Practice Case Studies

Case Study 1
Pelican Limited (PL) is audited by Faraz Naeem Rajput & Company, Chartered Accountants.
Faraz Paracha, PL's engagement partner, became ill during the engagement for the year ended
31 March 2023 and was replaced by Raja Jibran, who had recently joined the firm as a partner.
Raja Jibran formerly worked as a senior manager audit at Kareem & Company, Chartered
Accountants.

The engagement is nearing to the finalization stage, and the audit team has identified that the
management has capitalized initial operating losses on a new production plant as a trial run
loss. Upon further inquiry with PL’s management, they informed that the business feasibility
and cash flow projections of the new production plant were undertaken by Kareem &
Company. The new production facility started commercial production, and the management
identified that an important cost element was missed by Kareem & Company, which resulted
in initial operating losses. On the advice of Kareem & Company, PL had capitalized these
losses in the cost of the plant.

Furthermore, PL’s management expressed surprise that the audit team identified this issue at
the finalization stage, as Raja Jibran was part of Kareem & Company team and should have
considered this earlier. Raja Jibran was upset and furious with the audit team that why they
had not discussed the issue with him before bringing it up with the client. He has strictly
instructed the audit team members not to discuss any audit issues with others before
discussing it with him.

Required:
In light of ICAP’s Code of Ethics, identify and evaluate the threats involved in the above
situation and explain the course of action that should be taken to resolve the issue.

Case Study 2
You are the audit manager responsible for the audit of Apparel (Pvt.) Limited for the year
ended 30 September 2022.

During the audit, your team has observed that some unusually high amounts of cash sales
were made to distributors, against which only distributors’ purchase orders, sales invoices and
cash receipts are available for audit verification. On inquiry, your team observed that the
management had a defensive and unusual stance in responding to audit team’s questions. The
team has also noted that these distributors had similar delivery addresses and were mostly
located in the residential areas.

Required:
Analyse your team’s observation regarding above cash sales transactions and advise the
course of action that your team should follow.
Discuss the implication(s) of the above, on the audit report.
Case Study 3
MF Momin, Shams & Company is a firm of chartered accountants (the firm) which
was initially registered with two partners namely Momin and Shams, in the year 2011
with offices in Karachi and Islamabad. In 2020, the firm got affiliation with a reputed
international firm namely Missouri Fox (MF) which resulted in increase in clientele of
the firm especially in the province of Punjab. As a result, the firm has established its
new office in Lahore.

You are the quality control partner in the firm. While reviewing the annual revenue
earned by the firm for the year ended 31 December 2020, you have extracted the
following information from the firm’s books of accounts:

Firm’s offices Firm’s partners

Clients Karachi Islamabad Lahore Momin Shams Others
------------------------ Rs. in ‘000 ------------------------
Audit and assurance
services
Pervez Limited (PL) 2,730 - - - 2,730 -
Amin (Pvt) Ltd (APL) - - 1,680 - - 1,680
Salman Limited (SL) - 4,000 - 4,000 - -
Tania Limited (TL) 1,100 - - - 1,100 -
Other clients 3,800 3,000 6,000 3,000 1,800 8,000
Consultancy and
other services
Pervez Limited (PL) 500 2,000 500 - - 3,000
Amin (Pvt) Ltd (APL) - - 1,480 - - 1,480
Salman Limited (SL) 1,500 - 1,300 - - 2,800
Tania Limited (TL) 200 - - - 200 -
Other clients 4,170 6,000 2,040 3,000 3,170 6,040
14,000 15,000 13,000 10,000 9,000 23,000

Other information:
(i) PL, SL and TL are listed companies whereas APL is the first multinational
client of the firm.
(ii) All the clients have already re-appointed the firm for their subsequent statutory
audit.
(iii) Shams is also entitled to 20% additional commission of the total fees earned
from PL.

Required:
In the light of ICAP’s Code of Ethics for Chartered Accountants, evaluate the
implications of revenue earned from PL, APL, SL and TL on the firm and suggest the
safeguard(s), if any, available to the firm and partners.

Case Study 4
 Audit, Assurance and Related Services Page 2 of 4

(b) Other clients in (a) include Hafiz Limited (HL) and Chand Limited (CL) which have
not yet paid the audit fees for the year ended 30 June 2020. The audit report for HL
was issued three months ago but HL has still not paid the balance 50% of audit fee,
while the audit report for CL has not been issued due to certain pending issues.
Required:
Discuss the course of action available to the firm in the above situation.

Case Study 5
You are the audit manager in a firm of chartered accountants responsible for the statutory
audit of Hackney Pharma Limited (HPL) which is principally engaged in the business of
manufacturing and sale of pharmaceutical products.
Extracts from HPL’s statement of profit or loss for the year ended 31 May 2021 are as
follows:
2021 2020
Description
---------- Rs. in '000 ----------
Sales 3,343,214 3,213,435
Sales returns (72,519) (73,202)
Sales – net 3,270,695 3,140,233
Cost of sales (1,895,590) (1,860,579)
Selling & marketing expenses (94,089) (93,629)

During the planning meeting for the year ended 31 May 2021, HPL’s management informed
you about the recall notice issued in respect of HPL’s flagship product ‘Azteca’. The notice
was published in a local newspaper on 1 May 2021. The notice was issued on the advice of
the drug regulatory authority following complaints received with regard to development of
unexpected side effects in some users of the product.

