Test

Analytical Procedures & Final Matters

Name: Mango Date: 18/02/2025

Notes:

• Attempt 6 questions. Questions 3,4,5 and Question 9 are compulsory.

• You have 1 hour 45 minutes (15 minutes + 1 hour 30 minutes) to attempt the test.
• You have prepared really well; test is easy for you.
• The examiner Loves you and you’re very hot, so good luck.

Q1. The essential feature of analytical procedures is ‘comparison’. Discuss any four types of
comparisons, which could be made by the auditor. (Marks 4)

Q2. You have been assigned the audit of Sukkur Limited (SL), a listed company, for the year ended 31
December 2016. The company engaged in the business of manufacturing security equipment for the
local market. During the planning phase, while reviewing the previous year’s audit file, you have
noted that in 2015, due to introduction of many new equipment in the market and the changes in
technology, SL faced stiff competition and its market share reduced from 45% to 35%. However, the
management of SL has now informed you that SL has made significant investment in technology
which has helped the company in increasing the market share to 38% in 2016.

The following information has been extracted from the draft financial statements:

Extracts from the Statement of Comprehensive Income

2016 (draft) 2015 (audited) 2014 (audited)

Rs. In millions Rs. In millions Rs. In millions
Revenue 10,742 9,703 9,650
Cost of Sales 8,050 7,177 6,740
Financial Charges 750 600 350
Profit before Tax 1,550 1,601 2,260

Extracts from the Statement of Cash Flows

2016 (draft) 2015 (audited) 2014 (audited)

Rs. In millions Rs. In millions Rs. In millions
Cash Flows from (3,361) (1,948) (585)
Operations
Cash Flows from 4,000 3,500 1,500
Financing Activities

Required:

Identify four audit risks which the auditor should consider while planning the audit. (Marks 8)
Q3. You are the audit manager in a firm of chartered accountants. Your audit client Dairy (Private)
Limited (DPL) has emailed you its draft financial statements for the year ended 30 June 2021 along
with related notes. The information provided by DPL is summarized below.

Draft statement of financial position as at 30 June 2021

2021 2022
Rs. In ‘000’
Equity and Reserves 35,922 26,000
Long-term Loan 6,000 12,000
Trade and Other Payables 7,800 6,500
Equity and Liabilities 49,722 44,500

Property, Plant and Equipment 22,630 26,818

Prepayments 1,500 -
Trade Debtors 12,000 8,000
Inventory 13,000 7,000
Cash and Bank Balances 592 2,682
Assets 49,722 44,500

Draft Income statement for the year ended 30 June 2021

2021 2022
Rs. In ‘000’
Sales 110,000 73,000
Long-term Loan (83,050) (54,750)
Equity and Liabilities 26,950 18,250
Admin and Marketing Expenses (12,100) (10,950)
Finance Cost (675) (1,530)
Net Profit before Taxation 14,175 5,770
Taxation @ 30% (4,253) (1,731)
Net Profit 9,922 4,039

Notes:

i. During the year, sales prices of DPL products were obtained by 20%, to offset the
corresponding increase in cost of production.
ii. On 30 June 2019, DPL had obtained a loan of Rs. 20 million, which is payable in 10 equal
quarterly instalments at the end of every quarter. The loan carries fixed mark-up of 9%.
iii. Decrease in property, plant and equipment represents disposals made during the year net of
depreciation.
iv. Prepayment represents advance rental payment of warehouse, obtained for 6 months on 16
June 2021 at a monthly rent of Rs. 250,000.

Required:

Using analytical procedures, identify any four unexplained fluctuations and inconsistencies in the
above situation. State the key audit procedures which you would perform to address the issues
identified by you. (Marks 10)
Q4. Humphries Cooperates a chain of food wholesalers across the country and its year end was 30
September 2011. The final audit is nearly complete and it is proposed that the financial statements
and audit reports will be signed on 13 December. Revenue for the year is $78 million and profit
before taxation is $7.5 million. The following events have occurred subsequently to the year end.

