Fraud Risk Assessment

Client Name: MUHAMMADI GAS COMPANY (PRIVATE) LIMITED

Period: 30 June 2021
Name Date:
Prepared by: M Usman
Reviewed by:
Approved by: Waqar Nadeem

Discussion among the Engagement Team

The engagement partner discusses the susceptibility of the entity’s financial statements to
material misstatement due to fraud with the engagement team. In this brain storming session
critical audit areas are discussed. Items typically discussed include previous experiences with
the client, how a fraud might be perpetrated and concealed by the client, and procedures that
might detect fraud. When studying a business operation, auditors’ ability to think like a crook
and devise ways to steal can help in creating procedures to determine whether fraud has
happened. Often, imaginative extended procedures can be employed to unearth evidence of
fraudulent activity.

Matters for Discussions

i) How and where the entity’s financial statements may be susceptible to material misstatement
due to fraud, how management could perpetrate and conceal fraudulent financial reporting,
and how assets of the entity could be misappropriated.

ii) Circumstances that might be indicative of aggressive earnings management that could lead to
fraudulent financial reporting.

iii) The known external and internal factors affecting the entity that may create an incentive or
pressure for management or others to commit fraud, provide the opportunity for fraud to be
perpetrated, and indicate a culture or environment that enables management or others to
rationalize committing fraud.

iv) Management’s oversight of employees with access to cash or other assets susceptible to
misappropriation.

v) Any unusual or unexplained changes in behavior or lifestyle of management or employees

which have come to the attention of the engagement team.

vi) How an element of unpredictability will be incorporated into the nature, timing and extent of
the audit procedures to be performed.

vii) The audit procedures that might be selected to respond to the susceptibility of the entity’s
financial statement to material misstatement due to fraud and whether certain types of audit
procedures are more effective than others.

viii) Any allegations of fraud that have come to the auditor’s attention.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 1
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ix) The risk of management override of controls.

x) An emphasis on importance of maintaining professional skepticism throughout the audit.

Discussions with Management

During the planning phase of an audit, auditor makes enquiries of management

concerning fraud and error. We may also seek the views of those charged with
governance.

Matters that may be discussed as part of these enquiries include:

i) Whether there are subsidiary locations, business segments, types of transactions, account
balances or financial statement categories where the possibility of error may be high, or
where fraud risk factors may exist, and how they are being addressed by management.
Whether those charged with the governance or management have knowledge of any
actual, suspected or alleged fraud.

ii) How those charged with the governance exercise oversight of management’s processes
for identifying and responding to the risks of fraud in the entity and the internal control
that management has established to mitigate these risks.

iii) The work of the entity’s internal audit function and whether internal audit has identified
actual, suspected or alleged fraud or any material weaknesses in the system of internal
control.

iv) How management communicates to employees its view on responsible business practices
and ethical behavior, such as through ethics policies or codes of conduct.

If the entity has established a programme that includes steps to prevent and detect fraud,
we enquire of those persons overseeing such programs as to whether the program has
identified fraud risk factors.

a) Results of enquiries of management

i.Management’s fraud risk assessment

The entity has established an internal audit function which regularly evaluates the operating
effectiveness of internal controls in order to identify the risk of fraud (i.e misappropriation of
assets and fraudulent financial reporting.) Further, there is proper segregation of duties and
individuals are accounted for their responsibilities. Therefore, management’s fraud risk
assessment is low.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 2
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 ii.Oversight of Management by those Charged with Governance.

Management is actively involved in day-to-day operations of entity, under supervision of those

charged with governance. Also, reports submitted by management to those charged with
governance have been obtained and reviewed.

iii.Accounting and internal control systems including internal audit

After enquiries of management, we come to know that accounting and internal control system
have been in place to prevent, detect and correct the risk of material misstatement due to fraud
and error. The presence and working of an internal audit function also corroborates the
management responses to the enquiries.

iv.Fraud and error

Management asserts that they are unaware of any known, alleged or suspected fraud. As internal
controls are operating effectively to prevent, detect and correct material misstatement due to
fraud and error, therefore, no such error or fraud were discovered during the year.

