Ch # 9. Current Assets (S.

P) Page 275

ANSWERS
ISA – 501 & Inventory

Answer #1 Q.6(b) Autumn 2009

Substantive procedures for verification of stores and spares

(i) Obtain the listing of stores and spare balances at period-end and investigate large or unusual quantities or
amounts.
(ii) Review large or unusual entries in the ledger account.
(iii) Review period end reconciliation of subsidiary and general ledger and investigate large and unusual items.
(iv) Attend inventory counts at period end and ensure that physical differences are appropriately recorded and
resolved and damaged items if any are identified.
(v) Check valuation of selected items using one or more of the recommended sampling techniques.
(vi) Identify slow moving items and discuss/determine the impact thereof.

Answer #2 Q.7(b) Spring 2010

Following weaknesses in inventory count are identified from audit senior’s observations:
(i) Lack of segregation of duties
Inventory Controller is responsible for physical control of the inventory and is also supervising the stock count.
(ii) Non availability of detailed plan
Allocation of counting area by the teams themselves indicates non availability of detailed plan which may lead to
certain inventory items being counted more than once while some items may not be counted at all.
(iii) No system of marking on counted items
This again may lead to double counting or omission completely.
(iv) Perpetual inventory records available on count sheets
The person responsible for counting may try to match the numbers provided instead of carrying out an
independent count.
(v) Additional count sheets are not pre-numbered
If the separate sheets are numbered as they are used, there is no means of identifying that all sheets issued have
been returned and the last count sheet(s) may go unnoticed.

Answer #3 Q.4 Spring 2012

(a) Physical verification:

(i) Evaluate the client’s physical inventory taking instructions and procedures to their staff.
(ii) Attend physical inventory count to observe the inventory count procedures.
(iii) Ascertain whether the staff members are carrying out the physical inventory count as per approved instructions
issued to them.
(iv) Perform test counts to ensure the efficiency and effectiveness of the physical count procedures.
(v) Observe the physical inventory count and identify the matters for appropriate follow-up during the audit. These
matters may include the following:
▪ Excess/ Shortages found in test count performed by the auditors.
▪ Items of inventory identified as obsolete, slow moving, damaged or defective.
▪ Details of instances where the approved inventory count procedures are not followed by the staff members
of the client.
▪ Instances where the stock records (bin cards, stock and stores ledger etc) do not contain adequate details
relating to balance of inventory in hand, minimum level, maximum level, ordering level, specification of
inventory and location of inventory etc.
▪ Cut-off procedures and adherence thereto.
(vi) Check that adjustments arising out of the physical count have been made in stock count sheets.
(vii) Check final stock sheets for quantity, pricing, extensions, casting, summarization, and signatures of the stock
taking staff.
Ch # 9. Current Assets (S.P) Page 276

(b) Finished Goods:

(i) Obtain a list of items (schedule) shown as finished goods, with full particulars, quantity and value
(ii) Compare the list with physical count sheet balances and with stock ledger balances
(iii) On test basis check the items and quantities in the stock ledger with the bin card.
(iv) With regard to cut-off procedures performed during the attendance at the physical inventory count, check the
‘goods outward book’ or ‘delivery challans’ book for the last few days of the year, and early few days of the
succeeding financial year.
(v) If goods are sold on consignment, check the closing stock with the consignment account

(c) Work in Process:

(i) Obtain a list of items shown as work in progress, with full particulars, quantity and value.
(ii) Compare the list with physical count sheet balances and with stock ledger balances
(iii) Check the quantity and items included in the list with the production reports and job cards etc.
(iv) Check records showing the work in progress opening balances, raw material and other material issued and labour
and overheads charged to production and closing balance of work in process.
(v) Where it is not possible to quantify or value the work in process for technical reasons, the auditor should consider
to use an expert.

(d) Raw material:

(i) Obtain a list of items shown as Raw material, with full particulars, quantity and value.
(ii) Compare the list with physical count sheet balances and with stock ledger balances.
(iii) Verify cost of raw material appearing in F/S by matching with them with purchase invoices etc.

(e) Valuation of Inventories:

(i) Ensure that stock has been valued in accordance with the valuation policy.
(ii) Ensure that inventories have been valued at the lower of cost and net realizable value.
(iii) Ensure that the cost of inventories comprise of purchase price, cost of conversion and other costs incurred in
bringing the inventories to their present location and condition.
(iv) Check that the following costs have not been included in the cost of inventories:
▪ Abnormal wastes in labour, material or other production overheads.
▪ Storage costs unless considered necessary for the production process/ inventory.
▪ Administrative overheads
▪ Selling and distribution costs
▪ Financial charges
(v) Examine and perform test checks to verify the proper allocation of overheads is in accordance with the
requirements of IAS 2.
(vi) Where the inventories are valued at net realizable value, check that valuation is correct and is based on the most
reliable evidence.
(vii) Check that the cost of obsolete and damaged items is properly written down.
(viii) Test arithmetical accuracy of the calculation of the stock sheets.

(f) Disclosure:
Ensure that inventories have been disclosed in accordance with the requirements of International Financial Reporting
Standards and the Companies Act, 2017.

