Certificate in Accounting and Finance Stage Examination

The Institute of 2 March 2021

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

Audit and Assurance

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.

Q.1 You are the audit manager responsible for the audit of NKL Limited for the year ended
28 February 2021. The audit team has prepared the following summary of debtors’ balances
for your review:

Summary of debtors’ balances and their confirmed amounts as at 31 January 2021

Assertions verified: Completeness, Cut-off and Rights and Obligations
Balances (Rs.)
S.No. Debtor(s) confirmed Comments
as per books
by debtor(s)
(i) Alpha 800,000 800,000 -
(ii) Beta 900,000 900,000 Confirmation was returned by the
courier on the grounds of invalid
address. Confirmation was resent by
the client through its rider. The reply
was received directly by the auditor.
(iii) Gamma 700,000 No reply Gamma has gone into liquidation.
received
(iv) Small 600,000 Not These represent various small
distributors applicable distributors whose balances were
below Rs. 30,000. Due to immaterial
balances, they weren’t selected for
sending confirmation.

Required:
Assess the appropriateness of the work performed by the audit team. Also suggest the
additional procedures (if any) which the audit team may perform. (10)

Q.2 (a) Salman is the shareholder of Polkadot Limited (PL) and wants to appoint auditor
other than the existing auditor as proposed by the board.

Required:
In the light of the Companies Act, 2017 briefly explain the process that Salman should
follow in the above situation. Also discuss the requirements that PL should follow. (05)

(b) Afaq & Co has been appointed as the auditor of Ethereum Limited (EL) in place of
retiring auditor in the AGM.

Required:
List the additional matters that you should consider in the first year of EL’s audit. (04)
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(c) Your firm is the auditor of Monero Limited (ML).

ML’s financial statements were issued on 28 February 2021. However, after receiving
a High Court judgement on 2 March 2021, ML’s management assesses its impact and
has decided to revise its financial statements.

Required:
Discuss the documentation that is necessary to be included in the audit working file
regarding the above matter. (03)
Note: Audit procedures are not required.

Q.3 During the audit of Tether Limited (TL), the audit senior noticed that in one of the floors of
the office building, a business other than that of TL was being run. On inquiry with TL’s
management, it was identified that the floor was given to the daughter of a director for six
months for running her online business. No rent is being charged as it has been a vacant
floor and carries no marginal cost to TL.

Required:
Evaluate the above arrangement and discuss the procedures which should be performed by
the audit senior. (09)

Q.4 Cardano Limited (CL) is engaged in the business of assembling motor bikes. CL has a fully
integrated Computerised Accounting System (CAS). You have been given responsibility for
reviewing the internal controls relating to procurement. In this respect, you have gathered
the following information:

Ordering of inventory:
 Approved supplier’s list is maintained in CAS. The list was last reviewed for changes
two years ago. However, during the intervening period, any supplier whose
performance is not satisfactory is timely removed from the list. As a control measure,
the list is accessible and editable only by the employees of Procurement Department
(PD).
 The Inventory Control Department (ICD) of CL generates a numerically sequenced
Purchase Requisition (PR), when the quantity of a particular inventory item reaches
re-order level. PR is electronically forwarded within the CAS to the PD.
 For all regular and routine orders, PD reviews the PR and selects a supplier from the
approved supplier’s list. A Purchase Order (PO) having a unique sequential order
number is then generated for the selected supplier.
 For large or out of the ordinary purchases, a tendering process is carried out by the
PD. Procurement Manager invites tenders through an advertisement in newspaper
and the supplier offering the lowest price is selected by the Procurement Manager in
consultation with Head of Procurement.

Receiving of inventory:
 When inventory items are received, the officer in ICD confirms that the inventory
agrees to the PO. The CAS is then updated to confirm receipt of inventory and an
electronic numerically sequenced Good Received Note (GRN) is generated. The
physical inventory items are then transferred to store.