(b) Discussions with those charged with governance

No significant matter comes to our knowledge after through enquiries and discussion with the
management which should be communicated to those charged with governance.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 3
INTERNATIONAL
 Fraud risk factors

(i) Fraudulent financial reporting

Fraud risk factors relating to fraudulent financial reporting may be grouped as follows:

(a) Management Characteristics and Influence over the Control Environment

 Significant portion of management compensation contingent upon achieving aggressive targets

etc.
 Excessive interest by management in maintaining or increasing the entity's share price or earning
trends through the unusual practices
 Domination by single person/ small group without compensating controls
 Setting of unduly financial target and expectations for operating personnel
 Display of significant disregard for regulatory authorities
 Employing ineffective accounting, IT or internal auditing staff
 Participation of non-financial management in selection of accounting principles etc.
 High turnover of management staff or board members
 Strained relationship with existing/ predecessor auditor including frequent disputes, unreasonable
demands, restriction on auditors and domineering management behavior
 Weak or ineffective corporate governance structure

(b) Industry Conditions

 New regulatory etc. requirements, which may impair entity's stability or performance
 Increasing competition and market saturation and declining margins/ customer demands
 Declining industry with increasing business failures
 Rapid changes in industry like rapidly changing technology / rapid product obsolescence

(c) Operating Characteristics and Financial Stability

 Reporting earning/ growth while inability to generate cash flows

 Balances and/ or transactions based on significant estimates involving unusually subjective
judgments/ uncertainties
 Significant related party transactions out of normal course of business
 Significant, unusual, or complex transaction particularly at or near the year-end
 Significant bank account or business locations without clear business justification
 Over complex organisational structure involving various/ unusual legal entities, lines of authority
or contractual arrangements without apparent business purpose
 Unusual rapid growth/ profitability as compare to competitors/ industry
 Dependence on debt, marginal ability to pay debt and difficult to maintain debt covenant
 Threat of imminent bankruptcy, foreclosure, or hostile takeover
 Adverse consequences on significant pending transactions if poor results are reported
 A poor or deteriorating financial position when management has personally guaranteed
significant debts of the entity

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 4
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 Document the fraud risk factors

There were no fraud risk factors identified during our understanding of the business, enquiries
of management and audit team discussion that may indicate the possibility of fraudulent
financial reporting.

Response

No additional audit procedures are applied.

(ii) Misappropriation of assets

Fraud risk factors relating to misappropriation of assets may be grouped as follows:

(a) Susceptibility of Assets to Misappropriation

 Large amounts of cash on hand or processed

 Inventory and other assets' characteristics such as small size with high value and high demand
accompanied with lack of ownership identification
 Easily convertible assets such as bearer bonds, diamonds or computer chips

(b) Susceptibility of Assets to Misappropriation

 Lack of management oversight

 Lacking to screen job applicants for positions where employees have access to assets susceptible
to misappropriation
 Inadequate record keeping for assets susceptible to misappropriation
 Lack of appropriate segregation of duties
 Lack of appropriate system of authorization and approval of transactions
 Poor physical safeguards over assets susceptible to misappropriation
 Lack of timely and appropriate documentation
 Lack of mandatory vacations/ job rotations for employees performing key control functions

Document the fraud risk factors

There were no fraud risk factors identified during our understanding of the business, enquiries
of management and audit team discussion that may indicate the possibility of fraudulent
financial reporting.

Response

. No additional audit procedures are applied.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 5
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(a) Overall consideration

Professional skepticism:

Despite the fact that there were no fraud risk factors identified, audit team shall maintain
professional skepticism throughout the audit to address the risk that fraud risk factors may exist.

Assignment to the audit team members:

Senior audit team members will be assigned high risky areas and junior audit team members
will be responsible for low and moderate risk areas to conduct audit effectively and efficiently.

Accounting principles and policies:

Audit team members will ensure that significant accounting policies and principles are applied
consistently.

Modification in nature, timing, and extent of audit procedures:

No modification due to assessed low risk of misstatement.

(b) Consideration at the account balance, class of transaction and assertion level

Specific responses to the auditor's assessment of the risk of fraud will depend upon the
types or combinations of fraud risk factors or conditions identified, and the account
balance, class of transaction and assertion may affect.

Revenue recognition

Revenue is recognized according to IFRS 15. We shall perform test of controls and test of
details to ensure effective operations of internal controls established by the entity.

Inventory quantities

At the year end, we attended the physical inventory count and obtained evidence about the
quantity and condition of inventory items. We also ensured that management’ s instructions to
count teams were being followed at inventory count.