(g) General:
(i) Trace opening balance from last year’s working papers.
(ii) Agree closing balance appearing in the F/S with books of accounts.
(iii) Ensure that inventories have been appropriately classified.
(iv) Obtain direct confirmation for stocks held by third parties.
(v) Check reconciliations of opening and closing balances with production/ sale records, wherever possible.
Ch # 9. Current Assets (S.P) Page 277

Answer #4 Q.5 Autumn 2014

Weakness Implications
The warehouse in charge is
The warehouse in charge is himself responsible for the inventory, therefore he
supervising the inventory count
lacks independence
procedure.
Temporary staff involved in the Temporary staff may not be aware of the nature of inventory, and may not have
physical inventory count. any interest in detecting or reporting discrepancies.
Lack of precise instructions to The staff has been instructed to remain in constant contact with each other to
the counting team. avoid double counting. This depicts lack of precise instructions and it increases
the risks of mistakes in counting like missing out items or double counting.
Inventory is not tagged when it This gives ride to a risk that items of inventory will be counted twice, and
is counted possibility that some items may not be counted at all.
Count sheets not signed by staff In this case, it becomes difficult to identify the staff who has carried out the
carrying out the count. count, therefore any discrepancy found cannot be investigated properly.
Count sheets stated the quantity Count teams will focus on finding the number of items mentioned on the count
of items expected to be found in sheets. This could more likely result in undercounting inventory.
warehouse.

Examiner Comments:
It was a simple question requiring identification of weaknesses in inventory count procedure in the given
scenario and the implications of such weaknesses on the inventory count. This question was well
attempted as the candidates managed to identify the related weaknesses. However, a number of students
also explained how such weaknesses may be improved instead of explaining the implications of the
identified weaknesses. Some of the students unnecessarily discussed stocks held by third party and
obsolete stocks whereas in scenario based questions, unless the situation explicitly demands otherwise,
one should restrict to matters related to the given scenario only.

Answer #5 Q.5 Spring 2017

(a) During the count, the auditor should consider:

▪ whether or not the count is being conducted in accordance with the written instructions of the client’s
management
▪ the condition of the inventory, in order to identify items where NRV might be below cost (and in particular,
inventory that seems to have deteriorated in condition)
▪ whether or not inventory not owned by the client entity is properly identified and labelled (for example,
inventory owned by customers but held on the entity’s premises)
▪ whether or not, during the count, production of new inventory and the movement of inventory are controlled
and properly documented, in accordance with management’s instructions for the count
▪ At the end of the count, whether or not all inventory items have been counted and tagged accordingly.

(b) Cut-off at final audit:

The audit team should take last few receiving and delivering notes on either side of the year-end and trace these
to invoices and ledgers and inventory record to ensure that sales and purchases have been included in the correct
periods and related receivables and payables are booked accordingly.

Examiner Comments:
(a) This was a straight forward question in which the candidates were asked to state the matters to be
considered at inventory count and majority of the candidates performed well. However, many
candidates gave verification steps such as agreement with ledger, valuation of excess/shortages and
verification of NRV, which were not relevant in the context of the question.

(b) The performance in this part was below average as the candidates generally lacked proper
understanding of the cut-off procedures. Many candidates discussed performing the procedures on
invoices but did not discuss delivery documents. Many candidates were totally ignorant and
mentioned steps such as analytical review, inspection of suppliers/debtors statements, etc.
Ch # 9. Current Assets (S.P) Page 278

Marking Scheme:
(a) 01 mark for each matter to be considered while observing the inventory count 5.0
(b) 01 mark for mentioning each procedure to be performed in relation to the cut-off assertions for sales
and purchases 3.0

Answer #6 Q.2a Spring 2017

Shahbaz Chemicals Limited

The following steps shall be performed by the audit team:
▪ Review and test the procedures in place for comparing NRV with cost for each item of inventory.
▪ Review the information gathered during the physical inventory count (e.g. deterioration of inventory) which may
suggest that NRV may be lower than cost.
▪ Review the records relating to goods returned by customers or allowances granted to customers.
▪ Review inventory records and order books for evidence of slow-moving items and compare their expected NRV
with cost.
▪ Select major items of inventory from the list of stock and compare NRV with cost.
▪ Review prices at which goods have been sold after the reporting period, for evidence that NRV is higher than cost.

Examiner Comments:
In this part of the question, the candidates were required to specify the steps which the auditor should
perform to ensure carrying values of inventories is based on lower of cost and NRV. The performance in
this part was satisfactory. However, many students gave generalized steps and did not say anything
about the observation mentioned in the question. Several students focused on how the NRV is computed
which was not required.

Marking Scheme:
01 mark for explanation of each step which should be performed 4.0

Answer #7 Q.4 Autumn 2021

Weakness Implication
The warehouse manager is supervising Since there is a lack of segregation of duties, the Warehouse Manager
the inventory count procedure. may influence the inventory count process.
No system of marking on counted items. This may lead to double counting or omission completely and possibility
that some items may not be counted at all.
Perpetual inventory records and third The person responsible for counting may try to match the numbers
party inventory records are available on provided instead of carrying out an independent count.
count sheets. The third party inventory may be made part of the inventory. Confirm
that inventory belonging to third parties, but on the client’s premises at
the date of the count, is not included in the inventory.
Cut-off documents not obtained during There is a possibility of recording back dated entries, therefore the cut-
the inventory count. off documents should have been obtained on the date of the inventory
count date.

Examiner Comments:
Examinees performed well in this question.

Marking Scheme:
▪ 0.5 mark for identification of each weakness 2.0
▪ 01 mark for stating the implication 4.0
Ch # 9. Current Assets (S.P) Page 279

Answer # 8 Q.6 Autumn 2022

Inventory count procedures:

Chemical stored in container
▪ Obtain the report prepared by agency’s officials and verify the quantities as at 30 June.
▪ Obtain the documentation and verify related to purchase and issuances from 1 July to 30 September and reconcile
the movement of inventory from 30 June to 30 September.
▪ Ask the management to request the agency’s official to be present at the inventory count on 30 September.
▪ Consider involving an expert to verify the quantities within the container.

Inventory held abroad

▪ Send direct confirmation to third party in Malaysia to confirm condition and quantity of raw materials held.
▪ Consider visiting to Malaysia for attending the stock count.
▪ Arrange another auditor to attend the physical count in Malaysia, if practicable.
▪ Inspect documentation regarding inventory held by third parties (e.g. warehouse receipts), order received from
Columbia (e.g. purchase order received) and the subsequent shipment made to the customer.
▪ Consider performing observing the an online inventory count.

