may not be recovered in full. other balances.
FREEHOLD PREMISES
1. Revaluation may be incorrectly Ensure Competence, Capabilities and Objectivity of the Valuer:
calculated and recorded because it Auditor shall obtain knowledge of expert’s independence, qualification, experience,
involves Subjectivity and Complexity expertise, and reputation.
(e.g. deferred tax implication). Ensure adequacy of valuation report:
Therefore, Valuation and Allocation Auditor shall determine adequacy of work by evaluating:
assertion of fixed assets is at risk. 1. Relevance, completeness, and accuracy of significant source data
2. Relevance and reasonableness of significant assumptions and methods
2. The Newcastle site has not been 3. Reasonableness of expert’s findings and conclusions
revalued (IFRS require all properties 4. Consistency of these conclusions with other audit evidence
in the same class to be revalued). Ensure revaluation has been properly accounted for in financial statements:
1. Ensure that entire class of asset has been revalued.
2. Ensure that valuation is up-to-date.
3. Ensure that valuation is appropriately accounted for in accounts.
4. Recalculate “revaluation surplus (or loss)”, and “depreciation expenses” and
ensure these have been correctly recorded in books of accounts.
5. Ensure that appropriate disclosures have been made in accordance with IAS–16.
Q.4 Risk Factor: Unusual growth in revenue: (0.5 mark)

Revenue has increased by almost 66% as compared to last year, without any apparent reason. There is
a risk that this has been overstated by management by recording fake sales. (01 mark)
Risk Factor: Cost of Sales has increased significantly: (0.5 mark)

Cost of sales (as a percentage of sales) has increased significantly from 65% in last year to 78% in this
year. This indicates that purchases and other manufacturing expenses may have been overstated. (01 mark)
Risk Factor: Increase in inventory turnover ratio: (0.5 mark)

Inventory turnover ratio has increased from 6 days (last year) to 19 days (this year). This indicates that
company is facing difficulty in selling its inventory and some of the inventory may have become
obsolete (01 mark). This risk is further confirmed by the fact that no provision for expired canned food has
been made in the 2014 Financial Statements (01 mark).
Risk Factor: Debtor has gone bankrupt: (0.5 mark)

There is a risk that full amount may not be recovered from this debtor. Therefore, debtors would be
overstated if appropriate amount of provision for bad debts is not recorded(01 mark).
Risk Factor: Increased borrowings during the year: (0.5 mark)

Company’s liquidity position has worsened during the year and company has obtain significant short-
term as well as long-term borrowings(01 mark). There are following risks with higher level of borrowings:
1. Borrowings may not be appropriately classified between short-term and long-term protion(01 mark).
2. Interest expense may not be appropriately calculated and recorded(01 mark).
3. Disclosures relating to debts may not have been appropriately and completely included in financial
statements(01 mark).
4. If company breaches debt-covenant requirements, debt may become immediately payable and
company may not have sufficient resources to pay the debt which may cause going concern
problems(01 mark).
(THE END)
06 December 2023

Term Test – 1
Q. 1 Consider the following information of two companies:
Company A Company B
Particulars Listed Textile Company) (Unlisted Cement Company)
2023 2022 2021 2023 2022 2021
---------------------------- Rs. in million ----------------------------
Financial information
Net assets 4,645 4,008 3,998 571 665 566
Revenues 15,877 16,119 12,566 1,014 1,810 979
Profit before tax 864 768 690 (16) 145 71
Other information
Uncorrected misstatements in prior years - 9 - - - -
Debt equity ratio 10:90 Not relevant 85:15 Not relevant
Required:
Using the information provided above:
(a) calculate the materiality at the financial statements level for each company separately for the year ended
30 June 2023. (02)
(b) discuss the reasons for selection of appropriate benchmark for calculation of materiality in (a) above.
(05)
(c) briefly discuss how the performance materiality will be calculated for Company A. (02)
Q. 2 You have recently joined an audit company and have been asked to visit new client, Nowroz Textile
Limited (NTL), to develop audit strategy document. The following points were discussed and noted during
the meeting with the Chief Financial Officer (CFO) of the company:
• The company manufactures and sells cotton lawn and ready-to-wear garments. The market share and
profit are growing rapidly. The company made an investment in order to expand the existing plant and
machinery by 15%. The company has expensed out part of investment as expenses for current year.
• The company is now utilizing 25 marketing outlets including 10 rented from other parties and entered into
the agreement with 6 big stores to sell the additional product.
• The company has also implemented Enterprise Resource Planning (ERP) Accounting System during the
year. However, the two systems are still being run in parallel as the testing of the new system is in process.
• The company is going to launch many new designs whereas, stock of old and defective prints, returned by
the customers, are lying in the store. The company pays additional bonus on achievement of sales goals to
retail stores and market staff.
Required:
Identify any four (04) audit risks in the above situation and auditor's responses to those risks as part of audit
planning for NTL. (08)
Q. 3 Your firm is the statutory auditor of Astore Limited (AL), a listed company, for the year ended 31
December 2022. AL deals in fast moving consumer goods (FMCG). In recent times, the FMCG sector has
experienced significant growth with numerous new players entering the market and established companies
expanding their operations, resulting m a fiercely contested industry. AL has consistently endeavored to
meet ever-evolving needs and preferences of consumers by adapting to changes in the market.
Effective this year, AL has commenced importing raw materials for its new category of consumer products.
Some of these raw materials have a short-shelf-life and could become harmful if used after their expiration
date. However, AL has successfully captured the attention of consumers with its exceptional finished
products in this category, resulting in significant increase in sales.
During the year, AL has commenced the expansion of its production facilities and the implementation of an
ERP system to integrate its operations with financial reporting process. These initiatives are being financed
through additional borrowing facilities.
Required:
Identify and discuss the business risks and the related audit risks from the above scenario. (08)
Q. 4 Described below are situations that have arisen in two unrelated external audit clients of your firm. The year
end in each case is 31 December 2009.
Pollen plc (Pollen)

Pollen is a pharmaceutical company specialising in the manufacture of drugs for hay fever sufferers. It
currently manufactures the market-leading drug, Hiveal, which accounts for 65% of the company’s annual
revenue. High numbers of sufferers have recently experienced adverse side effects when using Hiveal and a
government committee is now investigating this. Pollen’s license to manufacture Hiveal has been
temporarily suspended until the investigation is complete.
The investigation by the government committee will not be concluded until after the financial statements for
the year ended 31 December 2009 have been published. The directors have disclosed this matter in a note to
the draft financial statements, stating that if the license is not reinstated there would be significant doubts
over Pollen’s ability to continue to trade.
Bloome plc (Bloome)

Bloome purchased a new manufacturing plant on 1 January 2009 for £2.8 million. The plant was capable of
being operated at this date but production did not commence until 30 June 2009 due to a worldwide
shortage of an essential raw material for the production process. The plant is being depreciated, using the
straight-line method, over 10 years and the directors have charged six months’ depreciation on cost in the
income statement for the year ended 31 December 2009.
The draft financial statements show that Bloome’s profit before tax is £1.3 million.
Requirements
In each of the situations outlined above, state whether you would modify the audit report. Give reasons for
your conclusions and outline the modifications, if any, to each audit report. (08)
Q. 5 The auditor needs to assess management integrity as a potential indicator of risk. Although the assessment
of management integrity takes place on every audit engagement, it is difficult to do and is not often well
documented.
For each of the following management scenarios, indicate whether you believe the scenario reflects
negatively on management integrity.
1. The owner/manager of a privately held company also owns three other companies. The entities
could all be run as one entity, but they engage extensively in related-party transactions to minimize
the overall tax burden for the owner/manager.
2. The president of a publicly held company has a reputation for being a “hard nose” with a violent
temper. He has been known to fire a divisional manager on the spot if the manager did not achieve
profit goals.
3. Jamshed is the president of a privately held company that has been accused of illegally dumping
waste and failing to meet government standards for worker safety. Jamshed responds that his
attitude is to meet the minimum requirements of the law and if the government deems that he has
not, he will clean up.
4. Kaleem is the young, dynamic CFO of Golden-Glow Enterprises, a company which is in financial
crisis now a days. Kaleem has a reputation for being a fast-living party animal, and the society pages
have carried reports of “extravagant” parties at his home. (08)
Q. 6 Your firm is the auditor of Ninja Foods Limited (NFL) for the year ended 30 June 2022. NFL is a food
chain having restaurants located in all major cities of Pakistan. NFL specializes in Pan-Asian cuisine and
has Japanese, Thai and Chinese food on its menu.
Following information has been gathered by the audit team:

(i) Some of the ingredients used in the food products offered to customers are imported. On 31 August 2022,
the government has banned import of luxury food items which includes most of the imported items used in
the NFL’s most selling items. NFL currently has stock of these imported items which fulfil its requirement
of next one month only.
(ii) 70% of the customers pay in cash while the remaining 30% pay through credit/debit cards. Furthermore,
55% of the customers’ visits are on weekend. All cash collection on weekend is deposited in the bank on the
very next working day.
(iii) NFL follows a policy in which all the expired stock is to be placed in separate store room, which can
then be adequately destroyed. In the internal audit report, it has been highlighted that two of the restaurants
were not following this policy.
(iv) During the year ended 30 June 2022, NFL’s profits have been reduced by 30% mainly due to rising
electricity prices, increase in interest rates on long term loan, decrease in demand of the product due to
recession in the economy and increase in raw material prices due to rupee devaluation.
Required:
Identify the key audit risks in the above scenario. (Ignore the risk related to going concern) (06)
Q. 7 You are the audit manager in a firm of chartered accountants. Your firm has been appointed as the auditor
of a listed company, Rustam Raees Limited (RRL) for the year ending 31 December 2019. RRL has been
publishing their annual financial statements within one month of the year end and have set strict deadlines
for the completion of audit. Further, this year, RRL has changed its accounting policy relating to property,
plant and equipment, from historical cost to revaluation model.
Required:
List the matters (related to the given scenario only) which you would like to include in the engagement
letter, along with their justification. (04)
(THE END)
CAF 08: Audit and Assurance
Suggested Solution – Term Test # 1
Answer # 1
(a)
Company A:
Materiality = Rs. 864 million* 5% = Rs. 43.2 million(01 mark).
Company B:
Materiality = Rs. 571 million* 1% = Rs. 5.71 million(01 mark).
(b)
Company A - Reasons for selection of Profit before Tax as Benchmark:
1. Company A is a profitable entity(01 mark).
2. Company A has consistent financial results(01 mark).
3. Company A is substantially financed by Shareholders (with 90% equity financing) (01 mark).
Therefore, appropriate benchmark is Profit before tax in this case(0.5 mark).
Company A - Reasons for selection of Net Assets as Benchmark:

1. Company B is a loss-making entity(01 mark).
2. Company B has volatile financial results (with sudden fluctuations) (01 mark).
3. Company B is substantially financed by Creditors (with 85% debt financing)(01 mark).
Therefore, appropriate benchmark is Net Assets in this case(0.5 mark).
(c)
How Performance Materiality can be calculated for Company A:
Determination of performance materiality is not a mathematical calculation. It involves the exercise of
professional judgment(01 mark) and is affected by:
• misstatements identified in previous periods(0.5 mark); and
• expected misstatements in current periods(0.5 mark).
Marking Plan:
(a) 01 mark for calculating materiality of each company 2.0 marks

(b) 01 mark for each reason for selecting the appropriate benchmark 7.0 marks
(c) Discussion on how to calculate the performance materiality 2.0 marks
Page 1 of 5
Answer # 2
Risk Response
Risk Factor: Significant investment in • Compare actual expenditure on Plant and Machinery
Plant & Machinery: with budget. Investigate unusual fluctuation.
There is a risk of misclassification between • Select a sample of cost incurred, and check with
capital and revenue expenditure. supporting documents to ensure expense has been
properly classified.
Risk Factor: Inventory is located at • Select a sample of locations to be physically
various locations: inspected by auditor. Conduct simultaneous stock
It will be difficult for auditor to verify checking for selected locations.
existence and completeness of inventory. • For locations not selected for stock-count, compare
inventory level with previous periods. Obtain
working papers of internal auditors, if relevant.
Risk Factor: New accounting system has • Auditor shall inspect system notes of new
been launched: accounting system and shall test control over its
There is a risk that opening balances have implementation.
not been transferred accurately and • Auditor shall compare the balances of new system
completely into new accounting system. with old system to identify issues in processing of
accounting system.
Risk Factor: Company pays additional • Discuss reasons for the increase in revenue with
bonus on achievement of sales goals: management.
Sales may be overstated due to recording of • Perform cut-off test
fake sales or next year's sales recorded in • Select a sample of significant revenue recorded and
current year. check their supporting documentation.
• Check any returns after the year end.
• Send confirmation letters to major debtors.
Risk Factor: There is stock of old and • Obtain and inspect aged inventory report and
defective goods returned by customers: review for evidence of slow-moving/obsolete
Stock may not have been recorded at lower inventory.
of cost and NRV. Further, sales return may • Inquire client about calculation of NRV of
not have been appropriately recorded. inventory (particularly of defective inventory), and
check reasonableness of the basis of calculations
(e.g subsequent sale price of inventory).
• Ensure sale has been reversed for all returned
items.
Marking Plan:
• 01 mark for identification and discussion of each risk factor. 4.0 marks
• 0.5 mark for each Key Audit procedure to address the issue identified. 4.0 marks
Page 2 of 5
Answer # 3
Sr. # Business Risk Audit Risk

1. Competition is increasing in the As revenue from existing products is
market due to entry of new players, decreasing, AL's equipment will need to be
and expansion of operations by tested for impairment and its inventory will
existing competitors. need to be written down to NRV.
Needs and preferences of consumers
are continuously changing.
2. Expired material may be used in There may be undisclosed penalties from food
production process, resulting in authorities.
harm to consumers. A contingent liability may arise and not
disclosed relating to any legal action taken by
consumers harmed from use of expired
material.
3. AL has to import its raw material for There is a risk that trade payables may not be
new products, therefore it is exposed translated using the correct exchange rate.
to foreign currency risk because of Exchange gain/loss may not be calculated
the fluctuation in exchange rates. correctly.
4. New ERP system may not be There may be error/omission in transferring of
correctly implemented, and staff may amounts from old system to new system.
not be properly trained. New system may incorrectly process
transactions.
5. Due to bank loan, AL will now have In order to meet bank's covenants, APL may
to manage its debt load and all the overstate its revenue or understate its expenses
terms and conditions of that loan. to depict a better picture to its lenders.
Marking Plan:
• 01 mark for identification and discussion of each business risk. 6.0 marks
• 01 mark for identification and discussion of each Audit risk. 6.0 marks
Answer # 4
Pollen plc (Pollen)
1. Regulatory action pending against company is a significant uncertainty which requires disclosure in
financial statements(01 mark) (not a misstatement if it is adequately disclosed in financial statements).
2. Auditor shall express unmodified opinion on financial statements. (01 mark)
3. Suspension of license casts doubt on entity's ability to continue as going concern as 65% of firm's
annual revenue is lost. (0.5 mark) Auditor shall include a separate section in audit report with heading
"Material uncertainty related to Going Concern"(0.5 mark) to:
• Draw attention to the note in the financial statements that discloses the matters(0.5 mark); and
• State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity's ability to continue as a going concern(01 mark) and
• State that auditor's opinion is not modified in respect of the matter. (0.5 mark)
Page 3 of 5
Bloome plc (Bloome)
1. This is a misstatement(0.5 mark) in financial statements because management has not recorded
depreciation which is required by IFRS.
2. Effect is material(0.5 mark) as amount of misstatement 140,000 (£2.8 million/10%)(0.5 mark) is greater
than materiality level determined using rule of thumb 65,000 (1,300,000 5%)(0.5 mark).
3. Auditor shall express qualified opinion on financial statements (as effect is material but not
pervasive) (0.5 mark). Auditor shall also describe nature of misstatement in Basis for Qualified Opinion.
(0.5 mark)
Answer # 5
1. Significant related party transactions indicate risk of material misstatement.

2. Incentive/Pressure on management to achieve financial goals increases risk of fraud.
3. This indicates that Management's integrity is in doubt. Auditor should consider its impact on
engagement acceptance and continuance. There may also exist some undisclosed contingencies or
unrecorded liabilities due to non-compliance with laws and regulations.
4. Does earnings of the company and earnings of the Charles justify his 'extravagant' living standard.
Answer # 6
1. Existence and Completeness of Inventory:

NFL has various restaurants located in all major cities of Pakistan, which makes it difficult for auditor to
verify existence and completeness of inventory simultaneously at year-end on all locations.
2. Exchange Rate Risk:

During the year, NFL has been importing raw material. Due to foreign currency transaction, there may
be errors in conversion of foreign currency into local currency. Further, translation of foreign currency
payables into local currency may not be appropriately recorded.
3. Excessive Cash in Hand:

Significant transactions of NFL are conducted in cash, particularly at weekend. Existence of excessive
cash in hand may cause theft or misappropriation of cash.
4. Valuation of Inventory:
There is a risk of expiry of stock in a food chain restaurant, particularly when 2 of the restaurants are not
segregating expired stock separately. Some obsolete stock may be included at cost in valuation of
inventory.
Further, decrease in demand of product may also cause obsolescence of some inventory items.
5. Non-compliance with laws and regulation:

Expired stock may be harmful to the health of customers. NFL is not segregating expired food from
fresh food. Food authorities may take adverse actions against NFL on inspection which may result in
fines and penalties as well as cancellation of license.
Page 4 of 5
6. Impairment of Property. Plant and Equipment:

Value in use of machinery and equipment has reduced due to decrease in demand of product due to
recession in economy. This may cause impairment loss due to under-utilization of machinery.
7. Risk of fraudulent financial reporting:

Decrease in profits, due to decrease in demand and increase in cost of production, may put pressure on
management to engage in fraudulent financial reporting to show better performance in financial
statements.
Marking Plan:
• 01 mark for identification of each audit risk. 6.0 marks
Answer # 7
1. Arrangement concerning involvement of predecessor auditor (because this is the first year of audit).
2. Arrangement concerning involvement of expert (because client has revalued property, which may
involve use of expert).
3. Reference to the expected form and content of any report to be issued by auditor (because change in
accounting policy from cost to revaluation model may require Key audit matter in report).
4. Expected date of completion of audit (to ensure appropriate deadline is agreed between parties).
5. Timely availability of financial statements, and arrangement regarding interim audit (to meet
deadline).
Marking Plan:
• Up to 01 mark for each matter to be included in the engagement letter 4.0 marks
Page 5 of 5
13 December 2023

Test – 8
Q. 1 Mr. Dar is the Chief Financial Officer (CFO) of a medium sized limited company engaged in sale of
consumer goods through a number of distributors. These distributors collect and deposit the sale proceeds in
collection accounts opened in more than 100 branches of a commercial bank situated in urban and rural
areas all over Pakistan. These accounts are non-checking accounts (i.e. the company cannot issue cheque or
transfer the amount to any account other than the designated sales collection control account). Under an
agreement with the bank, the branches transfer the amounts collected on next working day to the designated
sales collection control account.
The auditor of the company intends to obtain direct confirmations from all branches and intends to use
positive as well as negative confirmations. Considering that such audit procedures would take considerable
time and may delay the finalization of accounts, the Chief Executive Officer (CEO) is of the opinion that
Mr. Dar should ask the auditor to omit this procedure. CEO believes that according to International
Standards on Auditing management has a right to ask the auditor not to send direct confirmations.
Required:
Prepare an explanation for CEO on behalf of CFO explaining him the guidelines laid down in International
Standards on Auditing in respect of external confirmation in the above case. (06)
Q. 2 The audit of Karim Limited (KL) is in progress. The audit team has requested you to advise on the
following issues:
(a) The confirmation request sent to a customer who owed Rs. 35 million was responded by an e-mail
addressed to KL’s CFO. (04)
(b) The management of KL is not allowing auditors to send confirmation to Fareed Limited (FL) a debtor,
on account of certain disputes, as the sending of confirmation will undermine the ongoing negotiations with
FL. However, the management has offered to provide specific written representation on the matter.
Required:
Discuss how the auditor should deal with the above situations. (08)
Q. 3 Your firm is the external auditor of Brave Ltd (Brave) which maintains public parks, under a contract with
the owner of each park. The audit plan in respect of the external audit of Brave, for the year ended 30 June
2013, requires the use of substantive analytical procedures to estimate revenue.
You have been asked to perform these procedures using the following information:
• Prices on all contracts in place on 1 July 2012 increased by 5% on that date and amounts are invoiced
at the end of each month.
• The same contracts remained in place for the year ended 30 June 2013 compared with the prior year
except for one new contract which commenced on 1 January 2013, providing services of £150,000 per
month, and an existing contract, worth £90,000 per month when it expired on 31 March 2013.
• Prior year audited revenue was £7,560,000 and revenue recorded by Brave for the year ended 30 June
2013 is £8,668,000.
Requirements
(i) Calculate the expected revenue, for the year ended 30 June 2013, as required by the audit plan for
Brave. Your answer should clearly show each step in your calculation. (04)
(ii) State the audit evidence you would obtain to test the reliability of the data used at each step of your
calculation. (02)
(iii) Explain the actions you would take based on the result of your analytical procedures. (04)
Q. 4 An auditor has to rely on various kinds of data while performing analytical procedures. The reliability of
data is influenced by a number of factors. List out the main factors with examples. (03)
(THE END)
A.1
(0.5 mark)
1. External Confirmation is a highly reliable audit evidence , because it is external, written and
(0.5 mark)
direct evidence.
2. Management can request auditor not to send confirmation request to parties, however, ISAs require
auditor to:
(0.5 mark)
 inquire Reason , and
(0.5 mark)
 obtain evidence to their validity and reasonableness.
If request of management is reasonable:

(0.5 mark)
1. Auditor shall obtain evidence by performing alternative procedures e.g. subsequent transfers
into control account, inspection of internal documents (e.g. BRS, Deposit slips by distributors).
(0.5 mark)
2. If evidence is obtained from alternative procedures, auditor shall express unmodified opinion.
3. If evidence is not obtained from alternative procedures, this will be a scope limitation:
(0.5 mark)
 auditor shall communicate this matter to TCWG.
 auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect is
(0.5 mark)
pervasive).
If request of management is NOT reasonable:

1. This will be an inappropriate scope limitation by management.
(0.5 mark)
(0.5 mark)
pervasive).
2. Auditor shall also revise his:
(0.5 mark)
 assessment of risk of material misstatement, including risk of fraud , and
(0.5 mark)
 nature, timing and extent of other audit procedures.
A.2
(a)
Confirmation received via email:
Risk:
(0.5 mark)
Confirmation may not be from intended party.
What should auditor do:

Auditor shall check controls over electronic transmission of data (e.g. digital signature) to ensure identity
(01 mark)
of the sender, and authenticity of the message.
Confirmation received indirectly through CFO:

Risk:
(0.5 mark)
Management may have tempered it before sending to auditor.
What should auditor do:

(0.5 mark)
Auditor shall contact the confirming party, shall confirm contents of the response with him
(0.5 mark)
and shall ask him to resend the response directly to auditor.
If it is identified that response was Forged or Tempered:

Auditor shall:
(0.5 mark)
 revise his assessment of risk (including fraud) , and
(0.5 mark)
 revise nature, timing and extent of audit procedures.
(b)
1. Representation is not appropriate in this situation, as other sufficient appropriate audit evidence is expected
(0.5 mark)
to exist in case of receivables.
(0.5 mark)
2. Auditor shall obtain evidence to the validity and reasonableness of request.
If request of management is reasonable:

(0.5 mark)
1. Auditor shall obtain evidence by performing alternative procedures e.g. checking cash received
(0.5 mark)
from debtor subsequent to the year, inspection of internal documents (e.g. Account statements,
Sales Order, GDN, Sales Invoice).
(0.5 mark)
2. If evidence is obtained from alternative procedures, auditor shall express unmodified opinion.
(0.5 mark)
3. If evidence is not obtained from alternative procedures, this will be a scope limitation :
(0.5 mark)
(0.5 mark)
pervasive).
If request of management is NOT reasonable:

(0.5 mark)
1. This will be an inappropriate scope limitation by management.
(0.5 mark)
(0.5 mark)
pervasive).
2. Auditor shall also revise his:
(0.5 mark)
 assessment of risk of material misstatement, including risk of fraud , and
(0.5 mark)
 nature, timing and extent of other audit procedures.
Procedures to evaluate recoverability of receivable:

(0.5 mark)
Dispute with debtor indicates that full amount may not be recovered from debtor. Therefore,
auditor should perform following procedures to confirm Valuation assertion of debtor:
(0.5 mark)
 inspect correspondence between parties to understand the nature of dispute.
(0.5 mark)
 Obtain lawyer’s opinion on the disputed matter.
(0.5 mark)
 Check subsequent collection from receivable.
(0.5 mark)
 Evaluate basis of provisioning on this receivable, and its reasonableness.
A.3
(i)
Audited Revenue of prior year 7,560,000
(01 mark)
Add: Effect of increase in price (7,560,000 * 5%) 378,000
(01 mark)
Add: Effect of new contract (150,000 * 6) 900,000
(01 mark)
Less: Effect of expired contract (90,000 * 3) (270,000)
(01 mark)
Expected Revenue for the current year 8,568,000
(ii)
1. For Audited Revenue of prior year, agree with prior year working papers/audited financial
(0.5 mark)
statements.
(0.5 mark)
2. For increase in prices, agree to board minutes and invoices.
(0.5 mark)
3. For new contract, agree price of contract and start date with original contract.
(0.5 mark)
4. For expired contract, agree price of contract and end date with original contract.
(iii)
Expected Revenue 8,568,000
Actual Revenue 8,668,000
(0.5 mark)
Difference (in amount) 100,000
As difference between expected and recorded revenue (100,000) is greater than materiality level
(0.5 mark) (0.5 mark)
determined using rule of thumb 86,680 (8,668,000 * 1%) , there is a risk that recorded
(0.5 mark)
revenue is materially overstated.
(0.5 mark)
1. Auditor shall inquire of management , and shall evaluate those responses by taking into
account:
(0.5 mark)
 auditor’s understanding of entity and its environment and
(0.5 mark)
 other audit evidence obtained during audit:
2. If no adequate explanation is given by management, auditor shall perform other audit procedures
(0.5 mark)
(e.g. tests of details).
A.4
(01 mark)
(i) Source of information
(01 mark)
(ii) Controls over accuracy and completeness of information
(01 mark)
(iii) Nature and Relevance of information (Budget can be used if it is prepared on the basis of
expected results, and not as challenging targets)
(01 mark)
(iv) Comparability of financial information (Broad industry data may need to be supplemented
to be comparable for company selling single product)
(THE END)
20 December, 2023
Audit and Assurance

Test # 9
Q.1 During the audit of Cedar Limited (CL), your audit team observed that CL has sold one of its
freehold lands to Maple (Private) Limited (MPL) at a loss of Rs. 10 million. Your team’s further
investigation of the matter and reading of the minutes of the board of directors’ meeting revealed
that:
(i) a director of CL holds 20% shareholdings in MPL which makes this entity as CL’s related
party; and
(ii) MPL would pay 30% of the consideration in cash and the remaining amount over a
period of five years.
Required:
Evaluate the above related party transaction and suggest any eight key audit procedures that your
team should perform in this respect. (06)
Q.2 You are given the following information and results of the sampling performed on the area of
Repair Expenses during an audit.
Population Sample Misstatements

Number Amounts Basis Number Amounts Amounts
Category 1 30 2,500,000 All items 30 2,500,000 15,000
Category 2 320 4,500,000 Random 40 525,000 500
350 7,000,000 70 3,025,000 15,500
You are required to:

1. Calculate projected misstatement for the population.
2. Evaluate the result and recommend audit procedures to be performed, if tolerable
misstatement is Rs. 25,000.
3. Evaluate the result and recommend audit procedures to be performed, if tolerable
misstatement is Rs. 15,000. (05)
Q.3 (a) Give three examples of sample selection methods that can be used in audit sampling. (06)
(b) Identify four factors that may result in an increase in sample size for tests of details. (02)
Q.4 The results of tests of detail on a sample of receivables balances recorded as Rs.2,000,000
indicate that the correct balances should be Rs.1,950,000.
The total of balances for similar items has been recorded as Rs.10,000,000.
Required:
(a) Explain what the auditors might conclude about the projected misstatement in the
population of trade receivables.
(b) Explain the relevance of the concept of tolerable misstatement in this situation. (03)
Q.5 When designing audit procedures, the auditor sometimes selects specific items from the
population for testing instead of using audit sampling techniques.
Required:
(a) What factors does an auditor take into account while using specific selections? (02)
(b) What audit risk emerges in such selection and how is it dealt with by the auditor? (02)
Q.6 In performing test of details on inventory, the auditor decided to perform sampling. He
selected all items on two pages selected at random from the client’s 90-page inventory listing.
The sampling resulted in selection of items amounting Rs. 1,000,000 whereas total book value
of population was Rs. 100,000,000. Auditor found a total of Rs. 100,000 overstatements in the
sample.
Since the senior indicated that the amount of a material misstatement in the inventory account
was Rs. 2,000,000, the auditor concluded that the recorded inventory value was materially
correct.
Evaluate the auditor’s sampling plan and the manner in which the results were evaluated. (04)
Q.7 As per ISA 530 — Audit Sampling, discuss the following terms:
(i) Anomaly (02)
(ii) Tolerable misstatement (02)
(THE END)
Answer # 1
Evaluation of the transaction:
 Auditor has identified a related party transaction which was not identified by management. (1.0 marks)
 Terms of the transactions (loss of Rs. 10 million, alongwith delayed payment) indicate that transaction is
outside normal course of business. (1.0 marks)
Key Audit Procedures:

To address risk of completeness of related parties:
1. Promptly communicate the relevant information to other members of engagement to assist them in
determining whether risk should be revised.
2. If AFRF prescribed related party requirements:
o Inquire as to why entity’s process and controls failed to identify or disclose such related party
relationship/transaction.
o Request management to identify all transactions with newly identified related party for auditor’s
further evaluation.
3. Perform appropriate substantive procedures on newly identified related party, and/or significant related
party transactions.
4. Reconsider risk of completeness of related party information because other unidentified related parties may
also exist. Also perform additional audit procedures as necessary.
5. If non-disclosure appears intentional, reconsider risk of fraud. Also evaluate other implications on the audit
(e.g. re-evaluate integrity of management).
[0.5 mark for each procedure, subject to maximum of 02 marks for this risk]
To address risk of transaction outside normal course of business:

1. Auditor shall inquire management about business rationale of such transactions.
2. Auditor shall read contract of this sale, to obtain complete understanding of transaction.
3. Auditor shall obtain evidence for appropriate authorization of the transaction. (e.g. special resolution of
members for investment in associated company).
4. Auditor shall evaluate whether this transaction has been appropriately accounted for (e.g. discounting of
long-term receivable, and classification between short-term and long-term).
5. Auditor shall evaluate whether this transaction has been appropriately accounted for disclosed in financial
statements. [0.5 mark for each procedure, subject to maximum of 02 marks for this risk]
Answer # 2
1. Projected Misstatement = 15,000 + (500/525,000 * 4,500,000) = Rs. 19,286. (1.0 mark)
2. As the projected misstatement is less than the tolerable misstatement, hence it can be concluded that
population is not materially misstated. No further work necessary. (1.0 mark)
3. As the projected misstatement is greater than the tolerable misstatement, hence, sampling has not provided
a reasonable basis for conclusion. (1.0 mark)
Auditor should perform following procedures in such case:

 Request management to investigate identified misstatement to identify further misstatements (in
such case auditor will corroborate whether misstatements remain); (1.0 mark) or
 Revise nature, timing and extent of further audit procedures (e.g. auditor may increase sample size,
or modify substantive procedures). (1.0 mark)
Answer # 3
(a) Systematic Selection:

In this method, the number of sampling units in the population are divided by the sample size. This gives a
sampling interval (e.g. 50). A random starting point is chosen (e.g. within the first 50 items), and then items
(2.0 marks)
are selected with a standard gap between them (e.g. every 50th item).
Random Selection:
In this method, all items in the population have an equal chance of selection. Random numbers are used to
(2.0 marks)
select items for testing.
Page 1 of 3
Haphazard Selection:
In this method, auditor selects the sample on arbitrary basis, without a structured technique e.g. choosing
any 100 items from population. Haphazard selection is not appropriate when using statistical sampling
because sample may contain bias.
(2.0 marks)
(b) 1. Decrease in Tolerable misstatement

2. Increase in Expected Misstatement
3. Increase in Desired Level of Assurance
4. Other Substantive Procedures are NOT performed.
Marking plan:
0.5 marks for each factor, subject to the maximum of 2.0 marks.
Answer # 4
(a) There is a misstatement of Rs. 50,000 [2,000,000 – 1,950,000] in the sample of Rs. 2,000,000. Therefore,
projected misstatement in the population of Rs. 10,000,000 is Rs. 250,000 [50,000/2,000,000 * 10,000,000].
(1.0 mark)
(b) Auditor shall compare the projected misstatement with tolerable misstatement.
 If projected misstatement is less than tolerable misstatement, auditor may conclude that population
is not materially misstated. (1.0 mark)
 If projected misstatement is more than tolerable misstatement, sampling does not provide
reasonable basis for conclusion. (1.0 mark)
Answer # 5
(a)  All items over a certain amount (to verify a large portion) (1.0 mark)
 Key items showing certain characteristics (e.g. items with risk of misstatement) (1.0 mark)
(b) Such selection creates non-sampling risk, which can be reduced by following procedures:
1. Increased level of professional skepticism specially during audit of judgmental areas.(0.5 mark)
2. Adequate planning, and reduced materiality level. (1.0 mark)
3. Assigning more experienced and specialized staff e.g. use of experts if necessary.(1.0 mark)
4. Increased supervision and review of the audit work performed. (1.0 mark)
Answer # 6
1. In auditing most of the assets and liabilities (e.g. Property, Plant and Equipment, Inventory, Debtors,
Creditors), it is always considered efficient and effective to stratify the population. Then high value items
are selected separately and rest of population is sampled separately. This has not been done here.
2. Sample selection method used is Block Selection which is not considered a good method and usually do not
draw sample which is representative of population.
3. Auditor did not project the misstatement before conclusion. Projected misstatement is Rs. 10,000,000
[100,000/1,000,000 * 100,000,000] which is much greater than Tolerable misstatement i.e. Rs. 2,000,000.
4. Conclusion reached is incorrect. Sampling does not provide a reasonable basis for conclusion about
population.
5. Auditor did not propose adjustment for identified misstatement. (though amount identified is immaterial,
however, it is always better to propose adjustments for identified misstatements).
Marking plan:
1.0 marks for each point, subject to the maximum of 4.0 marks.
Page 2 of 3
Answer # 7
(i) Anomaly
Anomaly is a deviation or misstatement that occurs because of a one-off event and is not representative of
misstatements or deviations in a population e.g. error by a temporary employee.
(2.0 marks)
(ii) Tolerable Misstatement

It is the amount of misstatement (in financial statements) set by auditor for which auditor obtains assurance
that actual amount of misstatements in population does not exceed from this set-amount.
Tolerable misstatement is the application of performance materiality to sampling approach.
(2.0 marks)
(THE END)
Page 3 of 3
27 December 2023

Test – 10
Q. 1 Asim Enterprises, a prominent textile manufacturing company in Faisalabad, Pakistan, maintains an

internal audit department with a team of seven staff members. These staff members have been with Asim
Enterprises for durations ranging between six to sixteen years. Traditionally, the head of the internal audit
department has been responsible for hiring within the department. However, the Chief Executive Officer
(CEO) of Asim Enterprises appoints the head of internal audit. In this organization, the head of internal
audit reports directly to the Chief Financial Officer (CFO). Additionally, the CFO plays a significant role in
defining the scope of work for the internal audit department.
Asim Enterprises has fully computerized its accounting systems. The internal audit team is often involved in
suggesting and implementing controls within these systems.
Required:
Identify and explain the issues affecting the independence of the internal audit department at Asim
Enterprises. Provide recommendations to address each of these issues. (10)
Q. 2 In the audit of Jamil & Sons, a large textile manufacturer in Faisalabad, Pakistan, the audit manager,
Ayesha, has raised two concerns during the audit planning meeting:
(i) The company has recently acquired a significant amount of property, plant, and equipment (PPE) from
various suppliers. The audit team is considering engaging an independent valuation expert to assist in
assessing the fair value of these assets. Ayesha wants to know if, after ensuring the expert's competence and
objectivity, the audit team still needs to evaluate the expert's work.
(ii) During the audit, the team plans to use a well-regarded IT consultant's work to assess the adequacy of
Jamil & Sons' IT controls. Ayesha inquires whether it would be appropriate to mention the IT consultant’s
work in the audit report to highlight the specialized assessment of the IT controls.
Required:
Advise Ayesha on these matters in accordance with International Standards on Auditing. (06)
Q. 3 Asim is the statutory auditor of Emerald Enterprises, a luxury watch retailer in Pakistan. Emerald
Enterprises has hired Ali, a renowned gemologist, to appraise the value of its collection of gemstone-
encrusted watches. Asim, while preparing the audit report, feels hesitant to take full responsibility for the
valuations provided by Ali. He considers mentioning Ali's name in his audit report because he is depending
on Ali's expertise for the valuation. Asim is contemplating issuing a modified audit opinion.
Required:
Explain to Asim the situations under which he can refer to an expert's work in his audit report. (03)
Q. 4 Hammad Enterprises' Internal Audit Function
Hammad Enterprises, a well-known manufacturing company in Pakistan, has an established internal audit
function. This function includes a Director of Internal Audit, three senior internal audit managers, five
internal audit managers, eight internal auditors, and two internal audit assistants. The Director of Internal
Audit, who has been serving for eleven years, leads this team. The team members' lengths of service range
from one to fourteen years.
The Director of Internal Audit, appointed by the company's Board of Directors, is responsible for hiring
staff for the internal audit team. This director reports directly to the Board and coordinates with them to
determine the scope and focus of internal audits.
The internal audit team at Hammad Enterprises is fully dedicated to their audit roles and has no direct
operational responsibilities. If any internal audit staff members have previously worked in other departments
within Hammad Enterprises, the Director of Internal Audit ensures that these areas are audited by other
team members to avoid conflicts of interest.
The internal audit function at Hammad Enterprises strictly adheres to the International Standards for the
Professional Practice of Internal Auditing established by the Global Institute of Internal Auditors.
Ali Textiles' Internal Audit Function
Ali Textiles, another prominent player in the textile industry in Pakistan, has a smaller internal audit
structure. Their team comprises a Chief Internal Auditor, one senior internal audit manager, two internal
auditors, and one internal audit assistant. The Chief Internal Auditor, with a tenure of nine years, leads the
team whose members have been with the company for between three to eight years.
At Ali Textiles, the Chief Financial Officer (CFO) is responsible for recruiting internal audit staff. The Chief
Internal Auditor reports to the CFO and collaborates with him to set the internal audit's objectives and
scope.
In Ali Textiles, the internal audit team divides their time between internal audit activities and roles in the
finance department, spending about 60% of their time on audit tasks and 40% in finance roles. This has
occasionally led to situations where team members have had to review work they were involved in, due to
the small size of the team.
Ali Textiles' internal audit team follows a mix of standards based on the individual professional
backgrounds and certifications of its team members.
Required:
Based on the provided case study, compare and contrast the effectiveness of Hammad Enterprises and Ali
Textiles' internal audit functions. (14)
(THE END)
A.1
Issue with Independence Recommendation
The head of internal audit The head of internal audit should report to an independent audit
reports to the CFO (01 mark). committee (01 mark).
The scope of work for internal The scope of internal audit activities should be determined
audit is influenced by the CFO independently by the head of internal audit, possibly with guidance from
(01 mark)
. an audit committee (01 mark).
Long tenure of internal audit This could lead to a familiarity threat. Regular rotation of internal audit
staff at Asim Enterprises (01 mark). staff, perhaps every four years, could mitigate this risk (01 mark).
The head of internal audit is The appointment should be made by an independent audit committee or
appointed by the CEO (01 mark). the board of directors, rather than the CEO (01 mark).
To maintain objectivity, the internal audit department should not