Non-standard journal entries

No such non standard journal entries were identified during the audit.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 6
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 Others

We have not identified any significant activity that might indicate risk of material misstatement
due to fraud.

(d) Misappropriation of assets

Differing circumstances would necessarily dictate different responses. Document the specific
responses.

No such instances observed.

(e) Circumstances that may indicate the possibility of fraud or error

Document circumstances that we have encountered that may indicate that there is a
material misstatement in the financial statements resulting from fraud or error. Consider
the example circumstances in ISA 240, Appendix 3.

We have not encountered any such circumstances that may indicate that there is a material
misstatement in the financial statement due to fraud or error.

Examples:

 Unrealistic time deadlines for audit completion imposed by management

 Reluctance by management to engage in frank communication with
third parties
 Imposing limitation on audit scope
 Identification of important matters not previously disclosed by management
 Significant difficult-to-audit figures in the accounts
 Aggressive application of accounting principles
 Conflicting or unsatisfactory evidence provided by management or employees
 Unusual documentary evidence such as handwritten alteration to document or handwritten
documentation which is ordinarily electronically printed
 Information provided unwillingly or after unreasonable delay
 Seriously incomplete or inadequate accounting records
 Unsupported transactions
 Unusual transactions, by virtue of their nature, volume or complexity
 Transactions not recorded in accordance with management’s specific or general authorization
 Significant unreconciled differences between control account and subsidiary records or between
physical count and the related account balance which were not appropriately investigated and
corrected on timely basis
 Inadequate controls over computer processing
 Significant differences from expectations disclosed by analytical procedures

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 Fewer confirmation responses than expected or significant differences revealed by confirmation
responses
 Evidence of an unduly lavish lifestyle by officers or employees
 Unreconciled suspense accounts
 Long outstanding account receivable balances

(f) Audit procedures

Document the additional audit procedures performed as a result of the circumstances noted
above.

No additional procedures due to above stated circumstances.

V. Evaluation of Audit Evidence

If the auditor identifies a misstatement, the auditor shall evaluate whether such a
misstatement is indicative of fraud. If there is such an indication, the auditor shall
evaluate the implications of the misstatement in relation to other aspects of the audit,
particularly the reliability of management representations, recognizing that an instance of
fraud is unlikely to be an isolated occurrence.

If the auditor identifies a misstatement, whether material or not, and the auditor has
reason to believe that it is or may be the result of fraud and that management (in
particular, senior management) is involved, the auditor shall re-evaluate the assessment
of the risks of material misstatement due to fraud and its resulting impact on the nature,
timing and extent of audit procedures to respond to the assessed risks. The auditor shall
also consider whether circumstances or conditions indicate possible collusion involving
employees, management or third parties when reconsidering the reliability of evidence
previously obtained.

If the auditor confirms that, or is unable to conclude whether, the financial statements are
materially misstated as a result of fraud the auditor shall evaluate the implications for the
audit.

Results of Evaluation

No such indicators present.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 8
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 Communications to Management and with Those Charged with Governance

If the auditor has identified a fraud or has obtained information that indicates that a fraud
may exist, the auditor shall communicate these matters on a timely basis to the
appropriate level of management in order to inform those with primary responsibility for
the prevention and detection of fraud of matters relevant to their responsibilities.

Unless all of those charged with governance are involved in managing the entity, if the auditor
has identified or suspects fraud involving:

(a) management;

(b) employees who have significant roles in internal control; or

(c) others where the fraud results in a material misstatement in the financial statements, the auditor
shall communicate these matters to those charged with governance on a timely basis. If the
auditor suspects fraud involving management, the auditor shall communicate these suspicions
to those charged with governance and discuss with them the nature, timing and extent of audit
procedures necessary to complete the audit.

VI. Written Representations

The auditor shall obtain written representations from management that:

(a) It acknowledges its responsibility for the design, implementation and maintenance of internal
control to prevent and detect fraud;

(b) It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud;

(c) It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:

(i) Management;

(ii) Employees who have significant roles in internal control; or

(iii) Others where the fraud could have a material effect on the financial statements; and

(d) It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by employees, former employees,
analysts, regulators or others.

MUNIFF ZIAUDDIN & CO. CHARTERED

ACCOUNTANTS A MEMBER FIRM OF BKR 9
INTERNATIONAL