Work in process
▪ Check the stage of completion of the work in progress, in respect of both materials and conversion costs.
▪ Check the batch/production records and verify the finished goods subsequently produced and reconcile it with
raw material issued.

Examiner Comments:
The examinees did not mention the following audit procedures:
▪ Consider involving an expert to verify the quantities within the container.
▪ Consider visiting to Malaysia for attending the stock count.
▪ Arrange another auditor to attend the physical count in Malaysia, if practicable.
▪ Check the batch/production records and verify the finished goods subsequently produced and
reconcile them with raw materials issued.

Marking Scheme:
01 mark for each audit procedure 8.0

Answer # 9 Q.8(b) Spring 2023

List out all items over a pre-set amount (at least the materiality threshold) (for subsequent physical verification).
▪ For each item on the schedule, multiply the lower of cost and selling price quantity, and list any items where this
figure does not agree with the year-end valuation.
▪ Compare prices to those on the current sales price master file.
▪ List any items where the date of the last purchase was more than, say, one month ago (as this may indicate that
the product is obsolete/damaged/no longer in vogue and may need to be written down).
▪ List any items where the date of the last sale was more than, say, one month ago (as, again, this may indicate that
the product is obsolete/no longer in vogue and may need to be written down).
▪ List any items which do not appear on the post year-end sales listing for the, say, first month of the year (again,
may indicate that a provision is needed).
▪ Obtain the purchases made at 31 December 2022 and perform cut-off.
Examiner Comments:
▪ Instead of mentioning the substantive tests that can be performed based on the information provided
in the question, the majority of examinees mentioned general audit procedures related to inventory.
▪ Examinees did not mention the following substantive tests:
- For each item on the schedule, multiply the lower of cost and selling price quantity, and list any
items where this figure does not agree with the year-end valuation.
- List any items where the date of the last purchase was more than, say, one month ago, as this may
indicate that the product is obsolete or damaged and may require a write down.
Ch # 9. Current Assets (S.P) Page 280

Marking Scheme:
01 mark for each substantive test 5.0

ISA-505 & Debtors

Answer #1 Q.6 Autumn 2009

a) Substantive procedures for verification of trade debts (excluding receipt from customers)
▪ Investigate any unexpected or unusual movement/differences between current and prior period as regards the
amounts of trade debts, debtor’s turnover, ageing of receivable and ratio of debtors to credit sale etc.
▪ Review of period end reconciliation of subsidiary and general ledger and investigate large and unusual items.
▪ Reviewing the period-end bank reconciliation statements with specific reference to the list of cheques deposited
but not credited in the bank.
▪ Review the following:
- Large or unusual postings in the general ledger.
- Large or unusual balances in subsidiary records including, credit balances, past due balances and balances
exceeding credit limits etc.
▪ Circularization of confirmations and performance of appropriate follow-up of selected customer balances at
period end and obtaining and testing reconciliation of balances confirmed with book balance.
▪ Review the ageing schedule and ensure reasonableness of provision based on:
- Discussion with the credit manager.
- Examination of the subsequent collections made.
- Past practice and consistency.

Answer #2 Q.2 Spring 2010

(a) The auditor may consider not to circulate the direct confirmation to the customers where:
(i) accounts receivables are immaterial to the F/S; or
(ii) the response rate is not expected to be adequate; or
(iii) the responses are not expected to be reliable; or
(iv) inherent and control risk in aggregate are assessed at low level.
(v) audit evidence expected to be gathered through other substantive procedures (e.g. analytical procedures)
is sufficient to reduce the audit risk to an acceptable level.
(vi) management requests not to send the confirmation and auditor after satisfying himself from the reason and
explanation given by the management.

(b) While designing the confirmation request, the auditor considers the following factors:
(i) Assertions being addressed through the direct confirmation.
(ii) Form of the external confirmation requests (i.e. positive or negative or combination of both)
(iii) Prior experience on the audit of similar engagements.
(iv) The nature of the information being confirmed.
(v) The intended respondent.
(vi) Type of information respondents will be able to confirm readily.

(c) The auditor may perform one or more of the following steps:
(i) Check receipt from customers after balance sheet date.
(ii) When there is no receipt from customers after balance sheet date, the auditor should consider the following
audit procedures:
▪ Verify validity of purchase orders, if any.
▪ Verify goods dispatched note other documents duly acknowledged by the customers.
(iii) Obtain explanations for invoices remaining unpaid, if any, after subsequent one have been paid
(iv) Examine sales near the period end to provide audit evidence about cutoff assertion.
Ch # 9. Current Assets (S.P) Page 281

Answer #3 Q.1 Autumn 2011

(a) Certain conditions are required to be met before an auditor can decide to use negative confirmation as a sole
substantive procedure, these conditions include:
(i) Auditor has assessed risk of material misstatement as low and has obtained sufficient appropriate audit evidence
regarding operating effectiveness of controls relevant to assertions;
(ii) The population of items subject to negative confirmation procedure comprises a large number of small,
homogeneous account balances, transactions or conditions;
(iii) A very low exception rate is expected; and
(iv) The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation
requests to disregard such requests.

In the given situation, condition # (i) and (ii), are met; the fact that risk of material misstatement is low suggests that
condition # (iii) is also being met. Therefore it would be appropriate to use negative confirmation provided that the
fourth condition is met.
For 15 major debtors, it would be appropriate to use positive confirmation as their population consists of small
number of large balances.

