Certified Finance and Accounting Professional Stage Examinations

The Institute of 8 December 2016

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit, Assurance and Related Services

Q.1 You are a partner in a firm of Chartered Accountants. Annual audits of various clients are
at finalization stage and since this is the first time that ISA related to Key Audit Matters is
to be applied, several issues have been referred to you for guidance. These include:

(a) An adverse report is being issued in the case of Muneer Limited. The draft report also
contains certain matters as Key Audit Matters. (02)

(b) A qualified report has been drafted by the audit manager of Nadir Limited as the
company has failed to make adequate provision of contingency. The details of
qualification are mentioned in the Key Audit Matters section. (03)

(c) The Key Audit Matters section of audit report of Zia Limited includes details of Key
Audit Matters of only the current period. However, the opinion has been expressed
on current as well as prior year. (03)

(d) At one of the listed clients, investigation by a Government agency against some of its
staff members is in progress. Due to sensitivity of the matter the management has
requested you to not to include such information in the Key Audit Matters section. (03)

Required:
Advise the concerned partners/managers with respect to the above matters.

Q.2 You are the audit manager of Bolan Pharmaceuticals Limited (BPL) a listed company. For
the year ended 30 September 2016, BPL has prepared its financial statements which indicate
a net operating loss, current ratio of 0.79 and significant amount appearing as capital work
in progress comprising of expenses incurred on acquisition and installation of plant and
machinery. The following information is also available:

(i) The operations of BPL are currently suspended due to Balancing, Modernization and
Replacement (BMR) work.
(ii) The decision to carry out BMR was approved by the Board of Directors in 2015 with
a completion deadline of 31 March 2016.
(iii) Due to certain technical issues, BPL has not been able to complete the project to date.
(iv) Because of the above situation, loan from a bank became overdue on
1 September 2016. Further, BPL had also not complied with certain key covenants.
(v) In this difficult situation BPL has requested its major shareholders to inject additional
equity.

Required:
(a) You have asked the client to give a comprehensive plan explaining the steps to
counter the above situation. Briefly discuss what kind of details you would expect in
the above plan. (12)
(b) Besides the issue of going concern, state the other key matters that the auditor should
consider with respect to the above situation. (05)
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Q.3 Your firm has been appointed as the auditor of New Cement Limited (NCL), for the year
ended 30 November 2016. NCL is a listed company which owns one of the largest cement
plants in the country. 60% of the company’s shares are owned by the same family. The
CEO, CFO and Director Operations belong to the family. Following are the extracts from
the draft financial statements:

Extracts from statement of financial position

Assets Rs. in million
Property, plant and equipment 21,115
Deferred tax 270
Trade debtors 4,700
Other current assets 2,753

Equity and liabilities

Share capital 6,500
Reserves (1,462)
Surplus on revaluation of fixed assets 2,000
Non-current liabilities 13,000
Current liabilities 8,800

Extracts from statement of comprehensive income

Turnover – net 17,210
Gross profit 1,417
Operating loss (164)
Other income 223
Finance cost (1,560)
Loss before taxation (1,501)

Other information:

(i) Sales have declined during the past two years because of lower exports, however, the
decline in exports has been partially offset by slightly higher local sales. The
management is hopeful of a significant increase in local sales in the coming years.
(ii) NCL’s debtors have increased by 25%. The debtors include an amount of
Rs. 330 million due from a government owned entity. The amount became due on
30 June 2016. However, the amount has been rescheduled and is now recoverable in
6 equal instalments over a period of three years.
(iii) On 1 November 2016, the management entered into a contract with a new supplier
for supply of its main raw material. The new supplier has offered 15% lower prices.
The contract with the previous supplier has been terminated. The audit team has also
been informed that a senior member of purchase department was fired in
September 2016.
(iv) NCL revalues its plant and machinery after every three years. The last revaluation
was carried out in 2014.
(v) The internal audit department comprises of five staff members including Chief
Internal Auditor, who is a Chartered Accountant. The Chairman of the audit
committee is an independent director. The internal audit department has carried out
number of assignments. The reports of the internal auditor include many good
suggestions for improving the efficiency of the operations; however, they do not
contain any serious deficiencies/adverse comments in any area.

Required:
(a) Briefly evaluate the overall control environment of the company. (05)
(b) Based on the above information identify areas of risk for the audit and the planned
audit approach. (15)
(Note: Detailed audit procedures are not required)
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Q.4 Identify the differences between the auditor’s report on financial statements of a listed
company as compared to an unlisted company, based on International Standards on
Auditing. (04)

Q.5 Dawood Limited (DL), a listed company, has approached your firm to provide a limited
assurance on sustainability report of the company and presently you are verifying the
following statement related to carbon emissions:

“Carbon emissions were within the limits allowed by the regulator.”

Required:
Determine how you would verify the above claim. (06)

Q.6 Your firm has been hired by Sensitive Products Limited (SPL), for an assurance engagement
regarding compliance with regulatory requirements. SPL is engaged in the production of
highly sensitive products and is required to comply with strict regulatory requirements. In
this regard a report is submitted by SPL to the regulatory authority which contains certain
information.

Required:
Draft a limited assurance report to be issued to the regulatory authority regarding the
information provided to the authority by SPL. The report should contain a qualification and
mention atleast three procedures performed by your firm. (14)
(You may assume necessary details, however any annexures to the report are not required)

Q.7 You are the audit manager responsible for the audit of Mechanic Engineering Limited,
(MEL) which provides mechanical parts to different industries. The draft financial
statements for the year ended 30 September 2016 show profit before taxation of
Rs. 150 million (2015: Rs. 200 million) and total assets of Rs. 1.2 billion (2015: Rs. 1.1
billion).

Presently following matters are under your consideration:

(a) MEL has recognized a late payment surcharge of Rs. 2.5 billion on amount due from
Government agencies. Last year, the audit report was qualified with respect to the
recognition of late payment surcharge. The management has informed you that the
Government authorities have conveyed their willingness to pay Rs. 2 billion instead
of Rs. 2.5 billion and has provided you a written representation with respect to the
said amount. MEL however wants to preclude you from sending a confirmation to
the relevant agency. (07)

(b) During the year, MEL has sold one of its buildings to Natasha (Private) Limited
(NPL) at a loss of Rs. 20 million. The building was purchased at a cost of
Rs. 80 million seven years ago and was depreciated @ 5% per annum on straight line
basis. The minutes of the meeting of the Board of Directors at which the sale was
approved indicate that a director of MEL holds 20% shares in NPL. However, the
minutes also indicate that he did not vote on the transaction due to conflict of
interest. (09)

Required:
Evaluate the above situations and determine the course of action in respect of each of the
above independent situations. (Reporting implications are not required)
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Q.8 You are the partner in a firm of Chartered Accountants and presently following matters are
under your consideration:

(a) Annual audit of Kamran Limited (KL) for the year ending 31 December 2016 is due
to commence in a few weeks. Jamal has been an audit team member for eleven years;
two years as the job incharge, three years as manager and six years as partner.

KL was listed on the Pakistan Stock Exchange in July 2016.

Required:
(i) Identify the threats in the above situation and discuss the significance thereof. (06)
(ii) Discuss the need for rotation of engagement partner in each of the following
situations:

The firm has adequate resources and personnel who can replace Jamal as
engagement partner but Jamal does not want to leave this assignment.

The firm is unable to find a suitable replacement. (03)

(b) Your firm has received request from a listed audit client to assess the quality of the
internal audit function and give recommendations as regards improving the structure
of the internal audit department and the quality of its staff.

Required:
Evaluate the above situation and identify threats, if any and related safeguards. (03)

(THE END)