RISE School of Accountancy

Auditing and Assurance

Mock
19 August 2018 100 marks – 3 hours
CAF-09 Additional reading time – 15 minutes

Q. 1 (a) You have completed the audit of Fantasy Resort Ltd (Fantasy Resort) for the year ended 30 June 2015. The audit
partner suggested that the value of properties on the Gold Coast were overstated by Rs. 16 million, a figure which
was twice the level of materiality set for the audit. As a result of discussions with the audit committee, the CEO of
Fantasy Resort agreed to revise the valuations downward by Rs. 10 million. All other issues were resolved to the
satisfaction of the audit partner, resulting in an overall misstatement of the financial statements of Rs. 6 million. The
audit partner is now considering the effect of the misstatement on the auditor’s report.
Required
Explain the effect of the misstatement on the auditor’s report. (02)

(b) You are auditing the financial statements of Mixed Emotions Ltd (MEL) for the year ended 30 June 2015. In
January 2015, the Income Tax Office (ITO) commenced an audit of MEL’s income tax returns for the three income tax
years 2012 to 2014. On 20 June 2015, after the completion of the tax audit, the ITO sent written advice to MEL that, in
their view, MEL had incorrectly calculated the effective life of its depreciable fixed assets and, as a consequence, had
claimed excessive depreciation expense in the three tax years 2012 to 2014.

On 15 July 2015, the ITO issued amended assessments for the relevant tax years which were due for payment on 15
August 2015. MEL has sought advice from an independent tax expert and has been advised to appeal the revised tax
assessments, despite it being very unlikely that the appeal would be successful. The additional income tax payable
resulting from the revised tax assessments would be material to the report.
Required
Identify the appropriate auditor’s opinion for MEL for the year ended 30 June 2015 if management:
(i) refuses to adequately disclose the facts in a note to the financial statements.
(ii) discloses the amended assessment in a notes to the financial statements. (03)

Q. 2 (a) Explain the difference between “negative assurance” and an “adverse opinion.” (04)

(b) You are the audit partner for Good Times Ltd (Good Times), a listed company that specialises in the manufacture
and retail of home entertainment centres. You have completed your audit for the year ended 30 June 2015 without
any significant problems and have issued an unmodified auditor’s opinion. The past three months have been very
busy and you would like to take a holiday with your family; however, you have found out that Good Time’s annual
general meeting (AGM) will be held during this time. You suggest that your attendance is not required, given that
fewer than 10 shareholders usually attend the AGM, no questions have been asked of the auditor in the past and an
unmodified auditor’s report has been issued.

Required
Describe whether, as the audit partner, you are required to attend the AGM. (02)

Q. 3 (a) What procedures do auditors use to assess fraud risk? What are an auditor’s responsibilities if a fraud is
suspected? (05)

(b) The following situations may raise a suspicion of fraud on an audit engagement.
(i) An employee can authorize medical insurance claims and enter them into the system for payment without
supervisory review. What might happen?
(ii) The inventory warehouse manager was also responsible for making the physical inventory observation and
reconciling discrepancies to the perpetual inventory records. What might happen?
(iii) The petty cash custodian was replaced and the frequency of fund reimbursement decreased from every two
days to every four days. What might you suspect?
(iv) A company may have recorded fictitious sales. What account could you audit to determine whether this has
happened? (04)

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 Question Paper
Q. 4 You are the audit senior on the audit of Opal Pty Ltd, a large manufacturing company, for the year ended 30 June
2012. It is now 25 August 2012 and you are reviewing the audit working papers prepared by the audit assistant,
Monica Western. You notice the following matters:

(a) On 30 June Monica attended the stocktake and observed that the client followed the stocktake instructions. She
selected numerous items for test counting from the client’s inventory sheets and all were found to be correct. Cut-off
details were noted and subsequently checked and found to be correctly treated. Monica concluded that the inventory
was fairly stated.

(b) Monica selected 20 invoices to test the control that the sales clerk checks that the prices agree with the
authorised price list. She found three instances where the sales clerk had not signed the ‘prices checked’ box on the
invoice. The sales manager explained that the sales clerk always checks the prices but sometimes forgets to sign the
box. As the prices on all the invoices agreed with the authorised price list, Monica concluded that the control was
operating satisfactorily.