Azteca is a patent product under the licensing agreement with Global Healthcare
Laboratories (GHL), a multinational company, signed in year 2017. Under the agreement,
HPL manufactures and sells Azteca for 10 years against payment of upfront license fee of
Rs. 300 million. HPL is also subject to penalties in case of use of substandard raw material
in the manufacture of Azteca. The raw material is imported from foreign countries.
Currently, GHL is investigating the reason for the defect/unexpected side effects.

The management has also informed you that this product recall has not only affected HPL’s
sales but has also created working capital issues. HPL took immediate steps such as
commenced negotiation with the bank for financing working capital and launched
aggressive marketing campaign in May 2021 to boost the sale of its other products.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of identified risks.

Case Study 6
You are the audit manager responsible for the audit of Kamran Limited (KL) for the year
ended 31 May 2021. On 1 October 2020, KL raised Rs. 400 million by issuing convertible
bonds (having par value of Rs. 100 each). The bonds are convertible to KL’s ordinary shares
in 5 years' time at the option of bond holders. The convertible bonds carry coupon rate of
5% payable on 30 September each year.

KL’s total shareholders equity as at 31 May 2021 was Rs. 3,250 million.

Required:
(a) Specify the matters to be considered by the auditor while planning the audit of
convertible bonds. Also suggest the related audit procedures.
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(b) Discuss the reporting implication(s), assuming that KL believes that at least 30% of
the bonds would be converted to equity at the end of year 5 and have therefore
recorded Rs. 120 million as equity and the remaining amount as liability.
 Audit, Assurance and Related Services Page 4 of 4

Case Study 7
You are the audit manager in a firm of chartered accountants responsible for the
statutory audit of Fazal Limited (FL) for the year ended 31 March 2021.
During the audit, your audit team was informed that on 1 January 2021, FL entered
into a sale and leaseback agreement with Arabian Leasing Company (ALC) for its
head office property situated at premier commercial hub. FL sold the property to ALC
at fair value with useful life of thirty years as assessed on the date of sale.
Subsequently, ALC leased back the property to FL for a period of ten years.

Required:
State the audit procedures which may be performed in respect of the above
transaction.

(b) Saleem & Company, Chartered Accountants is the statutory auditor of Duo Limited
(DL). The management of DL has prepared summary financial statements, which
have been derived from DL’s statutory financial statements for the year ended
31 December 2020. The management intends to make a statement that the summary
financial statements have been derived from the financial statements for which audit
report was issued by Saleem & Company on 25 February 2021.

Required:
Discuss whether DL can include such a statement in the summary financial
statements and the course of action that the firm should take in this regard.

Case Study 8
Gama Pakistan Limited (GPL) is planning to expand its business by manufacturing
telecommunication accessories. For this purpose, GPL intends to obtain financing from a
bank for the planned expansion. To meet the bank’s requirement, GPL has prepared a five
years’ cash flow forecast based on management’s estimates. GPL has requested your firm to
review the forecast and furnish a report thereon.

Following information is available to you in respect of the forecast:

(i) GPL has secured agreement with two mobile phone manufacturers under which it
would be able to sell 30% of its production capacity. The mobile phone manufacturers
would pay to GPL after selling the accessories to the wholesalers.
(ii) The telecommunication accessories would be sold to mobile phone manufacturers
with one-year warranty.
(iii) During the first year, the supplies to the customers would be made through delivery
trucks; however, in order to reduce the delivery cost to other cities, cargo train would
be used from second year of production. Negotiations with railway authorities are
underway.
(iv) Royalty would be paid to a foreign company for acquiring the right to manufacture
certain accessories.
(v) A significant reduction in the cash outflows on account of income tax has been
forecasted in the years 3, 4 and 5. The management has placed a comment in support
of this reduction that the taxation authorities have principally agreed to reduce tax
rates for companies manufacturing ‘telecommunication equipment and related
accessories’ and the announcement of the reduction in tax rates will be made in the
next budget.

Required:
Discuss the key examination procedures that your firm would perform in respect of the
above information. Also discuss the reporting implication(s), if any. (14)
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Case Study 9
You are the audit manager at Salman, Pervez and Company, Chartered Accountants. You are
responsible for the audit of United Health Limited and its group financial statements for the
year ended 31 May 2021. Following information have been provided to you by the audit
team:

Profit before Total

Revenue
Name of company tax assets
------------- Rs. in million -------------
United Health Group (Consolidated) 75,000 11,000 69,000
United Health Limited 24,773 2,900 24,484
Quality Labs Limited 54,000 8,100 44,000

United Health Limited (UHL):

Due to COVID-19 pandemic, UHL has witnessed significant decline in sales. In order to
meet the sales target, UHL entered into five large contracts with its customers for supply of
its products. All these customers carried risks of either non-payments or delayed payments.