(b) Audit Procedures:

(i) Prepare or obtain a client roll forward schedule from 31 August 2011, to 31 October 2011.
(ii) Agree Individual entries for 31 October 2011, with the sales ledger and debtors control accounts.
(iii) Note and obtain explanation for any unusual journal adjustments.
(iv) Vouch material sales or receipts with supporting documents.
(v) Select a sample of receipts and sales and perform tests of controls to ensure that system of internal controls
continued to operate effectively.
(vi) Re-perform cutoff test at year end.
(vii) Perform analytical procedures by comparing the balances of debtors on 31 August 2011, to Debtors on 31
October 2011, and ascertain reasons for major variances, if any.
(viii) Check subsequent recovery of year end balances.

(c) If Management refuses to allow the auditor to send a confirmation request, the auditor shall:
(i) Inquire as to management’s reason for the refusal, and seek audit evidence as to their validity and reasonableness;
(ii) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud
(iii) , and on the nature, timing and extent of other audit procedures; and
(iv) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
(v) If the auditor concludes that
▪ Management’s refusal to allow the auditor to send a confirmation request is unreasonable; or
▪ the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures the auditor
shall communicate with TCWG and auditor shall also determine implications of results of procedures carried out
above on the audit and the auditor’s opinion.

Answer #4 Q.3 Autumn 2012

(a) Selection of Accounts Receivable for circulation at year-end

(i) The debtors listing will be stratified in accordance with the different market segments (Super markets, whole
sellers, retailers and five star hotels)

(ii) For positive circulation the selection may be as follows:

▪ All twelve super markets, as well as the seven five star hotels will be purposely selected (56% of the total debtors
balance will be covered in this manner).
▪ Whole sellers and retailers will be stratified further according to value and days outstanding. A sample will be
made from the above-mentioned sub-populations, with greater focus on the high value and long-outstanding
populations.
▪ Debtors with nil and credit balances, as well as overdue debtors should also be selected.
(iii) A negative circulation of non-selected debtors may be considered on sample basis.
Ch # 9. Current Assets (S.P) Page 282

(b) Situation where a debtor confirms a balance which is different from the amount appearing in the confirmation
request:
A response that indicates a difference between information requested to be confirmed and information provided by
the confirming party is termed as exception. The exception may be on account of:
(i) Timing difference
(ii) Misstatement
▪ In case of timing differences, the auditor will need to reconcile the amount confirmed by the confirming party and
the amount sent for confirmation.
▪ If the amount cannot be reconciled, the auditor is required to evaluate whether it is indicative of a fraud or
deficiency or deficiencies in the entity’s internal control over financial reporting.
▪ In either case, the auditor will consider whether he needs to revise his risk assessment and audit procedures.

Answer #5 Q.10f Autumn 2014

Conditions required to be met for sending external confirmations:

It may be appropriate to send negative confirmation request if all of the following conditions are met:
▪ The risk of material misstatement is low and controls have been tested.
▪ The population comprises of large number of small account balances or transactions.
▪ A very low exception rate is expected.
▪ There is no specific reason which would cause the respondent to ignore the confirmation request.

Examiner Comments:
Most of the candidates mentioned the conditions for sending negative confirmations but did not mention
an important point that negative confirmation may be used if all the said conditions are met.

Answer #6 Q.5 Spring 2015

(a)
(i) Hospitals and clinics:
The decision to send negative confirmation was appropriate as all the conditions for sending negative confirmation
i.e. Large number of small account balances, low risk of material misstatement, low exception rate as only four
customers have disagreed with the balances due and that have been also reconciled and there was no knowledge of
circumstances that would cause recipient to disregard the confirmation request.

(ii) Retailers:
Results of confirmations depict high risk of material misstatement and high exception rate. However, since the
decision to send negative confirmation was taken on the basis of initial assessment, the decision under the
circumstances seems correct.
(b)
Balance agreed:
No further audit work is required.

Balance not agreed:

▪ The client should be asked to review the replies and reconcile the balances in its records with the balances
confirmed by the customer.
▪ The reconciliation prepared by the client should be checked.
- The reconciling items depicting errors in the client’s records should be investigated and corrected.
- The client should be asked to resolve the difference in case the reconciling items depicting errors on part of
the customers.

No reply received:
In these cases, alternative procedures should be performed (e.g. subsequent payments and checking of invoices/
dispatch notes in order to obtain evidence to confirm the customer’s balances.
Ch # 9. Current Assets (S.P) Page 283

(c)From the winding up event it appears that the amount receivable from SDPL is irrecoverable. Therefore, the auditor
needs to ensure that the amount of irrecoverable receivables are written off or is duly provided for.
The following substantive procedures should also be performed:
▪ Review any correspondence of the SPL with the liquidator/management of SDPL (if any), relating to recovery of
the amount due.
▪ Review the calculation of amount of provision/write off and basis thereof.

Examiner Comments:
In this question, data relating to four different customer segments was provided. An analysis of the
debtor circularization carried out by the auditor and brief comments on the response received were also
provided. The requirements were divided into three parts. Response to each part is discussed below:
(a) In this part, the candidates were required to comment on the decision to send negative
confirmations to two of the four segments. The candidates response was quite poor, because of the
following reasons:
▪ Some candidates analyzed all segments irrespective of whether they were sent negative or
positive confirmations and therefore lost valuable time.
▪ Some candidates gave a combined answer for both, retailers as well as hospitals/clinics and did
not discuss them separately as separate segments. Consequently, they gave inappropriate
answers as the two situations were quite different and concluding remarks in two cases should
have been different.
▪ Many candidates stated the factors that justify sending of negative confirmations; but did not
conclude as to whether the decision to send negative confirmation was correct or not.
For a proper analysis of the situation, the candidates are advised to seek guidance from ICAP’s
suggested answer.
(b) In this case, the candidates were required to state the required audit procedures when (i) replies to
confirmations agreed with the balances in the clients books (ii) did not agree and (iii) when replies
were not received. Many candidates were not able to correctly describe the necessary procedures
when balances did not agree. Many of them just mentioned about the need for a reconciliation
without mentioning that the reconciliation needed to be checked and also did not distinguish
between reconciling items which indicated errors on the part of the client and those which indicated
errors on the part of the customers. In case of no reply, most students recommended written
reminders, follow up, telephone calls etc. Only about 50% of the candidates mentioned about the
need to adopt alternative procedures.
(c) In this part, majority of the candidates mentioned about the need to write off/provide for the
amount receivable. However, they did not mention that the calculation and basis of such write
off/provision should be reviewed.