(c) As part of her work on subsequent events, Monica noted that there were a large number of returns in July of
Product 75L. However, as this product was first sold in June and represented only 1 per cent of sales for the year, she
concluded that the amount was immaterial and that no further work was necessary.

(d) Advertising expenses are material, although only 50 per cent of last year’s balance. Monica selected a large
sample of entries and agreed them to supporting documents. No errors were found. Monica concluded that
advertising expenses were reasonable.

(e) As part of the verification work on accounts payable, Monica carried out a search for unrecorded liabilities. She
tested a random sample of 20 payments made after 30 June 2012 and found three instances of cheques that related to
services provided in June that had not been accrued. However, as the total of the three cheques was immaterial, she
concluded that no adjustment was required for unrecorded liabilities.

Required
For each of the five scenarios presented above, indicate whether you believe that sufficient appropriate audit
evidence was obtained to support the conclusions reached. Give reasons for your decision. (10)

Q. 5 (a) List categories of general and application controls used in IT-based systems? (04)
(b) Identify and explain the types of computer programs that are available for testing the audit client’s files. (03)
(c) List the functions of generalised audit software that are useful for audit tests. (03)
(d) What impact does it have on the audit if the transaction trails in an auditee’s system are only available in
machine-readable form for a limited period? (02)
(e) Explain why the auditor sends a confirmation request to the bank when they have access to the client’s copy of
the bank statement. (02)
(f) What steps should an auditor take when analytical procedures undertaken as part of the overall review at the end
of the audit identify an unusual fluctuation or relationship. (03)

Q. 6 (a) If a sample result suggests that there is material misstatement in the population, what actions may the auditor
take in response to this finding? (02)

(b) You are the audit senior at Walsh & Associates and are conducting the audit of Whirlpool Ltd (Whirlpool) for the
year ended 30 June 2015. Whirlpool retails spa pools and has stores across Pakistan. The audit assistant, Callum
Shaw, has carried out tests of controls over payroll. An extract from his audit working papers is as follows:
 The tolerable rate of deviation for this test, as per the audit plan, is 5 per cent.
 Twenty-four employee pays were selected from the weekly payroll reports (two per month) and tests
performed as per the audit plan.
 Two immaterial errors were found, all originating in Karachi.
 These errors were discussed with the client, who corrected them based on information provided by audit staff.

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 Question Paper
 As the errors were immaterial (less than Rs. 2,500 each) and subsequently corrected, audit assistant concluded
that payroll controls are working satisfactorily and there is sufficient appropriate audit evidence to rely upon
them.
Required
(i) Identify reasons why the audit assistant’s conclusion is incorrect.
(ii) State the correct conclusion the audit assistant should have reached. (03)

(c) You are the audit senior on the audit of Turbine Ltd (Turbine) for the year ended 30 June 2015. The auditor’s
report needs to be signed on 15 August 2015, and the audit manager has requested you to confirm the accounts
receivable balance. The accounts receivable balance was Rs. 12,175,568 as at 30 June 2015 and is considered
material.
Turbine’s payment terms are 14 days from the date of the invoice. Five different customers represent 65 per cent of
the accounts receivable balance outstanding as at 30 June 2015.
The remaining 35 per cent is made up of numerous smaller amounts, most of which have been outstanding for more
than 60 days.
Required
Identify two key factors that you would consider when designing a sampling approach for accounts receivable
confirmations for Turbine’s accounts receivable balance. (02)

Q. 7 You are an audit manager with Clarke & Johnson (CJ). For the past three years CJ has been the auditor of Luxury
Travel Holidays Ltd (LTH), a travel company. Geoff, the audit partner, has asked you to contact Chris, LTH’s CEO, with
a view to CJ being re-engaged as the auditor for the upcoming audit of the 30 June 2015 financial statements.
Geoff has also indicated that he intends to allocate Michael, a first-year accountant, and Annette, an accountant in CJ’s
tax advisory department, to the LTH audit for the first time. Geoff suggested that you discuss the audit with each of
these staff, with a view to identifying any independence issues. You held talks with Chris, Michael and Annette and
excerpts of these conversations were as follows:

1 Conversation with Chris, excerpt 1

Chris stated: ‘The board of directors were impressed with last year’s audit and would like to propose reappointing CJ
as the auditor of the 30 June 2015 financial statements audit. The board would also like to invite Geoff to give a
speech about LTH at the next travel agency seminar, to assist in promoting LTH’s business to attract more investors. I
understand that this is outside CJ’s normal practice; however, the board expressed the view that it will be very
difficult for LTH to continue any business engagements with CJ should Geoff refuse to provide such assistance.’