In addition to the above, UHL also entered into a contract for supply of lab equipment.
UHL had agreed to a pricing model in which 80% of the contract amount will be received as
the regular price of the equipment and 20% will be received as performance bonus subject to
timely delivery of equipment. UHL has always been able to deliver all its equipment within
the agreed time. However, due to COVID-19 lockdown in the country of import, UHL may
not be able to receive the lab equipment on time and consequently UHL may not be able to
timely supply it to the customer.

Quality Labs Limited (QLL):

Up to last year, the group audit team made local site visit to the component auditor team in
Spain to review key audit working papers and attended closing meetings with local
management as Spain does not allow the cross border sharing of health data. However, due
to COVID-19, Spain has imposed a strict lockdown and has placed travel restrictions which
may continue for at least next 30 days.

Required:
(a) Critically evaluate the issues brought to your notice and advise the course of action.
(b) Discuss the reporting implications on the group financial statements due to the
auditor’s inability to obtain sufficient appropriate audit evidence regarding QLL’s
financial statements.

Case Study 10

(a) You are the audit manager of Maryam & Company, Chartered Accountants,
responsible for planning the audit of Turbo Pakistan Limited (TPL) for the
year ending 30 June 2022. TPL is engaged in selling branded motorcycles which it
imports from China.
After obtaining the preliminary understanding and performing the related procedures,
your audit team has presented the following significant matters:
(i) TPL provides one-year warranty on the motorcycles. The warranty covers free of
cost repair of any defect and replacement of any faulty part. Up to last year, TPL
maintained a warranty provision of 6% of total sales.
The management has informed that the quality of motorcycles has significantly
been improved over the period and they are considering the reduction in warranty
 Audit, Assurance and Related Services Page 6 of 4
provision. The audit team reviewed the last year provision and observed that actual
claims were slightly higher than the provision.
(ii) During the year, in order to boost sales, TPL has relaxed its credit policy from
30 days to 60 days. This relaxation is expected to increase the sales by at least
10% as compared to last year. Up to last year, TPL maintained provision for bad
debts at 5% of the total debtors balance at year-end. The management has informed
your audit team that TPL will continue to maintain the same level of provision for
current year as well.
(iii) The internal auditors of TPL reported that cash collected from certain small dealers
were not recorded and deposited in the bank on timely basis and they have
recommended to avoid cash collections from dealers.

Required:
Identify and discuss the audit risks from the above information and explain auditor’s
response to each risk in planning the audit of TPL. (Reporting implications are not
required) (12)

(b) During the planning phase, your audit team has been informed that TPL has been
investing heavily in Information Communication Technology (ICT) infrastructure. This
has helped them to grow substantially and they have established their presence across
30 cities in Pakistan. For this purpose, TPL has formed a separate department for
managing the ICT’s operations including identification and management of the possible
risks and threats to the ICT infrastructure and processes.
This department is also subject to the oversight of the internal audit department that
carries out the risk assessment whenever asked by the audit committee. The latest risk
assessment was carried out by the internal audit department in 2021, in which they had
identified and established updated mapping of the business functions, roles and
supporting processes to identify interdependencies related to ICT and security risk. The
next such exercise is planned to be conducted in 2023, in which they intend to classify
the identified business functions, supporting processes and information assets in terms
of criticality.
 Audit, Assurance and Related Services Page 2 of 5

Required:
Identify the control weaknesses in the above situation and suggest the improvements
that TPL should introduce in order to overcome these weaknesses.

Case Study 11
You are the audit partner of Mansoor Akram and Company, Chartered Accountants.
Following significant matters have arisen at different audit clients of your firm where audit
field work has been completed:
(a) The management of Popeye Limited (PL), a listed company, has informed you that
one of its competitors has initiated a legal action against the company on grounds of
infringements of patent rights and is seeking damages of Rs. 200 million. In the draft
financial statements, PL has made the following disclosure in this regard:
Litigation is in the process against the company relating to a dispute with a
competitor who alleges that the company has infringed patents and is
seeking damages of 200 million. The information usually required by IAS
37 is not disclosed on the grounds that it can be expected to prejudice
seriously the outcome of the litigation. The directors are of the opinion that
the claim can be successfully resisted by the company.
Being an area of higher assessed risk of material misstatement which involved
significant judgement, the audit team has made substantial efforts to review the details
of litigation.

(b) During the course of audit of Buzz Limited (BL) for the year ended 31 March 2022,
your audit team identified that there were three overdue instalments of the long term
loans. On enquiry, the management informed your team that they were negotiating a
loan restructuring agreement with its banks since February 2022 and had formally
signed it with the bank on 7 April 2022. Under the agreement, payment of principal
amount has been relaxed in accordance with BL’s cash flow forecast and outstanding
interest has been converted into a two-year loan. The first repayment of principal is
now due in July 2023. All the amounts have been adjusted and disclosures have been
made in the financial statements on the basis of the restructuring agreement.

(c) During the physical stock count at the audit of Captain Limited (CL), certain expired
stock items were identified which were included in the year-end stock balance at their
carrying value. The management represented that they have maintained a 10% general
provision of Rs. 15 million for slow moving and obsolete stocks in the financial
statements and consequently no specific provision is required for expired stock items
identified during physical count. On further enquiry, the management informed that
this provision has been maintained for last many years but they failed to substantiate
the basis of this provision.
The carrying value of stock in trade at year-end was Rs. 55 million net of general
provision.

