Certificate in Accounting and Finance Stage Examination
22 May 2024
70 minutes – 39 marks
Additional reading time – None
CAF 8 – AUDIT AND ASSURANCE
Test – 6
Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.
Q. 1 You are the partner incharge of quality control department of Mian and Company, Chartered Accountants.
The following independent matters are under your consideration:
(a) Engagement partner’s brother-in-law has joined as CFO on an audit client. (04)
(b) On an unlisted audit client, the audit engagement team prepares financial statements from the trial
balance and proposes adjusting entries. (04)
Required:
Identify and evaluate the threats involved (if any), in each of the above situations and explain the actions
which should be taken as regards the above matters.
Q. 2 (a) Dynamic (Private) Limited (DPL) is a client of your firm. At the finalization stage of annual audit, it was
discovered that a senior member of the assurance team is the co-owner of a property, for the possession of
which DPL has filed a legal case. On investigation, the member informed that the said case is pending for
the last three years and he did not consider necessary to disclose it at the time of commencement of audit.
Required:
Discuss the matters that should be considered and the course of action which may be followed in the above
situation. (05)
(b) Murree Limited (ML) and Bhurban Limited (BL) are listed assurance clients of your firm. BL has filed a
claim of Rs. 50 million in the court in respect of low quality of goods delivered by ML. Upto last year ML
had not acknowledged the claim of BL. However, in the planning phase, you were informed by ML’s
management that in order to avoid bad reputation in the market and to continue its business relationship
with BL, ML intends to settle the dispute by making a payment of Rs. 20 million to BL. The debt of Rs. 50
million is fully provided in the books of BL.
Required:
Being the auditor of both the companies, identify and evaluate the threats for the firm and explain how these
can be reduced to an acceptable level. (04)
Q. 3 Your firm, which has 25 offices throughout the UK, is planning to open a new UK office in the town of
Milton Keynes. The managing director of Robinia plc (Robinia), a property company with numerous
properties throughout the UK, has suggested that your firm leases one of Robinia’s vacant properties in
Milton Keynes at the market rate. Your firm is the external auditor of Robinia.
State with reasons, whether it is appropriate for your firm to lease this property from Robinia (in accordance
with Code of Ethics). (03)
Audit and Assurance Page 2 of 2
Q. 4 You are the manager responsible for the engagement to review the financial information of Riff Ltd (Riff)
on behalf of an external audit client, Alto plc (Alto), a listed company. Alto requested the review as it
intends to acquire the share capital of Riff. The audit junior currently working with you on the review
engagement told you that, yesterday, he purchased shares in Alto because he believes its share price will rise
when the acquisition of Riff is announced. He also told you that he has informed his parents about the
acquisition and has advised them to purchase shares in Alto.
Explain the ethical issues arising in this situation and state the actions you and your firm should take. (04)
Q. 5 You are the audit manager in Farhad and Company, Chartered Accountants. You have specific
responsibility for assessing the risks associated with the firm’s existing and proposed listed clients.
Presently the following matters are under your consideration:
(i) Sherbano Limited (SL) has requested your firm to provide a consent letter for acting as its auditors.
The wife of a partner in your firm is the Director Marketing in SL.
(ii) One of your assurance clients has requested your firm to provide consultancy services in relation to a
proposed transaction with a company based in Singapore. As your firm does not have the expertise
to undertake that assignment, it is considering to refer the assignment to Marvi & Company,
Chartered Accountants. It is expected that your firm would receive a commission of 15% of the
assignment fee from Marvi & Company.
Required:
Discuss the categories of threats involved in each of the above situations and advise the partners as regards
the possible course of action that may be followed. (09)
Q. 6 State Street Limited (SSL) is a public limited company. Their external auditors are Mohammad Din & Co.,
Chartered Accountants. They are also providing taxation services to SSL. You are working as Manager
Audit on the above engagement. You came to know that your firm’s tax services department has agreed
with the management of SSL to represent the Company before the taxation authorities in respect of an
appeal filed by them involving substantial amount of tax demand. In consideration thereof, the tax
department will charge ten percent of the amount of tax relief that may be allowed.
As an audit engagement manager you are not comfortable with the above arrangement as it may impair
independence of the Firm. You are required to put forward a note before the audit engagement partner
highlighting the guidance provided in the Code of Ethics as issued by the Institute of Chartered Accountants
of Pakistan. (06)
(THE END)