2 Conversation with Chris, excerpt 2

Chris stated: ‘To express our sincerity towards CJ and Geoff, and to maintain the good relationship in anticipation of
another smooth audit for 2015, LTH would like to present a complimentary 14-day holiday package voucher for four
people to the Greek isles for both Geoff’s and your family. All expenses, including accommodation and travelling
costs, will be paid by LTH.’

3 Excerpt from discussion with Michael

Michael stated: ‘I am very excited to be part of the audit team. I believe that I will be a valuable asset to the team, as
my dad is LTH’s financial controller. He is responsible for the preparation of LTH’s financial statements.’

4 Excerpt from discussion with Annette

Annette stated: ‘I’m glad that I’ve been allocated to this year’s LTH’s audit team. It’s going to be a very efficient audit
this year! I was on a temporary assignment at LTH just a month ago, helping LTH with its tax calculations and
preparing accounting entries that will be reflected in the 30 June 2015 financial statements, so I don’t think there will
be much audit work required around the tax accounts. It will be great to catch up with everybody at LTH again, as
they are so easy to work with.’

Required
(a) For each excerpt, identify any threats in relation to auditor independence.
(b) Identify any safeguards to those threats identified above. (08)

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 Question Paper
Q. 8 You have completed your review of internal control over the purchases, receiving and accounting department of
Infinity Ltd and have identified the following controls:
(i) Requisitions by the production department are required before purchase orders are prepared by the
purchasing department.
(ii) Purchase orders are placed with approved suppliers only.
(iii) Purchase order and receiving report are reconciled before a voucher package is prepared.
(iv) The purchasing, receiving, accounts payable and cash payments functions are segregated.
Required
Explain how you would test the controls identified. (04)

Q. 9 (a) Outline the procedures you would perform to determine the adequacy of the provision for doubtful debts. (03)
(b) Identify the two assertions that are of primary concern to the auditor when undertaking tests of balances for
intangibles. Explain audit procedures that can be undertaken to test each of the assertions identified. (04)
(c) Explain how the auditor would substantively verify the carrying value of assets where an entity uses the
revaluation method and estimates fair value. (04)

Q. 10 Raymond Glover is an audit partner with Hand & Glove Chartered Accountants (Hand & Glove), a small audit firm
located in Islamabad. A potential new client, Exclusive Jewellers Ltd (EJL), has approached Raymond to conduct the
audit of the financial statements of EJL for the financial year ended 30 June 2015.

EJL has multiple branches throughout Pakistan and imports precious gemstones from Asia for sale directly to
exclusive jewellery stores in Islamabad, Karachi and Lahore. These stores must pay within 30 days of receiving an
invoice from EJL. Before deciding on whether to accept the engagement, Raymond reviews recent media articles and
publications relating to EJL and discusses last year’s audit of EJL with the previous audit partner and with EJL’s board
of directors.

As a consequence of his discussions and research, Raymond discovers the following:

• Two of EJL’s directors have recently resigned, claiming that they were being pressured by the other directors to
submit draft accounts to the bank that overstated sales in order to satisfy specific debt covenants.
• The previous audit report was qualified due to unresolved disagreements with management over the valuation of
inventory items and intangible assets.
• In the past few years, EJL has been struggling to meet sales targets. Customers have been steadily shifting their
focus towards cheaper jewellery items and away from the high-quality gemstones supplied by EJL.
• EJL has recently relaxed the strict 30-day payment terms with stores to give them extra time to pay. This was done
in the hope of avoiding reductions in sales volumes from these stores.

Required
Identify and explain five factors in relation to EJL that may increase the risk of material misstatement in the financial
statements. (05)

Q. 11 The audit report is signed by the auditor and subsequently, he becomes aware of an event which materially affects
the financial statements. The financial statements therefore need to be amended. He discusses the matter with
management but management refuses to amend the financial statements.