(d) During the year, Winnie Limited (WL) has obtained an office building under a
three-year lease period for relocating its head office. According to lease contract, WL
has the right to cancel the lease anytime by giving one-month notice. Furthermore,
after the lease, WL has incurred substantial leasehold improvement costs on the office
building.
Considering the lease cancellation option, the management has not recorded right of
use assets and related lease obligations as they were of the view that since WL has the
right to cancel the lease anytime, it is not a long term lease. Similarly, all leasehold
improvement costs were expensed out immediately.

Required:
 Audit, Assurance and Related Services Page 3 of 5
Discuss the auditor’s course of action along with implications on the audit report.
(Audit procedures are not required)
 Audit, Assurance and Related Services Page 4 of 5

Case Study 12
You are the manager responsible for the audit of Casper Limited (CL), for the year ending
30 June 2022. CL manufactures parts for medical equipment.
CL has been facing issues related to toxic emissions in its manufacturing process. In the last
five years, a Government Environmental Agency (GEA) imposed fine between Rs. 3 million
to Rs. 5 million each year.
In May 2022, CL has installed a new filter in its manufacturing plant at a cost of
Rs. 20 million, to process toxic emissions. The new filter is expected to reduce the toxic
emissions by over 95%. It is expected that installation of this new filter will prevent imposition
of fines by GEA. Annual inspection by GEA is scheduled to take place in the month of
August 2022.
During a meeting with the chief financial officer, she informed you the following:
(i) The filter is a new product of the filter manufacturer and CL is the first buyer of this
product. Therefore, the filter manufacturer:
▪ provided significant discount to CL on purchase of this filter;
▪ has been providing excellent after sales service to CL; and
▪ has provided a guarantee to CL that the filter will significantly reduce the toxic
emissions.
(ii) The existing provision for fines to GEA has been reversed as the new filter is most likely
to prevent imposition of the fine.
(iii) The useful life of CL’s manufacturing plant has been increased from 10 years to
15 years. CL had engaged an external independent engineering firm to review the useful
life. She also informed that the cost of the new filter has been expensed out as it was not
the reason to increase the useful life of the existing manufacturing plant.

Required:
Evaluate the possibility of misstatement which may occur in the above scenario. Also state
the audit procedures that should be carried out by your audit team in this regard.

Case Study 13

Ayesha Khalid & Co., Chartered Accountants (the firm) is planning the audits of its clients
for the year ending 31 December 2022. For this purpose, the firm is considering to appoint
certain partners responsible for some of the listed clients. The name of relevant partners’ along
with their association with the clients are as follows:
(i) Faizan Rashid has served five years as the engagement partner on the audits of various
clients including Dalmatian Limited (DL). The firm has transferred him to taxation
department as part of the firm’s rotation policy, where he would also be responsible for
filing of DL’s annual tax return.
(ii) Saad Akbar has recently been promoted as partner from senior manager. He has been
in various managerial roles for the audit of Aladin Limited (AL) for the last five years
before being promoted to partner. The firm is considering to appoint Saad as the
engagement partner of AL.
(iii) Sara Kareem had been the engagement quality control partner of Shifu Limited (SL)
from 2012 to 2015 and 2018 to 2020. During 2016 and 2017, Sara was on a service break
due to her illness. The firm is now considering to appoint her as SL’s engagement
partner.
 Audit, Assurance and Related Services Page 5 of 5
(iv) Raheem Shafique has served as the engagement partner of Panda Limited (PL) for five
years. The firm is now considering to appoint him as the engagement partner of
Hoper Limited, holding company of PL.

Required:
Discuss whether the partners can be appointed in the roles being considered by the firm.
 Audit, Assurance and Related Services Page 6 of 5

Case Study 14
You are the manager in Saira Saeed & Company, Chartered Accountants (the firm). Saira
has forwarded you the following email received from Fashion Limited (FL), in which they
have asked the firm to submit their proposal for the proposed engagement:

To: Saira
From: Junaid Sheikh
Subject: Audit of Prospective Financial Information
Date: 9 June 2022

Hi Saira,

Our company has witnessed a substantial growth in export sales of our textile
products. Owing to this, we have been planning to increase our production capacity
by 30% as there are many export orders which we have to turn down. Considering
this, we are planning to install an additional manufacturing plant within the existing
factory premises. The only major expenditure in this respect is to procure and install
the manufacturing plant. Procurement of manufacturing facility is expected to start
immediately after sanctioning of loan and the plant would be operational in twelve
months’ time.

In addition to the above, we are also in a very advanced stage of introducing smart
clothing in partnership with a US company. The smart clothing contains modern
technology. For example, it will contain the features like meshed wiring woven into
fabric which connects via Bluetooth to an iOS or Android smartphone.

The US company has more than 5 years of experience of manufacturing smart

clothing. 30% of the capital would be provided by that company whereas the rest
would be raised through bank loans. We are expecting that this would be an instant
success in the market as no such products are available in the Pakistani market. We
are expecting that we would recoup our investment within a five-year period.

