Mock Page 618 Audit, Assurance & Related Services
Mock Paper (Complete Book – Full Length 3 Hours Testing)
Question No. 1
Partners of your firm have prepared firm’s profile to be submitted to a prospective client
upon that client’s request. The profile contains the following statements at different pages of
the profile:
(i) We are a leading firm of Chartered Accountants
(ii) Our experience in ERP services is unmatched when compared to other CA firm providing
such services in the market
(iii) All the Partners in the firm are very competent. In recognition of high professional
standards being maintained by the firm, one Partner of the Firm has been appointed as
member of the FBR and another as member of the appellate tribunal.
(iv) Our rate of success in tax cases both at the level of Commissioner Appeals and Appellate
Tribunal is very high.
Required:
You have been asked to evaluate the profile. While your evaluation, you have noticed the
above statements. Do you agree with the inclusion of the above statements in the profile?
Draft your answer in the light of ICAP Code of Ethics. (04)
Question No. 2
You are required to evaluate the misstatements and the possible impact on the auditor’s
report in the following unrelated scenarios:
a) Rashid Chartered Accountants are the appointed external auditors of Naqash Limited to
audit the financial statements for the year ended December 31, 2015. Before that the
financials of the auditee were being audited by Maisam Chartered Accountants. The
auditee is not following the accounting policy of capitalizing the borrowing cost since last
three years. Prior years’ audit reports were qualified by the prior auditor in this
connection. (04)
b) While auditing the financial statements of Abidi Limited for the year ended 31 December,
2015, Osama Chartered Accountants realized that the financial statements of the auditee
for the prior year were materially misstated to the extent that inventory impairment was
not booked. During the current year, the Company stopped manufacturing and selling the
subject inventory (04)
c) While auditing the financial statements of Shuaib Limited for the year ended 31
December, 2015, Hashir Chartered Accountants have observed that Earning Per Share
(EPS) mentioned in the Directors’ report for the prior year did not match with the EPS as
mentioned in the relevant Financial statements. Said financials along- with the said
Directors’ report were submitted together by the Shuaib Limited with the SECP in April
2015. (04)
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Question No. 3
You are an engagement manager of CAME Chartered Accountants and was quite impressed
with the quality of the internal audit reports which you had seen during the course of your
last year"s audit of MNC Company Limited. This year, you intend to place reliance on some of
the work performed by the internal auditors this year specially in the area of plant operations
and the related controls.
Mr. Rehan Sarwar, internal audit head (IAD Head), is a professional Chartered accountant and
has a 16 years of thorough professional experience including last two years in the internal
audit department.
[Link], however, a bit lazy with respect to his documentary compliance with the
Continuous Professional Development (CPD) requirements of the ICAP.
Internal Audit Department comprises of 11 professionals apart from the IAD Head. 5
professionals are the sales auditors, 2 professionals oversee the head office operations and 4
professionals oversee the plant operations. IAD Head had been appointed by and is
reportable to the CEO, however, he gives quarterly presentations to the Board of Directors
on contentious findings. IAD doesn"t have an access to key operational software such as sales,
marketing etc...
CEO reviews the monthly IAD reports and his endorsed points are summarized by the IAD
for presentation to the Board of Directors and to the external auditors. IAD Head also acts as
the Company Secretary of the auditee Company.
Auditee Company"s last booked annual turnover was PKR 18 Billion and works on a 2% thin
post-tax profitability margins.
Owing to the current cash-flow crunch the Company is facing, HR department doesn"t
organize any formal paid external training for the employees. The relevant departmental
staff, however, are trained internally by the relevant subject matter experts periodically.
IAD"s main focus is on the conduct of operational audits rather than the financial audits,
however, they do thorough analytical reviews on quarterly basis and record the explanation
after seeking appropriate responses from the relevant financial managers, including the CFO.