State the action to be taken by the auditor in the following circumstances:

(a) If the report is not released to the entity
(b) If the audit report is released to the entity
(c) If the report is issued to general public (04)

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 Question Paper
Q. 12 For each of the following situations, suggest an appropriate audit report modification (if any).
Situations
(i) Based on the audit evidence obtained, there is no material uncertainty.
(ii) The going concern assumption is appropriate but material uncertainty exists, which is adequately disclosed.
(iii) As for (ii) but adequate disclosure is not made.
(iv) The going concern assumption is inappropriate but the financial statements have been prepared on a going
concern basis.
(v) The going concern assumption is inappropriate and the financial statements have been prepared on an alternative
basis, which is adequately disclosed. (05)

Q. 13 (a)
Do you agree with the following?
(i) Where an auditor finds that the internal control system is weak, he should state the fact in his report so that he is
not held responsible for any fraud or error. If he does so, he need not extend his substantive procedures.
(ii)Where an auditor detects a material fraud, the management revises the financial statements to show the effect of
the fraud. The auditor still qualifies his audit report since he feels that there is a distinct possibility of other frauds
remaining undetected. The management does not agree with the auditor’s action. (02)

(b)
As an auditor appointed under Companies Act 2017, what would he your response in the following situations?
(a)You have been appointed as auditor of A Ltd. at its annual general meeting held on August 19, 2017. The company
closes its accounts on March 31 every year. When your assistant goes for a surprise check of cash on September 30,
2017, he is not allowed to do so by the finance director who tells him that audit can be conducted only after the
accounts for the year are ready.
(b)The sales manager of A Ltd., of which you are the auditor, does no reply to a query raised by you regarding a sales
contract. He argues that he is in no way concerned with preparation of accounts and, therefore, you should seek
replies to all your questions from the account manager.
(c)You wish to make a qualification in your report regarding material discrepancies noticed between the book stocks
and the physical stocks. The management advises you to make these observations orally at the annual general
meeting instead of qualifying the report, on the ground that the shareholders would better appreciate the situation if
it is explained to them orally at the meeting. (03)

Q. 14 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 $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. (02)

(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 ($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 ($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 $62,500. (02)

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.

(THE END)

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 RISE School of Accountancy
Auditing and Assurance
Mock
Suggested Solution

Q. 1 (a)
The difference noted (Rs. 6 million) is now below materiality level (Rs. 8 million). Auditor should express unmodified opinion (1
MARK) if:

 It does not become material on qualitative criteria. (0.5 MARK)

 It does not become material when aggregated with other immaterial misstatements. (0.5 MARK)

(b)
(i) Auditor shall express qualified opinion (1 MARK).
(ii) The financial statements should include an adjustment for the additional tax assessments, as it is an adjusting event (1 MARK) .

Auditor shall still express qualified opinion (1 MARK) as disclosure is not substitute of correct accounting treatment.

Q. 2 (a)
Negative Assurance:
It is a moderate level of assurance which is expressed in negative form of conclusion (1 MARK) i.e.
“Based on our review, nothing has come to our attention that causes us to believe that financial statements do not give true and
fair view”. (1 MARK)

Adverse Opinion:
Auditor shall express adverse opinion when auditor has obtained sufficient appropriate evidence and concludes that there are
misstatements in financial statements whose effect is pervasive(1 MARK).
This opinion is expressed as “the financial statements do not give a true and fair view….. in accordance with AFRF”. (1 MARK)

(b)
In case of listed audit client, auditors have a legal obligation to attend the company’s AGM at which the auditor’s report is
considered (1 MARK).
The audit partner, or their representative who is capable of appropriately representing the audit partner, must attend the AGM of
Good Times (as it is a listed company) (1 MARK).