Answer #7 Q.1(h) Autumn 2015

A negative confirmation can be used, where any of the following condition is met:
▪ The risk of material misstatement has been assessed as low and controls have been tested.
▪ The population is comprised of large number of small account balances.
▪ A very low exception rate is expected.
▪ The auditor is not aware of the circumstances which would cause the respondent to ignore the request for
confirmation.

Examiner Comments:
The use of negative confirmation was rightly explained by a large number of candidates. However, only
few candidates mentioned all the conditions.

Marking Scheme:
01 mark for each condition 4.0
Ch # 9. Current Assets (S.P) Page 284

Answer #8 Q.1 Spring 2016

(a)
(i) The approach of not sending confirmation requests to balances below Rs. 100,000 is not correct unless the total
of such balances is clearly immaterial.
(ii) The conclusion documented by the team is not correct as the confirmation received from creditors only confirms
the recorded amount and is not relevant for the purpose of testing of unrecorded liabilities.
(b)
(i) The audit team is required to discuss the matter with client’s management and ask them to send confirmation as
per the normal sampling procedure of the audit firm.
In case the management does not agree, the audit team should evaluate the implications of management's refusal
on the auditor's assessment of the relevant risks of material misstatement, including the risk of fraud, and on the
nature, timing and extent of other audit procedures;

(ii) Following information should be tested by the audit team to draw conclusion related to unrecorded liabilities:
▪ subsequent disbursements
▪ unmatched receiving reports (Inventory Cutoff)

Examiner Comments:
In this question the candidates were required in their capacity as audit manager, to comment on two
issues which they identified during review of the working papers. The overall performance was very poor
as discussed below:
▪ Very few of the students mentioned or described how to deal and what procedures to perform in
respect of the management’s refusal to send confirmations in respect of balances below Rs. 100,000.
In fact, most of them concurred with the decision without raising any concerns. Many students
suggested sending negative confirmations without mentioning any reasons thereof.
▪ Very few students could explain that the confirmation received from creditors only confirms the
recorded amount and is not relevant for the purpose of testing of unrecorded amounts.

Answer #9 Q.1 (b) Autumn 2016

If management refuse to allow the auditor to send a confirmation request the auditor should:
▪ inquire as to management’s reasons for the refusal, and seek audit evidence as to the validity and reasonableness
of those reasons;
▪ evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and
▪ perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
The auditor shall communicate with TCWG if:
▪ the auditor concludes that management’s refusal to allow the auditor to send a confirmation request is
unreasonable; or
▪ the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures,

Examiner Comments:
In this part very few students were able to mention all the points. Most of the students missed the steps
relating to communication with those charged with governance. Further, most of the students explained
the implication on the report of the management refusal which was not required.

Marking Scheme:
01 mark for discussing each course of action 5.0

Answer #10 Q.7 Spring 2017

For sending negative confirmation, all of the following conditions are required to be met:
(i) The risk of material misstatement has been assessed as low and controls have been tested.
(ii) The population is comprised of large number of small account balances or transaction.
Ch # 9. Current Assets (S.P) Page 285

(iii) A very low exception rate is expected.

(iv) The auditor is not aware of circumstances which would cause the respondent to ignore his request for
confirmation.

Based on the above, my comment on appropriateness of sending confirmation requests for each category of customers
are as follows:
Customer category Comments
Distributors The condition of large number of small account balances is missing, therefore
positive confirmation will be sent.
Wholesalers All the conditions of sending negative confirmation exists, therefore negative
confirmation can be used.
Restaurants The condition of large number of small account balances is missing, therefore
positive confirmation will be sent.
It is evident from past experience that confirmation request is usually ignored,
Individual customers therefore positive confirmation will be used.
Examiner Comments:
This question in essence had two requirements i.e. conditions for use of negative confirmations and
appropriateness of the use of negative confirmation in the given scenarios. Most of the candidates
correctly identified the preconditions for use of negative confirmations although some of them
mentioned exactly the opposite of what should have been written.

While discussing the scenario, many candidates did not seem to understand that for sending negative
confirmations, all the conditions should be met and it was not enough if some of them were met.

Marking Scheme:
▪ Up to 01 mark for each condition to be met for sending negative confirmation 3.0
▪ 1.5 mark for discussing appropriateness/inappropriateness of sending negative confirmation for each
category of customer 6.0

Answer #11 Q.2 Spring 2018

We cannot choose to circulate negative confirmation merely on the fact that risk of material misstatement has been
assessed as low and majority of the balances comprise of large number of small balances. Before using the negative
confirmation as the substantive procedures, we also need to ascertain that:
▪ exception rate is expected to be low; and
▪ there is no apparent reason to suspect that the customers would disregard the confirmation request.
Furthermore, we cannot consider the offer of CFO because we should maintain control over external confirmation
requests which include sending the requests ourselves with an instruction for responses to be sent directly to us.

Ideally, confirmation of balances should take place after the reporting period, and should be based on customers’
account balances as at the reporting period. However, to reduce the time pressure at the final audit stage, the
confirmation process can also be based on balances at an interim date before the end of the financial year (normally
no more than three months before the end of the reporting period). However, while doing so, we should consider the
fact that we will need to check the changes in the debtor balances between the confirmation date and the end of the
reporting period.