For the capacity expansion and the new product, we are preparing Prospective
Financial Information (PFI) which needs to be audited, for submission to
US company and the banks with whom we are in negotiations.

PFI includes cash flow statement, profit or loss statement and details of
assumptions taken. PFI for the capacity expansion is required for a three-year
period and for the new product is required for the time until investment is recouped.
Since the amount of loan required is substantial, it is highly dependent on good
projections.

I would like your firm's services for auditing PFI prepared by our management. It
would be great if you could provide us with your quote.

Regards,

Junaid Sheikh
CFO
Fashion Limited

Required:
Write an email to Saira in which you identify and evaluate the matters that should be
considered before accepting the engagement to report on Prospective Financial Information.
(Ignore the requirements of ICAP’s Code of Ethics for Chartered Accountants)
 Audit, Assurance and Related Services Page 7 of 5
Case Study 15
You are the manager responsible for the audit of Amber Holding Limited (AHL) and its
consolidated financial statements for the year ended 31 December 2021. This is your first
audit of AHL although AHL has been your firm’s audit client since last three years. Your
firm is also the auditor of AHL’s both subsidiaries namely Dany Limited (DL) and Genie
Sugar Mills Limited (GSM).

During the initial meeting with the CFO, following matters have been discussed:
(i) The year-end of AHL and DL is 31 December whereas the year-end of GSM is
30 September.
(ii) DL is a leading producer of savoury snacks which include a wide variety of packaged
chips and crackers. Effective from 1 December 2021, DL has expanded its business by
commencing production of confectionery snacks. Sugar is one of the major raw
materials used in the production of confectionary snacks which is being procured from
GSM. It has been agreed between DL and GSM to make payment of the invoices within
45 days.
(iii) DL values its inventory on FIFO basis whereas GSM values its inventory on weighted
average cost basis. Value of closing sugar inventory appearing in DL’s record amounted
to Rs. 30 million.
(iv) At year-end, a payable amount of Rs. 15 million was appearing in the books of DL and
a corresponding receivable amount was appearing in the books of GSM.

Required:
Comment on above matters discussed with CFO and state the audit procedures that should
be performed in this respect.

Case Study 16

Your firm Asim Ghani & Company, Chartered Accountants has been appointed as the auditor of
Sparrow Limited (SL), which is listed on the Pakistan Stock Exchange and engagedin the business of
software development and trading. The appointment was made due to the board of directors’
dissatisfaction with the previous auditor’s performance. The previous auditor was removed after only
two years. The board of directors believed that the previous auditor was inefficient in their work and
that the changes recommended by them often provederroneous, as SL's management rarely agreed to
them.
During the first meeting with the SL’s management, they have shared the following extracts
from the draft financial statements for the year ended 31 March 2023 with your team:
2023 2022
--------- Rs. in '000 ---------
Extracts from statement of financial position
Property and equipment 218,503 73,115
Intangibles 1,000,732 566,870
Contract assets 878,980 444,687
Cash & cash equivalents 357,665 565,880

Share capital 1,000,000 1,000,000

Extracts from profit or loss

Revenue 5,899,750 3,477,800
Gross margin 773,203 455,790
Operating profit 365,151 215,250

During the meeting, your team has also been informed as follows:
 Audit, Assurance and Related Services Page 8 of 5
(i) SL’s revenue is derived from various sources, primarily through sale of off-the-shelf
software, bespoke software projects, regular software updates, and end-to-end solutions
in the form of short-term and long-term projects. SL secured two large development
projects from a financial institution based in the Middle East, leading to a major
increase in contract assets by year-end.
(ii) Until March 2022, 95% of SL’s business came from North American clients. However,
during the year ended 31 March 2023, SL has witnessed substantial growth in business
from the Middle East and Pakistan. Despite this increase, during the year ended
31 March 2023, 50% of income is still generated from North America, 35% from
Middle East, and 15% from Pakistan. This rise in sales is mainly attributed to SL’s
strategic decision to establish a dedicated division catering to clients in Pakistan and
Middle East.
(iii) To promote foreign exchange inflow in Pakistan, the government has granted SL a land
and building for expanding its operations. The government has set a sales target of
USD 100 million to be achieved within five years. The increase in property and
equipment is mainly a result of this grant.
 Audit, Assurance and Related Services Page 2 of 4

(iv) Increase in intangible assets can be attributed to two reasons. Firstly, during the year,
SL has revalued its intangible assets, which were previously carried at cost, resulting in
a revaluation surplus. These intangibles primarily consist of customer support software
acquired by SL in 2018. Secondly, the development of a state-of-the-art website has also
contributed to the increase. This website has enabled SL to showcase its projects and
collect client’s data for bespoke projects.
(v) Due to a high turnover of key development staff, SL has implemented a new scheme of
offering interest-free loans for the purchase of vehicle and for housing-related expenses,
such as purchasing or constructing a house. These loans are payable over a maximum
period of 20 years.

Required:
Discuss the audit risks that exist in the above scenario.