Involvement of internal audit in participate in the design and implementation of controls. Their role
designing and implementing should be limited to reviewing and assessing the effectiveness of these
system controls (01 mark). controls (01 mark).
A.2
(i)
Yes, even after ensuring the competence and objectivity of the valuation expert, the audit team must still
evaluate the expert's work (0.5 mark). This is necessary to determine whether the expert's work constitutes
(01 mark)
sufficient appropriate audit evidence . They should assess:
1. The relevance and accuracy of the data used by the expert (0.5 mark).
2. The appropriateness of the expert's assumptions and methods (0.5 mark).
3. The reasonableness of the expert's findings and their consistency with other audit evidence (0.5 mark).
(ii)
According to International Standards on Auditing, the auditor is solely responsible for expressing an opinion
(01 mark)
in the audit report . This responsibility is not diminished by utilizing the work of an IT consultant. The
auditor cannot include references to the work of the IT consultant in the audit report to reduce their own
(01 mark)
responsibility . Such references are only permissible if:
• Required by law or regulation (0.5 mark).
• Necessary to explain the nature of a modification to the auditor’s opinion (0.5 mark).
A.3
Auditor can refer ‘use of expert’ in audit report as such reference is relevant to explain nature of
(01 mark)
modification to the auditor’s opinion .
If such reference is included in report, the auditor’s report shall indicate that the reference does not reduce
(01 mark)
the auditor’s responsibility for audit opinion . Further, auditor may need the permission of the
(01 mark)
auditor’s expert before making such a reference .
A.4
1. Independence and Objectivity:

• Hammad Enterprises: Strong independence, as the internal audit team has no operational
responsibilities and potential conflicts of interest are mitigated.
• Ali Textiles: Lesser independence due to the dual roles in internal audit and finance, potentially
compromising objectivity.
2. Leadership and Reporting Lines:
• Hammad Enterprises: Direct reporting to the Board ensures greater autonomy and alignment
with organizational governance.
• Ali Textiles: Reporting to the CFO might limit the scope of the audit function and its
independence.
3. Team Composition and Expertise:

• Hammad Enterprises: Larger, more diverse team with a broader range of experience.
• Ali Textiles: Smaller team with limited resources, impacting the breadth and depth of audits.
4. Recruitment and Staffing:
• Hammad Enterprises: Recruitment by the Director of Internal Audit, promoting specialized
skills in auditing.
• Ali Textiles: Recruitment by the CFO, which might prioritize finance skills over auditing
expertise.
5. Adherence to Standards:
• Hammad Enterprises: Follows international standards uniformly, ensuring consistency and
professionalism.
• Ali Textiles: Uses a variety of standards, which might lead to inconsistency in audit quality and
reporting.
6. Conflict of Interest:
• Hammad Enterprises: Actively avoids conflicts of interest, enhancing credibility.
• Ali Textiles: Potential for conflict due to auditors reviewing their own work in finance.
7. Scope of Work:
• Hammad Enterprises: Clearly defined and agreed upon with the Board, ensuring relevance and
comprehensiveness.
• Ali Textiles: May be influenced by the CFO's priorities, potentially overlooking critical areas.
8. Conclusion:
• Hammad Enterprises appears to have a more effective internal audit function due to its
independence, larger and more specialized team, adherence to international standards, and
clear governance structures.
• Ali Textiles' internal audit function faces challenges in independence, potential conflicts of
interest, and might have a limited scope due to its smaller team and varied standards.
(02 marks for each comparison subject to maximum of 14 marks)
(THE END)
03 January, 2024
Audit and Assurance

Test # 11
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)
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)
Suggested Solution – Test # 11 (Chapter 19)
Answer # 1
Sr. # Effect on Risk of Material Misstatement Fraud Risk Factor Marks

1 Decrease No (0.5+0.5)
3 Increase Yes (0.5+0.5)
6 Increase No (0.5+0.5)
Answer # 2
Fraud Risk factors include following:

1. Management is having trouble in understanding reports produced by new
accounting system. This will cause ineffective controls over the system. (01 mark)
2. Complains about credit controllers are also a fraud risk factor, which is further
increased by the fact that this managerial role has close association with those
charged with governance. (01 mark)
3. There is domination of management by finance director which creates risk of
fraud. Further, close association between finance director and chairman of board
of director also increases risk of fraud as audit committee lacks independence and
may not oversee management effectively. (01 mark)
4. Management’s refusal to sign written representation letter also raises concerns
about integrity of management and increases risk of fraud. (01 mark)
👉👉 Notes for students: (not part of solution)

1. “Many of LED’s projects are complex” increases risk of material
misstatement, but not necessarily risk of fraud.
2. Engineers having shares does not increases risk because engineers have
no influence over financial statements.
3. Factors which reduces risk of fraud are:
 The company is in a sound financial position and has solid cash reserves.
 Management is reasonably vigilant in overseeing the accounting staff.
Page 1 of 2
Suggested Solution – Test # 11 (Chapter 19)
Answer # 3
Sr. Audit Implications

#
1 This is a control weakness. Individual has the ability to personally encash open
cheques received from debtors and conceal it by understating unpresented
cheques or overstating deposit in transit. (01 mark)
2. Pressure from stakeholders and contingent compensation are now a days
common in companies but their existence is a fraud risk factor for auditor. (01
mark)
3. Internal Audit’s independence is impaired, and its role will be less effective in
organization. (01 mark)
4. This is a fraudulent financial reporting. Auditor should perform procedures
advised by ISA – 240 in such situations. (01 mark)
5. Accountant behaved well till showing his concern. After that, he should have
informed either to internal auditor or external auditor. This shows ‘whistle-
blowing’ procedures are not implemented in the organization and indicates a
weak control environment. (01 mark)
6. This situation questions ‘auditability’ of client i.e. whether sufficient appropriate
audit evidence can be obtained. It also indicates fraud. (01 mark)
Answer # 4
Significant decline in customer demand:

Due to significant decline in demand of foreign customers, the management may be
inclined to show improved results by manipulating the accounting records. (01 mark)
Significant related party transactions:

Significant related party transactions between GL and BL would provide an opportunity
for engaging in fraudulent financial reporting. (01 mark)
Sale of shares by director:

The directors' intention to sell their shareholding in GL provides them an incentive to
manipulate the annual profits so that they can achieve the maximum possible gain from
the sale of shares. (01 mark)
Non-implementation of last year’s external auditor’s recommendations:

Management failure to place controls against weaknesses identified by the external
auditor on timely basis shows the management’s attitude towards the improvement of
internal controls and consequently it increases the risk of fraud. (01 mark)
(THE END)
Page 2 of 2
10 January, 2024
Audit and Assurance

Term Test # 2
Q.1 (a) Your firm has been conducting the external audit of Falcon Enterprises Ltd (Falcon) for the past four years.
During the preliminary analytical procedures for the audit of the fiscal year ending 30 June 2024, you observed
that the trade payables days have decreased to 27.3 days from 34.5 days in the previous year, ended 30 June
2023. Falcon's standard credit terms with suppliers are 35 days.
Required:
Develop an audit plan for the fiscal year ending 30 June 2024, focusing on the change observed in trade
payables days. (03)
(b) State four (04) types of account which should receive special attention when picking a sample for a
receivables confirmation. (02)
Q.2 The following matters arising during the audits have been noted on file for your attention:
(i) Legal Claim Due to Product Failure: A major client of Wheels Inc, a vehicle manufacturing company, had
to recall a line of motorcycles this year due to a defect in the fuel injection system. The client has filed a legal
claim against Wheels Inc for PKR 20 million for supplying defective fuel injectors. Wheels Inc's legal counsel
estimates a 75% probability that the company will lose the lawsuit. However, the directors of Wheels Inc are
confident in their quality control measures and believe that the fuel injectors will be proven to be fault-free.
Nevertheless, they have chosen to disclose this issue in their financial statements to inform shareholders. (04)
(ii) Return of Defective Product: Wheels Inc also manufactures and supplies motorcycle chains. Recently, a
small batch of these chains was returned by a client due to rusting issues. The company issued a credit note for
the full value (PKR 200,000) and accurately recorded this in the draft financial statements. Since the return
occurred before the year-end, the returned chains were included in the year-end inventory at a cost of PKR
180,000. Wheels Inc might be able to refurbish and resell these chains at their original price, but the
refurbishment will cost an additional PKR 90,000. (04)
Required:
Discuss each of these issues and describe the impact on the audit report if these issues remain unresolved.
Assume that the draft profit before tax is PKR 15 million, and total assets are PKR 60 million.
Q.3
(a) Ali and Sara are ACCA students employed at a renowned audit firm in Lahore. They are involved in the
external audit of KK Enterprises' financial statements for the year ending December 31, 2012. Ali began his
assignment on February 15, 2013, and selected a random sample of 40 suppliers from the accounts payable
recorded as of the year-end. His findings revealed the following discrepancies:
Recorded Value (in PKR) Correct Value (in PKR)

3,000 2,500
1,200 1,500
2,400 2,350
After summing up these discrepancies, Ali concluded that KK Enterprises' accounts payable were overstated
by PKR 750. Sara, after examining Ali's working papers, pointed out several errors in his sampling method.
Required:
Determine whether you agree with Sara's assessment of Ali's work and provide justification for your stance.
Support your response with three specific reasons. (03)
(b) Give two examples of situations when an emphasis of matter paragraph is included in audit report, and two
examples when other matter paragraph is included in audit report. (02)
Q.4 (a) Here's a summary of the year-end receivables balances at Titan's Tech, along with the figures from the
previous year. Performance materiality has been set at Rs. 60,000.
Customer 20X5 (Rs.) 20X4 (Rs.)