Required:
Identify any six weaknesses in the internal control system of CL and their possible effects.
Also give your recommendations to overcome these weakness to CL. (12)
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Q.5 (a) You are the audit senior on the audit of Nano Footwear Limited (NFL) for the year
ending 31 March 2021. NFL is in the business of making a wide variety of footwear
products. Your review of the last year working papers and initial meeting with the
NFL management have revealed the following:

(i) Due to a high influx of low priced Chinese products in the local market, NFL
has been experiencing a decline in customers’ demand and high degree of
competition. The sales managers have been given aggressive sales targets during
the year which are their key performance indicators and are considered in their
annual appraisals.

(ii) All the management and policy decisions such as human resources, accounting
estimates and procurement are taken by the CEO himself.

Required:
Briefly discuss the possible ‘fraud risk factors’ from the above scenario. (06)

(b) Discuss what actions that an auditor should take on identification of the fraud risk
factors. (05)

Q.6 You are a partner in a firm of chartered accountants. Following independent matters are
under your consideration:

(i) The draft financial statements of Elrond Pakistan Limited (EPL) for the year ended
31 January 2021 include inventory of Rs. 26 million that was purchased on
1 January 2021 for fulfilling a large specialized order of a foreign customer. Due to
sudden imposition of import restriction in the foreign country, the customer cancelled
the order on 28 January 2021. The draft financial statements show that EPL’s profit
before tax is Rs. 130 million.

(ii) During the audit of Stellar Limited (SL), the management informed the audit team
that its largest customer, Ether Limited (EL) has recently notified that it will not
renew its contract with SL, which is due to expire on 30 June 2021. Sales from EL
constitutes 70% of the total revenue. The management has further informed that they
are in negotiation with EL and are hopeful to retain the customer.

Required:
For each of the above independent matters:
(a) state the audit procedures which may be performed by your audit team. (08)
(b) discuss with reasons, the implication(s) on the audit report. (10)

Q.7 Your firm is the auditor of Iota Limited (IL) and audit report is expected to be signed on
10 March 2021.

IL’s management has just informed you that due to certain personal reasons, CEO will not
be available from 5 March 2021 to 15 March 2021. They have provided you with the
following alternate options:

(i) CEO will sign all the representations either on 4 March 2021 or 16 March 2021.
(ii) CEO will call on 10 March 2021 to the engagement partner and will verbally confirm
all the representations required by the auditor.

Required:
Comment on the acceptability of each option with reason(s) and suggest the best course of
action for obtaining the representations in the above scenario. (06)
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Q.8 (a) Describe any four limitations of flow chart as a tool of system documentation. (04)

(b) Companies having large in-house developed software, have a risk that new programs
might be introduced without proper authorisation. Briefly discuss any four general IT
controls to mitigate this risk. (04)

(c) Discuss the effects on application controls where general IT controls are ineffective. (02)

Q.9 You are the Ethics and Quality Control Manager in an audit firm namely HMB Chartered
Accountants. The audit manager responsible for the audit of Fantom Limited (FL), has
started the audit planning for FL and come across the following matters for which he needs
your guidance:

(i) Fizza was planned to be the engagement supervisor for the audit of FL. She has
received an employment offer from FL. However, she is considering not to accept
FL’s employment offer.
(ii) FL is the main sponsor of the ongoing cricketing event. Being the main sponsor, FL
has received some entry passes of VIP enclosure of the final match. It has offered three
such passes to the audit team members.
(iii) Your firm is under renovation process and about to procure two central air
conditioning systems through tendering process. Your firm has received quotations
from various vendors including FL. The total expenditures for purchase and
installation of two central air conditioning units are expected to be Rs. 50 million.
(iv) FL has offered your firm that the fee for taxation services of this year may be based on
a percentage of tax saved.

Required:
Identify the threat(s) which may arise and evaluate their significance. Also recommend the
course of action or the mitigating actions which may be taken by your firm. (12)

(THE END)