Q. 3 (a)
Procedures to assess fraud risk:
ISAs require the auditor to perform the following procedures to identify the risks of material misstatement due to fraud:
1. Make enquiries of management in respect of:
a) their assessment of the risk of fraud (0.5 MARK)
b) their process in place for identifying and responding to the risks of fraud(0.5 MARK)
c) any specific risks of fraud identified or likely to exist(0.5 MARK)
d) any communications within the entity in respect of fraud (e.g. code of conduct) (0.5 MARK).
2. Make inquiries of management and others within the entity as to whether they have any knowledge of any actual,
suspected or alleged frauds. (0.5 MARK)
3. Evaluate any unusual or unexpected relationships identified in performing analytical procedures which may
indicate a risk of material fraud. (0.5 MARK)
4. Evaluate whether any fraud risk factors are present. (0.5 MARK)
(maximum 03 marks)

Auditor’s responsibilities if a fraud is suspected:

As a general rule, the auditor should communicate any suspicion of fraud to a level of management or governance above the level
thought to be involved in the fraud(1 MARK). The auditor may be required to report fraud to outside agencies, and in this case the
auditor would need to get legal advice(1 MARK).

(b)
(i) The person could create fictitious medical claims and may issue payments to fictitious doctors/hospitals. (1 MARK)
(ii) Inventory manager may cover up his own mistakes or fraud by not reporting differences or by adjusting differences with fake
entries in reconciliations (1 MARK).
(iii) The former petty cash custodian apparently had more expenditures than the new one. Maybe the former one was running
false expense claims (1 MARK).
(iv) To audit for fictitious sales, you should inspect the accounts of sales and receivables (1 MARK).

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 Suggested Solution
Q. 4 (a) Sufficient appropriate audit evidence has not been obtained to support the conclusion (0.5 MARK). To conclude that the balance is
fairly stated, all material assertions must be verified (0.5 MARK). Test counts should also have been selected from the factory floor and
checked to the client’s inventory sheets to test for completeness (0.5 MARK). In addition, no work has been carried out on the
valuation and allocation assertion (0.5 MARK).

(b) Sufficient appropriate audit evidence has not been obtained to support the conclusion (0.5 MARK). Failing to complete the ‘prices
checked’ box means that there were three deviations out of 20 for the test of existence (1 MARK). The fact that the prices were correct
is not relevant when checking the control (0.5 MARK).

(c) Sufficient appropriate audit evidence has not been obtained to support the conclusion (0.5 MARK). Monica has not considered the
possible effect of the sales returns on other accounts (0.5 MARK), such as valuation and allocation of the inventory of Product 75L, and
the need for a provision for warranty if the goods are faulty (0.5 MARK).
Further, large number of sales return after the year is also indicative of fraudulent financial reporting. (0.5 MARK)

(d) Sufficient appropriate audit evidence has not been obtained to support the conclusion (0.5 MARK). The primary risk with the
advertising expenses is understatement (0.5 MARK), considering the 50 per cent reduction from the previous year (0.5 MARK). However,
the testing done has been only for overstatement (0.5 MARK).

(e) Sufficient appropriate audit evidence has not been obtained to support the conclusion (0.5 MARK). Monica has found three items
to be in error, as they had not been properly accrued. As all amounts relate to services, this might reflect that company’s controls
over recording of accrual of services are weak (1 MARK). There may be other amounts owing for services which are not accrued. A
further sample of payment for services should have been selected (0.5 MARK).

Q. 5 (a)
General IT Controls:
 Controls over System Acquisition and Development (0.5 MARK)
 Controls over Program Changes (0.5 MARK)
 Controls over use of Programs and Data (0.5 MARK)
 Access Controls (0.5 MARK)
 Controls over Data Center and Continuity in Operations (0.5 MARK)
Application Controls:
 Input Controls (0.5 MARK)
 Controls over Processing (0.5 MARK)
 Controls over Output (0.5 MARK)
 Controls over Master File and Standing Data. (0.5 MARK)
(maximum 04 marks)

(b)
Following are main types of computer programs available for testing audit client’s files:
 Interrogation programs: These are used to access the client’s files and records and to extract data for auditing. (1 MARK)
 Interactive software: These are used in interrogation of on-line IT systems. (1 MARK)
 Embedded Audit Facilities: It is auditor’s computer programs that is built into the client’s IT system to allow the audit to
carry out tests at the time transactions are processed in ‘real time’. (1 MARK)

(c)
Following functions of generalized audit softwares are useful for audit tests
 Sampling function (used to stratify population, or to select sample) (1 MARK)
 Materiality determination. (used to determine and revise materiality) (1 MARK)
 Data analysis function (to detect unusual items) (1 MARK)
 Variance analysis function (in performing analytical procedures) (1 MARK)
(maximum 03 marks)