Examiner Comments:
In this scenario based question the candidates were required to comment on whether the suggestion to
circulate negative confirmation was appropriate in the given situation and to suggest an alternative
approach if the suggestion was not considered appropriate.
The overall performance was quite satisfactory as 39% of the candidates secured passing marks. Many
students wrote about the four conditions necessary for opting for negative confirmation but did not
identify the conditions which were not being met in the given scenario. Most students also commented
that CFO’s offer should not be accepted but were unable to conclude and suggest the required way out
to tackle the situation.
Ch # 9. Current Assets (S.P) Page 286

While mentioning the alternate approach, a lot of students mentioned about circulating the
confirmations on sample basis. This was not appropriate as the confirmations are sent to the debtors on
sampling basis when the population comprises of a large number of debtor balances even if there is no
time constraint.

Marking Scheme:
▪ Explanation of the criteria for circulating negative confirmation 3.0
▪ Highlighting the need to receive confirmation directly 1.0
▪ Discussion on how to reduce time pressure at the finalization stage 2.0

Answer #12 Q.8(c) Autumn 2018

(c) If management refuse to allow the auditor to send a confirmation request the auditor should:
▪ inquire about the reasons for refusal and seek audit evidence as to the validity and reasonableness;
▪ evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and
▪ perform alternative audit procedures such as, subsequent receipts and inspection of documents, designed to
obtain relevant and reliable audit evidence.

If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request is
unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit
procedures, the auditor shall communicate with those charged with governance

Failure to obtain sufficient appropriate audit evidence indicates scope limitation and the auditor shall assess the
implications of such limitation on the auditor’s opinion.

Examiner Comments:
This question consisted of four parts. It was the best attempted question as 84% candidates secured
passing marks. Part wise comments are given below:
In this part, the requirement was to discuss the auditors steps where the management refuses to allow
sending confirmation to certain parties. This area had been tested several times in the past but the
performance was good except in case of very weak students i.e. those whose total marks were less than
30.

Marking Scheme:
01 mark for each step the auditor would take if management refuses to allow sending confirmation
request to a debtor 5.0

Answer #13 Q.1(a) Spring 2019

(a) (i) No further audit work is required.

(ii) This is a timing difference. We need to obtain goods delivery note and customer acknowledgement to ascertain
the date of delivery and date of acceptance of goods.
(iii) This is an adjusting event. We should perform the following steps:
▪ Check the return of goods with the relevant goods receipt document.
▪ Ask the client to reduce the sales and receivables and incorporate corresponding effects in cost of sales and
inventory.
(iv) Follow-up procedures should be initiated. For example, second request and third request letters could be sent,
or the client could be asked to contact the customer for a reply.
Subsequent receipt of the amount should be checked.
If no payment (or only part-payment) has been received, the outstanding sales invoices should be checked with:
▪ Purchase order issued by the customer.
▪ Delivery note duly acknowledged by the customer.
Ch # 9. Current Assets (S.P) Page 287

Examiner Comments:
Students wasted time in explaining the difference between the debtor account balance and the balance
confirmed by the debtor. In fact, these were provided in the question.

Marking Scheme:
Up to 01 mark for each audit step 5.0

Answer #14 Q.4 Autumn 2019

We will have to check the completeness and accuracy of the list prepared by the client.
Stratified sampling could be used for selecting customer balances for circularizing the confirmation.
If the chain stores are selected, 51% (or 49% in absolute terms) of the population can be covered without excessive
time and cost being involved. Therefore, all the three chain stores could be selected for confirmation.

Debtors from superstores and restaurants should be chosen on the basis of any appropriate sample selection method
adopted by the team.
Since balances of chain stores and super stores consist of large balances, positive confirmation should be circulated.

Since the population of restaurant comprises of large number of small account balances, the risk of material
misstatement has been assessed as low and control have been tested, negative confirmation can be used if the
following two conditions are also met:
▪ A very low exception rate is expected; and
▪ The auditor is not aware of circumstances which would cause the respondent to ignore the request for
confirmation.
▪ Credit account balances should also be separately selected for circulating the confirmation.

Examiner Comments:
Most of the examinees only discussed the conditions of sending positive and negative confirmations to
debtors and ignored other aspects of the answer such as stratification of the population, selecting entire
population of chain stores for confirmation and using sample selection method.

Marking Scheme:
▪ 01 mark for discussing each audit strategy for selecting debtors for balance confirmation 5.0
▪ Discussion on the conditions for sending negative confirmation 2.0

Answer #15 Q.6 Spring 2020

Debtor A
Evaluation
Even though the balance confirmed is the same, it raises doubt for the reliability of the response because the
confirmation was not received directly from the confirming party.
Steps to perform
▪ Auditor should modify or add procedures to resolve doubts over the reliability of information to be used as audit
evidence.
▪ Auditor should contact the confirming party and request them to respond directly to the auditor.
Debtor B
Evaluation
It appears that the confirmation did not come from the originally intended confirming party. It carries risk of
interception, alteration or fraud.
Ch # 9. Current Assets (S.P) Page 288

Steps to perform
▪ Auditor should resend the confirmation again to the debtor.
▪ Auditor should revise the risk of material misstatement at the assertion level and modify planned audit
procedures accordingly.
▪ If it is ascertained that fraud exist, it is important that the matter is brought to the appropriate level of
management and those charged with governance.
▪ If the auditor has doubts about the integrity of the management or those charged with governance, than the
auditor should consider to obtain legal advice for appropriate course of action.

Debtor C
Evaluation
Sales return subsequent to the year-end can be an adjusting event which needs to be adjusted in the financial
statements.