Alpha 30,000 29,000
Beta 70,000 35,000
Gamma 15,000 15,000
Delta 12,000 13,000
Epsilon 250,000 230,000
Other customers (all balances under Rs. 10,000) 180,000 80,000
Total 557,000 402,000
Gamma went into liquidation during the year.
Required:
Identify which of the above balances the auditor should select for testing and provide reasons for each
selection. (04)
(b) The audit of Dreamland Hotels Ltd (Dreamland Hotels) for the fiscal year ending 30 June 2016 has been
completed. The audit team suggested that the value of properties in Lahore was overstated by Rs. 20 million,
which was twice the level of materiality set for the audit. Following discussions with the audit committee, the
CEO of Dreamland Hotels agreed to revise the property valuations downward by Rs. 12 million. All other
issues raised during the audit were resolved satisfactorily, leaving an overall misstatement in the financial
statements of Rs. 8 million. The audit partner is now contemplating the impact of this remaining misstatement
on the auditor's report.
Required:
Discuss the effect of the Rs. 8 million misstatement on the auditor's report for Dreamland Hotels. (02)
(c) Harrington Cosmetics, a publicly traded company, produces skincare products under the 'SkinGlow' brand.
The company's fiscal year-end is 31 December 20X3, and today's date is 1 March 20X4. The draft profit before
taxation is Rs. 5 million.
As the audit nears completion, the following issue remains unresolved:
On 25 February 20X4, a lawsuit was filed against Harrington Cosmetics by a consumer who experienced
allergic reactions after using 'SkinGlow Cream' in August 20X3. Harrington Cosmetics is contemplating a
settlement of Rs. 150,000 annually for the expected lifetime of the claimant. However, no adjustment or
disclosure regarding this matter has been made in the financial statements.
Required:
(i) Determine whether the issue is an adjusting or non-adjusting event.
(ii) Discuss the potential impact on the audit opinion if the company's directors refuse to make any adjustments
or disclosures in the financial statements. (04)
Q.5 Your firm is conducting the external audit of Leviathan Inc. (Leviathan) for the fiscal year ending 31 October
2019. Within the trade receivables at 31 October 2019, there is an amount of PKR 900,000 owed by Titan Ltd.
(Titan). The Chief Executive Officer (CEO) of Leviathan refuses to disclose any details about the contract with
Titan and also denies permission for your firm to directly confirm the outstanding balance with Titan. The
CEO justifies this by stating that the contract involves highly sensitive government projects, and Leviathan is
bound by a strict confidentiality agreement with Titan. No alternative audit procedures are available to verify
the existence of this debt. The total assets of Leviathan as of 31 October 2019 were PKR 35.0 million, and the
profit before tax for the year was PKR 6.0 million.
Required:
Discuss the implications for the auditor's report on Leviathan’s financial statements for the year ended 31
October 2019. (04)
Q.6 Zirconia Corporation has an internal audit team comprising seven members, all with a tenure of at least six
years at Zirconia, and some have been with the company for over 20 years. Traditionally, the head of internal
audit is responsible for the selection of team members within the department, but the Chief Executive Officer
(CEO) appoints the head of internal audit. The head of internal audit reports to the Chief Financial Officer
(CFO). Furthermore, the CFO plays a significant role in determining the scope of work for the internal audit
department. The internal audit team is heavily involved in advising on and implementing controls within the
company's fully computerized accounting systems.
Required:
Discuss the issues affecting the independence of the internal audit department in Zirconia Corporation and
suggest methods to enhance their independence. (06)
Q.7 Gemstone Enterprises Ltd (GEL) has recorded a liability for employee pension benefits based on an actuarial
valuation conducted by Calculation Experts Ltd (CEL). As the lead audit partner for GEL, you have concerns
regarding the accuracy of CEL's valuation report. Consequently, you decide to appoint Actuarial Analysis Ltd
(AAL) to redo the valuation.
Required:
(a) Discuss the aspects to be considered in relation to:
(i) The competence, capabilities, and objectivity of AAL. (03)
(ii) Evaluating the adequacy of AAL’s work. (03)
(b) Outline the steps to be taken if AAL’s work does not meet the audit requirements. (03)
(THE END)
Suggested Solution – Term Test 2
Answer # 1
(a)
There is a risk that there are some payables which are not yet recorded (i.e. completeness of creditors).
1. Review of Goods Received Notes (GRNs):

Inspect all GRNs that are pending as of the balance sheet date. This includes goods received but not yet
invoiced by the suppliers. The objective is to ensure that all such liabilities are accurately recorded in the
financial statements. This procedure helps in assessing the completeness of trade payables.
2. Post-Year-End Payments Analysis:
Select a significant sample of payments made after the year-end and trace these back to the corresponding
liabilities recorded at the year-end. This process will help in verifying whether the liabilities were
appropriately recognized at the balance sheet date, thus addressing the risk of understated liabilities.
3. Supplier Ledger Scrutiny:
Conduct a thorough review of the supplier ledger to identify any potential omissions of major suppliers.
This involves comparing the current year's supplier list with that of the previous year to detect any
significant changes or exclusions.
4. Comparison and Analysis of Individual Trade Payables:
Compare individual trade payable balances with those of the previous year. Special attention should be
given to accounts that have significantly decreased or are absent in the current year. This investigation will
assist in identifying any unusual patterns or discrepancies that might suggest errors or omissions in the
recording of trade payables.
(1.0 marks for each procedure; subject to the maximum of 3.0 marks)
(b)
State four (04) types of account which should receive special attention when picking a sample for a
receivables confirmation.
1) Accounts over performance materiality level

2) Overdue accounts
3) Accounts with negative/credit balance
4) Major customers with small or zero balances
5) Accounts with unusual changes
(0.5 marks for each category; subject to the maximum of 2.0 marks)
Answer # 2
Page 1 of 6
(a) Defective Fuel Injectors:

1) A provision for PKR 20 million should be recorded, as it is probable that an outflow of resources will
occur.
2) This represents a misstatement of PKR 20 million.
3) The amount is material, exceeding the materiality threshold of PKR 750,000 (15,000,000 * 5%).
4) The auditor should issue a Qualified opinion if this issue is not resolved.
(b) Rusted Motorcycle Chains:

1) Inventory should be valued at the lower of cost and net realizable value (NRV). The cost is PKR
180,000, while the NRV, after refurbishment costs, is PKR 110,000 (200,000 - 90,000).
2) This leads to a misstatement of PKR 70,000.
3) The amount is not material, as PKR 70,000 is less than the materiality level of PKR 750,000
(15,000,000 * 5%).
4) The auditor should express an unmodified opinion if this issue is not significant to the overall financial
statements. (0.5 marks for each category; subject to the maximum of 2.0 marks)
Answer # 3
(a)
I concur with Sara's observation that Ali committed several errors in his sampling approach:
1. Inappropriate Sample Population:
Ali's sample should have been selected from suppliers as of December 31, 2012, rather than from current
(01 mark)
records. This is crucial to match the financial statement date.
2. Misinterpretation of Sample Misstatement:

The actual misstatement in Ali's sample is a PKR 350 understatement, not an overstatement. This error
(01 mark)
arises from incorrectly summing the differences between recorded and correct values.
3. Failure to Extrapolate Misstatement onto the Entire Population:

Ali neglected to project the discovered misstatement across the entire population of accounts payable. This
(01 mark)
projection is essential to estimate the total potential misstatement in the financial statements.
(b) Examples of Situations/Circumstance when Emphasis of Matter Paragraph is included in

Audit Report:
1. If there is material uncertainty relating to the exceptional litigation or regulatory action.
2. A significant subsequent event occurs between the date of financial statements and the date
of auditor’s report.
3. When a major disaster significantly affects entity’s financial position.
4. Early application (when permitted) of a new accounting standard that has a material effect
on financial statements.
Examples of Situations/Circumstance when Other Matter Paragraph is included in Audit

Report:
1. When financial statements of prior period were not audited or were audited by another
auditor.
2. When auditor reports on more than one sets of financial statements.
3. When auditor restricts distribution of auditor’s report.
(0.5 marks for each example, subject to the maximum of 1.0 marks in each category)
Page 2 of 6
Answer # 4
(a)
Beta:
Beta's balance should be selected for testing since it is above the performance materiality threshold of Rs.
60,000. Moreover, there is a significant increase in the balance from the previous year (from Rs. 35,000 to
Rs. 70,000), which warrants further investigation.
Gamma:
Despite being below the performance materiality level, Gamma's balance should be tested because the
company went into liquidation during the year. This raises concerns about the recoverability of the
receivable.
Epsilon:
Epsilon's balance is clearly above the performance materiality threshold and is therefore individually
material. The balance has also seen a notable increase from the previous year (from Rs. 230,000 to Rs.
250,000), which necessitates a closer examination.
Other Customers:
Although each of the “other customers” balances are below the performance materiality threshold, they
are collectively material (totaling Rs. 180,000). Therefore, a representative sample of these balances should
be tested to verify their accuracy and existence.
(1.0 marks in each category, subject to the maximum of 4.0 marks)
(b)
Assessment of Materiality:
The remaining difference of Rs. 8 million should be evaluated against the materiality level for the audit. If
(01
the materiality level was set at Rs. 10 million, the remaining misstatement falls below this threshold.
mark)
Expression of Audit Opinion:

An unmodified opinion could be appropriate if:
1. Qualitative Materiality:
The misstatement of Rs. 8 million does not hold materiality on qualitative grounds. This includes
considerations like the nature of the misstatement, its impact on trends, and its effect on covenants
(0.5 mark)
or regulatory requirements.
2. Aggregate Misstatements:
The Rs. 8 million misstatement, when aggregated with any other immaterial misstatements
(0.5 mark)
identified during the audit, does not exceed the materiality level.
Documentation and Communication:

It's essential for the audit partner to document the rationale behind the decision, including how the
materiality level was determined and why the misstatement is considered immaterial. Furthermore,
(01 mark)
communication with the audit committee and management about this conclusion is crucial.
Page 3 of 6
(c)
(i) Nature of the Event:

The lawsuit was filed after the fiscal year-end. However, the incident that led to the lawsuit occurred before
the year-end. This indicates that the event provides evidence of conditions that existed at the balance sheet
(01 mark)
date. Therefore, it qualifies as an adjusting event.
(ii) Impact on Audit Opinion:

• Materiality of the Claim:
Assuming the claimant's expected lifetime to be around 50 years, the total potential settlement
(01 mark)
could be material (Rs. 150,000 x 50 years).
• Consequences of Non-Adjustment:
If the directors refuse to adjust the financial statements for this material contingent liability, it
(01 mark)
would lead to a significant misstatement in the financial statements.
• Auditor’s Response:
The auditor should express a qualified opinion if the effect of the non-adjustment is material but
not pervasive. If the effect is determined to be pervasive, impacting the financial statements as a
(01 mark)
whole, an adverse opinion may be necessary.
Answer # 5
Scope Limitation:
• This situation represents a scope limitation, as the auditor is restricted from obtaining
necessary information due to confidentiality constraints. The auditor is generally entitled
(01 mark)
to access all information deemed necessary for the audit.
Materiality of the Amount Involved:
• The amount of PKR 900,000 is material in context, considering a materiality level of
PKR 300,000 (6,000,000 * 5%). This significant amount affects the overall reliability of
(01 mark)
the financial statements.
Qualified Opinion:
(01
• The auditor should express a qualified opinion on Leviathan's financial statements.
mark)
Basis for Qualified Opinion:

• The auditor should clearly explain the nature of the scope limitation in the 'Basis for
(01 mark)
Qualified Opinion' section of the audit report.
Page 4 of 6
Answer # 6
Issues with Independence and Recommendations:

1. Reporting Structure:
• Issue: The head of internal audit reports to the CFO.
• Recommendation: The head of internal audit should report to the audit committee to
ensure independence from the management being audited.
2. Scope Determination:
• Issue: The internal audit's scope of work is influenced by the CFO.
• Recommendation: The scope of work should be determined independently by the head
of internal audit, potentially in consultation with the audit committee, to prevent any bias
or undue influence.
3. Tenure of Internal Audit Staff:
• Issue: The long tenure of internal audit staff at Zirconia may lead to familiarity threats.
• Recommendation: Implement a rotation policy for internal audit staff to avoid long-term
associations with particular departments or processes, thus maintaining objectivity and
fresh perspectives.
4. Appointment of the Head of Internal Audit:
• Issue: The head of internal audit is appointed by the CEO.
• Recommendation: The appointment should be made by the audit committee or the
board of directors to enhance independence from the executive management.
5. Role in Control Systems:
• Issue: The internal audit department is involved in advising on and implementing
controls.
• Recommendation: Internal auditors should maintain a monitoring and advisory role
rather than being directly involved in the design and implementation of control systems.
This separation ensures that they can objectively assess the effectiveness of these systems
without conflict of interest. (0.75 for each issue, 0.75 mark for each recommendation)
Answer # 7
(a)
(i) Assessment of AAL’s Competence, Capabilities, and Objectivity:
1. Professional Qualifications:
• Verify whether AAL's team members hold relevant professional qualifications and licenses
appropriate for actuarial valuations.
2. Experience and Reputation:
• Evaluate AAL's experience in pension valuation, considering their track record and
reputation in this specialized field.
3. Independence:
• Ascertain AAL’s independence from GEL, ensuring there are no conflicts of interest, such
as financial stakes, personal or business relationships, or other provided services.
(ii) Evaluating the Adequacy of AAL’s Work:

1. Data Review:
• Assess the accuracy, completeness, and relevance of the significant data used in AAL's
valuation.
2. Assumptions and Methods:
• Critically examine the relevance and reasonableness of the assumptions and
methodologies applied by AAL.
3. Findings Consistency:
• Evaluate the reasonableness of AAL’s findings and conclusions, ensuring they are
consistent with other audit evidence gathered.
Page 5 of 6
(b) Actions If AAL’s Work is Inadequate:
i. Additional Work: - Request AAL to perform additional work to address any deficiencies.
ii. Alternative Audit Procedures: - If issues persist, consider performing alternative audit procedures,
which may include engaging another expert.
iii. Audit Opinion: - In the event that the work remains inadequate, recognize it as a scope limitation.
Depending on the materiality, issue either a qualified opinion (if the impact is material) or a disclaimer of
opinion (if the impact is pervasive).
(01 mark for each relevant point in each part)
(THE END)
Page 6 of 6
17 January, 2024
Audit and Assurance

Test # 12
Q.1 When should the following inventory counting tests take place – before, during or after the
inventory count? Insert alphabet only using format given below.
(a) Observe whether client staff are following instructions.

(b) Review previous year's inventory count arrangements.
(c) Assess method of accounting for inventories.
(d) Trace counted items to final inventory sheets.
(e) Review replies from third parties about inventory held for them.
(f) Conclude as to whether inventory count has been properly carried out.
(g) Gain an overall impression of levels and values of inventory.
(h) Consider the need for expert help.
Format:
Before During After
(04)
Q.2 List the auditing procedures that an auditor should employ to determine whether slow moving
or obsolete items are included in the inventory. (03)
Q.3 You are planning the statutory audit of the financial statements of Mahiwal Limited (ML) for
the year ending June 30, 2011.
A review of the draft financial statements has also disclosed that ML had revalued a property
in accordance with the requirements of the International Financial Reporting Standards. The
property was acquired many years ago to earn rental income.
Required:
Enumerate the key audit procedures to be conducted to assess the appropriateness of the
revaluation of property and the accounting treatment thereof. (06)
Q.4 State briefly how would you perform the following audit tests:
(i) Purchase Cut-off Tests. (02)

(ii) Assessing the reasonability of balance due from trade debtors. (02)
(iii) Completeness of Sales. (02)
(iv) Verifying stocks owned by the company but held by third parties. (02)
Q.5 Kabul (Private) Limited (KPL) has advanced Rs. 100 million to Qandhar Limited (QL), one
of its suppliers of raw material. KPL and QL have recently signed an agreement whereby the
above advance has been converted into a loan and QL has agreed to pay mark-up on the
outstanding balance at prevailing market rates. QL has confirmed the amount of loan and the
interest accrued thereon. However, you have acquired some information which suggests that
QL is facing financial difficulties.
Required:
As an auditor of KPL, discuss how you would deal with the above situation and possible
implications thereof on the audit report. (05)
(THE END)
Answer # 1
Before During After

(b), (c) and (h) (a), (f) and (g) (d) and (e)
Marking Plan:
0.5 marks for each correct classification.
Answer # 2
1. Inspect physical condition of inventory items to identify damaged inventory.

2. Obtain and inspect aged inventory report to identify long-standing or slow-moving or obsolete
inventory items.
3. Calculate inventory turnover ratio to identify slow moving inventory items.
4. Check sale price of inventory items after the year end.
Marking Plan:
1.0 marks for each correct procedure.
Each audit procedure should be specific. General procedures shall not be awarded any marks.
Answer # 3
1. Verify amounts in financial statements with the valuer’s report.

2. Ensure that valuation is up-to-date.
3. Ensure that entire class of asset has been revalued.
4. Evaluate the method used to measure fair value to ensure consistency.
5. Ensure that appropriate disclosures have been made in accordance with IAS – 16.
6. Recalculate “revaluation surplus (or loss)”, and “depreciation expenses” and ensure these have
been correctly recorded in books of accounts.
7. Inspect the property physically to ensure their condition is the same as described in valuation
report.
8. Obtain written representations from management regarding reasonableness of any assumptions
used in determining the fair value.
Marking Plan:
1.0 marks for each procedure, subject to maximum of 6.0 marks
Page 1 of 2
Answer # 4
Part Answer Marks

(i) Purchase Cut-off Tests:
At year-end, auditors should select the last goods receipt note (GRN) made on last
day of the year. He should then select further a sample of GRN for receipts
immediately before and after the last GRN. The sample of GRNs should be
matched to the associated purchase invoices to ensure that receipts have been
recorded in correct period. 2.0
(ii) Assessing the reasonability of balance due from Trade Debtors:
Any two procedures from substantive procedures of “Trade Receivables”. 2.0
(iii) Completeness of Sales:
1. Compare sales for current year with previous year, and inquire significant
differences.
2. Select a sample of GDN and inspect that related sales invoice has been
recorded in books of accounts. 2.0
(iv) Verifying stocks owned by the company but held by third parties:
1. Perform physical verification of the stock held by third parties.
2. Send confirmation letter to third parties to confirm existence of stock. 2.0
8.0
Answer # 5
How to deal with the above situation:

1. As QL is facing financial difficulties, there is an indication that the recovery of advance is
doubtful. (1.0 mark)
2. Auditor shall Review latest audited financial statements of QL to determine QL’s ability to pay
back the loan in future. (1.0 mark)
3. Discuss the issue with management and consider their assessment about the recoverability of the
amount. (1.0 mark)
Impact on Auditor’s Report:

1. If in the auditor’s opinion the recovery of the loan or mark-up accrued is doubtful and the client
fails to make appropriate provision in the financial statements, it will be a misstatement. (1.0 mark)
2. Auditor will issue a qualified opinion or an adverse opinion depending upon materiality and
pervasiveness of the matter. (1.0 mark)
(THE END)
Page 2 of 2
24 January, 2024
Audit and Assurance