Required:
Keeping in view of the required factors, kindly analyze the appropriateness of using the work
of the internal auditors in the given scenarios (10)
Question No. 4
CFO of Waheed Group of Industries has contacted you and have requested you to let him
know about the requirement of auditing the group financial statements for the year ending
31 March 2019. Group info is as under:
Mock Page 620 Audit, Assurance & Related Services
Company Nature Paid-up capital Total liabilities Total assets
Waheed Limited Parent PKR 900,000 90,000,000 115,000,000
Ayesha (Pvt) Ltd Subsidiary PKR 700,000 15,000,000 18,000,000
Alia (Pvt) Ltd Subsidiary PKR 800,000 22,000,000 25,000,000
Required:
Please write a brief memo to the CFO abreast him of the requirement for audit of the
consolidated financial statements of his group. (03)
Question No. 5
Your firm is the appointed auditor of Ayesha Group of Industries (group manufacturing
different building products). Following matters have been brought to your attention:
(i) Financial year end of Ayesha Limited, the Holding Company, is 31 December, 2018
whereas financial year end of the two subsidiaries are as under:
Sadia (Pvt) Limited 30 April, 2019
Sameera (Pvt) Limited 31 December, 2018
Profitability position and financial condition based on the last financials is as under:
---------------- PKR in Millions -----------------------
Post-tax Paid-up Total
Revenue
profits capital assets
Ayesha Ltd 1,725 20,000 250 5,000
Sadia 250 2,250 100 500
Sameera 100 1,235 75 215
Sadia has a long-outstanding debt of PKR 10 Mn. Management of Sadia has represented
that they are actively pursuing the debtor and are hopeful for the recovery. Management
understands that the debts are not impaired;
(iv) Sameera Limited has adopted revaluation model to depreciate its assets as a result the
fair value exceeds the historical carrying value by PKR 5 Mn;
Your firm has a policy of computing the materiality at 10% of the post tax profits in case
of profitable manufacturing concerns.
Required:
How should you would deal with the audit of the group as an Engagement Manager? (07)
Question No. 6
You are a quality assurance Partner in a large firm of Chartered Accountants. You have been
referred the following matter for advice:
“Father of a Partner of the Firm has given a guarantee on behalf of a listed company which is
an assurance client. The guarantor is a close friend of Chairman of that Company and has
close business relations with other directors as well. His guarantee was accepted by the
concerned party due to his sound financial position”.
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Required:
What are views on this matter in light of the ICAP’s Code of Ethics? (05)
Question No. 7
You have been appointed to represent one of your audit clients before Inland Appellate
Tribunal (income tax matter). The case involves an increase of PKR 2 Billion in the taxable
income by the taxation authorities. The Company had originally declared a taxable income of
PKR 3 Billion.
Required:
Identify the threat(s), if any, arising as a result of this appointment and the safeguards which
may be adopted by your Firm. (05)
Question No. 8
Your firm has been approached by Amin (Private) Limited (“the Company”) to provide the
annual audit. The Company operates a chain of bookshops across the country. The shops sell
stationery such as diaries and calendars, as well as new books.
The financial year will end on 30 September 2018, and this will be the first year that an audit
is required, as previously the company was exempt from audit due to its small size.
The potential audit engagement partner, [Link], recently attended a meeting with Raju
Shah, managing director of the Company regarding the audit appointment. In this meeting,
Raju made the following comments: „The Company is a small, owner-managed business. I run
the company, along with my sister, Rani, and we employ a part-qualified accountant to do the
bookkeeping and prepare the annual accounts. The accountant prepares management
accounts at the end of every quarter, but Rani and I rarely do more than quickly review the
sales figures.
We understand that due to the company"s size, we now need to have the accounts audited. It
would make sense if your firm could prepare the accounts and do the audit at the same time.
Next year we are planning to acquire another company, one of our competitors, which I
believe is an existing audit client of your firm. For this reason, we require that your audit
procedures do not include reading the minutes of board meetings, as we have been discussing
some confidential matters regarding this potential acquisition."