(d)
 Auditor may have to request client to keep copies of records for audit purposes. (1 MARK)
 Auditors also could plan to perform certain audit procedures at an interim date while the information they require is still
available. (1 MARK)
 Auditors may use ‘embedded audit facilities’. (1 MARK)
(maximum 02 marks)

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 Suggested Solution
(e)
Evidence obtained directly from the bank is more reliable than a copy of the bank statement obtained from the client(01 MARK). Also,
the bank confirmation will provide other information besides the balance, such as other accounts held by the bank, securities held
by the bank (01 MARK).

(f)
If relationships are inconsistent with other information or difference between expected value and actual value is significant,
auditor shall investigate the difference by:
1. Inquiring of management, (0.5 MARK)
2. Obtaining evidence to corroborate management’s response (0.5 MARK). This evidence is obtained by taking into account:
 auditor’s understanding of entity and its environment and (0.5 MARK)
 other audit evidence obtained during audit (0.5 MARK)
3. Perform other audit procedures (e.g. tests of details) (0.5 MARK) if :
 management is unable to provide an explanation, or (0.5 MARK)
 explanation together with the audit evidence obtained is not considered adequate. (0.5 MARK)
(maximum 03 marks)

Q. 6 (a)
Sample has not provided a reasonable basis for conclusion about population that has been tested (1 MARK). Auditor shall perform
further substantive procedures (1 MARK).

(b)
(i) The audit assistant’s conclusion is incorrect because:
• Whether or not the errors resulting from control breaches are immaterial in amount is irrelevant; the issue is that
the breaches occurred. (1 MARK)
• The tolerable rate of deviation of 5% was ignored when evaluating the test results. The actual rate of deviation of 8.3
% (2 of 24) for the test is greater than the tolerable rate, indicating that the controls are not operating effectively. (1
MARK)

• The fact that the client corrected the error based on information provided by audit staff is irrelevant; the issue is
that the breaches occurred. (1 MARK)
(maximum 02 marks)
(ii) The audit assistant should have concluded that controls over payroll are not operating effectively. (1 MARK)

(c)
Key factors to consider when designing a sampling approach:
1. Population should be stratified between “5 customers representing 65% population”, and “ remaining customers
representing 35% population”. (1 MARK)
2. All 05 customers representing 65% population should be selected as they represent small number of large items. (1 MARK)
3. From 35% population, items should be selected focusing on overdue debts (0.5 MARK). Therefore, some customers should
randomly be selected(0.5 MARK).
(maximum 02 marks)

Q. 7
(a) Category of
Explanation
Issue threat to (b) Safeguard
independence
Chris presents an intimidation threat by The advocacy threat and the intimidation
Intimidation threat saying that LTH will find it difficult to threat in relation to Geoff promoting LTH
1. LTH wants (0.5 MARK) continue business engagements with CJ are significant, and no safeguards could
Geoff to promote
Advocacy threat (0.5 should Geoff refuse to represent LTH. reduce the threat to an acceptable level.
its business. MARK) LTH wanting Geoff to present a speech to Geoff should therefore refuse to accept this
promote its business to attract more appointment (1 MARK).
investors will create an advocacy threat.
Chris made it clear, in giving the holiday The self-interest and familiarity threats of
Self-interest threat
2. LTH is offering (0.5 MARK)
voucher to you and Geoff, that he is the complimentary gift vouchers are
you and Geoff anticipating they will reciprocate by way of significant, and no safeguards could reduce
Familiarity threat
complimentary (0.5 MARK)
a ‘smooth audit’. This gift is therefore the threat to an acceptable level. Therefore,
holiday vouchers. neither trivial nor inconsequential, and thus you and Geoff should refuse to accept these
creates self-interest and familiarity threats. gifts. (1 MARK)