Test # 13
Q.1 Maria Brothers & Co. has full and part time employees who work in different shifts. Employees are issued
unique numbered access cards by the Personnel Department. Payment of salary is made at the end of the
month. The work time is electronically captured through access cards. Each week data is forwarded to relevant
departments to confirm the hours worked by the staff. Only the Payroll Manager and his Assistant are
authorized to input the data confirmed by each Department Head into the computerized software. The system
calculates salary and other deductions on the basis of data inputted by the Payroll Manager and his Assistant.
At last the Finance Manager reviews payroll report and compare it with previous month data to identify any
discrepancies. Payment is made through the bank transfer by the Finance Department and pay slips are sent
directly to the employees.
Required:
(i) List down and explain the strengths of the internal controls exist in the above payroll system. (06)
(ii) With reference to each of the strength identified above, describe the test of controls that should be
undertaken by the auditor to asses that controls are working effectively. (03)
Q.2 Glamour Textile Mills Limited has recently issued a document to all employees entitled “Our Code of
Conduct.” It sets out standards of ethical behavior towards other employees, suppliers, and customers. Each
employee also has a contract including a formal job description. All new employees are given aptitude tests
appropriate for the area they will work in. As a result, the company does not consider it necessary to obtain
references or conduct other background checks.
The board includes ten directors, two of whom are independent (being former executives of the company). The
full board meets twice a year and evaluates top management’s performance (as well as considering other
issues). The directors have an audit committee, which includes both independent directors, and which meets
once a year to discuss internal control with the company’s accounting and finance staff.
Requirement:
Discuss strengths and weaknesses in the control environment of Glamour Textile Mills Limited. (06)
Q.3 Purchases department of Bata Pakistan Limited receives requisitions from store manager as well as from
various departments. To speed up, purchasing process, these requisitions do not require authorization. As soon
as purchase requisitions are received, Purchase department issues unnumbered purchase orders to any supplier,
it thinks appropriate. For convenience, blank purchase orders are accessible to all purchasing department staff.
Required:
List the internal control weaknesses in the above situation and write recommendations to improve those
weaknesses. (05)
Q.4 You are responsible for the audit of the fixed assets of Bevs Ltd, for the year ended 31 October 2002.
From your discussions with the finance director, you ascertain that a capital expenditure budget is prepared
annually. Departmental managers can authorise capital expenditure up to £5,000, as long as it is within their
budget. Board approval is required for amounts above this threshold but the managing director, who is also the
major shareholder in the company, does not always adhere to this policy. He often commits the company to
acquiring assets without considering how they are to be financed, leaving the finance director to arrange the
borrowings. Capital expenditure proposal forms are required to be completed but this is not always done,
particularly when items are required in an emergency, and there is no formal policy in respect of obtaining
quotes for major items of expenditure.
There is a fixed asset register which is reconciled to the nominal ledger on a monthly basis. No other checking
procedures involving the fixed asset register are undertaken.
Requirements
Identify weaknesses in the system described above and, for each weakness, explain the consequences that
could result from it. (06)
Q.5 Haydn Co is a limited liability company and wholesale supplier of stationery products. It commenced trading
in 2001 and now has 60 employees with separate sales and accounts departments. However at a recent board
meeting, concern was expressed at some aspects of the company’s internal control, including those relating to
sales and trade receivables.
Jon May, the sales director is an excellent salesman and has been largely responsible for the company’s growth
since 2001 and for the implementation of the control activities exercised over the company’s sales and trade
receivables system. The following policies and procedures form part of the control activities exercised over that
system.
1. Haydn Co uses a networked integrated sales and general ledger accounts system. The company’s
accountant and assistant accountant, together with Jon May and the trade receivables department clerks
(sales clerks) have full access to all sales ledger files including the master file.
2. Requests from potential customers to open a credit account are forwarded to Jon May, who carries out full
credit checks before deciding whether to grant a credit facility. When credit facilities are granted a sales
clerk updates the sales ledger master file with the new customer details. Credit limits are not applied to
customer accounts as Jon May considers this to be a restricting factor in achieving sales targets. Slow or
late paying customers are pursued for payment by Jon May.
3. Customer orders received, in writing or by telephone, are directed to a sales clerk. After establishing that a
trade receivables ledger account exists, the clerk uses a sales invoicing programme to generate a
prenumbered sales invoice and accompanying goods despatch note addressed to customers for products as
ordered. The programme prices sales invoices automatically using authorised prices stored in a standing
data file. Full access to this file is restricted to Jon May and the sales clerks.
Required:
From the information provided on the sales and trade receivables system of Haydn Co:
(i) Identify FOUR weaknesses in the system;
(ii) Describe the implication of each weakness identified;
(iii) Recommend improvements to address the weakness. (12)
(THE END)
Q.1
Strength Explanation Test of Controls

Inspect the email sent by the divisional head
Hours worked are authorized by Risk of overstating hours for a sample of months and agree to the
divisional heads worked are reduced. employees hours recorded on the payroll
system.
Auditor should calculate salaries of a sample
Salaries are automatically calculated There is a reduced risk of
of employees and reconcile with system
by the system. human error.
calculated data.
Check payroll reports of a few months for
The Finance Manager reviews the This will highlight any unusual
evidence of signature of the Finance Manager
payroll and compares it with last changes as compared to last
confirming that the review has been
month figures. month.
performed.
This will reduce the risk of
Inspect the bank statements to identify
Payment is transferred directly into payments being stolen and
payments made to sample of employees on
the employees. Bank account. handed over to the wrong
the payroll report.
person.
(1 mark for each strength, explanation and test of controls, maximum of 9 marks)
Q.2 Strengths:
a. The company has established a written Code of conduct.
b. Assignment of authority and responsibility is appropriate through communicating job description to employee.
c. Company is committed to Competence as aptitude tests are being conducted.
d. Those charged with governance has participated in establishing and maintaining internal control by forming audit
committee consisting of members independent from management.
Weaknesses:
a. It is not mentioned whether code of conduct actual operates within company and whether company has a disciplinary
mechanism in case of non-compliance.
b. Board of directors meets only twice a year. It should meet atleast four times a year.
c. Audit Committee meets only once a year. It should meet more frequently.
(1 mark for each point, Subject to maximum of 6 marks)
Q.3
Weakness in Internal control Recommendation to improve Internal Control

Purchase department receives requisitions from Purchase department should receive requisitions only
various departments. from Store Manager.
Purchase requisitions are not authorized by head All purchase requisitions should be properly
of the department. authorized.
Purchase orders are not sequentially pre- Purchase orders should be pre-numbered to ensure
numbered. completeness.
 List of approved suppliers should be maintained.
There is no appropriate policy to select supplier.  Bids should be called, and order should be given to
supplier with lowest rates.
Blank purchase orders are accessible to all Blank Purchase Orders should be kept in safe custody,
purchasing staff. and sequence test should be checked.
Page 1 of 2
Q.4
Weakness Consequences
 There may be surplus, unnecessary fixed assets.

Lack of proper consultation or appraisal in respect of
 Company’s liquidity position may become worse and it
acquisition of fixed assets
may be under high debts.
Quotes from suppliers are not obtained for purchases

Assets may not be acquired on the most favorable terms
of major items.
There may be differences between book balance and physical

balances e.g.
Fixed assets’ register is not compared with physical  Assets may not exist
balance.  Disposals may not be recorded
 Purchases may not be recorded
 Assets which need to be written down may not be
identified
Board approval is not obtained for capital

Unnecessary capital expenditures can be incurred.
expenditures above 5,000.

Q.5
(i) Weakness (ii) Implication (iii) Recommendation
 There should be segregation of

Company’s accountant and duties between persons as to
assistant accountant, and Lower staff may make inappropriate authorization of changes in files and
sales clerks have full access to changes to sales ledger files and recording of transactions.
all sales ledger files including master files to commit fraud.  Sales staff should have ‘read only’
the master file access only to trade receivables
ledger files.
Sales director may allow credit to poor
A separate department should allow credit
customers to increase sales, or may
Decision to grant credit is approval of new customers (based on a
commit fraud by making sales to
made by sales director. customer’s financial strength and ability to
fictitious customers which will
pay) to ensure segregation of duties.
increase risk of bad debts or fraud.
Credit limits should be checked before
Sales may be made to customers approval of sales orders. Customer accounts
Credit limits are not applied
beyond their ability to pay which may should be closely monitored by an
to customer accounts.
increase bad debts. independent person to ensure that credit
limits are not exceeded.
Person responsible for sales may not

Slow or late paying customers A separate department should be given
pursue effectively collection of sales as
are pursued by sales director. responsibility of collection.
he may fear loss of sales in future.
Sales orders should be agreed with customers

Customers’ orders are There may be disputes with customers
in writing, clearly explaining terms and
received over telephone. regarding description of orders.
conditions of trade.
Sales invoice is generated at Generation of sales invoices before

Sales invoice should be generated only after
time of entering customer despatch of goods may result in early
despatch of goods.
order in system. recognition of revenue.
Sales department has full Sales department may allow

Sales department should have read-only
access to (i.e. authority to unauthorized prices to selected
access to authorized prices.
amend) authorized prices. customers.
(0.5 mark for each point, Subject to maximum of 12 marks)
Page 2 of 2

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CAF:08

Audit And Assurance

Test Number Syllabus

Test # 1 Syllabus: Ch. # 1

Test # 2 Syllabus: Ch. # 2 & 3

Test # 3 Syllabus: Ch. # 4 [LO 1 to LO 5]

Test # 4 Syllabus: Ch. # 4 [Complete]

Assessment # 1 Syllabus: Ch. # 4, 5 & 8

Test # 5 Syllabus: Ch. # 9

Test # 6 Syllabus: Ch. # 11 [LO 1 to LO 4] Ch. # 10 [LO 1]

Test # 7 Syllabus: Ch. # 11 [Complete]

Term Test # 1 Syllabus: 4, 5, 8, 9 & 11

Test # 8 Syllabus: Ch. #14, 15

Test # 9 Syllabus: Ch. # 16, 17

Test # 10 Syllabus: Ch. # 18

Test # 11 Syllabus: Ch.# 19

Term Test # 2 Syllabus: Ch. # 4, 11, 14, 16, 17, 18, 20

Test # 12 Syllabus: Ch. # 10

Test # 13 Syllabus: Ch. # 12 [5 Internal Control System]

CAF 8 – AUDIT AND ASSURANCE

Q. 1 (a) What is meant by reasonable assurance? (02)

Q. 3 Briefly explain following:

 Reasons why absolute assurance cannot be provided:

Subject matter is the information which responsible party prepares and is to

Evidence means information on which practitioner’s conclusion is based.

It is a page written in standard format which includes conclusion of

(a)  Provision for bad debts

(b) Assurance Engagement:

CAF 8 – AUDIT AND ASSURANCE

Q. 1 International Federation of Accountants (IFAC) provides leadership to the worldwide accountancy

Give your comments on each of the above matters. (06)

1. IFAC develops of high-quality standards and guidance. [01 mark]

(a) Analytical Procedures

CAF 8 – AUDIT AND ASSURANCE

Q. 4 State the effect on your audit report of the following situation:

Palm Industries Co (Palm)

Ash Trading Co (Ash)

Answer # 1 [Question Adapted from Spring 2010 Attempt of ICAP]

Situations causing modification in Report:

How such paragraphs are presented in audit report:

Answer # 2 [Question Adapted from Spring 2007 Attempt of ICAP]

The impact of uncertainty depend on type of uncertainty:

Answer # 4 [Question Adapted from December 2007 Attempt of ACCA]

Palm Industries Co (Palm)

Ash Trading Co (Ash)

This is an exceptional litigation which is required to be disclosed in financial statements.

ICAEW Book 8 Question Bank Section 4 Short form questions

CAF 8 – AUDIT AND ASSURANCE

a. The report must begin with "Chartered Accountant's Report"

(a) Incorrect. [0.5 Mark]

(b) Incorrect. [0.5 Mark]

(c) Incorrect. [0.5 Mark]

(d)Incorrect. [0.5 Mark]

(e)Incorrect. [0.5 Mark]

(f)Correct. [01 Mark]

(g)Incorrect. [0.5 Mark]

(h)Incorrect. [0.5 Mark]

(i) Incorrect. [0.5 Mark]

Answer # 2: [Question Adapted from Spring 2006 Attempt of ICAP]

To: [Partner's Name]

Evaluation of the Situation:

Conclusion about Type of Opinion:

Answer # 3: [Question Adapted from Spring 2012 Attempt of ACCA]