Company"s financial statements for the year ended 30 Sep 2017 included the following
balances:
Profit before tax PKR 5,000,000
Inventory PKR 2,500,000
Total assets PKR 50,000,000
The inventory comprised stocks of books, diaries, calendars and greetings cards.
Required:
How should auditor verify the opening balances specially the inventories? (09)
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Question No. 9
(a) Alam Steel Limited (“the Company”) accounts have been prepared following the going
concern assumption. Ahmed Yaar Chartered Accountants are the auditors of the
Company. Auditors have come to know that due to a legal regulation, the Company will
not be able to sell its products in the foreseeable future and, in the absence of finding any
other business avenues, the Company will have to close down. Board of Directors are
convinced with the auditors point of view.
(b) Financial Statements of Shani Gas Limited (“the Company”) are audited by Ahmer
Chartered Accountants. Moeez, a job incharge, has observed that the company"s
accounting records are prepared on the ERP System. Management has failed to provide
any document(s) indicating that the ERP system they are using is licensed. The
Company"s management has also failed to show the license with respect to other
Microsoft based office tools. CFO has categorically stated that all the software are duly
licensed and has provided written representation to the auditors duly signed by himself
and the Company"s CEO.
Required:
How should auditor respond in the above independent situation? (14)
Question No. 10
Hakim (Private) Limited"s Lahore operations books of accounts with respect to the year
ended June 30, 2017 were destroyed the fire that took place on 5 July 2017. Whilist providing
the management representation letter, CFO wrote that „all the available information had been
provided to the external auditors”.
Required:
Do you, as an Engagement Partner, agree with this statement contained in the management
representation?
Please elaborate and indicate the possible impact, if any, on the audit report. (04)
Question No. 11
Salam Limited"s auditors have found that deferred taxation to the tune of PKR 400 Mn were
(Total assets: PKR 8 Bn) were escaped from being provided in the last year"s financials.
Current auditors are auditing this Company for the first time.
Required:
What course of action should external auditors adopt in this connection? Also draft suitable
basis for modification and/or attention drawing paras of the audit report. (06)
Question No. 12
Auditors of Mutual funds are required to report, apart from IFRS compliance, the Funds"
compliance with the relevant laws and regulations also.
Mock Page 623 Audit, Assurance & Related Services
Required:
How that compliance be reported in the auditors" report? Also draft a suitable para. (03)
Question No. 13
Directors report of Amin Limited is not disclosing the earnings per share (both primary and
diluted).
Required:
What should auditor do including the treatment in the auditors" report? Draft suitable
para(s) in the audit report, if required. (03)
Question No. 14
Amreli Steels Limited (“the Acquirer”) intends to acquire a land in Dhaka Bangladesh and to
build a steel manufacturing plant there. CFO of the Acquirer is very much confident that all
the legal permission and formalities will be fulfilled. Corporate Authority of Bangladesh have
asked the CFO to get the future 5 year¬projections to be attested by the competent
practitioner under the relevant standards issued by International Auditing and Assurance
Standard Board (IASB).
CFO has appointed your firm to issue the suitable report, under the relevant standard as
issued by IASB, acceptable to the said corporate authority.
You have observed that the Management of Acquirer is too much optimistic of getting the
permission from the Land authorities inspite of the fact that to acquire land in Dhaka is very
big challenge and two mega businesses from Pakistan have are struggling since last 5 years
to get such permission.
You have further observed that prospective revenues are expected to be cut-down by atleast
15% owing to the cut throat competition with the already existed local companies coupled
with the fact that the government of Bangladesh intends to impose value added tax on steel
selling in couple of years time. CFO, however, is not convinced with your views.
Required:
a) Identify the type of Engagement appropriate in the circumstances along-with the reasons.
(03)
b) Write suitable verification procedures.(04)
c) Draft a suitable report making necessary assumptions (complete report writing is not
expected) (04)
Question No. 15
You are acting as a job in-charge at a review engagement for the six months ending on 31
December, 2018. Your manager has asked you to develop the review program for payroll
verification and going-concern assessment.
Required:
Draft a suitable review programs accordingly. (04)