Receivable

A customer of Humphries Co. has been experiencing cash flow problems and its year-end balance is
$0.3 million. The company has just become aware that its customer is experiencing significant going
concern difficulties. Humphries believe that as the company has been trading for many years, they
will receive some, if not full, payment from the customer; hence they have not adjusted the
receivable balance.

Lawsuit

A key supplier of Humphries Co. is suing them for breach of contract. The lawsuit was filed prior to
the year end, and the sum claimed by them is $1 million. This has been disclosed as a contingent
liability in the notes to the financial statements; however, correspondence has just arrived from the
supplier indicating that they are willing to settle the case for a payment by Humphries Co. of $0.6
million. It is likely that the company will agree to this.

Warehouse

Humphries Co. has three warehouses; following extensive rain on 20 November, significant rain and
river water flooded the warehouse located in Bass. All of the inventory was damaged and has been
disposed of. The insurance company has already been contacted. No amendments or disclosures
have been made in the financial statements.

Required:

For each of the three events above:

a. Discuss whether the financial statements require amendment.

b. Describe audit procedures that should be performed in order to form a conclusion on the
amendment; and
c. Explain the impact on the audit report should the issue remain unresolved.

(Note: The total marks will be split equally between each event). (Marks 15)

Q5. You are the audit manager responsible for the audit of Hub Mills Limited (HML). At the planning
stage, materiality level was determined at Rs. 8 million.

Audit team has completed the audit field work for the year ended 30 June 2018 and has presented
the following issues identified during the audit for you review:

i. Goods worth Rs. 3 million were returned by a customer on 5 July 2018 due to poor quality.
Since the goods were returned subsequent to the year-end, no adjustment has been
recorded by the management.
ii. HML is facing liquidity issues which has resulted in adverse key financial ratios. To address
the issue, HML has sold one of its offices to a company managed by a director to HML. The
office was sold for Rs. 40 million. Since the management had correctly recorded the disposal,
 no specific disclosure to this sale has been made in the financial statements. Directors are
confident that these sale proceeds would solve the cash flow problems of HML.
iii. A customer who owed Rs. 11 million at the year-end, was declared bankrupt on 15 August
2018. The management had already provided 50% of the balance in the financial statements.

Revenue for the current year is Rs. 800 million (2017; Rs. 950 million) and loss before tax is Rs. 22
million (2017; Rs. 7.6 million).

Required:

a. In respect of each of the audit issues identified by your team, mentioned the impact (if any)
which these might have on the audit report along with proper justification.
b. What matters would you want to indicate in the management representative letter, with
regard to the above issues. (Marks 15)

Q6. Describe the auditor’s responsibility for subsequent events occurring between:

i. The year-end date and the date the auditor’s report is signed; and
ii. The date the auditor’s report is signed and the date the financial statements are issued.

(Marks 5)

Q7. Representations by management are considered as audit evidence. Describe the basic elements
of a management representation letter. (Marks 4)

Q8. What are the situations in which written representation from management is mandatory?

(Marks 7)

Q9. Your audit client has provided you a draft representation letter. The extract from the
representation letter is as follows:

No management employee is involved in any fraudulent activity

All the related party transactions and the identities of those related parties have been
disclosed to you. These have also been appropriately accounted for and disclosed in
accordance with the requirements of International Financial Reporting Standards.

All the uncorrected misstatements identified are immaterial individually and therefore do
not need any adjustments.

Required:

Critically analyze the above representations given by the audit client. (Marks 8)
Q10. During the audit of CCN Limited for the year 30 June 2023, the audit team circularized direct
confirmations to trade debtors. The details are as follows:

Trade Year-end Balance Confirmation Comments

Debtor’s Balance Confirmed Received Date
Name Rupees
AAB 12,336,990 10,536,990 28 July 2023 None
BBC 50,997,000 - Not received None
CCD 20,234,565 20,234,565 20 July 2023 Received through email
DDE 1,678,000 1,678,000 Not received Confirmed over phone
on 15 July 2023

Required:

Analyze each of the above debtors’ responses and recommend further course of action to be
adopted by the auditor. (Marks 11)

-Good Luck, again, Hot Chocolate-