Case Study 17

(a) Raven Limited (RL) has developed an e-commerce platform to sell apparel, daily
wear, and footwear. The platform sells RL’s products as well as those of other
retailers. During the course of audit, the audit team has identified the following
matters:

(vi) RL maintains stocks of its own products at its warehouses and also at suppliers’
facilities located throughout the country. All orders are sent to RL warehouses for
quality check and packaging before being dispatched to customers.

(vii) A few years back, RL had launched a reward points program for its customers.
For every purchase of Rs. 100, customers are entitled to one reward point
equivalent to Rs. 2, which can be redeemed in the form of cash credits against
future purchases. Each point expires after six months.

Required:
Evaluate the above matters identified by the audit team and state the audit procedures
that should be performed in this respect.

(b) Due to the alarming surge in cyberattacks, RL has requested your firm’s assistance in
suggesting effective controls to mitigate the risk posed by such attacks to its business.

Case Study 18

Q.2 You are the audit partner of Naseer Jokhio & Company, Chartered Accountants. The
following significant matters have arisen at different audit clients of your firm, where the audit
field work for the year ended 31 March 2023 has been completed:
(a) Nightingale Limited (NL) had recorded the setup of its production line as capital work
in progress in its financial statements for the year ended 31 March 2022, amounting to
Rs. 500 million. Your firm expressed a qualified opinion as it believed that the setup of
the production line should have been transferred to property, plant and equipment,
considering that it was available for use from 1 October 2021.

However, in the financial statements for the year ended 31 March 2023, NL has
recorded depreciation for the complete year at a rate of 10% using the straight-line
method. As a result, the written-down value of the production line as at the year-end
was Rs. 450 million. NL’s profit before tax was Rs. 300 million and Rs. 220 million for
the years ended 31 March 2022 and 31 March 2023 respectively.
 Audit, Assurance and Related Services Page 3 of 4
(b) Dove Limited (DL) has financing arrangements that are set to expire and outstanding
amounts are payable on 19 June 2023. However, DL’s management has not made any
assessment regarding how the company would manage without these financing
arrangements. Further, no disclosures have been made regarding the uncertainty that
may arise from this situation.
 Audit, Assurance and Related Services Page 4 of 4

(c) Hawk Automobile Limited (HAL) has experienced significant growth during the year,
primarily attributed to the introduction of a highly anticipated vehicle in January 2023.
HAL offers a 3-year warranty or 50,000 km, whichever comes earlier, on all its vehicles.
As a standard practice, HAL records a warranty provision of 0.2% for all its sales, which
has proven to be fairly reliable in previous years.

However, your audit team has noticed significantly high amount of part replacement
claims for the newly launched vehicle in the months of April 2023 and May 2023.

Required:
Evaluate each of the above matters and advise the course of action. Also suggest the
implications, if any, on the audit report.

Case Study 19
Your firm is the auditor of Swan Energy Limited (SEL) for the year ended 31 March 2023.
SEL is engaged in the business of renewable energy. SEL started its business in 1980 by
purchasing land of 100 acres on a 50-year lease. SEL kept installing wind turbines in phases
and finally reached 2 megawatt electricity production in 1999. Wind turbines have a useful
life of 20 years. Upon completion of the lease term, the government requires SEL to remove
wind turbines and associated infrastructure, and restore the site.
SEL has commissioned three new wind turbines in October 2022 at a cost of Rs. 300 million,
which includes their purchase price and installation cost.

SEL depreciates wind turbines over 20 years.

Required:
Evaluate the implications of the purchase of the new wind turbines and state the audit
procedures that should be performed in this respect.
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Case Study 20

Kiwi Dairy Farms Limited (KDL) sells milk to corporate tetra packed milk brands
(corporates), restaurants and also through its retail outlets.
KDL has recently approached your firm to obtain an independent assurance opinion
on acash flow forecast being prepared for its bankers in support of a loan application. The
loan is to be repaid over 4 years.
The cash flow forecast prepared by KDL is as follows:
Actual Forecasted cash flow
31-Dec-2022 31-Dec-2023 31-Dec-2024 31-Dec-2025 31-Dec-2026
----------------------------- Rs. in '000 -----------------------------
Receipts
Sales to corporates 2,200,000 2,134,000 2,240,700 2,352,735 2,470,372
Sales to restaurants 307,500 315,000 330,750 347,288 364,652
Retail sales
– Milk 704,000 720,000 756,000 793,800 833,490
– Cheese - 990,000 1,039,500 1,091,475 1,146,049
Long-term loan - 600,000 - - -

Payments
Operational and
administrative expenses (2,890,351) (3,837,420) (4,029,292) (4,230,756) (4,442,294)
Capital expenditure for
cheese business - (857,200) - - -
Finance costs (10,000) (49,000) (70,850) (51,615) (32,504)
Repayment of loan - (75,000) (150,000) (150,000) (150,000)
Dividends paid (51,384) (66,544) (69,871) (73,365) (77,033)
Taxation (64,230) (83,180) (87,339) (91,706) (96,291)
Cash flow for the year 195,535 (209,344) (40,402) (12,144) 16,441
Opening cash 60,000 255,535 46,191 5,789 (6,355)
Closing cash 255,535 46,191 5,789 (6,355) 10,086

The following information is also available:

(i) Around 70% of KDL’s sales was to corporates. However, KDL has been
experiencing declining margins within this segment. As a result, KDL has decided to
reduce the sale of milk to corporates and instead utilize it for cheese production.
KDL plans to produce both fresh and aged cheese. The production process for
fresh cheese typically takes around 3 to 4 days, while aged cheese requires a longer
maturation period of 6 months to a year. However, the sale price of aged cheese is
significantly higher. All the necessary equipment required for cheese production can
be obtained locally and will be ready for use starting from July 2023.
(ii) KDL currently has an overdraft facility of Rs. 100 million and has approached the
bank with a loan request amounting to Rs. 600 million. The loan is expected to
carry an interest rate of 12% per annum. It is intended to be repaid over a period of
4 years, with payments made in 8 equal instalments. KDL expects to receive
the loan funds by30 June 2023.
(iii) All sales through retail outlets are cash sales, whereas sales to restaurants and
corporates are made on credit. For credit sales, 15% is paid in the month of the
sale, 50% is paid after 30 days, 20% is paid after 60 days, and 10% is paid after 90
days.
(iv) Operational and administrative payments mainly include employee salaries and
feed cost of animals.
(v) KDL receives an early payment discount of 8% from its suppliers if payment is
 Audit, Assurance and Related Services Page 6 of 4
made within 21 days of receiving the inventory. It is KDL’s policy to avail the early
paymentdiscount.
(vi) KDL is subjected to a final tax regime and pays a 2% tax on its sales receipts.

Required:

Specify the key examination procedures that your firm would

perform in respect of above information.

Case Study 21

You are the audit manager responsible for the audit of Alpha Communication Limited (ACL)
for the year ending 31 December 2022. ACL has been operational in Pakistan since 2012 and
is a subsidiary of a public listed company incorporated in China. ACL’s principal activity is
to manufacture, distribute and provide servicing of smart phones, tablets, accessories and
allied products.
In a recent audit planning meeting with the Chief Financial Officer, following information
has been provided to you:
(i) Extracts of statement of financial position:
Forecasted Audited Audited
2022 2021 2020
---------------- Rs. in '000 ----------------
Trade receivables 873,370 419,572 361,974
Loan from parent company 1,650,000 1,650,000 1,950,000
(ii) Extracts of income statement:

Forecasted Audited Audited

2022 2021 2020
---------------- Rs. in '000 ----------------
Sales revenue 2,680,000 1,963,346 2,330,097
Interest expense (264,000) (245,000) (234,000)
Exchange loss - (7,084) (33,464)
(iii) The increase in current year’s sales revenue is mainly due to a large order from the
government for procurement of 100,000 android tablets at Rs. 13,000 each, for
conducting census throughout the country. Another order of 100,000 android tablets is
expected to be received in January 2023 which would be required to be delivered within
30 days. Considering the tight delivery timeline, the management has decided to
manufacture the tablets in December 2022.
(iv) During the year, a manufacturing plant malfunctioned several times and consequently
several orders were fulfilled by importing the smart phones from the parent company.
This plant was purchased at the commencement of operation in 2012.
(v) During the last two years, the staff turnover in the accounts department has been high
due to job stress and long working hours. Except the Chief Financial Officer and the
Senior Cost Accountant, all three remaining employees have not stayed with the
company for more than two years. Temporary employees are often hired in the
department to ensure that the recording of daily transactions are kept up-to-date.
(vi) In May 2022, ACL has installed and commissioned fixed asset and human resource
modules but none of the modules has yet been integrated with the general ledger system.
(vii) ACL is presently negotiating with its bank to renew the existing running finance facility
which is being expired on 15 December 2022.
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Required:
Identify and discuss the audit risks that exist in the above scenario and how you would
respond to these risks.

Case Study 22

You are the audit engagement partner for Canister Products Limited (CPL) which is a
subsidiary of a local group.

During the audit, your team has identified that some payments posted in the marketing
expense ledger, were made to few customers. On investigation, it was revealed that there were
breaches of the customers’ data which was in non-compliance with the requirements of the
confidentiality agreement signed with these customers and data protections laws. The
management has informed you that these payments were made as compensation to customers
in order to avoid any negative public attention which may affect CPL’s reputation and
business.

Required:
In the light of ICAP’s Code of Ethics, identify and evaluate the threats involved in the above
situation and explain the course of action which should be taken to resolve the issue.

Case Study 23

You are the audit manager responsible for the audit of Active Sports Limited (ASL) for the
year ending 31 December 2022. ASL specializes in the manufacture and sale of sportswear
and sports equipment. ASL has separate manufacturing facilities for sportswear and sports
equipment located in Faisalabad and Sialkot respectively.

During the planning meeting, you have been informed that on 1 November 2022, ASL’s
board of directors announced to discontinue the sportswear business. Following are the key
decisions taken in the board meeting:
(i) Sell the manufacturing facility in Faisalabad. However, the machinery for packing of
finished goods would be shifted to Sialkot in January 2023 and would be deployed in
the plant for manufacturing of sports equipment.