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 Suggested Solution
(a) Category of
Explanation
Issue threat to (b) Safeguard
independence
Michael’s father, who is LTH’s financial The self-interest, familiarity and
controller, has a significant influence over intimidation threats in relation to Michael’s
Familiarity threat
(0.5 MARK)
the preparation of LTH’s financial relationship with LTH’s financial controller
3. Michael is statements. Having Michael in the audit can be eliminated by removing Michael from
Intimidation threat
related to LTH’s (0.5 MARK)
team creates self-interest, familiarity and the audit team (0.5 MARK). The threat could also
financial intimidation threats. be reduced to an acceptable level by
Self-interest threat
controller. (0.5 MARK)
structuring Michael’s responsibilities to
ensure he does not deal with matters that
are within the scope of his father’s
responsibilities. (0.5 MARK)
4. Annette was Annette’s involvement with the audit team The self-review threat of Annette having
involved in the in reviewing LTH’s tax calculations, which worked on LTH’s tax calculations can be
Self-review threat (1
preparation of MARK)
she helped to prepare, creates a self-review eliminated by removing her from the audit
LTH’s financial threat . engagement. (1 MARK)
report.
(there will be no marks if irrelevant threat is identified).

Q. 8
Control Test of control
(i) Requisitions by production department are Select a sample of purchase orders filed in the purchasing department(0.5
required before purchase orders are prepared by the MARK) and inspect corresponding purchase requisitions, ensuring
purchasing department. agreement of details. (0.5 MARK)
(ii) Purchase orders are placed with approved Select a sample of voucher packages (0.5 MARK)and trace the supplier details
suppliers only. to the approved suppliers list to ensure the use of approved suppliers
only. (0.5 MARK)
(iii) Purchase order and receiving report are Select a sample of purchase vouchers (0.5 MARK)and examine for evidence of
reconciled before a voucher package is prepared. purchase order and receiving report matching and reconciliation, and
appropriate follow-up. (0.5 MARK)
(iv) The purchasing, receiving, accounts payable and Observe that the purchasing, receiving, accounts payable and cash
cash payments functions are segregated. payments functions are performed by different individuals or
departments. (1 MARK)

Q. 9 (a)
a) Inquire management regarding estimates used in calculation of provision for bad debts. (1 MARK)
b) Obtain aged receivable ledger. Compare it with control account and test the aging. Review the aged receivable ledger to
identify any slow moving or old receivable balances. Discuss the status with the management to assess whether they are likely
to pay. (1 MARK)
c) Examine whether there are any cash recovery of doubtful debts or bankruptcy after balance sheet date. (1 MARK)
d) For large overdue balances, review financial statements of debtors and discuss with management likelihood of their collection.
(1 MARK)

e) Recalculate provision for bad-debts using sales, write-offs and current economic conditions of customers. (1 MARK)
f) Inquire management about any disputes with customers and review board minutes for disputed receivables. (1 MARK)
g) Review communication of client with customers, lawyers and collection agencies regarding debts which are in dispute or
unlikely to be paid. (1 MARK)
(maximum 03 marks)
(b)
Primary Assertion Procedure
Existence(0.5 MARK) Inspect legal and purchase documents to ensure existence, valuation and right of entity
over intangible asset. (1 MARK)
Valuation and 1. Check amortization calculation using client’s policy to ensure its accuracy
Allocation(0.5 MARK) (audit procedures for amortization are same as of depreciation). (1 MARK)
2. Review the possibility of impairment subsequent to acquisition. If so, ensure
impairment loss has been correctly calculated and recorded. (1 MARK)

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 Suggested Solution
(c)
If non-current assets are stated at revaluated amount, ensure that:
1. valuation is performed by a professional valuer, (1 MARK)
2. amount of valuation is reasonable, (1 MARK)
3. valuation is performed for all assets in the same class, (1 MARK)
4. valuation is regularly updated and (1 MARK)
5. valuation is appropriately accounted for in accounts. (1 MARK)
(maximum 04 marks)