Steps to perform
▪ Check the return of goods with the relevant goods receipt document.
▪ Inquire from the management the reasons for the return of good and assess whether it is an adjusting event.
▪ If it is established that it is an adjusting event than ask the client to reduce the sales and receivables and
incorporate corresponding effects in cost of sales and inventory.
▪ Consider the fraud risk that whether the sales were made for overstating the sales for the year end.

Additional steps (overall)

Since there are doubts over the reliability of the confirmation response, the auditor should also perform the following
alternate audit procedures to gather audit evidence:
▪ Subsequent receipt of the amount should be checked.
▪ If no payment has been received, the outstanding sales invoices should be checked with purchase order issued
by the customer and delivery note duly acknowledged by the customer.

Examiner Comments:
▪ Some of the examinees failed to realize that confirmation from debtor A was not received directly,
therefore it raises doubt for the reliability of the response. Consequently, the examinees mentioned
that no further procedure is required.
▪ Some of the examinees did not comprehend that since the confirmation from debtor B did not come
from originally intended confirming party, it carried risk of interception, alteration or fraud.
Consequently, they also did not mention the related procedures.

Marking Scheme:
▪ 01 mark for evaluation of the audit evidence obtained against each debtor 3.0
▪ 01 mark for each further procedure to be performed 7.0

Answer #16 Q.1 Spring 2021

Interim balances:
Since the interim balances were used for sending confirmation, the auditor will need to check the changes in the
receivable balances between the confirmation date and the end of reporting period. This check will consist mainly of
checking entries in the receivable control account with the transactions entered in the book of prime entry during the
same period.

Assertions addressed:
Cut-off, rights and obligation assertion has been correctly identified the audit team.
However, the receivable balances are generally tested for overstatement, the completeness assertion is therefore less
relevant. Assertion related to existence is more relevant as this exercise confirms that the receivables do in fact exist,
and there is no overstatement of receivables in the financial statements. Accuracy and valuation assertion is also
verified during the confirmation exercise which has not been addressed by the audit team.
Ch # 9. Current Assets (S.P) Page 289

Debtors’ wise assessment of work:

(i) Alpha:
No further procedure required.
(ii) Beta:
The auditor should maintain control over the external confirmation requests, including the process of sending the
requests himself. The confirmation being sent directly was returned by the courier on the grounds of invalid
address and that resending by the client may indicate doubts on the reliability of the response. The auditor should
also consider performing alternate audit procedures to verify the receivable balance such as subsequent clearance,
review the supporting documentation such as signed PO, delivery documentation and sales invoice.
(iii) Gamma:
From the winding up event it appears that the amount receivable is irrecoverable. Therefore, the auditor needs to
ensure that the amount of irrecoverable receivables is written off or is duly provided for.
▪ Review any correspondence with the liquidator/debtor, relating to recovery of the amount due.
▪ Review the calculation of amount of provision/write off and basis thereof.
(v) Small Distributors:
Audit team’s decision to ignore small balance is not correct. The team may consider sending negative balance
confirmation. If the team ensure that there is low risk of material misstatement, low exception rate is expected
and there is no reason to disregard the confirmation request.

Examiner Comments:
▪ Examinees failed to identify the correct assertions addressed through balance confirmation.
▪ Examinees did not mention that the balance confirmation was carried out at an interim date and
the related audit procedures to be performed in this respect.
▪ In case of Beta, examinees treated the confirmation reliable and appropriate on the grounds that it
was received directly by the auditor. They did not consider the fact that resending of confirmation
by the client through its rider affected its reliability.
Some examinees failed to mention the alternate procedures in the absence of reliable confirmation
response

Marking Scheme:
▪ Discussion on the use of interim balances for balance confirmation 2.0
▪ Identification of correct and incorrect assertions 2.0
▪ Discussion on the appropriateness of the work performed by the audit team 4.0
▪ 0.5 mark for mentioning each additional procedure 2.0

Answer #17 Q.7 Autumn 2021

Shortcomings Required changes

(i) The client has been asked to confirm the balance Instead of using the word ‘us’ we should use ‘our auditors
and notify any difference to the audit client’s directly’.
management.
It should be specifically mentioned somewhere in the
confirmation that it needs to be mailed directly to the
auditor.
(ii) The year-end date at which the balance need to be The year-end date needs to be inserted just before or after
confirmed is not mentioned. the places where the account balance has been mentioned
and the place where client confirms his balance.
(iii) An addressed and stamped envelope is always This also needs to be mentioned in the balance
attached with the confirmation request. confirmation request.
(iv)Balance reconciliation in case of difference has not The debtor should be asked that in case he does not agree
been asked. with the mentioned balance, he should provide the detail
and full particulars of the difference.
Ch # 9. Current Assets (S.P) Page 290

Examiner Comments:
Following shortcomings were not identified by the examinees:
▪ The year-end date at which the balance needs to be confirmed was not mentioned.
▪ An addressed and stamped envelope is always attached with the confirmation request.
▪ Balance reconciliation in case of difference has not been asked.

Marking Scheme:
▪ 01 mark for identification of each shortcoming 3.0
▪ 01 mark for suggesting each change 3.0

Answer # 18 Q.3(a) Autumn 2023

The response to the confirmation sent to three receivable balances is analyzed as under:
Confirmation from AAB
Analysis:
The response shows a difference of Rs. 1,780,000 which is an exception. It may or may not be a misstatement.
It is possible that this exception does not represent a misstatement. For example, the auditor may conclude that
differences in responses to confirmation requests are due to timing, measurement, or clerical errors in the external
confirmation procedures.