(ii) Recognize a provision of Rs. 90 million for expected restructuring costs, including
contract termination benefits and relocation (including machinery) expenses. Except for
a few, all the employees would be laid off. As compensation, they would be paid lump
sum amount and would also be entitled to receive a specified amount of ASL equity
shares, which will be calculated based on the last drawn salary. The employees which
are not laid off would be relocated to Sialkot.

Required:
Evaluate the key decisions taken in the board meeting and state the audit procedures that
should be performed in this respect.
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Case Study 24

You are an audit partner in a firm of Chartered Accountants. The following independent
matters are currently under your consideration:

(a) In the draft auditor’s report of Galaxy Limited (GL), a listed company, your firm has
expressed a qualified opinion with regards to incorrect application of an accounting
policy resulting in overstatement of revenue and profit for the year.

While reviewing the draft annual report of GL, you observed that the directors’ report
has shown the figures of revenue and profit as per the statement of profit or loss.

Required:
Discuss the reporting implication(s) due to the above matter.

(b) Your firm has been the statutory auditor of Mamta Oils Limited (MOL) for the year
ended 30 June 2022. Your firm issued the audit report for the year ended 30 June 2022
in which you included a paragraph on “Material uncertainty related to going concern”.

MOL is a subsidiary of a company incorporated in England. MOL needs to submit its

financial statements to its holding company, prepared in accordance with the guidelines
issued by the holding company. After the conclusion of the annual audit, MOL has
prepared its financial statements for the year ended 30 June 2022, in accordance with
the guidelines given by the holding company. MOL has approached your firm to issue
an audit report on the financial statements that are prepared in compliance with the
guidelines issued by the holding company.

Required:
Discuss the changes that need to be made in the audit report in comparison to the
statutory audit report issued earlier to MOL.

(c) Your firm has issued an adverse opinion on the financial statements of Alpha Limited
(AL) for the year ended 30 June 2022 because of misstatements in inventory, revenue
and receivables. On 30 November 2022, AL has approached your firm to issue an audit
report on AL’s property, plant and equipment as at 30 June 2022, for the purpose of
submission to AL’s lenders.

Required:
Discuss the opinion to be expressed, considering the fact that you have obtained
sufficient appropriate evidence that there is no material misstatement in property, plant
and equipment.

(d) Your firm has been engaged by Accenture Human Resource Limited (AHRL) to
provide an assurance report on the description, design and operating effectiveness of the
controls at AHRL.

AHRL is in the business of providing human resource management and payroll services
to various corporate clients. AHRL has established an independent and effective
internal audit function to ensure operating effectiveness of the controls. Considering the
effectiveness of the internal audit function, your team has used the work of internal
auditor during the assurance engagement.

Required:
 Audit, Assurance and Related Services Page 4 of
Discuss whether a reference to the work of internal auditor can be made in the assurance
24
report.
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Case Study 25 24

You are the audit manager responsible for the audit of Progressive Terminal Limited (PTL),
a listed company, for the year ended 30 June 2022. On completion of audit work, the audit
team presented the audit working papers including draft audit report to be issued to the
shareholders of PTL. Following are the extracts from the draft audit report:

Opinion
We have audited the annexed financial statements of Progressive Terminal Limited (the
Company), which comprise the statement of financial position as at June 30, 2022, and the
statement of profit or loss and other comprehensive income, the statement of changes in
equity, the statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies and other explanatory
information, and we state that we have obtained all the information and explanations which,
to the best of our knowledge and belief, were necessary for the purposes of the audit.
In our opinion and to the best of our information and according to the explanations given to
us, except for the effects of the matter described in the Basis for Opinion section of our report
the statement of financial position, the statement of profit or loss and other comprehensive
income, the statement of changes in equity, the statement of cash flows and together with the
notes forming part thereof conform with the accounting and reporting standards as applicable
in Pakistan and give the information required by the Companies Act, 2017 (XIX of 2017) as
at June 30, 2022.
Basis for Opinion
The Company’s property, plant and equipment are carried in the statement of financial
position at Rs. 33,379 million. Management has not recorded an impairment loss of
Rs. 400 million, which constitutes a departure from IFRSs. The Company’s records indicate
that, had management recorded the impairment, the property, plant and equipment and the
net profit would have been reduced by Rs. 400 million and Rs. 284 million respectively.
We conducted our audit in accordance with International Standards on Auditing (ISAs) as
applicable in Pakistan. Our responsibilities under those standards are further described in the
Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We
are independent of the Company in accordance with the International Ethics Standards Board
for Accountants’ Code of Ethics for Professional Accountants as adopted by the Institute of
Chartered Accountants of Pakistan (the Code) and we have fulfilled our other ethical
responsibilities in accordance with the Code. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
We have determined that there are no key audit matters to communicate in our report.

Other Information
[Reported in accordance with ISA 720]

Emphasis of Matter
We draw attention to Note 5 of the financial statements, which describes the effects of
acquisition of two subsidiaries which took place on April 15, 2022 and July 15, 2022. Our
opinion is not modified in respect of this matter.

Required:
Identify and explain the shortcomings in the audit report drafted by the audit team.
Note: ▪ Ignore the shortcomings related to Other Information.
▪ You are NOT required to re-draft the extracts from the auditor’s report.
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