Q. 10
Risk Factor Explanation
Gemstones are small and of high value. (0.5 Gemstones have a high risk of theft and so there is a high risk regarding the
MARK) existence of inventory. (0.5 MARK)
EJL has inventory in multiple locations. (0.5 As inventory is held in many locations there is a risk that inventory may be either
MARK) counted twice or not counted at all. (0.5 MARK)
Sales are declining and EJL is having Management will have increased motivation to ensure the financial (debt)
difficulty meeting its debt covenants. (0.5 covenants are met by manipulating the financial report. (There is evidence that
MARK) some directors are pressuring other directors to do this.) (0.5 MARK)
Precious gems are imported from overseas. Errors may be made on the exchange rates used at the time of purchase. There is a
(0.5 MARK) risk that not all cost elements of the inventory are included, such as freight, duties
and brokerage. (0.5 MARK)
Valuation of gems is dependent on their If the appropriate valuation at reporting date has not been applied, there is an
classification and subject to market increased risk of misstatement of inventory due to valuation errors. Given the
fluctuation in price. (0.5 MARK) (Valuation of subjectivity of the classification of the gems, there is a risk that the gems may be
gems was qualified in last year’s auditor’s misclassified and therefore, valued incorrectly. (0.5 MARK)
report.)
Previous year’s auditor’s report was also A disagreement last year about the valuation of intangibles increases the risk of
qualified due to disagreements with misstatements in intangibles this year, as the issue was not resolved. (0.5 MARK)
management over the valuation of
intangible assets. (0.5 MARK)
Down-turn sales and relaxing terms to Risk of debtor write-offs (and bad debts increasing), considering the downturn in
debtors. (0.5 MARK) sales and relaxing of payment terms with stores. (0.5 MARK)
(maximum 2.5 marks for risk identification and maximum 2.5 marks for explanation)

Q. 11 (a)
If audit report has not been provided to entity, auditor shall modify his opinion (01 mark).

(b)
 Auditor shall notify management and TCWG not to issue report to third parties (0.5 mark).
 If despite such notification, management or TCWG issue audit report with financial statements, the auditor shall
obtain legal advice and shall take appropriate action to prevent users from relying on auditor’s report (01 mark).
(c)
1. Auditor shall notify management and TCWG that the auditor will seek actions to prevent users from relying on auditor’s
report (0.5 mark).
2. If despite such notification, management or TCWG do not take necessary steps, the auditor shall obtain legal advice and
shall take appropriate action to prevent users from relying on auditor’s report (01 mark).

Q. 12 (i) Auditor shall express unmodified opinion.

(ii) Auditor shall include paragraphs in his report “Material Uncertainty related to Going Concern” to draw users’ attention
towards this matter.
(iii) Auditor shall express Qualified or Adverse Opinion.
(iv) Auditor shall express Adverse Opinion.
(v) Auditor shall express Unmodified Opinion. However, Emphasis of Matter paragraph will be included in audit report to draw
users’ attention towards this matter.
(01 mark for each situation)

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 Suggested Solution
Q. 13 (a)
(i) Disagreed. If internal controls are weak, auditor should increase his substantive procedures (0.5 mark). Weakness in internal
control should not be included in audit report, as auditor does not express opinion on internal control (0.5 mark).

(ii)Disagreed. Auditor cannot express qualified opinion on his presumption that there may be other undetected frauds (01 mark).
However, he shall respond at overall level to address the risk of fraud (0.5 mark). Further he shall communicate the identified
material fraud to TCWG (0.5 mark).

(b)
(i)
Finance director is wrong, some of audit procedures can be performed even before year end (01 mark). Tenure of auditor’s
appointment is from date of appointment till the conclusion of next AGM (01 mark). It is auditor’s discretion to decide about timing of
audit procedures i.e. whether before year end (interim audit), or after year end (final audit) (01 mark).

(ii)
Sales officer’s argument is wrong. Auditor of a company has a statutory right to require any director, officer or employee of the
company to provide him with such information and explanation as he thinks necessary for the purpose of audit (01 mark).

(iii)
Management’s advice is incorrect. Companies Act 2017 require auditor to state any qualification in his audit report (01 mark)

alongwith its reason and factual position (01 mark).

Q. 14 Faulty Brake System:

1. Provision for 10 million should be recorded as outflow of resources is probable.
2. This is a case of misstatement of 10 million.
3. Amount is material.
4. Auditor shall express Qualified opinion on financial statements.
(0.5 mark for each point)

Contaminated Brake Fluid:

1. 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).
2. Hence there is a misstatement of 50, 000.
3. Amount is not material as 50,000 is less than materiality level 450,000 (9,000,000 * 5%).
4. Auditor shall express unmodified opinion on financial statements.
(0.5 mark for each point)

(THE END)

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