Exceptions noted in responses to confirmation requests may indicate misstatements or potential misstatements in
the financial statements. When a misstatement is identified, the auditor is required to evaluate whether such
misstatement is indicative of fraud. Exceptions also may indicate a deficiency, or deficiencies, in the entity’s internal
control over financial reporting.

Further course of action:

The auditor should request the management to prepare a reconciliation of the difference.
If it is a misstatement, then the auditor will ask the management to rectify it.

Confirmation from BBC

Analysis:

Since the response to confirmation is not received, the auditor should consider to apply the alternative procedures.

Further course of action:

The auditor should apply the following alternate procedures:
▪ Send the confirmation request again when a reply to a previous request has not been received within a reasonable
time.
▪ If confirmation is still not received, examine subsequent cash receipts, shipping documentation, and sales near
the period's end.

Confirmation from CCD

Analysis:
Since the debtor has confirmed the same amount as circulated through email, the auditor should perform additional
steps to ensure its reliability.

Further course of action:

▪ Telephone the confirming party to determine whether the confirming party did send the response.
▪ Ensure that the response is from the proper source, the respondent is authorized, and integrity over transmission
has not been compromised.

Confirmation from DDE

Analysis:
An oral response to a confirmation request does not meet the definition of an external confirmation because it is not
a direct written response to the auditor.
Ch # 9. Current Assets (S.P) Page 291

Further course of action:

▪ Request the confirming party to respond in writing directly to the auditor.
▪ If no such response is received in writing, the auditor should seek other audit evidence to support the information
received orally.

Examiner Comments:
▪ For AAB, examinees did not mention whether the misstatement is indicative of fraud or deficiency in
internal control. The examinees also did not mention that the auditor would ask the management to
rectify it.
▪ In the case of CCD, some of the examinees mentioned that since the balance had been confirmed,
nothing needed to be done, which was not correct.

Marking Scheme:
▪ Up to 01 mark for each analysis 4.0
▪ 01 mark for each course of action 7.0

Bank & Cash

Answer #1 Q.7(b) Autumn 2010

(i) Substantive procedures for bank balance verification
(Following procedures apply individually to all bank accounts)
▪ Obtain bank confirmation from the company’s bank and agree the balances per the bank confirmation to the
company’s bank reconciliations.
▪ Check arithmetic accuracy of bank reconciliation.
▪ Perform cut-off procedures.
▪ Agree the balance per the bank books to the bank reconciliation and to the F/S and the ledger.
▪ Trace outstanding cheques per the bank reconciliation to the cash book and to after-date bank statements.
▪ Agree any un-cleared banking have been paid in prior to the year-end date by examination of paying-in slips.
▪ Scrutinize the cashbook and bank statements before and after the balance sheet date for exceptional entries to
transfers which have a material effect on the balance shown to be on hand.
▪ Determine whether the bank account is subject to any restrictions.
(ii) Types of Information
▪ Full titles of all accounts together with the account numbers and balances thereon, including NIL balances:
▪ Where the amount is subject to any restriction or exchange control considerations this information should be
stated.
▪ Full titles and dates of closure of all accounts closed during the period.
▪ The separate amounts accrued but not charged or credited as at the above date.
▪ Markup/interest and provisional charges (including commitment fees).
▪ The amount of interest charged during the period if not specified separately in the customer’s statement of
account.
▪ Particulars of any written acknowledgment of set-off, either by specific letter of set-off, or incorporated in some
other document or security.
▪ Details of loans, overdraft cash credits and facilities, specifying agreed limits and in the case of term loans, date of
repayment or review.
▪ A list of other banks, or branches of your bank where you are aware that the relationship has been established
during the period.

Security
▪ Details of any security formally charged to the bank including the date and type of charge, (e.g. pledge,
hypothecation etc.)
▪ Particulars of any undertaking to assign to the bank any assets.
▪ If a security is limited to any borrowing, or if there is a prior, equal or subordinate charge.
▪ Investments, bills of exchange, documents of title or other assets held but not charged.
Ch # 9. Current Assets (S.P) Page 292

Contingent Liabilities
▪ Total of bills discounted for your customer, with recourse;
▪ Details of any guarantees, bonds or indemnities given to you by the customer in favour of third parties.
▪ Details of any guarantees, bonds or indemnities given by you, on your customer’s behalf, stating
where there is recourse to your customer and / or to its holding, parent or any other company within the group;
▪ Total of acceptances;
▪ Total of forward exchange contracts;
▪ Total of outstanding liabilities under documentary credits;

Answer #2 Q.6 Autumn 2011

(a) Audit Assertions

The key audit objectives in the audit of cash are to verify the assertions of:
(i) Existence
(ii) Completeness
(iii) Rights and obligations
(iv) Presentation and disclosure

(b) Audit Procedures

(i) Existence
▪ Carry out cash count and reconcile it with the accounting records.
▪ Any unusual items such as IOU should be investigated thoroughly.
(ii) Completeness
▪ Perform cutoff procedures to ensure that there is no unrecorded cash or cash in transit is not missed.
▪ Check the reconciliation between Cash as per Head Office records with the Cash at the outlets.
(iii) Rights and obligations
▪ Ensuring that Company owns the cash in hand and none of the cash is held on behalf of any third party.
(iv) Presentation and Disclosure
▪ Ensure that cash and balances have been disclosed, classified and described in accordance with AFRF

Others

Answer # 1 Q.3(b)(ii) Autumn 2023

Substantive procedures:
(i) Obtain the rent agreement and verify the rent rates.
(ii) Verify that the new rent agreements have been properly approved.
(iii) Verify the rent payments through bank statements.
(iv) Recalculate prepaid rent to ensure that the correct amount is charged in the current period.

Examiner Comments:
For the substantive procedures related to rent expense, the majority of the examinees only mentioned
inspecting the rent agreements.

Marking Scheme:
01 mark for each substantive procedure 3.0